HomeMy WebLinkAboutStaff Report 3531
City of Palo Alto (ID # 3531)
Finance Committee Staff Report
Report Type: Meeting Date: 3/5/2013
City of Palo Alto Page 1
Summary Title: Fiscal Years 2013 to 2023 Long Range Financial Forecast
Title: Review of Fiscal Years 2013 to 2023 Long Range Financial Forecast
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 for review and
input.
Motion
I move to accept the Fiscal Year 2013 to 2023 Long Range Financial Forecast and
forward it to the full Council for review and input.
Executive Summary
The City’s General Fund Long Range Financial Forecast (LRFF) for the next ten years is
based on a variety of assumptions (See page 22 of Attachment A). It is a portrait of the
City’s financial condition painted at one point in time.
The LRFF was presented to the Finance Committee on December 18, 2012. Staff was
directed to return with a forecast based on specific, revised assumptions and comments
provided by the Committee. In addition, revenues and expenditures h ave been
changed based on additional data and information that has come to light since
December 2012. The revised ten year forecast now shows a cumulative surplus of $0.6
million from 2014 through 2023.
Background
City of Palo Alto Page 2
The Finance Committee directed staff to return with a revised LRFF that addresses the
issues and information requests cited below. Points made by the Committee are either
covered in this report or in the LRFF (Attachment A).
1. Use historical revenue growth rate information in projecting future revenue
streams (discussion and analysis included in this report; new assumptions can be
found on page 13 of Attachment A)
2. List major factors leading to a cumulative 10-year $6.9 million shortfall in the
December 2012 forecast compared to $88 million budget shortfall presented in
May 2012 (analysis presented in this report). Since December the model has
been revised and the difference between the May 2012 and new February 2013
forecast will be explained
3. Use most recent revenue projections from the Utilities Department for
forecasting Utility User Tax (UUT) revenues (included in the UUT line item on
page 12 of Attachment A)
4. Impact from a potential CalPERS board rule change whereby employer
contribution rates are based on a fixed five year period instead o f a “smoothing”
or rolling 15 year period (change included in new alternate scenario on page 25
of Attachment A)
5. Include a cumulative deficit/surplus total in the forecast (Shown on page 21 of
Attachment A)
6. Information showing full-time equivalent transfers from the General Fund to
other funds over the past 10 years (Shown on page 15 of Attachment A)
In addition to addressing Finance Committee issues and questions, staff has updated
the forecast given recent revenue performance data as well as other inf ormation that
has come to staff’s attention in the interim. These substantive changes are discussed
below.
Discussion
Point 1: Historical Revenue Trends
At the December 2012 Finance Committee meeting, staff was asked to review 20 year
and 10 year historical growth rates for economically sensitive revenue sources and
consider inserting those rates in place of assumptions in the December LRFF. The
City of Palo Alto Page 3
Committee expressed concern that revenue assumptions in the forecast could be overly
optimistic and that staff had not relied on a longer period of historical data that would
be a more reliable predictor of future performance. To address this specific point, a
comparison between the 20 year Compound Annual Growth Rates (CAGR) and the
December 2012 projections is discussed below. The 20 year CAGR incorporates two
dramatic economic cycles (dot.com boom and bust and the Great Recession) and, in
staff’s view, does provide a more reliable reference point than the more recent, past 10
year rates.
Staff has analyzed revenue growth rates dating back to 1992 on a revenue line item
basis, a total tax revenue basis and on a total General Fund revenue basis. The five
major tax revenue categories included property, sales, documentary transfer, transient
occupancy, and utility user taxes. To ensure that compound annual growth rates
(CAGR) reflected “true” growth and not growth due to external factors such as State
swaps of Vehicle License Fees revenue into property taxes, adjustments to prior year
actual collections were made where appropriate. The 2 percent increase in the
Transient Occupancy Tax in January 2007, was also controlled to determine organic
growth in this category.
Data in the table below shows historical growth rates over different periods and
compares those rates with those used in the December and revised February forecasts.
City of Palo Alto Page 4
Category 20 year CAGR
(1992-2012)
10 year
CAGR
(2002-
2012)
December
2012 LRFF
CAGR (2013-
2023)
February 2013
LRFF CAGR
(2014-2023)
Property Tax 4.67% 4.88% 4.29% 4.97%
Sales Tax 2.07% 0.98% 3.96% 3.38%
Transient
Occupancy Tax
4.88% 1.99% 4.50% 4.58%
Documentary
Transfer Tax
7.30%* 5.31% 4.58% 5.56%
Utility User Tax 3.79% 5.31% 2.80% 2.85%
Total of All 5 Major
Taxes (adjusted)
4.10%***** 3.12% 4.04% 4.23%
Total Revenues
(all)
4.56% 2.55% 3.14% 3.32%
* Documentary Transfer Tax was available beginning in 1993 so a 19 year CAGR is shown in the 20 year category.
It is interesting to note that the CAGR for the five major tax revenue sources was 4.10
percent over the past 20 years and close to the 4.04 percent used in the December
2012 forecast. From this perspective, the original forecast was neither too optimistic
nor too conservative. Line item tax projections, however, did reveal variations between
historical rates and those used in the December model. Sales tax in the last 20 years
revealed an anemic 2.07 percent growth rate, nearly 2 percentage points below staff’s
more robust of 3.96 percent in December. In contrast, historical increases in the
transfer tax were 7.30 percent over 20 years and 5.31% over 10 years while staff
projected 4.58 percent growth in the December model.
The above table shows that for property and transient occupancy taxes, the December
forecast used rates fairly similar to the 2 0 year trend. These rates are basically
maintained in the February forecast. Not included in the LRFF, are incremental
revenues from new hotels expected to come on line in the next several years. For the
documentary transfer tax, February forecasted rates are nearly 1 percent higher than
City of Palo Alto Page 5
those used in December and slightly lower than those over the past twenty years.
Since the volume and mix of property sales plays a significant in projecting this volatile
revenue source, staff has selected a lower rate than the 7.30 percent rate found over
the last 20 years.
The 20 year growth rate for sales tax at 2.07 percent is rather sobering. The rate of
growth is low and barely keeps pace with the rate of inflation. Growth projected in the
December forecast of 3.96 percent has been ratcheted back in the February model to
3.38 percent. Although sales tax receipts have improved over the past two years,
nominal growth over time has suffered as a result of Internet sales, the proliferation of
big box stores just outside City limits, the decline in auto sales, and the rise of
consumer services (not subject to tax) over the purchase of tangible goods. Several of
these adverse trends will continue, but with the City’s economic development activity
and efforts to maintain high profile retailers, staff is optimistically projecting a CAGR of
3.38 percent for the future. While there is confidence in the growth forecast over the
next few years, it will be important to monitor this revenue source in the future,
especially since sales taxes represent 14 percent of GF resources.
The utility user tax forecast is based on the latest revenue projections from the Utilities
department. The December and February forecasts used lower growth rates than those
found for the past twenty years. Again, rates that are more conservative than what
history would suggest have been deliberately used as a consequence of uncertainties
surrounding the telephone UUT.
The anticipated CAGR for overall General Fund revenues was 3.14 percent in the
December forecast and has been revised to 3.32 percent in February. The latter is
below the adjusted 20 year historical CAGR of 4.56 percent. One of the primary
reasons for this decrease is a consequence of a lower equity transfer from the Electric
and Gas Enterprise Funds which is discussed here and in Attachment A.
Point 2: Overall Change in 10-Year Cumulative Budget Shortfall
The LRFF presented to Council May 2012 reflected an $88 million cumulative 10 -year
budget shortfall between Fiscal Years 2013 and 2022. The attached forecast for FY
2014 and 2023 shows a cumulative $0.6 million 10-year budget surplus. Although we
are comparing two slightly different forecast periods, there are two main drivers behind
the improved 10 year outlook – additional and improving tax revenues and
miscellaneous employee concessions.
