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HomeMy WebLinkAbout2019-12-03 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Tuesday, December 3, 2019 Special Meeting Community Meeting Room 6:00 PM Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in the Council Chambers on the Thursday 12 days preceding the meeting. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Community Meeting Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Public comment may be addressed to the full Finance Committee via email at City.Council@cityofpaloalto.org. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1. First Quarter Fiscal Year (FY) 2020 Financial Report 2. Review and Recommend That Council Accept the FY 2021 - FY 2030 Long Range Financial Forecast and FY 2021 Budget Development Guidelines 3. Review and Acceptance of City Services Guide 4. FY 2020 Budget Referrals Update Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. City of Palo Alto (ID # 10793) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/3/2019 City of Palo Alto Page 1 Summary Title: First Quarter Financial Report FY2020 Title: First Quarter FY 2020 Financial Report From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee review and approve the financial report for the first quarter of Fiscal Year 2020. Background The purpose of this report is to provide information on the financial condition of the City’s General Fund and Enterprise Funds as of the end of the first (1st) quarter of fiscal year (FY) 2020. Discussion This report summarizes the actual financial activity of the General and Enterprise Funds for the three-month period July 1, 2019 through September 30, 2019 and compares those amounts to the FY 2020 Adjusted Budget as well as to the report for the same period in FY 2019. Attachment A provides a breakdown of revenues by source and expenses by function, with separate columns for the Adopted Budget and the Adjusted Budget. The Adjusted Budget column includes prior year commitments that were carried forward into this fiscal year and Council approved budget amendments to the FY 2020 Adopted Budget through September 30. Encumbrances and actual expenses for the three-month period are also reported. General Fund revenues (excluding operating transfers and other sources) for the 1st quarter FY 2020 total $25.7 million, which is 7 percent higher than the same period in FY 2019 and comprises 12 percent of the current year Adjusted Budget. Cash receipts declined in Property tax, Charges for Services and permits & licenses over the prior year’s 1st quarter. These lower levels are not indicative of the annual expected receipts in FY 2020, they merely reflect a timing difference. City of Palo Alto Page 2 General Fund expenses for 1st quarter are 3 percent higher than prior year, however, they are tracking at 22 percent of Adjusted Budget which is 1 percent lower than the prior year trend. Following is a detailed discussion of the most significant revenue and expense items. Revenue Highlights for 1st Quarter FY 2020 Following is a table which highlights the City’s major revenue sources for the 1st Quarter, compared to 1st Quarter of the prior year. Each quarter’s revenue is expressed as a percentage of the Adjusted Budget for each year. % change FY 2020 %FY 2019 % Property Tax -17%48,634$ 0%$45,332 0% Sales Tax 35%34,346 7%31,247 6% Charges for Services -5%30,267 15%28,419 17% Transient Occupancy Tax 10%29,309 11%25,049 12% Utility User Tax 6%17,581 20%16,092 21% Permits and Licenses -6%8,667 20%8,545 22% Documentary Transfer Tax 40%8,369 23%7,434 19% All Other Revenue Sources 7%33,997 24%32,535 24% Total Revenue 7%$211,170 12%$194,653 12% $25,701 1,761 1,882 1,926 1,376 8,170 7,654 4,595 4,827 3,199 2,920 3,528 3,336 89$ $107 2,433 1,800 1st Quarter Actuals Adjusted Budget FY 2020 FY 2019 City of Palo Alto General Fund Revenue FY 2020 1st Quarter (000's) Property tax revenue – in the 1st quarter of the fiscal year is typically only a nominal amount as property tax receipts are paid by the County beginning in the fall and then again beginning in late winter/early spring. FY 2019 actual property tax revenue was $47.3 million which included unusual receipts of $2.7 million for excess Educational Revenue Augmentation Fund (ERAF)1 distributions from the County of Santa Clara. The FY 2020 budgeted amount is $48.6 million, 2.75 percent higher than the prior year’s actual revenue. Since the adoption of the FY 2020 budget, the County of Santa Clara has revised the property tax forecast upwards by $1.9 million which is expected to be reflected in the mid-year 1 ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K-14 school agencies. When the state shifts more local property tax than required to support schools these funds are returned and known as excess ERAF. City of Palo Alto Page 3 budget adjustment. The $1.9 million increase is attributable to higher than expected excess ERAF estimated at $3.8 million, which is above prior year levels of $2.7 million. Sales tax revenue – for the 1st quarter has increased by $633,000 or 35 percent, from the same period last year. Due to the timing delay in sales tax collection by the State and remittance to the City, this only represents one month’s sales tax activity. In addition, in fiscal year 2018 the California Department of Tax and Fee Administration (CDTFA) was established and introduced new technology and collection process which had issues resulting to delays of distribution in sales tax. This resulted in fiscal year 2018 being economically lower by $0.7 million and Fiscal Year 2019 being higher by the same amount. CDTFA also made allocation timing changes so the 35 percent year over year increase for one-month receipts isn’t indicative of economic performance for the remainder of FY 2020. However, base receipts remain healthy and mid- year upward budget adjustment is expected. As in prior years, there is continued erosion of brick and mortar receipts caused by steady growth in on-line retail sales. However, increased receipts from the county pool, which include a growing number of on-line retailers collecting sales and use tax, has been offsetting these losses. Transient occupancy tax (TOT) – revenue of $3.2 million represents about one- and one-half month of collections which includes the 1.5 percent TOT rate increase for a total TOT rate of 15.5 percent that went into effect in April 1, 2019. Starting with FY 2019, 4th quarter, the base TOT decreased by 5.4 percent with average occupancy declining by 1.8 percent but average room rates increasing by 2.6 percent. This trend continued in the first two months of FY 2020 with the base TOT decline of 4.6 percent. Based on this trend, which is consistent with most regional trends, a downward mid-year budget adjustment is expected. For the first two months (July and August) of FY 2020, daily average room rates increased by 0.9 percent from $272.32 per day to 274.80 per day while the occupancy rate declined by 4.8 percent from 83.5 percent to 79.5 percent. As noted in the table below, this is in line with a similar trend reported in August for most northern California regions with a few exceptions. The below table contains average room rates and occupancy percentage for northern California regions in August 2019 as well as the City of Palo Alto’s August data. City of Palo Alto Page 4 Month of August Avg. Daily Room Rate Occupancy Percentage 2019 ($) 2018 ($) Chg. 2019 2018 Chg. San Francisco 294.01 286.50 2.6% 91.8% 90.2% 1.8% San Francisco Airport 212.00 208.51 1.7% 89.5% 91.8% -2.5% San Jose/Peninsula 226.56 225.70 0.4% 83.0% 85.4% -2.9% Oakland/East Bay 177.85 179.85 -1.1% 83.4% 85.4% -2.3% Monterey/Carmel 427.77 393.57 8.7% 86.0% 89.5% -3.9% Central Valley 109.12 107.78 1.2% 77.9% 77.8% 0.1% Sacramento 135.61 133.01 2.0% 79.8% 82.7% -3.4% Marin County 203.62 203.63 0.0% 87.5% 86.8% 0.8% Napa County 304.53 295.45 3.1% 82.4% 79.7% 3.4% Sonoma County 221.58 216.57 2.3% 83.4% 84.8% -1.7% Other Northern California 135.46 129.03 5.0% 82.8% 83.9% -1.3% Overall Average 218.42 213.78 2.2% 84.7% 85.8% -1.2% City of Palo Alto (August only) 271.26 278.19 2.6% 83.2% 80.5% -2.7% Source: CBRE Hotels August 2019 report, Trends in the Hotel Industry except for Palo Alto Documentary transfer tax – cash receipts total $1.9 million, or 23 percent of the FY 2020 budgeted amount, and are $550,000 higher than prior year receipts for the same period due to one large commercial sale. This revenue source is volatile since it is highly dependent on sales volume and the mix of commercial and residential sales. For example, in FY 2018, receipts were boosted due to large commercial sales resulting in total annual receipts of $9.2 million while FY 2019 had fewer and smaller commercial sales resulting in annual receipts of only $6.9 million Permits and licenses revenue – is down primarily due to a decrease in new construction permit revenue. City of Palo Alto Page 5 Expense Highlights for 1st Quarter FY 2020 Following is a table which highlights the City’s expenses by function for the 1st quarter, compared to 1st quarter of the prior year. Each quarter’s expense is expressed as a percentage of the Adjusted Budget for each year. FY 2020 FY 2019 % change FY 2020 %FY 2019 % inc (dec) Police 10,588$ 10,201$ 4%44,822$ 24%42,843$ 24% Fire 8,414 7,636 10%35,261 24%32,047 24% Community Services 7,598 7,144 6%32,481 23%29,699 24% Public Works 3,887 3,978 -2%20,302 19%19,004 21% Planning and Development Services 3,977 4,421 -10%23,258 17%23,768 19% Library 2,562 2,295 12%10,532 24%9,836 23% Administrative Services 1,925 1,887 2%8,755 22%8,038 23% All Other Departments 5,109 5,248 -3%29,274 17%20,655 25% Total Expenses 44,060$ 42,810$ 3%204,685$ 22%185,890$ 23% 1st Quarter Actuals Adjusted Budget FY 2020 1st Quarter City of Palo Alto General Fund Expenses (000's) Total expenses for the 1st quarter of the fiscal year are up 3 percent from the same quarter last year, but in total they are slightly lower by 1 percent of full-year budgeted amounts from the same quarter last year. Overall, expenses are expected to run higher than FY 2019 with the FY 2020 Adjusted budget of $204.7 million being approximately 10% higher overall. In FY 2020, the Office of Transportation was established which previously was a division of the Planning and Community Environment Department and the Development Services Department was combined with the Planning and Community Environment Department to form the Planning and Development Services Department. This reorganization is reflected in the FY 2020 figures by reporting the Office of Transportation under “all other departments” and combining the two prior departments of Development Services and Planning. This is causing much of the year over year variances in that department. Police and Fire comprises 43 percent of the total General Fund expenditures for the 1st quarter, which is comparable to the prior year. Following is a table which highlights Police and Fire salaries and overtime expenditures for the 1st quarter. City of Palo Alto Page 6 FY 2020 FY 2019 % change FY 2020 %FY 2019 % Inc (Dec) Police - Salaries 4,426$ 4,378$ 1%19,514$ 23%19,272$ 23% Police - Overtime 717 674 6%1,842 39%1,777 38% Total Police 5,143 5,052 2%21,356 24%21,049 24% Fire - Salaries 3,378 2,966 14%14,131 24%14,356 21% Fire - Overtime 572 918 -38%1,673 34%1,912 48% Total Fire 3,950 3,884 2%15,804 25%16,268 24% Total Public Safety Salaries & Overtime 9,093$ 8,936$ 2%37,160$ 24%37,317$ 24% 1st Quarter YTD Actuals Adjusted Budget Police and Fire Salaries and Overtime Expense FY 2020 1st Quarter YTD (000's) Police overtime is 6 percent higher from prior year due to a major incident that occurred in the first quarter, the President of the United States (POTUS) visit and staff vacancies. On a combined basis, salaries and overtime are at 24% of budget through the 1st quarter of the fiscal year which is consistent with prior year spend. The Department’s overtime analysis is included in Attachment B. Fire overtime is 38 percent lower than FY 2019 primarily due to lesser vacancies this year than the same period in prior year and the City did not send any crews on strike teams during this reported period. Fire is expected to generate overtime savings during the year due to a new deployment model expected to be deployed during the second half of the fiscal year. On a combined basis, salaries and overtime are 25% of the budget through the 1st quarter of the fiscal year. The Department’s overtime analysis is included in Attachment B. The Police and Fire salaries increases are due to new labor contracts and an increased number of filled positions when compared to mainly this period in FY 2019. City of Palo Alto Page 7 General Fund Budget Stabilization Reserve (BSR) Balance As reported to the Finance Committee on November 19, the General Fund ended with a Budget Stabilization Reserve of $54.8 million. The chart below outlines the recommended uses. Once all these adjustments are taken into consideration, the remaining BSR would be at $44.4 million when approved by the City Council, above the City Council target of 18.5 percent of budgeted expenses. Year-End Budget Stabilization Reserve (BSR) Summary (000’s) General Fund BSR Balance, June 30 2019 54,811 Uses of the FY 2019 Surplus FY 2020 Approved Adjustments to the BSR Balance FY 2020 Adopted Budget 1,292 FY 2020 City Manager Reports Budget Amendments (450) Recommended Budget Amendments Reserve for proceeds from the sale of 335 Webster (2,900) Additional funding for General Liability & Workers Compensation Reserves (1,400) Transfer to the General Capital Improvement Fund (471) (3,500) Transfer to the General Benefits Fund: 115 Pension Trust Fund Contribution (3,500) Current Projected FY 2020 BSR Level (June 30, 2019) $44,352 Enterprise Funds Following is a summary of change in net position for each of the Enterprise Funds for the three months ended September 30, 2019, including a comparison of results from the same period last year. City of Palo Alto Enterprise Funds Change in Net Position FY 2020 1st Quarter 1st Qtr 1st Qtr Increase FY 2020 FY 2019 (Decrease)% Change Water 8,630$ 7,918$ 712$ 9% Electric 6,941 8,742 (1,801)-21% Fiber Optic 415 370 45 12% Gas (261)248 (509)-205% Wastewater collection 687 687 0 0% Wastewater treatment 1,302 1,415 (113)-8% Refuse 3,440 3,814 (374)-10% Storm Drainage 650 697 (47)-7% Airport 522 213 309 145% Total Change in Net Position 22,326$ 24,104$ (1,778)$ -7% City of Palo Alto Page 8 Water Fund increased $0.7 million from prior year due to a combination of an increase in connection and capacity fee revenue and a decrease in operating transfers. In FY 2019, there was a transfer of $0.3 million for phase 1 of the Smart Grid project. Electric Fund decreased $1.8 million from prior year due to an increase in commodity purchases and transmission costs. In addition, the Electric Fund sold large volumes of surplus energy on the spot market in FY 2019 due to above average hydroelectric generation. Gas Fund decreased $0.5 million mainly due to lower City sales as a result of the retirement of the incinerators by the Regional Water Quality Control Plant (RWQCP). The RWQCP has moved to Sludge hauling instead. Refuse Fund decreased $0.4 million from prior year due to an increase in GreenWaste contract costs. Airport Fund increased $0.3 million from first quarter of prior year as a result of the receipt of the federal grant reimbursement for the Airport Apron Reconstruction Project in the first quarter of this year. Stakeholder Engagement This report has been prepared by the Accounting Division and reviewed by partner departments, the Treasury team and the Office of Management and Budget for certain sections. Resource Impact This is an Informational Report, so no actions or adjustments are needed at this time. Environmental Review This is not a project for purposes of the California Environmental Quality Act (CEQA). Attachments: • Attachment A: General Fund First Quarter Financial Report FY 2020 • Attachment B. Public Safety Overtime Analysis for Q1 FY 2018- 2020Q1 11/26/201910:21 AM ATTACHMENT A CITY OF PALO ALTO GENERAL FUND FIRST QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2020 (in thousands) BUDGET ACTUALS (as of 09/30/2019) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 34,346 34,346 - - 2,433 7% Property Tax 48,634 48,634 - - 89 0% Transient Occupancy Tax 29,309 29,309 - - 3,199 11% Documentary Transfer Tax 8,369 8,369 - - 1,926 23% Utility Users Tax 17,581 17,581 - - 3,528 20% Motor Vehicle Tax, Penalties & Fines 2,032 2,032 - - 349 17% Charges for Services 30,127 30,267 - - 4,595 15% Permits & Licenses 8,667 8,667 - - 1,761 20% Return on Investment 1,388 1,388 - - 540 39% Rental Income 16,326 16,326 - - 4,155 25% From Other Agencies 2,756 2,756 - - 317 12% Charges To Other Funds 10,908 10,908 - - 2,754 25% Other Revenues 587 587 - - 55 9% Total Revenues 211,030 211,170 - - 25,701 12% Operating Transfers-In 20,999 20,999 - - 5,250 25% Encumbrances and Reappropriation 7,791 - - - - Total Sources of Funds 232,029 239,960 - - 30,951 13% Expenditures & Other Uses City Attorney 3,387 3,627 5 250 800 29% City Auditor 1,235 1,295 10 45 139 15% City Clerk 1,346 1,441 76 262 23% City Council 498 540 42 64 20% City Manager 4,546 5,219 160 472 952 30% Administrative Services 8,519 8,755 113 189 1,925 25% Community Services 30,913 32,481 614 5,897 7,598 43% Fire 34,864 35,261 126 727 8,414 26% Human Resources 3,902 4,058 - 126 886 25% Library 10,314 10,532 35 482 2,562 29% Office of Emergency Services 1,728 1,845 146 219 20% Office of Transporation 2,312 2,312 218 9% Planning and Development Services 20,356 23,258 424 4,354 3,977 38% Police 44,666 44,822 78 886 10,588 26% Public Works 19,142 20,302 411 1,981 3,887 31% Non-Departmental 9,024 8,937 30 1,569 18% Total Expenditures 196,752 204,685 1,976 15,703 44,060 30% Operating Transfers-Out 5,023 5,023 - - 1,251 25% Transfer to Infrastructure 28,962 28,962 - - 7,240 25% Total Use of Funds 230,737 238,670 1,976 15,703 52,551 29% Attachment B Q1 2018 2019 2020 POLICE DEPARTMENT Overtime Expense Adopted Budget $1,700,000 $1,776,500 $1,842,231 Modified Budget 1,700,000 1,812,931 1,842,231 Net Overtime Cost - see below 347,677 185,811 194,800 Variance to Budget 1,352,323 1,627,120 1,647,431 Overtime Net Cost Actual Expense $2,286,527 $2,604,366 $717,808 Less Reimbursements California OES/FEMA (Strike Teams)- 36,431 - Stanford Communications 75,275 91,001 31,253 Utilities Communications Reimbursement 38,227 46,158 15,400 Local Agencies (A)11,431 12,172 2,562 Police Service Fees 73,600 125,025 25,779 Total Reimbursements 198,533 310,787 74,995 Less Department Vacancies 1,740,318 2,107,768 448,014 Net Overtime Cost $347,677 $185,811 $194,800 Department Vacancies (number of days)5,777 7,538 1,547 Workers' Compensation Cases 8 24 2 Department Disabilities (number of days)219 217 72 FIRE DEPARTMENT Overtime Expense Adopted Budget $1,396,436 $1,911,761 $1,672,872 Modified Budget (B)1,571,436 2,093,761 1,672,872 Net Overtime Cost - see below 2,675,517 2,403,254 572,342 Variance to Budget (1,104,081) ($309,493)$1,100,530 Overtime Net Cost Actual Expense $3,839,426 $3,047,510 $572,342 Less Reimbursements California OES/FEMA (Strike Teams)489,062 182,000 - Total Reimbursements 489,062 182,000 - Less Department Vacancies 674,847 462,256 - Net Overtime Cost $2,675,517 $2,403,254 $572,342 Department Vacancies (number of days)5,293 1,229 0 Workers' Compensation Cases 4 26 7 Department Disabilities (number of days)732 343 60 NOTES: (A)Includes Animal Control Services contract with Los Altos and Los Altos Hills. (B)FY 2020 does not include adjustments for Strike Teams as of Q1. These amounts will be reported through the year as reimbursements are confirmed. Public Safety Departments Overtime Analysis for Fiscal Years 2018 through 2020 11/26/2019 City of Palo Alto (ID # 10727) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/3/2019 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2021 - FY 2030 Long Range Financial Forecast Title: Review and recommend that Council Accept FY 2021 - FY 2030 Long Range Financial Forecast and FY 2021 Budget Development Guidelines From: City Manager Lead Department: Administrative Services RECOMMENDATION Staff recommends that the Finance Committee review and recommend that the City Council accept the Fiscal Year 2021 to 2030 General Fund Long Range Financial Forecast (Base Case), and the annual Budget Development Guiding Principles (Attachment C). EXECUTIVE SUMMARY The Fiscal Year (FY) 2021 to 2030 General Fund Long Range Financial Forecast (LRFF), marks the beginning of the FY 2021 annual budget process. It includes projected General Fund financials over the next ten years based on current City Council approved service levels as well as three alternative financial models. The current Base Case financial forecast projects a surplus in the General Fund of $1.1 million in FY 2021, followed by annual gaps where expenses outpace forecasted revenue growth ranging from a deficit of $2.4 million in FY 2023, that tapers to $1.1 million in FY 2025, before reaching significant surpluses in the final years of the forecast. The Base Case provides a preliminary forecast that can assist in gauging effects of major policy interventions against a likely “status quo” version of the future. It assumes that the world continues to change and unfold in line with current expectations. City staff will continue to review and refine these projections to establish the FY 2021 Base Budget and provide direction to Departments on the FY 2021 budget process. Based on this Forecast, it is anticipated that guidance to prioritize spending will again be necessary to ensure continued financial stability. More detailed guidelines to inform the development of the FY 2021 Budget are discussed at the end of this document (Attachment C). Looking forward, the City continues to face several pressures from the 2014 Council approved Infrastructure Plan (including a new public safety building) to the growing costs of pension City of Palo Alto Page 2 benefits and labor costs due to the current labor market and cost of living around Palo Alto. The policy direction from the City Council in November 2018 regarding proactively addressing the pension obligations, including the direction to assume a lower discount rate in calculating pension costs, is contained in the Base Case forecast model. If this direction were excluded from the model, the General Fund would maintain surpluses throughout the forecast, as seen in alternative scenario A. This scenario reflects the tough choices and the hard work of the City over the past few years to structurally balance the budget. The City will continue to face critical choices in order to balance future financial challenges and any unforeseen program needs or an economic downturn, plus any addition proactive funding contributions to pension liabilities. The review of this Long Range Financial Forecast and the planning that follows it will be critical since the City is facing many requests and has identified several key programs that the community would like to fund and complete. Included in this report and subsequent documents are the following: - Discussion of the current financial climate of the United States to the local economy of the City of Palo Alto - Base Case for the Long Range Financial Forecast including Revenue and Expense modeling assumptions beginning in FY 2021 o Current financial status of the General Fund as of the FY 2020 Adopted Budget, and a brief discussion of revised FY 2020 revenue estimates by category - Three Alternative Scenarios including a) CalPERS’ Pension Rates, b) an economic downturn (modeled beginning partway through FY 2021 of the forecast), and c) the impact of an additional 1% in salary increases for salary (only beginning once bargaining units past the term of current agreements) - FY 2021 Budget Development Guidelines to inform the Budget process (Attachment C) BACKGROUND Annually the Office of Management and Budget produces a ten-year General Fund Long Range Financial Forecast (LRFF). The LRFF reflects staff’s best estimates on the projected revenues and expenditures over the next ten years based on the information that is currently available. It is important to note that the LRFF is a planning document and is separate and distinct