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Home My WebLink AboutStaff Report 2527City of Palo Alto (ID # 2527) Finance Committee Staff Report Report Type:Meeting Date: 2/28/2012 February 28, 2012 Page 1 of 3 (ID # 2527) Council Priority: City Finances Summary Title: Long Range Financial Forecast 2012-2022 Title: Long Range Financial Forecast Fiscal Years 2012 to 2022 From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee review and comment on the attached forecast of revenues and expenses 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 fiscal years 2012 through 2022. The LRFF identifies key issues that will guide the upcoming 2012-2013 budget process and affect the City’s future financial condition. Discussion The economy has finally begun to show some longer-term improvement, both at the national and state levels. National unemployment was down to 8.3% as of January 2012, and for December 2011, state unemployment was down to 11.1 percent, its lowest level since 2009. Gross Domestic Product and Gross State Product are both showing consistent growth, as are venture capital investment and new technology jobs in Silicon Valley. Even more positive is that Silicon Valley is leading the state in job growth. Less positive is the number of still-unemployed: 13 million nationwide, of which 5.5 million have been unemployed for 6 or more months; and 2 million Californians. The City’s revenue projections are rosier than they have been for a couple of years. But employee benefit cost increases continue to outpace the rate of revenue growth. General Fund revenues for FY 2012 are projected to be $3.7 million higher than expected in the Adopted Budget. However, this “windfall” is overspent by the addition of $2.6 million to the Annual Required Contribution that the General Fund must set aside to pay down its retiree medical liability; plus $2.4 million in unrealized savings from the public safety units. The Adopted Budget in FY 2012 assumed $3.4 million in savings from agreements with the Fire and Police unions; of that, only $1 million was realized. February 28, 2012 Page 2 of 3 (ID # 2527) On top of this structural deficit, there is the City’s infrastructure problem. The under-funding of infrastructure was addressed via the Infrastructure Blue Ribbon Commission (IBRC) report to Council in December 2011. The IBRC report attempted to quantify the City’s underinvestment and recommended that the City try to find $4.2 million per year over ten years to fund its “catch-up” projects; invest an additional $2.2 million per year to more adequately fund its capital operating and maintenance (“keep-up”) costs; and seek voter approval to fund the public safety building, MSC, and other reconstruction projects. These recommendations are not incorporated directly into the base Forecast. Staff will continue to work with the Council to determine next steps based on the IBRC funding recommendations, among other options. The Base Model is summarized in the chart below. It shows a projected balanced budget for FY 2012 after a recommended $2.9 million draw on reserves, and a projected deficit of $2.1 million in FY 2013. For fiscal years 2013 to 2022 (ten years), the combined deficits are projected at $74.9 million. 2012-2022 LRFF - SUMMARY OF BASE MODEL FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 150,203 130,650 133,762 137,604 141,767 146,185 150,798 156,166 161,876 166,727 172,294 TOTAL EXPENDITURES 154,618 151,370 157,759 161,995 168,167 174,615 181,349 188,406 195,346 203,078 210,952 GRAND NET SURPLUS (DEFICIT) $ (0) $ (2,059) $ (3,729) $ (4,065) $ (5,299) $ (6,723) $ (8,221) $ (9,267) $ (9,837) $ (12,038) $ (13,646) Among the assumptions incorporated into the base model are two directives from last year’s Council: (1) that staff assume medical costs will increase by 10 percent per year, and (2) that staff assume that PERS rates will increase 3 percent each year beyond FY 2014; PERS actuarial reports provided projected rates for FY 2012-2014. Staff prepared two alternate scenarios: one in which the PERS rates increase by 1.5 percent per year, rather than 3 percent per year, in FY 2015-2022; and one in which the City invests an additional $6.6 million per year in infrastructure, as recommended by the IBRC. The first scenario shaves $25.9 million off the projected deficits from FY 2015-2022; the second $67 million in deficits over the ten-year period. As staff states each year, this Forecast is not a prediction. It is a snapshot contingent upon a number of assumptions, all of which are outlined in the report. It is staff’s hope that by examining this snapshot, Council members and staff may identify issues that must be addressed February 28, 2012 Page 3 of 3 (ID # 2527) now to improve the long-term picture, and that as a result incorporate into the FY 2013 budget changes that will improve the City’s outlook for future years. Staff is in the midst of conducting a review of fees charged for services with the goal of determining the net cost of providing City services. Staff hopes that this information will assist in establishing policies on cost recovery, level of service, and/or how services are delivered. 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 introduce the recommended midyear budget adjustments to the Finance Committee on February 28, 2012 and continue with the 2012-13 budget process. Staff’s proposed FY 2013 budget will include recommendations to balance the budget. Since the Cost of Services study will not be completed in time for the FY 2013 Budget process, additional steps will be introduced in the FY 2014 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. Environmental Review This report does not require California Environmental Quality Act (CEQA) review. Attachments: Blank page (PDF) Attachment A: Long Range Financial Forecast Fiscal Years 2012-2022 (PDF) Prepared By:Nancy Nagel, Senior Financial Analyst Department Head:Lalo Perez, Director City Manager Approval: ____________________________________ James Keene, City Manager This page has intentionally been left blank. City of Palo Alto 2012 LONG RANGE FINANCIAL Fiscal Years 2012 to 2022 FORECAST TABLE OF CONTENTS I. EXECUTIVE SUMMARY 1 II. ECONOMIC OUTLOOK 3 III. UPDATED MODEL 7 IV. ALTERNATE SCENARIOS 20 V. CHALLENGES & CONCLUSIONS 23 VI. ENDNOTES 28 City of Palo Alto 2012 EXECUTIVE SUMMARY I. EXECUTIVE SUMMARY This report is the City’s updated Long Range Financial Forecast (LRFF) for the fiscal years 2012 through 2022. The LRFF identifies key issues that impact the upcoming FY 2013 Budget process as well as the City’s future financial condition. It also allows Council and staff to explore some “what‐if” scenarios to see what alternative assumptions would do to the City’s “bottom line.” On the economic front, the economy has finally begun to show some longer‐term improvement, both at the national and state levels. By January 2012, national unemployment had decreased to 8.3 percent, and state unemployment reached 11.1 percent in December 2011, its lowest level since 2009. Gross Domestic Product and Gross State Product both showed consistent growth, as did venture capital investment and new technology jobs in Silicon Valley. Even more positive was that Silicon Valley led the state in job growth. Less positive was (and is) the number of still‐unemployed: 13 million nationwide, of which 5.5 million have been un‐ employed for 6 or more months; and 2 million Californians. The City’s revenue projections are rosier than they have looked for a couple years, but benefit costs continue their re‐ lentless upward climb – outpacing the rate of revenue growth. For example, a new actuarial valuation of the City’s un‐ funded retiree medical liability indicated that the General Fund needs to set aside an additional $2.7 million in FY 2012, to fund that liability. In FY 2013 that increase grows to $3.5 million. The City clearly still has its work cut out for it in addressing its structural deficit. Moreover, the under‐funding of infrastructure was directly addressed via the Infrastructure Blue Ribbon Commission (IBRC) report to Council in December. The IBRC report attempted to quantify the underinvestment and recommended that the City try to find $42 million to fund its “catch‐up” projects; invest an additional $2.2 million per year to more adequately fund its capital operating and maintenance (“keep‐up”) costs, and seek voter approval for funding for the public safety building, MSC, and other reconstruction projects — to the tune of $210 million. These recommendations are not incorporated directly into this Forecast, but are addressed in an Alternate Scenario on page 22. The Base Model is summarized in the chart at the top of page 2. It shows a balanced budget in FY 2012 after a recom‐ mended $2.9 million draw on reserves, and a deficit of $2.0 million in FY 2013. The City added $4 million to the Budget Stabilization Reserve in FY 2011, so there is room for a commensurate withdrawal in FY 2012. The report assumes Council will approve this request for forecasting purposes. For FY 2013 to 2022 (ten years), the combined deficits are projected at $74.4 million. Among the assumptions incorporated into the base model are two directives from last year’s Council: (1) assume medical costs will increase by 10 percent per year, and (2) assume that PERS rates This Forecast is not a prediction. It is a snapshot contingent upon a number of assumptions. 