City of Palo Alto Page 6
First, the revenue picture has improved since the May forecast. For example, staff has
raised its FY 2013 revenue level since December by 1.7 million and out year revenues
where appropriate. In addition, staff has revised the growth rates as a consequence of
the Finance Committee’s questions in December. Tax revenues alone have increased
cumulatively by $48.5 million in comparing the May and February forecasts. Non-tax
revenues also have changed with a cumulative impact of $7.0 million. Revenue
categories that were revised upward include permits and licenses for a cumulative
effect of $5.4 million.
Secondly, beginning in fall 2012, employees in the City’s Management and Profession al
and SEIU groups began paying the full “employee share” of pension contributions. This
change saved the General Fund approximately $30.5 million between FYs 2014 -2023.
The budget savings from miscellaneous employees paying their full employee share was
not included in the LRFF presented in May 2012.
Substantive Changes To Revenue and Expense Since December 2012 Forecast
Since the release of the December LRFF, new data and information has prompted staff
to make adjustments to revenue and expenses both in FY 2013 and in future years.
These are outlined below:
Recent activity for tax revenues has resulted in an upward revision to FY 2013
revenues of $1.7 million
Because of a decrease in PG&E’s rate of return by the California Public Utilities
Commission which affects a key component of the City’s equity transfer formula,
the transfer from the City’s Electric and Gas Enterprise Funds is decreasing by
$1.3 million in FY 2014 (More information on equity transfer is provided on page
14 of Attachment A)
The December LRFF assumed a negative $0.9 million impact in FY 2013 due to
the Golf Course Reconfiguration project. The project is now scheduled to begin
April 2014 resulting in a lower adverse impact of $0.2 million.
Salary and benefit projections in FY 2014 were changed based on the for the
City’s Service Employees International Union (SEIU) contract. The model
presented in December 2012 inadvertently assumed that SEIU would receive a 2
percent salary increase beginning July 1, 2013 or for the full FY 2014. In fact,
SEIU’s contract expires December 31, 2013 and the 2 percent increase base
begins January 1, 2014. This results in a $0.2 million savings in FY 2014.
City of Palo Alto Page 7
Between issues discussed in this report and changes made to the Long Range Financial
Forecast (Attachment A), staff believes it has addressed the Finance Committee’s
questions and concerns expressed in December 2012. As with all forecasts, revenues
and expenses are moving targets that change with circumstance and time.
Nevertheless, the forecast serves as a critical tool in developing the FY 2014 budget and
in identifying the City’s most pressing, future challenges.
Attachments:
LRFF 2013-2023 pub doc 3-5-13 (PDF)
LONG
RANGE
FINANCIAL
Fiscal Years 2013 to 2023
FORECAST
Finance Committee Draft II—March 5, 2013
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY 1
II. ECONOMIC OUTLOOK 3
III. UPDATED MODEL 6
CHARTS:
- 2013-2023 BASE MODEL 20
- PERCENTAGE CHANGES IN BASE MODEL 22
IV. RESERVES 24
V. ALTERNATE SCENARIO 25
VII. APPENDIX 28
VIII. ENDNOTES 30
VI. CHALLENGES & CONCLUSIONS 26
EXECUTIVE SUMMARY
This forecast summarizes the General Fund outlook for Fiscal Years (FY) 2014 through 2023. Rather than a
predic on or commitment, a forecast is a financial snapshot based on a number of assump ons. This Long
Range Financial Forecast (LRFF) is a tool to allow staff and Council members to see the longer‐term results
of choices made up to date, and iden fy issues that must be addressed in the near term in order to improve
the City’s long‐term outlook.
The na onal and state economies con nue to show improvement. At the na onal level, growth in the next
one to two years ranges between 2‐3 percent, with poten al growth of over 3 percent in 2014. With Cali‐
fornia being one of the top ten labor markets in the country, a 1.5 percent unemployment rate decrease
between September 2011 and 2012, a strong export market, and concentrated interest of venture capital
investors in Silicon Valley, the state has cause for op mism. Locally, job growth is steady and the housing
market increasingly robust. A few recent challenges for the City, such as providing adequate parking down‐
town and at California Avenue, reflect the no ceable increase in economic ac vity.
FY 2011 and 2012 ended with net posi ve results. FY 2011 ended with a $3.2 million General Fund surplus,
and FY 2012 financial results included a $4.5 million surplus. Therefore, staff recommended a transfer or
$7.6 million from the General Fund to the Infrastructure Reserve to support of the Council’s Infrastructure
priority.
The LRFF Base Model shows a con nuing posi ve trend. FY 2013 is projected to end with a $3.1 million sur‐
plus. In the LRFF Base Model, the combined surplus for FY 2014 to 2023 (ten years) is $0.6 million. The Base
Model can be found on page 20 of this report. Below is a summary.
The Base Model includes two assump ons indicated by Council: (1) 10 percent annual medical cost increas‐
es from FY 2014 on and (2) 3‐percent annual pension rate increases beginning FY 2017. The PERS actuarial
report received November, 2012 provides the base rates used in FY 2014 to 2016. PERS rates used in this
forecast can be found on page 17 of this report.
EXECUTIVE SUMMARY
2
The Base Model also includes savings from the recent agreements with the Palo Alto Police Officers’ Associa‐
on (PAPOA), the Service Employees Interna onal Union (SEIU) and the Management/Professional group.
The savings from these three agreements add to $2.7 million in FY 2013.
Addi onal assump ons incorporated into the Base Model are detailed beginning on page 6.
In addi on to the Base Model, one alternate scenario is included. It assumes significantly higher pension
costs due to two methodological changes currently being considered by PERS. One is a switch from a fi een‐
year smoothing period for recouping PERS investment losses down to a five‐year period. The other is due to
increased life expectancy among re rees. This scenario changes the combined bo om line from a $0.6 mil‐
lion surplus to a $50.0 million deficit—a total nega ve change of $50.6 million. This scenario is described on
page 25 of this report. Note: This scenario does not include the savings from the new third pension er im‐
plemented as of January 2013 as part of the California Public Employees’ Pension reform Act (see page 26). At
the moment, the dollar impact of this legisla on is unknown, and staff will provide Council with updates as
new informa on emerges.
The following pages of this report provide a summary of the na onal, state, and local economic outlook; a
detailed look at the ten‐year Forecast; an alternate scenario assuming higher pension rates; and a discussion
of the challenges and conclusions derived from the Forecast.
EXECUTIVE SUMMARY
3
ECONOMIC OUTLOOK
Economic growth – on na onal, state, and local levels ‐ has finally begun to look more robust in the past year.
The following indicators contribute to the impression that the economy is on a more stable foo ng:
Na onal
Predic ons for growth in next 1‐2 years range from 2‐3% (Beacon Economics) to poten ally above 3% for
2014 (Anderson School of Business Forecast).
Home values are now 2% to 3% above where they were last year at this me. See Housing Summary Ta‐
ble on page 4 for details on na onal, state and local housing market progress.
In September, the na onal unemployment rate fell to 7.8%, its lowest level since January 2009, followed
by a 0.1% increase in October. So far in 2012, overall job growth has averaged 143,000 a month, com‐
pared with 153,000 in 2011.1 The small increase in October is a ributed to the increasing re‐entry of
workers into the work force.
Lower labor costs helped push corporate profits to a record 10.6 percent of US GDP in the first three
months of 2012.2
ECONOMIC OUTLOOK
HOUSING MARKET SUMMARY
USA Home values are now 2% to 3% above where they were last year at this
me.3
CALIFORNIA Since hi ng bo om in April 2009, the median price of a home is up
more than 24%.
Beacon Economics expects home prices to grow at roughly 7% in 2012 at
about 5% in 2013 before se ling out in the mid‐3% range in 2016‐2017.4
Sales of exis ng, single family detached homes were up 15.3 percent
from a year earlier (July to July). Pace of exis ng home sales during first
seven months of 2012 was up 7 percent from the same months of
SF BAY AREA Single‐family home prices climbed 16 percent in the Bay Area between
September 2011 and September 2012.