from the development of the City’s annual Operating and Capital Budgets. There are assumptions and parameters modeled in the LRFF, but these assumptions are revised and refined as more information becomes available through the budget development process. The LRFF contains a comprehensive review of the costs to provide current City Council approved service levels, including current contracts, updates to salaries and benefits based on the current population of employees, and the current labor contracts in effect. Important to note in this LRFF is the ongoing budget adjustments that were approved in the FY 2020 Adopted Budget. Many approved budget adjustments assumed either a phase in period or the identification of the ongoing reduction later; this LRFF assumes that those adjustments materialized as planned in the FY 2020 Adopted Budget. The LRFF also reviews the status of the current economy and various economically sensitive revenues such as Sales Tax, Documentary City of Palo Alto Page 3 Transfer Tax, Property Tax, and Transient Occupancy Tax to explain key trends in those areas. This Forecast allows staff and City Council to look at both the short-term and long-term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges. Since the great recession, the City has approved many strategies to mitigate rising costs, especially the rising increase in salaries and benefits. Strategies that have been used include: a second pension tier, employees sharing in health plan cost increases, and shifting from employer-paid member contributions to employee pick-up of a portion of the employer share for pensions. Since 2016, rounds of negotiations with bargaining units have included employees not only paying their full portion of CalPERS contributions but also beginning a cost-sharing program wherein employees contribute a certain percentage of the City’s required employer pension contribution. These strategies have helped to create the financial capacity to invest proactively in the City’s Pension Trust, supporting the City’s commitments to employees while ensuring fiscal sustainability. The City Council continues to invest in the community and approved significant improvements in June 2014 with the Infrastructure Plan (IP) in the original amount of $125.8 million. However, the nine projects identified in the plan are estimated to cost substantially more due to updated designs, rising construction costs, and minimum and prevailing wage requirements. In addition, a tenth project was approved by the Council to be added to the IP in the FY 2020 Adopted Budget. These changes have led to an updated cost of approximately $280.6 million for the IP projects. Capital projects are one example of known items that are not fully included in this Forecast. Both the capital cost to build and the operating and maintenance costs once projects are completed and the new facilities are actively used, are estimated with the most current information available. These estimates will be refined during the budget process as more information becomes available and the projects are closer to award and completion. Palo Alto serves a diverse community with a broad range of unique services that adds to the significant complexity of managing a balanced budget and healthy long-range financial outlook. The demands and conflicts emerging from our vibrant economy have heightened the intensity of the “Palo Alto Process”. New analyses and data generation demands require deep dives into complex problem-solving within an engaged public process across a wide range of issues. These forecast figures present staff with the challenge of prioritizing the growing needs of the City with the long-term fiscal sustainability of these needs. The Economy National, state, regional and local economic indicators are mixed. Unemployment remains low, job growth is slowing down, and the trade war is negatively showing up in the economic data. U.S. economy’s national gross domestic product (GDP) grew by an annualized 1.9 percent in the third (calendar) quarter of 2019, with the next 12-month GDP growth outlook projected to be less than 2 percent. The national consumer price index (CPI), as of September 2019, has grown City of Palo Alto Page 4 1.7 percent. Consumer consumption, government spending and exports contributed to the GDP increase, offset by declines in business investments and imports. Consumer spending is expected to slow as real income and job growth further slowdown in 2020. The following graphs depict the GDP and unemployment trends over the past few years. Table 1: U.S. Gross Domestic Product (GDP) Growth Rate The nation continues to operate at what is considered “full employment” levels of 3.6 percent unemployment as of October 2019, compared to 3.5 percent the previous month. As of the end of September, California maintained 4.0 percent unemployment but the unemployment rate for the Bay Area region was lower at 2.2 percent. These levels have not occurred in almost 20 years, last appearing at the height of the dot.com boom. Bay Area job growth has been led by the Peninsula and for the past several years, the local economy continues to outpace the unemployment rate at the state and national level. Compared to other regions in California, the Bay Area experienced the second strongest job growth at 2.1 percent in 2018 and is forecasted to have the strongest growth of 2.2 percent in 2019. City of Palo Alto Page 5 Table 2: U.S. Unemployment Rate It is anticipated that the national job market may slow and the make-up of the market may change as immigration decelerates and labor participation from the Baby-Boomer generation declines. According to the Center for Continuing Study of the California Economy (CCSCE), trends indicate stable job growth in the Bay Area. However, cities are faced with serious challenges that can impact job growth and population, specifically housing supply and affordability and transportation. Immigration and housing policies are important factors to supporting future job growth at the national, state, and local level. Economically sensitive revenue sources such as transient occupancy tax and documentary transfer tax are showing a decline. In spite of this decline, the strong foundations of the local economy – stable housing market, diverse and favorable mix of business segments lead by professional and technology industries, and academic and medical properties – somewhat dampen the financial impact of a severe economic downturn. DISCUSSION Included in this section are both the Base Case and alternative scenarios. As with all forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in this document. For example, General Fund revenues may exceed or fall below expectations based on changes in economic or non-economic conditions. Various cost elements can also vary from year to year. Base Case The following table displays the projected General Fund revenues and expenditures over the next decade and the total cumulative surplus. In addition to the cumulative surplus, the incremental surplus or shortfall (assuming each preceding surplus or shortfall is addressed completely with ongoing solutions in the year it appears) for each year of the forecast is included. Because it is the City’s goal to remain in balance on an ongoing basis, the incremental figure is useful in that it shows the additional surplus and/or shortfall attributed to a particular City of Palo Alto Page 6 fiscal year. To the extent that a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is important to understand that the remaining budget gap or surplus will carry over to the following year. The hard work of the City in FY 2019 and FY 2020 to proactively balance the budget is seen in the surplus reflected in FY 2021, and in the decreased deficit seen in the middle of the forecast when compared to prior years’ forecasts. Although a small surplus is contemplated in FY 2021, this is not sustained throughout the forecast. The Forecast anticipates gaps ranging from $2.4 million to $1.1 million in the middle of the forecast with surpluses beginning in FY 2026 at $2.3 million and increasing through the final years of the forecast. The need to proactively plan for a structurally balanced budget on an ongoing basis will inform the development of the FY 2021 Budget. TABLE 3: FY 2021 – 2030 Long Range Financial Forecast Base Case Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total Revenue $232,101 $241,527 $248,358 $255,808 $263,083 $271,318 $280,028 $289,307 $299,625 $310,488 $321,728 4.1%2.8%3.0%2.8%3.1%3.2%3.3%3.6%3.6%3.6% Total Expenditures $230,809 $240,447 $250,168 $258,194 $265,396 $272,465 $277,743 $283,366 $291,169 $298,276 $304,382 4.2%4.0%3.2%2.8%2.7%1.9%2.0%2.8%2.4%2.0% Net One-Time Surplus/(Gap)$1,292 $1,080 ($1,810)($2,386)($2,313)($1,147)$2,284 $5,941 $8,457 $12,212 $17,347 Cumulative Net Operating Margin (One-Time)$39,664 Net Operating Margin $1,080 ($2,890)($576)$73 $1,166 $3,431 $3,657 $2,516 $3,755 $5,135 Cumulative Net Operating Margin $17,347 Assumes that the annual shortfalls are solved with ongoing solutions and annual surpluses are spent for ongoing expenditures. TABLE 4: FY 2021 – 2030 Long Range Financial Forecast Net Operating Margin Base Case City of Palo Alto Page 7 Revenue Assumptions Overall, economic indicators are providing mixed signals. While the overall U.S. economy continues to be strong, the growth rate has been weaker. The Bay Area economy continues to outperform the state and the nation with strong foreign trade, but this is being negatively impacted by the continuing trade disputes. These disputes and the global economic malaise pose significant challenges to conducting a long-term revenue forecast. Other challenges include an expected slowdown in Bay Area job growth and potential impacts to the local housing market. Despite these challenges, healthy and robust tax revenues for the City are anticipated throughout the term of the forecast in a cautiously optimistic modeling. Tax revenues constitute slightly more than 60 percent of General Fund resources. In FY 2021, the forecast projects a $9.8 million, or 7.0 percent, tax revenue increase compared to the levels in the Adopted FY 2020 Budget. These tax increases are partially offset by reductions in other revenue categories. In total, revenues are anticipated to increase by $9.4 million, from $232.1 included in the FY 2020 Adopted Budget to $241.5 million in FY 2021. The changes by revenue category, as well as the current expected FY 2020 status of many of the categories, are discussed in greater detail below. TABLE 5: FY 2021 – 2030 General Fund Revenue Forecast Base Case Revenue & Other Sources Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CAGR 10 Years Sales Taxes $34,346 $37,595 $39,149 $40,670 $42,169 $43,682 $45,162 $46,701 $48,326 $50,075 $51,842 4.2% Property Taxes 48,634 52,863 55,034 57,061 59,303 62,393 66,193 70,344 74,952 80,102 85,668 5.8% Transient Occupancy Tax- General Purpose 17,534 16,896 17,344 17,838 18,356 18,906 19,494 20,089 20,716 21,422 22,251 2.4% Transient Occupancy Tax- Infrastructure 11,774 14,576 14,963 15,389 15,835 16,310 16,818 17,331 17,871 18,481 19,196 5.0% Documentary Transfer Tax 8,369 7,952 8,189 8,428 8,666 8,957 9,264 9,590 9,936 10,297 10,694 2.5% Utility Users Tax 17,581 18,199 18,962 19,804 20,354 20,859 21,465 22,156 22,815 23,222 23,626 3.0% Other Taxes and Fines 2,032 1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 -0.2% Subtotal: Taxes 140,270 150,071 155,630 161,180 166,673 173,097 180,386 188,200 196,605 205,589 215,266 4.4% Charges for Services 21,834 21,180 21,637 21,988 22,290 22,578 22,723 22,861 23,151 23,423 23,633 0.8% Stanford Fire & Dispatch Services 7,885 8,127 8,466 8,758 9,005 9,233 9,396 9,587 9,819 10,038 10,176 2.6% Permits and Licenses 9,076 8,990 8,997 9,003 9,008 9,012 9,015 9,017 9,021 9,026 9,029 -0.1% Return on Investments 1,388 1,850 1,822 1,844 1,869 1,896 1,950 2,006 2,065 2,127 2,196 4.7% Rental Income 16,399 15,590 15,088 15,480 15,884 16,300 16,728 17,169 17,623 18,091 18,573 1.3% From Other Agencies 980 520 520 520 520 520 520 520 520 520 520 -6.1% Charges to Other Funds 10,908 11,577 11,948 12,290 12,586 12,865 12,962 13,031 13,320 13,586 13,628 2.3% Other Revenue 2,362 2,259 2,260 2,260 2,261 2,262 2,263 2,264 2,264 2,265 2,266 -0.4% Total Non-Tax Revenue 70,832 70,093 70,737 72,143 73,423 74,666 75,555 76,454 77,784 79,076 80,022 1.2% Operating Transfers-In 20,999 21,363 21,990 22,485 22,988 23,555 24,087 24,652 25,236 25,823 26,440 2.3% BSR Contribution (One-Time) Golf Operating Loss Reserve Liquidation Total Source of Funds $232,101 $241,527 $248,358 $255,808 $263,083 $271,318 $280,028 $289,307 $299,625 $310,488 $321,728 3.3% This table is available in a larger format in Attachment A. Sales Tax The sales tax revenue forecast is driven by strong personal income and spending growth and a larger share of consumer spending online. New and innovative retail formats have helped revive physical retail presence. Stores that were once strictly online are now finding physical presence within communities. As the nation transitions from a shopping center country to online sales, a surge in online retail sales will partially displace tax revenue from traditional industry segments to state and county pools. Based on activity and receipts for the recent quarter close, it is estimated that sales tax revenue will exceed the FY 2020 Adopted Budget by $1.6 million, or 4.6 percent, and will generate a total of $35.9 million by year-end of FY 2020. In FY 2021, sales tax is expected increase to $37.4 million, or 4.2 percent, above the revised FY City of Palo Alto Page 8 2020 forecast. This revenue category is currently tracking above budgeted levels in FY 2020 and it is anticipated that appropriate adjustments will be brought forward for the FY 2020 Budget through the mid-year budget process. Segments contributing to this growth include restaurants, office equipment, and auto sales and leases. Department and furniture/appliance sales experienced declines. The FY 2021 – FY 2030 LRFF anticipates a compounded annual growth rate (CAGR) of 4.2 percent through the term of the forecast, with FY 2021’s significant growth over FY 2020’s Adopted Budget level tapering down through the out-years. Property Tax Property tax revenue is the General Fund’s largest revenue source and represents 21.9 percent of total revenues. Over the last three-year period, property tax revenue has grown 20.2 percent, from $39.4 million in FY 2017 to $47.3 million in FY 2019 due to higher assessed values. These higher assessed values reflect continued robust commercial and residential real estate markets. In addition, fiscal years 2017, 2018, and 2019 included receipts of $0.7 million, $1.4 million, and $2.7 million, respectively, for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K-14 school agencies. When the state shifts more local property tax than required to support schools these funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not considered a permanent local revenue source. The FY 2020 Adopted Budget assumes $48.6 million in total property tax and is expected to grow to $50.5 million, a $1.9 million increase, by year-end which includes $3.8 million in Excess ERAF. This trend, with the exception of Excess ERAF, continues in FY 2021, where property tax revenue is expected to increase by an additional $2.3 million, or 4.5 percent, to total $52.8 million. Due to the uncertainties around the continued receipt of Excess ERAF at the current levels, this revenue sources is being eliminated from the forecast over the next four years and is completed eliminated in FY 2024. This results in lower forecasted growth rates between FY 2022 and FY 2025. City of Palo Alto Page 9 TABLE 6: City of Palo Alto Property Tax Actuals and Forecast through FY 2030 City staff meets with the County quarterly to obtain the latest assessed valuation and assessment roll data used to forecast of property tax revenues. The above graph displays ten years of actual revenue and 11 years of forecast, including the year-end projection for FY 2020. The forecast assumes the anticipated cooling of the housing market and an economic downturn that is spread over the length of the 10-year forecast. Over the 21-year period displayed, there has been some unpredictability in the revenue growth rate, from a negative 1.1 percent in FY 2011 to a high of 11.5 percent in FY 2015. Meeting the property tax revenue forecast is contingent on maintaining property turn over and the median sales price. Data for the first four months of FY 2020 show property sales volume is 14.3 percent lower than the same period for FY 2019 while the price is 7.4 percent higher. According to Zillow, as of September 2019, residential median sales price in Palo Alto is $2.8 million, a decrease of 11.9 percent over the prior year, and lower than the peak seen in June 2018 when the median price was $3.3 million. Transient Occupancy Tax (TOT) In FY 2020, TOT revenue is expected to reach $27.2 million. This is $1.5 million, or 6.0 percent, above the FY 2019 audited revenue amount which includes the April 1, 2019 rate increase of 1.5 percent to TOT. That rate increase resulted in a new total TOT rate of 15.5 percent. Compared to the FY 2020 Adopted Budget, the FY 2020 estimate represents a decrease of 7.2 percent, or $2.1 million. Starting with FY 2019, 4th quarter, the base TOT decreased by 5.4 percent with average occupancy declining by 1.8 percent but average room rates increasing by 2.6 percent. This tread continued in the first quarter of FY 2020 with the base TOT decline of 4.8 percent. If these trends continue, a downward mid-year budget adjustment is expected. City of Palo Alto Page 10 For the first quarter of FY 2020, daily average room rates increase by 1.9 percent from $275.83 per day to $282.79 per day while occupancy rate declined by 4.8 percent from 83.8 percent to 79.8 percent. In the Northern California regions, for September 2019, a similar trend occurred for occupancy and, for daily room rates, half the region had increases and half had declines. The below table compares average room rates and occupancy percentage in September 2019 for northern California regions and the City of Palo Alto. TABLE 7: Northern California Hotel – Motel Business Trends as of September 2019 Month of September 2019 Avg. Daily Room Rate ($) Occupancy Percentage (%) 2019 ($) 2018 ($) Chg. 2019 2018 Chg. San Francisco $326.79 $332.33 -1.7% 88.8% 88.9% -0.2% San Francisco Airport 219.28 229.72 -4.5% 87.9% 88.9% -1.1% San Jose/Peninsula 237.81 231.84 2.6% 79.8% 83.7% -4.6% Oakland/East Bay 182.23 184.22 -1.1% 82.0% 83.7% -2.0% Monterey/Carmel 363.44 332.69 9.2% 82.8% 83.4% -0.8% Central Valley 106.26 104.62 1.6% 77.2% 77.0% 0.3% Sacramento 142.72 141.08 1.2% 80.3% 80.7% -0.6% Marin County 207.73 215.13 -3.4% 79.3% 87.9% -9.8% Napa County 326.59 320.93 1.8% 82.6% 80.2% 3.0% Sonoma County 230.80 233.73 -1.3% 85.3% 85.9% -0.6% Other Northern California 123.68 120.54 2.6% 79.0% 78.4% 0.8% Overall Average 227.21 226.67 0.2% 82.7% 83.9% -1.4% City of Palo Alto (September only) 298.77 287.54 3.9% 80.23% 84.2% -4.7% Table source: TRENDS® in the Hotel Industry Northern California, compiled and produced by CBRE Hotels, Consulting TOT realized double digit growth in FYs 2015 and 2016 due the 2 percent rate increase (from 12 percent to 14 percent tax rate), the recovering economy, and the addition of the three large hotels. Since then, TOT revenue has moderated, however, with 1.5 percent rate increase (from 14 percent to 15.5 percent tax rate) partially offset by declining occupancy percentage there is a healthy growth that is anticipated for FY 2020 and beyond. In addition, in FY 2021, two new Marriot hotels with approximately 300 rooms are expected to open. Primarily as a result of these two new hotels, FY 2021 is forecasted to be $4.3 million, or 15.8 percent, above the current FY 2020 estimate, totaling $31.5 million. Utility User’s Tax (UUT) The UUT is levied on electric, gas, and water consumption, as well as on telephone usage. In total, FY 2020 revenues were budgeted at $17.6 million and are currently on target to be realized before rising to $18.2 million in FY 2021. City of Palo Alto Page 11 UUT telephone revenues rose from $6.0 million in FY 2018 to $6.6 million in FY 2019. This revenue has realized high single digit growth and is forecasted to reach $7.1 million in FY 2020. UUT revenue from Utility sales came in at $9.8 million in FY 2019 and is anticipated to reach nearly $10.4 million in FY 2020. Rate increases of 8.0 percent for electric, 5.0 percent for gas, and 1.0 percent for water, consistent with the financial plans discussed in Spring 2019 with Finance Committee and City Council, are the primary drivers of this revenue growth. This revenue is expected to rise to $10.9 million in FY 2021. Documentary Transfer Tax (DTT) In FY 2015, DTT peaked at $10.1 million. This milestone was a consequence of several large commercial transactions on Page Mill Road and in the Stanford Research Park. Since that time, DTT has significantly moderated, with $6.9 million earned in FY 2019. Though this revenue from July through October in FY 2019 is running nearly 7.4 percent above the same period in FY 2018, staff anticipates modifying the FY 2020 Adopted Budget at midyear from $8.4 million down to $7.7 million. For FY 2021, revenues are expected be slightly above the FY 2020 projected levels at $7.9 million. As in past years, this revenue source is challenging to forecast since it is highly dependent on sales volume and the mix of commercial and residential sales. The number of transactions through October 2019 (186) are running lower than those through October 2018 (217); however, the total value of these transactions has increased by 7.4 percent. Though the Palo Alto housing market remains strong, as discussed in the Property Taxes section, residential median sales price in Palo Alto has declined. Although pressure on the housing market and local economy has driven down property turnover, there is enough of a baseline trend in the Palo Alto housing market to signal a stable 3.0 to 3.9 percent growth in revenue over the length of this forecast. Rental Income Rental Income of $15.6 million primarily reflects rent paid to the General Fund from the City’s Enterprise Funds and the Cubberley Community Center. There is a slight decrease in rental income from FY 2020 to FY 2021 that continues in FY 2022; this decrease represents the phase- out of payments from the Refuse Fund to the General Fund associated with the Landfill. Steady growth after that reflects a 2.6 percent increase for this area partially offset by minor adjustments throughout the forecast. The annual increase for rental revenue is based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August to August period. It is expected that revenues will be reviewed and revised subsequent to this forecast based on updated information, typically the December to December change in the CCPI. The City is also examining the rent it is currently charging to the various enterprise and special revenue funds and will incorporate adjustments through the budget process as appropriate. City of Palo Alto Page 12 Charges for Services and Permits and Licenses Revenues in the ‘Charges for Services’ and the ‘Permits and Licenses’ categories are anticipated to be $21.2 million and $8.9 million, respectively, in Fiscal Year 2021. These amounts are slightly lower than the Fiscal Year 2020 Adopted Budget levels for each category primarily due to the reduction of revenue related to Animal Shelter services that were previously provided by the Police Department but are now provided by the City’s non-profit partner Pets-in-Need. These budget categories also include revenues associated with the Golf Course and after analyzing prior year actuals, some of the Golf Course revenue estimates have been reduced. Associated expenses for the Golf Course have also been reduced and are accounted for in the Contracts Services section of this document. The revenue estimates in these categories are primarily driven by the cost of staff to provide services to the community; therefore, revenues are impacted by personal service costs. Staff analyzed prior year revenue collections in these categories and determined that actual