2 City of Palo Alto 2012 2 will increase 3 percent each year beyond FY 2014; PERS actuarial reports provided projected rates for FY 2012‐2014, which are incorporated in the base model. Staff prepared two alternate scenarios: one in which the PERS rates increase by 1.5 percent per year, rather than 3 per‐ cent per year, in FY 2015‐2022; and one in which the City invests an additional $6.6 million per year in infrastructure, as recommended by the IBRC. The first scenario shaves $25.9 million off the projected deficits from FY 2015‐2022; the second adds $67 million in deficits over the ten‐year period. As we say each year, this Forecast is not a prediction. It is a snapshot contingent upon a number of assumptions, all of which are outlined in the report. It is staff’s hope that by examining this snapshot, Council members and staff may identify issues that must be addressed now to improve the long‐term picture, and that as a result incorporate into the FY 2013 budget changes that will improve the City’s outlook for future years. EXECUTIVE SUMMARY 2012-2022 LRFF - SUMMARY OF BASE MODEL FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 150,203 130,650 133,762 137,604 141,767 146,185 150,798 156,166 161,876 166,727 172,294 TOTAL EXPENDITURES 154,660 151,370 157,759 161,995 168,167 174,615 181,349 188,406 195,346 203,078 210,952 GRAND NET SURPLUS (DEFICIT) $ (0) $ (2,059) $ (3,729) $ (4,065) $ (5,299) $ (6,723) $ (8,221) $ (9,267) $ (9,837) $ (12,038) $ (13,646) City of Palo Alto 3 2012 3 II. ECONOMIC OUTLOOK NATIONAL: The economy ended 2011 on a surprising upswing. After months of concern about a return to recessionary conditions, most analysts now rule out another recession. The number of people applying for unemployment benefits came in at 366,000 in the second week in December, down from a peak of 659,000 in March 2009. Employers added 100,000 jobs five months in a row, the longest streak since 2006, capped by a 200,000 increase in December and a 243,000 increase in January 2012. The national unemployment rate fell from 9 percent in October to 8.3 percent in January, the lowest in nearly three years.1,4 Moreover, 2011 was a record year with the nation’s retailers; sales totaled $4.7 trillion – a gain of nearly 8 percent over 2010, the largest percentage increase since 1999. On the flip side, December sales were just 0.1 percent above No‐ vember’s.2 Holiday spending was heavily fueled by discounts, raising concern about what it will take to get shoppers to spend again in coming months.3 Looking forward to the rest of 2012, economists are cautious, and do not expect growth in 2012 to keep pace with the fourth quarter of 2011. Historically, consumption accounts for 70 percent of Gross Domestic Product (GDP), with gov‐ ernment contributing about 20 percent, so consumer spending has to “ignite” for growth to take off. However, infla‐ tion‐adjusted weekly earnings dropped 1.8 percent from November 2010 to November 2011, and more than 40 per‐ cent of the new jobs in the last two years have been in low‐paying sectors like retail and hospitality. So analysts are concerned that the rate of consumer spending shown in the 4th quarter of 2011 may not be sustainable.5 Consumers have several reasons to be cautious. More than one in five borrowers still owe more than their homes are worth. Turmoil in the stock markets in the late summer and early fall caused a $2.4 trillion decrease in household wealth, and many people who borrowed heavily during the boom to make big purchases are still repaying debt and cannot win approval for new loans.5 On the positive side, employment growth, which for long was tentative, has begun to look like a sustainable trend. While the unemployment rate dropped to 8.3 percent in January, the underemployment rate, which includes people who can find only part‐time work and those who have stopped looking for work, also declined to 15.2 per‐ cent, down from 16.6 percent one year ago.6 Yet as a January 6 New York Times article put it, there remains “a deep hole to climb out of. There are still more than 13 million jobless Americans, 5.5 million of whom have been unemployed for half a year or more. ECONOMIC OUTLOOK …”According to the US Labor Department, state governments sliced 49,000 jobs over the past year while local governments whacked 210,000 jobs. The result is that state and local government job cuts have become a drag on job recovery in a way they weren’t during the last two recessions.” —Chris O’Brien, “Government job loss having huge eco‐ nomic impact, “San Jose Mercury News,” December 22, 2011 4 City of Palo Alto 2012 4 And even those finding work are often taking sal‐ ary cuts, with job creation concentrated in low‐ wage sectors.” L OOKING F ORWARD Beacon Economics, in its December 2011 quarterly economic forecast, predicted that national unem‐ ployment levels would remain above 8 percent for the rest of 2012, and stay above 7.5 percent through all of 2013.7 Three dozen private, corporate and academic econo‐ mists recently predicted the economy (as measured by the GDP) would grow 2.4 percent in 2012, following a rate of about 2 percent in 2011. 8 The UCLA Anderson Forecast had a more sober prediction: a sub‐2 percent growth rate for most of 2012, followed by a 3 percent growth rate in 2013.9 Citigroup also forecasted slower, 2 percent expansion in 2012.10 CALIFORNIA The state unemployment rate dipped to 11.1 percent in December 2011, its lowest rate since 2009. Even more encour‐ aging was the fact that job growth was broad‐based, with strongest growth in construction (a new entrant in the grow‐ ing industry club), information, professional and business services, educational and health services. In December 2010, the state unemployment rate was 12.5 percent, having remained at or above 12 percent from August 2009 until April 2011.11 The California recovery has been noteworthy for the disparity between the pace of growth in its various regions. The Anderson Forecast described the following in September 2011: “Coastal California enjoys a recovery rooted in exports, innovation and knowledge communities, while Inland California continues to suffer from a glut of housing and a con‐ traction in government spending.”12 That outlook has improved somewhat with the Central Valley now projected to finally see its economy recover in 2012. 10 Most recently, in December, after leading the employment recovery with 15 consecutive months of job growth, the San Jose region posted a monthly decline of 1,200 jobs. In fact, much of the job growth across the state shifted to Southern California, with Los Angeles, the Inland Empire (east of Los Angeles), and San Diego posting the largest gains. 