Bay Area home values increased 8.2 percent between the 3rd quarter of
2011 and that of 2012, but are s ll down 29.5 percent from their peak in
2006.6
Silicon Valley home prices are close to an all‐me high. In the 3rd quar‐
ter of 2012, Los Altos, Palo Alto, and Burlingame reached home prices
just several percentage points away from peak levels in 2008.7
4
State
California remains one of the top ten labor markets in the country. The state accounted for half
of all the jobs created na onwide in May and all of the job growth in the US in June.8
The state unemployment rate declined to 10.6% in August and 10.2% in September, down from
11.7% in September 2011. Moreover, state job growth was broad‐based. Every sector besides
Farm, Manufacturing and Government, posted job growth over the last 12 months. Construc‐
on has led the charge adding 6% to its payrolls.9
UCLA Anderson Forecast predicted unemployment levels of 9.8% in 2012 and 8.5% in 201410 ;
Beaconomics forecasts job growth of 2% through 2012 and 2013, increasing to 2.5% to 3.0% per
year from 2015 to 2017. Taxable sales rose 9.2% on a year‐over‐year basis in Q1 2012, and are
forecasted to grow an average of 7% over the next year, reaching their pre‐recession peak by
the end of 2012.11
Venture capital investments con nue to be concentrated in Silicon Valley and California vs. rest
of na on.12
See Housing Market Summary, page 4 for info on the state housing market.
Local
The Bay Area has been the strongest regional economy in California. Two of its three major ur‐
ban centers, the South Bay and the SF‐San Mateo‐Marin region, in recent months have posted
the fastest rate of annual employment growth in the en re country.13
Total nonfarm employment in the San Jose area increased for each of the last 10 months and
has now added back 83% of all nonfarm jobs lost in the South Bay since March 2008. The tech‐
nology industry has led the way.14
Caltrain Annual Passenger Counts show a 15.7% increase in ridership to Palo Alto between Feb‐
ruary 2011 and February 2012.15
Home prices in Silicon Valley are at an all‐me high. (See Housing Table on page ___ for de‐
tails.)
Palo Alto is seeing a no ceable increase in commercial ac vity, as evidenced by the opening of
several new retail stores, and a renewed dearth of parking capacity, with Council and staff now
weighing a range of solu ons
The last two years have been a period of steady growth in revenues for local hotels, and five
hotels are in the pipeline, including:
Hilton Garden Inn: 175 Rooms. Expected opening: 2014
Hilton Homewood Suites: 138 Rooms, Expected opening, 2014
Casa Olga: 86 rooms. Approved July 23, 2012. Renova ons are currently under con‐
struc on. Expected opening, summer 2013.
Mings (1700 Embarcadero): 147 Rooms. Council approval requires that building permits
must be obtained and construc on commence must start by April 2014.
Wes n annex (711 El Camino Real) (Clement): 23 room expansion. Preliminary architec‐
tural review occurred in May 2012. No formal applica on has been received.
ECONOMIC OUTLOOK
5
ECONOMIC OUTLOOK
IMPACT OF ECONOMIC OUTLOOK ON ASSUMPTIONS USED IN MODEL
As a result of the factors discussed above, the Forecast includes rela vely healthy growth in sales, property,
transient occupancy and documentary tax revenues. The following chapter discusses each revenue source in
detail.
Unemployment Rates, 2011‐2012
Source: EDD Labor Market Informa on Division, October 19, 2012
Sept. 2011 Sept. 2012
(prelim.)
Palo Alto Civilian Unemploy‐
ment Rate
5.1% 4.2%
Santa Clara County Unemploy‐
ment Rate
9.6% 7.9%
CA Unemployment Rate
11.5% 9.7%
US Unemployment Rate
8.8% 7.6%
6
UPDATED MODEL
ASSUMPTIONS INCLUDED IN THE MODEL
The following describes factors assumed in the Base Model. Some descrip ons refer to the Compound Annu‐
al Growth Rate, or CAGR, which is the average rate of growth over a period of me for a revenue or expense
category. The Base Model refers to the CAGR over FYs 2008 to 2012, as noted in the discussions of each reve‐
nue and expense category, as a guideline for future rates of increase.
The FY 2013 revenues and expenditures include a number of one‐me expenditures and savings. The Base
Model excludes these one‐me items from the succeeding years, beginning in FY 2014:
$1.1 million salary and benefits net increase due to the release of previously frozen posi ons and budget
reduc ons (increasing FY 2014 expenditures)
$0.2 million in one‐me, non‐salary costs, including $80,000 for a Police Service Study; $50,500 for Com‐
prehensive Plan funding; and $70,000 for an organiza onal study of the Planning and Community Envi‐
ronment department. (decreasing FY 2014 expenditures)
The payback of a $4.9 million loan to the Technology Fund. The last payment of $1.2 million on this loan
was completed in FY 2013. (decreasing FY 2014 expenditures)
In addi on to these items, the FY 2014 projected budget assumes a one‐me net decrease in revenues of
$1.4 million for the Golf Course Reconfigura on project. The en re ten‐year period includes an assumed $1
million in addi onal opera onal expenses a ributable to the Library renova ons.
Recent agreements with the Palo Alto Police Officers’ Associa on (PAPOA), the Police Management Associa‐
on (PMA), Service Employees Interna onal Union (SEIU), and the Management/Professional group – re‐
sul ng in a combined savings of $1.9 million in FY 2013 – are included in the Base Model.
Revenue increases ranging from 1 to 5 percent are projected over the next 10 years. Although this is a good
sign of improved city resources, looming pension and re ree medical obliga ons and infrastructure needs
exceed available resources. The most recent valua on report from CalPERS increases the FY 2014 City contri‐
bu on by 1.6 percent and 2.3 percent for the City’s Miscellaneous and Safety groups, respec vely, and re‐
sults in $1.8 million in addi onal General Fund expense for FY 2014 compared to FY 2013. Furthermore, the
General Fund’s re ree medical obliga on is $9.1 million in the coming fiscal year and is expected to grow
3.25 percent annually.
Staff performed an analysis on revenue growth going back to 1992, reviewing overall General Fund revenues
as well as growth rates in the five major tax categories (Property Tax, Sales Tax, Documentary Transfer Tax,
UPDATED MODEL
7
Transient Occupancy Tax, and U lity User Tax). To ensure that the compound annual growth rates (CAGR)
for each analysis reflected ac vity changes rather than rate changes or re‐categoriza ons, adjustments to
prior year actual collec ons were made where appropriate.
A historical twenty‐year CAGR analysis for all General Fund revenues shows growth of 4.56 percent. Within
that figure, there are significant variances between the CAGRs for each of the tax categories. For instance,
the 20 year CAGR for Property Tax (the largest tax category), is 4.67 percent, while the CAGR for the second
largest tax category (Sales Tax) is 2.07 percent.
In the Base Model, the CAGR for projected overall General Fund revenues is 3.32 percent, well below the ad‐
justed 20‐year historical CAGR of 4.56 percent. One of the primary reasons for the decrease is a $1.3 million
reduc on in the equity transfer.
As recommended by the Infrastructure Blue Ribbon Commission (IBRC) report (December, 2011), and ap‐
proved by Council beginning in FY 2013, the Base Model incorporates an addi onal $2.2 million in annual
capital opera ng and maintenance funding (“keep‐up”). The IBRC report recommended that an addi onal
$4.2 million be contributed annually towards the City’s infrastructure “catch‐up” needs and that funding be
found for other project and construc on needs totaling approximately $210 million. These needs, including a
new Public Safety Building and rebuilding the Municipal Service Center, and the “catch‐up” funding are not
included in the Base Model.
Lastly, the LRFF contains one alternate scenario addressing addi onal pension costs, which may be found on
page 25 of this report.
REVENUES
Tax revenues in Palo Alto have improved markedly since the beginning of the Great Recession and are ex‐
pected to continue their upward trend in the near future. Since the December forecast presented to the Fi‐
nance Committee, several tax revenue categories have been adjusted for FY 2013 and in out years. These
changes are based on data available since the December forecast and on the alignment of future tax revenue
increases with historical growth rate trends, as discussed in the cover City Manager Report.
