HomeMy WebLinkAboutStaff Report 370-10TO:
ATTN:
FROM:
DATE:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
OCTOBER 5, 2010
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 370:10
SUBJECT: :l"ollow-up on General Fund Long Range Financial Forecast 2010-2020
BACKGROUND
On February 16,2010, staff presented to the Finance Committee the City'S General Fund Long
Range Financial Forecast (LRFF) for FY 2010 to FY 2020. In the presentation, staff asked the
Finance Committee to review and comment on its forecast of revenues, expenses and reserve
levels and to forward it to the full Couneil. (See Attachment B; CMR 143: 10).
During the discussion, Finanee Committee members posed a number of questions and requested
specific adjustments to the Forecast, to which staff's responses are included in this report.
DISCUSSION
The Long Range Financial Forecast (LRFF) presented an overview of the City'S fiscal situation
and showed projected deficits ranging from $6.4 million in FY 2011 to $19.6 million in FY
2020. The Forecast did not include benefit savings from the two-tier pension formula of 2.0% at
60 for new employees, nor did it include future employee contributions to health care premiums.
Chart 1 below summarizes the forecast presented February 16.
CMR:370:1O Page 1 of8
Chart 1
! SUMMARY LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) l
r .. "
T 0\1;11 o\her revenoo$
Relm!ma;amsnis frvm Olher Funds
Salaries.(lndtleooils
NCIl-Salaf)' ErpilnOlufes
lllfmsllucklre Food and Caplal Projl;l(:\$
FY2009 FY 2010 F'I' :WiG FY 2011 FY 2012 F'f 2013 FY 2014 FY 2015 1"'1' 2il16 F'( 2011 FY 2018 FY2fl1& F't' 2020
. Adopted PrnJuted
Aclual Budgtt Budget
.$ 69,102 $ 6~,2M ,$ 66,648 $ 00,Il00 $" 11,082 $ 73,101 $ 16,635 $ 00,250 .$ {l4,11S $ 87,781 $. 91.236 $ 93,.980 $ 91.245
43,200 42.546 40,627 <12,100 44,301 43,216 44,646 48,268 41,998 49,786 51,616 53$1 55.662
11.4Bl 10.643 1i},559 10,700 11,158 11,456 11,iru 1~329 12,&21 13,348 13,392 14,463 15,014
9t581 92,717 91,187 95,212 101,335 106,128 112,179 117,330 122,641 128,217
33,432 36.344 36,134 38,98(1. 39,918 41,434 4Z,4S2 43,126 4MOO 46,326
14,646 9,900 7:200 10,248 11,400 12,1100 13,339 14,847 15,411
004 603
1,633
Palo Alto is far from alone in facing sustained deficit projections; California cities in general are
faced with a narrowing revenue base, compounding the impacts of severe recession, In Palo Alto
in partieular, the depruiure of auto dealerships, competition from large retailers in neighboring
jurisdictions, and lack of space to grow limits the expectation of future General Fund revenue
growth.
At its February 16, 2010 meeting the Finance Committee posed the following questions and
comments for follow-up by staff. (The February 16 Finance Committee minutes are attached as
Attachment C.):
1, Property taxes should be looked at via speeifie buildings under development. Should staff
utilize the analysis being done by the School District regarding specific properties under
development in the City's forecast?
2, There are four hotels being proposed, of wbieh one has been approved. Can we
incorporate Transient Occupancy Tax (TOT) revenue from at least the approved new
hotel in our future projections?
3. Staff should include savings from two likely changes in the Miscellaneous group's
benefits: a) employee contributions of half of the armual health premium increases up to
a total of 10% of the total health care premium; and b) a second tier retirement formula of
2% at 60 for new employees,
4. Why should salaries continue to be projected at 3-4% inereases per year, especially when
head eount goes down? Combined salary and benefit increases should be no greater than
presumed revenue increases for each year.
CMR:370:1O Page 2 of8
5. The LRFF model includes PERS rates based on an assumed average investment return of
7.75%. What ifPERS does not achieve that rate of return?
Staff's responses to the above questions and requests follow.
1. Property Taxes -Project-by-project analysis, in cooperation with PAUSD
City staff met with PAUSD business management and found that all property tax information
compiled by the District flows from the County Assessor, Tax Collector, and Controller's Office.
Both PAUSD and City staff meet quarterly with these County offices to discuss issues or factors
affecting the development of the annual roll and tax revenues. The factors include the level of
assessment appeals, automatic roll adjustments by the County, and overall growth rates in the
roll. .
PAUSD eonfilmed that the County does not provide data on property tranaactions affecting each
jurisdiction's roll during the year. The district subscribes to a consultant report providing
transaction data, analysis of the mix between commercial and residential properties, and the top
tax contributors. This report, however, is provided after the roll is finalized and after budget
projections are made. In conclusion, the City and PAUSD use the best available County
information to forecast forthcoming year revenues. City and P A USD staff agreed to share
information and projection assumptions beginning next year.
On a related note, staff anticipates that with continued turnover in the housing stock, residential
assessed values will increase appreciably in the long term. Currently there are many long-held
residential properties in Palo Alto with lower assessed values than their more recently tumed-.
over counterparts. The median home price in FY 2009 was $1.3 million, while the median
assessed value was $0.547 million. (See Attachment D: Property Tax Data.) As houses continue
to turn over, clearly those assessed values will rise. Staff has not included this expected rise into
its property tax projections since it is impossible to accurately predict the rate of turnover. Staff
is concerned about commercial valuation appeals due to the recession. These will have a
negative impact for the next few years.
2. TOT Revenue from Approved Hotels Under Development
Staff estimates that the new hotel, Hotel Keen, will generate $153,000 in new TOT revenue
annually after its opening in May, and that the Ming's Hotel will begin generating $500,000 per
year in TOT revenue after its opening in 2013. Those amounts have been added to the revised
LRFF projections discussed below, beginning in the second half of FY 2011 and in 2013,
respectively. Because of the weak economy, both Ming's and the Palo Alto Bowl projects are
being delayed by the owners. To be somewhat conservative, staff has included projected revenue
for Ming's only.
CMR:370:1O Page 3 of8
3. Savings from Miscellaneous Group Contributions to Medical Premiums and from 2 % at
60 Tier for New Miscellaneous Employees -and -4. Constrain Salary and Benefit
Increases
In the original LRFF, staff included the pre-recession status quo scenario of annual staff salary
increases in the range of3% to 4%. In response to the Finance Committee's suggestions and the
harshening fiscal realities, staff created two salary-constraint scenarios. In the first (Attachment
A-2), combined salaries and benefits increase at a rate no greater than the projected rate of
revenue increases (the "No-Greater-Than-Revenues" Scenario), and no salary increase is
projected in FY 2012. Over the ten years, revenues increase by 39.26%, while salaries and
benefits increase by 36.85%.
In Scenario 2 (Attachment A-3), no salary increase is projected in 2012, and salaries rise at 2%
per year beginning in 2013 (the "2% Scenario"); salaries and benefits rise 29.42% over the ten
years.
In addition, both Attachments A-2 and A-3 include the following changes requested by Finance
Committee members:
• Added projected revenue from Hotel Keen and the Ming's Hotel
• Savings from 2% at 60 retirement formula for new Miscellaneous employees -a savings
of $3.05 million over the first ten years. These savings are assumed to begin in FY 2014,
since CalPERS generally begins recognizing such savings two years after the fact.
• Savings from Miscellaneous employee contributions to health care premiums -$8.27
million over ten years.
Lastly, staff added the following changes:
• Adjusted (midyear) budget figures for FY 2010. (Year-end figures will be presented to
the Council in December 2010.)
• Salaries frozen in 2011 and 2012 for all but PAPOA for which a 6% increase is included
in the FY 2011 budget.
• Adopted FY 2011 Budget substituted for the originally projected FY 2011 figures.
• "Retiree Medical Cost Increase" originally listed as $0.74 million for each year beginning
FY 2011 has been incorporated into overall benefit costs.
• The PERS investment portfolio lost 24% of its value in the fiscal year ending June 30,
2010, rather than the 28% it had assumed it would lose. Therefore PERS updated the
August 2009 Circular letter that had determined the "Additional Retirement Contribution
Increase" line item in the original LRFF. The rates were therefore increased by less than
originally prescribed, and thus the originally expected added cost of $46.5 million over
nine years was decreased to $27.4 million-a savings of $19.1 million.
• A new CalPERS Experience Study, measuring actual plan demographics over a period of
time, indicated that members should add an additional 1.1 % to 1.7% to their
Miscellaneous contribution rates and an additional 1 % to 2% to their Safety contribution
rates, beginning FY 2012. Staff assumed an overall increase of 1.7% for all groups.
CMR:370:1O Page 4 of8
The results of the changes described above are summarized in Chart 2 below.
Chart 2: Salary Increase Assumptions and Resulting Surplus (Deficit) for FY 2012 -2020 in
Original LRFF and Two Scenarios (Dollars In Millions)
$ (1.4) $ 0.4 $ O.S $
ill $ (1.41 $ (4.0) $ 0.1 $ 1.4 $ 2.6 $ 2.9 $
Chart 2 shows -in the first line -the bottom-line results from the Long Range Forecast presented
to the Finance Committee in February 2010. These figures do not include the $7.3 million in
adjustments included in the adopted FY 2011 budget. Scenarios 1 and 2 the second and third
lines in the chart -do include the $7.3 million in adjustments as well as the constraints requested
by the Finance C.-Ommittee.
Either one of the salary-constraining seenarios (Scenario I or Scenario 2) would erase the deficit
by FY 2017, but the 2% Scenario saves $3.7 million more than the "No-Greater-Than-Revenues"
Scenario saves over the ten-year period. More detailed versions of these scenarios may be seen in
Attachments A-2 and A-3.
Please note that adding a second tier of 3% at 55 for new Public Safety employees, for example,
would add a combined additional savings of $1.17 million in the first ten years. Greater savings
could be achieved tln'ough other less generous two-tier options, such as 2% at 55. (See Chart 3.)
Again, staff assumes here that no actual PERS savings would occur until FY 2013, due to
PERS'g delayed recognition of second-tier savings.
CMR:370:10 Page 5 ofB
Chart 3
Summary of Savings for Two-Tier Formula for SAFETY
Yesr 2012·13 2013·14 2014-16 2016-16 2016-17 2017-18 2018·19 2019-20
Not.: Retirement and Attrition Percentage assumptions equal 90% of average r.tes fOr 2005-2007, or 8 combined 4. 7%
Assumed Salary /n118110n 2% 2% 2% 2% 2% 2% 2% 2%
Numbe, of Employees (Start
of FYj"' 201
Current Estimated Cost fo,
Safely PERS $7,175,392 $7,750,275 $7,905,280 $8,063,386 $8,224,654 $8,389,147 $8,556,930 $8,728,068
Cost Savings of 2% at 55 $ 111.657 $ 214,800 $ 307,330 $ 388,983 $ 458,995 $ 561,810 $ 668,553 $ 779,342
;>avln~s!~[·r"l~"OJ);. .
p~rce!1tag~·.ofcurre~lpl.n.
< •...
Cost Savings of 2%
,?vl~lls!~!"W'.~. ~r.:.. • ..... .
percenlage'ofCur(eJjI plan
1.8%
Cost Savings of 3% at 65 $ 57,140 $ 102,736 $ 131,239 $ 143,196 $ 137,581 $
add'i savings fo' 36-month $ 445,025 $ 443,972 S 452,851 $ 463,004 $ 474,499 $
5. PERS Investment Return Lower than 7.75%
308,852 $ 367,534 $. 428,439
.. 3.7~1<}~S~I).·'.;4;9~
168,400 $ 200,395 $ 233.604
483,989 $ 493,669 $ 503,642
The PERS rates used in the forecast are based upon PERS' assumption that their portfolio will
achieve an average 7,75% return. Staff asked the PERS actuary what would be the impact of a
reduced return. The reply was that for each I % decline in average return on the portfolio, the
City'S normal costs would increase 15-20%, and accrued liability would increase 10% -20%,
For purposes of this r,eport, staff avemged the known impacts for an ovemll 20% increase in
PERS costs. Those results are summarized in Chart 4 below.
CMR:370:10 Page 6 of8
Chart 4
Additional Expense due to 1% decline in CalPERS investment returns
($$ Thousands)
General Fund Only Citywide
PERS expense PERS expense
with 7.75% avg. with 6.75% avg. Added
returns returns Added expense expense
2010·11 $ 12,334 $ 14,911 $ 2,578 $ 3,871
2011·12 $ 14,383 $ 17,389 $ 3,006 $ 4,515
2012·13 $ 14,454 $ 17,475 $ 3,021 $ 4,605
2013·14 $ 14,599 $ 17,650 $ 3,051 $ 4,697
2014·15 $ 15,073 $ 18,223 $ 3,150 $ 4,791
2015·16 $ 15,602 $ 18,863 $ 3,261 $ 4,887
2016·17 $ 16,084 $ 19,446 $ 3,362 $ 4,984
2017·18 $ 16,543 $ 20,000 $ 3,457 $ 5,Q84
2018·19 $ 16,933 $ 20,472 $ 3,539 $ 5,186
2019·20 $ 17,355 $ 20,982 $ 3,627 $ 5,290
Total add'i ten-year GF expense $ 32,052 $ 47,910
Note: each 1% decline results In an assumed Increase of 20.9% In overall costs.
Conclusions
In conclusion, a number of elements are driving costs down below those projected in the original
2010-2020 Long Range Forecast: first, employee contributions of up to 10% of the health care
premium (beginning 2011); second, the two-tier pension formula for non-safety employees. An
additional cost-reducing element that was included in the original Forecast is the change in the
retiree medical benefit from a vesting period of five years to twenty years for new employees
(starting in 2004). Finally, Council adopted a FY 2011 budget that balanced a $7.3 million
deficit. This not only solved the FY 2011 deficit problem; it also reduced the "base budget"
which drives expenditures in FY 2012 and beyond.
The two-tier pension and retiree medical vesting formulas, by providing new employees with a
twin incentive to stay with the City longer,' produce additional long-term savings beyond the
time span of this Forecast. When an employee retires at age 55, the City pays for her retiree
health care premiums as well as her pension costs through her retirement years. In addition, the
City incurs liability and expenses for a replacement employee. If that same employee stays with
the City until age 65, however, the City saves ten years worth of the new employee's retiree
1 Employees will have two financial incentives to stay longer: one, their pension benefit whereas an employee under
the 2.7% at 55 formula, with 30 years of service at age 55, would receive 81 % of his pay upon retirement. Under
the 2% at 60 formula, however, an employee with 30 years of service at age 60 would only receive 60% of her pay.
She has more incentive to continue working to age 65, at which point she would earn 84.63% of her highest pay.
Also, since employees will now contribute up to 10% of their annual health care premiums, working until 65 would
mean a newly retired employee with a dependent would pay just 10% of the Medicare health care premium of
$7,188 rather than the same percentage of the regular health care premium of $13,860 (using current rates).
Therefore, these benefit changes also create a strong incentive for employees to stay with the City longer.
CMR:370:10 Page 7 of 8
medical liability and pension ccsts. Therefore, the two-tier formulas will create additional
savings for the City well beyond the ten-year scope of this Forecast.
It is clear from the updated Forecast that the City cannot sustain the historic salary increases it
once bestowed and stay solvent. Salary and benefit increases will need to be more limited going
forward than they were in the past.
RESOURCE IMPACT
The resource impacts discussed as part of the Long Range Financial Forecast are outlined above.
POLICY IMPLICATIONS
The issues discussed above are in line with current City policies.
ENVIRONMENTAL REVIEW
This does not constitute a project under the California Environmental Quality Act.
PREPAREDBV, ~* 7 NANCYNA L
Senior Financial Analyst
DEPARTMENT HEAD APPROVAL:
t-r LALO PEREZ
Director of Administrative Services
CITY MANAGER APPROVAL:
City Manager
ATTACHMENTS
Attachment A: Tln-ee versions of Long Range Financial Forecast, 20 I 0-2020
Attachment A-I: Original LRFF model
Attachment A-2: Original LRFF model modified to include salary constraints to no
greater than the percentage of projected revenue increases, among
other updates
Attachment A-3: Model modified as in C-2, but salaries assumed to increase by 2%
per year
AttachmentB: CMR 143:10
Attachment C: Finance Committee Minutes from February 16,2010
Attachment D: Property Tax Data
CMR:370:1O Page 8 of8
ATTACHMENT A·1: ORIGINAL LRFF MODEL
· LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000)
F'/2009
$
r
Additional ReUrement Conlrlbu(ion Irrcreas9 (I)
Retiree Medical Cosllncrease
Salary /.. Benefit RedL'Cli.:lns to be Negotiated
Va~ntPoslfion$ Salal)' SaYin9s
SubtQtal: Salaries and Brmefils
Illfraslructurn Con!ribu!lonlllC(ilas$
TeclmoIogyflind Rell<fiffl6nt
Actual
,.m
2,000
17,[46
11,433
62,104
29',<117
91,561
10,100
M23
MOO
1,014
10,231
6,062
MOO
1.00Z
I, . Reooo, t11
FY 2010
Adoptoo
$
Blldgel
19.650
25,152
11,250
15,352
1(1,64$
63,512-
13,000)
32,205
~2,711
9,076
3,5~1
10,193
1.212
14,316
MOO
3,120
1,000
FV2010 FY 2<111
Pfoj\lc!\ld
Budge!
$ 17,100 $ 11,666 $
25,118 25,9Il1
i2,513
53,669 84,164
IT59)
11,"~ (1,1l2)
I""') (600)
32,205 33,373
136
1972)
11,300)
91,161 95.212
9,552 9,6fJ4
3,391 lA60
10,265 9,67(1
1,160 1,213
14,3j6 H,613
6,100 6,501
1.225 1.2'25
1~1")
3.121l
1,1)00
"
FV 2012 FY 2<113 FY2014 FY 2015 FY 2016
16.511 $ $
&U33 61,47& ~43J 12,174 75.020
11.2<1e) 11,171) 11.319) 11.3<2) 11,416)
I"~ 1639) 1664) 1696) 193')
30,396 36,210 40,250 42,375 44,61:)-
1,031 2,714 4,963 5,389 5,756
136 135 136 136 136
1901) (l,011t 11,042) 11.983) (1,121)
101.335 108,128 112,119 111,330 122.641
91lS1 10,120 10,373 lM84 11,005
3.632 3.592 3,662 3,'" 3.906
10,121 10.365 10,66i 11,002 11,330
1.231 1,252 1,283 1,322 1,362
14.832: 15.004 15.462 1!i,925 lMoo
!>O 1,(100 1,000 1,0(:(; 1,000
0,844 Ull 9.61l4 1l1,024 10,414
1,iJOO ~00l) 2,000 2,000 2,000
1,225 1,225
1.6$ 1,"" 1.735 1,186 1,838
,49 '"
fVZ(ll1 HiOlt! FY UJ19 f'/1020
$ 2Me1 $ 24,131 $
$4,954 35.181
11,200 la,lm
tOOl! 9.951
3,004
11~18 81.054 &1,251
11.41~ 11,53') 11,593)
101') 11,(10) 11.951)
46.900 49.475 52,125
6,140 6,542 6,963
735 735 '" (1,112) {i,2t9) (1,Ul)
126,211 134,045 140,163 H6,m
11,335 H,GS 12,025 12,366
4,023 4,144 4,2eJ 4,391
11,610 12,020 12,361 12,66S
1.402 1,445 1.456: 1,532
16,695 1].402 17,924 16,462
1,000 1,000 1.060 1,000
1(l,955 11,410 12,021 12,610
'~06 2.000 2,0(1) ~060
1,&92 V!G3
'" '"
----------~--------------------------------------__4
In FY 2i}10, $2.6 million!n permanent budge!edcompan$adon sovlngs: has: balln realired,
?cUre unIon (pAPOA) dclerrod Ihelr FY 2010 negotle!ed salary Increase 01 $o.a mllilon lei fY 2011
Based on current 2.1%@55formula;employeeconlrlbuUontowordsheallhcare premiums nol Int!uded,
INO"" ''',"'m~I,"'''"" $/lIMY Increa$¢ for SEIU lind MgmtJPro/, In FV 2010 snd FY 2011 and no safary Increase for Flrefightors (IAFf) In fy 2011
ATTACHMENT A·1: ORIGINAL LRFF MODEL
PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES
FV 2009 fYW13ABfY2010,PB FV2fJll FY 2{l12 FY20U f Y 2014 FYW15 f'( 2{l16 FVZ017 FV 201H fV2019 fY%020
% % % % % % % " %
%Cltaug(l %Change %CIHmge Chllllgll Cltangn Change Ch~e Ch .. ", "","", Change Changa
(1t2tr%1 ~.'9%) ~,,% 3.91% 4.08% 4,34% 4.42% 4.50% >5,)\' lOO% 2.86%
10.11% 1.26% (l.5!l% 2-.40% 3.14'l"~ 4.1.4% 4,99% !i.laY, 48&% 4.62% 1~6%
1.24% fUlll% 5.14% .'!J'!5% 5.22% !L33% 5.44% 5."'"
1'6.'''') 1.99% 2.20% 2.(,\% 4.16% 4.99% 4.10% "'" (42.64%) 1,94% 2.44% '.69% 0,94%
2.53% Ul1%
(Stanford
2.11% 2,27% 1.30% .. "" 3.>211 Ul% 2"% 3.94% 3.94% 3.94% 3.94% 3.94%
be Negoiated {1} "IA NlA
Oeiertal(2j NIA
NlA 0.00% 2.00% 200% 3.00% 4.00% '.00% 4.00% 4.00% 4.00%
NIA 0.00% 'M 200% 3,00',(, 4.00% '.00% '00% 4.00% 4.00%
1'.54") 9.15% 9.25% 3.83% 9.06% 6.15% 5.20% UG% 5.28% 5.31% 5.31% ."'%
Subtotal; S!I!ar!es and
(0.10%) 1.10% 2.50% 3JJI}% ,00% :tOO% 100%
(t83%) 2.61% 2.05% 2.9!l% 3.00% 3.00% 3.00%
(10.56%) \9.53% 16,33% 1.10% 2.50% 3,00% -lOO% '00% 300%
(lO.39%) 39,17% 39.11% 1.70% 2.50% 3.00% 3.00% '00% 3.00%
13,71% (23.34%) (23.34%, 37.55% 4.1J4% 4.15% 4.26% 4.38% 4,48% 4.60% <UQ% 4.ll0i4
(4l.52%) 1'3.52%) i5104%) (&30%) '.00%
Q:l6% \0.51") 113.99%) 119.04")
0.00% 4.00%
TOTAL EXPENDITURES
ATTACHMENT A·2
lONG RANGE FINANCIAL FORECAST MODEL 2010 ($OOO) i
FV2009 fY 2010 F't 2(110 FYW10 fY2i\H fY 2i\12 FV2013 BlOH f¥ZfH5 FV1()16 FYWll F\' W18 FY 2619
lWlval
I 10,089 , laliW 18,2i8 $: 18,MI $ l!1}t4 lQS1!) $ 21.419 $ 2l/M5 $: 23,231 I 23,m $ 24,612
2$,.132 25,152 25,901 $ 26,552 $: " .... 23,351 , lam , 31.663 , 33.411 , 3<.9£5 , 35,787
11,030 11.250 11,429, 3: , 12.12(1 11m $, lJ,626 $, 14,111 $: H,138 S j~32> , 15,9<11
1,111 1,000 5,9« $ 1,381 1~l>1 $ MOO , M62 , U43 , 9.131 , 9.3"
/tddijo!llil Hotel Kaen «Ivtmw 11 1 '" 11$ 1 158 $ '" , l!H $: I.., $ '" Adddiooal Mlng't Hotel RevimU!) , 500 $ 100$ 6121 ele $ e"
$ $ 4,021 $ $ 4,154 $
$ , 2.104 , $
62.104 63,512 63,669 50,509 5&.604 69,392 81,m 63,488 a;.436 87,301 63,682
:Sal," ""n'" R~I"'''''", .,be ... ,,,,, .. "' (3.000)
29,477 32,205 32,205
(Savings from Mise employoe contributions 10 medical p!elJ1iums,.·J
(Savings rrom Tier 2 ror Mis~lIanaous employees)
Add1funal Retiremont i;()nlrlbulion Inaease
Relitee Modltal CoSllncroaoo
Sa!olY & Bene(/1 ~6duclions 10 beNegoijaled eta
Vacal'll Posllkms Salaiy Sa .. ihl!5
Subtotel: Selarlos and Bonellls 91.581 92,711 91.187 92,194 118.544
10,100 ',07' 9,562 9,1169 10,100
3,023 ,.." 3.391 ;MIO ~242
9,QOS 10,193 10,265 9,657 10,(122
, &fquipmenl 1,014 1,212 1.100 1,086 1,115
10;267 14,318 14,318 14,389 15,371
,
11,062 6,111& l0£5
lnfraslruct.vre ConltRm!km Inc:roase
Teciloobgy furnt Repayment
Pub1(; Sefely Bldg. Budge! Savings
Jot OOler CapilaI ProjG
"""" . Rpt Reron. 117
In fV 2'016, $2'.0 million in penTllment budgeled compunsutToo slIVlngs. has bum roallm.t
Police union (pAPOA) deferted IhefrFV 2010 ncg01ll1lud lilliary fntroase 01 $0.6 million to FY 2611
Savings Include ARC savings (rellree medical n:quiredcOOlribution)
33,432 34,935
(529) (114)
(103)
401 793
"',
01,8W 93,115
10,333 10,00B
'.291 3,341
10,27S 10,540
1.132 1,151
15,&12 15,667
!!II 1.000
9..,4 9,211
1.000 ',1)1)1)
U25 1,225
\,665
'"
36,457 38,261 40.21& 42,215 44,218 46,388
(064) (000) (952) (991) (1.048) (1.100)
(196) (216) (344) (3'8) (485) (577)
2.683 2.999 3.326 3,666 4,017 4,381
"', "', "', "', ", "',
91,470 101..102 105,117 109,914 114,063 117,914
11),111 11,094 11,421 11,170 12,123 12,467
.},430 Ul3 3,639 3,146 j,661 3,911
1{),646 11,172 11,506 11,651 12,206 12,513
1, "00 1,215 1,252 1.>111 1,32B 1,368
16,283 16,151 11,254 11,112 18,305 16,654
1.000
~604 111.024 10,414 111,955 H,47Q 12,Q21
,~OO 2,1)1)1) 2,1)1)1) 2.000 2,G011 2,001)
\,135 1,636 I"", \,941 "'''' 74' m '" '" ."
mo",
, ,
$
$ ,
$
",
12,861 'm,
12,8ll2
1,409
19,419
ATTACHMENT A·2
I PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES
fV 2009 f'f 2010 AU F'I atlU PE F'IZ01l)A fV 2011 Hl012 Pi;1:Q13 f'i2{)l1 f'f 2015 fY201& FY:20H fYW1S FY201!1 FY2ll2{)
" % % " Ch<l»ge,2010.