collections were somewhat below budgeted revenue. Revenue estimates in these categories have therefore been kept generally consistent over the forecast period. One exception to this was for Development Services activities and related revenue. Development Services has been modeled as cost neutral through the forecast, which accounts for the fluctuations in the growth rate over the forecast period, because the average increase in general salaries and benefits for Development Services staff is changing over the ten-year forecast. Staff will analyze municipal fee revenue activity as part of the FY 2021 Budget development process and bring forward adjustments as appropriate. Stanford Fire and Dispatch Services The City has two separate agreements with Stanford University to provide its response and emergency dispatch services. The City and Stanford entered into a new agreement effective July 1, 2018 outlining both terms for service levels and a new cost allocation methodology as the baseline for the contract costs. This contract extends through June 30, 2023 with a renewal through 2028 unless otherwise terminated. The contract included a new staffing deployment model for suppression and medical services, which was approved by the City Council in October 2017 and deployed in January 2018. This forecast assumes this new staffing model and, in accordance with the contract, increases to this revenue from Stanford have been aligned with the year-over-year growth of the operating expenses in the Fire Department over the forecast period. Similarly, increases to the revenue received for dispatching services have been aligned with the year-over-year growth of the operating expenses in the Technical Services Division of the Police Department through which these services are provided. Charges to Other Funds The main source of revenues in this category is General Fund administrative cost allocation plan charges to the Enterprise and Internal Service Funds. Internal support departments such as Administrative Services, Human Resources, and Council Appointed Offices provide services to Enterprise and Internal Service Funds. The costs for these services are recovered through the administrative cost allocation plan charges. The FY 2021 estimate for Charges to Other Funds of City of Palo Alto Page 13 $11.6 million reflects growth of 6.1 percent from the FY 2020 Adopted Budget of $10.9 million; this is primarily attributable to year over year increases in costs for salary and benefits and allocated charges in the Internal Support Departments. After the first year of FY 2021, growth is more moderate ranging from 0.5 percent up to 3.2 percent annual increases throughout the forecast period. Return on Investment The return on investment category reflects the interest earnings on the City’s investment portfolio. This category is a combination of past investments, new investments at current market rates, and available investable cash which fluctuates seasonally and annually. Staff had anticipated the decline in interest rate would occur sooner and at a faster rate than it has occurred, so the City experienced a higher than anticipated return on investments. In addition, prudent investments further resulted in higher investment yields and earnings. The average portfolio rate of return for FY 2019 was 2.30 percent, in FY 2020 first quarter it was 2.35 percent and as of mid-November it’s 2.32 percent. The revised FY 2020 interest earning forecast of $1.90 million is $0.52 million higher than the adopted budgeted of $1.39 million. In FY 2021, the forecast is $1.85 million which reflects the declining interest rate environment. Since the City’s portfolio is laddered over a ten-year period, in a given year, around 10 percent to 16 percent of investments mature that is typically reinvested at the current market rates. As a result, the City’s portfolio yield and earnings decline more gradually than the market rate declines. Operating Transfers-in Operating Transfers-in materialize as expenses in other funds throughout the City and as a revenue in the General Fund. This budget category includes the equity transfer from the Electric and Gas funds. In accordance with a methodology approved by the City Council in June 2009, the equity transfer is calculated by applying a rate of return on the capital asset base of the Electric and Gas funds. This rate of return is based on PG&E's rate of return on equity as approved by the California Public Utilities Commission (CPUC). Using the Utility Department’s projections from the Electric and Gas Five Year Financial Forecasts, as approved by the City Council in spring 2019, the equity transfer from the Electric and Gas funds are projected to increase over the course of this forecast from $21.4 million in FY 2021 to $26.4 million in FY 2030. Overall, the Operating Transfers-in are estimated to increase slightly to $21.4 million in FY 2021, a 1.7 percent increase from the FY 2020 Adopted Budget level of $21.0 million. City of Palo Alto Page 14 Expense Assumptions As part of developing the FY 2021 Forecast expenditure budget, the General Fund expense categories have been adjusted by removing FY 2020 Adopted Budget one-time expenses and updating major cost elements such as salary and benefits costs. The tables below display the expense forecast and when compared to the FY 2020 Adopted Budget, growth of 4.1 percent is expected in FY 2021, with growth ranging from 1.9 percent to 4.0 percent throughout the ten- year forecast. TABLE 8: FY 2021 – 2030 General Fund Expense Forecast Base Case Expenditures & Other Uses Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CAGR 10 Years Salary 75,506$ 78,289$ 81,100$ 83,509$ 85,774$ 88,007$ 90,051$ 91,973$ 93,882$ 95,790$ 97,702$ 2.6% Benefits 59,042 62,695 65,921 69,089 71,631 73,917 74,743 75,642 78,340 80,726 82,123 3.4% Subtotal: Salary & Benefits 134,548 140,985 147,022 152,598 157,405 161,924 164,794 167,615 172,222 176,515 179,825 2.9% Contract Services 23,429 23,832 24,355 24,998 25,607 26,224 26,862 27,520 28,188 28,878 29,589 2.4% Supplies & Material 3,365 3,343 3,432 3,524 3,619 3,715 3,815 3,917 4,022 4,130 4,240 2.3% General Expense 12,089 11,267 12,509 12,676 12,818 13,071 13,090 13,413 14,079 14,356 14,535 1.9% Rents & Leases 1,734 1,762 1,777 1,793 1,809 1,825 1,843 1,860 1,878 1,897 1,916 1.0% Facilities & Equipment 771 516 530 544 559 574 589 605 621 638 655 -1.6% Allocated Charges 20,889 22,065 22,551 23,120 23,670 24,197 24,755 25,348 25,947 26,425 26,861 2.5% Committed Additions 223 674 708 728 764 787 825 849 890 916 Total Non Sal/Ben Before Transfers 62,277 63,009 65,828 67,363 68,811 70,372 71,740 73,489 75,584 77,215 78,712 2.4% Operating Transfers-Out 5,023 4,317 4,411 4,508 4,607 4,708 4,817 4,923 5,037 5,154 5,268 0.5% Transfer to Infrastructure - Base/Cubb 17,187 17,561 17,945 18,337 18,739 19,152 19,575 20,009 20,455 20,912 21,381 2.2% Transfer to Infrastructure - TOT 11,774 14,576 14,963 15,389 15,835 16,310 16,818 17,331 17,871 18,481 19,196 5.0% Total Use of Funds $230,809 $240,447 $250,168 $258,194 $265,396 $272,465 $277,743 $283,366 $291,169 $298,276 $304,382 2.8% This table is available in a larger format in Attachment B. Salary and Benefits Table 8 above (also included in Attachment B) depicts the estimated General Fund salaries and benefits costs for the next decade. Over the forecast period, the salaries and benefits costs remain relatively consistent in comparison to the total expenditure budget. In FY 2021, salaries and benefits costs represent approximately 60 percent of the General Fund budget expenditures and remain near that level of General Fund budget expenditures through FY 2030. Salary Consistent with the City’s salary budget methodology for recent budgets, positions are budgeted at the actual rate of pay of employees including benefits as of Fall 2019. Then, by position, salary costs are updated in accordance with applicable Memorandum of Agreements (MOA) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). In 2018, the City completed the bargaining process and reached agreements with all seven represented units1; MOA’s for Police and Fire 1 Represented units include the International Association of Fire Fighters (IAFF), Palo Alto Fire Chiefs’ Association (PAFCA), Palo Alto Peace Officers’ Association (PAPOA), Palo Alto Police Management Association (PAPMA), Service Employees International Union (SEIU), Utilities Management Professional Association of Palo Alto (UMPAPA), and Management and Professional Personnel (MGMT). The most recent agreements can be found here: www.cityofpaloalto.org/gov/depts/human_resources/labor_relations/default.asp City of Palo Alto Page 15 personnel continue through June 30, 2021, SEIU through December 31, 2021, and UMPAPA and MGMT for a one-year period through June 30, 2020. The Forecast assumes step increases for employees in applicable positions, including SEIU, IAFF, and PAPOA and assumes merit increases for Management and Professional employees. Additional general wage adjustments of 2.0 percent are included in each year of the Forecast for all employees in years when there is not a MOA in effect. This is consistent with prior Council direction to use the 2.0 percent increase as a forecasting model, not as a commitment to future negotiations. If agreements are negotiated with salary increases greater than presumed in the forecast, then expenses will increase accordingly. Benefits Pension: The Forecast includes pension rates from CalPERS as of the June 30, 2018 valuation (CMR 10641) for the City’s Miscellaneous and Safety plans for the first six years of the Forecast and projections from the City’s actuarial consultant (Bartel Associates) consistent with the CalPERS methodology for the final years of the Forecast. CalPERS has lowered the discount rate from 7.5 percent to 7.0 percent over three years which has resulted in significant impacts to the City’s pension liability. For Fiscal Year 2021, the final year of this three-year phase in, CalPERS used a 7.0 percent discount rate. CalPERS determines the City’s total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of payroll is the ‘blended rate’ and is used to represent total costs in the discussion below The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll reporting process of active employees. Commonly referred to as the ‘pay-go’ cost, the NC is variable and increases or decreases directly with the salary levels of the City. It represents the necessary funding for the City to pay for employees presuming that CalPERS makes its stated investment returns. In a year that CalPERS does not make its stated investment return, a loss in assets is realized. The accumulation of these losses represents the City’s Unfunded Accrued Liability (UAL), which is calculated by CalPERS and is commonly referred to as the ‘catch-up’ cost. The UAL is expressed as a dollar amount and is calculated over an amortized period with defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat dollar amount as opposed to a percentage of payroll due to potential funding issues that could arise from a declining payroll or number of active members in the plan. However, CalPERS provides an estimated percentage of payroll for UAL to allow a consistent comparison of total costs. For the miscellaneous plan, the projected blended pension contribution rate will increase from the current 35.6 percent in FY 2020 to 38.4 percent in FY 2021. This includes the continued phase-in of the lower discount rate, which will be completed in FY 2021. The rate steadily City of Palo Alto Page 16 increases to a peak of 42.8 percent in FY 2025 before tapering down over a two-year period to 37.0 percent in FY 2027. This projection is consistent with actuarial assessments done by Bartel Associates which anticipated a slight temporary decline in pension costs associated with various amortization factors including the pay-down of previously sustained losses and benefit improvements offered to employees. This decline in pension costs in FY 2026 is a significant factor of the surplus projected in the Base Case beginning in FY 2026. It also accounts for dampened impacts in other areas that are impacted by salary and benefits, such as charges to other funds. The Safety plan follows a more consistent trend line with steady increases throughout the years of the forecast. In the first year, the safety plan is projected to grow to 65.33 percent of payroll from the current 59.4 percent of payroll and increases steadily to reach a level of 79.5 percent in FY 2030. As with the miscellaneous plan, this initial growth is primarily driven by the phase-in of the 7.0 percent discount rate instead of the previous 7.5 percent discount rate. The table below shows CalPERS’ projected FY 2020 – FY 2030 blended retirement rates. As discussed above, it should be noted that the numbers in FY 2027 are not provided by CalPERS (they only provide a forecast through FY 2026) but have been calculated using a methodology consistent with CalPERS actuarial analysis. These rates are before the employee pick-ups of the employer share are factored in; that pick-up materializes as savings in the City’s pension costs. The forecast does presume that, consistent with applicable MOAs, employees in the miscellaneous plan will pick up 1% of the employer pension cost and that safety plan members will pick up percentages between 3% to 4% depending on the year and the unit. TABLE 9: CalPERS’ Projected FY 2020-2030 Blended Retirement Rates (percentage of payroll) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 Miscellaneous 35.6 38.4 40.3 41.7 42.3 42.8 40.2 37.0 37.7 38.0 38.5 Safety 59.4 65.3 69.4 72.7 74.4 75.6 75.6 76.6 77.6 78.5 79.5 In addition to the required contribution to CalPERS, the forecast includes supplemental contributions to the City’s irrevocable Section 115 Pension Trust (“Pension Trust Fund”). In January 2017 the City council authorized the establishment of a Pension Trust Fund with the Public Agency Retirement Service (PARS) (CMR 7553). To date, more than $22.0 million in principal contributions has been made into the PARS Trust. Contributions were initially made on an ad-hoc basis, using one-time savings or excess revenues. In October 2018, the City Council directed staff to include in budget assumptions the NC for pension benefits at an equivalent of 6.2 percent discount rate and a transfer of the additional funding beyond CalPERS actuarial determined contribution levels to the Pension Trust Fund (CMR 9740). This change in methodology has been factored into this forecast and is anticipated to generate an approximately $5.0 million in ongoing additional contributions across the organization in all funds. City of Palo Alto Page 17 The marginal costs of the lower discount rates, approximately $3.4 million in the General Fund, have been factored into the entirety of the forecast. In the General Fund, it is anticipated the City will spend a total of $34.3 million on total pension costs in FY 2021, including both CalPERS contributions and additional contributions. This increases to a peak of $45.8 million in FY 2030. These expenses represent approximately 14% of the General Fund’s total expenses. This Base Case does not contemplate the implications of further contributions beyond what was directed by the City Council in October 2018. Alternative Forecast A contemplates how the Long Range Financial Forecast would change if the marginal costs associated with the lower discount rate were excluded from the forecast. Retiree Medical: Retiree Medical is based on the most recent actuarial study prepared by Bartel Associates, which is completed every two years. The most recent study was completed in FY 2018 and presented to the City Council as part of the Fiscal Year 2019 Adopted Budget (CMR 9213). The table below details the cost to the General Fund for every year through FY 2028 based on that actuarial study. The final two years represent an extrapolation of the actuarial study but are consistent with the year over year growth seen throughout the time period. Consistent with City Council direction, as recommended by staff, the City continues to budget for the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare. Since CalPERS blends active employees with pre-Medicare retirees and charges the same medical premium, even though younger employees on average consume less healthcare and thereby subsidize older employees and retirees, there is an implied subsidy that effectively lowers the funding necessary to meet the ADC. The table below excludes the implied subsidy. TABLE 10: FY 2021 – FY 2030 Retiree Medical General Fund Contributions (Millions) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 General Fund $9.1 $9.3 $9.5 $9.7 $9.9 $10.2 $10.5 $10.9 $11.2 $11.5 The City’s CERBT Trust, which contains prefunding for the City’s Other Post Employment Benefit (OPEB) liabilities, maintains a very healthy fund balance. The CERBT Trust currently has over $120 million in assets. As the City continues through the next few years, there will be important impacts to examine associated with Retiree Medical as there may be opportunities over the course of this forecast to subsidize the City’s ADC payments with withdrawals from the OPEB CERBT Trust. That savings could possibly be used for other competing priorities, such as prepaying an additional portion of the City’s pension UAL. Staff anticipates returning with an updated actuarial study presented by Bartel Associates as part of the development of the FY 2021 Budget. Healthcare: Consistent with the most recent labor agreements between the City and its bargaining units in the General Fund, the City’s contribution amounts towards medical costs for City of Palo Alto Page 18 employees are based on a flat rate contribution from the City, with the employee contributing towards the remaining medical plan premium. Like salaries, healthcare costs are updated in accordance with applicable Memorandum of Agreements (MOA) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). Consistent with the prior year’s forecast, this forecast assumes an inflation factor of four percent on healthcare and two percent on dental and vision costs to the City in each year of the Forecast for all employees in years when there is not a MOA in effect. Contract Services This forecast assumes contract services of $23.8 million in FY 2021, reflecting a 1.7% increase from the FY 2020 Adopted budget of $23.4 million. This increase is driven primarily by aligning the costs of outside legal counsel in the City Attorney’s office and other important contract increases for contractual obligations already approved by the City Council for items such as tree maintenance, landscape maintenance, and janitorial services, among other items. These Increases are partially offset by the reduction of one-time dollars for items such as the second year of the FTA Grant in FY 2020 as well as a reduction for Golf Course expenses to align with revenue reductions related to actual activity in the prior year. Through the Forecast, a 2.7 percent annual escalator was modeled to capture anticipated growth in this expense category beginning in FY 2021. Supplies and Materials The FY 2020 Adopted Budget for the General Fund included $3.4 million for Supplies and Materials, which is anticipated to decrease slightly to $3.3 million in FY 2021. This decrease is due to the removal of one-time expenses budgeted in FY 2020 for Computer Aided Dispatch (CAD) software and Protective Personnel Equipment (PPE) and uniforms for Fire Department recruits. An escalator of 2.7 percent was applied to this expense category to capture anticipated growth over the course of the forecast. General Expense This category includes costs for travel and meetings, telephone and non-city utilities, contingency accounts, bank card service charges, and subsidies and grants provided through the Human Services Resource Allocation Program (HSRAP). The FY 2020 Adopted Budget of $12.1 million included $1.6 million in a Budget Uncertainty Reserve that has been removed in FY 2021 and partially accounts for the reduction to $11.3 million in FY 2021. That reduction is partially offset by a contribution to the Budget Stabilization Reserve (BSR), which is captured in this category for the purposes of this forecast, to maintain the BSR at the City Council target of 18.5 percent. In FY 2021, $0.6 million is needed to fund the BSR at the 18.5 percent; this amount changes somewhat over the course of the forecast based on the adjustments to the annual expenses. Further discussion of the BSR is detailed later in this document. An annual escalator of 2.7 percent was applied to this category, excluding BSR contributions, to capture anticipated growth over the course of the forecast. These figures do not include General Expenses for the Cubberley Lease, which is explained in further detail below. City of Palo Alto Page 19 General Expense - Cubberley Lease: In FY 2015, the City and Palo Alto Unified School District (PAUSD) agreed to an extension of the Cubberley Lease by five years starting January 1, 2015 and expiring December 31, 2019. On October 7, 2019, Council directed Staff to negotiate with PAUSD to extend the lease agreement an additional five years, though December 31, 2024 (CMR 10730), these negotiations are ongoing. As part of the original lease agreement, the City Council approved creation of a fund for Cubberley infrastructure improvements. It is expected that the lease continues an annual $1.9 million transfer to the Cubberley Property Infrastructure Fund. Therefore, the $1.9 million is classified as an Operating Transfer Out which is discussed in further detail below. With the Cubberley infrastructure funds set aside, the FY 2020 Budget includes $6.3 million for Cubberley Lease payments; this includes extended child daycare sites which may be included in a separate agreement. For planning purposes it is assumed that the current agreement will continue during the entire Forecast period. Rents and Leases The Rents and Leases expense category for FY 2021 is estimated to increase by 1.6 percent from $1.7 million in FY 2020 to $1.8 million in FY 2021. This category includes the lease agreement for some of the Development Services staff at locations outside City Hall. However, funding for those leases have not been increased as part of this forecast due to the uncertainty of the extended need for these leases. Space is anticipated to become available at City Hall after the completion of the Public Safety Building, estimated in FY 2022, however tenant improvements will be necessary. Development Services activities have been modeled as cost neutral through the forecast. If increased expenses for rent for Development Services are needed, corresponding revenue offsets will be incorporated through the budget process to ensure Development Services maintains its cost recovery levels. As a result of excluding these Development Services lease costs from the increases, the growth throughout the forecast is projected at approximately 1.0 percent for this category. Facilities and Equipment The Facilities and Equipment expense category is expected to decrease from the FY 2020 Adopted level of $771,000 to $516,000 in FY 2021. This reflects the annualization of one-time costs that were included in the FY 2020 Operating Budget, including the procurement of solar battery by the Office of Emergency Services and equipment, such as a gurney and air monitors, by the Fire Department. This budget category includes subscription payments for equipment like public safety radios as well as other non-capital equipment. Growth of approximately 2.7 percent is modeled through the forecast to capture anticipated increases. City of Palo Alto Page 20 Allocated Charges Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service Funds for services and products they provide to General Fund departments. The FY 2020 Adopted Budget for the General Fund included $20.9 million for these expenses, including utilities usage, general liability insurance, technology costs, vehicle equipment maintenance and replacement costs and other charges. The FY 2021 allocated charges in the Forecast update the revenues and expenses for these various allocations based on the information available at the time of the Forecast development. FY 