Sales Tax
This economically sensi ve revenue source is bouncing back from its recession low of $18.0 million in FY
2010. Receipts rose to $20.7 million in FY 2011 and to $22.1 million in FY 2012. Staff is currently projec ng
sales tax revenues of $23.4 million in FY 2013, nearly $0.8 million above the adopted budget. Receipts in the
first quarter of FY 2013, which are 6.7 percent above the prior year’s first quarter, support this change. Ro‐
bust economic segments include electronic equipment, apparel stores, restaurants, and service stations.
UPDATED MODEL
8
Weak performers include furniture/appliance and business services. Staff’s forecast is in line with that of the
City’s sales tax consultant, Muni‐Services, for the next two years. As a consequence of recent data, estimat‐
ed revenues for FY 2014 were raised by $0.28 million.
The sales tax growth rate used for the next ten years at 3.38 percent is more optimistic than the 20 year his‐
torical growth rate of 2.07 percent. While there are many challenges to sales tax growth, such as growing
Internet sales, the City’s efforts in economic development and maintaining high profile retailers could boost
the future growth rate. Sales tax growth must be monitored carefully since this revenue source represents
14 percent of GF resources.
Property Tax
Unlike many California jurisdictions, Palo Alto’s property taxes did not take a material “hit” as a consequence
of the Great Recession. Revenues have remained relatively stable as shown below:
For the past several years, staff has primarily relied on County estimates to develop its property tax budget.
The County has regular meetings to inform cities and school districts on assessment roll growth and events
that can impact revenues (e.g. appeals from commercial and residential properties). Based on recent County
data, it is likely that receipts will exceed the FY 2013 adopted budget of $27.3 million by some $0.6 million.
UPDATED MODEL
Fiscal Year Property Tax Revenues
2009 $25.4 million
2010 $26.0 million
2011 $25.7 million
2012 $26.5 million
$22,194
$22,623
$20,089
$17,991
$20,746
$22,132
$23,364
$15,000
$17,000
$19,000
$21,000
$23,000
$25,000
2007 2008 2009 2010 2011 2012 2013
Sales Tax (Millions, FY 2013 Projected)
Fiscal Year
9
As stated in the previous chapter, housing values in Silicon Valley are rising at a faster rate than the rest of
California and the country. According to a November “Intero Real Estate Services” update, “While the rest of
the country has been recovering…the Bay Area housing market has exploded over the last 18 to 24 months.
Most lis ngs are selling with mul ple offers and considerably over list price.” This prognosis for the Palo Alto
real estate market will likely translate into higher documentary transfer and property taxes. For FY 2014,
property tax revenue is projected at $29.1 million, a $1.2 million or 4.3 percent increase above the current
fiscal year es mate of $27.9 million.
Transient Occupancy Tax (TOT)
Since declining to $6.9 million in FY 2010 due to the Great Recession, TOT revenues have steadily risen. In FY
2011 receipts totaled $8.1 million and in FY 2012 they moved to $9.7 million. Staff now estimates they will
increase to $10.4 million in FY 2013 and to $11.3 million in FY 2014. Average occupancy and daily rates, re‐
spectively, have surged from 66 percent and $139 per day in FY 2010 to 85 percent and $174 in the first quar‐
ter of FY 2013. With increased business activity and visitors to Palo Alto, staff will adjust the FY 2013 budget
upward by approximately $0.8 million. The out years of the Forecast include a cumulative annual growth
rate of 4.58 percent. Note that the forecast does not include revenue from hotels expected to open in FY
2014.
Documentary Transfer Tax (DTT)
This revenue source is based on the number and value of commercial and residential property sales. In the
last decade, revenues have averaged $4.8 million per year. During the recession period, DTT revenues fell to
$3.1 million in FY 2009 and to $3.7 million in FY 2010. Results for FY 2011 and 2012 were $5.2 million and
$4.8 million, respectively. With revenue stabilizing in the last two fiscal years, the rising value of commercial
and residential transactions in the first quarter of FY 2013, and several extraordinary remittances, staff is pro‐
jecting receipts in FY 2013 of $6.8 million, or $1.7 million higher than Adopted Budget. Due to the unusual
stream of transactions this fiscal year, a more realistic $5.7 million for FY 2014 is projected.
U lity Users Tax (UUT)
FY 2013 UUT revenues are expected to be the same as actual FY 2012 revenues, or around $10.8 million. The
u lity‐generated UUT projec ons are based on the most recent rate informa on provided by the U li es de‐
partment. These numbers could change as the department discusses its proposed rate plan with the U li es
Advisory Commission and the Council. Telephone‐generated revenues con nue their downward decline, due
to decreased landline usage.
Other Taxes & Fines
The large part of this category is comprised of Parking Viola on revenue, which staff is es ma ng to be $1.5
million in FY 2014. Other revenue items such as traffic viola ons, administra ve cita ons, and library fines
and fees have con nued to grow over the past five years. Another component of this revenue category is the
Vehicle‐in‐Lieu Fee (VLF). In FY 2012, the state legislature suspended its alloca ons to local agencies in order
balance the State budget. Un l the legislature takes ac on to restore it, staff is not projec ng any VLF re‐
ceipts in this forecast. Staff expects that FY 2014 revenue will end at the same level as FY 2013, which is $2.1
million.
UPDATED MODEL
10
Charges for Services
Total revenues in this category are projected to be $1.3 million lower in FY 2014. Most of this reduc on is
a ributable to the loss of $2.2 million in Golf Course revenue while the course closes for reconfigura on. Ad‐
di onally, the FY 2013 adopted budget assumed revenue increases related to the Development Center ex‐
pansion and cost of service study implementa on, totaling $0.9 million. These an cipated revenue enhance‐
ments were not assumed in the FY 2014 Base Model. Staff plans to present Council with results of the cost of
services study in January/February 2013.
The December LRFF assumed a negative $0.9 million impact in FY 2013 due to the Golf Course Reconfiguration project.
The project is now scheduled to begin April 2014 resulting in a lower adverse impact of $0.2 million.
Based on the Na onal Golf Founda on es mate presented to Council, comple on of the golf course reconfig‐
ura on will bring in $0.3 million addi onal revenues beyond the $2.2 million lost in FY 2014. This is included
in Base Model. For the Charges for Services category, the forecast also assumes a 3.5 percent growth rate for
the overall Charges for Services category from FY2015 through FY 2023.
Stanford Fire and Dispatch Services
The City currently is under agreement with Stanford University to provide Fire Response and Dispatch ser‐
vices. Stanford is charged 30.3 percent of the Fire Department’s net cost and 16 percent of the Police Depart‐
ment’s Communica on and Dispatch Division. With the excep on of pension, healthcare, and re ree medical
obliga on cost increases, the FY 2014 base does not assume any significant changes for the Fire Department
and Police Communica on and Dispatch Services budgets. Stanford fire and dispatch revenue is es mated to
increase by $0.2 million in FY 2014 due to pension, healthcare, and re ree medical cost increases. The Base
Model assumes that revenue from this agreement will increase 3.5 percent annually.
UPDATED MODEL
11
Currently, the City is in nego a ons with Stanford for the Fire Services component of the contract. The FY
2013 budget includes a total of $8.2 million of revenue from Stanford for Fire and Dispatch Services. In the
best scenario, the final determina on of a new reimbursement agreement could result in $1.4 million in addi‐
onal revenue; in the worst scenario the agreement could be terminated en rely. The agreement requires
the University to give 12 months’ no ce of termina on. Assuming that nego a ons are concluded in FY
2014, a modest increase of 3.5% has been built into the outer years to account for staffing and other depart‐
ment costs.
Permits and Licenses
Revenue from permits and licenses rose significantly in FY 2011 and 2012 due primarily to increased ac vity
at the Development Center. Budgeted revenue in FY 2013 decreased because the city implemented a
citywide Technology Enhancement Fee and these revenues, which had previously been charged only to some
development permits, were moved from the General Fund to the Technology Fund. This revenue category is
projected to decrease slightly due to two factors. Internal street cut fees, which are based on U li es ac vi‐
es, are reduced $.11 million to reflect planned project ac vi es. Addi onally, based on historic ac vity, the
Forecast is decreased approximately 2 percent per year to reflect an assumed slowdown in permit ac vity
through FY 2018, followed by a 3.5 percent annual growth in subsequent years.