13 Positive Recovery Signs include:14 • Consistent Growth—State has seen 21 straight months of uninterrupted growth in GDP. • State Exports—State exports rose 12.7 percent over this time last year. The boost in exports has been led by technology products, though the state’s agricultural sector has posted strong gains as well. • Venture Capital Investment—Since hitting a low of $1.7 billion in the first quarter of 2009, new venture capital investment has risen nearly 118 percent. ECONOMIC OUTLOOK “ Many of the jobs created in October 2011 were primar‐ ily at small and medium‐sized companies. Businesses with fewer than 49 workers contributed 58,000 to the net monthly increase, while businesses with over 500 workers had zero net increase in their payrolls.” —Cutwater Asset Management, “Monthly Market Review,” October 2011 City of Palo Alto 5 2012 5 ECONOMIC OUTLOOK Areas of Concern include:14 • Skills Mismatch in the Labor Market — According to Beacon Economics, “there is a real di‐ chotomy between the skill sets of the workers in those sectors that were pummeled by the downturn and the skill sets re‐ quired by the sectors that are leading California out of the re‐ covery...” • Disproportionate Impact of Re‐ cession on Lesser Educated — More than 17 percent of all adults over the age of 25 who have less than a high school di‐ ploma were unemployed last year, compared with roughly 5 percent of all Californians with a graduate or professional degree. What might explain this phenomenon? Again, Beacon Economics explains, “Construction, real estate, and retail trade were among the hardest‐hit sectors in the region in terms of job losses. These sectors traditionally have low educational requirements and pay relatively low wages, which are two of the predominant characteristics of our unemployed popula‐ tion.” • Continued Unemployment—More than 2 million working‐age Californians remain without jobs and the state remains well above the national jobless rate of 8.3 percent. BAY AREA The Bay Area has enjoyed quicker rates of recovery than the state as a whole, but the recovery has been uneven among cities in the area. Several Silicon Valley cities – particularly San Jose, Sunnyvale, Mountain View and Palo Alto— showed the biggest jumps in the employment level between August 2009 and August 2011. “Driving the differing recovery outcomes is one overriding factor, say economists: the technology industry. Large tech companies such as Apple Inc. and Google Inc. have been on a recruiting tear, while start‐up hiring has also been brisk, fueled by the likes of Facebook Inc. Most of that activity is concentrated in South Bay cities such as Mountain View, Cupertino and mid‐peninsula in Palo Alto...” 15 6 City of Palo Alto 2012 6 The Bay Area is predicted to continue to outpace the state in job growth in 2012. According to a new University of the Pacific forecast, while the state job market is expected to grow by 1.1 percent in 2012, the Bay Area is expected to show employment expansion of greater than 1.5 percent. 16 Beacon Economics predicts the South Bay will re‐gain its pre‐recession peak by the second half of 2013. The unemploy‐ ment rate, which peaked at 11.8 percent in the 4th quarter of 2009 and reached 9.9 percent in October 2011, is pre‐ dicted to fall to 8 percent by the end of 2013. 17 E CONOMIC D EVELOPMENT IN P ALO A LTO Staff continues to work with Council to develop a Policy for Economic Development, to help guide the City’s efforts to attract and develop business activity in Palo Alto. In the meantime, staff is working on numerous fronts, including: • Helping shepherd current hotel projects through the City’s process • Investigating possible auto dealership, retail or hotel usages of the Municipal Services Center (MSC) site • Drafted an RFP for creating a digital billboard at the MSC • Participating in the Development Center restructuring • Creating a “Test Bed” for innovative, green, and clean tech companies. Staff has already created a Utilities‐ based funding source for new companies developing energy‐efficiency‐related technologies • Engaging in extensive outreach to the business community to develop lines of communication and stay at‐ tuned to opportunities to help facilitate business growth • Setting up meetings between business leaders, Council Members, and the City Manager • Updating the business portion of the City’s web site I MPACT OF E CONOMIC O UTLOOK A SSUMPTIONS ON THE M ODEL The economic developments in the Bay Area and locally translate into a more positive outlook for City revenues. Palo Alto transient occupancy and per diem rates have moved up appreciably as they have along the entire Peninsula, due to increased business activity. Sales tax revenue has been on an upward trend with strong department store and elec‐ tronic equipment sales. While property tax revenue is relatively flat due to commercial property tax appeals, there are indications that property transactions are increasing. Overall, and as long as there are no major exogenous economic events, the picture is slowly improving for City revenues. ECONOMIC OUTLOOK City of Palo Alto 7 2012 7 III. UPDATED MODEL ASSUMPTIONS USED IN THE BASE MODEL The following is a detailed description of the assumptions utilized in the Base Model. Note that some of the descrip‐ tions refer to “CAGR” or Compound Annual Growth Rate.18 This is the average rate of growth over a period of time in a particular revenue source or expense category. Generally, staff looked at the CAGR over fiscal years 2006‐2011 as a guideline for future rates of increase, after removing one‐time variations. REVENUES Overall, City revenues are improving, as discussed on the previous page. However, expense increases, discussed on pages 12‐15, continue to outpace the growth in revenues. Sales Tax FY 2012 sales tax revenue is estimated at $21.6 million, an increase of $1.4 million above the Adopted FY 2012 budget, given the year‐to‐date receipts as well as projected year‐end figures from MuniServices, the City’s sales tax consultant. The FY 2012 projected receipts represent a 4.1 percent increase from FY 2011 actuals, which reflects increased con‐ sumer spending in the area. Property Tax FY 2012 property tax revenue is projected at $26.0 million, which approximately equals the Adopted Budget amount, a 1.4 percent increase over FY 2011—which aligns with County growth expectations. The Forecast then assumes gradual growth in property tax revenues over the next 8 years from approximately 3 percent in FY 2013 to 4.6 percent in FY 2022. Transient Occupancy Tax (TOT) With the opening of Hotel Keen in May 2010 and strong receipts from existing establishments, the TOT rebounded in FY 2011, after two years of declines, with a 17.8 percent increase over 2010 actual receipts. FY 2012 first quarter re‐ ceipts were 26.2 percent higher than first quarter FY 2011 receipts, and for FY 2012 TOT revenues are projected to ex‐ ceed FY 2011 revenues by 7.3 percent. Note that the Forecast does not include revenues for potential new hotels. Two hotels (Hilton Garden and Palo Alto Bowl) have submitted plans while another two are expected to do so in the next 6‐ 9 months. Hilton Garden plans 170 rooms, with an expected opening in 2014, and potential TOT revenues of $1.0 to $1.2 million. Utility Users Tax (UUT) The UUT is levied on electric, gas, and water usage, as well as on telephone usage. FY 2012 UUT revenues are expected ECONOMIC OUTLOOK 8 City of Palo Alto 2012 8 to be 1.7 percent below FY 2011 revenues, or $10.7 million. The utility‐generated portion of the FY 2012 UUT comes in 1.3 percent higher than those in FY 2011, while the telephone‐generated portion comes in 9.5 percent lower. Tele‐ phone‐generated UUT revenues are projected to decrease at an average rate of 3.4 percent per year for the length of the Forecast, due to carriers’ unbundling of services, leaving a lower taxable portion of users’ telephone bills. Note that the Utility‐generated portion of projected UUT revenues assumes the rate change assumptions shown in the table below, and utilizes Utility department‐generated 5‐year revenue projections. The remaining years’ increases for Gas and Electric are based on the CAGR for the first 5 years. For the Water utility, given the steep expected increases in water rates over the next couple years, staff modified the CAGR downward for out years. UTILITY RATE INCREASE ASSUMPTIONS IN UUT PROJECTIONS Documentary Transfer Tax FY 2012 revenues are projected at $4.8 million ‐ 7.7 percent below FY 2011 revenues. This revenue source is challeng‐ ing to forecast accurately, since it is highly dependent on sales volume and the mix of commercial and residential sales. For example, in FY 2011, 17 large transactions—2 percent of all transactions—accounted for two‐thirds of the $1.5 million year‐over‐year increase. The forecast for FY 2012 and beyond is based on recent revenue trends and the real estate market outlook. Other Taxes & Fines Close to 65 percent of this category is comprised of Parking Violation revenue. It is assumed that continued gaps in staffing levels, due to disability and workers’ comp leave, will make it difficult to bring Parking Violation revenue back to 2008 levels. Experience over the past five fiscal years has shown this to be a volatile revenue stream