2021 is anticipated to experience an increase of 5.6 percent to a total of $22.1 million. This change is primarily due to general CPI and rate increases applied to various charges as well as an increase in Excess General Liability Insurance costs. Based on initial conversations with the City’s broker, a significant increase in the City’s Umbrella Excess Liability insurance costs is anticipated beginning in FY 2021 and continuing through the forecast. Operating Transfers Out Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the Technology Fund, and various other funds but excludes transfers to the Capital Improvement Fund, which are detailed in the following Transfer to Infrastructure section. Transfers to debt service funds include the debt issued to fund the renovation of the golf course. This reflects a change first seen in last year’s Long Range Financial Forecast, where no expenses in the Debt Service category appear in the General Fund, but are instead captured as transfers to the appropriate Debt Service Fund. These payments continue throughout the term of the forecast. The FY 2020 Adopted Budget included Operating Transfers Out of $5.0 million, including a one- time operating subsidy transfer of $0.7 million from the General Fund to the Residential Parking Permit (RPP) Programs Fund to cover an operating deficit. In FY 2021, Operating Transfers Out are anticipated to decrease to $4.3 million as a result of annualizing, or removing, that one-time transfer. Transfer to Infrastructure In FY 2020, the adopted General Fund transfer to the Capital Improvement Fund is $28.3 million, which includes the base transfer of $16.5 million, including $1.2 million in interest earnings, and $11.8 million from additional TOT proceeds generated through a 3.5 percentage point TOT increase as well as through the addition of new hotels. Incremental TOT increases from the rate increase and new hotels are dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan, consistent with City Council direction. This transfer is anticipated to increase to $17.6 million for the base transfer in FY 2021 and $14.6 million for the dedicated TOT funds per Council priorities. The increase to the dedicated TOT funds is due to the anticipation of new Marriot hotels coming online in FY 2021 and generating additional TOT revenue. This budget category also includes the separate $1.9 million transfer to the Cubberley Property Infrastructure Fund, described earlier in this document. This transfer remains consistent throughout this Forecast despite the sunset date of the current lease in FY 2024 for Cubberley to capture the anticipated costs. City of Palo Alto Page 21 Committed Additions - NEW As highlighted in the FY 2020 Adopted Capital Budget, staff focused on updating and including operating and maintenance (O&M) costs that would begin once the capital projects were complete in the 2020-2025 Capital Improvement Plan (CIP). Continuing this effort, a new category, Committed Additions, has been included in the 2021-2030 Long Range Financial Forecast to account for the estimated O&M costs in the years they are anticipated to materialize in the General Fund. These costs can vary from project to project depending on what was previously budgeted for a facility and generally include, but are not limited to, costs for fixtures and equipment to outfit a new or expanded facility; custodial, landscaping, and maintenance services; utilities; and additional staff to support operations at the facility. Most of the costs in this category are related to the 2014 Council Infrastructure Plan projects that will be coming online over the next five years. A majority of the O&M costs will come online in FY 2021 and 2022 for projects like the fire station replacement, the New Public Safety Building, and the Highway 101 Pedestrian/Bicycle Bridge. O&M costs for projects related to parking have not been included in the General Fund forecast, because it is assumed that parking fees in separate parking funds will be collected to support the O&M costs for these projects. However, depending on funding needs, loans between funds to support investments and operating costs may be needed. There are also a number of capital projects that are included in the five-year CIP that do not have an O&M estimate, either because the full scope of the projects has not yet been defined, or the projects require an initial study in order to establish the full scope of the project. These projects and their subsequent O&M costs would generally fall under the category of Assumptions Not Included in the Forecast which are detailed further below in this document; examples include the new Junior Museum and Zoo. TABLE 11: FY 2021 – FY 2030 Committed Additions (Millions) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 General Fund $0.2 $0.7 $0.7 $0.7 $0.8 $0.8 $0.8 $0.8 $0.9 $0.9 Budget Stabilization Reserve The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By policy, the BSR is maintained in the range of 15 to 20 percent of General Fund operating expenditures, with a target of 18.5 percent. Any reduction to the reserve below 15 percent requires City Council approval. At the discretion of the City Manager, any BSR balance above 18.5 percent may be transferred to the Infrastructure Reserve (IR), which was established to provide funding for maintenance and rehabilitation of the City’s capital assets. As recently discussed with the Finance Committee, on November 18, 2019 the BSR is anticipated to remain above the 18.5 percent target for FY 2020 at $43.7 million after anticipated qualifications for excess BSR. City of Palo Alto Page 22 The BSR is used to fund unanticipated one-time costs as opposed to ongoing or recurring operating expenditures. The City's intent is to fund ongoing programs and services with ongoing dollars. This forecast assumes that the BSR meets or exceeds the City Council approved target of 18.5 percent of anticipated expenses in any given year. Maintaining the BSR at 18.5 percent of anticipated expenses does impact the forecast, worsening the deficits beginning in FY 2022 and dampening the surpluses through the end of the forecast. However, maintaining the BSR at 18.5 percent also provides flexibility to the City do deal with unforeseen issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has been a strong factor in the City being rated AAA by rating agencies. Assumptions NOT Included in Forecast It should be noted that this Forecast does not include several potential impacts to the FY 2021 projected budget and the out years of the Forecast. Below is a list of a few items not included. This is not intended to be a comprehensive list nor in any priority order. Labor negotiations: Although the City has recently concluded negotiations with four safety units, these contracts only extend through the first few years of the forecast. These safety units are the Palo Alto Peace Officers Association (PAPOA), the International Association of Fire Fighters (IAFF), Fire Chiefs Association (FCA), and Palo Alto Police Management Association (PAPMA). Each of those contracts expires June 30, 2021. Additionally, the Service Employees International Union (SEIU) MOA expires in December 2021. The Base Case Forecast models only modest increases to salaries in years where there is not a contract. This region’s competition for a qualified workforce remains a significant pressure on the City’s anticipated salary costs. Capital Infrastructure Plan: As referenced earlier, the June 2014 Council approved Infrastructure Plan of $125.8 million in projects was based on construction and design costs with data from 2012. As construction costs have increased and the City is required to pay prevailing wages, the Infrastructure Plan’s funding status has shifted. The FY 2020 Adopted Capital Budget anticipated that these projects would cost $280.6 million. In addition, this Forecast does not assume ongoing operating and maintenance impacts as a result of the Infrastructure Plan, such as the operating costs associated with the new Public Safety building, but future forecasts will incorporate operating cost impacts as the specific projects are designed and implemented. Grade Separation: The City is currently in the process of exploring locations for grade separations. As the City continues the process of determining the number and type of grade separations to pursue the financial impacts are difficult to define. Additionally, it may make sense to undertake a coordinated area plan for transit in the downtown area to synchronize with the grade separation process. Costs for these items are not included in this forecast. City of Palo Alto Page 23 Parks Master Plan: The Parks Master Plan was finalized in 2017; however, when approved it identified a need to develop a funding strategy and this is still in process. As such, this Forecast does not yet contemplate the necessary investments to fully execute this plan. Other Capital Improvement Projects: A number of assets and planned projects remain on the horizon, however, none have resulted in formalized capital improvement projects. Major improvements such as an update to the animal care shelter, rail grade separation, the former ITT site, and the acquisition of land or assets are not factored into the Forecast. City owned assets operated by non-profit organizations: This Forecast does not include any additional capital or operating investments for the Avenidas Senior Center (beyond the current $5 million pledge), the Palo Alto History Museum, the Ventura Child Care Center, the Junior Museum and Zoo, nor the Sea Scout Building. As costs around potential capital or operating investments for these assets solidify, staff will return to City Council to address them as appropriate. Cubberley Community Center Concept Plan: The City is in the process of designing a Cubberley Community Center Concept Plan; however, costs to implement that concept plan in excess of the dedicated Cubberley infrastructure funding included in the existing agreement between the PAUSD and the City are not assumed in this Forecast. Loans for special projects: From time to time the City’s General Fund will assist other City operations with modest cash flow loans to bridge fiscal years. For example, the City provided over $3 million in loans to the Airport Fund as it works to secure significant grant funding from the Federal Aviation Administration (FAA) for capital improvement costs. As of the FY 2020 Adopted Budget, the Airport Fund has begun to pay back the loan to the General Fund. As mentioned in the Committed Additions section, the Base Case presumes that the parking funds will be able to sustain the ongoing operating and maintenance costs of new parking related capital infrastructure. However, these additions and other initiatives may need financial support from the General Fund to ensure they are fully implemented. Additional loans from the General Fund are not assumed in this Forecast. Legislative Updates: Various actions at the state and federal level that could impact the City of Palo Alto have not been incorporated into this forecast due to the changing context and uncertainty of the quantitative impacts of potential legislative changes. This includes the Cadillac Healthcare Tax at the federal level, property tax changes at a state level, and state-level efforts focused on the provision of affordable housing. Property Tax changes may be impacted by a potential state level ballot measure in November 2020. As uncertainty regarding the potential impact of various legislative initiatives is clarified, appropriate adjustments will be identified and brought forward as part of the development of the FY 2021 Operating Budget. Greater CalPERS City contributions: The City has had ongoing conversations with the Finance Committee about options for addressing the City’s long-term pension liability including an initial City of Palo Alto Page 24 discussion regarding development of a pension funding policy. Currently, CalPERS assumes an annual investment return of 7.0 percent. Further, the CalPERS Board approved a gradual de- risking strategy, which is intended to reduce the assumed investment return to 6.5% over the next 20 years. In accordance with the City Council’s direction for the FY 2020 Adopted budget, this forecast assumes a discount rate of 6.2% to more aggressively fund the City’s long-term pension liability. It is anticipated that a formal pension funding policy will be discussed with the City Council in early 2020. Tax revenue alignment with updated Comprehensive Plan: The City Council recently completed updating its Comprehensive Plan, including the potential fiscal impact of various land use scenarios. The fiscal impact of this plan and various land use scenarios are not factored into this Forecast. Changes in the local, regional, and national economy: This Forecast assumes a moderately growing local economy. Any changes may have positive or negative impacts on economically sensitive revenues such as Sales Tax and the Transient Occupancy Tax. Alternative Forecast A: CalPERS’ Pension Rates As discussed in the Salary and Benefits section above, the base forecast includes approximately $3.4 million in additional pension expenses in this Long-Range Financial Forecast. These costs capture the direction from City Council to budget the Normal Cost using a 6.2 percent discount rate to proactively prefund the City’s pension liability. This assumption deviates from the current CalPERS actuarial assumptions for investment earnings; CalPERS currently assumes a 7.0 percent discount rate in FY 2021. This alternative forecast models the impact of using the CalPERS’ discount rate to determine the City’s annual pension contributions. The summary table for this alternative forecast and the Net Operating Margin graph for this alternative forecast are below. Additional discussion for this alternative follows these figures. TABLE 12: FY 2021 – FY 2030 Long Range Financial Forecast Alternative Forecast A Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total Revenue $232,101 $241,527 $248,358 $255,808 $263,083 $271,318 $280,028 $289,307 $299,625 $310,488 $321,728 4.1%2.8%3.0%2.8%3.1%3.2%3.3%3.6%3.6%3.6% Total Expenditures $230,809 $236,393 $246,665 $254,647 $261,814 $269,000 $274,160 $279,706 $287,435 $294,468 $300,499 2.4%4.3%3.2%2.8%2.7%1.9%2.0%2.8%2.4%2.0% Net One-Time Surplus/(Gap)$1,292 $5,134 $1,692 $1,161 $1,269 $2,319 $5,867 $9,600 $12,191 $16,020 $21,229 Cumulative Net Operating Margin (One-Time)$76,482 Net Operating Margin $5,134 ($3,442)($532)$108 $1,049 $3,549 $3,733 $2,590 $3,829 $5,209 Cumulative Net Operating Margin $21,229 Assumes that the annual shortfalls are solved with ongoing solutions and annual surpluses are spent for ongoing expenditures. City of Palo Alto Page 25 TABLE 13: FY 2021 –2030 Long Range Financial Forecast Net Operating Margin Alternative Forecast A Compared to the Base Case, the General Fund would run a greater surplus in the first year and then maintain net one-time surpluses through the forecast. However, unlike the base case, no additional contribution to the City’s Section 115 Pension Trust Fund is presumed in this model. This scenario represents the significant efforts the City has taken over the past few years to structurally balance the budget through reprioritization of work and reductions to the City’s full-time staffing in order to help contain rising pension costs. It is anticipated that the City will continue to discuss its options for prefunding its long-term pension obligations through ongoing discussion and development of a pension funding policy. Alternative Forecast B: Major Tax Revenue Sensitivity Analysis For modeling purposes, the base case assumes a smoothed recession throughout the length of the forecast. The base case takes this approach to accommodate any one-time, unusual, or unexpected drops in revenue that may occur throughout the forecast. This alternative scenario models the potential impact if the economy contracted and the growth that would be anticipated for the remainder of the forecast. For modeling purposes, this economic contraction is assumed to occur in January 2021, midway through FY 2021. The lower revenue estimates would continue through the forecast but would recover toward the final years of the forecast. These lower revenue estimates through the initial years of the forecast would significantly constrain the City’s resources. As discussed in the Revenue Assumptions section of this report, tax revenue accounts for approximately 60 percent of the General Fund’s total revenues. This alternative scenario assumes that average tax receipts contract by 1.7 percent, from $140.3 million at FY 2020 Adopted to $137.9 million in FY 2021. The scenario models a further decline in FY 2022 to $131.3 million in tax revenues in FY 2022 and stays consistent in FY 2023. Consistent with growth seen after other recessions, tax revenues begin to grow significantly in FY 2024 through City of Palo Alto Page 26 the end of the forecast. If all other assumptions in the base case remain constant and a major recession were to occur of a magnitude similar to the dot-com bust or the Great Recession, the loss in revenue would be approximately $12.6 million in FY 2021 (half a year) and $24.6 million in FY 2022. In this alternative scenario, the City’s expenses would exceed revenues in the first six years of the forecast before turning positive at the end of the time period. The single greatest one-time gap occurs in FY 2023, with a $32.2 million deficit, before narrowing to $12.7 million in FY 2026 and turning slightly positive in FY 2027. The summary table for this Alternative Scenario and the corresponding graph showing the Net Operating Margin are included below. TABLE 14: FY 2021 – FY 2030 Long Range Financial Forecast Alternative Forecast B Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total Revenue $232,101 $229,313 $223,830 $226,020 $237,704 $250,122 $265,085 $283,416 $310,495 $341,969 $378,923 -1.2%-2.4%1.0%5.2%5.2%6.0%6.9%9.6%10.1%10.8% Total Expenditures $230,809 $240,447 $250,168 $258,194 $265,396 $272,465 $277,743 $283,366 $291,169 $298,276 $304,382 4.2%4.0%3.2%2.8%2.7%1.9%2.0%2.8%2.4%2.0% Net One-Time Surplus/(Gap)$1,292 ($11,134)($26,338)($32,174)($27,693)($22,343)($12,658)$50 $19,326 $43,694 $74,542 Cumulative Net Operating Margin (One-Time)$5,271 Net Operating Margin ($11,134)($15,204)($5,836)$4,482 $5,350 $9,684 $12,708 $19,276 $24,368 $30,848 Cumulative Net Operating Margin $74,542 Assumes that the annual shortfalls are solved with ongoing solutions and annual surpluses are spent for ongoing expenditures. TABLE 15: FY 2021 – 2030 Long Range Financial Forecast Net Operating Margin Alternative Forecast B City of Palo Alto Page 27 Alternative Forecast C: Change in Long Range Financial Forecast Assumptions Related to Salary for Bargaining Units Outside of MOA Terms During Finance Committee discussions regarding the Long Range Financial Forecast in the past few years there have been conversations regarding the appropriate methodology for modeling salary and benefit increases year-over-year. Per previous City Council direction and past practice, the Base Case assumes a two percent general wage adjustment in the years beyond the terms of existing MOAs. This is consistent with past direction to use two percent as a forecasting assumption, not as a commitment for future negotiations. As part of the expense sensitivity analysis on the City’s finances, a third alternative forecast is presented here that analyzes a general wage adjustment of three percent for all employees in years when MOAs have not yet been negotiated. As with other alternative models in the LRFF, this model is for forecasting purposes and is not a commitment to future labor negotiations. In this scenario, the initial surplus in FY 2021 is lessened somewhat compared to the Base Case and wider gaps between revenues and expenses would occur in next few years of the forecast. Through the ten years of the forecast, this change in the modeling would increase expenses significantly. In FY 2021, only the management group would be impacted by this change, so a relatively modest increase in expenses of $285,000 is seen. The City’s agreements with the safety units expire at the end of FY 2021 and the agreement with SEIU ends midway through FY 2022. Due to the expiration dates, FY 2023 is the first year that shows the full cost of an additional one percent raise for the General fund. As a result of the increased expenses modeled for the safety units and SEIU the costs increase by $1.1 million in FY 2022 before escalating by $1.9 million in FY 2023. Overall, the general trends of the Base Case persist through this third alternative scenario, despite the changes to the salary and benefit parameters. The Base Case projected that by FY 2026, the City would have a positive net one-time surplus; this alternative forecast extends the deficit to FY 2026 but still projects a positive net one-time surplus in FY 2027. TABLE 16: FY 2021 – FY 2030 Long Range Financial Forecast Alternative Forecast C Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total Revenue $232,101 $241,527 $248,358 $255,808 $263,083 $271,318 $280,028 $289,307 $299,625 $310,488 $321,728 4.1%2.8%3.0%2.8%3.1%3.2%3.3%3.6%3.6%3.6% Total Expenditures $230,809 $240,732 $251,229 $260,093 $268,112 $275,996 $282,090 $288,528 $297,146 $305,069 $311,991 4.3%4.4%3.5%3.1%2.9%2.2%2.3%3.0%2.7%2.3% Net One-Time Surplus/(Gap)$1,292 $795 ($2,871)($4,286)($5,028)($4,678)($2,062)$779 $2,479 $5,418 $9,738 Cumulative Net Operating Margin (One-Time)$284 Net Operating Margin $795 ($3,666)($1,415)($742)$350 $2,616 $2,841 $1,700 $2,939 $4,319 Cumulative Net Operating Margin $9,738 Assumes that the annual shortfalls are solved with ongoing solutions and annual surpluses are spent for ongoing expenditures. City of Palo Alto Page 28 TABLE 17: FY 2021 – 2030 Long Range Financial Forecast Net Operating Margin Alternative Forecast C FY 2021 Budget Development Guidelines As discussed earlier in this document, the Long Range Financial Forecast represents the initial steps of the FY 2021 budget development process. In the FY 2019 – FY 2028 Long Range Financial Forecast presented in December 2018, staff included budget development guidelines based on the trends that were identified and the anticipated fiscal condition of the City. Due to the clear overlap of projecting the City’s fiscal condition over the next ten years and the need to shape service level expectations over the same time period, staff recommends that the inclusion of Budget Development Guidelines be incorporated into the Long Range Financial Forecast on an ongoing basis. This year, the FY 2021 Budget Development Guidelines are detailed in Attachment C. They are meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary direction to the organization. These guidelines will shape and inform the annual financial planning and the allocation of resources across the organization, especially in the General Fund. When the Fiscal Sustainability Workplan (CMR 10267) was approved by the City Council on April 22nd, 2019 drafting a budget development policy was listed as part of the “Newly proposed or potential activities proposed to be completed”. The inclusion of Budget Development Guidelines in this, and future years’, Long Range Financial Forecast represents staff’s recommended method of addressing this referral. Pairing Budget Development Guidelines with the Long Range Financial Forecast links the anticipated fiscal condition of the organization with the necessary context regarding service delivery prioritization and resource allocation that will be further explored through the process. Including the Budget Development Guidelines with City of Palo Alto Page 29 the Long Range Financial Forecast ensures that the City is able to proactively address anticipated changes in its fiscal condition through the budget process. Conclusion The FY 2021 – 2030 Long Range Financial Forecast provides context for balancing high city service expectations against the limited resources available to meet them in a timely manner. The City’s work over the past few years to structurally balance the budget has better positioned the City through the forecast with relatively minor deficits projected, even as the City makes proactive