% COOnsI' % ChOOI}» % thlill9i' %Cliftng:& % Change % Chal1go % Chllf1ge Change' Change % Change % CI!ilIl99 Chllligtl Change % Change """ -$ales Taxes Ill""') 12,19%) 11"""1 . l'U9%) 5.%% '91% 4Jj8% OJ,, 4.42% 4.50% , ... , lOO% 2-3.81%
Property Taxes 10.17% 1.20% 1,36% 1},10% 0.5(1% 2.41I% l74% 4.74% ,-;.13% 4,86% U'" 2,33% 2~%
Ulii:tyUsll(T~ Ut% 1.99% 151% 1.4$% 0.11% liOO% ',,,,", 4.00% 3-00f. 4,00% 4.0I}"'~ ,-.-',00%
Translom Occll,Mllty Tax fiUg%) Ill6%) W,64%) 11,'6%1 4.51):% :J.JJ% 2JJn% 4.24% 4J\l% 4.99% 4.51)% 3.26% 2,$$% $.1)3%
Additional Hotel Keen 19.1enU9
Add~ioI'.s1 Ming'!; Holel Rt!v6nw
Documental)' TransferTal( I"M") I'M'%) 5.16% 1[107% 11.17% 1.#% 2.69% 2,94% 294% 2,19% 0.94% (O.51~ 0.44% 0'.63%
OlherTax4)s. Fines & PenaKies IM1%1 20,M% t11% {11,61%1 (ta,%) 1.96% 2.62% 3.1<1% ).158% 3,60% J6S%. 3.39% lAl% ;136%
StJblotat~Taxes (3.tll%) 0,26% (3.55%) (3,69%) 2,81% 3,64% 4.56% 4.41% 4.29% 4.54% 4.0~% 3.64% 2.16% 3.25% 4fi.10%
Service FeeS & Penni!s (5.43%) 7,57% ('A4%) (6,"%) 5.60% 7.38% 1.87% 2,92% 1S4% 3.94% 3.95% 3.!J5% 4.29% 4.2.7%
JoiM SeMc& Agreements (SianfoRl 12,40% 0.78% (llO%I 12,M%) 3.54% 7.07% "'9" 4.61% <.92% 4.93% 4.96% 4.9]% 5.UI% Q.OO%
In!eresl Eam:ngs (10.04%) (',)6%) (17,23%1 {12.53%) (O.gs,..) 1.82",k 2M% 3,54% 3.15% 3,63% 4.11% 2.55% 2,05% 3.25%
O:oorrevewes 14,;;6%) /'0,96%1 la$$%) 2.42% IW%) 1.83% (1M''') 2"% 2,5$% 2,56% 2.58% 259% 2.~Ao 2.61%
Reimburs€1llOOti from OIherFunds 1.32% (1.32%) ~,05%) ({t91%) G.&>% 3.41% 2.61% M6% 4Ji2% 4.(14% 4.06% 41M1% 4,11% 181%
Total ReumlQS Before Transb U,6l%! IUI"I (4,W%j ~"O%) L30% 4.1l};' 2,"", 3.91% 4.01% n2% 19% ',69% "',. 3.51% 41.08%
lranstem h(illl otI!er funds 2.24% lLM% Rl2% W% (l,"%) 3.41% 2.65% a45% M;;% HI'% 4.D6% '00% 4.11% JJ:H%
TOTAL REVENUES ~,'llij 0.48% (l,""l (l,W%j ""'" 4.01% 2:,13% US% .-4,_ 3.91% 3,14% ',,,," '''''% 39.26%
Exnendltures
!lase SalaOOs 211% 2.27% j,JII% I"'''') ('-I '00% ,,,,", LOO% ,25% 350% 3.10% 2~% 2J5% 2,51>% 10.89%
Salary & ~neft ~d\.'Clklns to 00 ~oilOO1d (1) tIIA N/A til,
PAPOA Salaly Incn;aoo DlJl'erral (2) N/A N/A
Savlngs from SEIU N/A N/A
Savings from MQrnlIProf. tIIA N/A
Bonofits (4:.54%) 9.25% 9.25% 1,54% (S.i4%J l1.3t% 4,49% 4,36% 4.96% 5.10% 4.97% 4.69% 4.17% 4.84% 51.01%
Subtotal: S!ilarlllsl\nd Beoofft1 0'01< 1.1:4% '23% ""'" ~"l%) ',J1J% "..,. 4,01% ,,0,,, '1.25% , .. " j,n% 3.43% 3,55% 33.10%
IContractSel1lials 1,31% (la14%) (""%) . 91l4% U~% 1,0)% 1.10% 2_ 'J)I)% 3.00% ',1)0% 3"'" 31)1)% ''''II
10,"%) 11.33% 1111% ('''''') 14.3i%) 1,50% L1il% 2.50"'~ 100% 'J)I)% 'JIG" ,q ""''II ;1,00%
IU!%) 13.15% 14.16% 1'30%) (2.''''') 1.55% 2.1;11% 2.65% 'JIG% 2.00% ""'" 3q '''''' 130% , 1'''''6%1 'M'" 11133% 1,~,05%) 1M"") I."" UfWt 2,""" 3,00% ',,,,", ',00% .""% .""" 3,00%
IAl!oca1e4 Erpenw$ I"D1l%) 39..11% 39.17% !).51% 1.3'1% UO% 1,10% 2.50% "",,% 3.00% ,-"",,% ,-'JIG%
Tolal EXPl'rnl!!ures saore Tra (4Ul%) -1.114% 4.41% ,,32,, (1,51%) "'"' 1.58% 3.55% 3.69% 3.115%. 3.66% '''''' 3.28% 3,32~ 33.11%
Trau:,ilftlS to Olltnr [uruis
GF Transfer fOJ Inmlnlctu((I CIP 13.77% (",34%1 (23.34%) 0.00% 30,34% 9.60% 4.15% 4.26% 4.30% 4.46% 4.60% 4,70% 4,60% 4.90%
Pl{ljecls 39.50% {43,52%j (43,"%1 ",01< 1>3,"%) lB."%) .-2.91% 2.94% 2.91% 2.94% 2,91% 2.6B% 3J}(l%
Debt ServkfI (0,01" 036% 0.36% (9,0"') ifi"'" 114,00%) 119.01"1 1M''') 11.68% [!}.31%) 1115% 10,1011) 0.31% ("1.0411) -m.3l1% I"OI}%) (50"{)%) 000'1 (Ul!l% '''''' 4,,,,", ~"'"' ,-4,,,,", .00% QOI)% ,,,,0% R"'"
TOTAL EXP(NDITURES (39"!l%l Q9O% (O.3%l ~,""I (OAO%) 6.01% 3,19% 2,1)$% J.ti1% 3JH% ;),l)'" m" m% "",. 3v.19%
Not OpnrnUng SUfplusJ{Gap) {too.oo%) (339.S2%1 (10U2%j Uli46:!'fffl.) 116.60% (56.10%) (44~'&) {IlUtI%l (41f),Il'f%J 95.51% 8.29% lii/,23%
ATTACHMENT A·3
. ., . LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000)
Addlliooal Hclcl Kmm I\Ivtooe
Addiliofial hilng'. I10teI RMI1n~
TrnnsferTu
fYZOO9
Mllel
I 1Q'"
25,432
11,030
1,111
3.002
7,796
2,008
11,246
11,463
FY 2010
'M'O
25,752
11,250
1.ililIl
~600
1.""
1,900
15,352
'Q643
82.104 63,5fZ
[3,OOO}
29,471 32,205
(Savings from Mise employee conlfib'Jtions to medical premil,lmsY"
(Savirlgs from TJer2 ror Misrelieneous employe (Is)
Additional Re'.llem(lnlCo.,lrlbulion Inclcero
Retiree Medical CGst Increase
Salruy 4 aene~t Reduclions to be Negotieted
Vacant P<lSitoos $ejerySmill','js
Svb!.oUl: Salarlesmd Ben(llits 91,581 92,711
I Services 10,100 11.076
& Malelials 3,023 3.541
9,006 10.193
1,llj4 1,212
11},261 14,316
6,002 ~, ..
infta.slnittl.lre COil1n1!Uticn Inuoose
lecllflo~ Fund RePll)'lllenl
Wll
. Apt Recon, 111
FY 2{I10 FY2010
32,205 32,702
In FY 2010, $2.6 mHllonln permenent budgeled compensation savings has been rOlllllOtt
FY 2011
16,216
25,001
17
30.035
61Ui44
1~1'"
3,242
10.022
1,115
15.371
1,141
Police union (PAPOAI def(llred IlUlir FV 2010 negClllal0d salary Increase of $0,6 mllUon to FV 2011
i(3}.''''''" ,,,"'" ARC savings (r~llroo medicel requIred contribution)
fY 2012 FYZQll
l1t941
26,552
12,115
7.115
'53
Pi 2014 FY2015
"J1O
28,851 ! , 13,2!11 ,
1fi94 $
156 $
800 !
21.41lt !
3a.2M !
13,tl~ !
!.O&l !
156 $
006 I
Q665
1.11"
14,001
!
fV 2\11£ FY 2011
22A45 $
31,863 !
14,171 $
8.462 !
to,t82
1.923
15,036
12,621
!
23,231 I
33,411 !
14,7JB !
6,843 !
161 $
616 $
'.1;.1 !
1.IlO2
15,424
13,146
FV2(l18 FY 2019
23,928 I 24.612
34,955 $ 35.781
15,32. $ 15.941
9,13t ! 9,391
'" ! lS'
$ 83'
56,50S SS,679 61l,OJl 62,090 63,332 64,599 65,691 67,2OS
33,432 35,154 36,623 38,45B 40,166 42,012 43,935 45,919
(529} [714) ('''} (S06) (952) [997) (1.046) (1.100}
[103) 119"} (276) (344) [396) (465) (577)
'07 793 2,683 ,999 3,326 3,666 4,017 4,381
,I. no ," ",. 001. ". no oJ.
111,820 tl4,810 99,318 102..362 105,548 1I11Ui83 112,310 115,891
11).333 10,506 1(1,711 11.004 11,421 11.no 12,123 12,467
3,291 a:J41 3,430 3.533 3,639 3,146 3,651 3.m
10,27& 10,546 10,6'6 11,172 11,500 11,651 12,200 12,513
1,132 1,151 1,18(1 1.215 1,252 t'" 1,326 1.3'"
15,602 15,661 16,263 16,151 17,254 H,m 16,305 1ll.6S4
'''' 1,000 1,099 ',000 '.000 '.000 1,000 '.<100
~'" 9,211 9.10' 10.il14 10,414 10,955 11,470 12'.021
t,OOO 2.000 ',000 '.000 2.ililIl '.ililIl '.000 ',099
1,225 1,225
1,&36 1,665 1,735 1,766 1,838 1,692 1,941 2.",3
9" '" 149 754 751 103 '" '64
" "
f'i 2020
,,~'"
36,821
lam
9,681
'" '"
66,553
48,131
4,758
",
ATTACHMENT A·3
,
I PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES I 1 ,
FV2000 fV 21)10 An fV W1O" <" f'{2011 fY2012 FV1013 rV2014 fH01S
FV ""'
f'( ztm rVW18 FVZ0l9 FV&i2Q
" " " " % % " % " eu",.., "cmng, % Ctwnge % Chooge %Crnmg6 Change ebengil' -11' Chang3
ClI_
Ctlllfl9$ Change Ch,,,,,, Change 'i Cnall{J(! "CM'3lI
Re1ttnug§
SaletT~s {1U!JlI} (l.1I%I (jUS,,) {jta91l} '-"'" ,.,,, ',!,ll% 4,34% 4.41% '.$0% S.OO% '00% 2.$t)% $jll%
Pro~rtyTaxe& W.t7% 1.26% 1.33% O.10"h ."'" 7.49% 174% 4.74% .o"" S,18o/~ .. '" 4.62% ,.,'" 'J!9"
Utlj!yltwTax 1.24% l.ii% 3.$1% 1.48% f/.11% lOW", 5.00"k 4.00% ~OO% 4.00% 4.00% 4.00% '.00% '.00%
Tran;;!er1tCwJpancyT;u: (1O."%) (Ull%) ('.14%1 (,,j,,,) 4.59% 3.33% 2JlfI% 4.2'% 4.76% 4.99% 4."'" 3.26% 2.65% 3.08%
Mifrtirmal Holel Kel!ll re'<enoo
Md~i:ln8! lAino's HokllRevenuo
Documen\arf Transfer Tax {42.54"} li."%) 5.10% 16.07% 11.17% 2.44% 2.69% 2.94% :ttt4% 2.19% 0.94% (0.51%) 0.44% 6.83%
Other Taxes, Fines& Penal(ies (5.63%) 2o.a6% 1.11% (17.61%) {1.8'%} 1.96% 2.62% 3.14% 3.56% 3.60% 3.65% 3.39% 3.41% 3.36%
Subtotal; T",..s:; (3.81%) 6.26% (U5%) (3.69%) 2.61% 3.M% 4.S6% 4.41% 4.29% 4.54% 4.05% 3.64% 2.76% 3,25% 45.10%
Service Fees /I; PelIDiis ('A''') 7.57% (2.44%) (a."%) 5,60% 7.38% 1.6/% 2.92% 3.1I4% 3.94% 3.95% 3.~5% 4.29% 4.27%
.10:01 SSMce Agreements (Stanford 12.40% •. m (2.11\%) (2.86%) 154% 7.07% '.29% 4,01% 4,92% U3'1{. U6-k U1% 5.01% 5.00%
JfllereSlfamL"IgS • (1M''') (5,38'l\) {17.2J%} (11.53%) ~.i6%) 1.8~ 2.a~A> 3.54% lU/% 3.63% 4.t1% 2.55% 2.05% :lW.4
OlherM'ellUas {4.36%} {1~"%} {6.S"'} 2.42% (2.27%) 1.63% (1O.m) 'Mll 2.56% Ui6% tS6% 2.59% 2.60% 2.61%
ReJmbulstlments ff(l,l1 OHm funds 1.32% 17.32%) (MIll) {~91%} 0.60% 3A1% 2.61% 3,46% 4,02% 4.04% 4JJ6% 4.03% 4.B%. 3.31%
Tolal ReVilllllilS Beforo Tranw {2.!!1%) It11%} (4.J!9%) p.S6%} 2.30% 4.11% ,m; .. $.91% "'" 4.22% 3.95% ,.'" 3.n% 3,51% 41.08%
Trnnsle/S from 0ltmI funds 2.24% 11,64% 14.72% 2.71% 17.54%} M1% 1<'" M!i% 4.1"% 4.04% 4.00% 4.68% 4.11% 3,S1%
TOTAL REVENUES ~.m} CA$% Il·''''' Il."%} .. '" 4~'" 2.11% 3"% 4.00% '.20% 1.91% 3.14% 3.35% u," 39,26%
h!l!!ndl1ures
BasaSabries 2.11% 2.21% 1.311% (2.19%) (7.M") ~01l% ''''' 2,00% 2.00% 2.00% 2JIOfa 2.00% 2.00% 200% 1.8""
Salary.& Bw.efil Red'lJcfonsl<> be Negotia:ed (i} WA NJA WA
PAPOA Sala!)' Ine<eas9 Deferral!21 NJA NiA
SavingS' flom SEIU , .. WA
Savings rrom Mgmt.iPfQf. WA NiA
Benelils {4.54"} 9,25% 9.25% 1.54% {a.74%! 11.31% 5.15% 4.75% 4.44% 4.49% 4.55% 4.56%-4.65% 4.66% 49.45%
SUbtotal: Sslafles and Bootflls .",,, 1.24% 9.23% ."'" ~."%} ).10% 3.26% 4.1.5% M7% 3.11% 3J6% 3,15% ~,,% 3,21% 30.32%
Conhact SeMce$ 1.37% {10J'''! (S.33%) 'M" M1l% "Wi! 1.10% 2.50% 3.00% 3.00% 3.00% 300% 3,,", 300%
Supplies&Malorim (,.10%) 11.33% 12.1'1% (3.B1l%! 14.39%) 1.Wi! 1."'" 2.56% '00% 3'<''''' ,-3.00% '00% 3.""
General Expe:!'i~ {'.Jl3%} 1;115% 14.18% !3<311%} l2.li'%1 2,55% :t51% 2.65% 300% 1.m 3_ 3.00% ''''''' 230%
Roots, leasM, & Eqtlipmlnl ('''53'') 19.53% 1fL33% if2.il5%} (SA''') 1.00% 1.11)% ZO." lGo% 3.00% 3.00% 3.00% ''''''' 3\10%
Al!ooelOO Elpall&\l$ ("'''''} J9.17% 39.11% 1).51% 7.m 1.10'. .. "'" 2.50% '''''' '''''' 3"''' 100" 3."'" 3.O1l%
Tolal E~pend!lures BefufO Tra (43.21%) 4.64% 4.4" 9.32% (1.57%) 3.29% 3.41% 4.f}1% 3.f}2% 3.6a% 3,69% 3,03% 3.11% 3.\)8-% 31.21%
Irallsfcrs to Othnr FUI,ds
GF Trans/er for InfrashvclufO CIP 13.71% {23.34%} (23.34%) 0.00% 30.34% 9.66% 4.15% 4.26% 4.36% 4.48% 4.60%. 4.70% 4.80% Utrh
Pro;ects 39.W% (4W%) (.fl.5:!%) MOOI (51"'%) ~.'S%) 3.00% 2.91% 2.94% 2.111% 2.94% 2.91% "6% "11%
O(!btSeMc& (iUl1%) 0,38% ,.$% (M'';) (ll,"%) {1"."! (1M''') ('AO") 0.68% ('.31%1 f}.15% {'.1"} il31% ("~"%)
OJ"" 115.38% (5()'oo%l ("'.OO%) Mil" 0.00% 4,00"4 4.00% 4.<''''' 4.00% 4,00% 1),00% 0.00% ,,"'" ~'II%
TOTAL EXPEHOITURES (3tH;8'%) G.9G% ro.""! (0.&1%) (OA"" S.lit% ,.-3.15% 3.{16% '.m 3.13% 3Xi% j,11% ' .... 1 .4."%
·i
ATTACHMENT B
TO:
ATTN:
FROM:
DATE:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
February 16, 2010
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 143:10
SUBJECT: Update to Long Range Financial Forecast, 2010·2020
RECOMMENDATION
Staff recommends that the Finance Committee review and comment on the attached forecast of
revenues, expenses, and reserve levels and forward it to the full Council.
BACKGROUND
Attached to this report is the City's updated General Fund Long Range Financial Forecast
(LRFF) for the fiscal years 2010 through 2020. The LRFF identifies key issues that will guide
the upcoming 2010·11 budget process and affect the City's future financial condition. In
addition, the December 15 report (CMR 478:09) is attached, containing copies of the Septemher
8, October 5, and Decemher 1, 2009 reports to Council.
DISCUSSION
This Long Range Financial Forecast and analysis demonstrate the irrefutable reality of the City's
structural deficit, which will only get worse with each passing year. The City cannot continue to
maintain the same portfolio of services at current levels given its shrinking revenue base. As
Stephen Levy of the Continuing Study of the California Economy aptly commented regarding
municipal finance for California cities "the arithmetic doesn't work. Something's gOlta change."
Although the worst of the recession may be behind us, the pace, if not the fact, of the recovery is
in q\lestion, particularly in California. Nationally, economists point to increased Gross Domestic
Product, some increase in consumer and business optimism, and increasing manufacturing orders
as evidence of a nascent recovery. However, California's unending fiscal quagmire and high
unemployment rate continue to negatively impact the City's finances. Until job creation picks up
considerably, consumer spending resumes, and property values grow at something like their prior
rate of increase, the City's fiscal position will continue to deteriorate.
Furthermore, even when that local recovery takes hold, the traditional revenue sources will not
sustain the current array of City services, employee salaries and benefits, and extensive
infrastructure. Thus the City will need to trim its service offerings, find new sources of revenue,
or continue to prune the benefits packages offered to its employees in an equitable manner.
CMR:143:10 Page 10f4
The Forecast assumes that one-time adjustments are made in FY 2010 'to bring this year's
deficits to zero, but no structural adjustments are made for the future. Moreover, the Forecast
does not fully fund the $510 million infrastructure liability, which if not adequately addressed,
wil11ead to significant long-term damage to the City's physical assets. Therefore this Forecast
illustrates the magnitude of the work that remains to balance the General Fund budget.
The following table summarizes the base Forecast presented in the report.
TOiaIOlhllrmveM.l1lEl
R&1mbut&emenl8 from Other Funds
Salar!eaandBaMfu
Non-SalaryE1pel1dtum.a.
Inf'lastu(;llIr8 Fund and C_~
91,581 Yl.1l1
33,'" 36,344'
14,548 9,900
91;1&7 95.,m 101,335 tOO,I:2a l1U79 111,330 122,641 '26,217 134.046 14Q,H!3 146,123
aa.rM· 36,980 39,918 41,434 42.482 43:128 45.(100 43.328 47.68& 49,($1 50M2
1$1i. 10,248 11,481} 12,500 13,339 13,&10 14,312 14,341 151117 18,!1l4 16,673
For FY 2010, the Forecast projects an initial funding gap of $6.3 million. This is an increase of
$0.9 million from the $5.4 million gap projected in December 2009, due primarily to a further
decline in sales tax revenue. The $6.3 million can be reduced by a net $4.5 million through the
following measures:
• Salary savings from vacant positions-$1.2 million
• Savings from non-salary one-time reductions-$1.8 million
• Savings from Public Safety Building funds that were budgeted but not spent-$2.7
million
• Repayment of Technology Fund-($1.2 million)
These measures leave a net operating gap of $1.8 million in FY 2010, which can be offset by
drawing on the General Fund's Budget Stabilization Reserve (BSR),leaving a balance of $22.9
million or 16.4% of total General Fund expenditures. The $1.8 million draw on the BSR
includes: (a) the $0.8 million transfer to the Technology Fund at Council's direction in January
2010 (b) the $0.4 million transfer needed to complete the Technology Fund repayment; and (c)
$0.6 million needed to close the expected FY 20 10 gap.
The Forecast does not include benefit savings from a two-tier pension formula of 2.0% at 60 for
new employees, expected to be implemented in the spring of 2010. Nor does it include future
employee contributions to health care premiums.
Palo Alto is far from alone in facing these dilemmas; California cities in general are faced with a
CMR:143:10 Page 2of4
narrowing revenue base. But in Palo Alto in particular, the departure of auto dealerships,
competition from large retailers in neighboring jurisdictions, and lack of space to grow leave the
City on shrinking fiscal ground Even if the Silicon Valley economy does reasonably well over
the next two to three years, the City will only partially benefit from that recovery, because of its
narrow tax base and the delayed response of the housing market.
NEXT STEPS
The presentation of this Forecast is the first step of a process of ongoing discussions to formulate
plans for balancing the City's budget. The chart below outlines one-time adjustments needed to
achieve a balanced budget this fiscal year, as well as the magnitude of structural adjustments that
will be required to balanee the FY 2011 and FY 2012 budgets. The particulars of those $9.2
million in spending cuts or revenue increases will need to be informed by all stakeholders,
including community members, businesses, staff, and others.
" " " .;
Adjustments Required to Address "
. FY2010-FY2012Deficits ,
, ~~. ~~~" 1
. $ (millions) FY2009 FY 2010
(adopted)
FY2010
(projected)'
FY 2011
(prolected)'
FY2012
(projected)
Staff recommends embarking immediately on this multi-step process of reaching sustainable
budgets for the future, including a clear timeline for presenting recommendations to Council.
RESOURCE IMPACT
As with any financial forecast, the fiscal impacts shown are estimates. Estimates of future
deficits and surpluses, as well as the estimated costs of future financial challenges, are meant to
guide future policy and budget decisions.
Staff will intruduce the recommended midyear budget adjustments to the Finance Committee on
March 2, 2010 and continue the budget reduction proposals with the 2010-11 proposed budget
process.
POLICY IMPLICATIONS
The Long Range Financial Forecast is a tool for Council's use in making policy decisions
regarding the allocation of resources.
CMR:143:10 Page 3 of 4
ENVIRONMENTAL REVIEW
This report does not require California Environmental Quality Act (CEQA) review.
PREPARED BY:
DEPARTMENTAL HEAD APPROVAL:
ULOPEREZ
Director, Administrative Services
CITY MANAGER APPROVAL:
ATTACHMENTS
Attachment A: Long Range Financial Forecast Fiscal Years 2010 to 2020
Attachment B: CMR 478:09, "Additional Information Provided in Response to Finance
Committee Questions on the 2009 Year-End Close," December 15,2009
CMR:I43:10 Page 4 of4
· CIT of ALO ALTO
LONG RANGE
FINANCIAL FORECAST
Fiscal Years 2010 to 2020
I. INTRODUCTION
The report that follows describes the latest economic outlook, changes in the revenue and expenditure
outlook since the adoption of the FY 2010 budget, and implications of those changes. It is intended to be
more concise than previous Long Range Financial Forecasts. Staff has reserved for the Appendices a
range of background information that will be useful to readers looking for trends that shed light on the
City's current fiscal situation.