with year‐to‐ year changes ranging from an 8 percent increase in FY 2007 to a 17 percent decrease in FY 2010. Another portion of this category is the Vehicle‐in‐Lieu Fee (VLF), which is projected to be $0.2 million lower than the adopted budget. As part of FY 2012 state budget adoption, Senate Bill 89 eliminated the allocation of VLF to cities and counties. According to the League of California Cities, Cities should expect zero VLF revenue in subsequent years unless there is a change in the law. Therefore, for FY 2012 and FY 2013, staff projects flat receipts in this category. In the remaining years, a 1 per‐ cent annual increase is assumed. Charges for Services Major changes in Charges for Services are anticipated from the projected increase in activity at the Development Cen‐ ter in FY 2012 and 2013. For FY 2012 and 2013, the combined increase is projected at $1.4 million. The City is currently undertaking a Cost of Services study which may have an impact on this revenue category starting in FY 2013. UPDATED MODEL FISCAL YEAR 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 Electric 0% 0% 3% 5% 6% 3.9% 3.9% 3.9% 3.9% 3.9% Water 20% 24% 6% 0% 8% 5% 5% 5% 5% 5% Gas -10% 4% 5% 4% 4% 0.8% 0.8% 0.8% 0.8% 0.8% City of Palo Alto 9 2012 9 Permits and Licenses The City’s Chief Building Official anticipates a $0.6 million increase in revenue for FY 2012, followed by five years of lower revenues, before resuming annual increases in FY 2018. This projection is based on the periodic ebbs and flows in this revenue source. The Cost of Services study may also impact this category as early as FY 2013. Return on Investment Since the recession began in FY 2009, interest income has fallen roughly by half. In FY 2009, revenues were $2.0 mil‐ lion; in FY 2012 they are projected at $0.97 million. As higher yielding maturing investments continue to be re‐invested in a historically low interest rate environment, interest income levels are expected to decline further. Starting in FY 2015, interest income is projected to increase each year by between 1.3 percent and 2.2 percent. Rental Income The largest components of rental income are from the City’s Enterprise Funds and the Cubberley Center. The rent from the Enterprise Funds will decline $2.3 million in FY 2013 with the closure of the landfill, the Middlefield Well Site, and the former Los Altos Treatment Plant (LATP) site. The City is conducting an assessment of all General Fund properties which might impact the rental income from Enterprise Funds starting in FY 2013. After FY 2013 rental income is ex‐ pected to increase at approximately the rate of the Consumer Price Index, which drives Enterprise Fund facility rental fees. Excluding the landfill rent, the removal of the two other rental properties will cancel the effect of the annual rent increases in FY 2013. But starting FY 2014, staff projects that the rent increases in other City properties will more than make up for the loss of the LATP and Well sites. UPDATED MODEL General Fund Major Revenues (in millions) Sales Tax 21.6 Property Tax 26.0 TOT8.7 Utility User's Tax 10.7 Doc. Transfer Tax4.8 $4 $8 $12 $16 $20 $24 $28 $32 $36 $40 2003-04 2004-05 2005-06 2006-07 2007-08 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Fiscal Year 10 City of Palo Alto 2012 10 From Other Agencies Revenue from Other Agencies includes income from Community Services Outreach theatre programs, PAUSD pro‐ grams, State of California grants for Police, Libraries and Community Services, and donations from Friends groups. Many of these are not predictable and are influenced by the economy. For example, State grants are reduced when the State of California experiences budget difficulties. Due to this category’s unpredictable nature, the Forecast assumes a zero growth rate from FY 2013 onwards. Charges to Other Funds Seventy‐eight percent of this category comprises General Fund administrative cost plan allocation charges. For FY 2012, the projected amount is equal to the Budgeted amount of $10.5 million. In FY 2013 onward, forecasted increases range from 0.5 percent to 1.6 percent. Other Revenues In FY 2012, Other Revenues are projected $0.7 million higher than the Adopted Budget as a result of a $0.5 million one‐ time donation from the Palo Alto Library Foundation to support library programs; $0.13 million in donations to fund Community Services Department programs; and $0.06 million in reimbursements from various agencies to public safety departments. In FY 2013 onwards, the Forecast assumes a $0.4 million decrease in Animal Services fees from Mountain View and an under‐one‐percent rate of increase each year. Operating Transfers In Operating Transfers include the equity transfer from the Electric and Gas Funds, as well as transfers from the University Avenue Parking Permit Fund and the California Avenue Parking Permit Fund. The FY 2013‐2016 equity transfers are based on Utilities Five‐Year Projections of capital‐based returns. EXPENSES Salary and Benefits SALARY • All groups assumed to have 4 years of 0 percent increase, followed by 2 percent annual increases • SEIU and Management (Miscellaneous) groups get 2 percent salary increases every year starting FY 2014. • Fire gets 0 percent increases in 2013 and 2014; 2 percent annual increases start 2015, pending the absence of a budget gap, as per the contract approved October 2011. • Police gets 0 percent increases until 2016 While it is difficult to contemplate salary increases in years in which budget gaps are forecasted, such increases are included for impact purposes. Note that the Miscellaneous group’s last cost‐of‐living increase was July 1, 2008. UPDATED MODEL City of Palo Alto 11 2012 11 BENEFITS • Forecast includes PERS’s estimated rates for FY 2013, 2014, and 2015 (as of their October 2011 actuarial re‐ port), then assumes 3 percent increases per year after that, as per Council direction in March 2011. • For Two‐Tier savings for Misc. and Fire, Forecast uses estimates by Bartel & Associates (September 26, 2011 slides) but delayed savings by two years from implementation • Medical, Dental, Vision: General Fund allocation is based on salary – or 58.25 percent of total citywide costs for FY 2012 • Assumes 10 percent increase per year in medical costs as per previous Council instructions • Assumes 4 percent increase per year in Dental and Vision • FY 2012 medical calculation includes $85.6K savings from partial year IAFF 90/10 contributions • FY 2013 medical calculation includes $141K in savings from IAFF 90/10 contributions, and no contributions from other Public Safety groups • Retiree Annual Required Contribution is based on January 1, 2011 actuarial study for 2012, 2013, and 2014, and assumes 3.25 percent increases every year over the next 10 years, as approved by Council November 2011 • No expected savings from PAPOA and PMA groups are included due to protracted negotiations Note in the chart below that Salary and Benefit costs — particularly Benefit costs—have continued to increase even as the General Fund has reduced headcount. UPDATED MODEL Salaries, Benefits, and Number of Employees (FTE) $48.5 $54.2 $58.9 $57.3 $53.9 $55.1 $55.6 $57.0 $60.4 $62.1 $58.4 $60.0 $60.4 $16.3 $21.0 $13.5 $19.0 $18.4 $24.5 $27.3 $29.9 $36.8$34.2$32.7$29.5$30.9 704 725 752 760 676 669 647 650 576 580623652653 $- $20 $40 $60 $80 $100 FY 200 0 FY 200 1 FY 200 2 FY 2 0 0 3 FY 2 0 0 4 FY 2 0 0 5 FY 2 0 0 6 FY 2 0 0 7 FY 2 0 0 8 FY 2009 FY 20 1 0 FY 20 1 1 FY 20 1 2 Mi l l i o n s - 100 200 300 400 500 600 700 800 Nu m b e r o f E m p l o y e e s ( F T E ) Salaries Benefits Full-Time Equivalent Permanent Employees (FTE) ` 12 City of Palo Alto 2012 12 UPDATED MODEL The following chart further illustrates the problem of rapidly increasing benefit costs. In particular, health care and pension costs have continued to grow steeply. The following chart illustrates the trend in pension cost. Citywide Benefit Portion of Total Salary & Benefits 49.8%54.9%62.9% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 2010 2011 2012 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Employer Contribution Employee Portion Paid by City 10‐Year Trend ‐ Citywide Pension Expense ($Millions, FY 2012 Projected) *Don't have breakdown prior to FY 2004 31.3% 68.7%58.9% 41.1% 70.6% 29.4% 73.8% 26.2% 77.4% 22.6% 73.4% 26.6% 82.3% 17.7% 85.1% 14.9%86.3% 13.7% $3.80 $2.4 $4.74 $15.6 $18.2 $19.5 $20.8 $22.9 $20.0 $19.5 $23.9 * FY 2002‐2012 overall growth of 528% City of Palo Alto 