pension contributions, and as costs for salaries and benefits continue to escalate. However, the City must continue to exercise diligence to remain fiscally sustainable and balance the ecosystem of resources, the cost of doing business, and service delivery levels. A continued scrutiny of the expansion and enhancement of existing services, the addition of new services, and the priorities of the community will be necessary, especially as a slowing of the economy is anticipated in the coming years. As the Finance Committee and Council continue to discuss major projects such as pension, infrastructure, and grade separation, the ability to manage expectations and implement innovative solutions will be critical. A prioritization of needs and one-time investments to modernize and advance service delivery models will be necessary to ultimately ensure that we operate within available resources. These strategies are essential to sustaining the City’s sound financial future. STAKEHOLDER ENGAGEMENT The Long Range Financial Forecast represents the beginning of the fiscal year 2021 budget development process. As in previous years, the LRFF will be discussed with the City Council after Finance Committee and those conversations will provide direction to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2020, according to the standard budget adoption process. RESOURCE IMPACT Financial implications from this report and input from the Finance Committee will be considered in the City Manager’s development of the Fiscal Year 2021 budget. ENVIRONMENTAL IMPACT This report is not a project for the purposes of the California Environmental Quality Act. Environmental review is not required. Attachments: • Attachment A: Long Range Financial Forecast Base Case Revenues Table • Attachment B: Long Range Financial Forecast Base Case Expenses Table • Attachment C: FY 2021 Budget Development Guidelines FY 2021‐2030 Long Range Financial Forecast Base Case Revenue Table ATTACHMENT A Revenue & Other Sources Adopted 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CAGR 10  Years Sales Taxes $34,346 $37,595 $39,149 $40,670 $42,169 $43,682 $45,162 $46,701 $48,326 $50,075 $51,842 4.2% Property Taxes 48,634             52,863 55,034 57,061 59,303 62,393 66,193 70,344 74,952 80,102 85,668 5.8% Transient Occupancy Tax‐ General Purpose 17,534             16,896 17,344 17,838 18,356 18,906 19,494 20,089 20,716 21,422 22,251 2.4% Transient Occupancy Tax‐ Infrastructure 11,774             14,576 14,963 15,389 15,835 16,310 16,818 17,331 17,871 18,481 19,196 5.0% Documentary Transfer Tax 8,369               7,952 8,189 8,428 8,666 8,957 9,264 9,590 9,936 10,297 10,694 2.5% Utility Users Tax 17,581             18,199    18,962   19,804   20,354    20,859   21,465    22,156     22,815    23,222     23,626   3.0% Other Taxes and Fines 2,032               1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 1,989 ‐0.2% Subtotal: Taxes 140,270             150,071    155,630   161,180    166,673    173,097    180,386     188,200     196,605     205,589     215,266   4.4% Charges for Services 21,834 21,180 21,637 21,988 22,290 22,578 22,723 22,861 23,151 23,423 23,633 0.8% Stanford Fire & Dispatch Services 7,885               8,127 8,466 8,758 9,005 9,233 9,396 9,587 9,819 10,038 10,176 2.6% Permits and Licenses 9,076               8,990 8,997 9,003 9,008 9,012 9,015 9,017 9,021 9,026 9,029 ‐0.1% Return on Investments 1,388               1,850 1,822 1,844 1,869 1,896 1,950 2,006 2,065 2,127 2,196 4.7% Rental Income 16,399             15,590 15,088 15,480 15,884 16,300 16,728 17,169 17,623 18,091 18,573 1.3% From Other Agencies 980                  520 520 520 520 520 520 520 520 520 520 ‐6.1% Charges to Other Funds 10,908             11,577 11,948 12,290 12,586 12,865 12,962 13,031 13,320 13,586 13,628 2.3% Other Revenue 2,362               2,259 2,260 2,260 2,261 2,262 2,263 2,264 2,264 2,265 2,266 ‐0.4% Total Non‐Tax Revenue 70,832               70,093       70,737      72,143      73,423       74,666      75,555       76,454        77,784       79,076       80,022      1.2% Operating Transfers‐In 20,999             21,363 21,990 22,485 22,988 23,555 24,087 24,652 25,236 25,823 26,440 2.3% BSR Contribution (One‐Time) Golf Operating Loss Reserve Liquidation Total Source of Funds $232,101 $241,527 $248,358 $255,808 $263,083 $271,318 $280,028 $289,307 $299,625 $310,488 $321,728 3.3% Revenue & Other Sources 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Sales Taxes 9.0% 4.1% 3.9% 3.7% 3.6% 3.4% 3.4% 3.5% 3.6% 3.5% Property Taxes 8.4% 4.1% 3.7% 3.9% 5.2% 6.1% 6.3% 6.6% 6.9% 6.9% Transient Occupancy Tax ‐ General Purpose ‐3.9% 2.7% 2.9% 2.9% 3.0%3.1% 3.0% 3.1% 3.4% 3.9% Transient Occupancy Tax ‐ Infrastructure 26.1% 2.6% 2.8% 2.9% 3.0% 3.1% 3.1%3.1% 3.4% 3.9% Documentary Transfer Tax ‐5.4% 3.0% 2.9% 2.8% 3.4%3.4% 3.5% 3.6% 3.6% 3.9% Utility Users Tax 3.5% 4.2% 4.4% 2.8% 2.5% 2.9% 3.2% 3.0% 1.8% 1.7% Other Taxes and Fines ‐2.1% 0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0% 0.0% Subtotal: Taxes 6.9% 3.7% 3.6% 3.4% 3.9% 4.2% 4.3% 4.5% 4.6% 4.7% Charges for Services ‐3.0% 2.2% 1.6% 1.4% 1.3%0.6% 0.6% 1.3% 1.2% 0.9% Stanford Fire & Dispatch Services 3.1% 4.2% 3.4% 2.8%2.5% 1.8% 2.0%2.4% 2.2% 1.4% Permits and Licenses ‐0.9% 0.1% 0.1% 0.1% 0.1%0.0% 0.0% 0.1% 0.0% 0.0% Return on Investments 24.3%‐1.5% 1.2% 1.4% 1.4% 2.8% 2.9% 2.9% 3.0% 3.2% Rental Income ‐4.9%‐3.2% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.7% 2.7% From Other Agencies ‐46.9% 0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0% 0.0% Charges to Other Funds 6.1% 3.2% 2.9% 2.4% 2.2% 0.8% 0.5% 2.2% 2.0% 0.3% Other Revenue ‐4.4% 0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0% 0.0% Total Non‐Tax Revenue ‐1.0% 0.9% 2.0% 1.8% 1.7%1.2% 1.2% 1.7% 1.7% 1.2% Operating Transfers‐In 1.7% 2.9% 2.2% 2.2% 2.5%2.3% 2.3% 2.4% 2.3% 2.4% BSR Contribution (One‐Time) Golf Operating Loss Reserve Liquidation Total Source of Funds 4.0% 2.8% 3.0% 2.8% 3.1% 3.2% 3.3% 3.6% 3.6% 3.6% FY 2021‐2030 General Fund Long Range Financial Forecast Base Case Expense Table ATTACHMENT B Expenditures & Other Uses Adopted  2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CAGR  10  Years Salary 75,506$   78,289$  81,100$  83,509$  85,774$  88,007$  90,051$   91,973$  93,882$  95,790$  97,702$  2.6% Benefits 59,042     62,695 65,921 69,089 71,631 73,917 74,743 75,642 78,340 80,726 82,123 3.4% Subtotal: Salary & Benefits 134,548   140,985 147,022 152,598 157,405 161,924 164,794   167,615 172,222 176,515 179,825 2.9% Contract Services 23,429 23,832 24,355 24,998 25,607 26,224 26,862 27,520 28,188 28,878 29,589 2.4% Supplies & Material 3,365 3,343 3,432 3,524 3,619 3,715 3,815 3,917 4,022 4,130 4,240 2.3% General Expense 12,089 11,267 12,509 12,676 12,818 13,071 13,090 13,413 14,079 14,356 14,535 1.9% Rents & Leases 1,734 1,762 1,777 1,793 1,809 1,825 1,843 1,860 1,878 1,897 1,916 1.0% Facilities & Equipment 771 516 530 544 559 574 589 605 621 638 655 ‐1.6% Allocated Charges 20,889 22,065 22,551 23,120 23,670 24,197 24,755 25,348 25,947 26,425 26,861 2.5% Committed Additions 223 674 708 728 764 787 825 849 890 916 Total Non Sal/Ben Before Transfers 62,277     63,009   65,828   67,363   68,811   70,372   71,740     73,489   75,584   77,215   78,712   2.4% Operating Transfers‐Out 5,023 4,317 4,411 4,508 4,607 4,708 4,817 4,923 5,037 5,154 5,268 0.5% Transfer to Infrastructure ‐ Base/Cubb 17,187 17,561 17,945 18,337 18,739 19,152 19,575 20,009 20,455 20,912 21,381 2.2% Transfer to Infrastructure ‐ TOT 11,774 14,576 14,963 15,389 15,835 16,310 16,818 17,331 17,871 18,481 19,196 5.0% Total Use of Funds $230,809 $240,447 $250,168 $258,194 $265,396 $272,465 $277,743 $283,366 $291,169 $298,276 $304,382 2.8% Expenditures & Other Uses Adopted  2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Salary 3.7% 3.6% 3.0% 2.7% 2.6% 2.3% 2.1% 2.1% 2.0% 2.0% Benefits 6.2% 5.1% 4.8% 3.7% 3.2% 1.1% 1.2% 3.6% 3.0% 1.7% Subtotal: Salary & Benefits 4.8% 4.3% 3.8% 3.2% 2.9% 1.8% 1.7% 2.7% 2.5% 1.9% Contract Services 1.7% 2.2% 2.6% 2.4% 2.4% 2.4% 2.5% 2.4% 2.4% 2.5% Supplies & Material ‐0.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% General Expense ‐6.8% 11.0% 1.3% 1.1% 2.0% 0.1% 2.5% 5.0% 2.0% 1.2% Rents & Leases 1.6% 0.9% 0.9% 0.9% 0.9% 0.9% 1.0% 1.0% 1.0% 1.0% Facilities & Equipment ‐33.0% 2.6% 2.7% 2.7% 2.7% 2.7% 2.7% 2.6% 2.7% 2.7% Allocated Charges 5.6% 2.2% 2.5% 2.4% 2.2% 2.3% 2.4% 2.4% 1.8% 1.6% Committed Additions N/A 202.6% 5.0% 2.9% 4.9% 2.9% 4.9% 2.9% 4.8% 2.9% Total Non Sal/Ben Before Transfers 1.2% 4.5% 2.3% 2.1% 2.3% 1.9% 2.4% 2.9% 2.2% 1.9% Operating Transfers‐Out ‐14.1% 2.2% 2.2% 2.2% 2.2% 2.3% 2.2% 2.3% 2.3% 2.2% Transfer to Infrastructure ‐ Base/Cubb 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% Transfer to Infrastructure ‐ TOT 23.8% 2.6% 2.8% 2.9% 3.0% 3.1% 3.1% 3.1% 3.4% 3.9% Total Use of Funds 4.2% 4.0% 3.2% 2.8% 2.7% 1.9% 2.0% 2.8% 2.4% 2.0% Attachment C  1) Develop a structurally balanced budget that brings ongoing revenues and expenses into alignment. Develop a plan for any structural imbalance to ensure that the City maintains it fiscal sustainability over the short, medium, and long- term. 2) Allocate one-time resources for one-time needs rather than committing one-time resources to ongoing services. Examine appropriate uses of revenue surpluses that exceed forecasted levels including planning for recession needs. 3) Ensure appropriate resource allocation for City Council’s existing priorities. 4) Focus on business process redesign to enhance quality, flexibility, and cost- effectiveness of service delivery (include examining opportunities to streamline, simplify, reorganize, and reallocate resources to avoid duplication of effort). 5) Explore alternative service delivery models (such as partnerships with non-profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectively use resources. 6) Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract services, for cost savings opportunities. 7) Explore the expansion of existing revenue sources or the addition of new revenue sources, including the alignment of existing charges for services and the opportunity to establish new fees, when appropriate. 8) Continue to analyze and prioritize resource augmentations, seeking to offset augmentations with reductions elsewhere for net-zero impacts to the budget whenever possible.  FY 2021 Budget Development Guidelines City of Palo Alto (ID # 10642) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/3/2019 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: Accept City Services Guide Title: Review and Acceptance of City Services Guide From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee review and accept the City Services Guide, ‘Our City at Work,’ currently based on the FY 2020 Adopted Budget. Background As part of the adoption of the Fiscal Year (FY) 2019 Budget, the City Council directed staff to: Return to the Finance Committee with a work plan and timeline to discuss the $4 million in structural reductions in the General Fund and the impacts of the reduction in expenses when the City Council returns from break, including a discussion of optimizing library hours. Also include discussion regarding the implications of closing the pension gap, at a commensurate 50% level to the General Fund, accounting for rising costs in non-general funds, specifically Enterprise and Other Funds. Staff developed two plans to address this referral: 1) “immediate action” and 2) “strategic action.” Ultimately, the Finance Committee and City Council approved the report and directed staff to complete both workplans. (City Manager’s Report (CMR) ID #9740) The Finance Committee and City Council completed the immediate action item in December 2018 with the approval of budget adjustments to the FY 2019 budget (CMR ID #9925). This action included the approval of an additional $4 million contribution from the General Fund to the City’s IRS section 115 irrevocable pension trust fund (Pension Trust). The second longer term plan for strategic action was included in the 2019 Fiscal Sustainability workplan (CMR ID #10267) adopted by the City Council. This report provides an update on the status of the second longer term plan for strategic action. City of Palo Alto Page 2 Discussion In November 2018, staff embarked on the strategic action alongside the City Council’s immediate action in response to the City Council referral discussed above, identification of additional funding for payment of pension liabilities. Using the FY 2020 Adopted Budget, over 120 programs have been identified across the City, allocating over 1,000 full time positions and nearly 1,150 total positions when including part-time staffing. Throughout the city, departments have engaged in documenting a guide to City services and programs, using a common set of terms to describe the wide range of services and programs currently provided by the City. This has informally been referred to as our “services inventory” previously and been renamed as the “City Services Guide.” After nearly a year, staff has gathered information about services, updated it for the FY 2020 Adopted Budget, and worked to more readily digest this information to articulate not only the financial accounting of services but the work the City performs and provides on a daily basis and the outcomes delivered. The City Services Guide can be found in Attachment A and an Appendix can be found here which has the tabular information of programs including a brief description; quantitative identification of revenues, expenses, and staffing allocated; and brief notes about resources managed or leveraged such as volunteer hours, grants, etc. The completed City Services Guide is intended to be used as a tool to begin outreach and education on both the resources and the costs of business that support the delivery of services to the community, each a critical component of the City’s financial sustainability ecosystem. Staff expects to continue to build on this and begin to further tie in performance metrics to assist in a more robust measuring of the services that are provided with the expected transition of the annual performance report from the City Auditor’s Office to the City Manager as previously approved by the Policy and Services Committee. Already as part of the FY 2020 Adopted Budget, at the direction of the City Council staff has amended its annual financial planning process to include ongoing annual contributions to the Pension Trust, approximately $6.2 million in all funds in FY 2020 for a total contribution of $22 million since inception in 2017. In order to accomplish this ongoing contribution, services are anticipated to evolve in areas such as Project Safety Net (PSN), medical and fire services, the re- opening of the junior museum and zoo, and printing and mailing services. A separate update on the status of referrals from the FY 2020 Budget process will be brought forward for the Finance Committee as an information item. Over the coming months, as part of the FY 2021 budget development, this work will be leveraged to continue to evaluate the resource needs and way services are delivered as the City works to maintain and further invest in the City Council priority of fiscal sustainability. Stakeholder Engagement Resources included in this document have been coordinated throughout the City with all departments and appointed officers. It is expected that these materials as well as presentation City of Palo Alto Page 3 materials will be used in future communication and engagement efforts including but not limited to blog posts and spotlights on Our City at Work, continued evaluation and follow-up on service delivery and the return on investment, and the further build out of this document to further tie in performance metrics. Resource Impact There are no immediate budget adjustments necessary; however, it is important to note the significant staffing resources across the City that have been dedicated to the completion of this work over the past year as well as consultant resources for the design and framing of this document (approximately $50,000). Further development of performance management and the evaluation of the delivery of services are expected to require additional resources. Policy Implications This work product aligns with the City Council direction included as one of the elements of the Fiscal Sustainability City Council priority workplan for 2019. Environmental Review This report is not a project for the purposes of the California Environmental Quality Act (CEQA). Environmental review is not required. Attachments: • Attachment A: City Services Guide OUR CITY AT Creating value for all. The government of the City of Palo Alto exists to promote and sustain a superior quality of life in Palo Alto. In partnership with our community, our goal is to deliver cost-effective services in a personal, responsive and innovative manner. QUALITY Superior delivery of services COURTESY Providing service with respect and concern EFFICIENCY Productive, effective use of resources INTEGRITY Straight-forward, honest and fair relations INNOVATION Excellence in creative thought and implementation 01 06 10 16 24 30 Citywide Introduction Palo Alto at a Glance “Where you Can Find Us” Map Our 2020 Adopted Budget Community & Library Services Library Community Services Public Safety Services Police Fire Office of Emergency Services Planning & Infrastructure Planning & Development Services Office of Transportation Utilities Public Works Internal Services Administrative Services Human Resources Information Technology City Council & Appointed Offices City Council Office of City Clerk Office of City Attorney Office of City Auditor Office of City Manager CONTENTS Dear Palo Altans, This “Our City at Work” is a services guide and complements the City of Palo Alto’s budget, highlighting the work that our staff do every day to support all Palo Alto residents. From our Fire Department to our Information Technology Department, we work together to deliver cost-effective services in a personal, responsive and innovative way. We hope you find this document to be a helpful resource that summarizes how our city government is organized and the work that each department carries out. This provides an overview of the cost to deliver valued services and to maintain and improve our public assets, such as our parks, libraries, roads, and utilities. As Palo Alto celebrates its 125th year, we reflect on the thriving community we have built together and look forward to continuing to promote and sustain a superior quality of life in Palo Alto. Respectfully, Ed Shikada A WORD FROM OUR CITY MANAGER PALO ALTO AT A GLANCE 125 years old Incorporated April 23, 1894 66,000 citizens Approximate population 25.85 square miles Approximate land 1,300 employees work for the City of Palo Alto $723 M Our Adopted Budget for 2020 AAA credit rating AAA, highest possible credit rating LIBRARIES 1.5 M items checked out 5 Library Facilities 254,678 Books 128,246 eBooks and eMusic 48,830 Audio Visual Material 52,966 Police Calls for Service 8,983 Fire/Ambulance Calls for Service 25 Police Vehicles 4 Police Motorcycles 1 Canine Unit 9 Fire Engines 2 Fire Trucks 6 Ambulances PUBLIC SAFETY PARKS, RECREATION, & COMMUNITY CENTERS 4,000+ acres Parks, Preserves, and Open Space 300+ Community Garden Plots 33 Parks 30 Playgrounds 5 Community Centers and Museums 4 Dog Parks 40+ miles of Trails 471miles of streets 9 million gallons Water Delivered to Customers Per Day 2.3 billion gallons Wastewater Treated 211 miles Gas Mains 307 miles Electrical Lines (Below and Above Ground) 48 miles Fiber Optic Backbone INFRASTRUCTURE AND UTILITIES 1 Downtown Library CITY HALL Fire Station 1 Fire Station 2 Fire Station 6 Palo Alto Police Station Pearson-Arastradero Preserve Weisshaar Park Werry Park Cameron Park Kellogg Park Cogswell Plaza El Camino Park Heritage Park Scott Park Peers Park Hopkins Creekside El Palo Alto Park Bowling Green Park Johnson Park Esri, HERE, Garmin, © OpenStreetMap contributors, and the GIS user community City of Palo Alto CITY HALL Foothills Park Fire Station 8 Pearson-Arastradero Preserve Stanford Menlo Park Mountain View East Palo Alto N Stanford Where you can find us Department Palo Alto City Boundary Stanford Boundary KEY Icon City Hall/Municipal Services Police Fire Library Community Services Public Works Click the icons for more information online! Children’s Library Rinconada Library College Terrace Library Mitchell Park Library Fire Station 4 Fire Station 5 Fire Station 3 Baylands Nature Interpretive Center Baylands Golf Links Bol Park Boulware Park Bowden Park Briones Park Wallis Park Byxbee Park Mayfield Park Esther Clark Preserve Eleanor Pardee Park Greer Park Heritage Park Hoover Park Mitchell Park Monroe Park Ramos Park Stanford-Palo Alto Playing Fields Terman Park Seale Park Robles Park Scott Park Riconada Park Cubberley Community Center Mitchell Park Community Center Peers Park Field House Lawn Bowling Green Club House Junior Museum & Zoo Palo Alto Art Center Lucie Stern Community Center & Children’s Theatre Pets in Need Animal Shelter Palo Alto Airport Palo Alto Regional Water Quality Control Plant Municipal Services Center Mountain View We work to maintain first-in-class facilities and services for our citizens! Ba y s h o r e F w y Oreg o n E x p y Al m a S t El C a m i n o R e a l OUR 2020 ADOPTED BUDGET all figures below in millions of dollars $723.8 M 34.3 8.3 53.2 29.3 31.4 17.5 10.0 91.6 17.1 11.4 11.7 2.3 335.5 8.6 60.9 Return on Investments Other Revenue and Operating Transfers In Use of Reserve Funds Charges to Other Funds Permits and Licenses Document Transfer Tax Other Taxes and Fines Net Sales Net Sales includes revenue from utilities customers for gas, electricity, water, wastewater, and fiber. From Other Agencies Property Tax For every $1,000 in property taxes paid by residents and businesses, the City receives $94. Charges for Services Services include fire services provided to Stanford, paramedic services, golf-related fees, arts and science classes, and plan check fees. Rental Income Transient Occupancy Tax Visitors staying at our local hotels pay a 15.5% tax applied to the room rate. Utility Users Tax Residents and businesses pay a Utility Users Tax of 5% for electricity, gas, water, and 4.75% for telephone services. Sales Tax For every $100 in purchases, the City receives approximately $1 out of the $9 sales tax. REVENUE AND EXPENSES This spread represents the authorized Fiscal Year 2020 budget for all funds, as adopted by the City Council. The grey bars in the center of the tree diagram represent general funds (light grey) and non-general funds (dark grey). This helps to show where revenue sources are spent. For instance, revenue from Net Sales for utility services corresponds with the funding source of the Utilities Department, which does not use general funds. REVENUE Revenue predominately for General Fund Revenue predominately for other funds $723.8 M The expenses below differ slightly from the figures in the rest of the document, because they include Internal Service Funds (ISFs), which provide services to City departments and recover their costs through user charges to those departments. Most ISF expenses are accounted for in the departments, and the rest are accounted for as Net Transfers. The department sections in this document include both the ISF expenses and the costs to deliver the ISF services, to represent the full cost of service delivery. *Information Technology (IT) expense budget is not reflected below as it is 100% ISF. 11.0 4.5 3.4 1.3 1.2 0.5 City Council & Appointed Offices City Manager City Attorney City Clerk City Auditor City Council 47.5 37.1 10.3 Community & Library Services Community Services Library Department Non-Departmental Non-Departmental Net Transfers 31.5 17.6 13.8 13.1 9.1 3.9 * Internal Services Administrative Services Human Resources Information Technology Public Safety Services Police Fire Emergency Services 82.7 44.8 36.1 1.7 Planning & Infrastructure Utilities Public Works Office of Transportation Planning & Development Services 538.1 302.6 190.8 23.3 21.4 EXPENSES General Fund Non-General Fund 5 Library Connecting the Community The library provides space for community get-togethers, meetings, workshops, emergency response meetings, election/ voting activities, citizenship, and tax assistance. Library visits totaled over 1 million in 2018. This is more than comparable library systems in Mountain View (633,920) and Redwood City (801,297), and on par with cities twice its size such as Berkeley. All Things Tech Every item in the library (books, media, e-books) is free to the public (excluding printing). There is free and equitable public access to computers at all of the libraries. This includes access to the Internet and public programs that use technology. The library also receives various grants to experiment and provide innovative (and fun) services. Our commitment to providing technology helps bridge the digital divide and ensure community access to the Internet. College Terrace Library Downtown Library Mitchell Park Library Rinconada Library The Children’s Library Palo Alto Santa Clara City Los Gatos Santa Clara County Visits per capita 15 10 5 Mountain ViewSan Jose Sunnyvale 2011 2018 1,000,000+ visits annually 500,000 titles readily available Ranked 5th out of 183 California libraries for circulation, with 22 items checked out and over 15 visits for every Palo Alto resident in 2018. LIBRARY DEPARTMENT Five Library Locations Mitchell Park Library Operating the Library Services needed to operate the library include facilities management, contracting, coordination of library equipment and planning. We annually provide 13,520 hours of library services (20% more than a decade ago). That’s an average of 52 hours a week per library. Library systems in Mountain View and Redwood City are open 3,808 and 10,816 hours a year respectively. The total budget for the library system is $10.3 million, with most of the resources and services provided free of charge. The department adopted a fines and fees budget of $216,000. Focus on Children The Palo Alto Children’s library was the first freestanding library in the U.S. intended solely for children. Staff spends a lot of time promoting childhood literacy, including giving kids tips on what to read, children’s story times, special event performances, and more. The Student Asset card has been implemented and more than 10,000 PAUSD students can now access all library resources with their school IDs. A Place for Teens What better place for a teen to hang out but the library where there are creative writing workshops, advice on book recommendations, and other services for teens 13 to 17. Teens can use their school ID card as a library card, and there is a teen librarian dedicated to help teen colleagues. 