HomeMy WebLinkAbout2022-12-06 Finance Committee Agenda Packet1
Materials related to an item on this agenda submitted to the Finance Committee after distribution of the agenda
packet are available for public inspection in the city’s website at www.cityofpaloalto.org
FINANCE COMMITTEE
Tuesday, December 6, 2022
Special Meeting
Community Meeting Room & Virtual
5:30 PM
Amended Agenda
Amended agenda items appear below in Red
Pursuant to AB 361 Palo Alto City Council and Committee meetings will be held as “hybrid”
meetings with the option to attend by teleconference/video conference or in person. To
maximize public safety while still maintaining transparency and public access, members of
the public can choose to participate from home or attend in person. Information on how the
public may observe and participate in the meeting is located at the end of the agenda.
HOW TO PARTICIPATE
VIRTUAL PARTICIPATION
CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)
Meeting ID: 992 2730 7235 Phone:1(669)900-6833
The meeting will be broadcast on Cable TV Channel 26, live on YouTube at
https://www.youtube.com/c/cityofpaloalto, and s t r e a m e d t o Midpen Media
Center at https://midpenmedia.org.
PUBLIC COMMENTS
Public Comments will be accepted both in perso n and via Zoom meeting. All requests to
speak will be taken until 5 minutes after the staff’s presentation. Written public comments
can be submitted in advance to city.council@ cityofpaloalto.org and will be provided to
the Committee and available for inspection on the City’s website. Please clearly
indicate which agenda item you are referencing in your email subject line.
CALL TO ORDER
ORAL COMMUNICATIONS
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.FY 2023 Finance Committee Referrals Update
2.Pension Policy and Retiree Healthcare Review and Update
Late Packet Report added
3.First Quarter Fiscal Year 2023 Financial Report
4.Review and Forward the FY 2024 - 2033 Long Range Financial Forecast
Staff Presentation
Consultant Presentation
Presentation
Presentation
2
Finance Committee Regular Meeting December 6, 2022
FUTURE MEETINGS AND AGENDAS
ADJOURNMENT
PUBLIC COMMENT INSTRUCTIONS
Members of the Public may provide public comments to hybrid meetings via email, in
person, teleconference, or by phone.
1.Written public comments may be submitted by email to
city.council@cityofpaloalto.org.
2.In person public comments please complete a speaker request card located on
the table at the entrance to the Council Chambers, and deliver it to the City Clerk
prior to discussion of the item.
3.Spoken public comments using a computer or smart phone will be accepted
through the teleconference meeting. To address the Council, click on the link below
to access a Zoom-based meeting. Please read the following instructions carefully.
•You may download the Zoom client or connect to the meeting in- browser. If using
your browser, make sure you are using a current, up-to-date browser: Chrome
30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be
disabled in older browsers including Internet Explorer. Or download the Zoom
application onto your phone from the Apple App Store or Google Play Store and
enter the Meeting ID below
•You may be asked to enter an email address and name. We request that you
identify yourself by name as this will be visible online and will be used to notify
you that it is your turn to speak.
•When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will
activate and unmute speakers in turn. Speakers will be notified shortly before
they are called to speak.
•When called, please limit your remarks to the time limit allotted.
•A timer will be shown on the computer to help keep track of your comments.
4.Spoken public comments using a phone use the telephone number listed below.
When you wish to speak on an agenda item hi t *9 on your phone so we know that
you wish to speak. You will be asked to provide your first and last name before
addressing the Council. You will be advised how long you have to speak. When called
please limit your remarks to the agenda item and time limit allotted.
Click to Join Zoom Meeting ID: 992-2730-7235 Phone: 1(669)900-6833
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) 48
hours or more in advance.
City of Palo Alto (ID # 14906)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: FY 2023 Finance Committee Referrals Update
From: City Manager
Lead Department: Administrative Services
Recommendation
This report provides a status update of Council referrals requested and approved, during the
City Council Retreat and annual Budget Process. Staff recommends the Committee review and
accept this report.
Background and Discussion
This report provides an update of the outstanding Council referrals to the Finance Committee
as requested during the February 2022 City Council Retreat, during the May 2022 Budget
Process, and throughout the year. The City Council requested information on various items that
are discussed in this report and is provided in coordination with assigned departments. A
summary table of the current referrals and their status follows.
Referral Assigned
Department
Status
FY 2020:
Evaluation of Printing &
Mailing Services levels and
service delivery.
Referred May 2019.
Administrative
Services
Nov 2022 Status: In Progress
The Administrative Services Department is in the
process of evaluating responses to a Request for
Proposal (RFP). Interviews with responders are
expected to occur before the end of the calendar
year. A return to the Finance Committee is
expected in calendar year 2023. This project has
been delayed due to staff capacity and
significant vacancies.
FY 2021:
A report or item on the
JMZ six months after it
opens and what it would
look like to eliminate the
Community
Services
Department
Nov 2022 Status: Complete
On September 2022, staff presented to the
Finance Committee (CMR 14584) preliminary
revenue and expenditures for the FY ending in
2022. The report reflected results from 7
1
Packet Pg. 3
City of Palo Alto Page 2
General Fund Subsidy
through a fully cost
recoverable program.
Referred June 2020
months of operations, and based on current
data, projected what potential increases to
memberships and ticket prices would have on
cost recovery levels.
The Committee recommended to Council that
the current cost recovery levels be maintained.
Additionally, the Committee also directed staff
to return on a future date with updated
attendance data and more detailed
recommendations on membership and ticket
prices.
FY 2022:
Dialogue with PAUSD
regarding cost-sharing for
mutual activities (i.e
Crossing Guards, Children's
Theater Outreach)
Police
Department
Nov 2022 Status: In Progress
The City maintains a productive working
relationship with the PAUSD and is actively
engaged in partnering in mutually beneficial
activities for the community. Currently, the CAO
is in the process of reviewing a draft for a cost-
sharing agreement for crossing guards. It is
anticipated to have this contract approved and
executed in the latter half of FY 2023.
FY 2023:
JMZ ticket pricing analysis
to understand interactions
between changes to $18
ticket, attendance, and
cost recovery
Community
Services
Department
Nov 2022 Status: Pending
On September 2022, the staff presented to the
Finance Committee (CMR 14584) the preliminary
results of the JMZ with projections on how
pricing could affect cost recovery levels. Staff is
also in the process of evaluating the potential
use of a consultant to conduct an organizational
and operational study for the JMZ, which would
consider how pricing changes could affect
demand and cost recovery as a requirement of
the study.
FY 2023:
Planning and Development
Services Fee Study
Planning and
Development
Services
Nov 2022 Status: Pending
In FY 2022 the Planning and Development
Services Department embarked on a fee study to
right-size fees to achieve cost neutrality based
on the newly combined department structure.
Due to competing priorities the study is on hold
while the Fire Prevention Program organizational
study is completed. Study results and potential
1
Packet Pg. 4
City of Palo Alto Page 3
corresponding revenue and expense
adjustments will be brought forward for
consideration upon conclusion of the study.
Stakeholder Engagement
This is an informational report to follow up on Counci l referral items and has been coordinated
internally among departmental parties.
Environmental Review
This is not a project under Section 21065 for purposes of the California Environmental Quality
Act (CEQA).
1
Packet Pg. 5
City of Palo Alto (ID # 15007)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Pension Policy and Retiree Healthcare Review and Update
From: City Manager
Lead Department: Administrative Services
This report will be a special late packet release on Thursday, December 1 st, 2022.
2
Packet Pg. 6
City of Palo Alto (ID # 14630)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: First Quarter Fiscal Year 2023 Financial Report
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
This report is informational and does not require an action by the Finance Committee.
EXECUTIVE SUMMARY
The purpose of this report is to provide the Finance Committee with information on the
financial status of the City’s General Fund and Enterprise Funds as of the end of the First (1 st)
Quarter of Fiscal Year (FY) 2023 (July 1, 2022 through September, 2022). The figures presented
here are unaudited.
For the 1st quarter, the General Fund revenues totaled $30.9 million which is 1.5 % higher than
the same period of the prior year while expenditures totaled $47.5 million which is 13.68%
higher that than prior year and are tracking at 20.4% of Adjusted Budget which is comparable
to the prior year trend.
All Enterprise Funds, except Airport Fund, resulted to a positive change in net position. The
total change in position decreased by $5.9 million, or 51.0%, lower than the same period of the
prior year.
BACKGROUND
This report summarizes the financial information of the General and Enterprise Funds for
First(1st) quarter ending September 30, 2022 of Fiscal Year (FY) 2023 and compares those
amounts to the same period of the prior year and to the FY 2023 Adjusted Budget.
Attachment A provides a breakdown of revenues by source and expenses by function, with
separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column
includes prior year commitments that were carried forward into this fiscal year and
amendments to the FY 2023 Adopted Budget through September 30. Encumbrances and actual
expenses for the three-month period are also reported.
3
Packet Pg. 7
City of Palo Alto Page 2
DISCUSSION & ANALYSIS
General Fund revenues (excluding operating transfers) for the 1st quarter of FY 2023 are $30.9
million which is 14.4% of the current year Adjusted Budget. The actual revenues totaled $30.9
million, 1.5% higher than the same period of the prior year (increase of $0.4 million). All of the
major taxes except documentary transfer taxes were higher compared to the same period of
the prior year. This indicates the economy is showing positive signs of recovery; however,
mixed economic data increases difficulty in determining if this trend will continue. The first
quarter General Fund cash receipts are not indicative of the annual expected receipts in FY
2023 due to timing of major revenues received over the fiscal year .
For the 1st quarter, General Fund expenses totaled $47.5 million which is $5.7 million, 13.68%
higher than the prior year and tracking at 20.4% of Adjusted Budget which is comparable to the
prior year trend.
The following is a detailed discussion of the most significant revenue and expense items.
Revenue Highlights for 1st Quarter FY 2023
The following highlights the City’s major revenue sources for the 1 st 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.
Table 1
% change FY 2023 %FY 2022 %
Property Tax 216.4%$59,770 0.3%$51,228 0.1%
Sales Tax 29.1%32,580 7.8%28,184 7.0%
Charges for Services 20.6%30,786 20.9%24,515 21.7%
Transient Occupancy Tax 81.3%18,199 14.6%8,428 17.4%
Utility User Tax 0.6%15,579 22.4%14,370 24.2%
Permits and Licenses -4.9%9,499 18.7%7,761 24.1%
Documentary Transfer Tax -41.5%7,217 16.7%7,137 28.9%
All Other Revenue Sources -11.3%41,851 30.2%41,650 34.2%
Total Revenue 1.5%$215,481 14.4%$183,273 16.6%
General Fund Revenue
FY 2022 1st Quarter
(000's)
1st Quarter Actuals Adjusted Budget
FY 2023 FY 2022
$174 $55
2,551 1,976
6,427 5,327
2,663 1,469
3,495 3,473
$30,942 $30,495
1,781 1,872
1,207 2,062
12,644 14,261
Property tax revenue in the 1st quarter of the fiscal year is only a nominal amount as property
tax receipts are paid by the County over three months beginning in the month of November
and then again beginning in March. The FY 2022 actual prop erty tax revenue was $59.4 million,
$6.1 million (11.5%) higher than the FY 2022 adjusted budget and $2.8 million (4.9%) over the
3
Packet Pg. 8
City of Palo Alto Page 3
prior year. Robust property sales in FY2022 resulted in higher than anticipated assessed value
growth and an additional $1.1 million in excess Educational Revenue Augmentation Fund
(ERAF) distributions contributed to these increased receipts.
The excess ERAF distributions from the County of Santa Clara in fiscal years 2018, 2019, 2020,
2021, and 2022 receipts are $1.4 million, $2.7 million, $3.9 million, and $5.6 million, and $6.6
million, respectively. Of this $6.6 million receipt, $1.7 million has been set aside for the at-risk
amount due to the lawsuit filed in November 2021 by the California School Boards of
Association and its Education Legal Alliance against the Controller of the State of California for
over the calculation methodology of the Excess ERAF.
The FY 2023 budget amount is $59.8 million, 0.7% higher than the prior year’s actual revenue.
This budget amount has been reduced by $1.5 million for the on-going FY 2023 Excess ERAF
lawsuit at-risk amount; without this reduction the budget increase would have been $1.9
million or 3.2% higher.
Sales tax revenue cash receipts for the 1st quarter have increased by $0.6 million, or 29.1%,
from the same period of last year. This represents one month’s sales tax activity due to the
two-month delay between sales tax collection by the State and remittance to the City. The FY
2022 actual sales tax revenue was $32.7 million, $3.6 million or 12.3% higher than FY 2021.
While the outlook of the local activity appears positive and sales tax continue to perform well,
the FY2023 estimate remain below pre-pandemic actuals of $36.5 million in FY 2019. Due to the
economic uncertainties, the FY 2023 adopted budget anticipates the sales tax recovery will
soften.
Charges for services revenue is up $1.1 million or 20.6%, compared to the same quarter of last
year. The decrease is due to combination of the following items:
• Program and class revenues increased by $0.7 million due to increase of enrollees and
additional programs such as modern dance and metal jewelry classes.
• Plan check fees increased by $0.3 million due to large projects at 1036 E Meadow Circle ,
2225 E Bayshore Road and 525 Charleston Road.
Transient occupancy tax (TOT) revenue of $2.7 million represents about one and half month of
collections which is an increase of $1.2 million or 81.3%, compared to the same period of last
year. This same period last year, marked a starting point for recovery from the pandemic with
most travel restrictions being removed during this time in 2021. When compared to the pre-
pandemic actuals of $3.2 million on Q1 in FY 2020 the receipts in FY 2023 Q1 are $0.5 million or
15.6% below pre-pandemic levels. This indicates that TOT revenue remains low and still
affected by pandemic. The FY 2023 adopted budget of $18.2 million is still significantly below
the FY 2019 actuals of $25.6 million. In addition, two major hotels have opened in the last year
and a half adding almost 300 rooms.
3
Packet Pg. 9
City of Palo Alto Page 4
During the first two months of the first quarter, hotels average daily room and occupancy rates
were $251.04 per day an increase of 74.9%; a 61.2% increase in average daily room and 24.4%
in occupancy rates over the same period of the prior year. As of writing of this report, the
occupancy percentage of individual hotels ranged from around 30% to over 95%.
Documentary transfer tax cash receipts for two and half months total $1.2 million, or 16.7% of
the FY 2022 adjusted budget and is $0.9 million, or 41.5%, lower than prior year receipts for the
same period. The number of transactions are 30.3% lower compared to prior first quarter. This
revenue source is volatile, it is highly dependent on sales volume and the mix of commercial
and residential sales. The prior year had a record receipt due to nine large commercial sales
which is not expected to occur in FY 2023. Staff continues to monitor these receipts closely due
to significant fluctuations that can occur anytime depending on the real estate sales activity.
All other revenue sources cash receipts for the 1st quarter have decreased $1.6 million or
11.3%, from the same period of last year primarily due to lower revenue from ARPA allocation.
Expense Highlights for 1st Quarter FY 2022
The following highlights the City’s expenses by function for the 1 st quarter, compared to 1st
quarter of the prior year. Each quarter’s expense is expressed as a percentage of the Adjusted
Budget for each year.
Expenditures FY 2023 FY 2022 % change FY 2023 %FY 2022 %
Police 12,333$ 10,507$ 17.4%47,723$ 25.8%43,319$ 24.3%
Fire 10,502 9,137 14.9%41,379 25.4%35,951 25.4%
Community Services 6,713 6,816 -1.5%34,429 19.5%32,098 21.2%
Public Works 4,504 3,935 14.5%22,667 19.9%19,980 19.7%
Planning and Development Services 4,223 3,507 20.4%26,131 16.2%19,855 17.7%
Library 2,133 2,055 3.8%10,524 20.3%8,976 22.9%
Administrative Services 2,301 1,934 19.0%10,107 22.8%9,201 21.0%
All Other Departments 4,743 3,851 23.2%39,827 11.9%31,359 12.3%
Total Expenses 47,452$ 41,742$ 13.7%232,787$ 20.4%200,739$ 20.8%
General Fund Expenses
FY 2023 1st Quarter
(000's)
1st Quarter Actuals Adjusted Budget
Table 2
For the 1st quarter of the fiscal year, total expenses increased $5.7 million, or 13.7%, compared
to the same quarter prior year and are trending in line with total budget at 20.4%. The 13.7%
increase is due to increased salary and benefit expense, including overtime, primarily due to the
4.0% cost of living adjustment wage increase for all labor groups, effective April 2022. Staff
3
Packet Pg. 10
City of Palo Alto Page 5
continues to work on filling vacant positions though maintains a high vacancy level which is
expected to generate savings in FY 2023.
Attachment A shows total expenses, including encumbrances for the 1st quarter are 29% of the
adjusted budget. This is higher than 25% due to some purchase orders that cover the entire
year (i.e., golf course management, consultant fees and others). It is the City’s practice in many
instances to encumber budget funds for the fiscal year so that invoices are drawdown, or paid
against, the encumbrances.
Police and Fire comprise 48.1% of the total General Fund expenditures for the 1st quarter,
which is 16.2% higher compared to the prior year. The following highlights Police and Fire
salaries and overtime for the 1st quarter.