II. EXECUTIVE SUMMARY
Although the worst of the recession may be behind us, the pace, if not the fact, of the recovery is in
question, particularly in California. Nationally, economists point to increased Gross Domestic Product,
some increase :in consumer and business optimism, and :increasing manufacturing orders as evidence of
a nascent recovery. However, California's un:ending fiscal quagmire and high unemployment rate
continue to negatively impact the City's finances. Until job creation picks up considerably, consumer
spending resumes, and property values grow at something like their prior rate of increase, the City's
fiscal position will continue to deteriorate.
Furthermore, even when that local recovery takes hold, the traditional revenue sources will not sustain
the current array of City services, employee salaries and benefits, and extensive infrastructure. As
Stephen Levy, senior economist at the Center for the
Continuing Study of the California Economy, com
mented during a recent discussion with staff, the tradi
tional revenue sources for local governments are in
creasingly inadequate for sustaining the services those
governments offer. "The arithmetic doesn't work.
Something's gotta change." Either the City will need to trim its service offerings, find new sources of
revenue, or continue to prune the benefits packages offered to its employees in an equitable manner-or,
more likely, implement a combination of the three.
• Salary savings from vacant positions-$1,2 million
• Savings from non-salary one-time reductions -$1,8 million
For FY 2010, the updated LRFF analysis
projects an initial gap of $6,3 million,
This is an increase of $0,9 million from
the $5,4 million gap projected in Decem
ber 2009, due primarily to a further de
cline in sales tax revenue, The $6.3 mil
lion can be reduced by a net $4,5 million
through the following measures:
• Savings from Public Safety Building funds that were budgeted but not spent-$2,7 million
• Repayment of Technology Fund -($1.2 million)
These measures leave a net operating gap of $1,8 million in FY 2010, which can be offset by drawing on the
General Fund's Budget Stabilization Reserve (BSR), leaving a balance of $22,9 million, or 16,4% of total Gen
eral Fund expenditures, The $1,8 million draw on the BSR includes: (a) the $0,8 million transfer to the Tech
nology Fund at CounciYs direction in January 2010; (b) the $0,4 million transfer needed to complete the Tech
nology Fund repayment; and (c) $0,6 million needed to close the expected FY 2010 gap,
In years 2011 to 2020, structural solutions will need to be found to address projected annual funding gaps
ranging from $6,4 to $19,6 million, These operating funding gaps indude only a partial solution to the esti-
Taxes
Tclal oIher l'B\I611ueS
Reimbursements rom other Funds
Transfers tom O~ef Funds
Salaries and Benefits
Non-Salary Expendlklres
Infraslruck/re Fund and CeJ)i!ai Projects
OIDt Service, Tech fund OIiIer
Reserve
Actual
$ 91,236 $93,9110 $ 97,2<\5
51,616 53,5111
13,B92
mated $510 million infrastructure liability. This liability comprises $302 million in estimated backlogged
maintenance of existing infrastructure over twenty years, plus $208 million required to replace or update ex
isting facilities. The Forecast's planned infrastructure funding is just under 41 % of the required funding in the
first five years. In light of the magnitude of these projected shortfalls, more comprehensive, structural solu
tions will need to be put into place.
The City is far from alone in facing this situation. In a December
report by the Public Policy Institute of California, cities statewide
were surveyed about their responses to recent fiscal difficulties.
As the report described:
"The surveys show that even before the state's budget crisis
deepened in 2009-10, many jurisdictions had already imposed a
variety of cost-cutting actions associated with managing fiscal
stress, including furloughs, layoffs, service cutbacks, and concessions from public employee labor groups. Thus,
many are on the brink of having to make cuts that respondents report are likely to cause significant deterioration
in services and comm.unity conditions.
,j ... cities and counties are caught between a rock and a hard place. As with the state, they have suffered from
declining economic conditions that have eroded their revenue bases. But they must also contend with attempts
by the state itself to cure its fiscal infirmities with program shIfts, cuts, adjustments, and deferments, as well as
the devolution of responsibilities down to the local level." 1
The state's fiscal mess has a continuing oppressive effect on local economies. Moreover, the effects of the
budget cuts being made in education and infrastructure will be felt for decades to come via the degradation
of the social and business climate -including the work force job-readiness.
California cities in general are faced with a narrowing revenue base. With the departure of auto dealerships,
competition from large retailers in neighboring jurisdictions, and lack of space to grow, Palo Alto in particu
lar stands on shrinking fiscal ground. As Stephen Levy suggested, trying to prevent raids by the state is not
enough; the City's revenue base must be broadened. Even though he expects Silicon Valley to do reasonably
well over the next two to three years, the City will only partially benefit from that recovery, because of its
narrow tax base and the delayed response of the housing market.
Therefore, staff needs to continue working with the community, the Council, and its own labor groups on
three fronts: curbing benefit costs, pruning City service offerings, and in
creasing revenues. In efforts to generate additional revenues, fees could be
raised where cost recovery levels are not being reached and new revenue
sources pursued, including those requiring voter approval. Finally, the
City must revise its Economic Development strategy and plan.
III. ECONOMIC OUTLOOK
Economists and other observers of the local economy see signs of stabilization, but retail spending and new
jobs have yet to show much improvement. If the national stage is a sign of things to come, there is some cause
for hope, as indicators such as Gross Domestic Product (GOP), manufacturing orders, and jobs created are
trending slowly upwards. Economists disagree about what to expect in the coming months for the country as
a whole, with several economists predicting a faltering, fragile recovery, and others expecting a more steady
recovery. None of the widely reported forecasts have predicted growth beyond the 3.0% range for the coming
year.
NATIONAL ECONOMIC OUTLOOK
Nationally, the economy is expanding tentatively, although retail sales
for calendar year 2009 fell 6.2% compared with 2008 to $4.14 trillion.2
GOP grew at a 2.2 percent annual pace from July to September, while
industrial production rose 0.8 percent in November. 3
In January, the Commerce Department's Census Bureau reported that after strong monthly gains in October
and November 2009, December retail sales declined 0.3 percent. Overall, however, fourth quarter sales rose at
a 7.0 percent annual rate, after a 6.4 percent gain in the third quarter. So while the trend was "in the right
direction, today's retail.sales data show that we have more work to do," according to u.s. Commerce
Secretary Gary Locke. 4
The news in the housing market was mixed at best. Sales of previously occupied homes in the U.s. rose in
2009 for the first time in four years, but prices plunged more than 12% -the sharpest fall since the Depression.
According to an economist with Capital Economic.s, a global economic analysis firm, this "places a large
question mark over whether the recovery can be sustained when the extended tax credit expires." 5
The U.S. unemployment rate reached 10.2% in November, its highest level since 1983. This figure includes
only people who have looked for work in the past four weeks. The underemployment rate, which also in
cludes jobless workers who have not recently looked for work as well as part-timers who need full-time
work, reached 17.5% in October. And the long-term unemployment rate -individuals unemployed for more
than six months -is now 35.6%."
Not surprisingly, unemployment is of top concern, with many fearing that even as GOP grows, employment
will not keep pace. Economists point to a new "normal" among businesses now accustomed to doing more
with fewer workers. Fewer jobs will limit consumer spending, which accounts for 70 percent of all economic
activity, and slow the recovery. 7
STATE AND LOCAL ECONOMIC OUTLOOK
California has lost more jobs than any other state, dropping
nearly 618,000 positions between November 2008 and
November 2009. 8 California now has about the same
number of jobs as it did a decade ago, when there were 3.6
million fewer working-age residents.' In November 2009
the state jobless rate reached 12.4 %, and in December, the
state lost another 38,800 jobs. Though the state unemployment rate did not increase in Deoember, San Fran
cisco and San Jose were among the regions where the unemployment rate actually increased for the month by
0.1 to 0.2 percent. 10
A recent article in the San Francisco Chronicle summed up the bleak situation:
"December's [unemployment] figure would have been even higher had not 107,000 Californians quit looking
for work last month and thus fallen out of the calculations ... The state estimates that 2.254 million people were
unemployed in December. In addition, state officials say 1.53 million Californians were forced to work part
time in December because they couldn't find anything full time, and another 903,000 people had stopped look
ing but wanted jobs. These two groups are added to the unemployed to create a broader labor market measure
called the underemployment rate. It registered 23.3 percent in December. One of the grimmest facts of the
recession ... has been the duration of unemployment. In December, 34.9 percent of jobless Californians had
been out of work more than
27 weeks, which is longer
than the six-month maximum
for normal unemployment
insurance coverage," 11
The bleak employment picture
depresses retail spending, impact
ing one of the City's primary
revenue sources: sales tax.
On the positive side, Bay Area
businesses are expressing glimmers
of optimism about the future. The
Business Confidence Index for the
Bay Area improved to a mark of 53
out of 100 in November, up from a
reading of 47 in August. An index
reading that exceeds 50 signals
16%
14%
12%
10%
8%
6%
4%
2%
Office and R&D Vacancy Rates, 2006 and 2009
City of Palo Alto
O%+-----~----~----,_----,_----,_----~----~----~
Source: Cornish & Corey 2009 Quarterly Report
economic growth, while a reading below 5{) signals contraction. "The job cutting is diminishing in the Bay
Area," said Scott Anderson, a Wells senior economist. "But we are forecasting another three to six months of
job losses" for the nine-county region. Employers simply aren't convinced the economy has healed enough to
justify a hiring binge -or any hiring." 12
")
COMPETING FORECASTS
Lastly, the Palo Alto real estate market is beginning to
show some signs of improvement, with some local real
estate agents reporting brisk sales.'3 In the commercial
market, vacancy rates appear to at last be declining. If
these trends continue, the City should see increased
property tax and documentary transfer tax revenue
streams in 2011 and beyond.
No one professes that the national recessions causes have been resolved. As one economist put it, " ... the core
problems for the economy -bust banks and a massively overleveraged consumer -have not gone away." 14
The UCLA Anderson Forecast predicted that real GDP would settle into a 2.0 percent rate for 2010, before
rising to about 3.0 percent in 2011. It predicted the national unemployment rate would peak at 10.5 percent in
the first quarter 2010, and then reach 10.0 percent for the rest of the year. 15 This forecast is matched by a
prediction from Goldman Sachs that GDP will grow by 2.1 percent in 2010.
The Anderson Forecast predicted that the California economy would grow little or not at all through 2010 -
with an average jobless rate of 12% --but pick up slightly in early 2011. 16
On the more optimistic side, the National Association for Business Economists predicted real GDP growth of
2.9 percent for 2010, and Economist magazine forecast 2.7 percent growth for 2010.17
Many observers are concerned that as federal stimulus programs term out, the economy will falter once
again. For example, "when the [first-time homeowners J tax credit expires this spring and the government
phases out programs to keep mortgage rates low, the housing market will have to stand on its own. Many
economists doubt it can." 18
The mixed economic signals described above set the stage for a Long Range Financial Forecast showing very
modestly increasing revenues over the next four years.
IV. UPDATED MODEL
The following tables show updated forecasts of General Fund reve
nues and expenditures from FY 2010 to FY 2020; the percentage
changes year-over-year included in the Forecast, and Budget Stabi
lization Reserve balances that result. All three tables should be
viewed as a Base Case-what the General Fund looks like if no
structural changes are made over the next ten years.
$ 18,sn '$11I,:m $: 20,116 ,."', ",,553 21,546
1;,!ljJ 11,156 13,616
9,111 e,,",, 1,H6
3,313 ~"4 3,485
UntvOlJi 7,91)1 e,,", 1\9"
1,648 1,676 1,124
\5,97a la,va 14,498
64,164 00"" 61,470
bilNegof<l~fl
!Al);;1(a/(Q
(1,222) (1,2<\8) (1.271) , .. , (&:12) I""
33,373 36,396 36,270
Addllillnal ~lrem(Ifl\C«llritlU:lon mroMo'-1.001 2.774
R«loo MOOk:lIl CQ$( ~fflMO 13S 13S '35
Salary & ~ R«\ool"lnt b Ix! Neocb'rld ~~ ~1) ("till)
VooantP{»I1Qna S6Ii!Iy SaYings
Subf4ttl: SlIUfln .!Ind S.m.1lt! ",m 101.m 10&.12&
' .... "51 10,12(1
MOO '''' >0" ."" 10,121 1lJ,J8S
EljI.!ipmooi 1,113 1,231 1,152
14,f!13 ,..." ".00<
200 1,COO
CP aOOl BJI44 9,211
Intas:/ruoMII Coofl:1Moo fiIImliWe 1,000 2,000
leehnok)9Y Fu,,~ R(Ij'laymtlrl 1,225 1,225 1.225
Pub\jo;:s~e~a~s.w~
TfOOStel for OhK C!lpiW! Pro;ools 1,141 ,,"" ,,""
".,'" '" "" " " "
million In ptlltlan8!rl blldseltd (ompannllon eavlng. hu 1nI01I rnli11d.
dehlr«ld thtllr FY 21)10flfJ90lh.!IId .. lIlry Incr.u. of $0,8 million to FY 2011
@Ul'omIule;empl>o)'n(cntrlbIlU>onf,()wtrJ.!,h\»!llJldl'« premium. notlflciuded,
"''''' 11,97J
',,,"
~'"
2,621
g,,,,
1,11l5
14,867
",W
(1,310)
(9l4,
40,259
4,,",
738
(1,(2)
112,U{I
10,313
"" 1{!,6IH
1,,",
lS,ttl?
1,000
',004
,,COO
1.735
'" "
'$ 21,001 $ 22,014 $ 22,1&4
""m 31,861 lU1{!
14,103 ,, .. 16,32a
1,n3 '''' U2t)
3,m 3,714 ,00>
2,721 2,819-
9,7'93 10,216 10,100
1,852 1,{!23 2.002
15,248 'M" 16,{)112
72,174 ,.,,,,. mm~
(t,362) (1,<l16) (1,413)
'''''I ~"I ~,~
42,375 014,&13 40,000
5,'" ",. 6,140
'" '" '" (1,083) (i.12i') (1,112)
111,$30 m,U1 1~U'l1
I .... 11,~ 11,335
"" ~ .. 4,023
11,002 11,330 11,{;10
1,'" 1,3&2 1,""
is,lm 11.1,4& 113,006
1,00) 1,00) 1,000
10,01.4 10,474 10,955
2,000 2"" ',000
1,71Il I.." U"'?
'54 '" '" " "
for SElU end Msml/P«lt III FY 21i10 FY Uit and flI.' nlary Illene" klr Flt1iAght.,. ~AFFi In FY 2{J11
"," j,
$ 23,4!11 $24,131
34,,," ,,1ll1
11,200 16,011 , ... $,1)57
"" , ...
:),124
I,
11,:m 11,8139
2,1)03 '",5
801,054 84,251
(1,5J2) (1,500)
(1,01(1) (i,OSI)
49,415 52,125
6,542 e,""
'" '35
(1,211) (1,267)
134,1)!IS 101t1,161 to,1U
11,615 ,,", U,3tt>
4,144 4,"" 4,397
It"'" 12,.381 12,005
1,"" 1,488 1,1112
11,402 17,924 "'"
1,000 1,000 1.000 :
11,470 12,021 12,&1{!
2,000 2,00) ?,(l)'J
1.941 1,003 "'" ,5:1 7" '" " " "
% % % %
Change Chen{le Cnengll Change
3.94% '1l7% <OS% 4.34% 4.42% 4.50% 3_ '00% 2.86%
0,5(}",4, .'9% 3.74% 4.74% .. -S.1So/. ...... 4,62% 2.38%
9.00% 6.14%, 3.95% 2.11% 6.22% 6.33% 5.44% .,.% ~06" ,-'.2<J% 2.86% 4.24% 'US%-4._ 4._ 3.26% 2.65%
1.94% 2,44% 2.69% 2.911% 2,9<\% 2.19% 0._ (O,67%) 0.44%
7.07% 4._ 4.61% 4,92% 4.93% 4.96% 4.97% M'I<
3,64% ,-,-2.05%
1.99% 3.22% 1.87% 2.92% 3.94% 3.94% 3,94% :l94% 3.94%
"be
Incrooee cetmaI (2)
SE1U 0.00% '.00% 2.""'" """' .. -4.00% '.00% 4.00% 4._
MgmHPtof 0.00% '.00% 2.00% .-4._
4.00% 4.00% 4._ '.00%
""% 9,06% 5.15% ,20% 6,26% ... % -5.31% &31% "6%
Subtotal: SslerlaG Ind
I
'.62% 1._ 1.10% 2.50% '00% 3.00% 3.00% '00% 3.00%
(4.04%) VlO% 2.61% ... " 3.00% 2:99% "00% 3_ '''''' 2._ UiO% 1.10% ..... 3.00<'.40 HO% 300% '00% 3.00%
>.<>,% 1._ 00'% 2._ 3.00% :loo% 300% 300% 3.00%
.. ,~% ,4.15% 4.25% 4.36% 4.46% 4.60% 4.700 4.80%
"., ".'.''';
FY~11 FY2U11 FY£01J FY2U14 fn'1l15
$ 22,914 $ 16,663 $ 7,521 $ (~655) 1(21.768) $ (37,192) 1(52,771) 1 (68,911) $ (OO,il3O) 1(1,15,00011
(asS1) (9.04') (14,176) (15.113) (15.424) (15,565) (15.134) (17, 1191 (j~97O)
000000000
o 0 0 0
The discussion on page 9, highlights changes in revenues and expenditures from budgeted values, as well as
comparisons to FY 2009 actual :results,
The updated Forecast shows a Net Operating Deficit line of $1.8 million in FY 2010, after implementing meas
ures to reduce a net $4.5 million from the initial $6.3 million gap, Staff suggests balancing the remaining
funding gap using the Budget Stabilization Reserve (BSR) for this year, leaving the BSR at $22,9 million or
16.4% of General Fund expenditures, But with forecasted gaps of $6.4 million to $19,6 million from 2011 to
2020, if the BSR were used as the only tool to balance those budgets,
it would be depleted some time in the middle of FY 2013, (See Gen
eral Reserve Summary above,) In this Base Case Forecast, revenues
increase 40.3 % over the ten years, while expenses increase 52.4 %.
As in earlier versions, the Forecast assumes a slow rate of growth for
the overall economy and for City revenues, The Forecast does not
include expected new revenue sources, such as new hotels planned
. for construction.
Staff has added an Optimistic and a Pessimistic Scenario, which are discussed following the base forecast.
REVENUES
Sales Tax
FY 2010 sales tax revenue is now estimated at $17,2 million, compared to $19.7 million assumed in the FY
2010 adopted budget - a $2.5 million or 13% drop. This estimate is $0.4 million lower than in the December 1
report due to the lower-ilian-anticipated 3rd quarter 2009 results. The new figure represents a 14% drop in
sales tax since FY 2009, Note that Fourth Quarter results, which include the Holiday season, are unknown as
of the printing of this report.
PropertlJ Tax
The property tax projection for 2010 is $25.8 million, just 0.1 % above FY 2010 adopted budget, and 1.3 % above
FY 2009 receipts. In FY 2011, revenues are projected to remain at FY 2010 levels, or $0.5 million less than was
projected in December 2009. The source of decrease in FY 2011 projected revenues is information from the
County that the cpr used to calculate changes in assessed value will be negative 0.237% for FY 2011.
Transient Occupancy Tax (TOT)
The FY 2010 estimate for TOT is now $6.6 million, down 5% from the FY 2010 budgeted amount of $7.0
million and 7% less than actual FY 2009 revenues. FY 2011 revenues are projected to increase by just 2.0%.
These estimates reflect the recent reports of dismal October and November 2009 TOT revenues, with declines
of 20.7 and 7.2 percent, respectively, from one year prior.
Documelltary Transfer Tax
Forecasted Documentary Transfer Tax revenue is $3.25 million in 2010, a 5% increase over last year' s actual
revenues and a 16% increase over the 2010 budgeted amount. This increase results from signs that these
revenues have bottomed out and are beginning to show signs of an upturn.
Joillt Service Agreements
The Stanford contract -the Joint Service Agreements' primary element -declined by $0.2 million for 2010,
compared to the FY 2010 budgeted amount, due to reversed Technology Fund charges to the Fire Department
and other midyear Fire department reductions.
EXPENDITURES
Salaries alld Benefits
Salaries and benefits for FY 2010 are now estimated at $91.8 million, compared to $92.7 million originally
budgeted for this fiscal year. This represents a 0.2% increase over FY 2009 actual expenditures. Jbe savings
from SEIU and the Management and Professional groups, along with a Palo Alto Police Officers' Association
(PAPOA) salary deferral, contributed to this reduction. The cost savings were partially offset by health insur
ance premium increases and CalPERS (pension) rate increases:
• Health care premiums for current and retired General Fund employees (not including retiree medical Ii
ability) in FY 2010 are $1.4 million (12%) above FY 2009 levels. This is a continuation of a long-time trend
in health care costs, which increased 159% between 1999 and 2009, and another 11 % from FY 2009 to FY
2010.
• CalPERS implemented a recent increase for 2011 and 2012 which will cause General Fund cost increases
of $0.4 million and $1.7 million respectively. In addition to this rate increase, CaIPERS announced a future
increase in retirement contributions from participating jurisdictions effective FY 2012, due to the loss in its
investment portfolio. The City's estimated additional increases will range from $1.0 million in FY 2012 to
$5.4 million in FY 2015.
The Forecast does not include benefit savings from a two-tier pension formula of 2.0% at 60 for newemploy
ees, expected to be presented to Council for implementation in the spring of 2010. Nor does it include future
e!l1ployee contributions to health care premiums.
NOl1-salm'y Expense
Estimated non-salary expense increased 1 % for 2010 compared to budget, and 16 % over FY 2009 actual ex
penditures. The primary reason for the increase is the "skipping" of the Tech Fund allocation in FY 2009 and
the planned repayment to the Fund over four years, beginning this fiscal year.
Infrastructure
The 2010 General Fund transfer to the Infrastructure Fund was reduced by $2.0 million, leaving that contribu
tion at $6.18 million, and General Fund funding for other capital projects was cut to $3.72 million from $6.6
million in FY 2009. In addition this forecast shows an expected savings of $2.7 million in FY 2010 funds from
Public Safety Building design work that was budgeted but not spent.
For 2011, the Infrastructure Fund transfer returns to $8.5 million, and the funding for other capital projects
decreases by $2.0 million to $1.7 million.
OTHER LARGE EXPENDITURES ON THE HORIZON
Among the City's other Big-Ticket expense-related challenges are:
• The City's most recent actuarial analysis dated January 1, 2009 indicated that the annual required contri
bution towards the citywide employee retiree medical liability will rise by $1.4 million per year, with the
General Fund's share at $0.7 million. Actuarial analyses are required every two years.
• The new library and community center expansions and rehabilitations require approximately $1.0 million
in incremental annual operating expenses beginning in FY 2013.
• The Forecast assumes funding from the General Fund and Infrastructure Reserve of, on average, $11.9
million per year over the next five years, which is about $17.7 million (60%) less than what is required over
the next five years to fund the $302 million 20-year infrastructure liability. This twenty-year amount includes
backlogged work carried over from prior years as well as future needed work, and required work to maintain
the City's streets, sidewalks, parks, open space, buildings, and other facilities. In addition, staff identified an
other $208 million to replace existing facilities that have exceeded their useful life or need substantial im
provements. These include the replacement of improvement of: the Municipal Services Center, two Fire Sta
tions, the Animal Shelter, the Public Safety Building
and the Junior Museum, among others. The addition
of the Public Safety Building to this list increased its
total from $148 million to $208 million. The stagger
ing estimate of $510 million in infrastructure reha
bilitation and replacement needs amplifies the se
verity of the City's" structural" funding gap.
The following graph shows the growing gap between planned funding and needed funding over the next five
years. Cumulative spending over those five years would be $61.7 million, or 40.6% of the estimated $151.9
million needed. The staggering estimate of $510 million in infrastructure rehabilitation and replacement
needs amplifies the severity of the City's" structural" funding gap.
Infrastructure Funding
2G10 2011 20-12 2013
Fiscal Year
OPTIMISTIC AND PESSIMISTIC SCENARIOS
2014 2016
The following graph
shows the growing
gap between planned
funding and needed
funding over the next
five years. Cumula
tive spending over
those five years
would be $61.7 mil
lion, or 40.6 % ofthe
estimated $151.9 mil
lion needed.
For the Optimistic Scenario, staff assumed the local economy would bounce back somewhat more quickly,
lowering the unemployment rate and increasing consumer income at a quickened pace compared to the base
forecast. As a result, sales tax revenues would pick up more strongly in 2011 and out years, as would
Property Tax and Transient Occupancy Tax revenues. The net result is that funding gaps in years 2011
through 2020 would decline to a range of $4.4 to $10.1 million. In other words, the structural problem would
remain, even with a stronger recovery, albeitsHghtly less dramatically.
In the Pessimistic Scenario, staff assumed the recovery would be hampered by unemployment lingering at
12% through 2012, with a resulting negative impact on retail spending. In this scenario, the funding gaps
would rise to a range of $8.0 million to $31.4 million, and more draconian measures would need to be enacted
in the short run to confront the larger anticipated 2011 gap.
All three scenarios show continued General Fund funding gaps for years 2011 to 2020. The base Forecast
shows that the City must make $6.4 million of permanent net changes in expenditure andlor revenue levels
to avoid a funding gap in 2011, and those changes must grow in magnitude to head off funding gaps that
would otherwise grow 200%
ReimOOI'$J:!IiieI'lls toot otler Funds
Tralls~ tom 0Ihe! Funds
Selalies ana Booen!s
Non-Salary Expendi\J'as
i1tast'ucLlre Fund and Capilal ProjeW
,0","
Reserve
r"O$
Tolal oller teVSflOOS
Reimbtmlemeot> toot otler Fund$
Traasfers tom Oller Funds
Selarle$ afll1SeoofIa
Non-SaIalj' Expe~
I'lteSYUCU6 Fund and Capitll Project
!lob!
on Budget S!abiizalioo Reserve
$ 73,415
44,800
$ 61,026 $ 94,'53 $ 9/1,211
52,441
I 00,'00
over ten years. In the optimistic scenario, the 2011 picture is
30% -or $2 million -better, but still the gaps grow by 130%
over ten years. In the pessimistic scenario, an additional $1.7
million in cuts or new revenues must be found in 2011, and
funding gaps quadruple in the next four years. Moreover, none
of the three scenarios incorporates a full solution to the $302
million, twenty-year Infrastructure backlog.