Return on Investment
General Fund interest earnings have declined 71 percent from FY 2009 to projected FY 2013 levels, as higher‐
yielding maturing investments are re‐invested in a historically low interest rate environment. The Federal
Open Market Commi ee remains commi ed to keeping interest rates at excep onally low levels through
mid‐2015 to s mulate the economy and boost job growth. This ac on would con nue to keep downward
pressure on the City’s por olio yield in FY 2014. The interest earnings are projected to gradually increase by
1.3 percent in FY 2015 growing to 3.0 percent in FY 2023. It is expected that FY 2013 revenue will be below
the adopted budget by $0.2 million, totaling $0.8 million. In FY 2014, return on investment revenue is es‐
mated to remain level at $0.8 million.
Rental Income
The largest source of rental income is the City’s Enterprise Funds and the Cubberley Community Center. The
rent from the Enterprise Funds declined $2.5 million with the closure of landfill, the Middlefield Well site, and
the former Los Altos Treatment Plant (LATP) site in FY 2013. FY2014 rental income also reflects par al closure
of restaurant and pro‐shop facili es during the Golf Course Re‐Configura on Project. For this forecast peri‐
od, a 2.5 percent growth was assumed for all rental proper es – ed to the projected increase in the CPI,
which drives Enterprise Fund facility rental fees ‐ except for the Refuse Fund rent which remains fixed un l FY
2021.
The City is conduc ng an assessment of all General Fund proper es which might impact the rental income
from Enterprise Funds during FY 2014 and beyond.
UPDATED MODEL
12
From Other Agencies
Revenue from Other Agencies includes income from Community Services Outreach theatre programs, Palo
Alto Unified School District (PAUSD) reimbursements, State of California grants for Police, Libraries and Com‐
munity Services, and dona ons from Friends groups. Many of these are less than predictable. For example,
state grants are reduced when the state experiences budget difficul es. Revenues over the past 4 years have
ranged from $0.08 million to $0.3 million. The Forecast assumes a zero growth rate from FY 2014 onwards.
Charges to Other Funds
Eighty‐six percent of this category is General Fund administra ve cost plan alloca on charges to the Enter‐
prise Funds. For FY 2013, the projected amount is equal to the budgeted amount of $10.9 million. In FY 2014
onward, forecasted increases are around 2 percent.
Other Revenues
Major revenue sources in this category are Animal Services charges to Los Altos and Los Altos Hills, reim‐
bursements from PAUSD for its share of Cubberley and athle c field maintenance, dona ons from non‐
profits for City libraries, and revenues which do not belong to other categories. In FY 2013, Other Revenues
are projected at $1.2 million – the same level as in the Adopted Budget. Projected FY 2014 revenues of $1.9
million include a $0.7 million dona on from various non‐profits to libraries plus a 2 percent increase. The
Base Model assumes one‐me library dona ons of $0.6 million. In FY 2015 onwards, the base model assumes
a 2 percent annual increase for all Other Revenues.
Opera ng Transfers In
Opera ng Transfers include the equity transfer from the Electric and Gas Funds, as well as transfers from the
University Ave Parking Permit Fund and the California Ave Parking Permit Fund. In accordance with a meth‐
odology approved by Council in June 2009, the equity transfer is calculated by applying a rate of return to the
capital asset base of the Electric and Gas Funds. This rate of return is based on PG&E's rate of return on equi‐
ty as approved by the California Public U li es Commission (CPUC). On December 26, 2012, the CPUC issued
its decision to lower PG&E's rate of return on equity. As a result, the equity transfer from the Electric and
Gas Funds is projected to decrease from $17.7 million in FY 2013 to $17.0 million in FY 2014. The City A or‐
ney's Office will be providing Council with addi onal informa on regarding the equity transfer in light of the
provisions of Proposi on 218, which prohibits ci es from raising fees without voter approval, and Proposi on
26, which prohibits ci es from raising taxes without voter approval.
UPDATED MODEL
13
UPDATED MODEL
14
UPDATED MODEL
EXPENSES
Salary & Benefits
Salary
A 2 percent salary increase for SEIU and Management/Professional is assumed in FY 2014. Beginning FY
2015 and through FY 2023, a 2 percent salary increase is assumed for all labor groups. It is important to
note that these increase are for forecas ng purposes and do not represent a commitment.
$1.1 million in salary and benefits related to posi on freezes is added back to the FY 2014 projected base.
This includes funding for five Library Department staff (related to the Mitchell Park Community Center
and Library Project), seven posi ons in the Police Department, one Plan Check Engineer, one Program
Assistant in the Fire Department, and one three‐quarter me Program Assistant in the Community Ser‐
vices Department. In addi on, the FY 2014 projected base assumes three posi on reduc ons in the City’s
Animal Services opera ons.
The chart below shows how staffing has decreased in the GF since FY 2004, but Salary & Benefit cost has not.
15
UPDATED MODEL
The chart above indicates the degree to which GF FTE reductions are tempered by reallo ‐
cations to other funds. While overall GF staff has decreased by 180.1 over the last ten
years, 80 of those FTE have been transferred to other funds, leaving a net decrease of
108.2 FTE in the GF.
Benefits
The Base Model includes CalPERS’ es mated rates for FYs 2014, 2015, and 2016. The most recent rates
were received in November 2012.
Per Council direc on, the Base Model assumes a 3 percent per year increase in pension costs from FY
2017‐2023. Following the Base Model, an alternate scenario assuming a 4.5 percent per year increase be‐
ginning in FY 2017 is presented on page 25. Second‐er re rement savings, es mated by Bartel & Associ‐
ates, are included in the Base Model beginning FY 2015.
Star ng in January 2013, pension reform requires new members of CalPERS be enrolled into a new pen‐
sion plan that offers lower pension benefits. CalPERS is calcula ng the actual cost for Palo Alto, so an es‐
mate is not available at this me. It is clear that the savings of the pension reform is in the outer years
since it impacts only new members to the pension system. Staff will provide updated cost savings once
CalPERS provides expected costs.
Re ree Annual Required Contribu ons (ARC) are based on the January 1, 2011 actuarial study for FY
2012, 2013, and 2014, as amended by the Council Direc on of April 16, 2012. In se ng the ARC, the actu‐
ary assumes it will increase each year by 3.25 percent, the presumed annual increase in payroll.
The forecast assumes a 10 percent annual increase in medical costs and a 4 percent annual increase in
dental and vision costs. This assump on results in a $0.76 million increase between projected FY 2013
and 2014 costs. Over the next ten fiscal years (2014 through 2023), these healthcare cost will increase
from $9.5 million to $20.8 million, or 218 percent.
16
UPDATED MODEL
17
UPDATED MODEL
Contract Services
FY 2013 Projected Contract Services include $80 thousand of one‐me contracts, such as the Police Organiza‐
on study, and $0.5 million in assumed savings from the re‐organiza on of Palo Alto Animal Services. The FY
2014 base removes these one‐me FY 2013 expenses and projected savings. The forecast assumes that the
project will be completed and return to normal opera ons at the end of FY 2014. In addi on, the FY 2014
Base Model also assumes a one‐me $0.6 million increase for use of library dona ons from the library foun‐
da on. Total expense for this category totals $10.7 million, a $0.4 million increase over the FY 2013 adopted
budget. In FY 2015 and beyond, contract expenses are projected to remain rela vely stable, with a 3.0 per‐
cent annual growth rate throughout the forecast period.
Supplies & Materials
The base model assumes the same level of $3.2 million for this category in for FY 2013 and 2014. In FY 2015,
Community Services will see a small increase of approximately $31,000 for Supplies & Materials at the Palo
Alto Golf Course. This is based on the Na onal Golf Founda on es mates to maintain the newly redesigned
golf course. Costs will remain rela vely constant looking forward to outer years, with a consistent yearly in‐
crease based on the 3.0 percent annual increase.