13 2012 13 UPDATED MODEL The following two charts illustrate the trend in health care cost. $800,000 $875,000 $950,000 $1,025,000 $1,100,000 $1,175,000 $1,250,000 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2012 FY 2011 FY 2012 8 Year Trend ‐ Citywide Average Monthly Healthcare Expense *FY 2004‐2012 Overall Healthcare Growth 55% $14.9$14.3$13.7$13.5$13.0$12.2$11.8 $10.9$9.7$9.0 $6.6 $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 * FY 2002‐2012 overall growth of 126% 10 Year Trend ‐ Citywide Health Care Expenditure ($Millions, FY 2012 Adopted) 14 City of Palo Alto 2012 14 Contract Services FY 2012 Projected Contract Services include $0.4 million in one‐time contracts. The FY 2013 Base removes these one‐ time expenses, and from then on this expense remains relatively stable, with a 1.5 percent annual growth rate. The Attorney’s Office, Human Resources and Community Services have discussed the possibility of needing to convert many outside contractors, particularly class instructors, to hourly personnel. Were this to happen, contract services expense would decrease and Salaries and Benefits expense would increase, most likely by a higher amount. Some of these would be SEIU hourly workers, requiring benefit expense in addition to salary. Supplies & Materials FY 2012 projected Supplies and Materials costs are about $0.6 million higher than the Adopted Budget, due mainly to a one‐time donation from the Palo Alto Library Foundation for collection materials for the new Mitchell Park Library. Aside from that one‐time gift, Supply & Materials costs are expected to remain relatively constant in outer years, with a 1 percent yearly increase. General Expense The majority of General Expense comprises the lease payments to PAUSD for the Cubberley facility. The Forecast as‐ sumes that the lease contract with PAUSD will continue beyond 2014. The current lease contract calls for the City to make a decision on the next 5‐year option by December 2013. Rents and Leases After one‐time increases in FY 2012 and FY 2013 of $49,000 and $115,000, respectively, due to Development Center upgrade needs, Rents and Leases expense growth is expected to grow fairly steadily at a 3.5 percent annual rate. Facilities & Equipment The FY 2012 projected amount is slightly higher than budgeted, due to increased Development Center expenses. Ex‐ cluding the City Manager’s housing allowance, the historical average year‐over‐year increase from FY 2007 to projected FY 2012 was about 5 percent, so that is the growth rate assumed for FY 2013‐2022. Allocated Charges Allocated charges vary significantly from year to year, since they include a variety of sources, such as City use of utili‐ ties, liability insurance, technology costs, and vehicle replacement costs. Technology costs are increasing in FY 2012 and FY 2013 due to the Development Center Blueprint Process. Additionally, the General Fund has been repaying the Technology Fund its $4.9 million loan at about $1.2 million per year over four years. FY 2013 will be the last year of the loan repayment. Beyond 2013, the Forecast assumes a 2‐percent annual growth rate. UPDATED MODEL City of Palo Alto 15 2012 15 UPDATED MODEL Operating Transfers Out Operating Transfers Out include transfers to Debt Service and Capital Project (Infrastructure) Funds, which change along with any new debt issuances or changed funding levels. Debt Service Fund transfers are based on payment schedules for the 2002 B Downtown Parking Improvement Project Certificates of Participation (COP) and the 2011 Golf Course debt. The Golf Course debt will be paid down by 2018. For FY 2013‐2016, transfers to the Capital Project Fund are based on the FY 2012‐2016 Five‐Year Capital Plan. Beyond FY 2016, transfers to the Capital Project Fund are based on a fairly complex formula, described below: 1. The “annual base transfer” of $3.6 million and a “dedicated year‐end surplus” of $1.0 million remain constant. 2. The transfer for specific projects receiving General Fund reimbursements varies year‐by‐year with the 5‐year CIP Budgets. The FY 2012‐2016 CIP Budget’s average annual rate of increase is 2.7 percent, so this is used as the assumed increase in each of the years from FY 2017‐2022. 3. $5.9 million is increased by 7 percent per year, as a result of Council’s “$3 million challenge” begun in 2007, whereby they committed to spend an additional $3 million on infrastructure, growing by 7 percent per year. F ACTORS N OT I NCLUDED IN THE B ASE M ODEL The following factors are not incorporated into the base model assumptions: • Beginning FY 2014, about $0.7 to $0.9 million in additional operating expenses for the new, larger Mitchell Park Library and Community Center. Impacts will be to the departments of Library, Public Works (Facilities), and Community Services, with large portions in Salaries & Benefits and Contracts, and some in Facilities & Equip‐ ment. • Impacts from possible conversion of selected contractors to hourly personnel • Any IBRC recommendations (see discussion below) • Any additional employee costs sharing needed to close budget gaps • Possible TOT revenues from as‐yet‐unapproved new hotels, such as the Hilton Garden and Palo Alto Bowl • Ongoing salary‐related expense increases identified in the FY 2012 Midyear report—in the range of $0.5 to $0.6 million—after FY 2013. B ASE M ODEL The Base Model is included on pages 16‐19. The first table shows projections over the years from FY 2012‐2022, and the second table shows year‐over‐year percentage changes in each category. The Base Model shows a balanced budget in FY 2012—after a $2.94 million draw on the BSR. In FY 2013 it shows a deficit of $2.1 million, and for the ten‐year period from FY 2013 through FY 2022, cumulative deficits are projected at $74.9 million. 16 City of Palo Alto 2012 16 UPDATED MODEL 20 1 2 - 2 0 2 2 L R F F - B A S E M O D E L FY 2 0 1 2 Ad o p t e d FY 2 0 1 2 Pro j e c t e d FY 2 0 1 3 F Y 2 0 1 4 F Y 2 0 1 5 F Y 2 0 1 6 F Y 2 0 1 7 F Y 2 0 1 8 F Y 2 0 1 9 F Y 2 0 2 0 F Y 2 0 2 1 F Y 2 0 2 2 Re v e n u e s Sa l e s T a x e s $ 2 0 , 2 4 6 $ 2 1 , 5 9 4 $ 2 2 , 1 9 5 $ 2 2 , 9 9 8 $ 2 3 , 8 4 4 $ 2 4 , 8 1 1 $ 2 5 , 8 4 5 $ 2 6 , 9 3 0 $ 2 8 , 0 9 1 $ 2 9 , 3 3 5 $ 3 0 , 6 6 4 $ 3 2 , 134 Pro p e r t y T a x e s 2 6 , 0 5 2 2 5 , 9 8 9 2 6 , 8 2 9 2 7 , 7 6 6 2 8 , 7 4 8 2 9 , 8 0 9 3 0 , 9 5 6 3 2 , 2 2 2 3 3 , 6 0 3 3 5 , 0 9 2 3 6 , 6 8 7 3 8 , 3 6 7 Tra n s i e n t O c c u p a n c y T a x 8 , 2 0 4 8 , 6 7 4 9 , 2 9 1 9 , 5 9 9 9 , 9 7 7 1 0 , 3 7 6 1 0 , 8 0 1 1 1 , 2 5 1 1 1 , 7 2 6 1 2 , 2 3 0 1 2 , 7 59 1 3 , 3 5 0 Uti l i t y U s e r T a x 1 0 , 8 5 9 1 0 , 6 6 6 1 0 , 8 9 7 1 1 , 3 2 8 1 1 , 6 8 2 1 2 , 0 7 6 1 2 , 4 7 7 1 2 , 8 1 3 1 3 , 1 5 9 1 3 , 5 1 0 1 3 , 8 6 2 1 4 , 2 1 7 Do c u m e n t a r y T r a n s f e r T a x 4 , 2 6 9 4 , 7 6 9 4 , 9 7 8 5 , 2 2 5 5 , 4 9 0 5 , 7 7 1 6 , 0 6 7 6 , 3 8 2 6 , 7 1 8 7 , 0 7 4 7 ,45 2 7 , 8 5 9 Oth e r T a x e s & F i n e s 2 , 3 3 0 2 , 1 5 6 2 , 1 2 4 2 , 1 4 5 2 , 1 6 7 2 , 1 8 8 2 , 2 1 0 2 , 2 3 2 2 , 2 5 5 2 , 2 7 7 2 ,30 0 2 , 3 2 3 S u b t o t a l : T a x e s 7 1 , 9 6 0 7 3 , 8 4 8 7 6 , 3 1 4 7 9 , 0 6 2 8 1 , 9 0 7 8 5 , 0 3 1 8 8 , 3 5 7 9 1 , 8 3 1 9 5 , 5 5 2 9 9 , 5 1 8 1 0 3 , 7 2 4 1 0 8 , 2 5 0 Ch a r g e s f o r S e r v i c e s 2 1 , 8 4 1 2 2 , 7 0 2 2 3 , 8 6 6 2 4 , 0 8 0 2 4 , 9 2 3 2 5 , 7 9 6 2 6 , 6 9 8 2 7 , 6 3 3 2 8 , 6 0 0 2 9 , 6 0 1 3 0 , 6 3 7 3 1 , 7 0 9 Pe r m i t s a n d L i c e n s e s 5 , 7 7 8 6 , 4 0 6 6 , 1 4 7 5 , 9 0 9 5 , 6 8 1 5 , 4 5 4 5 , 2 3 6 5 , 0 1 8 5 , 2 6 9 5 , 5 3 2 5 ,80 9 6 , 0 9 9 Re t u r n o n I n v e s t m e n t 1 , 3 1 8 9 7 4 9 5 9 9 5 7 9 6 9 9 8 6 1 , 0 0 5 1 , 0 2 8 1 , 0 4 9 1 , 0 7 0 1, 0 9 3 1 , 1 1 7 Re n t a l I n c o m e 1 3 , 9 1 4 1 3 , 9 1 4 1 1 , 6 6 2 1 1 , 9 7 3 1 2 , 2 5 9 1 2 , 5 5 4 1 2 , 8 5 7 1 3 , 1 6 9 1 3 , 4 9 1 1 3 , 8 2 1 1 2 , 9 4 9 1 2 , 4 1 7 Fro m o t h e r a g e n c i e s 1 5 5 1 5 5 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 2 9 0 Ch a r g e s t o O t h e r F u n d s 1 0 , 5 0 5 1 0 , 5 0 5 1 0 , 5 5 9 1 0 , 6 3 7 1 0 , 7 1 6 1 0 , 7 9 7 1 0 , 8 7 8 1 0 , 9 6 1 1 1 , 0 4 6 1 1 , 1 6 9 1 1 , 3 4 8 1 1 , 5 3 0 Oth e r r e v e n u e s 1 , 4 2 8 2 , 0 9 3 8 5 1 8 5 4 8 5 7 8 6 1 8 6 4 8 6 8 8 7 1 8 7 5 8 7 8 8 8 2 T o t a l R e v e n u e s B e f o r e T r a n s f e r s 1 2 6 , 8 9 9 1 3 0 , 5 9 7 1 3 0 , 6 5 0 1 3 3 , 7 6 2 1 3 7 , 6 0 4 1 4 1 , 7 6 7 1 4 6 , 1 8 5 1 5 0 , 7 9 8 1 5 6 , 1 6 6 1 6 1 , 8 7 6 1 6 6 , 7 2 7 1 7 2 , 294 Op e r