Table 3
FY 2023 FY 2022 % change FY 2023 %FY 2022 %
Police - Salaries $4,476 $4,241 5.5%$20,026 22.4%$17,499 24.2%
Police - Overtime 740 379 95.3%973 76.1%944 40.1%
Total Police 5,216 4,620 12.9%20,999 24.8%18,443 25.1%
Fire - Salaries 3,553 3,219 10.4%15,997 22.2%13,676 23.5%
Fire - Overtime 1,070 1,202 -11.0%2,124 50.4%1,931 62.2%
Total Fire 4,623 4,421 4.6%18,121 25.5%15,607 28.3%
Total Public Safety
Salaries & Overtime $9,839 $9,041 8.8%$39,120 25.2%$34,050 26.6%
1st Quarter YTD Actuals Adjusted Budget
Police and Fire
Salaries and Overtime Expense
FY 2023 1st Quarter YTD
(000's)
Police overtime is 95.3% higher than the prior year and 76.1% of adjusted budget due to the
following:
• Backfilling 14 vacancies: 7 police officers, 2 dispatchers, 5 other records and support
staff. The vacancy rate is still high despite vigorous hiring.
• 7 employees on various levels are on extended leave.
• Catching-up on a hiring and training freeze which results in positions being allocated
from patrol to training (academy/Field Training Officer).
• Backfill to meet patrol and dispatch minimum staffing requirements.
3
Packet Pg. 11
City of Palo Alto Page 6
The Department is anticipating overtime to continue this fiscal year, but it should improve
when the staff clearing training requirements are completed. On a combined basis, salaries and
overtime are 24.8% of the budget through the 1st quarter of the fiscal year.
The Fire overtime is 11.0% lower than the same period in prior year and 50.4% of adjusted
budget. Overtime is generated when there are firefighters on leave and the position is
backfilled with overtime. In FY 2023 1st quarter overtime was primarily generated from the
firefighter positions that were vacant, however, there were positions that have been filled in
current year, which reduces overtime spending. The department is actively recruiting entry
level firefighters to keep up with staff turnover, there are currently 3 new firefighters in a Joint
Fire Academy. Despite of the decreased overtime in the FY 2023 1st quarter, the department
expect the overtime to rise as there is more staff turnover. Overtime was also generated to
staff Fire Station 8 during high fire danger days. This is reimbursed by Santa Clara County Fire,
which will show in the midyear budget as an adjustment to the revenue and overtime.
On a combined basis, salaries and overtime are 25.5% of the budget through the 1st quarter of
the fiscal year. The Department’s overtime analysis is included in Attachment B.
General Fund Budget Stabilization Reserve (BSR) Balance
Based on information reported in the FY 2022 Annual Comprehensive Financial Report (ACFR)
CMR 146321, the City’s current BSR balance is $59.8 million, approximately $14.2 million above
the 18.5% target of $45.6 million for FY 2023. There are recommended adjustments in line with
the City Manager’s authority for transfer of excess BSR, adjusted for a recommendation to
reserve funds to safeguard the financial stability by re-establishing an economic uncertainty
reserve. Staff do recommend a transfer to the Infrastructure Reserve as inflationary costs are
impacting capital project needs including anticipated significant price increases in the
Automated Parking Guidance Project, as well as a need to provide safety improvements to
critical assets such as the artificial turf playing fields. These actions will leave the BSR at $45.8
million or $0.2 million above the 18.5% Council recommended level. Staff anticipates returning
to Council in February 2023 with the FY 2023 Mid-Year Review and recommendations in
alignment with the allocation below for the appropriation of BSR funds above the 18.5% level.
1 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/finance-
committee/2022/20221129/20221129pfcsm-linked.pdf
3
Packet Pg. 12
City of Palo Alto Page 7
Enterprise Funds
Following is a summary of changes in net position for each of the Enterprise Funds for the three
months ended September 30, 2022, including a comparison of results from the same period last
year.
Table 4
City of Palo Alto
Enterprise Funds Change in Net Position
FY 2021 1st Quarter
1st Qtr 1st Qtr Increase
FY 2023 FY 2022 (Decrease)% Change
Water $3,701 $5,321 ($1,620)-30%
Electric 2,245 1,943 302 16%
Fiber Optic 202 170 32 19%
Gas 364 (631)995 158%
Wastewater collection 116 (32)148 463%
Wastewater treatment 7,054 660 6,394 969%
Refuse 3,419 3,316 103 3%
Storm Drainage 502 788 (286)-36%
Airport (11)120 (131)-109%
Total Change in Net Position $17,592 $11,655 $5,937 51%
Water Fund decreased $1.6 million, or 30.0%, from prior year due to overall decrease in
revenues and increase in operation costs. Revenue decreased despite a 4% rate increase
effective July 1, 2022 due to voluntary water conservation efforts. The increase in operation
costs is driven by commodity purchases and cost. The San Francisco Public Utilities Commission
(SFPUC) commodity rate increased from $4.10 to $4.75, a 15% increase due to drought
conditions.
Electric Fund increased $0.3 million, or 16.0%, from prior year due to a 5% rate increase
effective July 1, 2022, partially offset by increase in operating expenses. The majority of the
costs are related to energy purchases, mainly due to rising transmission cost and low levels of
water supply that lead to lower-than-normal generation from hydroelectric plants.
Gas Fund increased $0.9 million, or 158.0%, from prior year due to a $2.1 million increase in
revenue from customer sales partially offset by higher commodity purchases. A 4% rate
increase effective July 1, 2022 resulted in an average overall rate increase of $0.55 compared to
FY 2022. In additional, overall average consumption in FY 2023 increased compared to FY 2022.
3
Packet Pg. 13
City of Palo Alto Page 8
Wastewater Treatment Fund increased $6.4 million, or 969.0%, from prior year as a result of
an earlier receipt of $4.8 million in partner payments, compared to FY 2022 and a $1.7 million
reimbursement from the California State Water Resources Control Board for the Primary
Sedimentation Tank project.
Storm Drainage Fund decreased by $0.29 million, or 36.0%, from prior year due to higher
operating expenses related to salary and benefits costs, contract services, and indirect charges.
Stakeholder Engagement
This effort to manage and monitor the financial status of City funds continues to be a citywide
effort coordinated among all departments. Outside consultants for expertise on major
revenues categories including Sales Tax and Property Tax are consulted regularly to provide
updates to the forecasted revenue collections.
Resource Impact
At this time, this report does not recommend an action amending the City’s financials,
however, depending on trends and further input from Council, actions may be necessary later
in the year to better align revenues with expected collections. The City continues to monitor
activities closely.
Environmental Review
The action recommended is not a project for the purposes of the California Environmental
Quality Act.
Attachments:
• Attachment A FY2023 First Quarter General Fund Financial Report
• Attachment B FY2023 First Quarter Public Safety Overtime Analysis
3
Packet Pg. 14
11/4/20223:53 PM
CITY OF PALO ALTO
GENERAL FUND FIRST QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2023
(in thousands)
BUDGET ACTUALS (as of 9/30/2022)
Adopted Adjusted Pre % of Adj
Categories Budget Budget Encumbr Encumbr Actual Budget*
Revenues & Other Sources
Sales Tax 32,580 32,580 - - 2,551 8%
Property Tax 59,770 59,770 - - 174 0%
Transient Occupancy Tax 18,199 18,199 - - 2,663 15%
Documentary Transfer Tax 7,217 7,217 - - 1,207 17%
Utility Users Tax 15,579 15,579 - - 3,495 22%
Motor Vehicle Tax, Penalties & Fines 1,784 1,784 - - (127) -7%
Charges for Services 30,786 30,786 - - 6,427 21%
Permits & Licenses 9,249 9,499 - - 1,781 19%
Return on Investment 1,066 1,066 - - 204 19%
Rental Income 15,499 15,499 - - 3,429 22%
From Other Agencies 9,179 9,179 - - 5,631 61%
Charges To Other Funds 13,690 13,690 - - 3,426 25%
Other Revenues 548 633 - - 81 13%
Total Revenues 215,146 215,481 - - 30,942 14%
Operating Transfers-In 22,532 22,532 - - 5,633 25%
Encumbrances and Reappropriation 159 10,457 - - - -
Contribution from Development Services Reserves 399 399 - - - -
Total Sources of Funds 238,236 248,869 - - 36,575 15%
Expenditures & Other Uses
City Attorney 4,234 4,622 - 468 1,046 33%
City Auditor 979 1,174 0 714 9 62%
City Clerk 1,429 1,502 80 144 287 34%
City Council 436 485 - 75 82 32%
City Manager 4,094 4,446 176 188 784 26%
Administrative Services 9,745 10,107 31 323 2,301 26%
Community Services 32,866 34,429 1,550 6,228 6,713 42%
Fire 40,981 41,379 59 737 10,502 27%
Human Resources 4,742 4,982 50 236 850 23%
Library 10,211 10,524 219 536 2,133 27%
Office of Emergency Services 1,342 1,500 60 323 167 37%
Office of Transporation 1,718 1,737 0 19 390 24%
Planning and Development Services 22,615 26,131 91 3,560 4,223 30%
Police 47,401 47,723 38 900 12,333 28%
Public Works 20,104 22,667 109 3,721 4,504 37%
Non-Departmental 19,088 19,377 25 294 1,129 7%
Total Expenditures 221,986 232,787 2,486 18,467 47,452 29%
Operating Transfers-Out 4,962 4,962 - - 1,241 25%
Transfer to Infrastructure 20,400 20,400 - - 5,100 25%
Total Use of Funds 247,348 258,149 2,486 18,467 53,793 29%
Net Change to BSR (9,112) (9,279) (17,218)
Budget Amendments in the General Fund Authorized by Council thru 9/30/2022
Action to support Downtown Streets Team (06/20/2022) CMR#14526 (167)
Total Budget Amendments Authorized by Council - (167)
BSR Balance as of 9/30/2022 45,538 45,371
BSR % of Adopted Total Use of Funds 18.4% 18.3%
ATTACHMENT A
3.a
Packet Pg. 15
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
F
Y
2
0
2
3
F
i
r
s
t
Q
u
a
r
t
e
r
G
e
n
e
r
a
l
F
u
n
d
F
i
n
a
n
c
i
a
l
R
e
p
o
r
t
(
1
4
6
3
0
:
F
i
r
s
t
Q
u
a
r
t
e
r
F
i
s
c
a
l
Y
e
a
r
2
0
2
3
F
i
n
a
n
c
i
a
l
R
e
p
o
r
t
)
Attachment B
Q1
2021 2022 2023
POLICE DEPARTMENT
Overtime Expense
Adopted Budget (A)$944,186 $944,186 $972,512
Modified Budget (B)944,186 1,244,186 972,512
Net Overtime Cost - see below 366,045 781,344 345,785
Variance to Budget 578,141 462,842 626,727
Overtime Net Cost
Actual Expense $1,431,959 $2,319,043 $740,075
Less Reimbursements
California OES/FEMA (Strike Teams)- - -
Stanford Communications 64,906 107,684 34,431
Utilities Communications Reimbursement 33,191 56,004 18,047
Local Agencies (C)2,412 5,456 1,362
Police Service Fees 467,167 120,411 5,863
Total Reimbursements 567,676 289,556 59,704
Less Department Vacancies (A)498,238 1,248,143 334,586
Net Overtime Cost $366,045 $781,344 $345,785
Department Vacancies (number of days)1,494 3,903 1,143
Workers' Compensation Cases 14 11 3
Department Disabilities (number of days)1,007 1,221 318
FIRE DEPARTMENT
Overtime Expense
Adopted Budget (D)$1,931,121 $1,931,121 $2,124,054
Modified Budget (E)2,971,460 2,703,621 2,124,054
Net Overtime Cost - see below 1,792,228 4,073,011 747,593
Variance to Budget 1,026,424 (1,369,390) 1,376,461
Overtime Net Cost
Actual Expense $2,840,968 $4,684,796 $1,070,143
Less Reimbursements
California OES/FEMA (Strike Teams) 887,531 - -
Total Reimbursements 887,531 - -
Less Department Vacancies (D)161,208 611,784 322,549
Net Overtime Cost $1,792,228 $4,073,011 $747,593
Department Vacancies (number of days)1,942 1,717 938
Workers' Compensation Cases 14 35 10
Department Disabilities (number of days)387 947 200
NOTES:
(A)The FY 2022/23 Police Department budget was increased by 4.0 Police Officers, 1.0 Business Analyst, and 2.0 Public Safety Dispatcher.
(B)Police Department adopted budget not modified during FY 2023, Q1
(C)Includes Animal Control Services contract with Los Altos and Los Altos Hills.
(D)The FY 2022/23 Fire Department budget was increased by 1.0 Deputy Chief, 0.20 40-Hour Captain, 3.0 Fire Fighter Trainee,
and 0.05 Fire Marshal.
(E)Fire Department adopted budget not modified during FY 2023, Q1
Public Safety Departments
Overtime Analysis for Fiscal Years 2021 through 2023
3.b
Packet Pg. 16
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
F
Y
2
0
2
3
F
i
r
s
t
Q
u
a
r
t
e
r
P
u
b
l
i
c
S
a
f
e
t
y
O
v
e
r
t
i
m
e
A
n
a
l
y
s
i
s
(
1
4
6
3
0
:
F
i
r
s
t
Q
u
a
r
t
e
r
F
i
s
c
a
l
Y
e
a
r
2
0
2
3
F
i
n
a
n
c
i
a
l
R
e
p
o
r
t
)
City of Palo Alto (ID # 14629)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Review and Forward the FY 2024 - 2033 Long Range Financial Forecast
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and recommend that the City Council
accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2024-2033 and the
FY 2024 annual Budget Development Guiding Principles (Attachment A) and direct staff to use
this forecast as the starting point for the initiation of the FY 2024 budget process.
Executive Summary
Annually, the City presents a ten-year General Fund Long Range Financial Forecast (LRFF) in
December that marks the beginning of the annual budget process. This preliminary forecast is
based on the most current information available, actual revenues for FY 2022, and projected
results through FY 2023 at the point in time of release. General Fund expenditures are based on
current City Council approved service levels compared to projected revenues over the next
year.
The Base Case Long Range General Fund forecast projects a surplus of $0.4 million in FY
2024, followed by a $3.4 million gap in FY 2025 and a $2.6 million gap in FY 2026, with
small but increasing surpluses in FY 2027 through FY 2033. This forecast maintains
current service levels approved in FY 2023 and should be used for planning purposes to
assist in gauging effects of major policy interventions against a likely “status quo”
version of the future.
Staff modeled an alternate forecast scenario that reflects a more severe recession.
Compared to the Base Case, this scenario increases the General Fund gap over the next
ten years. FY 2024 changes from a surplus to a gap of $3.5 million, and revenues are not
anticipated to be able to fund the annual expenditures until FY 2029.
Staff modeled an alternate forecast that reflects estimated funding from Measure K
and the impacts on the General Fund over the next ten years reflects a surplus in FY
2024 of $1.1 million, a gap in FY 2025 of $1.9 million, and surpluses in FY 2026 through
FY 2033. These alternate forecasts were done separately to show the impacts of each
4
Packet Pg. 17
City of Palo Alto Page 2
scenario in isolation; however, aspects of both alternate forecasts may occur in
conjunction in the future.
As the COVID-19 pandemic is waning, new economic challenges are emerging such as monetary
policy tightening actions by the US Federal Reserve to tame persistently high inflation and
increasing geopolitical risks which may lead the United States into a recessionary period. This
economic uncertainty has heightened the int ensity of financial forecasting and budget
development 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 fiscal sustainability of these needs.
Locally, based on current election data, staff anticipate that both Measure L and K will be
successful in gaining voter approval. Measure L, affirming the ongoing Equity Transfer from the
Gas Utility Fund is included in the Base Case scenario. Measure K, approval of a new Business
Tax, is not assumed in this LRFF as part of the Base Case scenario; a resolution for intended use
of funding has been earmarked for investments in public safety, transportation and train
crossing safety, and affordable housing and unhoused support.
There are several issues across the City continuing to impact the ability to transition beyond
impacts of the pandemic including staff turnover, recruitment and retention, and supply chain
issues and inflation that continue to increase costs across all aspects of the City. Development
of the FY 2024 budget and planning for the subsequent years outlined in the forecast will need
to be done strategically over the next several months in order to balance the increased service
level needs of the community with the financial resources currently projected. With these
variables, ongoing revenues are unable to keep pace with expenses in the short term.
City staff will continue to review and refine these projections to establish the FY 2024 budget
and use this forecast to begin internal planning for budget balancing solutions. Based on this
forecast, it is anticipated that the prioritization of spending and the use of one-time surplus
funding from FY 2022 to cover short-term gaps over the next several years will be necessary to
ensure continued financial stability. More detailed guidelines or Budget Policies to inform the
development of the FY 2024 budget are discussed at the end of this document (Attachment A).