In November 2012, Council was presented with the results of the contracts audit conducted by the City Man‐
ager’s Office. Staff has examined the audit findings and determined that under a new, revised contract, the
City would save an addi onal $40 thousand (citywide) in office supplies. Staff es mates that approximately
$24 thousand of this savings would occur in the General Fund. Staff expects to have the new contract in place
in early 2013.
General Expense
The majority of General Expense includes categories like travel and mee ngs, telephone and non‐city u li‐
es, con ngency accounts, and debt service payments for the newly signed Golf Course Lease/Purchase
Agreement. Projected FY 2013 expenses of $4.6 million reflect annual debt service which was originally
budgeted as a transfer to Debt Service Fund. In FY 2014, there is a 2 percent decrease, and from FY 2014 on‐
wards, annual increases of 3.0 percent are assumed.
FY
2007
FY
2008
FY
2009
FY
2010
FY
2011 FY2012 FY 2013 FY
2014 FY2015 FY2016
Miscellaneous 11.4% 17.4% 17.0% 17.1% 17.6% 21.7% 23.0% 24.6% 26.4% 26.9%
Safety 24.2% 23.6% 24.5% 23.9% 24.7% 30.1% 31.1% 33.4% 35.9% 36.6%
* FY 2008 Miscellaneous rate reflects plan change from 2% @ 55 to 2.7 % @ 55
** FY 2014, 2015, and 2016 rates are based on PERS actuarial valuation received November
2012.
Employer CalPERS Rates Assumed in Base Model
18
Cubberley Lease
This category represents lease payments to PAUSD for the Cubberley facility. The Forecast assumes
(assuming as dis nct from recommending) that the lease contract with PAUSD will con nue beyond 2014.
Payments from FY 2014 onward are based on projected 3 percent annual CPI increases. This yields $7.3 mil‐
lion in Cubberley lease expense in FY 2014.
Rents and Leases
Expansion of the Development Center increased this expense category by $0.2 million in FY 2013. Rent and
Lease expense for FY 2014 is es mated to remain at $1.1 million. From FY 2015 onwards, this expense is ex‐
pected to increase by 3 percent per year.
Facili es and Equipment
An addi onal $0.2 million was added to Facili es and Equipment during FY 2013 due to one‐me increases
for the Development Center upgrade. Facili es and Equipment expense for FY 2014 is $0.5 million, increasing
by 3 percent per years
Allocated Charges
Allocated charges represent expense alloca ons to the City’s enterprise and internal services funds for ser‐
vices and products they provide to General Fund departments for items such as general administra on costs,
u li es usage, liability insurance, technology costs, and vehicle replacement costs. The last year of the Gen‐
eral Fund loan repayment to the Technology Fund was in FY 2013; the FY 2014 base model is reduced by this
amount to total $15.8 million. Beyond FY 2014, the Base Model assumes a modest an annual growth rate of 2
percent in Allocated Charges.
Opera ng Transfers Out
Opera ng Transfers Out includes transfers for Debt Service, Tech Fund, and the Airport Fund. Transfers out
is reduced by $0.4 million due to the refinancing of the Golf Course debt. The Golf Course debt will be paid
down by FY 2018. Funding for the Airport Fund from the General Fund con nues through FY 2014 and the FY
2013 projected base model assumes an addi onal $0.2 million will be transferred to the Airport Fund. The
Base Model assumes that the Airport Fund will be self‐sustaining in FY 2015.
Transfer to Infrastructure
In FY 2013, adopted and projected transfers to capital project fund remain at $13.2 million. In FY 2014, they
are projected to grow to $13.5 million. Transfers to the Capital Projects Fund are based on several compo‐
nents described below:
1. The “annual base transfer” of $3.6 million and a “dedicated year‐end surplus” of $1.0 million remain con‐
stant.
2. The transfer for specific projects receiving General Fund reimbursements varies year‐by‐year with the 5‐
year CIP Budgets. The average annual rate of increase is 2.7 percent in the 10‐year forecast.
UPDATED MODEL
19
3. As a result of Council’s “$3 million challenge” begun in 2007, Council commi ed to spend an addi onal $3
million on infrastructure, growing by 7 percent per year. This amount has grown to $4.9 million in FY
2014 and is reflected in the Base Model.
4. Beginning in FY 2013, an addi onal $2.2 million per year is added to fund the annual maintenance of ex‐
is ng infrastructure or “keep‐up” needs as defined by the (IBRC) Infrastructure Blue Ribbon Commission
Report.
5. An addi onal $4.2 million per year will be required to fund deferred maintenance or “catch‐up” needs as
defined by the IBRC Report. This addi onal contribu on is not included in the Base Model.
6. In FY 2012, the General Fund closed with a $4.4 million surplus. A one‐me, addi onal $7.6 million was
transferred from the General Fund to the Capital Fund.
FACTORS NOT INCLUDED IN THE BASE MODEL
The allocated cost of various IT Department’s new ini a ves such as migra on to cloud based technolo‐
gies, purchase of new equipment and related maintenance/support costs.
The IBRC’s recommended $4.2 million per year increase in infrastructure expenditure
Possible TOT revenues from five hotels expected to open in the next two years (see page 4 for details).
UPDATED MODEL
20
BASE MODEL
GENERAL FUND LONG RANGE
BASE MO
FY 2013‐2
Adopted Projected
2013 2013 2014 2015
Revenues
Sales Taxes 22,545 23,364 23,646 24,317
Property Taxes 27,306 27,912 29,102 30,586
Transient Occupancy Tax 9,591 10,439 11,275 11,950
Documentary Transfer Tax 5,078 6,800 5,699 6,002
U lity User Tax 10,731 10,825 11,013 11,227
Other Taxes & Fines 2,058 2,058 2,058 2,078
Subtotal: Taxes 77,309 81,398 82,794 86,161
Charges for Services 15,461 15,461 14,204 12,782
Stanford Fire and Dispatch Services 8,221 8,221 8,391 8,685
Permits & Licenses 6,614 6,614 6,587 6,431
Return on Investment 959 774 769 779
Rental Income 12,640 12,640 12,983 13,307
From Other Agencies 157 157 157 157
Charges to Other Funds 10,875 10,874 11,062 11,283
Other Revenues 1,187 1,187 1,887 1,319
Total Non‐Tax Revenues 56,114 55,928 56,040 54,744
Opera ng Transfers‐In 18,995 18,995 18,270 18,834
Total Source of Funds 152,418 156,322 157,104 159,739