a t i n g T r a n s f e r s - I n 1 9 , 6 0 6 1 9 , 6 0 6 1 9 , 4 3 2 2 0 , 2 6 8 2 0 , 3 2 7 2 1 , 1 0 1 2 1 , 7 0 7 2 2 , 3 3 0 2 2 , 9 7 2 2 3 , 6 3 3 2 4 , 3 1 2 2 5 , 0 1 2 T O T A L R E V E N U E S 1 4 6 , 5 0 5 1 5 0 , 2 0 3 15 0 , 0 8 1 1 5 4 , 0 3 0 1 5 7 , 9 3 1 1 6 2 , 8 6 8 1 6 7 , 8 9 2 1 7 3 , 1 2 8 1 7 9 , 1 3 9 1 8 5 , 5 0 9 1 9 1 , 0 4 0 1 9 7 , 3 0 6 Ex p e n d i t u r e s Sa l a r i e s 5 7 , 4 2 2 6 0 , 3 8 9 5 7 , 9 8 1 6 0 , 4 1 7 6 1 , 4 1 7 6 2 , 6 5 8 6 3 , 9 2 5 6 5 , 2 1 7 6 6 , 5 3 4 6 7 , 8 7 9 6 9 , 2 5 0 7 0 , 6 4 8 Be n e f i t s 3 4 , 6 4 8 3 6 , 7 6 8 3 9 , 3 5 1 4 2 , 1 1 6 4 3 , 9 3 3 4 7 , 3 8 0 5 1 , 0 2 0 5 4 , 8 6 1 5 8 , 9 3 1 6 3 , 2 2 6 6 7 , 7 8 4 7 2 , 6 1 1 S u b t o t a l : S a l a r i e s a n d B e n e f i t s 9 2 , 0 7 0 9 7 , 1 5 7 9 7 , 3 3 1 1 0 2 , 5 3 2 1 0 5 , 3 5 0 1 1 0 , 0 3 9 1 1 4 , 9 4 5 1 2 0 , 0 7 8 1 2 5 , 4 6 6 1 3 1 , 1 0 5 1 3 7 , 0 3 4 1 4 3,2 5 9 Co n t r a c t S e r v i c e s 1 1 , 2 9 7 1 1 , 6 0 7 1 0 , 3 4 5 1 0 , 5 0 0 1 0 , 6 5 7 1 0 , 8 1 7 1 0 , 9 7 9 1 1 , 1 4 4 1 1 , 3 1 1 1 1 , 4 8 1 1 1 , 6 5 3 1 1 , 8 2 8 Su p p l i e s & M a t e r i a l s 3 , 2 0 6 3 , 7 6 1 3 , 2 2 6 3 , 2 5 8 3 , 2 9 1 3 , 3 2 4 3 , 3 5 7 3 , 3 9 0 3 , 4 2 4 3 , 4 5 9 3 ,49 3 3 , 5 2 8 Ge n e r a l E x p e n s e 1 0 , 8 9 7 1 0 , 9 2 8 1 1 , 1 0 1 1 1 , 4 6 6 1 1 , 8 4 4 1 2 , 2 3 5 1 2 , 6 3 9 1 3 , 0 5 8 1 3 , 4 9 1 1 3 , 9 4 0 1 4 , 4 0 4 1 4 , 8 8 5 Re n t s & L e a s e s 8 3 1 1 , 0 0 5 1 , 1 0 3 1 , 1 4 2 1 , 1 8 2 1 , 2 2 3 1 , 2 6 6 1 , 3 1 0 1 , 3 5 6 1 , 4 0 3 1 ,45 3 1 , 5 0 3 Fac i l i t i e s & E q u i p m e n t 4 6 0 6 2 2 4 6 0 4 8 2 5 0 6 5 3 1 5 5 7 5 8 4 6 1 3 6 4 3 6 7 4 7 0 7 Allo c a t e d C h a r g e s 1 5 , 7 6 2 1 6 , 4 5 0 1 6 , 2 1 6 1 6 , 3 8 5 1 6 , 7 1 2 1 7 , 0 4 7 1 7 , 3 8 8 1 7 , 7 3 5 1 8 , 0 9 0 1 8 , 4 5 2 1 8 , 8 2 1 1 9 , 1 9 7 T o t a l E x p e n d i t u r e s B e f o r e T r a n s - fer s 1 3 4 , 5 2 3 1 4 1 , 5 3 1 1 3 9 , 7 8 1 1 4 5 , 7 6 5 1 4 9 , 5 4 2 1 5 5 , 2 1 5 1 6 1 , 1 3 1 1 6 7 , 3 0 0 1 7 3 , 7 5 2 1 8 0 , 4 8 2 1 8 7 , 5 3 2 1 9 4 , 908 City of Palo Alto 17 2012 17 UPDATED MODEL Op e r a t i n g T r a n s f e r s O u t 8 5 9 2 , 1 0 9 6 1 0 6 6 0 6 6 6 6 6 4 6 6 6 6 6 6 6 6 8 2 3 5 2 3 3 - Tra n s f e r t o I n f r a s t r u c t u r e 1 0 , 9 7 8 1 0 , 9 7 8 1 0 , 9 7 8 1 1 , 3 3 4 1 1 , 7 8 8 1 2 , 2 8 8 1 2 , 8 1 8 1 3 , 3 8 3 1 3 , 9 8 6 1 4 , 6 2 8 1 5 , 3 1 3 1 6 , 0 4 4 T O T A L E X P E N D I T U R E S 1 4 6 , 3 6 0 1 5 4 , 6 1 8 15 1 , 3 7 0 1 5 7 , 7 5 9 1 6 1 , 9 9 5 1 6 8 , 1 6 7 1 7 4 , 6 1 5 1 8 1 , 3 4 9 1 8 8 , 4 0 6 1 9 5 , 3 4 6 2 0 3 , 0 7 8 2 1 0 , 9 5 2 Ne t S u r p l u s / ( G a p ) 1 4 5 ( 4 , 4 1 5 ) ( 1 , 2 8 8 ) ( 3 , 7 2 9 ) ( 4 , 0 6 5 ) ( 5 , 2 9 9 ) ( 6 , 7 2 3 ) ( 8 , 2 2 1 ) ( 9 , 2 6 7 ) ( 9 , 8 3 7 ) ( 1 2 , 038 ) ( 1 3 , 6 4 6 ) BA O s A p p r o v e d b y C o u n c i l : A d d ' l l e g a l c o u n s e l 1 8 5 L o a n t o R e f u s e F u n d 1 , 2 5 0 De v e l o p m e n t C e n t e r B l u e P r i n t P l a n 4 Mid y e a r D e c i s i o n P o i n t s S a l a r y / F T E r e l a t e d - o n g o i n g ( 4 5 1 ) ( 5 7 1 ) R e v e n u e / N o n - S a l a r y r e l a t e d 4 8 5 P r o p o s e d M i d y e a r B S R D r a w 2 , 9 4 2 On e - T i m e I t e m s : No v e m b e r 2 0 1 2 E l e c t i o n s ( 5 0 0 ) So f t h i r i n g f r e e z e 3 0 0 S u b t o t a l - 4 , 4 1 5 ( 7 7 1 ) - - - - - - - - - G R A N D N E T S U R P L U S ( G A P ) $ 1 4 5 $ ( 0 ) $ ( 2 , 0 5 9 ) $ ( 3 , 7 2 9 ) $ ( 4 , 0 6 5 ) $ ( 5 , 2 9 9 ) $ ( 6 , 7 2 3 ) $ ( 8 , 2 2 1 ) $ ( 9 , 2 6 7 ) $ ( 9 , 8 3 7 ) $ ( 1 2 , 0 3 8 ) $ ( 1 3 , 6 4 6 ) 18 City of Palo Alto 2012 18 UPDATED MODEL PE R C E N T A G E C H A N G E S I N B A S E M O D E L FY 2 0 1 2 Pro j e c t e d F Y 2 0 1 3 F Y 2 0 1 4 F Y 2 0 1 5 F Y 2 0 1 6 F Y 2 0 1 7 F Y 2 0 1 8 F Y 2 0 1 9 F Y 2 0 2 0 F Y 2 0 2 1 F Y 2 0 2 2 Cu m u l a t i v e % Ch a n g e 201 2 - 2 0 2 2 Re v e n u e s Sa l e s T a x e s 4.0 9 % 2 . 7 8 % 3 . 6 2 % 3 . 6 8 % 4 . 0 6 % 4 . 1 7 % 4 . 2 0 % 4 . 3 1 % 4 . 4 3 % 4 . 5 3 % 4 . 7 9 % Pro p e r t y T a x e s 1.1 7 % 3 . 2 3 % 3 . 4 9 % 3 . 5 4 % 3 . 6 9 % 3 . 8 5 % 4 . 0 9 % 4 . 2 9 % 4 . 4 3 % 4 . 5 5 % 4 . 5 8 % Tra n s i e n t O c c u p a n c y T a x 7.3 2 % 7 . 1 1 % 3 . 3 2 % 3 . 9 3 % 4 . 0 0 % 4 . 1 0 % 4 . 1 7 % 4 . 2 2 % 4 . 3 0 % 4 . 3 2 % 4 . 6 4 % Uti l i t y U s e r T a x (1.7 0 % ) 2 . 1 7 % 3 . 9 6 % 3 . 1 3 % 3 . 3 7 % 3 . 3 2 % 2 . 6 9 % 2 . 7 0 % 2 . 6 7 % 2 . 6 1 % 2 . 5 6 % Do c u m e n t a r y T r a n s f e r T a x (7.7 0 % ) 4 . 3 9 % 4 . 9 6 % 5 . 0 6 % 5 . 1 1 % 5 . 1 3 % 5 . 1 8 % 5 . 2 6 % 5 . 2 9 % 5 . 3 5 % 5 . 4 6 % Oth e r T a x e s & F i n e s 1.2 7 % - 1 . 4 8 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % S u b t o t a l : T a x e s 1.6 3 % 3 . 3 4 % 3 . 6 0 % 3 . 6 0 % 3 . 8 1 % 3 . 9 1 % 3 . 9 3 % 4 . 0 5 % 4 . 1 5 % 4 . 2 3 % 4 . 3 6 % 46. 5 9 % Ch a r g e s f o r S e r v i c e s 1.4 0 % 5 . 1 3 % 0 . 9 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % Pe r m i t s a n d L i c e n s e s 28 . 1 9 % - 4 . 0 3 % - 3 . 8 7 % - 3 . 8 6 % - 4 . 0 1 % - 3 . 9 9 % - 4 . 1 6 % 5 . 0 0 % 5 . 0 0 % 5 . 0 0 % 5 . 0 0 % Re t u r n o n I n v e s t m e n t 82 . 3 3 % - 1 . 4 9 % - 0 . 2 4 % 1 . 3 1 % 1 . 7 6 % 1 . 9 1 % 2 . 3 1 % 2 . 0 1 % 2 . 0 4 % 2 . 1 1 % 2 . 1 9 % Re n t a l I n c o m e (2.7 6 % ) - 1 6 . 1 8 % 2 . 6 6 % 2 . 3 9 % 2 . 4 0 % 2 . 4 2 % 2 . 4 3 % 2 . 4 4 % 2 . 4 5 % - 6 . 3 1 % - 4 . 1 1 % Fro m o t h e r a g e n c i e s (47 . 4 6 % ) 8 6 . 9 2 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % Ch a r g e s t o O t h e r F u n d s (6.8 0 % ) 0 . 5 2 % 0 . 7 4 % 0 . 7 4 % 0 . 7 5 % 0 . 7 6 % 0 . 7 6 % 0 . 7 7 % 1 . 1 2 % 1 . 6 0 % 1 . 6 0 % Oth e r r e v e n u e s 12 . 9 5 % - 5 9 . 3 6 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % T o t a l R e v e n u e s B e f o r e T r a n s - fer s 1.7 8 % 0 . 0 4 % 2 . 3 8 % 2 . 8 7 % 3 . 0 3 % 3 . 1 2 % 3 . 1 6 % 3 . 5 6 % 3 . 6 6 % 3 . 0 0 % 3 . 3 4 % 31. 9 3 % Op e r a t i n g T r a n s f e r s - I n 9.3 3 % - 0 . 8 9 % 4 . 3 0 % 0 . 2 9 % 3 . 8 1 % 2 . 8 7 % 2 . 8 7 % 2 . 8 7 % 2 . 8 8 % 2 . 8 8 % 2 . 8 8 % T O T A L R E V E N U E S 2.7 1 % -0.0 8 % 2.6 3 % 2.5 3 % 3.1 3 % 3.0 8 % 3.1 2 % 3.4 7 % 3.5 6 % 2.9 8 % 3.2 8 % 31. 3 6 % Ex p e n d i t u r e s Sa l a r i e s 0.7 3 % - 3 . 9 9 % 4 . 2 0 % 1 . 6 6 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 16. 9 9 % Be n e f i t s 7.3 8 % 7 . 0 2 % 7 . 0 3 % 4 . 3 2 % 7 . 8 5 % 7 . 6 8 % 7 . 5 3 % 7 . 4 2 % 7 . 2 9 % 7 . 2 1 % 7 . 1 2 % S u b t o t a l : S a l a r i e s a n d B e n e - fits 3.1 5 % 0 . 1 8 % 5 . 3 4 % 2 . 7 5 % 4 . 4 5 % 4 . 4 6 % 4 . 4 7 % 4 . 4 9 % 4 . 4 9 % 4 . 5 2 % 4 . 5 4 % 47. 4 5 % Co n t r a c t S e r v i c e s 24 . 3 1 % - 1 0 . 8 8 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % Su p p l i e s & M a t e r i a l s 32 . 3 0 % - 1 4 . 2 3 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % Ge n e r a l E x p e n s e 17 . 2 0 % 1 . 5 8 % 3 . 2 9 % 3 . 2 9 % 3 . 3 0 % 3 . 3 1 % 3 . 3 1 % 3 . 3 2 % 3 . 3 2 % 3 . 3 3 % 3 . 3 4 % Re n t s & L e a s e s 57 . 2 9 % 9 . 7 5 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % Fac i l i t i e s & E q u i p m e n t 11 2 . 9 2 % - 2 6 . 0 1 % 4 . 8 6 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % 4 . 9 0 % Allo c a t e d C h a r g e s 4.7 0 % - 1 . 4 2 % 1 . 0 4 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % 2 . 0 0 % T o t a l E x p e n d i t u r e s B e f o r e Tra n s f e r s 6.9 5 % - 1 . 2 4 % 4 . 2 8 % 2 . 5 9 % 3 . 7 9 % 3 . 8 1 % 3 . 8 3 % 3 . 8 6 % 3 . 8 7 % 3 . 9 1 % 3 . 9 3 % 37. 7 1 % City of Palo Alto 19 2012 19 UPDATED MODEL Op e r a t i n g T r a n s f e r s O u t 84 . 5 1 % - 7 1 . 0 7 % 8 . 2 5 % 0 . 8 7 % - 0 . 2 7 % 0 . 2 4 % - 0 . 0 4 % 0 . 4 3 % - 6 4 . 8 0 % - 1 . 1 4 % - 1 0 0 . 0 0 % Tra n s f e r t o I n f r a s t r u c t u r e 11 . 3 7 % 0 . 0 0 % 3 . 2 4 % 4 . 0 0 % 4 . 2 4 % 4 . 3 1 % 4 . 4 1 % 4 . 5 0 % 4 . 5 9 % 4 . 6 8 % 4 . 7 7 % T O T A L E X P E N D I T U R E S 7.8 7 % -2.1 0 % 4.2 2 % 2.6 9 % 3.8 1 % 3.8 3 % 3.8 6 % 3.8 9 % 3.6 8 % 3.9 6 % 3.8 8 % 36. 4 3 % Ne t S u r p l u s / ( G a p ) (25 1 . 8 8 % ) - 7 0 . 8 2 % 1 8 9 . 4 5 % 9 . 0 0 % 3 0 . 3 6 % 2 6 . 8 8 % 2 2 . 2 8 % 1 2 . 7 3 % 6 . 1 4 % 2 2 . 3 8 % 1 3 . 