Included in this report and subsequent documents are the following:
- The Economy: discussion of the current financial climate of the United States to the
local economy of the City of Palo Alto (details can be found in Attachment B)
- Summary Long Range Financial Forecast including Revenue and Expense assumptions in
FY 2024-2033 (details can be found in attachment C and D)
o Financial status of the General Fund as of the FY 2023 Adopted B udget
o Brief discussion of FY 2022 surplus funding
o Updated FY 2023 revenue assumptions based on current projections
- FY 2024 Budget Development Policies to inform the Budget process (Attachment A)
4
Packet Pg. 18
City of Palo Alto Page 3
- Alternate scenarios to the base case forecast to demonstrate financial impacts to the
City from:
o Impacts from a moderate recession
o Impacts from the passage of Measure K
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. The LRFF also
reviews the status of the current economy and various economically sensitive revenues such as
Sales Tax, Documentary 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.
The Economy
U.S. workers and consumers have shown great resiliency throughout the pandemic, energy cost
spikes, geopolitical uncertainty, and high inflation. National, state, regional, and local economic
indicators are in transition; the economy exited 2021 in overdrive, but that growth combined
with global supply chain constraints has pushed inflation higher than expected. The federal
reserve began raising the fed funds interest rate in March 2022 and is expected to continue in
2023 which is intended to tame inflation, but as of the writing of this report, progress is slower
than desired. This has begun to and is predicted to cool the economy and result in a rise in
unemployment. The federal reserve’s ability to balance the objectives of fighting inflation while
maintaining employment and GDP growth will be challenging.
The local economy continues to show strong performance in the latter half of the calendar year
2022 though signs of “headwinds” are growing that are likely to stem economic growth.
Additional details on economic statistics such as Gross Domestic Product (GDP) and Consumer
Price Index (CPI) can be found in Attachment B in greater length.
Discussion
Palo Alto serves a diverse community with a broad range of unique services that adds to the
complexity of managing a balanced budget and healthy fiscal outlook. This annual General
Fund Long Range Financial Forecast is coupled with annual rate forecasts for the City’s various
4
Packet Pg. 19
City of Palo Alto Page 4
enterprise activities such as electric, gas, and water utility services provided to the community.
As the COVID-19 pandemic is waning, new economic challenges are emerging which may lead
the United States into a recessionary period. This economic uncertainty has heightened the
intensity of financial forecasting and budget development process and continues the rigger
previously demonstrated by the Council and staff through the challenges of the pandemic.
These forecast figures present staff with the challenge of prioritizing the growing needs of the
City with the fiscal sustainability of these needs.
The FY 2024-2033 ‘Base Case’ revenue and expense assumptions include updates on the status
of the general fund as of the FY 2023 Adopted Budget, the FY 2022 fiscal year end, and current
FY 2023 projected assumptions. As with all forecasts, there is uncertainty regarding the revenue
and expenditure estimates contained in this document. This forecast assumes a mild 18-month
recession at the beginning of the ten-year period. Major tax revenues continue to rebound
from prior year levels, reserves for economically sensitive revenues have been elim inated as
programs modified or canceled during the pandemic have returned, and investments in Capital
projects are restored to pre-pandemic levels. One-time resources that have boosted the City’s
financial outlook in prior years: Coronavirus Aid, Relief, and Economic Securities Act (CARES Act)
and American Rescue Plan Act (ARPA) have been allocated in full with no funds included in FY
2024.
Base Case
Table 1 displays the projected General Fund revenues and expenditures over ten years and the
cumulative net operating margin.
- The operating margin reflects the variance between the projected General Fund
revenues and expenditures for each year of the forecast or the annual surplus or
shortfall.
- The net operating margin is presented on a one-time basis, as the annual surplus or
shortfall for a given year, and on an incremental basis.
The incremental forecast assumes that each shortfall is addressed completely with ongoing
solutions in the year it appears and that each surplus is completely expended with ongoin g
expenditures. It is the City’s goal to remain in balance on an ongoing basis, so the incremental
figure is useful to illustrate the additional surplus and/or shortfall attributed to a particular
fiscal year. To the extent 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 remain and be
pushed to the following year.
The Base Case financial forecast projects a surplus of $0.4 million in FY 2024, followed by a $3.4
million shortfall in FY 2025, a $2.6 million shortfall in FY 2026, and increasing surpluses
thereafter. Based on these assumptions, the cumulative net operating margin, or ongoing
surplus, during the forecast period is a surplus of $33.9 million .
4
Packet Pg. 20
City of Palo Alto Page 5
TABLE 1: FY 2024 – 2033 Long Range Financial Forecast (Base Case)
TABLE 2: FY 2024 – 2033 Long Range Financial Forecast Net Operating Margin (Base Case)
Revenue Assumptions
The FY 2022 Annual Comprehensive Financial Report (ACFR), scheduled for review by the
Finance Committee on November 29, 2022, reported higher annual earnings for general fund
revenues as compared to the prior year; major tax revenues experienced faster recovery paces
in the last two quarters of the fiscal year (CMR 146321). Major tax revenues generated $137.5
million in FY 2022, an increase of $20.7 million or 17.7% over the FY 2021 levels of $116.8
million. Staff and the Council anticipated a portion of this increase in revenues and discussed
$14 million during the May 2022 budget discussions for allocation in FY 2023. This recovery
trend may continue as discussed in the First Quarter (Q1) FY 2023 Financial Report, scheduled
for review by the Finance Committee on December 6, 2022; several categories appear to be
tracking similarly in FY 2023 to FY 2022 (CMR 14630). The current timing and potential for
recession makes it difficult to determine if these trends will continue in the near term. In FY
2023, Staff estimates a range of $238 to $244 million in total revenues, reflecting up to $6
1 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/finance-
committee/2022/20221129/20221129pfcsm-linked.pdf
4
Packet Pg. 21
City of Palo Alto Page 6
million or 2.5% above adopted budget levels. The higher end of this projection assumes that
revenues will continue a similar positive trend as recent quarters. However, actual results will
vary depending on the timing and magnitude of recessionary impacts in the near term.
A summary of revenue assumptions are discussed here, extensive information regarding each
revenue category can be found in Attachment C.
- Tax revenues constitute nearly 60% of General Fund resources. In FY 2024, the forecast
projects an $11.4 million or 8.4% increase from FY 2023 adopted levels ($135.1 million
to $146.5 million). This increase is primarily attributed to higher anticipated receipts for
Sales Tax, Property Tax, and Transient Occupancy Tax (TOT) categories.
o Sales Taxes is anticipated to increase $0.7 million or 2.2% from FY 2023 ($32.6
million to $33.3 million). Revenue in this category is experiencing growth;
however, is not anticipated to reach pre-pandemic levels until FY 2026.
o Property Taxes make up the largest source of the General Fund’s revenue,
approximately 25%. In FY 2024, this revenue is anticipated to increase $3.9
million or 6.5% from FY 2023 ($58.9 million to $63.7 million). During economic
downturns, impacts to property tax occur a year later, however, due to robust
residential and commercial property sales this source has continued to grow
annually.
o Transient Occupancy Taxes are impacted by business and other leisure/non-
leisure travel and experienced significant reductions in the past few years due t o
a number of factors resulting from the pandemic. Though this revenue remains
below pre-pandemic actuals, the opening of the two Marriott hotels in FY 2021
and the re-opening of multiple hotels in FY 2021 and FY 2022 were positive
developments for this tax revenue. In FY 2024, this revenue is anticipated to
increase $6.8 million or 37.3% from FY 2023 ($18.2 million to $25.0 million);
however, this category is not anticipated to reach pre-pandemic levels until FY
2026.
- The forecast for non-tax revenues projects a $1.0 million or 1.2% increase in FY 2024
from FY 2023 adopted levels. This increase is primarily attributable to the alignment of
revenue estimates for the Stanford agreement to provide Fire and Dispatch services,
and the restoration of several programs and services that were modified due to public
health orders, mainly in public safety and community services.
- One-time resources that have boosted the City’s financial outlook in prior years have
been eliminated:
o The City received $13.7 million in American Rescue Plan Act (ARPA) funding that
the Council, per the legislation, designated to address the significant revenue
loss resulting from the pandemic;
o $294,000 in Coronavirus Aid, Relief, and Economic Securities Act (CARES Act)
funding to provide rental assistance and support safe parking and COVID-19
4
Packet Pg. 22
City of Palo Alto Page 7
testing programs; and
o $3.5 million in federal funds in FY 2022 through the Staffing For Adequate Fire
and Emergency Response (SAFER) Grant Program. This funding offset the hiring
costs of 5.0 firefighters for a three-year period and is fully expended in FY 2025.
The changes by revenue category, including dates in which revenues are anticipated to reach
pre-pandemic levels, are discussed in greater detail below.
TABLE 3: General Fund Revenue Forecast
Revenue & Other Sources
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
CAGR 10
Years
CAGR 5
Years
Sales Taxes 32,705 32,580 33,288 34,953 37,085 39,570 41,292 43,080 45,096 47,301 49,628 52,085 4.6%2.2%
Property Taxes 59,353 59,770 63,669 67,305 71,224 75,448 79,950 84,570 89,238 94,334 99,937 106,164 5.2%2.3%
Transient Occupancy Tax
General Purpose 8,828 8,472 14,429 15,255 16,059 16,549 17,181 17,894 18,766 19,710 20,740 21,829 4.2%1.8%
Infrastructure 8,118 9,727 10,567 11,173 11,762 12,121 12,583 13,106 13,744 14,435 15,190 15,987 4.2%1.8%
Documentary Transfer Tax 11,990 7,217 6,867 7,029 7,200 7,381 7,574 7,849 8,152 8,452 8,755 9,066 2.8%1.0%
Utility Users Tax 15,599 15,579 15,878 16,967 18,359 19,133 18,460 20,488 21,215 21,943 22,706 23,498 4.0%1.5%
Other Taxes and Fines 893 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 0.0%0.0%
Subtotal: Taxes 137,486 135,129 146,483 154,467 163,473 171,986 178,824 188,771 197,995 207,959 218,740 230,413 4.6%2.0%
Charges for Services 28,671 30,271 33,355 33,648 33,847 33,952 34,040 34,225 34,379 34,563 34,622 34,744 0.4%0.2%
Permits and Licenses 9,111 9,764 11,454 11,928 12,154 12,266 12,456 12,743 13,020 13,316 13,161 13,274 1.5%0.8%
Return on Investments 1,325 1,066 1,492 1,528 1,574 1,622 1,671 1,734 1,805 1,881 1,960 2,043 3.2%1.1%
Rental Income 13,681 15,572 16,447 17,303 18,034 18,635 19,151 19,682 20,228 20,792 21,372 21,968 2.9%1.5%
From Other Agencies 9,232 7,526 1,281 998 266 266 266 266 266 266 266 266 -14.5%-14.5%
Charges to Other Funds 13,980 13,690 14,460 14,810 14,989 15,091 15,398 15,668 15,963 16,261 16,330 16,411 1.3%0.6%
Other Revenue 2,447 2,201 2,592 2,615 2,630 2,646 2,662 2,679 2,696 2,712 2,730 2,748 0.6%0.3%
Total Non-Tax Revenue 78,447 80,090 81,080 82,830 83,495 84,477 85,643 86,996 88,357 89,791 90,441 91,454 1.2%0.5%
Operating Transfers-In 22,802 22,532 23,614 24,374 25,097 25,740 26,204 26,709 27,143 27,802 28,508 29,233 2.2%1.0%
BSR Contribution (One-Time)9,670
Total Source of Funds $238,735 $247,421 $251,177 $261,671 $272,065 $282,203 $290,671 $302,477 $313,495 $325,552 $337,689 $351,101
TABLE 4: General Fund Revenue Forecast Year to Year Percentage Change
Revenue & Other Sources
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Sales Taxes -0.4%2.2%5.0%6.1%6.7%4.4%4.3%4.7%4.9%4.9%5.0%
Property Taxes 0.7%6.5%5.7%5.8%5.9%6.0%5.8%5.5%5.7%5.9%6.2%
Transient Occupancy Tax
General Purpose -4.0%70.3%5.7%5.3%3.1%3.8%4.1%4.9%5.0%5.2%5.3%
Infrastructure 19.8%8.6%5.7%5.3%3.1%3.8%4.2%4.9%5.0%5.2%5.2%
Documentary Transfer Tax -39.8%-4.8%2.4%2.4%2.5%2.6%3.6%3.9%3.7%3.6%3.6%
Utility Users Tax -0.1%1.9%6.9%8.2%4.2%-3.5%11.0%3.5%3.4%3.5%3.5%
Other Taxes and Fines 99.7%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%
Subtotal: Taxes -1.7%8.4%5.5%5.8%5.2%4.0%5.6%4.9%5.0%5.2%5.3%
Charges for Services 5.6%10.2%0.9%0.6%0.3%0.3%0.5%0.4%0.5%0.2%0.4%
Permits and Licenses 7.2%17.3%4.1%1.9%0.9%1.6%2.3%2.2%2.3%-1.2%0.9%
Return on Investments -19.6%39.9%2.4%3.0%3.0%3.0%3.8%4.1%4.2%4.2%4.2%
Rental Income 13.8%5.6%5.2%4.2%3.3%2.8%2.8%2.8%2.8%2.8%2.8%
From Other Agencies -18.5%-83.0%-22.1%-73.4%0.0%0.0%0.0%0.0%0.0%0.0%0.0%
Charges to Other Funds -2.1%5.6%2.4%1.2%0.7%2.0%1.8%1.9%1.9%0.4%0.5%
Other Revenue -10.1%17.8%0.9%0.6%0.6%0.6%0.6%0.6%0.6%0.7%0.7%
Total Non-Tax Revenue 2.1%1.2%2.2%0.8%1.2%1.4%1.6%1.6%1.6%0.7%1.1%
Operating Transfers-In -1.2%4.8%3.2%3.0%2.6%1.8%1.9%1.6%2.4%2.5%2.5%
BSR Contribution (One-Time)-100.0%
Total Source of Funds 3.6%1.5%4.2%4.0%3.7%3.0%4.1%3.6%3.8%3.7%4.0%
4
Packet Pg. 23
City of Palo Alto Page 8
TABLE 5: City of Palo Alto Major General Fund Revenues
Expense Assumptions
As part of developing the FY 2024-2033 Forecast expenditure budget, the General Fund
expense categories have been adjusted by removing FY 2023 Adopted Budget one -time
expenses and updating major cost elements such as salary and benefits costs. The table below
displays the expense forecast and when compared to the FY 2023 Adopted Budget, growth of
1.4% is expected in FY 2024. The small overall annual growth is due to the elimination of large
one-time reserves in FY 2023 that offset the increase in expenses in other categories such as
Salary and Benefits and Transfers to Infrastructure.
A summary of expense assumptions are discussed here, extensive information regarding each
expense category can be found in Attachment D.
- Salary and Benefits are projected to increase $11.3 million or 7.6% from the FY 2023
($148.4 million to $159.7 million). This is primarily attributable to increases in salaries
($6.1 million or 7.7%) and pension costs ($4.1 million or 10.5%). A general wage
adjustment of 2.0% is included for all employees starting in either January 2023 or July
2023 for all years of the forecast since no MOA’s would be in effect at that time. A level
of reserve to reach a target market placement for employee compensation in new labor
agreements, as directed by the City Council is also assumed beginning in FY 2023.
- Long Term contributions to pension and other post-employment benefits and capital
investments are being phased through the first three to five years of the forecast:
4
Packet Pg. 24
City of Palo Alto Page 9
o Pension 115 Trust contributions reflect City Council approved discount rate from
6.2% to 5.3% over two years; FY 2023 is a transitio nal year in which six months or
the equivalent of approximately 5.8% is budgeted and the full transition in FY
2024 ($12.2 million ($7.2 million in the General Fund) in supplemental
contributions is assumed in FY 2024).
o California Employers’ Retiree Benefit Trust (CERBT) Fund for Retiree medical
liabilities contributions reflect a 5.75% discount rate (6.25% assumption), and
shortened amortization (from 22 to 15 years). Through FY 2023, it is expected
that $8.0 million in supplemental principal contributions will be made to the
CERBT Trust. The FY 2024 Budget estimates $16.4 million ($10.5 million in the
General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY
2023 levels of $15.9 million ($9.9 million in the General Fund).
o Capital Infrastructure transfers reflect the goal established as part of the 2022-
2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer
to pre-pandemic levels by FY 2026. As the local economy continues to recover
from the COVID-19 pandemic, estimated transfers from TOT revenues in FY 2024
are currently projected to increase to $10.5 million and the base transfer to
increase to $10.8 million for a total $21.3 million transfer to the Capital
Improvement Fund.
- Inflationary assumptions in this long range reflect the record inflation being seen at
present, in FY 2024 and FY 2025, a 5% annual inflation is assumed, while in the outer
years FY 2026 ongoing it is brought to the historical average of 3%.
- Previously committed investments are included in this forecast including but not limited
to the continuation of the two year restoration of key services as adopted in the FY 2023
Budget. These services are assumed to be ongoing in this forecast in alignment with the
expected voter approval of measure L and affirmation of current revenues to the
General Fund. This LRFF includes the City’s committed investment of $7.0 million in
operating expenses for the partnership with LifeMoves and Project Homekey site
services ($1.0 million annually which started in FY 2023 and is programmed through FY
2029).