6,000 teens participated in programs last year, a 174% increase from the prior peak in 2012. Grown Ups Go to the Library Too The library uses ideas from the community to develop programs for adults. The library partners with other City departments such as Community Services to offer mini classes like yoga, photography, and Excel mastery. Other services also include English Language Learner classes, book groups, and more. In 2018, 6,445 people participated in over 450 programs. The library also responded to over 33,000 reference inquiries. Total expenses for the Library Department in FY 2020. Business Operations Access to Collections Access to Technology 3 Other Programs Children’s Services Adult Services Department cost recovery 2% 12% 11% 11% 22% 33% Total Expenses $10.3 M 7 Library Our Team Our Community Services Department (CSD) provides programs and services supporting the health and wellbeing of residents. Through our partnerships with community organizations, volunteers, commissions, foundations, and friends’ groups, we strive to achieve our mission: “Engaging individuals and families to create a strong and healthy community, through parks, open space, recreation, social services, arts and sciences.” CSD provides safe and welcoming spaces for creative expression, physical activity, personal growth, and lifelong learning. Our Office of Human Services provides safety net services to enhance overall quality of life. Our Recreation and Arts & Sciences Divisions provide camps, classes, and workshops to more than 10,000 people of all ages annually. Enrichment opportunities abound – participants can try their hand at everything from Acting to Zoology. We provide science, art, dance, and theatre enrichment programming in every PAUSD elementary school. We enrich lives and build community. We offer abundant youth programming and leadership opportunities. MakeX, a makerspace “for-teens-by-teens,” served 1,500 youth in FY2018. The Drop, an afterschool program for middle-schoolers, served over 200. CSD also provides nearly 100 counselor, counselor-in-training, and summer internships each year to local teens. COMMUNITY SERVICES DEPARTMENT Did you know? Palo Alto operates: acres of open space community garden plots parks playgrounds miles of trails dog parks community pool golf course (newly renovated!) sport courts and fields! 4,000+ 300+ 33 30 40+ 4 1 1 dozens We oversee three theaters with programming almost every week of the year! The Children’s Theatre and the three non-profit theatre partners at the Lucie Stern Community Theatre host artistic productions, viewed by more than 95,000 people in FY2018. We also host special events, including the May Fête Parade, Fourth of July Chili Cook-Off, a summer concert series, and family days. Our Office of Human Services works with the City’s Human Relations Commission to allocate grants for services for seniors, youth, the unhoused, and basic needs including food and low-income healthcare. In FY2018, Human Services awarded 17 human- services grants and provided financial support to grantees, senior services, and childcare subsidies totaling nearly $1.5 million. Our Public Art Program oversees art installations throughout Palo Alto with over 300 pieces in the collection. The Public Art Program also oversees the Cubberley Artists Studio Program which supports the vitality of the arts in Palo Alto by providing affordable studio space. Volunteer and Partner Support CSD receives amazing support from our partners. We collaborate with three commissions, five foundation and Friends’ groups, dozens of non- profit partners, and thousands of volunteers. In FY2018, volunteers contributed 27,000 hours of work across our programs. Friends’ groups and Foundations supported programming through $435,000 of direct financial contributions and $150,000 of in-kind donations in FY 2018. Facility Management Total expenses for the Community Services Department in FY2020. 6 other programs Children’s Theatre Junior Museum & Zoo Art Exhibitions, Classes, Camps Human Services Open Space Admin. Golf Course Parks, Athletic Fields, & Courts Management Capital Projects: Parks & Open Space Capital Projects: Buildings & Facilities Department cost recovery 30% 10% 9% 17% 8%7% 6% 9% 6% 5% 5% 5% Total Expenses $37.1 M 9 Library Public Safety The Police Department helps residents and visitors stay safe while living, working, or simply enjoying the City of Palo Alto. We solve community safety issues through collaboration and transparency. We strive to be approachable, yet direct in our resolve to deter crime and keep all people safe. Public Service The Police Department has been serving the community of Palo Alto since 1894. Community Service Officers work to make public parking space available and accessible for our community. Animal Control Officers respond to 2,700 animal calls a year. Our dispatch center is the third busiest in the county. Our Technical division keeps the communication flowing between police, fire, paramedics, public works, utilities, and Office of Emergency Services. The Police Department is the provider of crossing guards for PAUSD students. We also conduct a Citizens Academy twice a year and parental support through Parent Project classes. Enforcing laws is just one aspect of the department. Being a community partner is our focus. POLICE DEPARTMENT 8 DIVISIONS | 158 MEMBERS Patrol Investigations Technical Services Traffic Parking Animal Control Personnel and Training Administration 8 Divisions - One Department The business of a Police Department is aiding a diverse set of customers and service requests, utilizing a unique infrastructure and processes. At the end of the day, the 158 members of the Palo Alto Police Department are unified in our mission: to proudly serve and protect the public with respect and integrity. Always Ready Whether we respond to a critical incident or a house alarm, our team is ready. Training is ongoing as laws continue to change, and how we do business evolves. From basic life support to canines that detect explosives, we have the skills and resources to take on emergencies large and small. 92 sworn officers who receive on average 90 hours per year of professional training 25 marked cars 4 motorcycles 55,000 responses annually to calls for service 1,900 accident reports 74% of cases solved by our detectives Total expenses for the Police Department in FY2020. 7 other programs Traffic Enforcement Information Management Technical Services Support Communication/ Dispatch Services Patrol Services Investigations Department cost recovery 10% 46% 11% 11% 7% 7% 5% Total Expenses $45.0 M 11 Library Saving Lives Health and safety is our priority. We continuously train to rescue people from any incident, including injury accidents, or medical emergencies. All our engines, trucks, and ambulances have certified EMTs and paramedics to provide treatment as soon as we arrive on the scene. Protecting Your Home and Business Saving lives is our priority, but we also protect property and the environment. We remain ready at all times to protect the community from fire, hazardous conditions, accidents, natural disasters and any emergency situation; and reduce the potential impact with immediate intervention and containment. Prevention and Education We enforce the latest fire and hazard prevention methods in building projects. Our Fire Inspectors conduct thousands of plan reviews and building inspections each year to ensure structures are up to code. Serving Stanford Stanford University partners with us to provide fire, EMS and all hazard response to campus. This partnership was established in the 1970s when Stanford closed its fire station and merged with our department. We recently renegotiated the terms of our service contract with Stanford and are proud to continue to serve as their fire department. The City receives $7 million annually which covers the staffing and administration costs to provide the service to campus. FIRE DEPARTMENT Helping our Neighbors We are ready and prepared to aid our local, regional, and national neighbors whenever they have emergencies that require our assistance. Our specialized training and apparatus allow us to be a valuable resource for areas that are affected by disastrous wildfires across the state of California. Due to global warming and climate change, wildfires and other natural disasters are more prevalent. We maintain a state of readiness to help our regional partners protect lives and property in their communities. Managing a 24/7 Operation Fire Business Operations works hard to ensure our firefighters are expertly trained and have the facilities and equipment they need. We ensure all required and specialty training is completed over three shifts. The total budget for the Fire Department’s is $32.2 million, with most of the services provided free of charge. The department generates approximately $3 million from ambulance transport fees, which are primarily collected from Medicaid, Medicare and private insurance. 9,000 calls responded to annually 70% of which are for medical emergencies. 8 minutes or less; our response time for 94% of EMS calls. 6 Ambulances 7 Fire Stations in operation every day 200 presentations fire safety presentations per year Total expenses for the Fire Department in FY2020. 4 other programs Business Operations Ambulance Transport Services Non Emergency Incident Response Emergency First Response Department cost recovery 32% 46% 25% 12% 10% Total Expenses $36.1 M 13 Library What We Do In Palo Alto, our planning environment is “all hazards, all risk” -- ranging from natural disasters (earthquakes, floods, climate change, etc.) to technological failures/accidents to crime and terrorism. We publish and revise a family of emergency management plans that form the baseline for our wide-ranging community outreach efforts. We support planned events, such as Stanford football games and dignitary visits, to bolster public safety and ensure our skills and equipment are kept to a high level of readiness. Serving the Community: Are You Ready? The OES leads day-to-day planning, intelligence, and coordination for emergencies City-wide. In 2017, OES updated the Threats and Hazards Identification and Risk Assessment Plan (THIRA) for Palo Alto. We have helped Palo Alto complete seismic improvements to facilities and critical infrastructure and city buildings. OES is also the program manager for the City’s Intrusion Detection System along the rail corridor. Whole Community Engagement OES has expanded our outreach to the community and provides public safety education lectures, presentations, and trainings throughout the community. Throughout the year, OES conducts emergency drills with key stakeholders that include seminars, communications tests, table-top exercises, and full-scale exercises, coordinated with community groups. We also participate on the Project Safety Net team which implements a community-based mental health plan for teen suicide prevention efforts. OFFICE OF EMERGENCY SERVICES Over 700 volunteers are active members of the Emergency Services Volunteer Program. Led or participated in over150 public education events throughout the community. We sponsor the Emergency Services Volunteer program. This neighborhood-based program provides a means for neighbors to help neighbors, especially when first responder resources are overwhelmed. OES apportions funds annually to support this program including an annual community event, monthly training sessions, quarterly leader meetings, and two exercises per year. You’ll see us all around town, but especially at the big City events such as the Great Race to Save Water, the May Fete Parade, and 4th of July Chili Cookoff. OES in Action We specialize in our ability to bring agencies and organizations together to improve our ability to work together. We spearheaded a monthly interagency public safety meeting for coordinating homeland security across local, county, state, and federal agencies in the Bay Area. Similarly, we are formed a multi-agency coordination group on San Francisquito Creek related issues. Our team participates in regional exercises and provides expertise during regional and statewide incidents and events. In 2019 we had 33 activations of OES resources. These resources include the City’s Emergency Operations Center, the Mobile Emergency Operations Center, two Ford response trucks, one logistics trailer, and an all-electric utility terrain vehicle. We actively maintain these resources so they are ready when needed. 26% Total expenses for the Office of Emergency Services in FY2020. Emergency Services Project Safety Net Department cost recovery 17% 74% Total Expenses $1.7 M 15 Library Our Team The Planning and Development Services Department (PDS) provides guidance for land use development, long range city planning, housing and environmental policies, efficient processing of building permit applications, and code enforcement that maintain and enhance the City as a safe and attractive community. Planning Entitlements For many development projects, the process starts with planning entitlements. Planning entitlement is the process of obtaining discretionary approvals for the right to develop a property. Our staff reviews proposals for compliance with the City’s Comprehensive Plan and Municipal Code. This is typically the time for residents and the community to review projects and provide input. This public engagement opportunity often includes public hearings before the Architectural Review Board, Historic Resources Board, Planning and Transportation Commission, or City Council. Building Responsibly Once it is time to build, we serve as a resource for homeowners, businesses, designers and contractors to help our customers build safe, healthy and sustainable buildings that comply with applicable codes and regulations. We assemble multi-disciplinary teams for project review and approval and are committed to delivering exceptional customer service. Prior to occupancy, we inspect projects to ensure they are withing state laws and local regulations. PLANNING & DEVELOPMENT SERVICES DEPARTMENT Plan Review Project Inspection Code Enforcement Code Enforcement This program ensures properties are maintained in a manner that reflects the community’s expectations in terms of property maintenance, structures built with proper permits, and other quality of life interests. This program also ensures projects that have received a planning entitlement continue to operate in a manner consistent with their conditions of approval. Long Range Planning and Code Updates The department is responsible for updating and maintaining the City’s Comprehensive Plan, the primary tool for guiding preservation and development in Palo Alto. We also recommend updates to the Municipal Code and to policies related to land use and building standards, which are driven by community input, state law, and sustainability goals. Administration/Business Operations To support this work, we set department priorities, provide resources to our staff, and manage the budget, contracts, and personnel. We are responsible for data collection, retention, and retrieval, and prepare reports and analysis. We share information with the public utilizing current technologies. 26,000 building inspections in 2018. Total expenses for the Planning & Development Services Department in FY2020 Long Range Customer Service/ Front Counter Current PlanningInspection Administration/ Business Operations 3 Other Programs Department cost recovery 99% 13% 13% 14% 23% 25% Total Expenses $21.6 M 17 Library OFFICE OF TRANSPORTATION 56%+ of PAUSD students bike or walk to school. That is compared to the national average of 13%. Moving Safely The Office of Transportation helps people move around. We undertake projects and manage programs that enhance the safety and mobility of Palo Alto’s transportation system while protecting environmental resources and preserving the community’s quality of life. The Office of Transportation is responsible for parking management, traffic operations, the bicycle network, area transportation studies, regional transportation activities, the Palo Alto Free Shuttle, and neighborhood traffic calming. Mobility We are responsible for sustainable transportation systems that aim to reduce traffic congestion and greenhouse gas emissions by facilitating an increase in pedestrian, bicycle, public transit, and other alternative modes of transportation use. We guide programs such as Safe Routes to School and the Palo Alto Shuttle and implement projects from the Bicycle to Pedestrian Transportation Plan and the Comprehensive Plan. Parking We plan, develop, and administer the Residential Permit Parking (RPP) program, parking in the City’s garages and lots, and on-street parking in commercial districts. PAUSD HIGH SCHOOL BIKE COUNTS (%), 1999-2018 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 1999 2018 3,000+ middle and high school students bike to school today. That’s 2.6X more than in 2003. Transportation in Palo Alto We oversee the City’s transportation infrastructure investments to enhance safety and mitigate traffic congestion through long- and short-range plans, corridor plans, traffic studies, and review of proposed private developments. Our projects include Rail Grade Separations and Traffic Operations & Capital Improvement Projects. Traffic Operations and Safety We are working with the community to separate the rail from the street throughout Palo Alto. Over the past few years, the City has engaged in a community-based process to address the increased traffic congestion expected as more trains are added to the Caltrain corridor. We have held over 50 meetings and received hundreds of comments. This process will inform decisions affecting future generations to come as we work to decrease traffic congestion and increase safety for all road users through this project. Over 4,200 trips. The free Crosstown Shuttle made over 4,200 roundtrips in 2018! The Shuttle program costs $586k to run, 2% of the Office of Transportation expenses. Safe Routes to School For 40 years, the City, PAUSD, and the PTA have maintained a child transportation safety-focused collaboration. Encouraging active and alternative commutes is critical to supporting the goals of Palo Alto’s Sustainability/Climate Action Plan as well as the Comprehensive Plan and the Bicycle and Pedestrian Transportation Plan. To accommodate these increases, the scope of the City’s Safe Routes to School education offerings has grown. The 2017-18 core education programs touched approximately 6,077 students, or roughly 49% of total PAUSD enrollment. 56% Total expenses for the Office of Transportation in FY 2020. 5 other programs Traffic & Transportation Capital Projects Parking Capital Projects Parking Operations Railroad Grade Separation Capital Project Department cost recovery 47% 19% 10% 4% Total Expenses $27.3 M 19 Library City Run and Owned Multi-Utilities The City of Palo Alto Utilities Department (CPAU) is unique among municipalities in California by providing five utility services: electric, fiber optics, gas, sewer, and water. The Utilities Department provides safe, reliable, environmentally sustainable and cost-effective services. Benefits of a Municipal Utility City owned and operated utilities benefit Palo Alto residents and businesses: • Local control and policy setting • Competitive utility rates • Reliable and safe services operations • Responsiveness and accountability to citizens and utility customers • Community values-driven programs & services • Support for Fire, Police, Library, and other City and community services Investment in Safety & Reliability CPAU is a leader in implementing long-term utility system replacement planning. Annual investments in the electric, fiber optic, natural gas, wastewater, and drinking water systems are necessary to sustain reliability over the long term. All the utility systems with the exception of fiber optics are over 100 years old and most are in need of replacement or upgrade. Operations staff are on call 24/7, 365 days to respond to outages, main breaks, and other emergencies. UTILITIES DEPARTMENT We maintain hundreds of miles of infrastructure. 217 mi Sewer Main 235 mi Water Main 48 mi Fiber Cable 307 mi Electric Dist. Line 211 mi Gas Main 100% carbon neutral Electricity and natural gas 25,400 residential, plus 4,000 non-residential customers served. 2030 goal: 80% GHG reduction below 1990 levels. Leader for Environmental Sustainability Palo Alto has long been a leader in sustainability, making remarkable progress toward reducing its carbon impacts. CPAU offers energy and water saving programs and services to educate customers about how to use utility resources more efficiently. CPAU also offers assistance to low-income customers including both bill payment plans and free home efficiency measures. Palo Alto provides 100% carbon neutral electricity and natural gas. Carbon neutral means that no net emissions of greenhouse gases (GHG) are released into the atmosphere. With shifting climate patterns and significant long-term water supply uncertainty, CPAU will continue to encourage water conservation, as well as increase the availability of recycled water. Natural Gas, Electrification, & Transportation Energy efficiency, renewables and electrification are key to Palo Alto’s low carbon energy strategy. Natural gas emissions represent approximately 25% of Palo Alto’s remaining carbon footprint. Palo Alto will first seek to reduce natural gas usage through energy efficiency and conservation, followed by electrification of appliances where cost effective. The largest contributor of Palo Alto’s GHG emissions are from road transportation. Palo Alto is encouraging its residents and commuters to adopt zero emission vehicles. Palo Alto has one of the highest electric vehicle (EV) ownership rates in the country - estimated by staff at 3-4% of registered vehicles. Utilities will accelerate EV penetration through policies, incentives, and provisions of EV charging infrastructure. 