If there is one thing the economic optimists, pessimists and" realists" can agree on, it is that the City has a
structural funding gap problem: given the general fiscal and expense structure of this service-based organiza
tion, the numbers do not add up to a sustainable budget.
V. CONCLUSION AND NEXT STEPS
This Long Range Financial Forecast and analysis demonstrate the irrefutable reality of the City's biructural
funding gap, which will only get worse with each passing year. The City cannot continue to maintain the
same portfolio of services at current levels given its shrinking revenue base. As Mr. Levy pointed out, "the
arithmetic doesn't work."
The presentation of this Forecast is the first step of a process of ongoing discussions to formulate plans for
balancing the City's budget. The chart on page 15 illustrates the one-time adjustments needed to achieve a
balanced budget tIus fiscal year, as well as the magnitude of structural adjustments that will be required to
balance the FY 2011 and FY 2012 budgets. The particulars of those $9.2 million in cuts will need to be deter
mined by all stakeholders, including community members, Council, businesses, staff, and others.
Given the drop in City revenues over the course of the fiscal year, departments will need to close an expected
$6.4 million gap in FY 2010. Staff will present a detailed Budget Balancing Plan for FY 2010 during the Mid
year Report to the Finance Committee on March 2, 2010, and will return in late March with a big-picture view
and outreach plans for engaging stakeholders in closing the $6.4 million projected gap in FY 2011.
Staff recommends embarking immediately on this multi-step process of reaching sustainable budgets for the
future, induding a clear timeline for presenting recommendations to CounciL
Initial revenue sources that should be pursued include adjusting cost recovery levels to 100% and reviewing
subsidized facility rents. In addition, new revenue opportunities should be developed, including those that
require voter approvaL The opportunity to issue debt for financing infrastructure needs will also need to be
explored, as will pursuing development strategies in the Comprehensive Plan.
~~': :tv\' C,' ,::, ADUUSTMI;NTS R~.OUIReD TO tDDRI;SS ' : . :
:: • : C • • FlY 2010· FY 2012 DEFICITS . " . , " \ " ~
$ (millions)
Funding Gap
FY 2009 FY 2010
(adopted)
FY 2010
(projected)·
FY 2011
(projected)'
FY2012
(projected)
\'
Staff will soon begin implementing a "Otange by Design" effort by which interdepartmental Design Teams
will be created to work on specific problems the City faces as an organization, including balancing the
budget, streamlining operations, revenue generation, and others.
In addition, efforts will be made in upcoming negotiations with Fire and Police units to seek salary and bene
fit concessions conceptually similar to those imposed on SEIU and acceded to by the Management and Pro
fessional group. While PAPOA already postponed a contracted salary increase, equity will be sought in dis
cussions with the Fire union and Fire Chiefs unit These benefits concessions are a necessity in balancing the
long-term structural gap problem the City faces, along with nearly every other city in California ..
VI. APPENDICES
General Fund LRFF Revenue by Type
Fiscal Year 2010
Olher fe ... /J"vet
13.3%
Relmb!.Jrnmlllllt8 from
Olhu FUllde
Saln Tuu
14.6%
Illtena1' eUnlng!
1,4%
Joint Servl~.
Agr&6mSIlU !8lallrorcl
Unl¥6rtlly)
6.5%
Peull/aa Tranalenl O~eupaney
Garvie. FaOe' PermUa 2,0% Doeumanlery Tran&l&r Till
Tn 6,6%
2.8%
Total Budgeted Revenues = $138.2 million
Due to rounding error % may not equ8l100%
Fiscal Year 2010 General Fund Long Range Financial
Forecast Expenditure byType
Allocated Expenses
10.2%
General ExpenlUl
-0,8%
Genllrel Exp.n."
7.3%
Contract Services
6,6%
OF Tr81'1&fer ft)r Oth&r
Tranafer for CapItal ProJects
1.6% Service
Beneflta
20.8%
0.8%
Total Budgeted Expenditures = $140.1 million
llJe to rounding error % rrey not equal 1 00%
Sslarles
44.8%
• c
$24.6
$22.0
$19.5
i $17 .•
$14,5
$1;2.0
$9.5
$7,(;
$4.6
$2.0
$190
$1BO
$170
$160
o
.!§S150
~
$140
'130
.120
$110
21)00 21)01
2000 2001
2006 2006
General Fund Major Revenues
Last 10 Years In Fiscal Year 2000 Dollars
2001 2003 2064 200e;· 2006 2007 2008 200'9
Fiscal Year
General Fund Major Revenues
Last 10 Years In Fiscal Year 2000 Dollars
2002 2003 2004 200e: 2006 2007 200a
Flecsl Year
2007 2008 2009 2010 2011 .012 2013 2.14 2015
FIscal Year
$190
$190
$170
",$160
c
~$150
&$140
'" c
$130
$120
$110
$190
$190
$170
$160
.2 $150
~
$140
$130
$120
$110
General Fund Total Rev. and Expenditures· Balancing Fiscal Years 2010,
2011, and 2012
2006 2006 2007 2009 2009 2010 2011 2012 2013 2014
FIscal Year
General Fund Total Rev. and Expenditures· Balancing Fiscal Year 2010,
2011, and 2012 with Infrastructure Funding
2005 2006 2007 2008 2009 2010
Fiscal veu
2011 2012 2013 2014
2015
2016
$100
$90
$BO
$70
'" $60 c
~ $50
ii $40
$30
$20
$10
$-
$140
$120
$20
$,
General Fund Salaries and Benefits (Millions) I-Salaries III Beneflts 1
2000 2001 2002 2003 2004 2005 2006
Fiscal Vear
2007 200B 2009
General Fund Salaries and Benefits (Millions) with
Full·Tlme lent Permanent and HOIJrlv Emlpl'~YE,es
2000 2001 2002 2003 2004 2008 2008 2001 2008 2009 2010
Fl5ca~ V •• r
2010
•••
800
700 ..
soo 5.
!i
50. ~ §'
-~ om
4001 i
III <'
300 i
2.0
100
$55
$25
$15
'5
$35
$30
$25
General Fund Operating Expenditures:
Last 10 Years In Nominal Dollars (In $OOOs)
-+-f"Ublic Safety _____w__ •• CSD& library .------a-Adnin. ~ f""lblle Works _____.._ .. Running
Citywide Pension Expense
i :::10"79~~~0~~~ .. ~ .. --.~~~ .. ,a.~.~~ .. ~.---.---.",.
$10~~~---------·······---,~····---------······,~~7~~
$51~~~~~~r~·~-~~~t~~~~
$O+-~-=~UL~~~~~~~~~
$35
$30
$25
.S $20
i $15
$10
$5
$0
Citywide Healthcare Expenses
Acti"", Employees • Retirees I:J Retiree Medical Ualbililtyl
CITIES' ACTIONS TAKEN TO DEAL WITH FISCAL STRESS
2008-09
Cut spending for various services
Eliminated unfilled pOsitions
Raised fees fee)
Imposed hiring freeze
Laid off
Used reserves to cover shortfalls
Reclassified open positions to lower levels
Reduced/eliminated allocation to reserve account
general, uniform cross-board cuts
Used work furloughs
Reduced benefits for new employees
incentives for early retirement
Raised taxes (any tax)
Reduced benefits for current employees
Reduced wages
81%
60%
53%
71%
30%
60%
24%
42%
37%
1
15%
20%
10%
10%
13%
Source: Max Neiman and Daniel Krimm, "Perceptions of Local Fiscal stress During a Slate
Budget Crisis, " Public Policy Institute of California, December 2009
(Average number of Cities responding = 220)
A VERAGE PERCENT MID· YEAR REDUCTION FOR LINE ITEMS IN
RESPONDING CITIES, 2008·09
Contribution to Reserve Fund 48.1%
Senior programs 16.8%
Streets and roads 13.9%
Planning 12.5%
12.1%
Homeless 11.5%
Management and Admin. Services 10.8%
Animal Control 10.6%
Fire & Emergency medical 9.9%
Economic development (not redevelopment) 9.1%
Adult & youth recreation 8.8%
Police services 8.5%
Public works 7.9%
Water & sewer utilities 7.3%
Source: Max Neiman and Daniel Krimm, "Perceptions of Local Fiscal stress
During a Stete Budget Crisis, » Public Policy Inslilute of California, December 2009
29
52
88
106
42
9
117
69
76
49
84
116
95
49
NOTES
1 Max Neiman, Daniel Krimm, "Perceptions ofLoeal Fiscal Stress During a State Budget Crisis," Public Policy Institute, De
cember 2009.
2 Rex Nutting, "for 2009, sales sank a record 6.2% to $4.14 trillion," MarketWatch, Jan. 14,20 I 0
3 MuniServices, Economic Outlook, 4" Quarter 2009 News
4 US Commerce Department press release, January 14, 20 I 0
, Alan Zibel: "Sales rise, prices drop so recovery still on hold," San Jose Mercury News, January 26,20 10
• New York Times Editorial, November 8,2009
7 Tom Abate: "Smaller GDP growth might mean slower recovery," quoting Bart van Ark, economist with. the Conference
Board, San Francisco Chronicle, December 23, 2009
, "The Beacon Employment Report," Beacon Economics, December 2009
9 Maris. Lagos, "Cuts hurt economy, group warns," San Francisco Chronicle, February 3, 2010
to "The Beacon Employment Report," Beacon Economics, January 20 I 0
I. Tom Abate: "State jobless rate flat at 12.4%," San Francisco Chronicle, January 23, 2010
12 MuniServices Economic Outlook, 411> Quarter 2009 News
13 Jim Carlton, "Bay Area Housing Market Starts to Pick Up," The Wall Street Journal, January 21, 2010
14 Ian Shepherdson of High Frequency Economics, as quoted in MuniServices, Economic Outlook, 4" Quarter 2009 News
15 UCLA Anderson Forecast, December 9, 2009
16 Tom Abate: "Recovery will be slow, forecasts say," San Francisco Chronicle, December 9, 2009
17 MuniServices Economic Outlook 4th Quarter 2009 News
" Alan Zibel: "Cold winter for home sales;' San Francisco Chronicle, January 6, 2010
THIS PAGE IS INTENTIONALLY LEFT BLANK
The City of Palo Alto is located in northem Santa Clara County,
approximately 35 miles south of the City of San Francisco and 12 miles north of the
City of San Jose. Spanish explorers named the area for the tall, twin·trunked
redwood tree they camped beneath in 1769. Palo Alto incorporated in 1894
and the State of California granted its first charter in 1909.
Home to Stanford University and numerous innovative and world-famous businesses.
o 30% post·consumer fecycle<1
CITY OF PALO ALTO
250 HAMILTON AVE
PALO ALTO, CA 94301
www.cityofpaloalto.org
Phone:6S0-3Z9-Z100 Fax:650-32S-5025
TO:
ATTENTION:
FROM:
DATE:
SUBJECT:
ATTACHMENTB
I
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
DECEMBER 15, 2009
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 478:09
Additional Information Provided in Response to Finance Committee
Questions on the 2009 Year-End Close
RECOMMENDATION
Staff recommends that the Finance Committee review and provide input on the additional
information and responses requested on December 1, 2009 when the Committee reviewed the
General Fund financial results for FY 2009 and FY 2010.
BACKGROUND
On December I staff presented to the Finance Committee the financial results for Fiscal Year
2009 and Fiscal Year 2010 as of November 20, 2009 (CMR:434:09, Attachment A). The
presentation focused on the deficit that occurred at the end of Fiscal Year 2009 along with
information provided on the local economy, the financial forecast through 2012, and budget
'·reduction strategies for FY 2009 and FY 2010. After the presentation, Finance Committee
discussion centered on important issues surrounding financial results for FY 2009, the financial
condition of other municipalities, and the plans for addressing deficits FY 2010. The committee
requested that staff return on December ]5, 2009 with additional information and responses to
their questions.
DISCUSSION
The Finance Committee wanted additional information for FY 2009 concerning the General
Benefits and Insurance fund. This fund consists of three sub-funds. They are benefits including
PERS payments, workmen's and liability. compensation other issues raised by the Finance
Committce included deficits in other cities, public safety overtime and for FY 2010 revenue
projections for property documentary transfer taxes,
CMR:478;Q9 Page I of1
Benefits
As stated in CMR 434:09, staff maintained the General Fund benefit and insurance budget
allocations for FY 2009 at the same levels as for FY 2008. The General Fund's benefit and
insurance expenses at year-end, however, ended at approximately $1.8 million over budget.
With such an overage, and in any other year, staff would look to the General Benefit and
Insurance Fund (an Internal Service Fund) to cover this excess expense. As of June 30, 2008,
unrestricted reserves in the General Benefit and Insurance Fund were $3.2 million (page 124 of
the 2008 Comprehensive Annual Financial Report -CAFR) which should have beell sufficient
to cover the $1.8 million overage.
As background, many but not all benefits expenses and liabilities are centralized in the General
Benefits and Insurance Fund (GBIF) and are then allocated to all City funds based on actual
salary expense. Examples of these GBIF expenses inclu4e: pension, health care' premiums for
current employees and retirees, life insurance, disability insurance, paid leave, dental, and
general and workers compensation liabilities. As a consequence of some ofthese expenses being
lligher than expected, the GBIF's reserves were reduced to $0.5 million at year end. These
overages primarily were in the areas of unpaid leave liability and dental care premium expense.
Since the GBIF balance was reduced to such a marginal balance, and to have some cushion to
absorb unanticipated expenses for FY 2010, the GBIF was unable to absorb the General Fund's
$1.8 million excess expense as it would have and did in prior years. While there were very small
increases in general liability and workers compensation expenses, it must be clarified that they
did not cause the reduction in the GBIF fund balance. In other words, the general and workers
compensation liabilities were funded appropriately and there were no significant expense
variances as previously thought.
The GBIP balance of $0.5 million at the end ofFY 2008 will be replenished somewhat by health
care premium savings in FY 20 I 0 of $0.6 million dollars. This is a consequence of CALPERS
reducing the charges for the Preferred Provider Organization (PPO) health care premiums for
two months due to, one-time adjustments. Staff is analyzing the current budget to actual trends to
identifY any additional funding requirements and could make a recommended revision to the
budget that could result in an increasing budget deficit for 2010.
Deficits in Other Cities
Based on the Finance Committee's request, the following table provides information on deficits
faced by surrounding cities:
($ millions) ,,-
City Fiscal Year Budget Deficit % of Budget
Palo Alto 2010 $143 $5.4 3.18%
2011 $145 $5.6 3.86%
San Francisco (citywide) 2010 $6,600 $53. 0.80%
2011 $6600 $522 7.91%
I Livermore 2010 $86 $3.2 3.72%
CMR:478:09 Page 2 of?
, I I
Oakland 2010 $430 $19 . 4.42%
San Jose 2010 $984 $96.4 9.80%
I Mountain View 2011 $90 $4.1 4.56% ,
Santa Clara 2011 $158 $9 5.70% I
Redwood City 2009 $85 ' $5.8 6.82%
2010 $86.6 $8.2 9.47%
Walnut Crook 2011,2012 $143 $20 13.99%
San Cal'los 2010 $29 $2.7 9.41%
As the data above indicates, Palo Alto is not alone in facing budget shortfalls.
Overtime
The Finance Committee requested data on overtime by quarter for the past several years. This
information is provided in Attachment C.
Salary Savings
TIle Finance Committee requested confirmation that the salary savings projections in 2010 will
be realized. The City Manager has placed a hold on the hiring non-critical positions. With this
freeze in place, it is expected that salary savings in the amount of $1.5 million will be achieved.
This includes covering the cost of overtime as well as temporary salaries.
Staff reported on December 1,2009 that the General Fund's has 622.51 Full-Time Equivalents
(FIE) of which there are currently 45 vacant FTE. Should the City maintain this vacancy rate,
an estimated $4.1 million in savings can be realized by year end. Of the 45 FTE, however, 10
positions are considered critical for public health and safety and operations will be filled. This
will reduce the vacancy savings by approximately $1.0 million. In addition, and because of
overtime costs annually exceeding budget, anticipated salary savings must be further reduced by
$1.6 million. The net anticipated vacancy or salary savings at year end is anticipated to equal
$1.5 million at year end. TIle Table below shows these savings by department.
CMR:478:09 Poge 3 of7
City Manager
AdOlinistl'8tive Services
Community Services
Library
Fire
Human Resources
Planning and Community
Environment
Police .,
Public Works
Non-departmental
1 Total
Reyenue Information
Documentary Transfer Tllx
1302 151
3,709 147
8,707 276
3;291 156
14,182 1539
1544 193
4531 • 390
16706 1,891
4831 337
(!,313) (2,206)
60,0151
-lSI
. 147 ,
(137) 139 !
-156
(679) 860
. 193
i (311 353
• (691) 1200 !
(51) 286 !
-(2206)
~, .. ~~ (1,595) 1,500
During the December I, 2009 Finance Committee meeting. the Committee requested trend
analysis of the documentary transfer tax results for FY 20 I 0 that incorporated different
assumptions for growth in the remainder of the year.
In the report delivered to the Committee (CMR: 434:09), staff stated that that this revenue source
may have reached its trough and that revenues at year end were likely to equal $2.9 million. This
conservative estimate assumed that revenues through the remainder of this fiscal year would not
be materially different from December through June of the prior year. This assumption was
based primarily on a persistently weak economy. poor credit availability, and data (through mid
October) that indicated transactions were running nearly 22 percent below the prior year levels
for the same period.
In addition, staff stated that transfer taxes from July through November 30, 2009 equaled $1.5
million, similar in amount for the same period in the prior fiscal year. Since revenues began to
decline considerably from December of 2009 through June of 2009, performance through the
first four months of this fiscal year would appear to indicate a strengthening in transfer taxes. A
straight annualizing of year to date revenues (based on 9 of 24 remittances) would result in
revenues of$4.0 million at year end, an amount that does not appear achievable given prior year
results and the economy. On December 9, staff received a remittance of $170.104 (#10 for the
FY). This remittance exceeds that of the prior year period by $36,000 or 26.8 percent indicating
ftuiller stabilization and possible growth in this revenue source compared to the prior year
Before providing a reasonable range for year end revenues, the following factors affecting this
revenue category should be considered:
CMR:478:09 Pago4 of?
o Documentary transfer taxes ($3.30 per $1,000 of value) are dependent on the volume of
transactions in any given year
o These taxes are based on the mix of transactions between commercial and residential
properties where one large commercial transaction can be the equivalent of numerous
residential transactions
o Seasonality plays a tole in projections since there are a higher number of transactions
during the period March through August than during the remaining months
o One or two large commercial property transactions, which mayor may not occur in any
given year, can skew trend analysis
The graph below plots remittances and available transaction data and depicts the affect the above
factors can have on under or over estimating revenues.
,.. ..~~_ .. ___ .. _I:!Q..£\!rmtntaly.lransfer Tax vl!,j\llJmber of Tr.!!!!sactiona ______ ~_,_ m.
"JU6 . $113
" '~11)\I , " ..
····1 uui
~
~
I:: Ilfl
" t ! &0
$1110
Keeping in 'mind these factors, as well as data indicating a possible firming of transactions, staff
now believes a $2.90 million projection represents the lower end of a reasonable projection.
Assuming that revenues will grow by 10 percent for the remainder of the year, a projection of
$3.25 million is attainable. A 15 percent increase would result in $3.32 million in revenue.
Should the City realize another large, commercial transaction during the remainder of this year,
an additional $0.1 to $.2 million may be realized.
Another approach to determining a reasonable range of transfer tax outcomes is to use the
historical percentages (ratios) of July through mid-December revenues to total fiscal year
revenues for prior years (note that revenues from July through mid· December, 2009 equal $1.66
million). The graph below shows these percentages, which range from a low of 31 percent in FY
2002 (dot.com boom period) to a high of 53 percent (Great Recession period) in FY 2009.
Remittance data dating back to FY 2001 and the percentages cited in this text can be found in
Attachment D.
CMR:478:09 Pog.50f7
to Mld·Dec. Doc. Transfer Tax Receipts· Thru Mid-Dec. end Annual "
~l------·---------~-------~----~f---~···~·~~~~~t
!i! .,
:Ill .............. ········ .. ··· .. ·········~········· .... I··
$1
With the first remittance of December, it now appears. that higher year-end revenue could be
realized. For example, a [ower percentage, such as 50 percent or 48 percent (a 48 percent ratio is
similar to that experienced in FY 2004 when the City was recovering from dot.com bust) would
result in revenues of$3.3 million or S3.4 million, respectively.
Based on the analysis' above and respecting the fragility and potential surprises from a still weak
economy, staff believes transfer tax revenues could reach the $3.2 to $3.3 million levels by year
end.
Property Tax Revenues
The Finance Committee requested additional analysis of property tax projections for FY 2010-11
and wanted information on the assessed value added to the roll by new developments and
property transactions or turnovers/sales. The !3ble below shows the secured property tax roU
percentage changes for the City of Palo Alto dating back to FY 2005
Fiscal Secured Property Percentage
Yellr Valuation Change
2010 I $20.24 billion 4.4% ,
, 2009 19.38 billion 11.5%
2008 17.39 billion 7.2%
2007 16.22 billion 8.9%
2006 14.89 billion 9.3%
2005 13.62 billion
Although the county does provide statistics on growth due to change in ownership and new
construction, it is on a countywide basis. There are several variables affecting growth, but based
on the maximum 2 percent increase permitted by law and realized from 2006-2010, the City's
growth rate to new ownership and construction is close to a low of 2.4 percent in 2010 to a high
of 9.4 percent in 2009. A 1 percent increase in secured property value translates into
approximately $175,000 in additional secured property tax revenue.
CMR:41B:09 Pase 6 of?
At this time, the County is projecting that 2011 property values will have a negative .23 percent
adjustment factor based on the California CPI. This means that assessed values for City
properties will decline by .23 percent and offset growth due to property transactions and
development. Given the precipitous decline in the secured property assessed value from 2009 to
2010, growth is likely to be minimal for FY 2011. It is important to note that property tax
movements lag behind the increases and decreases in the more immediately economically
sensitive sales and transient occupancy tax revenues. The long range forecast attached to the
December I, 2009 CMR projected an increase of 2.3 percent increase for 2011. At this time, and
given the most recent infol'matipn that a llegative CPT adjustment is likely, staff believes a I
percent increase over the 2010 projection would be more prudent.
RESOURCE IMPACT
The discussion in this report and the financial results depicted in the LRFF indicate impacts to
the City's General Fund,
ENVIRONMENTAL REVIEW
This is not a proj eel for the purposes of the California Environmental Quality Act.
PREPARED BY:
DAVIDRAMBG
Assistant Director of Administrative Services
JOES
Deput !recto of Administrative Services
DEPARTMENT HEAD APPROVAL:
Director of Administrative Services
CITY MANAGER APPROVAL: JAME EENE
. ~1iy anager
I
ATTACHMENTS {/
Attachment A: CMR:434:09 Fiscal Year 2009 General Fund Discussion and Fiscal Year 2010
Financial Results as of November 20,2009
Attachment B: Excerpt from the Finance Committee Minutes of December 1,2009
Attachment C: General Fund Overtime Trends
Attachment D: Documentary Transfer Tax Performance
CMR:47S,09 Page? of?
TO:
ATTENTION:
FROM:
DATE:
SUBJECT:
ATTACHME.NT A
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
DECEMBER 1, 2009
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 434:09
Fiscal Year 2009 General Fund Discussion and Fiscal Year 2010
Financial Resulfll as of November 20,2009
. RECOMMENDATION
Staff recommends:
1. That the Finance Committee review and provide input on the General Fund financial
results for FY 2009 and preliminary results for FY 2010, including staff's proposed
financial plans for each of the two fiscal years.
2. After Finance Committee review, direct staff to present this report to the full Council in
January 2010.
BACKGROUND
Staff is providing the 2009 fiscal year-end financial results for the General Fund (OF) earlier
than usual due to the severe downturn in the economy and the impacts it has caused to the City's
financial position. Because of a higher than anticipated budget gap in Fiscal Year (FY) 2009,
staff is presenting year-end results in this report and win provide the final audited financial
statements to the Finance Committee December 15.
Looking at tbe cun-ent fiscal year, the continuing economic downturn requires revisiting revenue
and expense performance and potential options to close a higher than expected year-end budget
gap. In the FY 2010 budget process, a $10 million General Fund deficit was Identified. This gap
was closed with a three pronged approach that relied on one-time reductions, program cuts, and
reductions in employee benefits and salaries. The latter was achieved through reductions in
benefits 10 SEm and management employees and a postponement of a police union salary
increase. Unfortunately, these reductions of approximately $10 million have proven insufficient
to stem the tide of declining revenues and the City is facing an additional $5.4 million deficit.
This deficit could continue to grow if revenues do not remain stable in the second half of this
fiscal year.
CMR:434:09 Page I of 13
The City of Palo Alto is not alone in facing this disturbing situation. The cities of San Francisco
and Oakland have already pared their budget several times and are likely to face additiolllli futurc
drops in property taxes. Jurisdictions up and down the Peninsula are facing fluid, if disruptive
revenue environments in which multiple budget adjustments are needed. Moreover, the size lind
nature of the revenue shortfalls, such as shifts in consumer spending patterns, likely require long
term structural expense changes. An updated Long Range Financial Forecast (Attachment A) is
provided to show the projected deficits the City faces in FY 2010 and beyond.