4
Packet Pg. 25
City of Palo Alto Page 10
TABLE 6: General Fund Expense Forecast and Year to Year Percentage Change
Expenditures & Other Uses
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
CAGR
10 Years
CAGR 5
Years
Salary 71,145 79,732 85,869 90,166 92,806 95,320 97,394 99,341 101,269 103,198 105,127 107,056 3.0%1.3%
Benefits 61,531 68,636 73,780 77,229 79,099 80,111 82,477 86,269 87,134 88,371 87,251 87,425 2.4%1.1%
Subtotal: Salary & Benefits 132,676 148,368 159,649 167,395 171,905 175,431 179,871 185,610 188,403 191,569 192,378 194,481 2.7%1.2%
Contract Services 20,844 24,194 23,921 25,375 25,863 26,555 27,106 27,931 28,461 29,330 29,834 30,688 2.4%1.3%
Supplies & Material 2,508 3,205 3,270 3,426 3,519 3,612 3,705 3,798 3,891 3,984 4,077 4,170 2.7%1.3%
General Expense 3,174 21,765 8,561 8,745 8,835 8,938 9,042 9,161 8,252 8,357 8,463 8,576 -8.9%0.5%
Rents & Leases 453 1,333 1,368 1,405 1,443 1,482 1,522 1,564 1,606 1,649 1,694 1,741 2.7%1.1%
Facilities & Equipment 538 480 450 471 484 497 510 523 536 549 562 575 1.8%1.3%
Allocated Charges 19,647 22,714 24,744 25,741 26,454 27,121 27,860 28,623 29,403 30,227 31,072 31,939 3.5%1.2%
Total Non Sal/Ben Before Transfers 47,164 73,691 62,314 65,163 66,598 68,205 69,746 71,600 72,149 74,097 75,701 77,689 0.5%1.1%
Operating Transfers-Out 5,498 4,962 4,643 4,745 4,854 4,959 5,072 5,188 5,302 5,423 5,547 5,699 1.4%0.9%
Transfer to Infrastructure - Base 4,506 10,673 13,640 16,607 19,575 20,009 20,523 21,053 21,599 22,161 22,740 23,336 8.1%4.2%
Transfer to Infrastructure - TOT 8,118 9,727 10,567 11,173 11,762 12,121 12,583 13,106 13,744 14,435 15,190 15,987 5.1%1.8%
Total Use of Funds 197,963 247,421 250,814 265,083 274,694 280,726 287,794 296,558 301,197 307,685 311,557 317,193 2.5%1.4%
Expenditures & Other Uses
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Salary 12.1%7.7%5.0%2.9%2.7%2.2%2.0%1.9%1.9%1.9%1.8%
Benefits 11.5%7.5%4.7%2.4%1.3%3.0%4.6%1.0%1.4%-1.3%0.2%
Subtotal: Salary & Benefits 11.8%7.6%4.9%2.7%2.1%2.5%3.2%1.5%1.7%0.4%1.1%
Contract Services 16.1%-1.1%6.1%1.9%2.7%2.1%3.0%1.9%3.1%1.7%2.9%
Supplies & Material 27.8%2.0%4.8%2.7%2.6%2.6%2.5%2.4%2.4%2.3%2.3%
General Expense 585.8%-60.7%2.2%1.0%1.2%1.2%1.3%-9.9%1.3%1.3%1.3%
Rents & Leases 194.1%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.8%
Facilities & Equipment -10.7%-6.2%4.7%2.8%2.7%2.6%2.5%2.5%2.4%2.4%2.3%
Allocated Charges 15.6%8.9%4.0%2.8%2.5%2.7%2.7%2.7%2.8%2.8%2.8%
Total Non Sal/Ben Before Transfers 56.2%-15.4%4.6%2.2%2.4%2.3%2.7%0.8%2.7%2.2%2.6%
Operating Transfers-Out -9.7%-6.4%2.2%2.3%2.2%2.3%2.3%2.2%2.3%2.3%2.7%
Transfer to Infrastructure - Base 136.8%27.8%21.8%17.9%2.2%2.6%2.6%2.6%2.6%2.6%2.6%
Transfer to Infrastructure - TOT 19.8%8.6%5.7%5.3%3.1%3.8%4.2%4.9%5.0%5.2%5.2%
Total Use of Funds 25.0%1.4%5.7%3.6%2.2%2.5%3.0%1.6%2.2%1.3%1.8%
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% of General Fund operating expenditures,
with a target of 18.5%. Any reduction to the reserve below 15% requires City Council approval.
At the discretion of the City Manager, any BSR balance above 18.5% may be tran sferred to the
Infrastructure Reserve (IR) in the Capital Improvement Fund, and/or the City's Section 115
Pension Trust Fund, as outlined in the Pension Funding Policy. The BSR is used to fund
unanticipated one-time costs as opposed to ongoing or recurring operating expenditures;
ongoing revenue or expense trends are updated as part of the annual budget process to adjust
ongoing needs. The City's intent is to fund ongoing programs and services with ongoing dollars.
Maintaining the BSR at 18.5% also provides flexibility for the City to 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.
Based on information reported in the FY 2022 Annual Comprehensive Financial Report (ACFR)
CMR 146322, the City’s current BSR balance is $59.8 million, approximately $14.2 million above
the 18.5% target of $45.6 million for FY 2023. Micro and macro-economic conditions are
adjusting daily, with rising inflation, changes in jobs, and recessionary trends creating significant
uncertainty. As the State of California Legislative Analyst Office (LAO) wrote in their annual
Fiscal Outlooks for California “Economic Conditions Weigh on Revenues, [the] bo oming
2 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/finance-
committee/2022/20221129/20221129pfcsm-linked.pdf
4
Packet Pg. 26
City of Palo Alto Page 11
economy has led to high inflation…efforts to tame inflation are slowing the economy…inflation
pressures remain, raising risk of recession…fiscal outlooks revenues balance competing risks.3”
As shown in the table below, there are recommended adjustmen ts in line with the City
Manager’s authority for transfer of excess BSR, adjusted for a recommendation to reserve
funds to safeguard the stability the City has strived to achieve in the recent year by re -
establishing an economic uncertainty reserve. Staff anticipates returning to Council in February
2023 with the FY 2023 Mid-Year Review and recommendations in alignment with the allocation
below for the appropriation of BSR funds above the 18.5% level. Staff do recommend a transfer
to the Infrastructure Reserve as inflationary costs are impacting capital project needs including
anticipated significant price increases in the Automated Parking Guidance Project, as well as a
need to provide safety improvements to critical assets such as the artificial turf playi ng fields.
These actions will leave the BSR at $45.8 million or $0.2 million above the 18.5% Council
recommended level.
TABLE 7: Budget Stabilization Reserve (BSR) Summary (in millions)
General Fund BSR Balance, June 30, 2022 $72,835
FY 2023 Approved Adjustments to the BSR Balance
FY 2023 Adopted Budget ($9,072)
FY 2023 Services Reinvestment ($3,700)
Downtown Streets Team (CMR 14526) ($167)
Reappropriations (CMR 14728) ($100)
Subtotal: Approved Adjustments to the BSR Balance ($13,039)
Subtotal: BSR Balance, After Approved Adjustments $59,796
Uses of the FY 2022 Surplus
FY 2023 RECOMMENDED Adjustments to the BSR Balance
(to be considered in FY 2023 Mid-Year Budget Review)
Reserve for Economic Uncertainty ($5,000)
Transfer to Section 115 Pension Trust Fund ($5,000)
Transfer to Infrastructure Reserve (IR) in the Capital Improvement
Fund
($4,000)
Subtotal: RECOMMENDED Adjustments to the BSR Balance ($14,000)
Current Projected FY 2022 BSR Level, (June 30, 2023) $45,796
This trend may continue as discussed in the First Quarter (Q1) FY 2023 Financial Report,
scheduled for review by the Finance Committee on December 6, 2022, in which several
categories appear to be exceeding budgeted levels in FY 2023 similar to FY 2022 (CMR 14630).
3 The 2023-24 Budget California’s Fiscal Outlook, California Legislative Analyst’s Office (LAO), November 16, 2022,
https://lao.ca.gov/Publications/Report/4646
4
Packet Pg. 27
City of Palo Alto Page 12
Although revenues have experienced growth in recent periods, the potential for recession
makes it difficult to determine if these trends will continue in the near term. This LRFF assumes
a mild 18-month recession at the beginning of the ten-year period and projects a range of $238
to $244 million in total revenues in FY 2023, reflecting up to $6 million or 2.5% above adopted
budget levels. The higher end of this projection assumes that revenues will continue a similar
positive trend as the summer period. Although staff may complete the 115 Pension Trust Fund
and Infrastructure Reserve transfer, staff recommend waiting until more data is available on
current trends to ensure staff and the Council are making an informed decision on how best to
position the city to ensure stability during these uncertain times. Staff expect that one-time
funding such as these will be critical to continue to mitigate impacts from a recession and
bridge the near term gaps seen in the first few years of this LRFF.
Assumptions NOT Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2024 -
2033 LRFF that are outlined below. These items are known projects or areas of investment that
are a priorities, but have not been fully developed in terms of costs and timelines. This is not
intended to be a comprehensive list nor in any priority order.
Project Homekey: On September 27, 2021 the City Council directed staff to apply for Project
Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former
Los Altos Treatment Plant (LATP) site (CMR 135954). This project will rapidly deploy modular
housing to provide interim housing opportunities for homeless individuals and families in the
City of Palo Alto. The grant was awarded in Summer 2022 and the City is currently in
negotiations with local partners on operational roles to leverage local expertise and ensure high
quality services. This LRFF includes the City’s committed investment of $7.0 million in operating
expenses ($1.0 million annually which started in FY 2023 and is programmed through FY 2029);
however, with the actual timing of the funding still to be determined, and commitments from
other local partners negotiated, City costs for this project could fluctuate throughout the ten
year period.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the
Sustainability and Climate Action Plan (S/CAP) Framework to determine the goals and key
actions needed to meet its sustainability goals, including the goal of reducing greenhouse gas
(GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). As part of the FY
2022 Mid-Year Review (CMR 138015) and the 2023 Adopted Operating Budget6, Council
approved several actions to increase resources to support S/CAP needs. In October 2022 (CMR
4 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/city-council-
agendas-minutes/2021/09-september/20210927/210927accsm-amended-final.pdf
5 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220207/20220207pccsm-revised-final.pdf
6 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-
budget/adopted-fy23/operating-budget_final-4.pdf
4
Packet Pg. 28
City of Palo Alto Page 13
147207), City Council accepted the updated S/CAP Goals and Key Actions and adopted a goal to
make the City carbon neutral by 2030. Staff commenced California Environmental Quality Act
(CEQA) evaluation of the S/CAP upon Council’s acceptance of the proposed S/CAP Goals and
Key Actions. The City is currently in the process of finalizing the Three-Year Work Plan, which
will be brought to Council for review and discussion in December 2022. The final S/CAP Report
will be brought to Council for acceptance in Spring 2023. As the S/CAP Work Plan and final
report are still in development, cost projections are not yet contemplated in the forecast.
Implementation is anticipated to require significant resources, including internal staffing and
consultant expertise.
Service reductions not restored to pre-pandemic levels:
The City made significant service reductions in FY 2021 and FY 2022 Adopted Budgets to align
expenses with losses of nearly $40 million in General Fund tax revenues due to economic
impacts resulting from the COVID-19 pandemic. During this time, many services were reduced
or eliminated across the organization and essential services were prioritized. Ultimately, th e
City’s General Fund workforce was reduced by 83 full-time staffing positions (76.50 FTE) and
107 part-time positions (26.18 FTE). In FY 2022, the City began to see gradual signs of
improvement and a positive economic outlook that supported initial reinve stments in the first
quarter (Q1) FY 2022 financial report (CMR 134398), FY 2022 Mid-Year Budget Review (CMR
138019), and the Staffing for Adequate Fire and Emergency Response (SAFER) grant (CMR
1364310). Further reinvestments were made in the FY 2023 Adopted Budget11 to restore
services that were previously reduced and provide resources to support priority initiatives. In
total, full-time staffing levels have increased by 61.85 FTE, from the pandemic low of 956.00
FTE to 1,017.85 FTE. This level of staffing remains below pre-pandemic levels of 1,034.85 FTE.
As of this LRFF, some services remain below pre-pandemic levels or have new and evolving
changes to meet community needs. These services will continue to be evaluated and proposals
brought forward in future budget processes for City Council consideration.
Significant code and ordinance updates: Updates to several significant programs, codes and
ordinances are expected to be necessary in the near future; some of these updates include:
Seismic Inventory Ordinance and Program Development, Historic Building Survey and
Ordinance Development, and Zoning Code Updates. Depending on future Council direction,
program implementation is anticipated to require significant resources, including internal staff
and outside consultant expertise.
7 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20221003/20221003accsm-amended-presentations.pdf
8 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/city-council-
agendas-minutes/2021/10-october/20211025/20211025pccsm-linked-w-times.pdf
9 https://www.cityofpaloalto.org/files/assets/public/agendas -minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220207/20220207pccsm-revised-final.pdf
10 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2021/11-november/20211101pccs-amended.pdf
11 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-
budget/adopted-fy23/operating-budget_final-4.pdf
4
Packet Pg. 29
City of Palo Alto Page 14
Fee and Organizational Studies: The Planning and Development Services (PDS) Department is in
the process of completing two studies, a fee study and an organizational study on the Fire
Prevention group. The purpose of the fee study is to align fees and revenues based on the
updated department structure to continue to meet Council approved cost recovery levels.
Ahead of the completion of the Department-wide study, an organizational study of the Fire
Prevention program will be completed to inform the fee study. Because the Fire Prevention
Program is currently housed in both the Fire and Planning and Development Services
departments, recommendations may be made to realign the program and resources. The
Library Department is also in the process of completing an organization study to assess staffing,
resource, and service levels with the goal of increasing open hours and providing additional
services to the community. Lastly, a citywide fee study needs to be completed periodically by
an outside consultant to ensure the City’s fees are in line with its cost recovery policies. This
study will be scheduled to be completed by FY 2024 and could update fees and associated
revenue assumptions in future year LRFF reports.
Labor negotiations: As of the timing of this report, all labor agreements are scheduled to expire
on December 31, 2022, with the exception of the Service Employees International Union Hourly
Unit (SEIU-H) agreement, which is extended through June 30, 2023. A general wage adjustment
of 2.0% is included for all years of the forecast since no agreements would be in effect at that
time. This is consistent with prior Council direction in previous long range financial forecasts to
use the 2.0% increase as a forecasting assumption, not as a commitment to future negotiations.
Additionally, this forecast includes a level of reserve to reach a target market placement for
employee compensation in new labor agreements, as directed by the City Council. Staff expects
to adjust these costs throughout the budget development process in accordance with market
studies and final contract terms.
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 2023 Adopted
Capital Budget anticipated that these projects would cost $261.8 million. Staff is working to
maintain these projects within the current budget; however, project costs can fluctuate based
on market conditions at the time of construction award.
Grade Separation: The grade separation project consists of the four at-grade crossings along the
Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Drive, Meadow
Avenue, and Charleston Road. The City is working on conceptual alternative plans for the
selection of the preferred alternative at Churchill Avenue, Meadow Drive, and Charleston
Avenue crossings. In November of 2021, after performing a detailed review of the alternative
plans under consideration, Council selected the Partial Underpass Alternative as the preferred
alternative and designated Closure with Mitigation as a backup alternative for the Churchill
Avenue crossing. Council also directed staff to conduct additional studies and to refine
underpass alternatives by seeking input from stakeholders (Pedestrian and Bicycle Advisory
4
Packet Pg. 30
City of Palo Alto Page 15
Committee, Palo Alto Unified School District, and Stanford University). Such input could further
assist in narrowing down grade separation alternatives. On May 23, 2022 (CMR 1434112), the
City Council authorized an amendment to the consultant contract for performing these
additional tasks
Once preferred alternatives are selected, the next phase will include preparing preliminary
engineering and environmental documents for the three crossings. The Valley Transportation
Authority (VTA) 2016 Measure B Caltrain Grade Separation funding is available to the City for
additional studies and the next phases of the project which include preliminary engineering and
environmental review, right-of-way, design, and construction. In addition to this, on August 10,
2022 (Supplemental Memorandum AA113) the City Council adopted advisory spending
guidelines stating its intention to expend a portion of the revenues from Measure K on the rail
grade separation project.
The 2016 Measure B program tax revenue amounts to a total of $700 million in 2017 dollars for
all at-grade crossings in Santa Clara County, and the City anticipates allocation of 50% of said
funding. The VTA is currently programming these funds in two-year increments. Grade
Separation 2016 Measure B funding requires matching local funds as a result, additional
funding sources will need to be identified to perform this work in upcoming years (FY 2024 – FY
2033). The full funding needed to complete the grade crossings project is unknown at this time;
however, it is expected, that funding necessary to complete this work will exceed funding
currently identified for this project. Therefore, additional resources will need to be explored to
plan and fund these grade separations, including City staff pursuing additional funding throu gh
grant opportunities as they become available.