Expenditures
Salaries 57,214 58,940 60,722 61,959
Benefits 37,071 35,426 37,552 40,006
Subtotal: Salaries and Benefits 94,285 94,366 98,274 101,965
Contract Services 10,733 10,698 11,964 10,139
Supplies & Materials 3,220 3,219 3,263 3,509
General Expense 4,019 4,568 4,475 4,606
Cubberley Lease 7,133 7,133 7,347 7,567
Rents & Leases 1,184 1,184 1,207 1,243
Facili es & Equipment 518 746 521 549
Allocated Charges 16,932 16,933 15,854 15,946
Total Expenditures Before Transfers 43,739 44,481 44,631 43,560
Opera ng Transfers Out 1,605 1,176 639 329
Transfer to Infrastructure 13,178 13,178 13,465 13,843
Total Use of Funds 152,807 153,201 157,009 159,697
Net Surplus/(Gap) (389) 3,120 95 43
21
BASE MODEL
E FINANCIAL FORECAST
DEL
2023
2016 2017 2018 2019 2020 2021 2022 2023
25,076 25,916 26,809 27,736 28,735 29,813 30,857 31,905
32,151 33,809 35,557 37,405 39,331 41,216 43,118 45,029
12,520 13,101 13,694 14,295 14,909 15,538 16,190 16,866
6,276 6,555 6,920 7,322 7,749 8,203 8,688 9,274
11,747 12,150 12,440 12,813 13,186 13,550 13,907 14,187
2,099 2,120 2,141 2,163 2,184 2,206 2,228 2,251
89,870 93,651 97,561 101,734 106,095 110,527 114,988 119,512
15,408 15,944 16,494 16,872 17,262 17,665 18,081 18,511
8,989 9,303 9,629 9,966 10,315 10,676 11,049 11,436
6,302 6,177 6,043 6,255 6,474 6,733 7,069 7,423
793 809 828 848 869 891 914 942
13,640 13,981 14,330 14,689 15,056 14,190 13,641 13,982
158 158 159 160 161 161 162 163
11,509 11,739 11,974 12,213 12,458 12,707 12,961 13,220
1,345 1,372 1,399 1,427 1,456 1,485 1,515 1,545
58,144 59,483 60,857 62,430 64,049 64,507 65,393 67,222
19,416 20,017 20,637 21,275 21,935 22,614 23,317 24,040
167,430 173,152 179,054 185,439 192,079 197,648 203,698 210,774
63,144 64,352 65,585 66,842 68,124 69,432 70,767 72,127
41,748 45,022 48,470 52,119 55,961 60,035 64,341 68,898
104,892 109,374 114,055 118,961 124,086 129,467 135,108 141,026
11,664 11,929 12,213 12,492 12,779 13,075 13,376 13,684
3,614 3,722 3,834 3,949 4,067 4,189 4,315 4,444
4,716 4,829 4,945 5,065 5,189 5,316 5,447 5,582
7,794 8,028 8,269 8,517 8,773 9,036 9,307 9,586
1,281 1,319 1,359 1,400 1,442 1,485 1,529 1,575
574 591 609 627 646 665 685 705
16,265 16,590 16,922 17,260 17,606 17,958 18,317 18,683
45,908 47,009 48,151 49,310 50,501 51,724 52,976 54,260
329 329 329 329 329 329 329 329
14,263 14,710 15,186 16,693 16,233 16,809 17,422 18,075
165,391 171,422 177,720 185,293 191,148 198,329 205,834 213,690
2,039 1,730 1,334 146 931 (680) (2,136) (2,916)
Cumula ve Deficit
FY14‐23 586
22
BASE MODEL
GENERAL FUND LONG RANGE
BASE MODEL PERECENT
Adopted Projected
2013 2013 2014 2015
Revenues
Sales Taxes 1.86% 3.63% 1.21% 2.84%
Property Taxes 3.07% 2.22% 4.26% 5.10%
Transient Occupancy Tax ‐0.75% 8.85% 8.01% 5.99%
Documentary Transfer Tax 5.32% 33.91% ‐16.18% 5.32%
U lity User Tax ‐0.95% 0.88% 1.74% 1.94%
Other Taxes & Fines 1.22% ‐0.01% 0.00% 1.00%
Subtotal: Taxes 1.75% 5.29% 1.71% 4.07%
Charges for Services 0.61% 0.00% ‐8.13% ‐10.01%
Stanford Fire and Dispatch Services ‐9.48% 0.00% 2.07% 3.50%
Permits & Licenses ‐8.48% 0.00% ‐0.41% ‐2.36%
Return on Investment ‐5.29% ‐19.33% ‐0.57% 1.31%
Rental Income ‐11.57% 0.00% 2.71% 2.50%
From Other Agencies 94.45% 0.00% 0.00% 0.25%
Charges to Other Funds ‐6.56% ‐0.01% 1.73% 2.00%
Other Revenues ‐52.15% 0.03% 58.97% ‐30.14%
Total Non‐Tax Revenues ‐8.28% ‐0.33% 0.20% ‐2.31%
Opera ng Transfers‐In ‐16.26% 0.00% ‐3.82% 3.09%
Total Source of Funds ‐4.64% 2.56% 0.50% 1.68%
Expenditures
Salaries ‐4.60% 3.02% 3.02% 2.04%
Benefits 0.86% ‐4.44% 6.00% 6.54%
Subtotal: Salaries and Benefits ‐2.53% 0.09% 4.14% 3.76%
Contract Services 3.22% ‐0.32% 11.83% ‐15.25%
Supplies & Materials 3.52% ‐0.03% 1.38% 7.51%
General Expense 15.23% 13.65% ‐2.03% 2.94%
Cubberley Lease 3.03% 0.00% 3.00% 3.00%
Rents & Leases 17.95% 0.02% 1.94% 3.00%
Facili es & Equipment 62.50% 43.97% ‐30.15% 5.37%
Allocated Charges ‐5.91% 0.01% ‐6.37% 0.58%
Total Expenditures Before Transfers 1.16% 1.70% 0.34%
Opera ng Transfers Out ‐54.04% ‐26.71% ‐45.71% ‐48.54%
Transfer to Infrastructure ‐29.32% 0.00% 2.18% 2.81%
Total Use of Funds ‐5.74% 0.26% 2.49% 1.71%
Net Surplus/(Gap) ‐82.81% ‐902.08% ‐96.94% ‐55.16%
23
BASE MODEL
FINANCIAL FORECAST
TAGE CHANGES
2016 2017 2018 2019 2020 2021 2022 2023
3.12% 3.35% 3.45% 3.46% 3.60% 3.75% 3.50% 3.40%
5.12% 5.16% 5.17% 5.20% 5.15% 4.79% 4.61% 4.43%
4.77% 4.64% 4.52% 4.39% 4.30% 4.22% 4.19% 4.18%
4.57% 4.44% 5.57% 5.82% 5.84% 5.86% 5.92% 6.74%
4.63% 3.43% 2.39% 3.00% 2.91% 2.76% 2.63% 2.01%
1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
4.30% 4.21% 4.17% 4.28% 4.29% 4.18% 4.04% 3.93%
20.55% 3.47% 3.45% 2.29% 2.31% 2.33% 2.36% 2.38%
3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
‐2.01% ‐1.99% ‐2.16% 3.50% 3.50% 4.00% 5.00% 5.00%
1.76% 2.01% 2.38% 2.41% 2.46% 2.51% 2.66% 3.01%
2.50% 2.50% 2.50% 2.50% 2.50% ‐5.75% ‐3.87% 2.50%
0.30% 0.35% 0.40% 0.45% 0.50% 0.55% 0.60% 0.65%
2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
6.21% 2.30% 2.31% 2.59% 2.59% 0.71% 1.37% 2.80%
3.09% 3.10% 3.09% 3.10% 3.10% 3.10% 3.10% 3.10%
4.81% 3.42% 3.41% 3.57% 3.58% 2.90% 3.06% 3.47%
1.91% 1.91% 1.92% 1.92% 1.92% 1.92% 1.92% 1.92%
4.35% 7.84% 7.66% 7.53% 7.37% 7.28% 7.17% 7.08%
2.87% 4.27% 4.28% 4.30% 4.31% 4.34% 4.36% 4.38%
15.04% 2.27% 2.38% 2.28% 2.30% 2.31% 2.30% 2.31%
3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
2.38% 2.40% 2.41% 2.42% 2.44% 2.45% 2.46% 2.48%
3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
4.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
‐2.40% 5.39% 2.40% 2.43% 2.41% 2.41% 2.42% 2.42%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
3.03% 3.13% 3.24% 9.92% ‐2.76% 3.55% 3.65% 3.75%
3.57% 3.65% 3.67% 4.26% 3.16% 3.76% 3.78% 3.82%
4668.18% ‐15.15% ‐22.91% ‐89.08% 539.25% ‐173.07% 214.03% 36.51%
24
RESERVES
RESERVES
FY 2012 ended with a Budget Stabiliza on Reserve (BSR) totaling $28.1 million. Although the Base Model
forecasts surpluses in FYs 2014 to 2020, in FY 2019, and then again in FY 2021, 2022 and 2023, the reserve
balance drops below the 18.5 percent minimum reserve level. The graph below illustrates the projected BSR
levels as compared to the minimum reserve levels.