DISCUSSION
Fiscal Year 2009 General Fund Results
The drop in key revenue sources in FY 2009 required midyear budget adjustments to OF
revenues and expenditures, Early in the year, staff estimated the FY 2009 budget deficit to be $8
million and a plan was implemented to close this gap. The adjustments made to revenues at
midyear were close 10 projections. Unfortunately, however, the adjusted expense budget
underestimated expenditures at year end and resulted in a OF deficit of $4.8 million (in addition
to the $8 million projection). This additional shortfall was mentioned briefly during the October
5, 2009 Council meeting, but since staff did not have the specific data reviewed by the outside
auditor at that time, it has not been discussed in detail until this report. The components of the
sh0l1fail are outlined in the following table and explained below.
Table 1
FY 2009 General Fund Deficit Summary
Salaries ($2,100,000) --I • Overtime
i Police ($ 650,000)
Fire ($ 250,000)
Benefits ($1 800,000)
Total ($4,800,000)
Salaries
The salary line item was over budget due to a miscalculation in the amount of expected salary
savings. The adopted operating budget includes an annual factor for salary savings. These
savings result from 1) an expected vacancy rate or the number of positions that are not filled at
any given time throughout the fiscal year; and 2) a salary expense "cushion" resulting from
salaries being budgeted at the top step compared to actual salaries that are, for many employees
lower (e.g" new hires). During the midyear budget process, staff included a second round of
salary savings that did not materialize. The miscalculation was not recognized in time to make
additional expense adjustments. Staff has implemented monthly variance reports, as well as other
controls, to avoid such occurrences in the future.
CMR:434:09 Page 2 of J3
Overtime
Overtime costs in the Police and Fire departments exceed the budget every year due to vacancies,
disabilities, minimum staffing requirements, and staffing of Station 8 for fire protection in the
summer and emergencies. In a typical year, these overages are covered by salary savings
citywide or in the public safety departments. With the salary savings factor overestimated,
however, the savings were not there to absorb thtl overtime excess. Therefore, the $900,000 in
excess overtime for these two departments contributed to the FY 2{)09 deficit. It should be noted
that Stanford University reimburses 30.3 percent of all operating expenditures including
overtime and the State of California provided reimbursements for Fire Strike Team activities.
The $900,000 is not offset by these reimbursements. The City will receive these reimbursements
in FY 2011.
Benefits
The City has a General Benefit Fund (GBF) from which it pays its benefit expenses such as
medical and workers compensation costs. This fund, like other Internal Service Funds (e.g.,
Technology, Vehicle), typically carries a positive balance in the form of retained earnings which
covers operations and project or capital needs. In the past, the balance in retaIned earnings in the
General Benefits Fund helped cushion against year-end benefit expense adjustments.
Specifically, workers compensation and general liability costs, which reflect yearend actuarial
adjustments (based on incurred but not reported expenditures) can fluctuate considerably but are
not known until year end as they are based on the volume and severity of claims. In most years,
the GBF and the Fund's retained earnings are sufficient to cover unexpected liabilities as well as
any overages in other benefit categories such as medical premium expenses.
Anticipating that retained earnings in the GDF were sufficient to cover benefit expenses in FY
2009, General Fund benefit expenses were held constant from FY 2008 to FY 2009. This
practice has been implemented in past budget years in an effort to keep a reasonable balance
between retalned earnings balances in the GBF and what expenses are budgeted in and allocated
to GF departments each year. Disappointingly, benefit expenses at the end of FY 2009 came in
$1.8 million over budget due to higher than anticipated claims.
Establishing an annual budget depends on a number of variables that can be difficult to predict
and are subject to change. In high performing years, the City has enjoyed considerable cushion
in its budget that has allowed midyear adjustments with negligible impact on the bottom line. In
times of sustained economic downturn, cushions such as higher than anticipated revenues, are no
longer present. Margins that are extremely tight due to falling revenues, low Internal Service
Fund reserve balances, and prior expense reductions have become tighter and more difficult to
maintaIn. Of the $4.8 million FY 2009 deficit shown in Table I, only the $2.1 million in
underestimated salary expenses could have been foreseen at midyear (midyear report was
presented to the Finance Committee on March 10) and later. The remaining expenditures, on the
other hand, are finalized at year-end and thus sufficient data is not available for earlier
adjustments.
CMR:434:09 Page 3 of 13
Budget Balancing Plan for Fiscal Year 2009
In order to solve the $4.8 million deficit for FY 2009, staff proposes postponing a budgeted $4.8
million transfer to the Technology Fund. This will have the effect of lowering OF expense and
eliminating the General Fund deficit This one-time deferral will reduce the Technology Fund's
retained earnings to $51,000 net of encumbrances and re-appropriations. The $4.8 million
transfer will result in planned technology projects such as radio infrastructure improvements and
library RPID implementation being delayed. In addition, technology infrastructure replacement
schedules will need to be revisited and adjusted accordingly. As a consequence of this action,
the Technology Fund is at an exceptionally low balance Ilnd wiIl need to be replenished via
future transfers from the GF so as to not severely impact technology operations. Currently,
repayment over a four year period is being contemplated. The only other immediately available
option to solve the deficit would be to draw down the General Fund Budget Stabilization
Reserve, but since the City is experiencing extremely volatile economic conditions which have
implications for FY 2010 a reserve drawdown in FY 2009 is not recommended.
Fiscal Y car 2010 Financial Results To Date
On September 8 and October 5 (CMR: 394:09 and CMR 358:09 in Attachment B), staff
informed Council of potential further deterioration in General Fund revenues and the possible
need for budget adjustments in excess of the S10 million in reductions already incorporated in
the Adopted FY 2010 Budget. Due to the extended recession, City revenues will fall
significantly below budget in FY 2010. Since FY 2008, sales, transient occupancy,
documentary, and interest income have fallen by a combined $8.2 million. In addition, permit,
golf course fee, and traffic fine revenue also have dropped by $1.1 million since FY 2008 due to
the economic environment. Cumulatively, this represents a $9.3 million downward swing in GF
resources over two years and it has caused an additional budget deficit for FY 20 10 which is
estimated now at $5,4 .million. Attachment C shows the performance of revenues through
November 20, 2009 relative to the budget. Due to the timing of payments (e.g., sales and
property taxes) and seasonal factors, these results must be viewed cautiously.
Revenue Performance in FY 2010
Sales Tax
Sales Tax revenue is the General Fund's third highest revenue equaling 14 percent of its
resources. In recent years sales tax has become a highly volatile and fragile source of City
income. Whereas FY 2008 actual revenues were S22.() million; it now appears the City will
realize $17.7 million in FY 2010. This represents a $5 million or 22 percent decline in a very
short period of time. To place it in perspective, this $5 million drop equals 77% of the FY 2010
Library budget.
The projected $17.7 million in sales tax revenue is $2.0 million below the FY 2010 Adopted
Budget. The primary cause for the decline is economic and the secondary cause is a drematic
decrease in the amount remitted by the State in its semi-annual "triple flip" payments for FY
2010. With the exception of one economic segment (electronic equipment), all sales tax
segments -autos, department stores, miscellaneous retail, furniture/appliance had dreadful
results in the second quarter. In mct, all of these areas had the lowest "benchmark year"
performance in this quarter compared to 8 prior "benchmark year" quarters (a benchmark year is
the current quarter reporting period plus the prior 3 quarters). New auto sales fell to $1.1 million
CMR:434:09 rage 4 ofJ3
comp!ll'ed to $1.8 million in the second quarter of2007. For the same periods, department store
sales have fallen from $2.7 million to $2.2 million, while miscellaneous retail sales dropped from
$1.9 million to $1.5 million. Even the normally resilient restaurant sector has turned downward.
The City'S outside sales tax consultant believes that sales taxes may fall as much as 15 percent in
the upcoming third quarter compared to the prior third quarter. This would be consistent with
the prior 2 quarters and would not bode well for the critical fourth quarter holiday sales season.
FUrthermore, on October 14, the 'State notified jurisdictions of lower "triple flip" payments.
Whereas the State advanced the City $5.7 million in FY 2009, in FY 20 I 0 its payment dropped
to $4,3 million, a 24.6 percent reduction. While there is a solid rationale for reducing the City's
"triple flip" payment given the economy and statewide sales tax receipts dropping by 20.8% in
the second quarter, the State seems to have underestimated what the City will realize in sales
taxes at year end by around $0.4 million. The State eventually will reconcile its payments to
actual results for FY 2010, but not until the following fiscal year.
In contrast, the State's "triple flip" payment to the City for FY 2009 was higher than justified by
actual results. Since the State reconciles its payments to actual results in the following fiscal
year, consequently the "true up" for FY 2009 will result in a $0.8 million reduction in payment
for FY 20 10. By adopting the "triple flip" payment system to solve its budget dilemmas, the
State has further complicated salcs tax projections.
Transient Occupancy Tax Q'OT)
City TOT revenues have been soft. Revenues from January through June 2009 were 29 percent
below those of the prior year. In July 2009. revenues were below July 2008 by 21.3 peroent.
The Senior Games did have a salutary impact in that A~gusl revenues were only 8.7 percent
below the previous August; but September's results resumed Ihis sector's weak trend line being
21 percent below September 2008. Based on performance to date, a downward adjustment of
around $0.2 million will be recommended at midyear.
InVestment Income
With the Federal Open Market Committee (FOMC) keeping interest rates low for a longer than
expected period, the City's interest income has declined. Although short-term interest rates on
Treasury instruments are close to zero percent, the City is earning nearly 4 percent on its
portfolio. This rate of return is a consequence of earlier, long-term investments that have not yet
matured. This rate will decrease and staff believes a downward adjustment in income of $0.2
million is necessary.
Property and Documentary Transfer Taxes
Property taxes are tracking close to budget and are expected to be on target at year end. Despite
a weak housing market, property values in Palo Alto have remained relatively stable. Thera are
indications from the County, however, that a large number of commercial properties throughout
the County are filing for reassessments which will lower future property tax receipts. No hard
numbers are available at this time, but an impact on this revenue category can be expected in the
next few years.
Although the transfer tax has fallen from $5.4 million in FY 2008 to $3.1 million in FY 2009,
receipts from July through October are only slightly lower compared to the same period of the
CMR:434:09 Page 50fl3
prior year. This may indicate that the bottom of this revenue source has been reached and will
hold steady until year end. At this time, the budget of $2.8 million in FY 2010 for the transfer
tax appears realistic and will likely be increased to $2.9 million at midyear.
Utility Users Tax
Results to date indicate the telephone tax will exceed estimates, while utility related revenues
will be lower than anticipated. The net result is that this revenue source will likely be adjusted
upward at midyear by around $0.2 million.
Parking Violation Revenue
The City has collected $0.4 million 01' 20 percent of the $2.0 million budgeted in Parking
Violations to date. The number of first quarter citations issued is 29 percent lower than previous
first quarter results, while, due to a decline in downtown occupancy and the slowdown of retail
spending. the number of vehicles monitored has decreased 16 percent. Based on the 16 percent
checked for compliance, year end Parking Violation revenue is projected to be $1.5 million, or
$0.5 million short of budget. Staff will be reevaluating the cost recovery levels of the program
and make recommendations to balance revenues and expenses.
Permits
Permit processing has declined approximately 14 percent or $0.6 million. Although the
valuation of projects submitted for permit issuance is higher than the prior year, stricter lending
qualifications and conservative spending practices have lengthened the time applicants require to
finalize their projects. While some permit fees are collected at the beginning, most are
recognized when the permit is finally issued. Projects that do not go to completion do not pay
the costs of processing their permits part way. This collection system should be reevaluated to
ensure that the program is covering its costs throughout the permit process.
Plan Checking Fees ,
Fees for the processing of applications have declined approximately 14 percent due to the
recession, This line item is expected to be decreased at midyear by $0.3 million.
Golf Course R~venue
1110 economic environment has affected the number of golf rounds played in Palo Alto and
throughout the industry. The projection for FY 2010 of 76,000 rounds at the course is being
revised downward to 72,000 rounds, thus reducing revenues by an estimated $0.2 million. CSD
is examining ways to keep the golf course competitive with other nearby municipal golf courses.
It will be important to develop a long-term plan for the golf course (which is in need of
additional maintenance and upgrades) given the significant drop in rounds and as the associated
costs of running and maintaining the course continue to increase. It is important to note that the
Golf Course suffered a $0.3 million loss in FY 2009. Staff will return during the fiscal year with
further recommendations on how to address the golf course deficits and a long-term plan.
Class Registration Fees
The Community Services Department (CSD) experienced a 6 percent decline in program and
camp registrations this summer, demonstrating that the recession has had an impact on class and
program activity. CSD fee revenue will be adjusted downward at midyear by approximately
CMR:434:09 Page 6 or 13
$0.4 million. The department is working with class producers to look at new programs and
revamp old ones by using evaluation information from participants. CSD will look at new
methods of marketing (including banners through the city, school flyers and e-mail blasts from
Friends groups).
Cost recovery levels will need to be reviewed and difficult policy decisions made regarding
programs that may not be recovering their costs or are being duplicated by surrounding
competition. The City is likely at a point where it will no longer be able to sustain the number of
Community Services programs offered, and a prioritization of programs will be needed with
input from all stakeholders.
Other Reyenues
This revenue source includes facility rentals, special events. fees, and other miscellaneous
revenues. It will be decreased by approximately $0.3 million, due to an economy related
decrease in demand for these services.
Attachrnent D shows, in considerable detail, GF revisions to revenue projections for FY 2010
and FY 20 II based on the discussion above.
Expense Performance in FY 2010
With the exception of overtime, regular salary expenses are in line with their budgeted levels.
This is supported by the discussion .below on the salary savings expected in FY 2010 due to
vacancies. These savings represent one of the proposed steps for solving the expected year-end
deficit.
Overtime Expenditures Compared to Adjusted Budget
General Fund Overtime Analysis:
'flle following chart sbows total overtime expenditures reaclting 73 percent of the adjusted
budget on a citywide basis while straight line usage would indicate 39 percent usage through
November 20. The table below shows that Fire. Police. and Public Works Departments are the
principal departments exceeding their budget.
CMR:434:09 Page 7 of 13
Table 2: FY 2010 General Fund Overtime As of November 20
OITY OF PALO ALTO
FISCAL YEAR 2010 MIDYEAR FINANOIAL REPORT
AS OF NOVEMBER 20, 2009
IAdlmlnlslre,tlve Services
IColmm'JnHy Services
Resources
GENERAL FUND OVERTIME
(In thOusands of doHtro)
7 7
3
45
105
56
I Plannlrlc and Community Environment
1,016
4
67
• The Fire Department has used 102 percent of its annual overtime budget through
November 20, 2009. This is due to Station #8 staffing ($0.2 million) and Medic-I
staffing ($0.1 million), with the remaining amount of $0.7 million resulting from backfill
for minimum staffing requirements due to sick leave, vacations, and workers'
compensation light duty assignments.
• The Police Department's has used 57 percent of its annual overtime budget. The
customary work of busy shifts, case writing, investigations, and court appearances on off
days as well as an increase in the 9-1-1 dispatch center as more senior Police Dispatchers
train newer employees are the cause of Police exceeding budget to date. Traffic control
services at Stanford football games and other events are partially offset by
reimbursements from the university and organizations.
• The Public Works department has used 66 percent of its overtime budget. The
department has had limited staffing in custodial and maintenance areas and has used
overtime to maintain minimum service levels. The department is currently using limited
hourly persormeJ to assist with custodial and maintenance services. Overtime costs are
expected to rise further as the temporary salary budget is exhausted. This department's
OT budget is small in comparison to the Fire and Police departments.
CMR:434:09 Page 8 of 13
For historical and morc detailed information on public safety overtime costs see Attachment E.
Budget Balancing Plan for Fiscal Year 2010
Although department expense budgets, as a whole, are within their expected target range, the
dramatic fall in revenues requires immediate action to achieve a balanced budget. The following
table shows the revenue adjustments discussed above and the actions recommended to close the
expected $5.4 million gap. These actions are explained below.
Table3: FY 2010 Proposed Budget Balancing Plan
...
Revenue Impacts -OOOs-
Sales Taxes -2,005
Parking V[?latlons -46Q
Fees/Perm Its -1,551 ,
Return on Investments -238 i
Other Revenue -186 !
Increases In Spe~ific Revenues 144 •
Total Revenue Impacts. ·4,296
Expense I m pact -1,131
I
. Total GF Impact -5,427 •
: Expense Offsets -Proposed .
. Salary savings -hiring freeze 1,500
Public Safety Building 2,700
Budget Stabilization Reserve 1,279 .. -
Re payment of the IT Loan -1,225
Non-Salary Savings 1,000 i
S3 Million Solution Salary and Benefit i
Gap to Offset 173 :
i Total Proposed Offsets 5,427 !
Net Change 0
Salary Savings
Staff is now monitoring salary savings due to vacant positions on a monthly basis. The General
Fund's has 622.51 Full-Time Equivalents (fTE) of which there are currently 45 vacant FTE.
Should the City maintain this vacancy rate, an estimated $4. I million in savings can be realized
by year end. Of the 45 FTE, however, 10 positions are considered critical for public health and
safety and opemtions will be tilled. This will reduce the vacancy savings by approximately $1.0
million. rn addition and because of overtime costs annually exceeding budget, anticipated salary
CMR:434:09 Pftg.9or1J
savings must be further reduced by $1.6 million. The net anticipated vacancy or salary savings
at year end is anticipated to equal $1.5 million at year end. Attachment F shows these savings by
department.
Public Safety Building
It is proposed that the remaining encumbrance for the public,safety building capital project be
reduced by $2.7 million. These funds were designated for completing design work and since this
project has been postponed and there is no land cun'endy identified for the building, it is
recommended they be returned to the original source of funding the General Fund's Budget
Stabilization Reserve. This project will then retain $0.3 million to allow for evaluation of
alternative facilities.
Budget Stabilization Reserve
The extraordinary economic conditions, precipitous fall in revenues, and time required for
implementing further expense reductions, cause staff to reluctantly recommend a one-time draw
on the General Fund Budget Stabilization Reserve (BSR) of $1.3 million. With the City'S
participation in the California Securitization Program (CMR 413:09), the $2.5 million property
tax "loan" by the State (cited in CMR: 394:09) that would have required a draw on the Budget
Stabilization Reserve has been neutralized. The City will now receive bond proceeds through
the Program at the time property taxes are deducted from the State, thereby keeping the GF
whole.
The one-time $1.3 million drawdown will reduce the BSR to $24.6 million or 17.4 percent of
budgeted expenditures. City policy requires that the BSR remain at a minimum of 15% of
expenditures. If the reserve falls below this level the policy will need to be amended or an
exception will need to be approved by the Council. Having a healthy level of reserves is critical
for emergencies or severe economic dislocations such as the one we are enduring. Therefore, it
is appropriate to use it in FY 2010. In future years, however, additional expenditure reductions
or revenue enhancements will be required to avoid drawing down the BSR below required
minimum levels (see Attachment A -the Long Range Financial Forecast).
Additional FY 2010 Budget Reductions and Expenses
To minimize the draw on the BSR, staff will attempt this fiscal year to fmd $1.2 million in non
salary and other savings. Contracts, travel and training. and materials and services will be
scrutinized to achieve this before year end. Staff had hoped to find such savings in FY 2009 (to
offset the $1.131 million expense impact cited in Table 3 above), but was unable to identify
them. Without these reductions, an additional draw on the BSR may be needed. This will be a
challenging but necessary exercise to close the anticipated gap.
Because of the $4.8 million drawdown on the Technology Fund in FY 2009, it is important to
replenish the Technology Fund. To do so requires a $1.2 million annual payback ov~r four
years. This payment is reflected in the Table 3 above.
FY 20lQ and Future Fiscal Year Challenges
Although staff believes that if all of the above budget solutions are implemented and revenues do
not further decline, a balanced budget would result at year end, the tenuousness of the economy
and uncontrollable expenses such as general liability losses and workers compensation could
CMR:434:09 Page 10 of 13
further adversely impact the budget. The City has already made repeated and painful expense
reductions to balance its budget beginning with the dot.com bust and earlier and there are only
more painful reductions left. Meanwhile, the City faces sizeable, new expense challenges.
The Long Range Financial Forecast (LRFF) presented to Council on October 5, 2009 (CMR:
. 394:09) has been updated based on recent revenue and expense data. The Net Operating Surplus
(Deficit) line in the forecast for FY 20 I 0 shows a deficit of $5.4 million in FY 20 I O. Below this
line are the recommended solutions (discussed above) to solve the projected deficit. Even with
the solutions proposed for FY 2010, the General Fund still shows continuing Net Operating
Deficits in Fiscal Years 2011 through 2020.
Compounding these deficits are additional costs and liabilities the City will face in the near
future. These "below the line" liabiUties and costs cause the City'S deficit to equal $5.6 million
in FY 2011 and to grow considerably until 2020. These include:
I) CalPERS will increase retirement contributions from participating jurisdictions starting in
FY 2012 due to significant losses in its investment portfolio. The City of Palo Alto
estimated increases will rise from an additional $1.0 million in FY 2012 to $5.4 million
in FY 2015.
2) The annual contribution towards the citywide employee retiree medical liability will rise
by $1.4 million per year with the General Fund's share at $0.7 million
3) The new library and community center expansions and rehabilitations require
approximately $1.0 million in incremental annual operating expenses beginning in FY
2013.
4) The current rate of funding from the General Fund and Infrastructure Reserve, which is
around $9 million per year, is about $6 million less than what is required to fund the $302
million infrastructure backlog or liability. Moreover, the Infrastructure Reserve balance
currently stands at $6.4 million and is expected to decline to $2.7 million in FY 2011.
New revenues or a reallocation of expenses are necessary to fund needed infrastructure
work.
Offsetting these deficits, but not included in the LRFF, are the savings from certain benefit
changes implemented for SEIU and management employees. These include a second tier
retirement plan (2 percent at 60) for new employees and an employce contribution to medical
expenses that is to take effect in FY 20 I I. Similarly, the City will need to seek salary and
benefit savings from Fire and Police whose cosl8represent 39 percent of the OF's budget.
It should be noted that the CalPERS Board recently adopted a plan to share excess reserves in the
preferred provider organization health plan with local agencies by providing a two month
"premium holiday." This results in a savings to the General Benefit Fund of approximately $0.7
million citywide in FY 20 I O. Given the minimal balance in the GBF, staff proposes that these
savings be used to bolster the Fund's balance in preparation fur any year end unanticipated
liability expenses.
CMR:434;09 Page II of 13
The l'econunendations to balance the FY 2010 budget primarily consist of one-time adjustments
(e.g. draw on reserves, vacancy savings) to get us through the current fiscal year. During this
time, the Council. community, and staff will need to address the long-term deficits the City
faces. In addition io further contributions by employees, expense reductions will be necessary
and must involve prioritizing City programs. Also, additional reveilues must be explored.
During the FY 201 0 budgeting process, the Finance Committee discussed what has come to be
known as "Tier Two" reductions (Attachment G). These reductions were placed in abeyance
until such time as a clearer revenue picture emerged in FY 2010 and need now to be revisited. In
addition, and because of the magnitude of the City's financial challenges, a list of near, medium,
and long-term alternatives are presented to foster further discussion of how to balance the
General Fund's budget (Attachment H). It is important to note that many of these options have
significant policy ramifications andlor legal or other obstacles. They are being introduced at this
time, however, as examples of issues to discuss and with the expectation that they will generate
other related solutions. The Executive Leadership Team (ELl) has scheduled a retreat to take a
comprehensive look at these initial recommendations and it is expected that this list will undergo
further refinement before it is presented to the fuJi Council.
ELT will examine the best practices identified in a recent League of California Cities pUblication
("Municipal Fiscal-Health Contingency Plarming," Western City, pp. 18-23) to plan for the
difficult cost reduction process ahead and for proposals to Council. General strategies
recommended include, for example:
o Proposing reductions that reflect the fewest service impacts to the community
o Describe service impacts and make process transparent to all involved parties
o Crafting operating expenditure reductions that are real and feasible
o Reductions must be ongoing and net of any related revenues, fees or grants
o Maintain essential facilities, infrastructure and equipment at reasonable levels
Once ELT develops a process and identifies possible reductions, staff will propose these to
Council.
Conclusion
Critical revenues sources have declined by a total of $9.3 million since FY 2008. The recovery
in these revenues is expected to take multiple years, and it is entirely possible that some revenue
sources never ~gain the levels reached in peak years. Beginning in FY 2010 the City has taken
proactive measures to begin paring back its expenses. By establishing a two-tier retirement
structure and requiring employees to contribute to medical expenses (still to be negotiated with
Fire and Police unions), the City has taken a major step toward addressing its unsustainable
expense structure. But there is considerable work ahead. Even with the current year deficit
closed, expenses will outpace revenues in each future year. The City must decide how to cut
those expenses back -which programs and services are lowest priority. This is likely a multi
year process.
CMR:434:09 P.ge 12 of 13
RESOURCE IMPACT
The discussion in this report and the financial results depicted in the LRFF indicate impacts to
the City's General Fund.