Parks Master Plan: The Parks Master Plan14 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.
Racial Equity Work: The Race & Equity Framework and action plan was approved in June 2020
(CMR 1144115) and remaining funding of $0.5 million has been reappropriated to be available in
FY 2023. Staff is in the process of procuring consultants to assist with the City’s diversity, equity,
and inclusion efforts in engaging staff, the City Council, and Boards/Commissions. After this
initial work, further recommendations are anticipated to be for thcoming and will likely require
additional resources either for more consultant assistance and/or an ongoing in -house Equity
Officer position (discussed during the 2020 Ad Hoc Committee meetings). These
12 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220523/20220523pccsm-revised.pdf
13 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/at-places-
memo/20220810apmccsm.pdf
14 https://www.cityofpaloalto.org/files/assets/public/public-works/palo-alto-parks-master-plan.pdf
15 http://cityofpaloalto.org/civicax/filebank/documents/77273
4
Packet Pg. 31
City of Palo Alto Page 16
recommendations are anticipated to be brought forwar d in FY 2023 or as part of the FY 2024
budget process.
Palo Alto Animal Shelter operations and rebuild
In early 2019, the City entered into a public private partnership with Pets In Need (PIN) to
support the operation of the City’s animal shelter. Part of PIN’s operating proposal included
robust fundraising to rebuild the current shelter into a state-of-the-art animal shelter for the
City, with costs shared between the City and PIN. Since the initial agreement, PIN has indicated
that additional construction projects are required, which will increase capital project costs
significantly. Preliminary estimates are $3.0 to $4.0 million over existing commitments, and no
funding is identified for these costs. The City and PIN both have an interest in continuing t he
partnership and on February 14, 2022 City Council directed staff to proceed with negotiations
to update the service agreement (CMR 1395216).
City owned assets operated by non-profit organizations: This Forecast does not include any
additional capital or operating investments for the Avenidas Senior Center, the Ventura Child
Care Center, 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. As part of the FY 2023 Adopted Capital Budget17 the City Council established the
Roth Building Rehabilitation Phase 1 capital project (PF -23001) directed a funding strategy for
the Roth Building Rehabilitation Project, which consists of utilizing $5.4 million from a variety of
funding sources including the Stanford University Medical Center (SUMC) Fund; library, parks,
and community center impact fees; grants from Santa Clara County; and donations from the
Palo Alto Museum. This funding strategy is included in the LRFF; however, if costs for
rehabilitating the Roth building increase, additional sources of funding would need to be
identified.
Cubberley Community Center Concept Plan: The City and PAUSD completed a co-design process
for a Cubberley Community Center Concept Plan in 2019; however, costs to implement the
concept plan are not assumed in this LRFF in excess of the dedicated Cubberley infrastructure
funding included in the existing agreement between the PAUSD and the City (discussed in the
Transfer to Infrastructure section of this report). The Concept Plan may require revision before
implementation as operational changes have occurred since its completion including execution
of a new lease between the City and PAUSD for the school district owned portion of Cubberley,
which commenced on July 1, 2020, and reduced the amount of building space leased to the City
(discussed in the General Expense - Cubberley Lease section of this report). On February 14,
2022 the Council directed Staff to pause p reparation of the Cubberley Concept Plan CEQA and
return with a work plan to include: i. exploring a land swap at Fletcher or financial framework
for acquiring available land; and ii. scoping the design process for Cubberley Community Center
16 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220214/20220214pccsm-amended-linked-final.pdf
17 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-
budget/adopted-fy23/capital-budget_final-4-online-version.pdf
4
Packet Pg. 32
City of Palo Alto Page 17
that is City owned once the acreage is determined. Staff is communicating with PAUSD on the
potential to acquire additional land at Cubberley, including acreage amount. This could be
through a land swap, acquisition, or ground lease. Staff is also determining next steps for repair
of Cubberley Gyms A and B, which have been closed since February 2022 due to damage
caused by water line breaks.
Loans for special projects: From time to time the City’s General Fund will assist other City
operations with modest cash flow loan s to bridge fiscal years. For example, the City provided
over $3 million in loans to the Airport Fund as it worked to secure significant grant funding from
the Federal Aviation Administration (FAA) for capital improvement costs. As of FY 2020, the
Airport Fund began paying back the loan to the General Fund. Additions and other initiatives
funded in other funds may need financial support from the General Fund to ensure they are
fully implemented. In FY 2023 the Residential Preferential Parking (RPP) Fund rec eived a one-
time $0.4 million General Fund loan to remain solvent while continuing operations given the
sustained drop in parking demand during the pandemic. 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. As the potential
impacts of various legislative initiatives are clarified, appropriate adjustments will be identified
and brought forward as part of future budget development cycles.
Tax revenue alignment with updated Comprehensive Plan: The 2030 Comprehensive Plan was
adopted in FY 2018, 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.
Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of
which have been identified in the City’s ADA transition plan and by the Infrastructure Blue
Ribbon Commission as requiring capital project work to bring them up to full ADA compliance
and/or sufficient conditions. Facilities of concern include Cubberley Community Center,
Foothills Park Restrooms, Lucie Stern Community Theatre restrooms, and Rinconada Pool locker
rooms. Staff continues to program work needed in this area as part of the Americans with
Disabilities Act Compliance capital project (PF-93009); however, the entire scope of work
needed in this area exceeds current resources.
Parks Trash Removal: The City currently does not have weekend trash removal services at most
urban parks. Prior to the COVID-19 pandemic, Rinconada and Mitchell Parks had weekend trash
removal, because those parks had picnic tables that could be reserved by residents. Staff have
noted that garbage cans can become overfilled on the weekends and are looking into how to
fund and operationalize adjustments to mitigate this issue. Possible solutions under
consideration include an increase in collection frequency, enhanced signage, and educational
4
Packet Pg. 33
City of Palo Alto Page 18
materials on waste reduction options such as reusable picnicware. Staff will bring forward
needs for reinvestment in this area in FY 2023 or as part of the FY 2024 budget process.
Permanent Parklet Program: On June 23, 2020 the City Council adopted an emergency
ordinance to temporarily permit businesses to operate outdoors on both public and private
property, referred to as the pilot parklet program (CMR 1143918). On April 19, 2021 the Council
directed staff to develop a permanent parklet program (CMR 1204119). The current pilot
program was extended most recently on October 24, 2022 (CMR 1469220) to extend the
temporary parklet program to June 30, 2023 and allow the other on-street and parking lot
dining and retail programs through December 31, 2023. Staff are developing a permanent
program which will include staffing and maintenance resources funded by new municipal fees
and associated revenues. This program is anticipated to be brought forward for Council
consideration in December 2022 and resources adjusted in FY 2023 or as part of the FY 2024
budget process.
General Liability Umbrella Excess Premiums: The City’s General Liability Program provides
funding to cover various insurance policies for City-owned equipment and machinery. The City
is self-insured for the first $1.0 million in losses per occurrence and participates in a Joint
Powers Authority for coverage up to $55 million per occurrence. These expenses are allocated
to citywide departments. General Liability Umbrella Excess Premiums are anticipated to
increase in future years due to significant national events and natural disasters such as claim
costs for Hurricane Ian. Staff will bring forward adjustments for these costs as part of future
budget cycles as they become available.
Fire Training Center: As part of the FY 2023 Adopted Capital Budget21 the City Council approved
the Fire Training Facility Replacement capital project (FD-24000) to identify an appropriate site
and construct a new fire training facility in Palo Alto. Funding was only appropriated for the
feasibility study portion of the project, and additional resources will need to be appropriated in
future budget cycles based on the results of the study. In addition, the Fire Department is also
evaluating opportunities to partner with other local jurisdictions for training needs, instead of
building a permanent facility in Palo Alto.
FY 2023 Budget Development Guidelines
When the Fiscal Sustainability Workplan (CMR 1026722) was approved by the City Council on
April 22, 2019 drafting a budget development policy was listed as part of the “Newly proposed
18 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2020/id-11439.pdf
19 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2021/id-12041.pdf
20 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20221024/20221024pccsm-amended.pdf
21 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-
budget/adopted-fy23/capital-budget_final-4-online-version.pdf
22 https://www.cityofpaloalto.org/civicax/filebank/documents/70506
4
Packet Pg. 34
City of Palo Alto Page 19
or potential activities proposed to be completed”. The i nclusion of Budget Development
Guidelines in with this forecast represents staff’s recommended method of addressing this
referral. Pairing Budget Development Guidelines with the forecast at the beginning of the
budget process 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. This also ensures that the City is able to proactively address
anticipated changes in its fiscal condition through the budget process.
As discussed earlier in this document, this preliminary forecast represents the initial steps of
the FY 2024 budget development process. Due to the clear overlap of projecting the City’s fiscal
condition and the need to shape service level expectations, staff recommends that the inclusion
of Budget Development Guidelines be incorporated into the discussions at the beginning of an
annual budget process. The FY 2024 Budget Development Guidelines, which are detailed in
Attachment A, 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 resour ces across the organization, especially in
the General Fund.
Conclusion
This forecast maintains current service levels approved in FY 2023 and should be used for
planning purposes to assist in gauging effects of major policy interventions against a likely
“status quo” version of the future. The level of uncertainty in this forecast is reduced from
where it was a year ago in terms of impacts from the COVID-19 Pandemic; however, the City is
continuing to manage through current economic uncertainty and evaluating potential impacts
on the local economy. Positive trends in major tax revenue categories that occurred in FY 2022
caused a one-time surplus of $14.2 million that Staff anticipates returning to Council in
February 2023 with the FY 2023 Mid-Year Review and recommendations in alignment with the
allocation for the appropriation of BSR funds above the 18.5% level. This includes transfers to
the Infrastructure Reserve (IR) in the Capital Improvement Fund ($4.0 million) and the City's
Section 115 Pension Trust Fund ($5.0 million), as outlined in the Pension Funding Policy, and a
recommendation to reserve funds to safeguard the stability the City has strived to achieve in
the recent year by re-establishing an economic uncertainty reserve ($5.0 million). Although
revenues have experienced growth in recent periods, the potential for recession makes it
difficult to determine if these trends will continue in the near term.
4
Packet Pg. 35
City of Palo Alto Page 20
The LRFF Base Case assumes a mild 18-month recession at the beginning of the ten-year period
in which revenue growth is anticipated to slow through the end of FY 2024. As a result, the LRFF
projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million gap in FY 2025, and a
$2.6 million gap in FY 2026, with small but increasing surpluses in FY 2027 through FY 2033.
Additionally, this LRFF projects a range of $238 to $244 million in total revenues in FY 2023,
reflecting up to $6 million or 2.5% above adopted budget levels. The higher end of this
projection assumes that revenues will continue a similar positive trend as recent quarters.
However, actual results will vary depending on the timing and magnitude of recessionary
impacts in the near term. If these additional revenues continue to materialize in FY 2023, Staff
anticipates returning to Council as part of the FY 2023 Mid-Year Budget Review to recommend
using this funding to increase the economic uncertainty reserve to help mitigate impacts from a
recession as well as smooth the near-term gaps seen in the first few years of this LRFF.
In addition to the Base Case Forecast, staff modeled an alternate forecast scenarios that are
discussed below. The first alternative reflects a more severe recession compared to the Base
Case and increases the General Fund gap over the next ten years. FY 2024 changes from a
surplus to a gap of $3.5 million, and revenues are not anticipated to be able to fund the annual
expenditures until FY 2029. Staff also modeled an alternate forecast that reflects estimated
funding from Measure K and the impacts on the General Fund over the next ten years. The
surplus in FY 2024 increases to $1.1 million, the gap in FY 2025 reduces to $1.9 million, and FY
2026 changes from a gap to a small surplus. These alternate forecasts were done separately to
show the impacts of each scenario in isolation; however, aspects of both alternate forecasts
may occur in conjunction in the future.
Alternative Scenarios for Consideration
Alternative Forecast Scenario A: Moderate Recession
This alternative forecast models the impact of a moderat e recession that assumes slower
growth of major tax revenues as compared to the base case. In this alternative, the range for
excess revenues in FY 2023 is reduced from an upper estimate of $6 million to $3 million.
Additionally, growth rates in FY 2024 and beyond are slowed, reducing net earnings by
approximately $4 to $6 million in the forecast and extending the timeframe to recover to pre -
pandemic levels by one to three years. 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.
4
Packet Pg. 36
City of Palo Alto Page 21
TABLE 8: FY 2024 – FY 2033 Long Range Financial Forecast
Alternative Forecast A
TABLE 9: FY 2024 –2033 Long Range Financial Forecast Net Operating Margin
Alternative Forecast A
The Base Case projected that by FY 2027, the City would begin to have a positive surplus; this
alternative forecast extends the operating gap to FY 2029. In this alternative, the General Fund
would have a gap of approximately $3.5 million in the first year of the forecast. This gap
increases to a peak of $7.2 million in FY 2025 and begins to taper in the two years following. FY
2029 is the first-year revenues would reach levels sufficient to support expenses.
Alternative Forecast B: Measure K Funding
This alternative forecast assumes the use of approximately 30 percent of revenues generated
from Measure K to offset known eligible expenses that contribute to funding gaps in the base
case. Measure K was presented on the November 8, 2022 ballot to establish a tax on businesses
operating in Palo Alto. This measure levies a tax on businesses based on a monthly rate of 7.5
cents per square foot of occupancy, subject to exclusions, with initial payments due January
2024. For the first two years, the tax would be imposed at half the rate. The tax rate and cap
would be increased by 2.5% annually to account for general inflation, beginning July 2026. The
tax would terminate January 1, 2058, unless extended by voters. The propose d tax is estimated
4
Packet Pg. 37
City of Palo Alto Page 22
to raise approximately $9.6 million each year for 35 years. The City Council has adopted
advisory spending guidelines stating its intention to expend revenues on long-term stable
funding for public safety, affordable housing and homeless services, and grade separated train
crossings that maintain safety and mobility for vehicles, bicyclists, and pedestrians, and to
annually report on tax revenues and expenditures. 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.
4
Packet Pg. 38
City of Palo Alto Page 23
TABLE 10: FY 2024 – FY 2033 Long Range Financial Forecast
Alternative Forecast B
TABLE 11: FY 2024 – 2033 Long Range Financial Forecast Net Operating Margin
Alternative Forecast B
In this alternative, the eligible funds for Measure K are phased-in over three years, in alignment
with the anticipated implementation of the tax. As mentioned above, approximately 30 percent
of the total anticipated receipts are used to offset eligible costs. These additional resources
result in a higher surplus of $1.1 million in FY 2024 as compared to the base case. Additionally,
the gaps in forecast years are significantly reduced or eliminated. In this scenario, the City has a
one-time gap of $1.9 million in FY 2025 followed by continued surplus throughout the forecast.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2024 represents the beginning of the fiscal year 2024 budget
development process. Information provided in this report 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
4
Packet Pg. 39
City of Palo Alto Page 24
community will occur through public budget hearings in Spring 2023, 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 2024 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 - FY 2024 Budget Policy Guidelines
• Attachment B - The Economy
• Attachment C - General Fund Base Case Revenue Assumptions
• Attachment D - General Fund Base Case Expense Assumptions
4
Packet Pg. 40
Attachment A – FY 2024 Budget Development Guidelines
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
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 such as planning for recession needs, restoration needs, and
strategic investments.
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 or realignment with current needs.
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; however, ensuring when resource augmentations are added, it is in alignment
with one-time and ongoing forecasted sources.
9) Continue to prioritize proactively funding long term liabilities including but not limited
to debt obligations, pension obligations, and capital infrastructure in accordance with
City policies as approved by Council.
FY 2024 Budget Development Guidelines
4.a
Packet Pg. 41
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
-
F
Y
2
0
2
4
B
u
d
g
e
t
P
o
l
i
c
y
G
u
i
d
e
l
i
n
e
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
F
i
n
a
n
c
i
a
l
F
o
r
e
c
a
s
t
)
ATTACHMENT B
The Economy
The economy closed 2021 with GDP growing 6.9% by the end of this calendar year with inflation
increasing, year-over-year by 7%, a level not seen since the early 1980s. As of October 2022, the
consumer price index (CPI) was below 8%. The unemployment rate at the end of 2021 was 3.9%
which was down from 6.4% at the beginning of this year. At the pandemic peak, unemployment
rate was at 14.7% when significant portions of the economy were shut down. The GDP growth in
2022 is expected to be below 3% then drop to low 2% in 2023. The unemployment rate hovers
around the mid 3% but is likely to go up as the economy cools down. The above outlook is
predicated on the federal reserve achieving a “soft landing” whereby there’s a slowdown in
economic growth that avoids recession for the purpose of stopping the economy from
overheating and continue to experience high inflation.
The local economy continues to show strong performance in the latter half of the calendar year
2022 though signs of “headwinds” are growing that are likely to stem economic growth. The UCLA
Anderson Forecast for California paints a generally positive picture for the state as compared to
national economic concerns, citing continued gains in gross domestic product. The outlook
reports that increases in defense spending and the continued demand for tech will likely keep
the economy growing, albeit at a slower pace. The outlook is that the world has become more
unstable so the expectation is that federal defense spending over the next few years will increase.