25
ALTERNATE SCENARIO
ALTERNATE SCENARIO
In this Alternate Scenario, it is assumed that PERS will make the following two changes in their methodology,
both of which will result in higher pension rates: (a) switch from 15‐year smoothing to a 5‐year smoothing
basis, and (b) factor in improved mortality rates (longer lives) among re rees.
In the shorter smoothing scenario, PERS’s investment losses of FY 2008 and FY 2009 would be reflected in
higher pension costs spread over 5 years rather than 15, causing addi onal increases of 1.4% for Miscellane‐
ous and 1.9% in Safety rates for each of five years, FY 2015‐2019. The mortality changes would cause a 3.0 %
bump‐up in rates for Miscellaneous and a 4.0% bump‐up for Safety in FY 2015.
These changed assump ons result in a $50.6 million increase in the Forecast’s ten‐year cumula ve
shor all. The chart below summarizes this scenario, with resul ng pension rates shown at the bo om.
Alternate Scenario 1
26
CHALLENGES: PENSION REFORM
The California Public Employees’ Pension Reform Act of 2013 (PEPRA) was enacted fall 2012 and has generat‐
ed increased a en on and ques ons from CalPERS re rement system members and employers. The new law
includes a suite of changes to current re rement formulas, new members, employer/member contribu ons,
and working a er re rement. PEPRA also establishes a cap on the amount of compensa on that can be used
to calculate the re rement benefit for all new CalPERS members. At this me, the dollar impact to the City of
this new legisla on is unknown. Staff will provide Council with updates as more informa on and data
emerge.
CONCLUSIONS
The LRFF shows be er “bo om line” results than in last year’s presenta on. This is due to employee benefit
concessions, budget reduc ons, and higher revenues. The City must con nue, however, to find addi onal
structural savings as benefit costs are increasing at a faster rate than revenues.
Since FY 2010, the City has realized $16.7 million in savings from structural changes, the fruit of staff
“thinking different.” The Cost of Service study is nearly complete and will allow the Council to thoroughly re‐
view the price of doing business and make decisions on what services can be provided and/or how they can
be provided.
In addi on to employee benefit obliga ons, the City’s infrastructure needs – capital opera on and mainte‐
nance, project “catch‐up”, and other projects that were iden fied in the IBRC report – are commitments that
should be addressed and planned for via this forecast.
To maintain prudent fiscal stewardship, the City must con nue to explore its benefit structure, alterna ve
forms of service delivery, and more efficient opera ons. Although successful efforts have been made, staff
recognizes that it must con nue to review alterna ves in service delivery and the cost of such services to ad‐
dress key issues outlined in this report to realize a sustainable, long‐term, financial plan.
CHALLENGES & CONCLUSIONS
27
28
APPENDIX
CONCESSIONS TO DATE
Since 2009, Council and staff completed the nego a on of agreements with labor groups to eliminate more
than $8.5 million in salary and benefit expense. The City is working with the Police Management Associa on
(PMA) to nego ate cost savings.
The following is a list of current labor contracts and agreements:
SEIU (current contract)
Es mated Savings: $0.55 million per year, or 0.76 percent of total compensa on
Created a second er to our re rement structure (2 percent at 60) for new employees hired or a er July
17, 2010.
Shi ed full cost of employee PERS contribu on to employee.
Implemented the 90/10 medical cost sharing plan.
Decrease alterna ve medical cash‐out benefit to a flat $284 per month, effec ve October 1, 2012.
1.65 percent cost of living increase effec ve first day of pay period including July 1, 2012
Reduced floa ng holidays by three days. An addi onal floa ng holiday will be eliminated a er June 30,
2013.
Management and Professional (current agreement)
Es mated Savings: $0.51 million per year, or 1.5 percent of total compensa on
Eliminated the Variable Management Compensa on plan as of FY 2009.
Shi ed full cost of employee PERS contribu on to employee.
Implemented the 90/10 medical cost sharing plan.
Decrease alterna ve medical cash‐out benefit to a flat $284 per month, effec ve October 1, 2012.
Three percent salary increase to par ally offset pension contribu on costs
Changes to the group’s professional development plan, including elimina ng use of professional develop‐
ment funds to purchase electronic technology and gym memberships and reducing the annual amount
per employee from $1,500 to $500. Gym members can be reimbursed through management excess bene‐
fit.
Eliminated car allowances for newly hired Department Directors.
Interna onal Associa on of Fire Fighters (current contract)
Es mated Savings: $1.6 million per year, or 6.8 percent of total compensa on
Created a second er to our re rement structure (3 percent at 55) for new employees.
Shi ed full cost of employee PERS contribu on to employee.
Eliminated minimum staffing requirements.
29
APPENDIX
Implemented the 90/10 medical cost sharing plan.
Cost‐of‐living freeze for FYs 2012‐2014.
Eliminated tui on reimbursement program.
Fire Chiefs’ Associa on (current agreement)
Es mated Savings: $91 thousand per year, or 9.8 percent of total compensa on
Created a second er to our re rement structure (3 percent at 55) for new employees.
Shi ed full cost of employee PERS contribu on to employee. In March 2013, the city paid employee
re rement contribu on “resets” to 5.1 percent.
Eliminated the Variable Management Compensa on plan.
1.33 percent salary reduc on.
Eliminated three holidays.
Implemented the 90/10 medical cost sharing plan.
Palo Alto Police Officers’ Associa on (current contract):
Es mated Savings: $1.4 million per year, or 7.7 percent of total compensa on
Created a second er to our re rement structure (3 percent at 55) for new employees.
Shi ed full cost of employee PERS contribu on to employee.
Eliminated tui on and training benefit.
1.33 percent salary reduc on.
Eliminated three holidays.
Implemented the 90/10 medical cost sharing plan.
Prior to 2009, between 2004 and 2006, the City implemented for all bargaining units:
20‐year ves ng period to qualify for lifelong City‐paid health coverage
Highest cost health care plan op on eliminated, saving almost $10,000 per year for each employee
moved away from this op on.
The aforemen oned concessions and staffing reduc ons have been tough decisions that were not taken
lightly. Like the City, our employees face rising household costs and diminished asset values. Further‐
more, the impact of the posi on elimina ons is that our employees are stretched thin, and our ability to
take on new projects is reduced.
30
ENDNOTES
1. Josh Mitchell and Sara Murray: “Unemployment Rate Falls to 7.8%,” Wall Street Journal, Oc‐
tober 15, 2012
2. MuniServices Economic Overview 3Q2012 News, page 4
3. Beaconomics, vol 5 number 2 October 2012, page 6
4. Beaconomics, Volume 5, Number 2, October 2012, page 18‐19
5. Department Of Finance: Finance Bulle n, Sept. 2012
6. Carolyn Said, “Bay Area home prices show strong rebound,” San Francisco Chronicle, Octo‐
ber 23, 2012
7. Amir Efra , “Home Prices Near Highs in Some Ci es,” The Wall Street Journal, November 7,
2012
8. Beaconomics, Volume 5, Number 2, October 2012, page 13 and Kathleen Pender, “State not
in the clear as jobless rate sinks,” San Francisco Chronicle, October 20, 2012
9. Beaconomics, Volume 5, Number 2, October 2012, page 14
10. UCLA Anderson Forecast, “The US and California Forecasts,” presenta on to Bay Area Coun‐
cil Economic Ins tute November 8, 2012
11. Beaconomics, October 2012
12. Discussion at Bay Area Council Economic Ins tute mee ng of November 8, 2012
13. MuniServices Economic Overview 3Q2012 News, page 14
14. Op. Cit.
15. February 2012 Caltrain Annual Counts
ENDNOTES
31
Visit our website at: www.CityofPaloAlto.org
A D A S‐
Contributors Chris ne Paras
Amber Cameron
Sco Jensen
Tarun Narayan
Sherry Nikzat
Lalo Perez
Joe Saccio
Dale Wong
In compliance with
Americans with Disabili es Act (ADA) of 1990,
this document may be provided
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For informa on contact:
ADA Coordinator
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285 Hamilton Avenue
(650) 329‐2550
Prin ng City of Palo Alto
Nancy Nagel
Tony Sandhu
32
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.
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