5 Utilities Divisions Administration: oversees strategic direction, goals, budget, staffing resources, and action plans. Customer support: manages customer accounts and billing for all utility services resulting in one comprehensive bill for all city utility services. Engineering: designs and constructs utility system capital improvement and resiliency projects. Operations: maintains and repairs all utility systems and subsystems; responds to emergency outages, breaks, and leaks. Resource Management: manages resource portfolio including carbon neutral supplies, sustainability, and efficiency programs. Total expenses for the Utilities Department in FY 2020. 7 other programs Operations Wastewater Treatment Charges Engineering Business Operations CIP Resource Planning Department cost recovery 89% 44% 18% 16% 7% 4% 4% Total Expenses $337.2 M 21 Library Keeping the City Flowing The Public Works Department is responsible for a diverse set of construction, maintenances, and sustainability initiatives. The Department is comprised of four divisions: Airport Operations, Engineering Services, Environmental Services, and Public Services. Together they keep Palo Alto flowing. Going Green Environmental Services operates and maintains the Regional Water Quality Control Plant, provides pollution prevention information and programs, and manages the City’s waste programs. The City is currently enacting multiple projects to update infrastructure, reduce greenhouse gas emissions, and achieve Zero Waste goals. The Zero Waste Program serves 5,700 households a year via weekly hazardous waste events. That’s a 20% participation rate; by comparison, the County of Santa Clara has a 4-5% participation rate. The program also maintains over 80% of waste diverted from landfills, with the long term goal of 95% by 2030. Approximately 10 acres of the 130-acre capped landfill are rehabilitated annually. The water treatment facilities process and treat over 6,300 million gallons of wastewater a year, and deliver 230 million gallons of recycled water. Well-managed operation and maintenance of the plant facilities avoids overflows and release of poorly treated sewage, protecting the environment and the San Francisco Bay for everyone to enjoy. Finally, the watershed protection program performs about 600 inspections annually at businesses to ensure they meet sanitary sewer system requirements. They also perform outreach to the community, and over 150 education programs across 18 schools. PUBLIC WORKS DEPARTMENT FOUR DIVISIONS Airport Operations Engineering Services Environmental Services Public Services 58,000 tons of recyclable and compostable materials 24,000 tons of garbage 6,300 M gallons of wastewater treated 230 M gallons of recycled water serving approximately 18,000 residents & 2,000 commercial sites Waste Collection Water Treatment The Sky’s the Limit The Palo Alto Airport is the fourth busiest airport in the Bay Area, serving as a general aviation reliever to surrounding major airports. Airport Operations staff inspects and maintains over 102 acres of airport facilities and grounds to ensure the airport remains open and safe to the flying public. The Federal Aviation Administration (FAA) has identified the Airport Apron Reconstruction project as a high priority. The FAA provided $10.7 M in funding, which is 90% of the project construction costs. Engineering Palo Alto Engineering Services provides the community with safe, modern, and sustainable libraries, community centers, theaters, fire stations, park restrooms, parking garages, outdoor facilities, bridges, streets, and sidewalks. The division also supports private and public development construction in the public right of way to ensure compliance with City standards and proper handling of stormwater runoff. Keeping Everything Running Public Services maintains and rehabilitates roads, sidewalks, storm drains, signage, parking lots, and all City service vehicles. The Street Sweeping program keeps the community clean and safe by preventing dirt, garbage, and leaves from clogging and polluting waterways and drains, which reduces the likelihood of flooding. There are 2,750 catch basins and 8 pump stations that are regularly inspected to ensure the City’s storm drainage is running at 100% efficiency. Total expenses for the Public Works Department in FY 2020. 66,000 trees maintained by the Urban Forestry Program, City-wide. 28 other programs CIP: WWT System Improvements WWT: RWQCP Operation & Maintenance CIP: Vehicle & Equipment Replacement Facilities REF: Waste Collection, Processing, & Disposal CIP: GF Buildings & Facilities CIP: GF Streets & Sidewalks Department cost recovery 69% 16% 14% 13% 11% 9% 3% 3% Total Expenses $206.6 M 23 Library Financial Stewardship The Administrative Services Department takes care of the finances for the Palo Alto City organization. We ensure that the City and community are in good financial standing. We plan and account for all spending and financial transactions made by the City. Like the home budget that Palo Alto families manage to meet their needs, ASD ensures that financial resources in the City’s $723 million budget are allocated to the City Council priorities and to the many services expected by our community. We monitor the inflow of revenues so that each year we have a balanced budget. At the end of each fiscal year, we collect and send all the financial data to an external auditor to transparently ensure that our City’s finances are in order. At the end of this process we issue an annual financial report to the City Council with the external auditor’s analysis. We conduct long-term financial planning. By showing the City Council the ten-year outlook of expected expenses and revenues, the Council can make informed decisions that keep priorities in line with available resources. Customer Service ASD helps community-members and visitors obtain parking permits and pay invoices at the public customer service counter in the City Hall Lobby. Here we offer friendly service and answer common questions to the City’s many daily customers. ADMINISTRATIVE SERVICES DEPARTMENT $723 M The City’s annual budget, balanced by ASD. 6,210 parking permits were provided to customers in FY2018 $540 M in the City’s investment portfolio 4,259 items in inventory at the City Warehouse, with a value of $4.6 M Supplying the City ASD is the central coordinator for the purchasing of supplies and materials for other City departments. This centralization allows for economies of scale while ensuring the city is getting the best value through the competitive bidding process. Keeping the City Well Stocked We manage the City warehouse, where we keep tools and replacement parts such as street light fixtures. Our tracking and accounting process ensures that City doesn’t lose or waste items. Managing Investments We maintain the City’s cash on hand, financial reserves, and investments, planning for contingencies such as emergencies, natural disasters, or sudden changes in the economy. Protecting and preserving the City’s finances are a key piece of our sound financial stewardship. Public Real Estate Assets We in ASD are charged with managing the City’s public lands, buildings and properties on behalf of the community. We establish lease agreements, grant approved access, and manage public easements among other real estate activities that protect and enhance the community’s land value. The City has over 150 properties ranging in size from small utility stations to large complexes like Lucie Stern Community Center. 23% 16% Total expenses for the Administration Services Department in FY2020. 4 other programs Office of Management & Budget Accounting & Financial Reporting Printing & Mailing Services Purchasing Revenue Collection Parking Permit Department cost recovery 32% 15% 13% 7% 7% Total Expenses $10.8 M 25 Library A Strategic Partner for the Organization Human Resources (HR) provides strategic, consultative and collaborative HR services throughout the organization. Human Resources serves as technical experts on job specifications, hiring processes, salary schedules, benefits, union contracts, policies and workplace health and safety. In addition to providing technical services, Human Resources hosts employee recognition and appreciation events, along with serving as ambassadors for employee engagement. The mission of the Human Resources department is to “Support the workforce to be empowered to serve the community.” This is accomplished by attracting and retaining a quality workforce and facilitating collaborative relationships between employees, management and employee organizations. Onboarding for a Great Start The City’s nationally recognized “New Employee Orientation” (NEO) is the starting point to welcome new employees and newly promoted employees. NEO is held monthly to engage new hires and promoted employees in a two-day immersion into the City’s mission, values and operations. NEO attendees learn about Palo Alto’s history, culture and present-day enterprises through a guided tour, where attendees are provided a broad perspective of the community we serve. In addition to connecting attendees to the City’s mission, participants are provided a valuable networking opportunity with their peers. Through the NEO onboarding program, new hires and promoted employees can establish working relationships that will help them be successful throughout their careers. HUMAN RESOURCES DEPARTMENT 1,100 employee classes completed throughout the year 11,000 applications screened 160 full-time and 135 part-time employees hired 5,000 personnel transactions processed with 95% accuracy 7 Union Contracts successfully renewed in FY2018 A Learning Organization In addition to meeting State and Federal requirements for specific trainings that are mandatory for the workforce, Human Resources provides professional development opportunities throughout the organization. Human Resources has piloted a Leadership Academy along with increased opportunities for more training classes and professional development. Human Resources participates in a regional “Next-Gen” program which spans multiple city and county governments. Through this effort, Palo Alto has offered 20-30 internships per year to introduce high school, undergraduate and graduate students to the rewards of serving in local government. Facilitating Change Human Resources assists employees to make informed decisions about the comprehensive benefits the City provides for the employee and their family. Throughout an employee’s tenure with the City, various changes are bound to happen -- including advancement opportunities, compensation changes and life events, such as growing a family or becoming empty nesters. Human Resources facilitates these changes to be as seamless and streamlined as possible. 8% reduction in Workers’ Compensation Claims over the last 5 years Total expenses for the Human Resources Department in FY 2020. 5 other programs Risk Management Benefits Department cost recovery 97% 88% 9% When the Unexpected Happens The City employs approximately 1,300 employees, spanning a wide range of occupations throughout the organization, including high-risk jobs such as police officer, firefighter and utilities employees who work with electricity or gas. As such, it is unavoidable that workplace injuries may occur from time-to-time. The Human Resources occupational safety program seeks to minimize employee injuries, provide prompt care when injuries occur, and return employees to work as safely as possible. Total Expenses $106.3 M 27 Keeping Palo Alto Connected The Information Technology Department champions a forward-thinking vision that reflects our role as a global leader in technology innovation. We provide a broad range of solutions to employees, city departments, City Council members and our community. You might not see us every day, but we are continuously working behind the scenes, driving and maintaining the technology that runs our digital City 24/7. Upcoming projects include Enterprise Resource Planning (ERP) upgrades, Council Chambers AV upgrade, and the Next Generation City Website. The majority of funding for the Information Technology Department comes from all other city departments. This enables us to support the technology for City departments such as the Police Department and the Community Services Department to enable them to provide services to our community. As the technology team for the City of Palo Alto, we are uniquely positioned to help provide solutions that span across all city functions and deep into our community. Our strategy is to embrace the very best of technology innovation with a vision to “Build and Enable a Leading Digital City.” Under the leadership of the Chief Information Officer, we deliver five core service areas designed to enable, facilitate, and improve government services to our community. INFORMATION TECHNOLOGY DEPARTMENT Best Digital City Palo Alto was named a Best Digital City in 2017 by Government Technology for the fifth consecutive year, the only California city with under 75,000 people to win. 90 datasets available 1,400 visits yearly OpenData Portal Public Wi-Fi 36 hotspots 2,400 daily users City Website 77,580 average monthly visits IT Service Desk employees supported 6,000 calls per year 1,300 IT Service Desk Office of Chief Information Officer This office provides leadership and strategic direction for the City of Palo Alto’s use of technology. We are often the public-facing part of the team and are responsible for fostering mutually beneficial public-private, technology-related partnerships. IT Project Management Office As stewards of the public trust for IT project management, we ensure successful execution of technology projects. We aspire to be a center of excellence for IT project management through the promotion of standards, awareness, and education. IT Operations We maintain and support back-end and front- end City technologies including the process of retiring products and services. Our team also ratifies standards while working alongside other IT divisions. Enterprise Systems We maintain a core set of Enterprise Resource Planning (ERP) systems like SAP for supporting financial business processes, information flow, and reporting for the City. Information Security Systems We develop and implement the citywide information security program that includes the preservation of the availability, integrity, and confidentiality of the City’s information resources. Total expenses for the Information Technology in FY 2020. Project Management Services Desktop Support ERP Support App Maintenance & ReplacementBusiness Operations Infrastructure Services Citywide Tech Upgrades & Improvements 7 Other Programs Department cost recovery 68% 6% 8% 10%12% 13% 27% 7% Total Expenses $25.4 M 29 Our Council Palo Alto’s City Charter established a Council and City Manager form of Government. The Council is the legislative body of the City, it sets policy and establishes the City’s overall priorities and direction. Our guiding values emphasize community, stewardship, and public service. The seven Council members are elected at large for four-year terms in even-numbered years. The terms are staggered so that three of the four Council seats are filled at the general municipal election, and four are filled at the next general election. Service on the Council is limited to two consecutive full terms. In January of each year, Council elects one of its members as Mayor and another as Vice Mayor. Priorities The City Council sets policy direction for the City of Palo Alto and confers that direction through legislative actions. Each year the City Council sets it priorities for the upcoming year. Recent priorities are Climate/Sustainability and Climate Action Plan, Grade Separations, Transportation and Traffic, Housing, and Fiscal Sustainability. CITY COUNCIL City Council Services Department cost recovery 15% Total Expenses $0.6 M Total expenses for the City Council in FY 2020. Empowering Voters The City Clerk is a City Council appointed officer and serves as the liaison between the public and City Council. The City Clerk is the elections official for the City and works with the Santa Clara County Registrar of Voters for elections administration. The Clerk provides information and services to help the community participate in its government and make informed decisions. The Clerk also ensures that all actions taken by the City Council are in compliance with Federal, State, and Local statutes and regulations. Transparency and Records The Office of City Clerk is also responsible for a variety of other initiatives and actions for the City. The City Clerk: • Produces the City Council’s agenda • Maintains and updates the City Council Procedures and Protocols Handbook • Coordinates recruitment to fill vacancies on the City’s various Boards and Commissions • Manages campaign statements of all local campaign committees • Facilitates the execution of official and legislative process • Maintains the City’s Records Retention Schedule and provides departments with guidance on policies and best practices of records management. OFFICE OF CITY CLERK 65% Business Operations Election Services Public Noticing & Engagement Legislative Process & Records Compliance Department cost recovery 50% 21% 9% 5% Total Expenses $1.3 M 65% Total expenses for the Office of City Clerk in FY 2020. 31 Our Team The City Attorney’s Office provides high-quality comprehensive legal services to Palo Alto’s city government, including the City Council, City Manager, operating departments, and appointed boards and commissions. We focus on advocating for the City and its residents and reducing risk. Supporting Effective Decisions We support the work of the City Council, City Manager, department leaders and resident volunteers by explaining legal requirements and offering options. When decisions are made, we draft ordinances, project approvals, regulations, procedures, contracts and memorandum of agreements (MOUs) that advance the City’s interests and are clear, complete and enforceable. As projects and services are implemented, we provide ongoing legal advice and guidance to resolve issues that arise. Resolving Claims and Defending the City The City Attorney’s Office investigates and resolves liability claims against the City. This reduces unnecessary lawsuits, ensures timely response to legitimate concerns, and safeguards public resources. When legal action is brought against the City, we launch a vigorous defense. Enforcing City Rules We assist Code Enforcement when court action becomes necessary, and work with the court and non- profit social services providers to resolve misconduct citations. Reducing Risk We strive to reduce risk and avoid liability. We assist in developing procedures and practices that foster compliance with our obligations. We offer training to increase awareness of legal requirements and adoption of effective practices. OFFICE OF CITY ATTORNEY 95% of resolvable claims concluded within 45 days of filing. 63% Business Operations Department cost recovery 19% 18% 19% 63% Litigation & Dispute Resolution Consultation & Advisory Total expenses for the Office of City Attorney in FY 2020. Total Expenses $3.9 M Independent and Objective The Office of the City Auditor (OCA) conducts performance audits and reviews of City departments, programs, and services. Performance audits provide the City Council, City management, and the public with independent and objective information regarding the economy, efficiency, and effectiveness of City programs and activities. The OCA coordinates and issues the annual City of Palo Alto Service Efforts and Accomplishments report summarizing costs, workload, and performance results for City services with selected data for the last five years. The OCA contracts with an independent certified public accountant for the City’s annual external financial audit. The OCA also conducts and coordinates revenue monitoring in areas such as sales and use tax, property tax, transient occupancy tax and utility user’s tax. Each fiscal year, the OCA presents an annual audit work plan for City Council approval. The OCA reports quarterly to the City Council on the status of audit projects and annually on the status of open audit recommendations. OFFICE OF CITY AUDITOR Click to see the latest Performance Reports Total expenses for the Office of City Auditor in FY 2020. External Monitoring & Reporting Performance Audit Services Department cost recovery 80% 71% 29% Total Expenses $1.4 M 33 Library Our Team The City Manager’s Office provides leadership and professional management to the City government organization. We work with the City Council to develop and implement policies that maintain and enhance Palo Alto’s quality of life. Our guiding values emphasize community, stewardship, and public service. Actions and Priorities The City Council sets policy direction for the City of Palo Alto and confers that direction through legislative actions. The City Manager’s Office plays a leading role in supporting the City Council’s work. This work includes analysis, preparation and review of reports, drafting recommendations, and coordinating implementation of Council actions. Council priorities and unfolding events often lead to special projects that require the coordination and leadership from our office. For example, the Office of Sustainability is housed here as the principles of sustainability must reach every department in order to have an impact. As a result, every year Palo Alto becomes more sustainable as demonstrated by the City’s continued increase in electric vehicles and investment in alternative modes of transportation. Operations and Support The operations of the City and priorities of the Council are carried out by a dedicated professional workforce. The City Manager’s Office cultivates a strong service culture in order to recruit and retain a highly qualified, engaged, and effective workforce. We do not work alone in these efforts but rely on the executive leadership team (ELT). The ELT is made up of all the department heads in the City. We provide strategic guidance to the ELT through weekly team meetings and individual collaboration. We also emphasize mentorship, developing a pipeline of qualified managers within the organization. To this end, we created an internal Leadership Cohort to maximize leadership development training, coaching, and mentoring. OFFICE OF THE CITY MANAGER 70 City Council and Committee Meetings spanning 322 hours in FY2018 Over500 Agenda Items for City Council and Committee Meetings in FY2019 Visiting dignitaries from Yangpu District. Sister Cities Palo Alto has eight sister cities across the world. The City Manager’s Office coordinates and promotes educational and cultural exchanges with these cities, including student exchange, adult travel, sustainability and government, commerce, charitable work, and local community festivities. Find out more about our sister cities and partnership with Neighbors Abroad here. Community Engagement Palo Alto stands out as a well-informed and engaged community. We build on this strength by proactively communicating public information through social media and the press, creating and supporting neighborhood partnerships, and facilitating citizen involvement. Working with community members is critical to a strong local democracy and strong community. We also promote economic vitality and engage with our business community. We serve as the point of contact for entrepreneurs; helping them to connect with appropriate departments, answering questions, and resolving issues as they arise. Palo Alto’s Sister Cities 2 Other Programs Business Operations Community EngagementSustainability Program Special Interdepartmental Projects Workforce Facilitate Legislative Actions Department cost recovery 43% 18% 18% 14%14% 12% 12% Total Expenses $4.5 M Total expenses for the Office of the City Manager in FY 2020. Heidelberg, Germany Enschede, Netherlands Yangpu District, Shanghai, China Tsuchiura, Japan Albi, France Palo Alto, USA Oaxaca, Mexico Linkoping, Sweden Palo, Philippines 