There have been broad-based hiring with leisure and hospitality, health care and social services,
and technology. However, the “mixed-signals” in economic data and headline news such as
technology sector layoffs are a concerning trend and a potential early indicator of an economic
slowdown. Another concerning trend, which California and the local economy are sensitive to, is
that the world economy seems to be worse than the U.S. With U.S. rising interest rates and global
instability, investors have been putting their money in the U.S. causing the dollar to rise against
other currencies. This causes U.S. exports to be more expensive around the world. The growing
home inventory, higher mortgage rates, and low and diminishing affordability are expected to
negatively impact the national and local housing market though demand for Palo Alto housing
has always been and is expected to remain strong.
According to the US Bureau of Economic Analysis (BEA), the “advance” estimate of the U.S.
economy’s real gross domestic product (GDP) percentage change, from the preceding quarter,
changed in the second and third (calendar) quarters of 2022 by a decline of .06% and an increase
of 2.6%, respectively. Real GDP is an inflation-adjusted measure that reflects the value of all
goods and services produced by an economy in a given year. According to the BEA, in the third
quarter the increase in real GDP reflected increases in exports, consumer spending,
nonresidential fixed investment, federal government spending, and state and local government
spending, that were partly offset by decreases in residential fixed investment and private
inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
4.b
Packet Pg. 42
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
-
T
h
e
E
c
o
n
o
m
y
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
F
i
n
a
n
c
i
a
l
F
o
r
e
c
a
s
t
)
Table 1: National Gross Domestic Product (GDP)
The national Consumer Price Index (CPI), as of the second calendar quarter peaked at 8.6% and is
expected to steadily decline in the coming quarters. In the third quarter, actuals in July, September and
October 2022 were 8.2%, 8.2% and 7.7%. This is slightly better than shown in the Table 2 third quarter
forecast of 8.3% which bodes well for the forecasted declining trend.
Table 2: National Consumer Price Index
The nation’s unemployment rate is 3.7% as of October 2022, compared to a record high of 14.7%
at the height of the pandemic in April 2020. It is expected, by the U.S. Bureau of Labor Statistics,
that the unemployment rate will rise due to the Federal Open Market Committee (FOMC or aka
federal reserve) raising the federal funds (interest) rate in order to bring down the elevated
inflation rate. Per the State of California's Employment Development Department, the state’s
unemployment rate as of September 2022 is 4.1% with the prior year being 7% and the County
of Santa Clara is 2.3%. Nationally, the improved unemployment rates are driven by job gains in
the leisure and hospitality; trade, transportation and utilities; professional and business services;
education and health services; manufacturing, and construction. Hi storically, the Bay Area job
4.b
Packet Pg. 43
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
-
T
h
e
E
c
o
n
o
m
y
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
F
i
n
a
n
c
i
a
l
F
o
r
e
c
a
s
t
)
growth has been led by the Peninsula for the past several years. The unemployment rate for the
San Francisco Peninsula was also in the low 2%.
Table 3: U.S. Unemployment Rate
The high inflation rate has resulted in the continued erosion of purchasing power, however, this has not
substantially deterred the U.S. consumer from spending. Real personal spending climbed 0.3% in
September. This was driven by a 0.6% increase in services spending with goods spending declining by 0.1%,
a tread reflected in the prior few months. As the pandemic restrictions have been removed, the trend
reflects consumers are shifting their activity to services and away from goods. Though there’s net monthly
solid growth, as reflected in the below graph, the year over year shows a slight decline
Table 4: Real Personal Spending Growth
4.b
Packet Pg. 44
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
-
T
h
e
E
c
o
n
o
m
y
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
F
i
n
a
n
c
i
a
l
F
o
r
e
c
a
s
t
)
ATTACHMENT C
General Fund Base Case Revenue Assumptions
Sales Tax
Compared to FY 2019 pre-pandemic actuals of $36.5 million, sales tax revenue declined by $7.4
million, or 20.2%, during the pandemic in FY 2021. The recovery, which began in the last quarter
of FY 2021, resulted in the FY 2022 receipts increasing by $3.6 million or 12.3%. Though this trend
has continued in the first quarter of FY 2023, the rate of recovery is expected to decline. The
general retail, food products (includes restaurants), business to business (includes car leasing),
and transportation (includes auto sales) categories experienced significant increases. This
economic trend also occurred in municipalities in the San Francisco Bay Area and in California.
These significant upward trends were partially offset by construction activity, which has been
declining.
The FY 2023 Adopted Budget for Sales Tax is $32.6 million, a $0.1 million or 0.4% decline over FY
2022 actuals of $32.7 million. In FY 2024, this revenue is anticipated to increase to $33.3 million,
a $0.7 million or 2.2% increase over the FY 2023 Adopted Budget. Revenue in this category is
experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2026. The
Base Case assumes 4.3 to 6.7% growth over the length of the forecast.
TABLE 1: City of Palo Alto Sales Tax Revenues through FY 2033
Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents approximately
25% of the total revenues. Historically, the 10-year compound annual growth rate (CAGR) was
8.4% with a low of 3.1% in FY 2012 and a high of 11.5% in FY 2015. During economic downturns,
impacts to property tax occur a year later, however, due to robust residential and commercial
property sales and significant Educational Revenue Augmentation Fund (ERAF) growth, the FY
2022 actual growth was 4.9%. In addition, fiscal years 2019, 2020, 2021, and 2022 included
receipts of $2.7 million, $3.9 million, $5.5 million, and $6.6 million, respectively, for excess ERAF
4.c
Packet Pg. 45
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
distributions from the County of Santa Clara. The FY 2022 budget included $4.9 million for excess
ERAF, however, actual receipts were $6.6 million, or $1.7 million higher which is explained further
below. 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.
In FY 2021, five counties including Santa Clara County, and the State were in a dispute over the
calculation and disbursement of excess ERAF funds. In a claim by the State, calculations for excess
ERAF incorrectly shifted too much property tax from schools to local agencies. The City set
established a reserve for the potential litigation amounts that was later released to the Budget
Stabilization Reserve (BSR) upon reaching a favorable resolution. In November 2021, the County
of Santa Clara notified the cities that the California School Boards Association and its Education
Legal Alliance filed a lawsuit against the Controller of the State of California arguing that the
settlement reached with the counties is unlawful. The County estimates a range between 20 to
30% of Excess ERAF is at-risk. The FY 2023 Budget assumes 25% or $1.5 million for a potential
loss starting in the current year and extending into forecast years. The FY 2022 amount at risk,
$1.7 million, was sent to the City since the lawsuit wasn’t settled in FY 2022; these funds were
recognized as property tax receipts in FY 2022 and are reserved, pending the settlement of the
lawsuit. Staff will continue to monitor the status of this dispute and report on any significant
developments.
Transfer of ownership has been a significant driver of past growth; however, that growth is
expected to moderate in FY 2023 due to the expected economic slowdown and the higher
mortgage rate. For example, the median sales price of single family residential in the fourth (fiscal
year) quarter of FY 2022 declined by 5.3% over the prior quarter.
TABLE 2: City of Palo Alto Property Tax Actuals and Forecast through FY 2033
4.c
Packet Pg. 46
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
The FY 2023 Adopted Budget for Property Tax is $59.8 million, a $0.4 million or 0.7% increase over
the FY 2022 actuals of $59.4 million. In FY 2024, this revenue is anticipated to increase to $63.7
million, a $3.9 million or 6.5% increase over FY 2023 Adopted Budget level.
Transient Occupancy Tax (TOT)
Revenue in this category is impacted by business and other leisure/non-leisure travel and has
experienced significant reductions in FY 2020 and FY 2021 due to public health orders, travel
restrictions, and diminishing business and personal travel plans resulting from the pandemic. TOT
revenue declined by $20.5 million or 79.8%, when comparing the FY 2019 pre-pandemic actuals
of $25.6 million to the pandemic FY 2021. As public health conditions improved and travel
resumed, this revenue began to recover and significantly grew in FY 2022. Though this revenue
remains below pre-pandemic actuals, strong growth was realized in the FY 2021 fourth quarter
and in FY 2022. In FY 2022, actual receipts were $16.9 million, an increase of $11.8 million, or
227.2% higher. The opening of the two Marriott hotels in mid and late FY 2021 and the re-opening
of multiple hotels in FY 2021 and FY 2022 were positive developments that help drive recovery
for this tax revenue.
The FY 2023 Adopted Budget for TOT adopted is $18.2 million, a $1.3 million or 7.4% increase
over FY 2022 actuals of $16.9 million. In FY 2024, this revenue is anticipated to increase to $25.0
million, a $6.8 million or 37.3% increase over the FY 2023 Adopted Budget. Year-to-date (as of
August 2022), daily average room rates increased by 61.2% from $155.73 per day to $251.04 per
day while occupancy rate increased by 24.4% from 60.2% to 75%. Revenue in this category is
experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2026.
TABLE 3: City of Palo Alto Transient Occupancy Tax Actuals and Forecast through FY 2033
Note: January 2015, TOT Rate went from 12% to 14%
April 2019, TOT Rate went from 14% to 15.5%
4.c
Packet Pg. 47
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.
Revenue in this category is impacted by consumption levels and has experienced reductions in
prior periods due to water conservation programs and reduced workforces and business closures
due to the pandemic. This revenue is expected to recover as the local economy recovers and
workers partially return to the office. The FY 2023 Adopted Budget for UUT is $15.6 million,
consistent with FY 2022 actuals. In FY 2024, this revenue is anticipated to increase to $15.9
million, a $0.3 million or 1.9% increase over the FY 2023 Adopted Budget. Revenue in this
category is experiencing growth; however, is not anticipated to reach pre-pandemic levels until
FY 2025.
TABLE 4: City of Palo Alto Utility Users Tax Actuals and Forecast through FY 2033
Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and dependent on sales volume and the mix of
commercial and residential sales. DTT experienced record receipts in FY 2021 and FY 2022 at
$10.6 million and $12 million, respectively. In both years, these milestones were a result of large
commercial transactions, six in FY 2021 and nine in FY 2022, and robust residential sales. Revenue
from July through October in FY 2022 is running 37.9% below the same period in FY 2021 which
is expected, however, this is around 25% below the average normal year’s receipt. The FY 2023
Adopted Budget for DTT is $7.2 million, $4.8 million or 39.8% lower than FY 2022 actuals of $12
million. In FY 2024, this revenue is anticipated to decrease to $6.9 million, a $0.3 million or 4.8%
decrease from FY 2023 levels.
As in past years, this revenue source is challenging to forecast and can fluctuate month to month
depending on real estate transactions. The number of transactions through September 2022
(136) are running lower than those through September 2021 (215) with the total value of these
transactions decreasing by 37%. Though the Palo Alto housing market remains strong, as
discussed in the Property Taxes section, single family residential median sales price in Palo Alto
has slightly declined, which is an expected occurrence as the predicated economic downturn and
higher mortgage rate will impact property sales activity in FY 2023.
4.c
Packet Pg. 48
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
TABLE 5: City of Palo Alto Documentary Transfer Tax Actuals and Forecast through FY 2033
Rental Income
Rental Income of $16.4 million in FY 2024 primarily reflects rent paid to the General Fund from
the City’s Enterprise Funds and the Cubberley Community Center. There is a slight increase in
rental income of $0.8 million compared to the FY 2023 Adopted Budget. The increase can be
attributed to a review of the changes in the California Consumer Price Index (CCPI) in the San
Francisco Bay Area from the August-to-August period, and 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 no longer receiving rental income from the former Los Altos Treatment Plant (LATP)
site. The site is no longer available for traditional rental as a laydown yard, although the
contractors of the planned projects may need to use portions of the site for this use. The site is
planned for two uses: 1) an interim housing project with Project Homekey to provide
opportunities for homeless individuals and families, and 2) a joint water purification project with
the Santa Clara Valley Water District. Please see the Expense Assumptions General Expenses
section of this report for additional information regarding Project Homekey developments at the
former LATP site. The water purification project is being funded in the Wastewater Treatment
Fund, so it is not part of the General Fund LRFF; however, funding needs for the project will be
discussed in the development of the FY 2024 budget for the Wastewater Treatment Fund.
Charges for Services and Permits and Licenses
Revenues in the ‘Charges for Services’ and the ‘Permits and Licenses’ categories are anticipated
to be $33.4 million and $11.5 million, respectively, in FY 2024. Together, these amounts total
$44.8 million and are approximately $4.8 million higher than the FY 2023 Adopted Budget of
$40.0 million. Increases in this category are primarily due to revenue adjustments for the
agreement with Stanford to provide Fire and Dispatch services, the elimination of the
Economically Sensitive Department Revenue Reserve, and adjustments to development center
revenues.
4.c
Packet Pg. 49
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
Revenues in these categories were impacted by changes in FY 2024, such as increasing golf
revenue estimates in alignment with the last two fiscal years of operation. These budget
categories also include revenues associated with two fee-based programs in the Fire Department:
a first responder fee (assessed on commercial insurance companies), to cover the cost for initial
response for first due engine; and an ambulance subscription fee (FireMed program), to secure
co-pay free ambulance transport. These fees were implemented in 2022 with revenue expected
to continue growing as advertising campaigns develop.
Additionally, revenues in these categories were impacted by a phase-out of the Economically
Sensitive Department Revenue Reserve. This reserve was established to mitigate unexpected
losses from services impacted by the COVID-19 pandemic, such as the suspension of parking
enforcement, delays in opening the Junior Museum and Zoo, and limited operations at
community centers, recreational facilities, and the Children's Theatre. In total, $2.5 million was
set aside for this purpose in the prior year. This forecast assumes gradual overall improvements
in the return of canceled or modified services by phasing out this reserve in its entirety in FY
2024.
The revenue estimates in these categories are based on current activity levels. These revenue
sources are primarily driven by the cost of staff to provide services to the community. Therefore,
as part of the FY 2024 Municipal Fee process, staff will evaluate and bring forward
recommendations to align fees with target cost recovery levels, and general salary and benefits
and CPI trends. One exception to this is for Development Services activities and related revenue.
Development Services fees are fully cost-recoverable, and the department has been modeled as
cost-neutral in this forecast. staff will analyze municipal fee revenue activity as part of the FY
2024 Budget development process and bring forward adjustments as appropriate.
Charges for Service - Stanford Fire and Dispatch Services: The City and Stanford have two separate
agreements for the provision of fire response and emergency dispatch services. The fire response
services agreement became effective in July 2018 and outlines service level terms and a new cost
allocation methodology as the baseline for agreement costs. The term extends through June
2023, with renewals through 2028 unless otherwise terminated. The agreement 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 aligns with the new staffing
model and, in accordance with the agreement, adjustments to revenue from Stanford have been
aligned with the year-over-year changes to the operating expenses in the Fire Department for FY
2023. Similarly, changes to the revenue received for dispatching services have been aligned with
the FY 2023 adjustments to the operating expenses in the Technical Services Division of the Police
Department where the costs to provide these services are budgeted. For fire and police revenue,
additional adjustments may be applicable if new labor agreements are negotiated. Revenues for
these services are based on anticipated changes in salary and benefits costs within the Fire
Department and Police Department Dispatch Unit.
4.c
Packet Pg. 50
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
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 2024 estimate for Charges to Other Funds of
$14.5 million reflects a slight increase of 5.6% from the FY 2023 Adopted amount of $13.7 million;
this is primarily attributed to fully adjusting the costs associated with the allocated charges in the
Internal Support Departments to the adjustments made as part of the FY 2023 Budget as well as
a technical adjustment to better align the cost plan methodology with the system calculations.
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. As of the timing of
this LRFF, the Federal Open Market Committee (FOMC) has raised the federal funds rate six times
totaling 3.75% and may increase this rate further to bring down the inflation rate between 2 to
3%. As a result, an increase in interest earnings is forecasted; earnings on new portfolio
investments have increased from 0.5 to 2% to 4.5 to 6%.
The average portfolio rate of return for the first quarter of FY 2023 was 1.66%, and a 1.62%
average yield as of the fourth quarter of FY 2022. The adopted budget General Fund FY 2023
interest earning is $1.1 million. Though this is below the FY 2022 actual of $1.3 million, the
expectation is the actuals in FY 2023 will be higher. In FY 2024, the forecast reflects a relatively
high interest rate environment with increased interest earnings through the ten-year period.
TABLE 6: Palo Alto Historical Investment Portfolio Yields and Citywide Interest Earnings
4.c
Packet Pg. 51
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
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 repayment of a previous loan from
the General Fund to the Airport Fund, funding for police patrol in the downtown area, and the
equity transfer from the Electric and Gas funds. Overall, the Operating Transfers-in are estimated
to be $23.6 million, a $1.1 million increase from the FY 2023 level of $22.5 million due to a $0.5
million increase from the Electric Fund and a $0.6 million increase from the Gas Fund.
In accordance with the methodology approved by the City Council in June 2009, the electric to
general fund equity transfer has been calculated by applying a rate of return on the capital asset
base of the Electric Fund. This rate of return is based on PG&E's rate of return on equity as
approved by the California Public Utilities Commission (CPUC). This LRFF also assumed the
passage of Measure L on the November 2022 ballot to seek voter approval of the City’s gas to
general fund equity transfer going forward. As outlined in the ballot measure language, Staff
calculated the gas to general fund equity transfer as 18% of annual gross gas retail revenue.