3 6 % 20 City of Palo Alto 2012 20 IV. ALTERNATE SCENARIOS SCENARIO #1: LOWER PERS INCREASES AFTER FY 2015 Council directed that staff assume in the Base Model that PERS employer rates would increase 3 percent each year. Staff believes that this assumption is a bit conservative, and would suggest considering an increase of 1.5 percent each year after FY 2015. Note that from FY 2007 to (PERS‐) projected FY 2015, Miscellaneous PERS rates will have increased an average of 1.54 percent per year; Safety PERS rates will have increased an average of 0.98 percent per year. (See following chart.) If we assume a 1.5 percent annual increase for both groups after 2015, rather than a 3 percent annual increase, it re‐ duces projected deficits by $27.1 million over the seven‐year period from FY 2016‐2022. The alternate scenario is summarized on the page at right. ALTERNATE SCENARIOS Employer PERS Rates FY 2007-2015 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY2012 FY 2013 FY 2014 FY2015 Misc. 11.4% 17.4% 17.0% 17.1% 17.6% 21.7% 23.0% 23.3% 23.7% Safety 24.2% 23.6% 24.5% 23.9% 24.7% 30.1% 31.1% 31.5% 32.0% * FY 2008 miscellaneous rate reflects plan change from 2% @ 55 to 2.7 % @ 55 * FY 2014 and FY 2015 rated are based on PERS projections as of October 2011 actuarial reports City of Palo Alto 21 2012 21 The Scenario summary’s year‐over‐year percentage changes may be found below. ALTERNATE SCENARIOS 2012-2022 LRFF - ALTERNATE SCENARIO - LOWER PERS INCREASES FY 2016-2022 FY 2012 Adopted FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 146,505 150,203 150,081 154,030 157,931 162,868 167,892 173,128 179,139 185,509 191,040 197,306 Expenditures Salaries 57,422 60,389 57,981 60,417 61,417 62,658 63,925 65,217 66,534 67,879 69,250 70,648 Benefits 34,648 36,810 39,351 42,116 43,933 46,375 49,123 52,037 55,142 58,433 61,947 65,689 Subtotal: Salaries and Benefits 92,070 97,199 97,331 102,532 105,350 109,033 113,048 117,254 121,677 126,312 131,197 136,337 TOTAL EXPENDITURES 146,360 154,660 151,370 157,759 161,995 167,161 172,718 178,524 184,617 190,553 197,241 204,030 Net Surplus/(Gap) 145 (4,457) (1,288) (3,729) (4,065) (4,293) (4,826) (5,396) (5,478) (5,044) (6,201) (6,724) "Below-the-Line" summary - 4,457 (771) - - - - - - - - - GRAND NET SURPLUS (GAP) $ 145 $ (0) $ (2,059) $ (3,729) $ (4,065) $ (4,293) $ (4,826) $ (5,396) $ (5,478) $ (5,044) $ (6,201) $ (6,724) PERCENTAGE CHANGES IN ALTERNATE SCENARIO #1 FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Cumulative % Change 2012-2022 TOTAL REVENUES 2.71% -0.08% 2.63% 2.53% 3.13% 3.08% 3.12% 3.47% 3.56% 2.98% 3.28% 31.36% Expenditures Salaries 0.73% -3.99% 4.20% 1.66% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 16.99% Benefits 7.50% 6.90% 7.03% 4.32% 5.56% 5.93% 5.93% 5.97% 5.97% 6.01% 6.04% Subtotal: Salaries and Benefits 3.19% 0.14% 5.34% 2.75% 3.50% 3.68% 3.72% 3.77% 3.81% 3.87% 3.92% 40.27% TOTAL EXPENDITURES 7.90% -2.13% 4.22% 2.69% 3.19% 3.32% 3.36% 3.41% 3.22% 3.51% 3.44% 31.92% Net Surplus/(Gap) (253.32%) -71.09% 189.45% 9.00% 5.62% 12.41% 11.82% 1.51% -7.93% 22.95% 8.43% GRAND NET SURPLUS (GAP) n/a 81.09% 9.00% 5.62% 12.41% 11.82% 1.51% -7.93% 22.95% 8.43% 22 City of Palo Alto 2012 22 SCENARIO #2: ADDITIONAL INFRASTRUCTURE INVESTMENT The Infrastructure Blue Ribbon Commission (IBRC) presented its report to Council in December 2011. One of its recom‐ mendations was that the City put on the ballot a bond measure to fund structures such as the Public Safety Building and its $42 million “backlog” of projects. It also recommended that the City increase its annual funding by $2.2 million for “keep‐up” operating and capital maintenance needs. (See Table 1‐1 of the IBRC Report.) If Palo Alto voters approve such a bond measure, they will in effect be paying the debt service costs, and there would be no appreciable effect on the General Fund. If, however, they do not approve a bond measure, the City could issue COPs (Certificates of Participation, or bonds) backed by the General Fund to fund these infrastructure needs, or it could attempt to fund these needs directly from the General Fund budget. If, for example, the City issued $100 million in COPs, with a 25‐year term, its annual debt service would be about $6.6 million. If, on the other hand, the City self‐funded the $41.5 million backlog over ten years ($4.2 million per year) plus the additional $2.2 million in keep‐up needs, it would need to spend an additional $6.4 million per year for ten years. With or without the COPs, the City would have to restructure the way it delivers services to come up with over $6 mil‐ lion per year in savings, possibly by outsourcing and/or decreasing some of its services. With the COPs, however, the City would have the cash up‐front to work through its backlogged projects and/or build new structures in a shorter amount of time. The effect of either COPs or self‐funded scenarios is summarized below: ALTERNATE SCENARIOS 2012-2022 LRFF - SUMMARY OF ADDITIONAL INFRASTRUCTURE INVESTMENT SCENARIO FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 150,203 130,650 133,762 137,604 141,767 146,185 150,798 156,166 161,876 166,727 172,294 TOTAL EXPENDITURES 154,660 151,370 157,759 161,995 168,167 174,615 181,349 188,406 195,346 203,078 210,952 NET SURPLUS (DEFICIT) $ (0) $ (2,059) $ (3,729) $ (4,065) $ (5,299) $ (6,723) $ (8,221) $ (9,267) $ (9,837) $ (12,038) $ (13,646) Additional Infrastructure Exp* $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) $ (6,600) GRAND NET SURPLUS (DEFICIT) $ (0) $ (8,659) $ (10,329) $ (10,665) $ (11,899) $ (13,323) $ (14,821) $ (15,867) $ (16,437) $ (18,638) $ (20,246) * May be either $6.6 million in debt service on $100 million COPs or an equivalent amount of additional spending to complete the backlog in ten years and increase operat- ing & capital maintenance expenditures by $2.2 million per year. City of Palo Alto 23 2012 23 CHALLENGES & CONCLUSIONS V. CHALLENGES & CONCLUSIONS Thankfully, the City’s revenue outlook has improved with the economy. Overall projected FY 2012 revenues are an‐ ticipated to be approximately $3.7 million higher than the Adopted FY 2012 Budget. While these revenue increases are certainly welcome, they bring the City’s tax revenues to where they last were in FY 2008. The City will just emerge from the trough of the Recession after four years of decline. Also of some relief was the October 2011 PERS valuation which showed PERS rates rising less steeply than we ex‐ pected one year ago. On the flip side, a new actuarial valuation of the City’s unfunded retiree medical liability showed an increase of $30 million – or 29 percent ‐ since the 2009 valuation. This translated to an increase of $2.6 million in the amount the General Fund needs to set aside in FY 2012 to fund that liability. In FY 2013 that increase grows to $3.2 million. In addition, the FY 2012 Adopted Budget assumed that negotiations with the City’s public safety units would yield $3.4 million in savings for this fiscal year. Of that, about $1 million was realized via the agreement with the Fire‐ fighters union. Negotiations with the Police union, which have been ongoing for six months, have not yet yielded any savings. Therefore, the unexpected $3.7 million in revenues for FY 2012 are more than “undone” by $5.0 million in unfore‐ seen expenses. In this Long Range Financial Forecast, the City projects 2.8 percent average annual increases in revenues and 4.0 percent average annual increases in salary and benefit expense. This gap reflects the City’s continued structural deficit, yet it does not even take into account the significant increase in infrastructure investment that will be critical to the City’s future. The rate of increase in staffing costs has varied among the City’s bargaining units, with public safety outpacing the non‐safety groups. In FY 2006, approximately 25 percent of the City’s general fund was allocated to public safety services, with the remaining 75 percent shared roughly equally between Public Works, Community Services and Ad‐ ministration. Just five years later, public safety’s portion had grown by 11 percent – to 36 percent, due to large sal‐ ary increases for public safety employees and significant concessions made by the Miscellaneous group. The first chart on the following page illustrates that trend. This discrepancy contributed to the City’s adoption of a guiding principle of seeking fairness across all bargaining units as it negotiates employee concessions. To date, Council and staff have eliminated over $15 million in expenses and over 100 positions from the General Fund budget. SEIU, Management, and IAFF (Firefighters) have agreed to contribute an equal percentage of their total compensation towards defraying their pension and health care costs. 