35 Eric Filseth, Mayor Adrian Fine, Vice Mayor Alison Cormack, Council Member Tom DuBois, Council Member Liz Kniss, Council Member Lydia Kou, Council Member Greg Tanaka, Council Member Ed Shikada, City Manager Molly Stump, City Attorney Beth Minor, City Clerk City Hall 250 Hamilton Avenue, Palo Alto, CA 94301 General City Information (650) 329-2100 Visit our website at: www.CityofPaloAlto.org Contact the City Council CityCouncil@CityofPaloAlto.org CityMgr@CityofPaloAlto.org Americans With Disabilities Act Statement 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 250 Hamilton Avenue, Palo Alto, CA 94301 (650) 329-2496 City of Palo Alto (ID # 10643) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/3/2019 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2020 Budget Referrals Update Title: FY 2020 Budget Referrals Update From: City Manager Lead Department: Administrative Services Recommendation This is an informational report and no Finance Committee action is required. Background and Discussion In April 2019, Finance Committee reviewed the Fiscal Year 2020 Budget. As part of this review, the Finance Committee requested various information items. The table below provides an update on both completed and outstanding referrals. These updates have been provided in coordination with the assigned departments. Referral Assigned Department Status FY2020 Budget: Return to the Finance Committee to strategize the use of uncommitted funds from the Stanford University Medical Center (SUMC) development agreement. Office of Management and Budget Oct 2019: See Attachment A Included in Attachment A is a summary of the current status of the SUMC development agreement funds, remaining balances, future anticipated expenses and uncommitted balances. Staff recommends that considering the continuing competing priorities, the City Manager review and incorporate any recommended changes to current allocations and/or future allocations as part of the FY 2021 annual budget process. FY2020 Budget: Provide an update on the Bicycle/Pedestrian Plan to the City Council in Fall 2019. Office of Transportation Nov 2019: Due to staff vacancies, in particular the position of Chief Transportation Official, the presentation of the Bicycle/Pedestrian Plan update has been be delayed. With new staff coming aboard and an amended consultant contract with Municipal Resource Group (pending Council approval on November 18), the update should be ready for Council in the first half of calendar year 2020. City of Palo Alto Page 2 FY2020 Budget: Review of New Junior Museum Zoo Staffing, Budget, and Fees planned for FY21-->Analyze the appropriate price levels for the gated Junior Museum and Zoo (JMZ), anticipated to open in summer 2020, to ensure appropriate cost recovery levels Community Services Department Oct 2019: The Junior Museum and Zoo (JMZ) construction project is well underway. Due to delays caused by rain, the anticipated re-opening date is now October 2020. Staff is currently in the process of refining the business plan for the new facility, which includes developing a new staffing model and operating budget. Staff is also finalizing the proposed ticket and membership price levels for the gated entry. Staff anticipate presenting these recommended changes to the Finance Committee in February 2020. FY2020 Budget: Discuss Library fines with the Library Advisory Commission. More extensively discuss the trade-offs associated with fines in the Library and the disadvantages and advantages of using fines. Library Oct 2019: Library fines were discussed with the Library Advisory Commission (LAC) during the June 27, 2019 meeting. Minutes from this meeting can be found here, video can be found here. An additional follow-up during the August 14 meeting included a letter explaining offset considerations here. A motion which was unanimously passed by the LAC recommends banning fines on policy terms and to allow staff to begin exploring what the potential offsets would be. Library fine revenue does not directly offset costs, is not guaranteed, and varies year to year; currently showing a 48% reduction over three years partially due to the elimination of children’s late fines. Further reduced late fines are expected in FY 2020 due to the implementation of automatic renewals in September 2019. Automatic renewals have resulted in up to 50% reduction in late fine revenues for other library systems, making it possible for further late fine reduction to occur in Palo Alto. The Library spends 1,560 staff hours each year processing late fines collection and $8,000 annually on a collection service to facilitate fine collection over $10. Some staff hours and collection services investments will still have to be made to collect other library fines, but both amounts should decrease upon elimination of late fines. Despite the decreased revenue over the years and the national and local trend to eliminate late fines as barriers to service for low-income customers, late fines still represent a line of revenue for the General Fund. $59,000 was collected from late fines in FY 2019. This represents 0.6% of the Library’s entire operating budget and 0.03% of the entire General Fund’s revenue. Lost or damaged materials fines would remain ($24,981 in FY 2019). City of Palo Alto Page 3 The Library is seeking alternate forms of dependable revenue to offset a loss of late fine dollars, such as implementing community room rental fees in January 2020 for the Embarcadero and Midtown rooms at Rinconada and Mitchell Park libraries respectively. Other examples of potential new revenue streams the Library is exploring are a passport office and exam proctoring services. Recommendations related to library fines and other Library related revenue will be brought forward as part of the FY 2021 annual budget process. FY2020 Budget: Adopted budget approved a one-year phase out of Project Safety Net to a nonprofit or partnership relationship. Community Services Department Oct 2019: The Fiscal Year 2020 adopted budget anticipated that Project Safety Net (PSN) would transition from a Collective Impact Model funded by the City’s General Fund to a nonprofit entity by the start of FY 2021. This effort is underway and the City anticipates that PSN will be incorporated as a separate entity by Fiscal Year 2021. PSN has initiated the process of legally transitioning to a 501(c)(3) nonprofit by engaging with a law firm that is providing pro bono service to complete the application. PSN is also establishing the nonprofit board of directors and is developing the nonprofit’s operating model, by-laws, future mission, and scope of services. To support this transition, staff proposed to provide financial support in an amount of $100,000 annually beginning in FY 2021 (an ongoing savings of $170,000) and one-time funding of $25,000 in FY 2020 to assist in transition costs. This funding level is still recommended but will be reassessed if PSN’s transition timeline is delayed. FY2020 Budget: Adopted budget approved the elimination of medic 61 beginning January 2020 (currently staffed by overtime) Fire Oct 2019: The planned deployment changes require consultation with the local International Association of Firefighters (IAFF) and renegotiation of the Stanford Fire Services Contract. The Fire Department has been in consultation with Human Resources and the Attorney’s Office and City Manager’s Office on the necessary consultations. The City has sent official notice in early October to Stanford University in accordance with the contract terms and has requested to schedule initial negotiations. There has not yet been a response from Stanford. Upon initiation of discussion with Stanford, the City plans to engage IAFF on the appropriate elements. The City and Stanford have not begun discussions; therefore, staff anticipates a revised start City of Palo Alto Page 4 date of Q1 FY 2021. Additional funding may be needed in FY 2020 as a result of negotiations taking longer than initially planned. Staff may bring forward a funding recommendation as part of the FY 2020 Mid-Year Budget Review. FY2020 Budget: Evaluation of Printing & Mailing Services levels and service delivery Administrative Services Department Oct 2019: The Administrative Services Department has convened an interdepartmental committee to review printing service alternatives. The review will look at how best to continue to provide printing services to City departments via possible alternative service delivery approaches including third party provided services. This will take into account a comparison of the current cost of these services compared to alternatives and related service levels. This group has outlined a set of requirements to include in a scope of services for printing services. Some of these requirements include turnaround times, service levels, onsite proof review, paper type, print format and size, binding options and oversize deliverables like banners and signs. Staff is expecting to issue a request for proposal (RFP) in the first quarter of 2020 and to make a recommendation to Council during calendar year 2020 on a proposed path forward. Meanwhile, the City’s Print Shop continues to operate providing the full breadth of services to City departments. Stakeholder Engagement All assigned departments have coordinated with the Office of Management and Budget to update the status of each referral for this report. Resource Impact This is an informational report; there are no financial impacts resulting from this report. Environmental Impact This is not a project. Attachments: • ATTACHMENT A: SUMC Summary of Fund Status ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 1 of 6  CITY COUNCIL REFERRAL  Return to the Finance Committee to strategize the use of uncommitted funds from the Stanford  University Medical Center (SUMC) development agreement. More information regarding this  potential referral can be found below.    Staff recommends that considering the continuing competing priorities, the City Manager  review and incorporate any recommended changes to current allocations and/or future  allocations as part of the FY 2021 annual budget process.  As a one‐time source of funding,  clear principals of spend should follow the important budgeting principal that funds only be  spent and invested in one‐time costs.      BACKGROUND  As part of the FY 2020 budget process, staff and the Finance Committee agreed, to return to  the Finance Committee in the fall to strategize the use of uncommitted funds from the Stanford  University Medical Center (SUMC) development agreement.    In 2011, the City of Palo Alto entered into a Development Agreement between the City of Palo  Alto and the Stanford University Medical Center Parties (SUMC). Funds received in Fiscal Year  2012 as part of this agreement were used in Fiscal Years 2013, 2014, and beyond as outlined in  the agreement and approved by the City Council. In Fiscal Year 2018, the City received the final  payment of $11.8 million, for a total principal amount of $44.3 million over the course of the  development agreement. The funds received per the development agreement are allocated for  specific purposes, which include funding for the 2014 City Council approved Infrastructure Plan.  As outlined in the agreement, expenses and revenues for each category must be accounted for  separately.  The full text of the agreement and significant background information can be found  in the following documents:      City Council adoption of the final SUMC Development Agreement, Staff Report 1339,  Action Minutes   Ordinance of the Council of the City of Palo Alto Approving a Development Agreement  Between the City of Palo Alto and Stanford Hospital and Clinics; Lucile Salter Packard  Children's Hospital at Stanford; and the Board of Trustees of the Leland Stanford Junior  University, Ordinance 5124   Annually the Planning and Development Services Department, formerly the Planning  and Community Environment Department, issues a report of activities during the prior  period for Council review to ensure compliance with the agreement. The annual report  for the 2016‐2017 period is included in CMR 8999 found here:   https://www.cityofpaloalto.org/civicax/filebank/documents/65285.     Historically, the City Council and Committees have provided direction to staff on the  authorization process for use of SUMC funds, including guiding principles for their expenditure.  ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 2 of 6  At a high level, these funds should be consistent with 1) City Council priorities, 2) used for  impactful and long‐lasting projects, and 3) primarily focused on infrastructure.   The development agreement contains provisions for certain expenditures that have been  programmed in prior years, including Project Safety Net and emergency vehicle traffic signal  preemption. The authorization to use SUMC funds:  ‐ For new projects (excluding Health and Safety) is completed as part of the annual  budget process.   ‐ Funding for Health and Safety is to be reviewed and recommended by the Policy &  Services Committee to the City Council for approval. In prior years a joint Stanford/City  Committee was created to advise Community Health and Safety programs.   At the May 15, 2019 Budget Hearing, the Finance Committee requested additional information  regarding the definitions, restrictions, and current status of the SUMC development agreement  funds. Staff provided follow up to this request during the May 28, 2019 Budget Hearing via an  At Places Memorandum. As result of this discussion, the Finance Committee requested that  staff provide additional information related to the uncommitted balances in the SUMC Fund,  assuming that FY 2020 ‐ 2024 Capital projects are expended as planned. This information was  provided in Staff Report 10419. The Finance Committee also requested that staff return to the  Finance Committee later to strategize a spending plan for uncommitted SUMC development  agreement funds.     DISCUSSION  At the close of FY 2019, a total of $20.5 million remains of the $44.3 million in direct payments  (plus nearly $4.2 million in interest) with $14.7 million programed for various capital  investments and $6.1 million remaining in unspent and unallocated funds.        Below is a summary table of the different expenditure categories outlined in the development  agreement and the current status of each of those categories.  Following the table is a summary  of the expenses to date as well as the planned expenses.  In light of the continuing competing  priorities, staff recommends that City Council direct the City Manager to incorporate any  recommended changes or current allocations and future allocations as part of the FY 2021  annual budget process.  As a one‐time source of funding, clear principals of spend should  follow the important budgeting principal that funds only be spent and invested in one‐time  costs.  The Finance committee may review the planned expenses and the uncommitted  balances, provide feedback on priorities and goals for future spend within the parameters of  the development agreement.    ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 3 of 6  Stanford University Medical Center (SUMC) Current Fund Status Summary (millions):  DEVELOPMENT AGREEMENT  EXPENDITURE CATEGORY  PRINCIPAL  FUNDING  FY 2020  BEGINNING  BALANCE FY 2020  INTEREST  (EST) PLANNED  COMMITMENTS UNCOMMITTED Community Health and Safety 4.00 2.78 0.04 - 2.81 Expansion Cost Mitigation  2.42 2.87 0.05 ‐ 2.91 Intermodal Transit  2.25 1.20 0.02 1.7 (0.48) Quarry Road Improvements  "Linkages"  0.40 ‐‐‐ ‐ Infrastructure and Affordable  Housing   23.20 10.86 0.17 10.6 0.43 Climate Change and  Sustainable Communities  12.00 2.77 0.04 2.4 0.41  $44.3 $20.5 $0.3 $14.7 $6.1     Community Health and Safety:  Funds in this category are intended for use on community‐based health and wellness programs  that benefit residents of the City. Of the original funding of $4.0 million, 50% or $2.0 million was  dedicated to Project Safety Net (PSN) expenses including program costs and means restriction  costs. Through FY 2017, these funds were expended on PSN program costs including staffing  and administrative expenses and the track monitors. Once the SUMC funds were exhausted,  these costs were reallocated and this program has been funded from the General Fund –  current annual expenses include approximately $0.3 million in PSN program costs and $0.4  million in annual intrusion detection system monitoring costs.    The remaining uncommitted balance of $2.8 million (including interest earnings to date) can be  used for a number of programs or initiatives such as, but not limited to:  ‐ continued support of the PSN work (currently recommended to be transitioned to a  separate agency from the city;   ‐ repayment to the General Fund for past expenses in relationship to the investment of  intrusion detection system equipment as well as the ongoing monitoring of the system;  and  ‐ new or expanded investments in one‐time costs.  Per the agreement, this category of funding is to be reviewed by a joint Stanford/City  Committee.    Expansion Cost Mitigation:  Funds in this category are intended for mitigating unexpected project impact costs and ensure  cost neutrality of the development. Of the original $2.4 million allocation, no funds in this  category have been expended or planned for expense and therefore a balance of $2.9 million  remains as a result of interest accrued in this category. Funds are being held in this category for  the purpose of assuring that City costs associated with the project do not exceed revenues to  the City. These funds can be used for a number of programs or initiatives such as, but not  ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 4 of 6  limited to:  ‐ Additional project costs for existing projects such as the El Camino/Quarry Road  Intersection as discussed below, curing the projected negative balance in the  “Intermodal Transit” category.  ‐ Transportation program investments of a one‐time nature including capital  infrastructure and studies.     Intermodal Transit:  Funds in this category are intended to enhance pedestrian and bicycle connection from the  Transit Center to the El Camino/Quarry Road intersection. Of the original $2.25 million  allocated, $1 million has been spent on the estimated $5 million Quarry Road Improvements  and Transit Center Access project (PL‐16000).     The remaining uncommitted balance of $1.2 million plus additional funds of $0.5 million which  includes interest earnings are planned to be expended on the Quarry Road Improvement and  Transit Center Access project (PL‐16000) as part of the FY 2020‐2024 Capital Improvement Plan.  This would bring the total SUMC supported funding to $3.1 million (combined funding from  Intermodal Transit and Quarry Road Improvements categories) of this $5.1 million project. This  planned expense of $1.7 million over the FY 2020‐2024 CIP would result in a negative balance in  this category of $0.5 million which would need to be covered by another expense category  from this development agreement.  A letter from the the City Manager to Stanford from 2016  articulated that incremental cost increases may be funded from the Infrastructure, Sustainable  Neighborhood and Communities and Affordable Housing Fund.    The Quarry Road improvements project has recently increased in cost by $1.1 million to  account for increased construction costs.  Significant expenses have already been incurred for  this project of an estimated $1.3 million through FY 2019 and project completion is expected in  FY 2022 with the most significant construction outlay of an estimated $3 million in FY 2022.       Quarry Road Improvements:  These funds are to be used for improvements to the right‐of‐way for pedestrian and bicycle  connection in the Quarry Road area, such as improvements to the right‐of‐way to enhance  pedestrian and bicycle connection from west side of El Camino to Welch Road along Quarry  Road. As of FY 2019, all of the original $0.4 million allocation have been expended in this  category towards the Quarry Road Improvement and Transit Center Access project (PL‐16000).  Remaining funding for Quarry Road Improvements are planned to be expended from the  lntermodal Transit category.    Infrastructure and Affordable Housing:  Funds are to be used in connection with infrastructure, sustainable neighborhoods and  communities, and affordable housing. Of the $23.2 million principal allocation (plus nearly $2  ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 5 of 6  million in interest earnings), $14.2 million has been spent and an additional $10.7 million is  planned for expenditure over the FY 2020‐2024 CIP exhausting all but $0.4 million of the  original allocation. To date, funds have been spent on projects such as $6.0 million for the  replacement of Fire Station 3, $3.9 million for the construction of the new Public Safety  Building, a $2.7 million transfer to the Residential and Commercial Housing in‐lieu funds (of  which $1.0 million has been appropriated through City Council direction), and $1.55 million for  the Charleston/Arastradero Corridor Project.    Over the coming FY 2020‐2024 CIP, $10.7 million is planned for the following projects:  PROJECT  SUMC $’S  ALLOCATED  PLANNED  EXPENSE YEAR PROJECT STATUS  Downtown Parking Garage (PE‐15007) $9.1 million FY 2022 Deferred (design development)*  Public Safety Building (PE‐15001) $800,000 FY 2021 Construction Documents  Fire Station 4 Replacement (PE‐18004) $750,000 FY 2021 Not started  * Project is currently under review per City Council direction.    Should these project expenditures not be completed as planned, eligible projects would be  reevaluated for connection with infrastructure, sustainable neighborhoods and communities,  and affordable housing initiatives. These three remaining projects are all part of the 2014 City  Council approved Infrastructure Plan.    Climate Change and Sustainable Communities:  Funds are to be used for projects and programs for a sustainable community, including  programs identified in the City’s Climate Action Plan. Funding in this category is programed to  be used for the Bicycle and Pedestrian Transportation Pan Implementation (PL‐04010) capital  plan, approved as part of the City Council approved 2014 Infrastructure Plan. In total this  project, within the 2014 Infrastructure Plan, is planned to invest $20 million, in the design and  construction or bicycle boulevards, enhanced bikeways, shared‐use paths, bicycle parking, and  pedestrian improvements in accordance with the 2012 Council approved Palo Alto Bicycle and  Pedestrian Transportation Plan. Of the $20 million in capital investments, $12 million is to be  funded from the development funds.  Beginning in FY 2020, this fund is estimated to begin with  $2.8 million in remaining funds, which are planned to be transferred to the General Capital  Improvement fund for the Bicycle and Pedestrian Transportation Pan Implementation (PL‐ 04010) in FY 2020 and FY 2021 in the total amount of $2.4 million. The project is currently  under review and appropriated expenses continue to be carried forward from year to year until  a new plan is reviewed and approved by the City Council; this is part of the Office of  Transportation’s workplan for FY 2020.              ATTACHMENT A    Stanford University Medical Center Fund FY 2020 City Council Referral    Attachment A Page 6 of 6  REFERENCE:  Annually a report outlining the activities associated with the Stanford University Medical Center  Development agreement is transmitted.  Below are links to all reports to date.    Fiscal Year 2011‐2012 http://www.cityofpaloalto.org/civicax/filebank/documents/31976   Fiscal Year 2012‐2013 https://www.cityofpaloalto.org/civicax/filebank/documents/39991  Fiscal Year 2013‐2014 http://www.cityofpaloalto.org/civicax/filebank/documents/45631  Fiscal Year 2014‐2015 http://www.cityofpaloalto.org/civicax/filebank/documents/51645  Fiscal Year 2015‐2016 https://www.cityofpaloalto.org/civicax/filebank/documents/60896  Fiscal Year 2016‐2017 https://www.cityofpaloalto.org/civicax/filebank/documents/65285  Fiscal Year 2017‐2018 In progress, expected to be completed in 2020  Fiscal Year 2018‐2019 In progress, expected to be completed in 2020.