ENVIRONMENTAL REVIEW
This is not a project for the purposes of the California Environmental Quality Act
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
ATIACHMENTS
Assistant Director of Administrative Services
~
LALOPEREZ
Director of Administrative Services
JAMES KEENE
City Manager
Attaclunent A: Long Range Financial Forecast
Attaclunent B: CMR:394:09 Fiscal Year 2010 Budget Update
CMR:358:09 Review of Preliminary FY 2009 Revenue Analysis
Attaclunent C: Fiscal Yeul' 201 0 General Fund Financial Report as of November 20
Attachment D: General Fund Revenue Changes for FY 2010 and 201 I
Attaclunent E: Police and Fire Departments Public Safety Overtime Analysis for Fiscal Years
2005 through 2009, with Fiscal Year 2010 Data through November 20, 2009
Attaclunent F: FY 201 0 Salary Savings by Department
Attaclunent G: Tier 2 Reductions
Attachment H: Budget Reduction Options
CMR:434:09 Page 13 of 13
CITY OF PALO ALTO LONG RANGE FINANCIAL FORECAST GGneral Fund ($000)
A ttachment A
LONG RANGE FINANCIAL FORECAST MODEL 2009 ($000)
FY 2009 FY2011 fY 2012 FY2013 FY 2014 FY2011 FY201& FY2017 '12018 FY 2019
Ac:tu.1
, 20,089 • W,6(iO $ 11,645 $ 17,992 $ I 16,9113 $ 1~641 $ 2t434 $ 21,20(1: I 21 1941 $ 22,lW , 23.051
21;,762 25,m; 2am 28.319 29.619 31,136 32,735 34,331 35.9.1& 36.804
11,,250 lMll 12,513 13.615 13,013 1~71Xl 15.4611 1~326 \1,200
7,1lOO &,650 6,987 1,344 7,656 MI9 M2il ~7llIl
FY 2020
$ 23,m:
31,379
18,966
9,631
OJIB 10.300 1~B20 11,3ilI 11,932 12,533
'.1.900
Funds
62,11)1 63,512 ' 00.&12
~ lie Nagoi8l«l ., , (~iiOOJ
~ 1194! 'i· , , (l,i221
MgII'<@rof,
29,471
91,581
10,100
~023
I
MdltkHlB! Reflrernanl CooII!bu!.kln fwease PI
Retir&e MOOki. CoslIll(;teal6
library OPlflling Ceat !ncrellie
Inftaslare Con!flbuUan Ioctease
T~r F"'" "'Plllm'~ 11,225)
l'ubllo SalSIy B"" Budgel Savlll9s 2,700
Non-5$.IaIy RaQucUOO$1o be DettfrnUunt 1,000
Salary & genenl ftad~ to be Negctiete:d 173
ViIlOO! PQsWon& Sl'ialy Savings 1,500
Drawdown Of! Badgel St&blflzaOon .ReseJVe 1.219
Subtotal # otnw ActiyltJe1
1,646
15,4&1
64.007
(1,222)
(1lOII)
32,935
94)9:'4
B,884
Mao
(73)J
11~2!)
!167
1.676
66,(}/4
{1,24~
l822)
34,713
!M16
9,9$1
U32
(1,0011
~351
~501
~,!IOO)
(1)361
988
1.785
61j 3(19 69,271
(1,271) (1,310)
[83ij IIJe.t)
36m 36,715
10I~71 105,611
10,1IC 19,373
as!!2 3,682
(1,1l4) (4,963)
{7351 (7351
11,000) (1,000)
12.Il00) 12,000;
Cl,22~
l.ooii 1,9.1&
$U-mllll:on In bvdatttd '41flr)1l1lvtng,1 reataed. an addftfontl $185 thOIl8lltO 1" .... 1"0* &CU, nem to hi Kblevt6
(PAPOA) delall'id their FY 2010 11f1l1otlated salary Inlirtat&a' $0.8 mlllIQI'i to FY 2011
2,095
72JJiYl 74,841 71.192 rJ.II6(I 84,049
11,362) (IAli1 11,47)1 11,532) {1,593)
j898) (914) 1972) 11,010)
40,789 42,943 46,243 47,935
1I0,lIl 120~6 1~'" 117,579
10,&64 11,3$ 11.675 1~3116
~71Xl 4P23 4,1~ 4.3$7
12.m
(6,38\1) (5.756) (a14O) (11.!42) 15~31
(736l (735) , {735l (73)J (7361
11,Q00) 11.000) 11,000) (1,000) 11,000)
j2,000) I~ooo) (aOOO) j2,000) 12.000)
1,978 1.121 1,100 1;12 1,261 1,311
Attachment A
CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN·
General Fund ($000)
PERCENTAGE CHANGES IN FORECASl FOR REVENUES AND EXPENSES
fY20Dll FY 2010 AS FY 2010 PB FY 2011 FY 2&12 FYlO13 IY",,. FY2015 FY 2010 FY 2017 FY2lJl~
II % '. y, ''\ % \I %
% Chang. % Chenga 0 .. Chartge Ch&llglr Cha"Ot Chal'lg8 Changa Changa CharlOt Cha"D' Cht/ljJI
(11.20%1 (2.19%) (12.11%) 1.91% 2A9~ &001\ 150% 4,01'% 3.16% 3.111% 3,o(w,
10.23% 1.21% Ul'1\ 2.33% a~% 3.116'1\ 4.62% 4.11% ~14" 4$% 4.66%
1.2411 1.9111\ 3.61% 1.00% 5,1411 39iJ% 2.11l4 5,22% 6.33% &44% al4'11
(10_) ;1.>8%) (3.01%) 2,00% 2.19% 21l'l% 425% Ui% ~00l\ 4M\> 1m
p",-!3Q88%) awo (aQ5%) 220% 2.ZIlI 2.llS% 304% 323% 2.1!4'11. 2,44% 1.25%
Subtolat THO g.1i%) il.25l1 IW'II) 3.421\ 3.)1" 3.46% 1121\ 4.1&11 4.6)% «l!I 3.11%
(a43%) 1,57% 12.44") 4.m 1.311% 1.67% Ul" 3.94% 3.i14lI 3.88% aMI!.
12,40% 0.10% Mlm 303% 4.45% 4,1l2% 4.65% 4.1)4% 4.W" 4.01% ~99"
(10.04%) (6.36%) (1113%) (0.96%) I.Il!II 2B6r. 3.54% l.151Yf 3.881\ 4,11:& ~,55".
14.116%) 110.g3%1 (11.66%1 1.63% !.61% (11.34%) 2.63% 2.55% 2.65% 266% 2.6i%
UllWrflNlds 1.32% (7.32%) (1.31%) lA6% 2.56% 2.03% 3,45"9 4.ro% 4.04% 4.07% 4.00%
(2.10%) (1.11%) 14.11%) 3.11l4 3.110% 1042% 3.11% 4,23% 4.lnI 4.17% 3.m',
224% 11.04% 11.04% ( .. BIll\) 2.66% 2.03% 3.46% 4.\l3% 4,04% 4.OIl% •. ~
It26%) CA7% (1.S7%) U2% MIl% 1J!1" 3.51% 4.21% 4,2,1\\ 4.15% am
117% 2.27l'. lI.m 2116'1. 3,23% 1.l17% 291'1. 3.!14% 3.91% 3.11lll 391%
tl/A filA
IIIf
S"!nv' kom SEIU IlIA
rrom MgmlW,oI. NIA
14.64%) 9.26% I.m 2.211\ 5.40% 5.03% 6.26% 5,31% 5,33% 5.36% 5.36lI
0.30'1. 1.24% 1A3% 2.17% 4.01% 3.29'. Ml% H.% 4.4Sf. W% 4.47",
7.37% 110.1'%1 10.2411) 12m) U;O\\ 1.70% 2,60% 3OOl\ 3.000/0 300% 3.00%
(0,10%) 17.33% 11.m (tll1lll) UiO% 1.70% 2,60\\ 3.00't\ 3.00% 300% 3.00\\
(1.88\\1 13.1511 13.16'/, (117%1 2.65% 2.61% 2.1l5% 100% 2.99\\ 3.00% 1111i%
(1a06%) 19.53% 19A9% ij,121\ l.roll 1,7(1% 2.50% 3.00% 3.00\\ 300% 3.00't\
(30.3911) 39.17% 39.17% 207% 1.50% 1.10% 2;0% lOO't\ 3.00% 3.110% MO%
~I.2l%) 4.14% 11<1% 1.9 3.l&lI 2_ 343% 4.03\1 •• 01% ~1I6lI . 4.07%
4&.73% (40.50%) 146.511%) 37,5&1. 4.04% 4.lIi% 4.26% 4.36% 4.48\\ 4.60% 4.M
(9.9&%) (12,41i'k) (12,49%) (&3.()o1I1) [6.3;%1 MO% 2,91% 2.94% 2.111% 2.91\\ 2S1%
(0.0111) 1I.3B% 0.30% lU.iiI%) Itl99\\) (11.07%) (0,40%1 0.60\\ (0.31%) 0.t6\\ (0,10%)
116.30% (50.00%1 (50.00%) O~O% 4.00% 4.00% 4.00% •. 00% 4.110% 0.00% 0.00%
(39.58l'.) 11.111% 1.73% 1.3911 3.11% 2.14% 1.41% 4.1J311 4.$4% 4,06f. 4.11311
FY2D1D FY 2020~
%
CheAp % Chug.
2.001\
2.42'10
6.M%
2.85%
lil3%
tl5%
4.29lI
MoI%
2.OS!l
2.00%
4.10%
U311
4.10'.
3.lIfo
3.94%
6.4111
'.111%
3.00't\
3.00't\
3.00't\
30IIII
lOO't\
4.Q9%
4.60%
2.1lS%
0.31%
0.00't\
4.11%
Attachment A
Budget Stabilization Reserve
BegInnIng Balance
TO/(From) Reserves
CAFR ad/uslmenls
One-time O1ly Il1creasesf(Decreases)
Ending Balom",
% of Total Expendilures
,': "
LRFP 2009.1111 E~hibils '·3 with IR
CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
GENERAL FUND RESERVE SUMMARY ($000)
Adoplod Ptojocted
FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 201S FY 2017 FY 2019 FY 2019 FY 2020
$ 26,102 I 24,637 $ 24,637 24,637 $ 19,012 $11,519 $ (1,369) $ (15,333) I (29,660) I (44,243) $ (59,272) I (75,192) I (93,134)
645 49 0 (5,625) (7,493) (12,aan (13,964) (14,32n (14,563) (15,029) (15,919) (17,942) (18,842)
,1,581 0 0 0 0 0 0 0 0 0 0 0 0
13,691) 0 0 0 0 0 0 0 0 0 0 0 0
I 24,637 I 24,681 I 24,837 I 19,012 11,519 (1,369) I (15,333) I (29,660) I (44,243) I (59,272) $ ~,5,112) $ (93,134) 1(111,176)
17.5% 17,4% 17.2% 13.10/0 7.7% (0.9%) (9.6%) (17.9%) (25.6%) (33.0%) (40.2%) (47.9%) 165.4%)
--.,,>:::,;:.: .. '
111251lOOS 10:16 AM
TO: CITY COUNCIL
FROM: CITY MANAGER
DA TEl OCTOBER 5, 2009
AITACHMENT B
DEPARTM,ENT: ADMINISTRATIVE
SERVICES
CMR:394:09
SUI;IJECT: Fiscal YeIll' 2010 Budget U:pdllte
UCOMMENDATION . . .... ..
Staffrecollllllends tbat Council review and provide input on the FY 2010 1'1 QtWter Update!llld
structural budget issues idenlified in thIs City Maneger Report (CMR).
BACKQBOUND
As a conll6<juence of the "Great ·Recession" and the decline in economically sensitive revenues
SUCh.IIS.BII[es and tl'!lnSlellt oocupsncy:tllxe8 (TOT),budgetddicits were identified for FY 2009
and FV 201 O.ln tho FY ·20 I 0 Operating Budget process; the City identified II General Fund $10
million budget gnp. This projected ,d~clt would have fisen to $12 million had theClty
IncQl'JlI,lfateda pay ral.s.e for tnaI1IIgement·and SEro employees .. Hence,the .. bud&etproposal
assumed zero incrosses for thes.e groups. To solve the $10.million deficit, the City implemented
$3.7 million II! savings fi'().m department and service reductions (this included the eliminstlon of
2M Full Time Equivalents I?ased On' vacancies an.d retirements); a$l.4.mlliion i'evenue
enh!l~ment; $2.2 million in ternporftl'Yreductlons in transfers t9 the Capital Improvement and
Retiree MedIcal Liability.funds; and $3.0 millionln employee. compenslltion and benefit
redU!;tions.The latter t<alegorysavings WIIS dependent on the City negoUating compensation
and/or benefit concessions fi'om msnagementancl City unions.
The ·City is stili in the process of negotiating with SBIU, dlSllUlllling benefit ohanges with
management, !IlldfinaUziug II salary deferral with the Police union {approxbuately $800,000).
The Fire union has decided to take its contracted salftI'Y increllSe this fiscal year. The
Management and ProfessionalGr~lip hIlS already made a contribution in the variable
management compensation program (VMC) totaling $657,000 for the General Fund. The City's
latest proposal to SBIU is available en the City's website at
hllp:lJwww,gltyoll)aloallo.orgliabomegQtlatlons
In the City Manager's FY 2010 Operating Budget transmittal letter, the possible need to revisit
deeper service cuts IlIld savings strategies was discussed. These deeper service cuts were
described as the "Tier 2" Jist (Attachment C) and they Included, for example: eliminating the
disaster preparedness program; eliminating the Police traffic team; and contracting out golf and
parks maintenance work. Layoffs could result with these recommendations, which the City bas
CMR:394:09 Page I of7
sectors, a permanent change in consumer spending would have a substantial effect on the City's
General Fund fmances.
Results to date for the transient oceupancy and dooumentary transfer taxes have not changed
since the September 8 report. TOT receipts from January to June in FY 2009 were ·30 peroent
lower compw:ed to the prior year period III1d July 2009 revenues were ·21.3 percent under those
In July 2008. As with sales \lllI, ifl'ecelpts do not improve, midyear adjustments ofbetwelll1 $0.2
and $0.5 mi!lionmay be needed. Documentary transfer taxes, whioh fell from $5.4 millioh in
FYfOO8 to $3.1 million In FY 2009, continqe !oahow weaknesB.ReyenueB through September
2009, were ·36 perce!)t ,below the BIl!1UlWior year period. At this time, howeyer, staff does not
foreSee :adjU8Ip1!lll~t!J ~e $2.8~lilion to be coliecte41n this cat!lgoQ' forFY 2010.
AtuWlunent Bsho~s actW;1 revenu,ereceipts through ihe middle of September in comparison to
the FY2010 Adopted Budget. 'A~ mentioned, it is ,too early to draw firm conclusions from this
information, but In aaaition to the .are~ citedabovp, those that bear further scrutiny and close
monitoring erepat!clllsviolatlous, plan checklng fees. and bulldlngpermlts.· These areas had·
especiaJly.weak results In FY z0()9 w~ich may, ~onllnueinto FY ;!010.Propertytaxes, the
Gene.fI\l.Fund$~ highest single revenue soprce, is exp\Wted to be close to budget at ycarend bMed
on recent County projections.
FY 2Q1Q I;lxpenses . . . . . ' .
As w,ith revenues, it .Is too tl!Irly In the year to detect important expense variances. With the
e!,ceptiOll of overtime in the Police and Fire departments, which typically exceed their budgets
qU,e tQ minimal ~ng requitements, there is ·nodis,cernable expense trend causlng,concern at
this t411e. If the City cannot achieve the $3 mlUlon in mllru-y !Inc! benefit savings discussed above
anclinCqrporated i~ tbe.FY201Obudget, a <\e{iclt would result.
"tier 2" ltmns and Action
Should revenues not perform as forecast or salary or benefit concessions. by the unions and
IIll!nagement not be realized, the City will be fo~ced to utiUze "ner 2" expel)diture reductions.
During the FY 2010 Finance Committee budget hearings, these reductions were discussed at
length and. the)' . were called to the attention of the full Council at budget adoption. Again.
Attachment C lists these items lIud provides II description of the potlll1tial cuts. These include,
for example: .
o EUmin/iting the current Disaster Preparedness program
o Ellmmllting the City's shuttle service
o Contraeting out parks and golf maintenance work
o Eliminating Policc traffic control services
Tier 2 reductions will impact services to the conununity and will result in position reductions.
S.ructnrei or Systemic Budget wues
To 9ubstanti~te the position that the City faces structural budget issues, staff has modified the
Long Range Finlll1cial Forecast (LRFF) presented in the FY 2010 Adopted Budget. Based on
new data and known liabilities, the Net Surplus (Deficit) line in the forecMt has been adjusted
CMR:394:09
The current rate· of funding from the General Fund and Infrastructure Reserve, which is
around $9 million per year, is inadequate to meet the annual $15 million needed to offset
the $302 million liability in any predictable or reliable way. The Infrastructure Reserve
balance currently stands at $5.2 million and is expected to decline to $1.6 million next
fiscal year. Without replenishment from General Fund surpluses over the next few years,
which will not occur, the ability to sustain $9-$10 million of annual General Fund
Jnfrastructure work is unlikely. New revenues lire necessary.
5. Although one-time innatm'tJ and supposedly to be repaid in:) years, the City feces a $2.5
million property tax takeaway by the Statoto solve its budget deficit. This cut wJII
decrease the General Fund's Budget Stabilization Reserve, impact the City's cash flow
aud intel'tJ9telltllings (the City {)urrently elltlls around 4 percent on its Investments and
. the State has proposed repaying the·principal with a 2 petcentinterest rate), and reduce .
;flexibility in dealing with unforeseen needs. The City, with the Leag\le of California
.Citles is.explorlng out options .. Even.withstatutory protections against State takeaways
·on~1 ,revenues. the State can withhold revenues in.fiscal emergencies and the S.tate's
rCCOl'(\ on coping with suchemllrgencies.· is well-documented. Having. solid and
~bstantialreserves pmteots the City from, the Slate risk;
In addition to the structural issues cited. above, ·the City faces additional threats on the revenue
side. Outlined each year in the Long Range Financial Foreoost, City rllvenues and the servi~es
they fund face an lIlTIIy of risks. These can include. for example. rlsks to ssles tax and the TOT
through: community opporition.to new business and hotel development (e,g., the loss of 'Hyatt
Rickey~s); the potentlalexodus of automobile dealerships; surrounding big box stores that couse
leakage of local spending and sales tax to surroundillg jurisdictions; '!OSS 'of sales fax to Internet
sales; and.· most recently; the threat of consumer.s .. spending lesam retail areas such as the
downtown and. Stanford Shopping Center. ,It is important to notetl1at nearly 50 percent 'of the
General Fund's roughly $20 million in annual sales tax is generated by 25 businesses. The loss
of one of these enrerprisllS can have a substantial' impact on continuing services as we know them
today. '
Additionally, the impact of Statewide initiatives and legislation S\!Ch as PrOpcrition 13 (property
tax); Proposition 218 .(revenue thresholds); and required super majorlty(2/3) approval for
General Obligation bond funding limit the City's revenue raising options. And of course, the
financial markets crisis and impact on lending as well III! the dysfunction of State government all
Impact the City.
QonclusiM§ ,
Actulll revenue and expenditure data to date do not. definitively indicate new downward budget
adjustments at this moment. As additional revenue and expenditure data materializes, however,
further adjustments at midyear may be necessary.
As indicated in a prior report (October 2007) on maintaining a Sustainable Budget (CMR:
381:07), the City may be faced with determinlng its long-term service priorities. It must be
recognized that the City provides a wide and high level of service and dedicates sizeable annUill
resources in such areas as the school district ($6.6 million in FY 2009 for the Covenant Not to
Develop 8S well as additional expenditures on field maintenance and outreach programs) and to
CMR:394:09 PegeS of?
PREPARED BY:
DEPARTMENT HEAD APPROVAL: -;::-;~-,;:
CITY MANAGER APPROVAL; ~-::=:::7'3=-:;;!-':"'="---t't--'-~-
CMIt:394:09 Pag~ 1 of1
ATTACHMENT A City of Palo Alto
City Manager's Report
TO: FINANCE COMMITTEE
FROM: CITY MANAGER
DATE: SEPTEMBER 8, 2~
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 358109
SUBJECT: Review of Preliminary FY 2009 Revenue ADalysls
• RECOMMJjjNDATION
Statl' recommends that the Finance Committll\l review and discuss preliminary General Fund
revenue perfotn;lance for FY 2009. '
BACKGROUND
As a result ortlle current recession and consequent decline of key General Fund revenue sources,
the Finance Committee requested a Iale summer assessment of FY 2009 revenue performance.
This a,<3sessment was to include a comparison of actual revenue receipts to the fY 2009 Adjusted
Budget and to prior year results. The variance analysis could lead to necessary mid year budget
a4justments and allow the City to be proactive in resolving unforeseen budget gaps.
It is criticaHo note that the FY 2009 numbers prasented In tbls report are unaudited and that
there are potentlalaccruaJs that may result in subsequent changes, Staff is not presenting a year
end expense analysis at ihis time. Since aecruals and incurred, but not reported, expenses in ,such
areas as workers' compensation ,and general liability have not been fully booked and allocated 10
departments, staff believes an expense report 1$ premature and could be potentially ntlsleading,
In addition, the Committee requested an earlier review of FY 2010 quarterly 'revenue and
expense results. Staff anticipates prasenting a fuJI analysis in late Oclober 2009, bul offers tne
following insights into preliminary trends in this report.
DlscysmON
The crllcial backdrop to the results jn this report is tbe dismal state of the economy. Iri what has
come to be called the "Great Recession," the City's key and economically sensitive revenue
sources have declined significantly since FY 2007·08. Rising unemployment rates, tightening
cred It markets, deteriorating residential and commercial property markets, and diving consumer
confidence have driven down public revenue streams across the country. The City of Palo Alto
has flol been immune from the recession.
CMR:358:09 Page I ofS
Documentary Transfer Tax ,
This important revenue source, which is based on the number and value of commercial and
residential property sales, has moved down sharply during the recession, Rising to the mid $5
million level for the past 5 years, it retreated to $3.1 million in FY 2009. While close to the
adjusted budget, this result was 42.5 percent or $2.3 mllljon below FY 2008 results. The poor
performance is a consequence of the commercial and residential markets coming to a virtual
standstill. Commercial transactions decreased due to low occupancy rates and residential
transactions were minimal due to sellera holding onto their homes during a period of market
softness. In addition, cradlt conditions were abysmal due to the collapsing credit markets for
commercialMd jumbo home 10alls.
As with sales tax and TOT, documentary transfer tax revenue estimates for 20J 0 may require II
midyear adjustment. Results for the month of July 2009 were nearly 40 percent under those for
July 2008, Cun-ently, the adopted budget for FY,2010 projects $2,8 million in transfer taxes,
$0.3 million below actual FY 2009 revenues. With credit markets'slowly returning to more
nonnll] activity, staff hopes Ihis revenue source will rebound and obviate the need for a midyear
adjustment.
Fines & Penalli~
This revenue category contiists primarily of parking vIolations and library fines. Revenues are'
below the FY 2009 Adjusted Budget by 16.6 percent or $0.5 million, and 4.1 percent or SO.l
millioll below prior year results. The negative variance isprimariIy due to parking violations,
which came in 28 percent or $0.6 million below the adjusted budget. The combination of
industrial injuries to Community Service Officera and fewer cars in violation of parking
regulations have led to this drop. Should vacancies cQntinue, an adjustment to adopted budget
revenues may be necessary.
Permits &, Licenses
The downturn in the ecOnomy has heavily and negatively impacted building related fees, Permit
and license fees were J 6. 5 percent or $0,9 million below the adjusted budget and 11.4 percent pr
$0.9 million below the prior year. Compared to the budget, new construction permit fees are
down 13.7 percent or $0,4 million while plan check fees were down $0.1 million.
In the new fiscaJ year, July 2009 building fee revenues are up by $0: I million in comparison to
July 2008. This may signal an upturn in this revenue category. which would preclude II midyear
adjustment.
Return on Investmllll!
Interest income came in higher than the adjusted bndget for 2009, but was under prior year
results by 6.9 percent or $0.2 million. With the Federal Reserve keeping interest rates low to
stimulate the economy. the City's portfolio yield has declined to the low 4 percent range over the
past two years. It is expected thai yields will continue to decline as higher yielding instruments
mature and the City continues to buy securities in the 3 to 4 percent range. An adjustment at
midyear may be necessary if interest rates do not trend upward.
CMR:3S8:09 Poge 3 ors
PREPARED BY:
'ces
DEPARTMENT HEAD APPROVAL; -;-;)~~B.m~p;;;...~::"
LAL
Director of Administrative Services
CITY MANAOER APPROVAL:
CMR:358:09 rage 5 of5
Attachment B
CITY OF PAL.O ALTO
REVENUE AND EXPENSE RESULTS THROUGH MID-SEPTEMBER
COMPARED TO THE ADOPTED FY 200$ BUDGET
GENERAL FUND
(llltIJOUHIldtl.t rfotlllNl)
. I Adoptod I Adlusted
Cotcgol'lr.s Budget Bu(IO!!!
Pm Adjusted I I I % of
EnclImhr Encumhr Actual Blldgol ----8MON" " Olher SOlI reea
Sales Tax
Prop9f\y Tax
i',anslenl Ocoupancy Tax
Udlll)! Users Tax
Ollleri'axesand Fines
Charges tor SeM08s
Permits & L.loenoos
Retum 011 Investment
Rentallnoome
From Other AgencIes
·Cha'lJEls To Other Funds
§l!WlIlfilll!l!! & Olh!!: UU8
CII)! Attomey
CII)! Auditor
City Clerk
CIty Council
City Manager
Administrative Services
Community Services
FltlI
Human ResourceS
library
Planning and Communlly Environment
PolIce
PubllcWorks
Operating Tranefers..()ut
19,650
25.152
7,peO
11,250
5,633
20,238
5,()56
1,900
13.656
92
2,569
999
1,51.2
.296
2,395
6,1S1
21.1176
25,166
2,887
6,385
9.858
.29.008
13,484
I,
1.624
300
2.648
6,910
22,770
28;548
2,970
8,668
10,600
'Excludes OtIcumbrancea, reapproprlllllon and Infraslruclure r.terv8
--
21 667
246
17
35
33 61
5 187
203 2,839
99 495
126
164
658
385
934
1,682
n
676
2.367
1,2()4
2.613
943
5
2,450
15
3,608
559
152
486
70
487
1,296
. 4,173
4,600
501
1,169
1,940
5.433
2.443
AlIachment c
cay cf PaJo All!>
I_oJ Budget HeotIngs • FY 2010 SIim"""Y
TIGI' 2 Items
GenlQ! Fund
C$o~~L-~pam:;:~:·~me:~::::.~::~~~::::~~
CSO Go!! Course Malnt· Cc>ntract out l11li_
PI.A Eliminale S!lUWe
POL Tralfic Team •
POL School Res Officer Ptg
POL ?oI Record SpeeialIS!. FfIlI'II Desk Records
POL Ptogram A$SII-Crime AnalysiS
PWD Eliminate Tree Trimming C<lnIract
PWD Contraoc cut T .... Trimming
SuIlIDIal
AdditiOnal Finance C<:mmittee "Pa!!<!np Lor Recomtntllldaliolls
(l00.ooo)
(133,400)
FIR EvaIr.uiIe t'uI!.Im organIzalion of OES~
FIR Rogionalization cptions for FIre ~
PQIlce RegiOnalizaIioII options lor ?oIiCIi>Setvites
Par""" ~ the PoIiCIi> Depalhi .... g Budge! by $500.000 -PoIiCIi> CIlief to idI!ntiIy reductiOns
~
7Oc:cupied
(4.00) Q:eupied
(1.00) Occupied .