This LRFF also considers the trial court’s decision in Green v. City of Palo Alto (Santa Clara Superior
Court Case No. 16CV300760), a class action lawsuit which challenged the City’s gas and electric
rates under Proposition 26, one of many such cases following a 2015 decision involving the City
of Redding. In Green, the trial court judge found the City’s electric rates valid, but held that the
City’s gas rates were taxes requiring voter approval under California’s Proposition 26, because
they were set at a level sufficient to fund an annual transfer to the City’s general fund. On June
24, 2021, the trial court entered judgment partially against the City and ordered the City to pay
$12.6 million to a common fund to refund gas ratepayers and for payment of incurred litigation
costs.
The City and the plaintiffs appealed the trial court’s judgment. Payment of refunds due to gas
ratepayers under the trial court judgment are stayed pending a decision by the Court of Appeal
(expected in 2023) on the parties’ respective appeals. While the ultimate outcome of the claim
is uncertain, the City set aside funding in the General Fund for the potential financial impacts.
Specifically, the City recorded a claim payable of $17.5 million, which includes the trial court
judgment covering claims for 2015-2019, plus an amount covering refunds for 3 additional years
of plaintiff’s claims that were tolled (paused) during active litigation. While the process for
calculating the equity transfer from the Electric and Gas Funds has not changed, the City has
placed the funds in a Litigation Reserve. This action continues the City’s proactive actions to
address known liabilities with the best information available at the time and sets these funds
aside pending final resolution of this dispute.
4.c
Packet Pg. 52
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
C
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
R
e
v
e
n
u
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
ATTACHMENT D
General Fund Base Case Expense Assumptions
Salary and Benefits
The table above depicts the estimated General Fund salaries and benefits costs. Consistent with
prior years, the FY 2024 salaries and benefits costs represent approximately 60% of the General
Fund budget expenditures.
Salary and Benefits are projected to increase $11.3 million or 7.6% from the prior year, from
$148.4 million to $159.7 million. Discussed in the following sections, this is primarily attributable
to increases in salaries ($6.1 million or 7.7%) and pension costs ($4.1 million or 10.5%).
Salary
Consistent with the City’s salary budget methodology for recent budgets, positions are budgeted
at the actual rate of pay of employees including benefit selections as of Fall 2022. Then, by
position, salary costs are updated in accordance with applicable Memorandum of Agreements
(MOA’s) between the City and its labor groups and the Management and Professional Personnel
and Council Appointees Compensation Plan(s). It is important to note that as of this forecast, all
bargaining groups are near the end of their agreement terms and the City is actively engaged in
negotiations with the various labor groups. The forecast assumes step increases for employees
in applicable positions, including SEIU, IAFF, and PAPOA, and merit increases for Management
and Professional employees including UMPAPA. A general wage adjustment of 2.0% is included
for all employees starting in either January 2023 or July 2023 for all years of the forecast since no
MOA’s would be in effect at that time. This is consistent with prior Council direction in previous
long range financial forecasts to use the 2.0% increase as a forecasting assumption, not as a
commitment to future negotiations. Additionally, this forecast includes a level of reserve to reach
a target market placement for employee compensation in new labor agreements, as directed by
the City Council. Staff expects to adjust these costs throughout the budget development process
in accordance with final contract terms.
Benefits
Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2021
valuation (CMR 146281) for the City’s Miscellaneous and Safety plans. 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
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220920/20220920pfcs.pdf
4.d
Packet Pg. 53
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
necessary funding for the City to pay for employees presuming that CalPERS meets the current
set of assumptions.
In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes,
method changes, or plan experience (including investment gains/losses), there is an increase or
decrease to the Unfunded Accrued Liability (UAL). 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.
In the miscellaneous plan, total costs are projected to increase from the current 42.9 percent in
FY 2023 to the 44.8% in FY 2024. In the safety plan, total costs are projected to increase from the
current 71.1% in FY 2023 to 74.0% in FY 2024. These rates do not consider the employee pick-up
of the employer share; that pick-up materializes as savings in the City’s pension costs. Consistent
with applicable MOAs, the FY 2023 forecast presumes that the miscellaneous plan will pick up 1
to 2% of the employer pension cost and that safety plan members will pick up 3 to 4%.
The FY 2024 budget was impacted by significant favorable investment returns of 21.3% (6.8%
assumption) earned in the most recent June 30, 2021 valuation and changes to economic and
demographic assumptions resulting from the CalPERS Asset Liability Management (ALM) process
and Experience Study completed in November 2021. As part of the ALM, the CalPERS board
approved a reduction to the discount rate (from 7.0 to 6.8%), revised actuarial assumptions (price
inflation from 2.5 to 2.3%), and a new asset allocation targeting 1/3 investment in private assets,
5% leverage, and reduced public equity exposure.
Since the issuance of the current valuation, CalPERS announced a preliminary investment loss of
6.1% for the period ending June 30, 2022. These results will be included in the CalPERS valuation
report issued in Fall 2023 to inform the development of the FY 2025 budget. The resulting liability
of the investment loss will be amortized over 20 years with a 5-year ramp-up period. To inform
this LRFF, staff used the CalPERS Pension Outlook Tool to calculate the estimated impacts,
resulting in additional costs of $3.4 million ($2.6 million in the General Fund) in FY 2025, and
increasing to $16.8 million ($12.9 million in the General Fund) at the peak of the 5-year ramp in
FY 2029.
TABLE 1: CalPERS’ Projected FY 2023-2033 Blended Retirement Rates
(percentage of payroll)
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
Miscellaneous 42.9 44.8 43.6 38.9 32.9 30.9 30.7 30.3 30.1 26.7 25.4
Safety 71.1 74.0 72.3 69.5 66.8 63.6 63.2 61.9 61.4 57.9 55.8
4.d
Packet Pg. 54
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
The City has taken several proactive steps to address rising pension costs and long-term liabilities,
including cost-sharing in labor agreements, establishing an irrevocable Section 115 Pension Trust
(“Pension Trust”) (CMR 7553 2), and adopting a Pension Funding Policy (CMR 11722 3). As part of
policy goals, the City seeks to reach a 90% funded status by FY 2036. This policy is subject to
modification at City Council discretion and requires that staff report the status of the funding
goal every three years. Consistent with the Pension Policy, staff continues to include the NC of
pension at a more conservative discount rate than CalPERS in budget assumptions and transmits
amounts above required payments (“supplemental contributions”) to the Pension Trust.
Beginning in FY 2023, the City Council approved to reduce the discount rate for supplemental
contributions from the previously approved rate of 6.2% to 5.3% over two years; FY 2023 is a
transitional year in which six months or the equivalent of approximately 5.8% is budgeted.
Additional one-time contributions continue to be made each year if excess revenues or unspent
savings are available, subject to City Council approval.
In accordance with Pension Policy reporting requirements, staff is engaged in a series of meetings
with the Finance Committee in Fall 2022 to review the status of the City’s pension and retiree
healthcare plans, and Pension Policy. Staff expects as part of this review to memorialize any
practices adjusted since the adoption of this policy, review progress towards policy goals, and
recommend potential modifications to the Pension Policy or budgetary practices used to inform
the financial planning of these benefits. This series of reports includes: 1) Review of the most
current actuarial analysis as distributed by CalPERS (CMR 14628 4), 2) Review of the current status
of both the Pension and Other Post-Employment Benefits (OPEB)/retiree healthcare liabilities
including the proactive contributions and discussion with plan providers (CMR 14829 5), and 3)
Review of actuarial analysis based on alternative assumptions as defined in the Pension Funding
Policy and recommended revisions to the Pension Funding Policy for City Council consideration
and adoption (tentatively scheduled December 6, 2022).
In this forecast, approximately $12.2 million ($7.2 million in the General Fund) in supplemental
contributions is assumed in FY 2024. This reflects a $4.0 million ($2.7 million in the General Fund)
increase over the prior year, primarily due to the transition to a lower discount rate. Through FY
2023, a total of $49.4 million (31.8 million in the General Fund) in principal contributions are
expected to be made to the Pension Trust.
In the General Fund, it is anticipated the City will spend a total of $43.1 million on total pension
costs in FY 2024, including both CalPERS contributions and supplemental Pension Trust Fund
contributions. This is approximately $4.1 million higher than the prior year costs of $39.0 million,
or a 10.5% increase. These expenses represent approximately 17% of the General Fund’s total
expenses.
2 http://cityofpaloalto.org/civicax/filebank/documents/55487
3 http://cityofpaloalto.org/civicax/filebank/documents/79256
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220920/20220920pfcs.pdf
5 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221018/20221018pfcs.pdf
4.d
Packet Pg. 55
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
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
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).
Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the June
30, 2021 actuarial study prepared by Bartel Associates, which is completed every two years. The
most recent study was completed in June 2022 to inform the development of the FY 2023 and FY
2024 operating budgets (CMR 14112 as amended by CMR 145026). Consistent with City Council
direction, this forecast continues the practice to budget for the full payment of the Actuarial
Determined Contribution (ADC) for retiree healthcare, using a more conservative discount rate
to transmit amounts above the recommended payment as an additional discretionary payment
(“prefunding”) to the California Employers’ Retiree Benefit Trust (CERBT) Fund.
The results of the recent valuation benefited from significant favorable investment returns of
27.5% (6.25% assumption) and lower than anticipated healthcare premiums. The City Council
further adjusted funding to continue alignment with the proactive pension funding assumptions
as well as known variable such as June 30, 2022 market returns. Budgetary assumptions in LRFF
include a zero percent return in 2021-22 (one-time), a 5.75% discount rate (6.25% assumption),
and shortened amortization (from 22 to 15 years). Through FY 2023, it is expected that $8.0
million in supplemental principal contributions will be made to the CERBT Trust.
CalPERS blends active employees with pre-Medicare retirees and charges the same medical
premium, even though younger employees on average consume less healthcare. The higher
premium to younger employees thereby subsidizes older employees and retirees who, on
average, have higher claims and premiums. The FY 2024 Budget estimates $16.4 million ($10.5
million in the General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY 2023
levels of $15.9 million ($9.9 million in the General Fund). The implied subsidy is $3.1 million in FY
2024 and effectively lowers the funding necessary to meet the ADC.
TABLE 2: Retiree Medical General Fund Contributions
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033
$10.2 $10.5 $10.9 $11.2 $11.5 $11.9 $12.3 $12.7 $13.1 $13.5
Workers’ Compensation: The budget appropriation for workers' compensation includes an
estimate for claims incurred and reserves for current filings at an 85% confidence level, based on
actuarial studies completed by Bickmore. In FY 2022, claims expenditures decreased slightly by
$39,000 or 0.6% from $6.07 million to $6.04 million from the prior year. Actuarial estimates
6 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220607/20220607pfcsm-final.pdf
4.d
Packet Pg. 56
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
completed in August 2021 informed FY 2023 budget levels of $6.5 million (approximately 65% in
the General Fund). More recent actuary estimates completed in August 2022 project higher than
expected levels for FY 2023 at $6.9 million. Staff will continue to monitor expenditures in the
fund and bring forward adjustments as necessary. Estimates for FY 2024 are $7.3 million,
representing a $0.8 million or 12.9% increase over the Adopted FY 2023 Budget. Estimates for
workers' compensation increase in the forecast at rates consistent with general CPI increases.
Contract Services
This forecast assumes contract services of $23.9 million in FY 2024, a 1.1% decrease from the FY
2023 Adopted budget of $24.2 million. This decrease is driven primarily by the removal of one-
time costs adopted in FY 2023 including funding to address continued COVID-19 recovery efforts
across the City. These decreases are partially offset by service contract increases as well as a 5.0%
CPI cost increase in FY 2024 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
the estimated CPI increases will be substituted with department base budget requests to adjust
contract funding needs as part of the FY 2024 budget process.
Contract Services - Committed Additions
The Committed Additions included in this forecast account for anticipated operating and
maintenance (O&M) costs in the General Fund for capital projects anticipated to come online
within the ten-year forecast period. A preliminary total estimate of $0.3 million for costs
associated with the following projects anticipated to come online in FY 2024: Boulware Park
Improvements (PE-17500), Dog Park Installation (PG-18001), Library Automated Materials
Handling (LB-21000), Park Restroom Installation (PG-19000), Public Safety Building (PE-15001),
and Rinconada Park Improvements (PE-08001). The Public Safety Building is anticipated to be
complete in Fall 2023, so the full O&M cost for the facility is anticipated to be realized in FY 2025.
Additional cost increases are included throughout the ten-year forecast 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. Timing and analysis of the funding needs for these projects will be
evaluated as part of the FY 2024 Budget process. Also, estimated operating impacts from the Fire
Station 4 (PE-18004) project are included starting in FY 2026.
TABLE 3: FY 2024 – FY 2033 Committed Additions (Millions)
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033
$0.3 $0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.7 $0.8 $0.8
4.d
Packet Pg. 57
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
Supplies and Materials
The FY 2023 Adopted Budget for the General Fund included $3.2 million for Supplies and
Materials, which is anticipated to increase by a 5.0% CPI cost increase in FY 2024 to $3.3 million
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 the estimated CPI
increases will be substituted with department base budget requests to adjust funding for supplies
and materials as part of the FY 2024 budget process.
General Expense
This category includes costs for travel and meetings, telephone and non-city utilities, contingency
accounts and reserves, bank card service charges, and subsidies and grants provided through the
Human Services Resource Allocation Program (HSRAP). The FY 2023 Adopted Budget of $21.8
million is expected to decrease to $8.6 million in FY 2024, primarily due to phasing out the Utility
Ligation reserve and elimination of the one-time Budget Uncertainty Reserve. Please see the
Revenue Assumptions Operating Transfers-In section of this report for further information about
the Utility Transfer Litigation reserve. The reduction is partially offset by a CPI cost increase 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 the estimated CPI increases will be
substituted with department base budget requests to adjust funding for general expense items
as part of the FY 2024 budget process.
General Expense – Project Homekey: On September 27, 2021 the City Council directed staff to
apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter
at the former Los Altos Treatment Plant (LATP) site (CMR 13595 7). This project will rapidly deploy
modular housing to provide interim housing opportunities for homeless individuals and families
in the City of Palo Alto. Project Homekey is a program, funded by the State of California
Department of Housing and Community Development, intended to provide grant funding and
facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety of
housing types. Once developed, these projects provide interim or permanent housing options for
persons experiencing homelessness and who are also at risk of health concerns. The site would
be operated for at least fifteen years as interim housing per the program’s durational
requirement. This project would utilize a combination of funding sources including the Project
Homekey Program for capital expenses and donations, grant funds, and City support for ongoing
operations expenses. This LRFF includes the City’s committed investment of $7.0 million in
operating expenses ($1.0 million annually FY 2023 through FY 2029), with actual timing of the
funding still to be determined. Some operating funding support is expected from Project
Homekey as well as the County of Santa Clara. Any remaining gaps in funding will need to be
closed by fundraising, operating cost containment strategies, and/or grant funds.
General Expense - Cubberley Lease: In FY 2015, the City and Palo Alto Unified School District
(PAUSD) agreed to a five–year extension of the Cubberley lease from January 2015 to December
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2021/09-september/20210927/210927accsm-amended-final.pdf
4.d
Packet Pg. 58
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
2019. In October 2019, the City Council directed staff to negotiate with PAUSD to extend the
lease agreement an additional five years, through December 2024 (CMR 107308). A new
Cubberley lease was approved by the City Council in June 2020 (CMR 11460 9) for a smaller
portion of the Cubberley site with a correspondingly lower base rent payment (CMR 11386 10). As
part of the original lease agreement, the City Council approved creation of the Cubberley
Infrastructure Improvements Fund. The new lease continues the $1.9 million transfer to the
Cubberley Property Infrastructure Fund, which is classified as an Operating Transfer-Out and
discussed in further detail in that section of this report below. With the Cubberley Infrastructure
funds set aside, the annual base rent for the Cubberley premises is $2.7 million. Other pending
factors at the Cubberley site that are part of ongoing discussions, but not included in the LRFF
estimates are returning the S Building to PAUSD and the Community Services Department is still
interested in negotiating with PAUSD to expand the Cubberley premises by renting additional
space from the M Building. Separately, the City leases extended child daycare sites from PAUSD
on a one-year lease from July 2022 to June 2023. The combined annual rent for the child daycare
sites plus utilities amounts to $0.8 million.
Rents and Leases
The Rents and Leases expense category for FY 2024 is estimated to increase from the FY 2023
Adopted Budget level by approximately 2.7% to $1.4 million, This is based on current lease terms
that include previously negotiated lease increases or CPI cost increases 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. This current estimate will be updated when the December-to-
December CPI information is available. This category includes the lease agreement for
Development Services staff at locations outside City Hall (285 Hamilton and 526 Bryant) as well
as lease with Stanford for El Camino Park. A new lease agreement was executed in December
2020 for the Development Services office location at 526 Bryant Street, limiting the space to the
basement level (CMR 11426 11). The lease was amended in September 2022 to extend the term
initially for 12 months with the right to automatically extend for four successive 12-month
periods, potentially through January 31, 2028 (CMR 14713). In June 2021, the City entered into a
seventh amendment for the Development Services office lease at 285 Hamilton Avenue to extend
the term from February 2022 to January 2025 (CMR 1233412). As expenses for rent for
Development Services are adjusted, a corresponding revenue adjustment will be made to ensure
Development Services maintains cost recovery levels.