24 City of Palo Alto 2012 24 CHALLENGES & CONCLUSIONS The following two charts show the rates of growth of the different bargaining units’ compensation over the last two years. Public Safety % of Total General Fund Expenditures 24.1% 26.1% 29.8% 30.7% 35.9% 30.1% 26.5%25.3%26.3%25.6% 23.0% 25.0% 27.0% 29.0% 31.0% 33.0% 35.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Public Safety % of Total General Fund Expenditures % Growth of Salary & Benefits by Labor Group 0.7% 4.6% 6.9%7.2% 6.3% 1.5% 9.0% 5.0%5.9% 1.2% 0% 2% 4% 6% 8% 10% 2011 2012 Mgmt/Prof % Growth Fire Chief Assoc % Growth IAFF % Growth PAPOA % Growth Police Mgmt % Growth SEIU % Growth City of Palo Alto 25 2012 25 CHALLENGES & CONCLUSIONS The following concessions have been approved since fall of 2009: Current SEIU contract • Created a second tier to our retirement structure (2 percent at 60) for new employees hired on or after July 17, 2010. • Reduced City payment of employee share of PERS for SEIU employees 3.75 percent ‐ with employees picking up the difference. • Implemented a 90‐10 medical cost sharing plan that began April 1, 2011 • Implemented cost‐of‐living freezes in FY 2010 and 2011 • Eliminated Tuition Reimbursement program Estimated Savings: $2.7 million per year, or 4 percent of total compensation $50,000 $70,000 $90,000 $110,000 $130,000 $150,000 $170,000 $190,000 $210,000 $230,000 $250,000 2010 2011 2012 Management/ Professional Fire Chiefs Association IAFF PAPOA Police Management Assoc SEIU Citywide Average Salary & Benefits by Labor Group * 26 City of Palo Alto 2012 26 Current Management and Professional agreement • Eliminated the variable management compensation plan as of FY 2009 • Implemented a 90‐10 medical cost sharing plan that began April 1, 2011 • Implemented cost‐of‐living freezes in FY 2010, 2011, and 2012 • Created a second tier to our retirement structure (2 percent at 60) for new employees hired on or after July 17, 2010. Estimated Savings: $1.7 million per year, or 4 percent of the total compensation Current agreement with Fire personnel (approved October 2011) • Created a second tier to our retirement structure (3 percent at 55) for new employees • Ceased paying the full 9 percent of the employee portion of pension expense. Fire employees them‐ selves will pay the 9 percent. • Eliminated final year “spike” of 9 percent for pension formula calculation • Eliminated minimum staffing requirements • Implemented a 90‐10 medical cost sharing plan • Implemented cost‐of‐living freezes from FY 2012‐2014 • Eliminated Tuition Reimbursement program Estimated Savings: $1.4 million per year, or 7.14 percent of total compensation. Taking into account the 4 percent salary increase received in FY 2010, Fire salary and benefit concessions are in line with the 4 per‐ cent of total compensation given by SEIU and Management. PAPOA voluntarily postponed a scheduled salary increase of 6 percent for one year from July 1, 2009 to July 1, 2010, saving the City $0.8 million in one‐time expenses All bargaining units Between 2004 and 2006, the City: • Implemented for all new hires a new 20‐year vesting period to qualify for lifelong City‐paid health cov‐ erage. • Eliminated the highest cost health care plan option—saving almost $10,000 per year for each em‐ ployee moved away from this option. The aforementioned concessions and staffing reductions have been tough decisions that were not taken lightly. Like the City, our employees face rising household costs and diminished asset values. Furthermore, the impact of the posi‐ tion eliminations is that our employees are stretched thin, and our ability to take on new projects has been reduced. We have also experienced a significant amount of staff turnover as a result of the compensation adjustments. Yet the need to make additional difficult choices will continue until the structural budget gap is eliminated. Additional employee concessions will be required. The City is in the process of realigning and recalibrating its organization to match available staff and financial resources. This includes looking at alternate ways to provide services, including CHALLENGES & CONCLUSIONS City of Palo Alto 27 2012 27 CHALLENGES & CONCLUSIONS contracting out services, evaluating delivery of services through a regional model, and much more. Through the Cost of Services Study, the City will reach out to the community to determine the services they value most. Despite these considerable efforts on the part of the City and its staff, the structural deficit has not gone away. This Forecast shows that, without further action, the City can expect more deficits in the coming years. However, the City has received a vote of confidence in the form of a General Obligation Bond Triple‐A credit rating from Standard and Poor’s. Staff trusts that the community, Council and staff will act, as they have in the past, to bal‐ ance the budget and to maintain the assets that make Palo Alto a renowned place to live. Staff trusts that the community, Council and staff will act, as they have in the past, to balance the budget and to maintain the assets that make Palo Alto a renowned place to live. 28 City of Palo Alto 2012 28 ENDNOTES VI. ENDNOTES 1. Paul Wiseman, “Economy ends year on surprising upswing,” San Jose Mercury News, Dec. 22, 2012 2. Martin Crutsinger, “Retail sales hit record despite slow December,” San Jose Mercury News, January 13, 2012 3. Anne D’Innocenzio, “Retailers pay the price for holiday deals,” San Jose Mercury News, January 6, 2012 4. “The Employment Situation—January 2012,” Bureau of Labor Statistics, News Release, February 3, 2012 5. Motoko Rich and Stephanie Clifford, “For 2012, Signs Point to Tepid Consumer Spending,” New York Times, January 3, 2012 6. Shaila Dewan, “U.S. Economy Gains Steam as 200,000 Jobs Are Added,” New York Times, January 6, 2012 7. Beaconomics, “United States: Unemployment Rate” Forecast dated December 2011 8. Paul Wiseman and Derek Kravitz, “Steady as we go with economy,” San Jose Mercury News, December 27, 2011 9. UCLA Anderson Forecast, “The National Economy Remains Mired in a Long Slump but Double‐Dip Possi‐ bilities Abate,” Press Release, December 2011 10. “U.S. Macro Focus, The Outlook for 2012: Unfinished Business,” Citigroup Global Markets, December 14, 2011 11. Don Thompson, “State’s jobless rate drops below 11%,” San Francisco Chronicle, January 21, 2012 12. UCLA Anderson Forecast, “The National Economy is Stalled, but No Recession in the Forecast,” Septem‐ ber 2011 13. The Beacon Employment Report, Beacon Economics, January 2012 14. Chistopher Thornberg, “Beaconomics,” September 2011 15. Pui‐Wing Tam, “Uneven Growth as Region Revives,” Wall Street Journal, November 17, 2011 16. George Avalos, “’The worst’ may be over on job front in Bay Area,” San Jose Mercury News, November 16, 2011 17. Beacon Economics, “The Regional Outlook‐South Bay,” Quarterly Update, December 2011 18. Compound Annual Growth Rate calculations use the following equation: City of Palo Alto 29 2012 29 n the last few years, the City and its employees have made some headway in addressing the structural deficit by increasing the employees’ contributions towards the costs of their benefits. The City has pur‐ sued a guiding principle that all of its bargaining units should share equally – as measured by percent of total compensation ‐‐ in contributing to a solution to the city’s immediate and long term fiscal de‐ mands. To date, all units, with the exception of the Policy Officers Association, have agreed to contrib‐ ute an equal amount of their total compensation towards defraying their pension and health care costs. Note that due to differing past agreements, different units’ compensation costs have grown at different rates. Visit our website at: www.CityofPaloAlto.org AMERICANS WITH DISABILITIES ACT STATEMENT Contributors Nancy Nagel Rob Braulik Amber Cameron Libby Dame Tarun Narayan Sherry Nikzat Christine Paras David Ramberg Joe Saccio Tony Sandhu Dale Wong In compliance with Americans with Disabilities Act (ADA) of 1990, this document may be provided in other accessible formats. For information contact: ADA Coordinator City of Palo Alto 285 Hamilton Avenue (650) 329‐2550 Printing City of Palo Alto 30 City of Palo Alto 2012 30 The City of Palo Alto is located in northern 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. Phone:650‐329‐2100 Fax:650‐325‐5025 City of Palo Alto 250 Hamilton Ave Palo Alto, CA 94301 30% post‐consumer recycled