(1.00) Ocalliled
(1.00) Occupied
(2Ull)
PQIlce Reduce the PoIiCIi> Department But%Je! by $492,000 Finance ~ recommended ...:Iur;tiOl1$
Add back 0.5l'1& V'*"'-CoaIlllISlOr (Salary & BeneIi!s)
Reduce the TI3ffic Team by one.-IlBIf ~ of GlI"inall,,")
1.0 FTEP<lIiCe Officer (salary & benefits)
1.0 FTE Foroce AQent (salary & beneIiIs)
Add back "M"'"
F.\0(tuCe positions rOllllO below 6y O<le-haltii.stead cf e1iminalion
School _ 0fIicer (0.5 FTE I'Ioice AQl>nt)
Crime ~ Program (0.5 FTE Crime AnaI)Ist)
Police 0u1read> (0.5 FTE Program AssisIant I)
$ 52,000
(154,000)
(158,000)
SO,OOO
(79,000)
(56,000)
(47.000)
Planning & Cgmmunity Environment· $ 256,000
Eliminate the City's shuttle service. There are not City FTE associated with this program
and its termination would result in $256,000 in aonUlll savings. Eliminating the shuttle
program would reduce mobility and transporUition alternatives within Ihe City.
Police D!lWlrtment • $ 865.015
Eliminating the TrIlffic Team would result in the reduction of $626,000 in expenditures
and $100,000 in .evenue. Included is the reduction of four FIR The duties nonnally
assigned to the Traffic Team would be assumed by patrol onits.
Eliminating the School Resource Officer (SRO) Program: During the FY 2010 budget
hearings, one vacant SRO position was eliminated. The Tier 2 reduction would eliminate
the remaining SRO position which is curreutly filled. The expenditure reduction is
estimated at $,162,000.
Elimination of the CrIme Analysis Program. This would result in the reduction of one
FTE with an estimated expenditure reduction of $94,000.
Elimination of Community PolicinglOutreacb program. This would result in the
reduction of one FTE with an estimated expenditure reduction of $83,000.
The Finance Committee also discussed the possibility of evaluating Ihe future of
regionaliz8tion QPtiQns for the Police Department. Staff has not reviewed the costlbenefit
strips to property owners. It would require a change: to policy and to the Municipal Code.
II would nol impact Utilities line or emergency tree trimming clearing.
The other alternative for the Public Works Department is the contracting out of Tree
Trimming. This would l'esult in Ihe elimination of 1 FrE and a net expenditure reduction
of $46,000.
The Public Works Department is recommending eilher/or for these options, not both.
Attachment C
CITY OF PALO ALTO
FY 2010 FINANCIAL REPORT as of 11·20·09
GENERAL FUND
(I. !hous •• ds of dollsrs)
1
_ I Adopted I AdJ usted
Categories Budget Budget
Pre Adjusted I I I %of
EnclImbr EnclImbr Actual Budget ---Rav81lYIll! & Qtb!!r ~yr!<!!8
Sales Tax 19,650 5,510 28%
Property Tax 25,752 3,140 12%
Transient Occupancy Tax ·7,000 1,781 25%
Utilily Users Tax 11,250 4,360
OtherTaxes and Fines 5,633 2,092
Charges for Services 20,238 -6,209
Permits & Licenses 5,056 1,455
Return on Investmenl 1,900 633
Rental Income 13,655 4,780
From Other Agencies 92 62
Charges To Other Funds 10,643 3,540
19,664
Exwtnditures & Qill!!r Uses
Cily Attorney 2,569 3,343 8 601 970 47%
Clly Aud ilor 999 1,143 229 296 46%
City Cieri< 1,512 1,524 16 655 44%
City Council 296 309 31 107 45%
City Manager 2,395 2,646 6 62 814
Administrative Services 6,761 6,910 156 2,267
Commu nity Services 21,876 22,770 86 2,308 7,993
Fire 25,166 25,546 10 648 9,156
Human Resources 2,837 2,970 5 104 911
library 6,385 6,668 48 145 2,110
Planning and Community Environment 9,858 10,603 158 953 3,331
Police 29,998 30,239 337 319 9,877
Public Works 13,484 14,177 104 936 4,510
778 19 772
Operating Transfers·Out 11,028 11,028
, exclude. encumbrances, ",approprIation and Infrastructure reserve
Attachment 0
City of Palo Alto
General Fund Revenue Changes for FY 2010 and FY 2011· Detail
($000)
Property Taxes
I Tr2lnsl!ent Occupancy Tax
Utility Usefs Tax
City Utilities
Telephone
Sub-totel-UtHily Users Tax
Taxes and Fines
Vehicle In-Lieu
Documentary Transfer
Parking VIolations
General (Fines, Forfeitures & Penalties)
Sub..folal-Otller Tex9S and Fines
Total Taxa. and Fines
I Cham, ... for Services
Stanford Fire/Police Service Reimbursement
Golf Related Fees
Class Program Fees
Paramedic Fees
Plan Checking Fees
Cable Franchise
Other Fees
Sub..folel-Charges fOr Services
Its and Licenses
Street Cut Fee
Permits
Licenses
Sub-total· Permits and LlcenBils
I Charg,es to Other Funds
Cost Plan -Admin. Support to Other Funds
Communication· UtilHy Relmb. for 911 Support
Public Works Admin. Support to En!. Funds
Olher Reimbursements
Sub-Iotel-Ch8rg6s to Other Funds
lnoome
Utilities Facilfty Charges
Property Rental-CUbberley Tenants
Use of City Facilities
Olher
Sub-totEll-Rentallncom9
Other Agencies
on Investments (Interesllncome)
jurlfeE,lizEld Galnfloss on Investment
Total Revenues (Prior to Oper. T'ters-In)
IOp,era.ting Transfers-In
Equity & Utility Transfers
Parking Districts
Other
Sub·tolal-Operating Tronsfsf8·ln
Total
16,502
1,069
1136
16,502
1,069
..
150
(254)
Attachment E
Pollee and Fire Departments
Oy.l1Im. Analy.l. for FI ••• I v ..... 2005 throug11 :looe
Wltb I',,"e.1 Vo.r 2010 nola Through Noyember20, 2000
FIscal Veur Enrll(!a: JUM 30
. uooudil&d thtu 1112()
2005 200$ 2007 200e 2009 2010
POLICE OIlPARTMENT
anrUm. ElIpen88
Ortgln~1 (;htdgfl'1 $974.426 $961.862 $1.015.620 $1.{!36,815 $999,OOl) S~,900
Curr8l'1t aud~t 1.028.337 1.009.705 1,074,399 1)')11,005 1.016,900 999.900
Net Overtime Coe,t· lee below 1,0961017 780,647 1,026,718 1,0116,894 lao,!!" 215,550
RenWnl(lg Sudget E!74()~ *'229,0£8 $4a,O.' (!25,oOJll. $130133:2 1764,350
Overume Nat Co"t
Actual e)(pBr'lt1!J $1 1229,851 $1 140'0,155 -$1l651667 $2 1°09.542 !1&!51842 $£&7 1870
Lau RtlmbUlMmen1.s
Stanford COMmunlcallol18 30,941 30.951 39,342 65,079 42,160 17,466
Uliilln Commuro!eallGflS RtdmOv,umer\l 17,40<1'1 17 A02 22.130 36,607 23.715 9,826
local AgOllCl •• (A) 32,617 34,566 30.451 41,770 37,413 1'3,413
f&deret Grant.
State Granla (I) 8,135 65,636 63.344 4,872 10,996
Police SeNlcc FeN >'17.166 49,168 43,218 67.390 53,812 48.035
Other 7 1489 12:,447 18:157 15,982
Tola! Reimbursement" 133.774 197.924 216:;938 233.676 1&4,000 88.742
Left Ottpirtmenl Vacancies 376~15 426,5&4 543!001 678 t973 59&1 194 263j 578
Net Ovttrllme Co$t !'1098 an !700~7 !1 I0251718 $1,0961894 S886~58i 121 &1 500
Otpal1ment Vlcal'leklil (l'Iumbtror dlye) 1.IW2 1.733 2.2:80 2.766 2,402 608
fiRE OEPARTM!!NT
Overtfmt £!lpeU98'
01191 ... 1 Sudgot $982,574 $959,389 $1,032,674 $&92.874 $1.017,574 $1,017,874
Current Budgel 982,674 959.389 1,032.674 996,674 1,363,066 1.017.674
Nat Overtime COlli -&ee ~kIw 877,89' 637,310 731,766 663,442 416,610 513,ees
Remaining Budget 1'04,762 $322,°79 $*1906 11!i!232 !9361"'48 1W31969
OvertIme Nat eo.t
ActuGi E!fpanee $1,.58,629 " ,!!2,l!§! t1.860)757 t1~744107e tt,591 1281 $1 I04(1l77
lM8 RelJnbur,ementl
Stanford Ara SarvIce. IO} 592.828 479.608 563,609 528.4fi5 482,152 315.365
CaI·F1rf1tfEMA (Strike 181m.) 68.269 &5.ti31 140,224 453,619 43,000
Sla!1 Homelend Seculfty
Grant prottam (SHOOP) (0) 17.20~ 72,2&4-40,897 10,164 4,342
Urban At .. 8Jeurlly Initiative (lIAaI) ~6j782 1,160
Oeparl!'neni al Homelund SeQ\llity CI, 5,600
Totel R.ltnbu'Hmenla 610.0a1 6#,911 6GO.237 679,993 940,113 35B,365
tou. Oepartment VllCendet 46&,1308 3001837 43217&2: 200,641 2341538 1~737
Nsl Overtime Coal f 6n•59 %. 16371310 !73717(t8 $6631442 $418,610 Jg'3,6BS
OepartrnenlVaoanciett (nllmber of daya, 1.000 1,230 1.740 810 7 .. 630
NOmS:
(AI Indudel Animal Service. I)ontrael wflh Loa Alia, Mountain Vlaw el'ld Lm AItol HI~ •.
(Bl Slete Otflce or Traltic Safely and A8C granta,
lei Included Io:l the SHSGP end VASI ralmbursamenle is a mall smallnl of per dieM relmbufBtttmlnt
(DI Slaroord ~urMl$ 30.3'" 01 Flre Itxpandiwr6l,
(E) Relrnburaemont from U.S, Oepet1m.ertt 01 Homelend Security for HuMe! ContinUing Chatlene8 Training ConfeJ'9nt'» (Ssp 20(9)
11125/2:009
Attachment F
FY 2010 Salary Savings by Department
City Atlorney 1,374 124 124
City AudRor 487 . 25 25
CUy Clerk 593 67 67
City Council 65 5 5
City Manager 1,302 151 151
AdministratIVe Services .3,709 147 147
COmmunity Services 6,707 276 (137) 139
Library 3,297 156 156
Are .14,162 1,539 (679) 860
Human Resources 1,544 193 193
Planning and Community Environment 4,531 390 (37) 353
Police 16,706 1,891 (691) 1,200
Public Works 4,831 337 (51) 286
Non-departmentel (1,313) (2,206) (2,206)
Total 80,015 3,095 (1,595) 1,500
ATTACHMENT G
"Tier Two" Reductions
Dept. Other Ootlons Revenue Expense FTE
Eliminate Disaster Preparedness
FIR Dlv (33,400) (442,826) (1.00)
i Park Maintenance -Contract
CSD ' oul net expense (122957) (5.00)
Golf Course Main! • Contract out
CSO net expense I (176,352) I (7.00) i
I PLA
i
Eliminate Shu tile (256,000)
i POL Traffic Team (100,000) (626,433) J4.00)
School Resource ,Officer
POL ProQram (161,772) (1.00)
Program Ass! I -Police Outreach
POL Program (94037) (1.00)
POL
Crime Analyst· Crime Analysis
! Program (111353) (1.00)
Eliminate Tree Trimming
PWD Contract (379000) ,
PWD i Contract out Tree TrlmminQ (46737) (1.00)
Subtotal (133400) (2417,467) (21.00)
Near-Term Cost Savings .
Attachment H
Budget Reduction Options
1. Institute a hiring freeze except for positions absolutely required for public health
and safety. The City will look at reorganization around vacant positions (short
tenn within departments and long-term among departments), but it must be noted
that significant staff reductions and efficiencies have been implemented since the
"dot-com" bust
2. Freeze or cut all travel and meeting budgets unless critical to immediate public
health and safety issues
3. Institute furloughs
4. Reviewal! consultant contracts, particularly those just starting, to determine if
needed
5. Defer any Capital Improvement Projects (CIPs) that are not absolutely essential
6. Close public safety building design CIP and return funds to reserves
7. Evaluate need for temporary positions including retirees who have been hired
back: to work
8. Review staffing levels in departments where fee. fine or permit revenue has
dropped, e.g., CSD classes, parking violations, and in development center,
Design flexible budgets for these areas
9. Consider instituting a 2.5% reduction for small departments and 5% for remaining
departments
10, Institute full cost recovery for programs that provide unique and limited service to
small populatious
II. Institute full cost recovery for adult classes. Revisit the non-resident fees and
examine all programs where non-residents are not paying fees for use of City
facilities.
12. Use the Budget Stabilization Reserve to balance the budget along with other
initiatives in 2010. The goal would be to make longer term decisions during the
fiscal year 2010 timeframe. The drawdown should not take the reserve lower than
15 percent of General Fund adopted budget expenditures
Medium Term
1. Institute a 5.0-7.5% equity transfer on dark fiber fund
2. Enhance and expand the Economic Develop Plan
3. Negotiate away minimum staffing levels in Fire Department
4. Have fire department use newest employees for OT work rather than most senior
staff; same for police (Le .• staff according to reverse seniority)
S. Have Fire department complete an evaluation (funds have been budgeted) o~ need
for current levels and configurations of fire serviee based on predominant number
of calls for paramedic service
6. Institute II two-tier retirement plan for public safety personnel
7. Contracting out services such as parks and golf
8. Decrease rental subsidies at Cubberley or restart negotiations with Foothill
College
9. Review all support to PAUSD to determine what the City can continue to provide
10. Review the Cubberley Lease and the Covenant Not To Develop agreement with
PAUSD to determine affordability and course of action going forward.
11. Revisit all HSRAP services to non-Palo Alto institutions with new budget cycle
and focus resources on needy seniors, children, and teens in trouble.
12. Revisit residents and businesses paying for cost for sidewalk work at 10% per
year and cap at 50% in year S
13. Revisit policy on property rental rates to be at or close to cost recovery as
agreements come up for renewal,
14. Move all employee groups toward assuming greater share of PERs "employee"
contribution and all groups contribute towards the cost of health care.
IS. Consider assessment districts -parks, sidewalks, fire and/or public safety.
16. Begin GF serviee priority selting process with Council and community
Long-Term
17. Revisit new conference hotel in Palo Alto
18. Develop LATP site as a source of rent or sell the land to Enterprise Funds
19. Negotiate away no minimum staffing requirement for Police
20. Review all police services for efficiencies and potential reduction in least
essential services
21. Contract out, with reasonable response time specifications. paramedic service to
outside agencies e.g., AMR
22. Begin discussion with neighboring cities e.g .• Mountain View on sharing public
safety services e.g. dispatch center, SWAT. white collar units. border fU'e
response
23. Explore and implement new revenue opportunities
24. Revisit land use policies to provide the most benefit to the community
ATT ACHMENT B
ORDINANCE NO.XXXX
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AMENDING THE BUDGET FOR FISCAL YEAR 2010 TO REINSTATE A
$B09.000 TRANSFER FROM THE GENERAL FUND BUDGET
STABILIZATION RESERVE TO THE TECHNOLOGY FUND.
The Council of the City of Palo Alto does ORDAIN as follows:
SECTION 1. The Council of the City of Palo Alto finds and
determines as follows:
A. Pursuant to the prov~s~ons of Section 12 of Article III
of the Charter of the City of Palo Alto, the council on June 15.
2009 did adopt a budget for Fiscal Year 2010; and
B. On December 1, 2009, staff reported to the Finance
Committee a one-time budget change to solve a $4.8 million
deficit for the Fiscal Year 2009; and
C. The one-time budget change deferred a $4.8 million cost
allocation transfer from the General Fund to the Internal Service
Fund-Technology Fund in FY 2009; and
D. Pursuant to discussions with the Finance Committee. a
motion was passed to approve staff's recommendation to close out
the 2009 Fiscal Year by deferring the $4.8 million transfer to
the Technology Fund; and
E. The Finance Committee also passed a motion recommending
staff submit a Budget Amendment Ordinance to Council amending the
FY 2010 Technology Fund Budget in the amount of $800,000', which
\"as the excess from FY 2009 year end close, plus any amount
necessary to fund all of the Tech expenditures that had been
planned for FY 2010; and
F. City council authorization is needed to transfer
$809.000 from the General Fund to the Internal Service Fund
Technology Fund.
SECTION 2.
A. The Budget Stabilization Reserve is hereby decreased by
the sum of Eight Hundred Nine Thousand ($809.000). As a result of
this change the Budget Stabilization Reserve will be reduced from
Twenty Two Million Twenty Two Thousand Three Hundred Sixty
One($22,022,361) to Twenty One Million TwO Hundred Thirteen Thousand
Three Hundred Sixty One ($21.213,361).
B. The Internal Service-Technology Fund is hereby increased
by the sum of Eight Hundred Nine Thousand ($809,000). As a result
of this change the Internal Service-Technology Fu~d Reserve will be
increased from Fifty One Thousand Four Hundred ($51,400) to Eight
Hundred Sixty Thousand Four Hundred ($860,400).
SECTION 3.
As specified in section 2.28.080(a) of the Palo Alto Municipal
Code, a two-thirds vote of the City Council is required to adopt
this ordinance
SECTION 4. The Council of the City of Palo Alto hereby finds
that this is not a project under the California Environmental
Quality Act and, therefore, no environmental impact assessment is
necessary.
SECTIQN 5. As provided in Section 2.04.350 of the Palo Alto
Municipal Code, this ordinance shall become effective upon adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO. FORM:
City Attorney
APPROVED:
Mayor
City Manager
Director
Services
of Administrative
ATTACHMENT B
FINANCE COMMITTEE
EXCERPT FROM THE REGULAR MEETING
DECEMBER 1, 2009
2. Fiscal Year 2009 General Fund DIscussion and Fiscal Year 2010
Financial Results as of November 20, 2009.
City Manager, James Keene stated due to a higher than anticipated
budget gap in Fiscal Year (FY) 2009, Staff will be presentlng the year
end budget review earlier than usual, and would provide the final
audited financial statements on another date. The intent was to call
attention to the upcoming challenges In the forthcoming fiscal years.
He spoke on the continuing economic downturn and declining revenues
projected In the next four years, and beyond. In the FY 2010 budget,
a $10 million General Fund deficit was Identified by Staff. This gap
was Initially closed with a three pronged approach, but had proven
insufficient to stem the tide of declining revenues. The City was facing
an additional defiCit. Staff would discuss in detail the shortfalls and
Issues In the closing of the FY 2009 Budget .. In the wake of the FY
2009 Issues, the City's Bud,get Manager voluntarily left, and the
Administrative Services Department (ASD) had restructured creating
an Office of Management and Budget within the ASD Department. The
ASD Department was currently recruiting for a Budget and
Management Officer. He spoke on the recommendation to balance the
FY 2010 with one-time adjustments to get the City through the current
fiscal year, and systemic adjustments would be required for future
drop-offs in revenues.
Director of Administrative Services, Lalo Perez stated the purpose of
the report was a follow-up to discussions with the Finance Committee
on September 8, 2009 and October 5, 2009, to provide new
Information depicting a worsening financial condition, and to layout
plans for addressing the current projections and future defiCits. He
gave a PowerPoint presentation that highlighted the following topics:
1) background on Palo Alto's financial position; 2) four-year view on
the challenges that lay ahead; 3) FY 2009 General Fund results; 4) FY
2010 General Fund results to date; 5) long range financial forecast; 6)
future challenges; and 7) budget reduction options. He stated that
Palo Alto has lost $9.3 million in revenues since the end of FY 2008.
FIN: 091201 EXERPT 1
FINANCE COMMITTEE
He stated that the net deficit for 2008 was $4 million. He projected
that In 2010 the· deficlt will be $5.4 million, driven by a deCline in
revenues. Staff recommended one-time adjustments for 2010. A
$5.6 million structural adjustment to the General Fund Budget will be
required and was subject to change. He stated the City would face an
additional deficit of $1.9 million In 2012.
Mr. Keene added that the additional $1.9 million In 2012 was
predicated on the $5.6 million In 2011 being systemic and ongoing.
Council Member Klein inquired whether the deficit projections in the
four-year view were in addition to the $10 million deficit when the FY
2010 budget was prepared.
Mr. Perez stated that was correct. He spoke on FY 2009 General Fund
results. The drop In key revenue sources In FY 2009 required midyear
budget adjustments to the General Fund revenues and expenditures.
The salary line Item was over budget due to a miscalculation in the
amount of expected salary savings. The General Fund deficit conSisted
of $2.1 million in employee salaries, $0.9 million In overtime, and $1.8
million In employee benefits. The miscalculations were not recognized
In time to make additional expense adjustments. Staff had
Implemented enhanced monthly variance reports, a department
restructuring, as well as other controls, to avoid such occurrences In
the future. He stated that Staff's recommended solution was a one
time adjustment to the FY 2009 General Fund by eliminating the $4.8
million transfer to the Technology Fund. He said that given the
downturn In revenues It was important to not draw on the Budget
Stabilization Fund first. The result of the error was an overage of $2.1
million In salaries, a $900,000 overage In overtime, and a $1.8 million
overage in benefits. He stated that the Fire Department and Police
Department covered their overtime through vacancies and
reimbursements. Regarding the benefits overage, he stated that In
previous years the City was able to rely on the Benefit Fund Balance to
cover overages. In recent years the balance has dried up as the City
had used it to balance the budget and can not absorb the overage any
longer. After the close of the year Staff realized that there was not
going to be sufficient budget to cover the overages In the General
Fund. The Impacts of not transferring the $4.8 million to the
Technology Fund will be delayed projects. This may be acceptable in
the short term, but this was not a fund that could forego these
FIN: 091201 EXERPT 2
FINANCE COMMIITEE
projects. The money will need to be put back In order to support the
organizations technology needs. Staff was recommending a pay back
over a four year period. The projects being considered for deferral
were the Radio Infrastructure Improvements, the Library Radio
Frequency Identification, the replacement schedule for on~golng Items,
and restrictions on any future technological Initiatives until the funds
were put back. After accounting for encumbrances and
reapproprlatlons there will only be $51,000 left In the Technology
Fund.
Mr. Keene iterated that Staff was proposing an approach to close the
books on FY 2009. And how to replenish, over a four-year period, the
Technology Fund, If the City Council chooses that alternative to close
the FY 2009 General Fund gap. He stated the FY 2010 deficit
challenge contained $1.2 million from FY 2009, totaling a FY 2010
projected defiCit that totaled $5.4 million. He spoke on the Impact on
the Technology Fund.
Chair Burt spoke on how the City Council should proceed with the
subsequent discussions regarding this Agenda Item.
Council Member Klein stated the City Council Member's questions
should be answered thoroughly before moving forward.
Vice Mayor Morton stated $4.8 million from the Technology Fund was a
transfer, and not an expenditure that had been made. He Inquired
whether the City Council was asked to solve a booking In payroll
savings error in FY 2009 by deferring to the Technology Fund.
Mr. Perez stated that was correct.
Vice Mayor Morton stated a draw of $800,000 from the Budget
Stabilization Fund could be transferred to the Technology Fund to
minimize the future Impact on said fund.
Mr. Perez stated that was the Intent of Staffs recommendation.
Vice Mayor Morton stated his preference to transfer $800,000 from the
Budget Stablllzation Fund this Fiscal Year. He requested clarification
on how employee vacancy savings became a misidentification in
General Fund deficit.
FIN: 091201 EXERPT 3
FINANCE COMMITTEE
Mr. Perez spoke on the process leading up to the miscalculation. He
spoke on the line Item that was over budget, due to a miscalculation
made on the expected vacancy salary savings.
Vice Mayor Morton Inquired whether there was an option to not
transfer funds from the General Fund to the Technology Fund to solve
the FY 2009 Budget problem.
Mr. Perez stated yes and that the miscalculation was not a system
error.
Vice Mayor Morton left the meeting at 7:54 p.m.
Council Member Schmid inquired whether the miscalculation In salary
. savings from vacancy rates was $2.1 milllon i and whether the error
accounted for the overtime and benefit shortfall.
Mr. Perez stated the FY 2009 General Fund deficit consisted of $2.1
million, plus $900,000 for overtime costs.
Council Member Schmid Inquired whether the benefits were a separate
Issue.
Mr. Perez stated this was correct because they were not covered under
the General Fund. He Indicated there were a number of variables that
could be difficult to predict.
Council Member Schmid stated there were a growing number of
vacancies during the time period contributed to the miscalculation.
Mr. Perez stated that was correct.
Council Member Schmid stated the vacancies should have created a
budget positive. He Inquired whether the Issue was an overestimate.
Mr. Perez stated that was correct. He spoke on the three components
that contributed to the miscalculation.
Council Member Schmid stated the miscalculation was not what was
owed to the retired employees.
FIN: 091201 EXERPT 4
FINANCE COMMITTEE
Mr. Perez stated the payroll was correct, and the amount that should
have been paid out was in line with the adopted budget, with the
exception of benefits.
Council Member Schmid stated the benefits showed a $1.8 million
shortfall due to workers compensation and general liability costs. He
requested clarification for the underestimation of funds to cover
benefits.
Mr. Perez stated the City's actuarial consultant analyzed the existing
and new claims and made a determination on what the payout wouid
likely be. He stated the consultant's amount was booked against the
General Benefits Fund. The benefit expenses at the. end of FY 2009
came In at $1.8 million over budget due to a higher than anticipated
cost of the claims.
Council Member Schmid stated Mr. Perez was Implying there was an
underestimation in the fundIng to cover benefIts.
Mr. Perez stated that was correct.
Council Member Schmid stated $1.8 million was a sizable amount. He
inquired on the total amount booked in a given year for workers
compensation claims.
Mr. Perez stated $15 million.
Council Member Schmid stated the error was roughly 10%.
Mr. Perez stated the shortage was In benefits, He stated assumptions
were made at the beginning of the Fiscal Year to book the liability In
the General Benefits Fund, and that amount was not sufficient to cover
the unanticipated expenses,
Council Member Schmid stated the amount requested at the beginning
of the Fiscal Year was deemed as reasonable at the time. In addition,
there was a sizable and growing vacancy In the City's workforce. He
questioned whether something happened Inside the workers
compensation area that created larger payouts.
FIN: 091201 EXERPT 5
ATTACHMENT C
FINANCE COMMITTEE
Regular Meeting
February 16, 2010
Chairperqon Schmid called the meeting to order at 7:02 p.m. in the Council
Conference Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Schmid (Chair), Espinosa, Klein, Scharff
Absent: none
1. Oral Communications
Roger Smith, 270 Tennyson Avenue Spoke regarding tax on Internet sales.
He suggested that Palo Alto should lead the trend towards collecting tax on
internet sales.
2. Update to Long Range Financial Forecast, 2010-2020
Director of Administrative Services Lalo Perez spoke regarding the Long Range
Financial Forecast. He said the goal was for Staff to hear the Committee's
feedback so they could then present the forecast to the full Council. The
purpose of the Long Range Financial Forecast was to create a balanced and
sustainable General Fund budget. He said this was not a budget or a plan, nor
a commitment to future increases. Rather, it was a model to start the
conversations. The focus of the forecast was on 2011. He said that the local
economy wasn't showing many signs of recovery. The FY 2010 gap was $6.3
million. With the report on March 2, 2010, Staff would provide specific details
for addressing the gap. They would save $4.5 million through vacant positions
with salary savings of $1.2 million not including benefit expense savings.
Council Member Klein said the fund covered the General Liability Insurance, but
not pensions and healthcare.
Mr. Perez said any savings realized from the vacant positions benefit expense
would build up that balance to cover unexpected expenses for the General
Fund.
City Manager James Keene said Staff was not trying to earmark the salary
savings, Rather it would be used to replenish the benefit fund.
Council Member Klein said it would be better to show an additional expense
item to replenish the fundI and then show the total savings.
Mr. Keene said Staff would look at that.
Mr. Perez continued the presentation saying that additional savings would be
met through non-salary, one-time reductions of $1.8 million, unspent Public
Safety Building Design Funds of $2.7 million, and repayment to the Technology
Fund of ($1.2 million), which would bring the gap to $1.8 million, He said that
Staff was recommending Council draw on reserves. He said that what this
meant for the FY 2011 through the FY 2020 forecast was between a $6,4
million and $19.6 million annual gap.
Mr. Keene said there would be an annual one-time budget balancing.
Mr. Perez said that if the $4.5 million in adjustments were made, and there was
a draw out of $1.8 as projected in FY 2010 the budget would be balanced. He
cautioned the budget assumed everything forecasted comes to fruition.
Revenues deteriorating further than expected were would not be part of the
formula, In 2011 there was a $6.35 million deficit prOjected. All the changes
that would be reported on March 21 2010 were one-time Items. If permanent
adjustments were consldered l the City would only have to make up the
difference between the $9 million and the $6.3 million. .
Council Member Scharff asked if this meant they would make large cuts every
year.
Mr. Perez said that both cuts and revenues have to be accounted for. He
suggested revenue from the new hotels were not in the forecast, and no
savings were included for the changes in the 2%@60 formula. There would be
some numbers that would change and create some savings going forward.
Mr. Keene suggested salary increase of growth assumptions could be debated.
Mr. Perez said he would discuss PERS later in the presentation. He added this
was a common amount in many surrounding cities. At least 40 cities are gOing
through reductions. Staff was formulating information for the Council.
Deputy Director of Administrative Services, Joe Saccio discussed the deficits of
neighboring cities.
Council Member Klein said the Committee had asked Staff to show them
percentages of the budget.
Mr. Keene said it was about 10% of San Francisco's budget.
Mr. Perez stated that well known Economist, Steven Levy, has said that the
outlook for local cities was not good. He said the recovery for government
revenue would be more at the state level. The impact of the current economic
conditions on the City's revenues meant the current portfolio of services was in
jeopardy.
Mr. Saccio said that the California economy was among the worst in the nation.
He said that 90,000 jobs had been lost in the Silicon Valley Region alone.
Unemployment reached 12.4% in December 2009. He said that temporary
workers were being increased and held longer than in the past. An upward
trend of temporary workers previously indicated that full-time jobs would come
soon, but the current trend was concerning, he said, because organizations
were holding onto temps rather than hiring benefitted employees. The state
deficits totaling $20.7 billion may impact the City, but it was still unclear how.
He stated that the Bay Area Business Confidence Index was positive in
November/ with 53% of the respondents expressing optimism. He said that
economic forecasts pointed to a slow growth trend over the next one to two
years. Federal stimulus programs had given signs of an upturn/ but it was
unclear what those Impacts would be when the programs expire. He said that
since FY 2009, sales tax revenues had dropped $2.9 (14%), property tax
revenues increased $0.35 million (1.3%), Transient Occupancy Tax was down
$.5 million (7%), Documentary Transfer Tax was up $.2 million (S%), Joint
Service Agreements were down $.2 million (2%).
Council Member Klein said he heard recently that revenues were up. He asked
if that data was included in the analysis.
Mr. Saccio said they had been looking at the data. The Transient Occupancy
Tax (TOT) was bottoming out; perhaps pointing to increases. He said the
Documentary Transfer Tax was similar/ but Sales Tax was down 9%. It would
take some time for that to affect spending habits.
Mr. Keene said the State Controller recently wrote a letter saying the State
would be out of cash by April if revenues continued at the same level.
Council Member Espinosa asked when the Revenue Plan would come into this
discussion.
Mr. Keene said he thought there would be many variables, some due to policy
direction from Council. It should be looked at as a package of solutions, or
. mitigations the Finance Committee would look at. He asked if there were new
revenues they would want to look at.
Mr. Perez said the budget calendar would also indicate an opportunity for such
discussions.
Council Member Scharff asked if Staff was looking at methods to increase sales
tax.
Mr. Keene said he thought a more focused economic development strategy
would be a Finance Committee agenda item. It was difficult to predict what
would forestall 2011 decisions. It could come into play for a long range
forecast.
Council Member Scharff said the City couldn't make that level of cuts every
year realistically. He stated that the City could not tax themselves out of this
and that some growth would be required. He asked if there was a way to
increase property taxes.
Chair Schmid said this was a 10 year outlook that outlined assumptions about
where revenues would come from. He said the fastest growing revenue stream
was the Utilities User Tax. The Utilities User Tax depended on usage rates, and
the wholesale gas prices were currently level with 2002-2003, oil prices were
the same as they were in 2007 yet there was an assumption that the biggest
source offuture revenue would be through the Utility User Tax. He asked if this
forecast would push reality.
Mr. Perez said the gap between the electric commodity market and the City was
narrowing.
Council Member Klein said that had not been demonstrated in the report.
Mr. Perez said the gap was at the high 20%. Staff was concerned about not
having enough wet years. With less brown power and increased green there
was a potential for the cost to go up.
Mr. Keene said the situation in Palo Alto was not a unique situation; many other
purveyors of utilities are dealing with drought.
Chair Schmid said more of an uptick in utilities was being built into the Long
Term Financial Forecast than anything else.
Mr. Saccio said this was primarily driven by Utilities own forecast. There could
be more hydro power available, and the forecast would be revised.
Mr. Saccio said water rates were driving much of the forecast. Gas and electric
prices fluctuated regularly.
Chair Schmid said the City could carefully look at that.
Council Member Klein said property tax forecasts were being based off of macro
numbers provided by the State and the County instead of a more granular
base. Commercial projects coming on-line such as Tesla should be factored
into the forecast.
Mr. Perez said the School District did a more comprehensive analysis through a
consultant; Staff could look into providing additional analysis.
Mr. Keene said Staff could target the big projects.
Mr. Perez agreed and suggested something similar to the SEA with Cisco.
Council Member Scharff asked if buying less hydroelectricity, and more green
would raise the bills
Mr. Perez said that it was a higher cost for the green.
Council Member Scharff asked if that meant the City collects more tax because
the bills go up.
Mr. Saccio said the tax was 5% on gas, water, and electric bills. Anything that
drove up the bill for the customer would drive up the revenue for the City.
Mr. Keene said the CIP needed to be looked at as well.
Council Member Klein said the Staff Report referred to a narrow tax base for the
City, but previously Staff had reported to Council that the City had a broad tax
base.
Mr. Perez said that comment had to do with the discussion with Mr. Levy who
felt there was less of the type of positively impacting revenues.
Mr. Keene said compared to some cities Palo Alto had a more diversified tax
base. Most cities didn't have many tools available for their tax base. The taxes
Palo Alto had have been limited in some ways by legislation and the more
elastic taxes were not currently there.
Council Member Klein stated that the CMR was a public document and he didn't
want that comment to be circulated giving the impression that Palo Alto had a
narrow tax base. He then spoke regarding the comment in the CMR that
referred to the delayed response to the housing market. He said that language
was inconsistent with the fact that Palo Alto's tax base had outpaced every
other city In the county.
Mr. Perez agreed and mentioned the negative CPI adjustment expected from
the County.
Council Member Klein asked Staff to rewrite that entire sentence.
Mr. Saccio said that housing had seen robust growth but currently it was
leveling off.
Council Member Klein said that the sentence in question was still comparing
Palo Alto to other cities. other cities would be delighted to be where Palo Alto
was.
Mr. Perez said that salaries and benefits were up $0.2 million rather than $1.3
million In the adopted FY 2010 budget. That expenditure number Included the
followfng; Benefits costs increased by $2.8 million, base salaries increased by
$1.6 million, SEIU and Management savings, plus PAPOA salary deferral saved
$2.8 million, and vacant positions saved $1.2 million. The net change was a
$.2 million increase. Salaries and benefits attributed to 65% of expenditures.
He said that In FY 2000 the benefits were $16.3 and In FY2010 they were
$28.5. One of the main reasons it had gone up was health care. The
Infrastructure funding problem was not fully addressed in the forecast. The
infrastructure had a 20-year backlog estimated at $302 million for existing
structures, plus $208 million for replacing and updating facilities. The firstfive
years of the $510 million 20-year need was estimated at $152 million. The
Forecast includes funding for just $62 million or 40% of that.
Council Member Espinosa how it was decided what was included in the 40%.
Mr. Perez said it was based on the available dollars. Council approved the level
of funding which met prior policy directions. Staff was requesting a revisit of
those directions. otherwise the backlog will grow and maintenance needs will
grow.
Council Member Espinosa asked if the formula would get to the 40%.
Mr. Perez said the City averaged $10 million a year in transfers from the
General Fund to the Infrastructure Capital Program. That was not enough; he
said it needed to be approximately $15 million. The majority grew by about 7%
based on the formula.
Council Member Scharff asked if the graph on page 12 of the Long Range
Financial Forecast was indicating that this was to not fall further behind or if it
was to catch up.
Mr. Perez said that with a 20 year plan this was what it would take to address
the infrastructure.
Council Member Scharff asked if that meant the $500 million would be fully
addressed if they put in $25 million.
Mr. Perez said yes.
Council Member Scharff asked how much would have to be put in to not have
the gap grow. He said that currently there was a $500 million gap; he asked
how much money they would have to put in to make sure it's not $505 million
next year.
Mr. Keene said Staff would have to research that.
Mr. Perez said the City was $5 million behind in maintenance. He said that if
the facilities were not maintained the deficit would grow.
Chair Schmid said this study was done three years ago, at the height of the
escalated numbers. He said there was a unique opportunity in the next few
years to get this work done for less money than previously.
Council Member Espinosa said this would be addressed in other ways as well.
He said he was concerned about Staff using the term "some maintenance." At
the retreat he thought they were discussing all maintenance as well as a dream
building.
Mr. Keene said his understanding was that this would address that backlog and
projected funding for maintenance needs in that 20 year period.
Chair Schmid said in addition to the $10 million in 2010, Public Works had a
Maintenance Budget, for a total of $15 million for 2010.
Mr. Perez said there was an Operating Budget for maintenance.
Council Member Klein said it would be better to say "deferred maintenance."
Council Member Scharff said that in 2009 it was $15 million on infrastructure, in
2010 it would be $8 million.
Mr. Keene said other funding sources for infrastructure were included in the
CIP, such as the General Fund transfer.
Mr. Perez said there was also money from the prior years that will have
accumulated.
Mr. Keene said a few years ago the Council decided to increase the amount of
money put into infrastructure funding. It would fall short of what would be
needed.
Council Member Klein said the Council increased the amount by $3 million in
2006 and any surplus was added to the Capital Infrastructure Program. One
way to balance the budget was to not put it in infrastructure.
Council Member Scharff said that was in essence what had been done in 2010,
the infrastructure had been cut by $2 million.
Mr. Keene said the contribution to the infrastructure had been cut by
approximately $1 million. But Council's thought was that given the currently
lower prices for services the City could get the same amount of work for less
money. He said the $3 million was a combination between some Capital Funds
and some additional funding.
Chair Schmid recalled a report from 2009 on retiree medical actuarials, which
laid out a series of assumptions built Into the model currently being used.
Those assumptions included a CalPERS number that indicated reserves earned
7.75% per year. Palo Alto's pension liability was the same. He said that
CalPERS would have a major loss in their investments. A cbmparable
investment was CIAA credit, without the property investment. Their 10 year
rate of return was 4.4%, using a 7.75% future would be unrealistic if Palo Alto
kept some control from CaIPERS. He stated that the numbers on the benefits
side were understated. Staff forecasted the benefits would grow 60% faster
than salaries and salaries would grow at the same rate as total revenue. If
CalPERS was overstated then Staff was understating the deficit.
Mr. Perez said that was the discussion in Sacramento'and in Staff's working
groups. It would be a challenge because the real estate holdings at PERS
would take a hit which would Include assets. The City had less control of the
state assumptions from the pension side.
Chair Schmid said Staff was basing assumptions on the future that salaries and
benefits would grow faster than revenues.
Mr. Perez said that would be correct if nothing was changed. Staff was
recommending changes. The City could not have 40.3% growth in revenue and
52.4% growth in expenditures. The City was required to go by the PERS report
assumptions. The City would need to push PERS on a charge to the assumed
rate of return. He said that Mr. Levy expressed concern about the same issue.
Chair Schmid said CalPERS would want to avoid changing but Palo Alto still had
decisions to make.
Mr. Keene said that an alternate scenario of a lower return on CalPERS
investments could be built into the model. He said the Committee should
consider this to be a long range forecast, each year would still require a budget.
There will always be some trade offs for risk asseSsments.
Council Member Klein asked why there was a projected salary increase when
there was a decrease in head count. He said that if increases were eliminated
between 2011 and 2020 the budget would be balanced with a surplus. Given
that benefits are going up, without our control, there was no justification for
building in salary increases.
Mr. Keene said the model was based on historical data.
Council Member Klein said they declined to use that model on the revenue side.
He suggested a different model on the expense side as well. He said he did not
approve of excessive conservatism. Those increases would never be allowed
during a time when services will be cut.
Mr. Keene said that the Finance Committee could recommend what the
percentage increase should be.
Chair Schmid said the sum would be the total compensation in the long run
with equal gain in total revenue.
Council Member Klein said that was a reasonable assumption. The salaries and
benefits were outpacing the revenues. If the Council accepted these
assumptions dramatic cuts in programs would be required.
Mr. Keene said Staff was looking at the trade-off between program cuts and
salary reductions. The policy choice would be the City could not have this level
of salary increases. He said there should be some rational in the forecast.
Council Member Klein said there could be several different models.
Council Member Scharff said that if the City grew the revenues there could be
money left-over for salary increases. Projections should have the
understanding that Staff had a good economic development plan.
Mr. Perez said the forecast did not include the 2%@60 pension going forward,
which would need to be added. Retiree medical liability would be an additional
$1.4 million per year. There was an additional $1.0 million per year for
operating library and community center expansions. CalPERS was two years in
a rears on the contribution assumption and the funding plan for the upcoming
years was $0.4 million for 2011 and $1.7 million for 2012. He said that Staff
asked CalPERS what the loss of over 25% of the value meant. Their response
was that the City would have an expense of about 7% of the miscellaneoUS and
11 % for Safety employees. Those numbers had been included in the forecast.
That meant $0.1 million in 2012 to $5.4 million in 2015 to fund these lost
dollars. 2010's structural changes add up to $7 million. Structural changes will
need to be made in 2011 and 2012 that add up to $9.2 million.
Council Member Klein asked where the 2%@60 and the health care would get
added in.
Mr. Perez said that no significant savings from those would be achieved in 2011
or 2012 because the medical part in January 2011 will have about half a year.
He said that if the City made the assumption that health care premiums would
grow about 5% it would be approximately $230,000 for half the year. CalPERS
claimed that the 2%@60 wouldn't save the City any money for the first five
years.
Council Member Klein said that was based off of generalized trends toward
hiring in the last few years.
Mr. Perez agreed. He said there would not be a return in the first few years.
Council Member Klein said the forecast needed to be based on Palo Alto's data,
not generalized data.
Mr. Perez said CalPERS uses the system experience, not the Palo Alto
experience. He said he would discuss that with them.
Mr. Keene said that at the League City Manager meeting recently the change
was figured to save about 5% on the cost on the pension side. That was a
generalized model. The numbers could be adjusted as the actual experience
passed.
Mr. Perez said that difficult choices would be coming. Stakeholder involvement
would be required to develop options for the Council to consider. That was the
reason for the Long Range Forecast so Staff could start to prepare for 2011.
Herb Borock, PO Box 632 spoke regarding structural deficit. He said the voters
approved a general user tax but while the school district was using their money
they couldn't fix the streets. He wanted to see a break down on how much
money had been given to the school district.
Chair Schmid asked if the goal was to pass the report onto Council with
comments. He wanted to go over the suggestions and if two members agreed
they would pass the recommendation onto the Council. He said that the
recommendations they've discussed so far were Revenue Generation, Economic
Development Strategy, Infrastructure Update, Compensation Assumptions, and
2%@60 Scenarios.
Council Member Scharff added that 2%@60 scenarios should be explored
across all employee groups.
Council Member Klein spoke regarding Menlo Park who was putting together a
ballot measure to create a 2%@60 penSion structure for all non-public safety
employees.
Council Member Schmid asked if that should be a recommendation from the
Finance Committee.
Mr. Keene said that could be a recommendation. Public Safety employees are
typically at a different formula.
Council Member Scharff said he didn't mean to presume it would happen; he
just wanted to see what it would look like.
Chair Schmid said the suggestion was to see a scenario.
Mr. Perez said that some jurisdictions have changed the formula from 3% at 50
to 3% @ 55.
Council Member Espinosa asked for clarification. He asked if changes were
being made to this document.
L.
Chair Schmid said this document would be presented to Council to be voted on,
but for now the Committee was making suggestions for Staff to bring to Council
in the presentation.
Mr. Keene asked if they are able to incorporate some suggested changes prior
to going to Council. Cost savings on insurance and the pension piece could be
added. Some of the other things were more variable and more difficult to
incorporate.
Chair Schmid suggested they determine which suggestions have a group of
members interested. He asked if another Committee Member was interested in
the 2%@60 scenario or the Revenue Generation suggestion proposed by
Council Member Espinosa.
Council Member Klein said he didn't think it was part of the forecast.
Chair Schmid said it was not part of the forecast. He said the Economic
Development Strategy was part of the same category.
Council Member Scharff asked if Staff was going to adjust the hotel forecasts at
all.
Mr. Perez said they could use their current experience to make some
assumptions on the rates.
Council Member Klein said they should consider looking at trends on that one.
He said it was reasonable to assume there will be a 4-5% increase in the
number rooms per year.
Mr. Perez suggested that adjustments more similar to the compensation should
be looked at.
Mr. Keene asked if CalPERS would be in that category
Chair Schmid said that would be helpful for the Committee to see what impact
might happen. Alternative compensation would be good to see. And an
infrastructure update would be helpful.
Council Member Espinosa these are good to talk about during the year.
Chair Schmid said they are an integral part of the forecast.
Council Member Klein agreed but added that they didn't have enough
information.
Mr. Perez said Staff has done a partial analysis.
Chair Schmid said before working on the 2011 budget it would be helpful to
know how much was being spent.
Mr. Keene said whatever the City does will put more pressure on the Long
Range Forecast and widen the gap.
Council Member Klein said a bond measure on the 2011 ballot would wipe out
the infrastructure deficit completely.
Chair Schmid asked if there were any other suggestions they should pass on.
Mr. Keene said that his view of the Long Range Forecast was that it was just a
forecast. There was value in keeping drivers to create enough possible tension'
to force the City to look at things. Seeing shortages would make the City look
at those items. Looking at this wasn't going to give the City a rebound. Staff
and Council must acknowledge the difficulty communicating the financial
situation to the public, so the public can offer their input regarding the trade
offs and choices. His thought was they wouldn't have a linear budget process
but rather one that would have some parallel processes. The City Manager's
budget would be a tentative proposed or trial budget. He suggested pushing
the adopting of the budget up to the end of the fiscal year to maximize the
amount of time to work on it and gather public and Staff input.
Chair Schmid said a key point on community outreach was Staff would be
engaged with the community and with Council as well.
Mr. Keene agreed. The Staff as a whole would be engaged. The City would
have to find ways to be more effective than in the past.
Mr. Keene said neighborhood meetings could take place in living rooms.
Council Member Klein asked if the outreach on the 30 th would have a list of cuts
to discuss.
Mr. Keene said that was the thought. Before presenting the budget Staff would
discuss cuts with the community. He said that the Baron Park Neighborhood
Association organized a meeting and 75-100 people attended. He said they
talked for over an hour about the budget. They actually discussed how they
can tax themselves to raise more money for the City.
Administrative Services Director Lalo Perez introduced the new Budget Manager
Marc Puckett to the Committee.
3. Auditor's Office Quarterly Report as of December 31, 2009
City Auditor Lynda Brouchoud spoke regarding tl:le Auditor's Office Quarterly
Report. She said the Municipal Code required quarterly reports to the City
Council on the status of the annual work plan. She stated that notable
reports were the Status of Audit Recommendations issued in October 2009,
which reported that 45% of the open audit recommendations were resolved
and the Service Efforts and Accomplishments (SEA) report. During the first
half of FY 2010, the Auditor's Office revenue recoveries and other audit
savings have resulted in a total economic benefit of $452,681. The Auditor's
Office has also been involved in several internal control activities, listed in
the Quarterly Report. With this Quarterly Report, the Auditor's Office was
also providing a detailed update on the monitoring of the Utilities portion of
the SAP upgrades. Her office monitored Phase 1 of the upgrades (the
ESS/Mss module) and the implementation of Phase 2 of the upgrades (the
Utilities module). She did not audit the system, she basically advised on
best practices, monitored the implementation of the system, and
coordinated the external auditor's external scan of the system.
ImprOVements occurred. She said that Staff had been receptive to best
practice suggestions. Three areas are still outstanding. These include: (1)
ensuring the system was compliant with the purchasing card industry (PCl)
standards; (2)security procedures and processes were In-place and updated,
and processes for patches were Institutionalized; and (3) Staff was resolving
post implementation areas, and manual work arounds were being
minimized, and internal controls were functioning. She said the system was
fully operational and the on-line payment portion activated in January. Her
department's monitoring would end. The next phase will include audit
sampling in the SAP system.
Administrative Services Director Lalo Perez said that the 17 Items they needed
to address had been successfully addressed. He said that a third party would
be able to determine the scope of service on the contract and provide feedback.
The issues outstanding were limited in scope and not significant. He said they
were not hitting the thirty day mark because when a patch was implemented it
could have adjustments to the configuration and code and they wanted to test
these in back up systems under test scenarios prior to implementing the
patches. He said they were searching for tools to do the back up. Staff will
come forward to the Council if there was a desire to change the billing format or
if Staff would like to see any enhancements going forward.
Attachment D: Property Tax Data
(excerpted from Stone & Youngberg presentation on Library Bonds)
Assessed Value Composition -Primarily residential
2009·10 Land Use Distribution by Assessed Value and Parcel·
Distribution by Assessed Valuation Distribution by Number of Parcels
AgrkultW'll
0.1%
Commercfalf
Indtlstrlal
27.3%
Resldentlal
12.0%
Other Vacant
2.2% L.f.4
Agrkuttural
0.2%
Commercia! I
Industrial
5.5%
Other Resldemlal
17A%
Otheo
0.4%
V;,;cant
Stogie FamUy
1~.1%
30%
25%
20%
fl IS%
~ 1 10%
5%
Attachment D: Property Tax Data (cont'd)
Single Family Assessed Value by No. of
Parcels
Distribution of Single Family 2009-10 Assessed Valuations
(By Number of Parcels)
Median Single
2009·10 Assessed Valuation of Single family Homes
-t
.E
~ .~ ';:;
'0 • ~ > 0 « .t -.» lS .-~~
'l5 ..
30%
25%
20%
15%
10%
5%
0%
Attachment D: Property Tax Data (cont'd)
Single Family Assessed Value by Value
Category
Distribution of Single Family 2009·10 Assessed Valuations
(By Percentage of Total Single Family Residential AV)
2009· I 0 Asses5cd Valuation of Single Family Homes