Facilities and Equipment
The Facilities and Equipment expense category is expected to decrease from the FY 2023 Adopted
level of $480,000 to $450,000 due to the elimination of funding for one-time equipment
8 https://www.cityofpaloalto.org/civicax/filebank/documents/73558
9 http://cityofpaloalto.org/civicax/filebank/documents/77365
10 http://cityofpaloalto.org/civicax/filebank/documents/77073
11 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2020-2/id-11426.pdf?t=59979.32
12 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2021/id-12334.pdf
4.d
Packet Pg. 59
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
purchases in FY 2023 such as electric leaf blowers and medical gurneys. Along with funding for
various equipment across departments, this budget category includes subscription payments for
equipment like public safety radios. The reduction is partially offset by a CPI cost increase 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 the estimated CPI increases will be
substituted with department base budget requests to adjust funding for equipment needs as part
of the FY 2024 budget process.
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 2023 Adopted
Budget for the General Fund included $22.7 million for these expenses, including utilities usage,
general liability insurance, technology costs, vehicle equipment maintenance and replacement
costs, and other charges for services provided by other City departments and funds. The FY 2024
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 2024 is
anticipated to experience an increase of 8.9% to a total of $24.7 million. This increase is primarily
due to anticipated higher costs associated with technology services and utilities for City facilities
such as water, electricity, and gas.
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. The FY 2023 Adopted
Budget included Operating Transfers Out of $5.0 million. In FY 2024, Operating Transfers Out are
anticipated to decrease to $4.6 million due to the elimination of funding for a one-time loan of
$0.4 million to the residential parking permit fund in FY 2023. At this time no loans to the parking
permit funds are anticipated as part of the LRFF; however, staff will be evaluating these funds as
part of the FY 2024 budget development and will bring forward recommendations for additional
loans if needed to keep the parking permit funds solvent.
Transfer to Infrastructure
Recovery from the COVID-19 pandemic were reflected in improved revenue levels in the FY 2023
budget compared to the FY 2022 budget. The total General Fund transfer to the Capital
Improvement Fund budgeted in FY 2023 is $17.5 million compared to the $11.9 million
transferred in FY 2022. This is comprised of a $7.8 million base transfer including interest
earnings, and $9.7 million from TOT revenue generated through voter-approved rate increases
and new hotels that is dedicated to the Capital Improvement Fund to support the 2014 Council
Infrastructure Plan, consistent with City Council direction. As the local economy continues to
recover from the COVID-19 pandemic, estimated transfers from TOT revenues in FY 2024 are
currently projected to increase to $10.5 million and the base transfer to increase to $10.8 million
for a total $21.3 million transfer to the Capital Improvement Fund. This forecast continues the
goal established as part of the 2022-2026 Capital Improvement Plan (CIP) to restore the base
portion of this transfer to pre-pandemic levels by FY 2026. This budget category also includes the
4.d
Packet Pg. 60
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
separate $1.9 million transfer to the Cubberley Property Infrastructure Fund. This transfer to the
Cubberley Property Infrastructure Fund supports general operating and maintenance needs a the
Cubberley Community Center facility as well as capital improvement projects to maintain and
upkeep the facility.
4.d
Packet Pg. 61
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
D
-
G
e
n
e
r
a
l
F
u
n
d
B
a
s
e
C
a
s
e
E
x
p
e
n
s
e
A
s
s
u
m
p
t
i
o
n
s
(
1
4
6
2
9
:
R
e
v
i
e
w
a
n
d
F
o
r
w
a
r
d
t
h
e
F
Y
2
0
2
4
-
2
0
3
3
L
o
n
g
R
a
n
g
e
City of Palo Alto (ID # 14748)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Pension Policy and Retiree Healthcare Review and Update
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and accept the revised actuarial pension
analysis using alternative assumptions and recommend City Council adoption of modifications
to the Pension Funding Policy used to guide financial planning of these benefits.
Executive Summary
In alignment with the Pension Funding Policy and Council direction, periodic reviews are
conducted to assess and respond to changes impacting the City’s pensions and Other Post -
Employment Benefits (OPEB) plans and the funding available to meet those benefit costs. This
report focuses on actuarial analysis using alternative assumptions to CalPERS. These results will
be used to inform the status of pension plans, progress towards meeting funded status goals,
and other risk mitigation strategies.
As part of this review, staff recommends memorializing any practices adjusted since adoption
of the policy and discussing further policy modifications or budgetary practices used to inform
long term financial planning of these benefits. Potential policy revisions recommended include:
•Adding proactive planning for Other Post-Employment Benefits (OPEB)/retiree
healthcare to policy, consistent with City Council actions
•Assuming a more conservative discount rate for supplemental contributions from 6.2
percent to 5.3 percent (Pension) and from 6.25 percent to 5.75 percent (OPEB), as
approved by the City Council
•Adding language for investment strategy of Pension and OPEB Trusts, including more
conservative investment allocations once 75-80% funded, or when the City’s actuary
recommends disbursements
•Identifying areas of focus for accumulated savings, such as rat e stabilization and
Additional Discretionary Payments (ADPs) to CalPERS, such as
o ADPs in excess of one-year employer contribution (current policy)
o No ADPs, accumulate savings in Pension Trust
2 Late Packet
Packet Pg. 62
City of Palo Alto Page 2
o ADPs for excess BSR contributions and/or supplemental contributions only
•Modifying actuary reporting from 3 to 4 years to align with CalPERS Asset Liability
Management (ALM) process and Experience Study
Background
The City has taken several proactive steps to address rising pension costs and long-term
liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115
Pension Trust (“Pension Trust”) (CMR 75531), and adopting a Pension Funding Policy (CMR
117222). The Pension Policy is an evergreen policy that automatically renews until goals are
complete, subject to modification at the City Council’s direction. The policy identifies a path
forward for the City to address its pension obligations on an ongoing basis, ensure prudent and
proactive financial planning, and avoid significant impacts to service delivery.
The current Pension Funding Policy sets the following goals and principles:
Funding Goal and Timeframe:
•Target of reaching a 90 percent funded status of the CalPERS determined liability within
fifteen years (FY 2036).
Funding Components:
•‘pay go’ costs also known as Normal Cost (NC) of annual pension costs to be funded with
a discount rate of 6.2%, more conservative than CalPERS rate of 7.0%.
•Discretion to the City Manager to make additional contributions from excess Budget
Stabilization Reserve (BSR) above the City Council approved target BSR level.
Use of Funds:
•City Manager must identify the impacts on the funding goal and timeframe to modify
the transmission of contributions to the PARS Trust Fund.
•Any transmission of funds from PARS to CalPERS will require City Council approval.
Reporting:
•Every three years, staff will consult with an actuary to inform the City Council on the
progress the City has made towards its goal
•Staff will report to the City Council through the annual budget process on the status of
the PARS section 115 pension trust fund, recommended contributions to the PARS fund,
and potential transmission of any funds from PARS to CalPERS for the coming fiscal year
In alignment with the policy and Council direction, periodic reviews are conducted to assess and
respond to changes impacting the City’s pensions and Other Post-Employment Benefits (OPEB)
plans and the funding available to meet those benefit costs. Staff expects as part of this process
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-
archive/2017/7553.pdf
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-
archive/2020-2/id-11722.pdf
2
Packet Pg. 63
2 Late Packet
City of Palo Alto Page 3
to memorialize any practices adjusted since the adoption of the policy, review progress towards
policy goals, and discuss and review any modifications to the Pension Policy or budgetary
practices used to inform financial planning of these benefits.
To facilitate this review, staff planned three meetings with the Finance Committee beginning in
September 2022 including: 1) Review of the most current actuarial analysis as distributed by
CalPERS (CMR 146283), 2) Review of the current status of both the Pension and Other Post -
Employment Benefits (OPEB)/retiree healthcare liabilities including the proactive contributions
and discussion with plan providers (CMR 148294), and 3) Review of actuarial analysis based on
alternative assumptions as defined in the Pension Funding Policy and recommended revisions
to the Pension Funding Policy for City Council consideration and adoption (December 6, 2022).
Discussion
This report includes a comprehensive analysis of the City’s pension plans completed by an
outside actuarial consultant, Foster & Foster (Attachment A) formerly Bartel & Associates. This
actuarial analysis provides an updated status of the City’s pension plans, including alternative
calculations as compared to CalPERS for economic and demographic assumptions, funding
policy, and other risk mitigation strategies. Additionally, this analysis considers other factors not
assumed in CalPERS reporting, such as cost-sharing with employees, preliminary investment
losses earned by CalPERS in the most recent reporting period, and accumulated savings in the
City’s Pension Trust. These factors, and the resulting impact on projected employer
contributions and funded status, are to inform discussions on long-term pension obligations
and the progress of meeting policy goals.
Overview of Actuarial Analysis Results
Representatives from Foster & Foster will provide an overview of the detailed presentation of
the attached report that provides an updated status of pension plans, progress towards
meeting funded status goals, and other risk mitigation strategies (Attachment A). As noted
above, this analysis considers alternative assumptions to CalPERS, including:
•Preliminary 6.1 percent investment loss for the period ending June 30, 20225; this loss
will be included in the CalPERS valuation analysis issued in August 2023
•Reduction to discount rate (6.8 percent assumed by CalPERS); ultimately reaching 6.0
percent over 20+ years
•Consideration for employee contributions towards the employer share of costs6
3 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220920/20220920pfcs.pdf
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221018/20221018pfcs.pdf
5 This has since been revised from an estimate of 6.1 percent to an estimate of 7.4 percent, as reported in the
November 15, 2022 CalPERS Finance and Administration Committee:
https://www.calpers.ca.gov/docs/board-agendas/202211/financeadmin/item-6a-01_a.pdf
2
Packet Pg. 64
2 Late Packet
City of Palo Alto Page 4
•Supplemental contributions to the Pension Trust calculated at the equivalent of a 5.3
percent discount rate for normal cost
•Additional Discretionary Payments (ADPs) from the Pension Trust to the CalPERS plans
for amounts in excess of a one-year employer contribution
Ultimately, the City is expected to reach a 90 percent funded status in the Miscellaneo us plan
by FY 2038, and the Safety plan by FY 2040, without consideration for the City’s Pension Trust.
Once the accumulation of funds in the Pension Trust (no payments to CalPERS) and payments
to CalPERS are considered, the Miscellaneous plan is expected to meet funding targets by FY
2034, whereas the Safety plan is expected to meet funding targets by FY 2036 -37. Of note, this
does not consider future contributions to the Pension Trust using excess BSR, since these
amounts are one-time and tend to vary from year to year; balances already in the trust have
been considered in this analysis. Additional contributions would help the City to reach to target
funded status levels sooner.
Pension Policy Revisions for Consideration
This report concludes the series of meetings initiated with the Finance Committee to review the
status of pension and retiree healthcare plans. Staff recommends memorializing any practices
adjusted since the adoption of the policy and discussing further modifications to the Pension
Policy or budgetary practices used to inform long term financial planning of these benefits. A
summary of the current Pension Policy and potential revisions is included in Attachment B and
discussed in more detail in this report.
Add proactive planning for Other Post-Employment Benefits (OPEB)/retiree healthcare to policy,
consistent with City Council actions
The Pension Policy does not explicitly include language for Other Post-Employment Benefit
(OPEB)/retiree healthcare plans. As directed by the City Council, staff have worked to align the
City’s policy goals for pension and retiree healthcare liabilities since the adoption of the Pension
Policy. A revision is included for Finance Committee consideration to change the title to be
inclusive of both plans, from ‘Pension Funding Policy’ to ‘Retiree Benefit Funding Policy’.
Assume a move conservative discount rate for supplemental contributions from 6.2 percent to
5.3 percent (Pension) and from 6.25 percent to 5.75 percent (OPEB), as approved by the City
Council
Beginning in FY 2023, the City Council approved reducing the discount rate to calculate
supplemental pension contributions from the previously approved rate of 6.2 percent to 5.3
percent over two years; FY 2023 is a transitional year equivalent to a rate o f approximately 5.8
percent. These actions more closely align the discount rate with the CalPERS Asset Liability
Management (ALM) study completed in November 2021, which includes a survey of external
6 The City has negotiated Memoranda of Agreements (MOAs) with labor groups to include provisions for
employees to accept a greater share of pension costs; Miscellaneous groups pick-up 1-2 percent and Safety groups
pick up 3-4 percent of the employer share of pension cost
2
Packet Pg. 65
2 Late Packet
City of Palo Alto Page 5
asset managers and consultants to gain expert projections on expected market returns. In the
most recent ALM study, the median expected returns of survey participants were 5.3 percent
(10-year) and 6.2 percent (20-year). Additionally, the City Council approved the use of a lower
discount rate for supplemental OPEB contributions from 6.25 percent to 5.75 percent, and
alternative assumptions to align with known variables such as investment returns (CMR 14112
as amended by CMR 145027).
A goal of this funding element is to identify a discount rate for the calculation of the normal
cost of pensions that best aligns with actual investment returns, mitigatin g the creation of new
liability bases resulting from these discrepancies to the extent possible. Future adjustments are
anticipated to align planned contributions with anticipated economic and demographic
assumptions, including but not limited to expected investment returns, subject to City Council
approval. Staff expects to use proactive measures to inform changes, such as the ALM study
and other external expert projections. Additionally, staff will continue to monitor any major
factors that contribute to the creation of new liabilities in future CalPERS reporting.
Add language for investment strategy of Pension and OPEB Trusts, including more conservative
investment allocations once 75-80% funded, or when actuary recommend disbursements
In October 2022, staff facilitated a status update of the City’s irrevocable 115 Pension Trust
Fund and the City’s California Employers’ Retiree Benefit Trust (CERBT) Fund for the retiree
healthcare plans with plan providers (CMR 148298). Ultimately, the investments made in these
funds are required to be used to pay retiree pension and healthcare costs respectively.
However, the City has the discretion to select the investment risk tolerance and control the
inflow and outflow of funds. Ultimately, the balance maintained, an d investment strategy(s)
should depend on the intended use of the funds.
As prefunding strategies move the City closer to meeting funded status goals, staff
recommends revising the investment strategy for these funds. When actuary valuations
recommend disbursements or when the balance-maintained approaches 75-80 percent funded
status, the investment strategy should be diversified with an intention of ensuring both stability
and growth of the assets versus an only growth focused goal . This strategy is intended to
preserve assets and mitigate against volatility in the market when the funds are expected to be
disbursed. Currently, the City’s Pension Trust is invested in a Moderately Conservative portfolio,
this is the second most conservative of five (5) port folios. The City's CERBT Fund is invested in a
Strategy 1 portfolio, which offers the highest expected return of three (3) portfolios. Changes to
the investment portfolio selection(s) do not require additional budgetary action, as funds may
be moved from one portfolio to another at the City’s discretion.
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220607/20220607pfcsm-final.pdf
8 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221018/20221018pfcs.pdf
2
Packet Pg. 66
2 Late Packet
City of Palo Alto Page 6
Contributions to the OPEB Trust are intended to generate long-term asset growth through
accumulated contributions until returns are sufficient to contribute to a portion of the annual
“pay-go” costs. In consultation with CERBT representatives, staff recommends setting aside 2 -3
years of estimated disbursements in a more conservative portfolio. The alternative assumptions
approved by the City Council for development of the FY 2023 and FY 2024 budget do not
recommend this type of disbursement over the next ten years. Staff expects to monitor the
status of disbursements in future valuations; the next valuation will be completed as of June 30,
2023 for the development of the FY 2025 and FY 2026 budget.
Identify areas of focus for accumulated savings, such as rate stabilization and Additional
Discretionary Payments (ADPs) to CalPERS
The City has discretion to control the inflow and outflow of funds contributed to the Section
115 Pension and OPEB Trusts; contributions to the Pension Trust are held separately from
CalPERS and do not directly pay down pension liabilities, whereas contributions to the OPEB
Trust directly pay down retiree healthcare liabilities. Therefore, the City may use the Pension
Trust as a rate stabilization reserve, where funds may be used to smooth volatility in employer
contributions in any given year, or a “rainy day” reserve in an emergency or in difficult
economic times. Additionally, the City may use the Pension Trust to pay down liabilitie s through
Additional Discretionary Payments (ADPs) to CalPERS. The City may elect to make additional
contributions, above and beyond the required employer contribution, at any time and in any
amount. However, payments made to CalPERS are permanent and cannot be returned.
The Pension policy outlines two funding components: 1) the difference in cost using a more
conservative discount rate to CalPERS for normal cost (“supplemental contributions”); and 2) 50
percent of excess BSR above City Council target levels. Currently, both components are
contributed directly to the Pension Trust. Consistent with the current Pension Policy, the
actuary analysis in this report contemplates ADPs from the Pension Trust to CalPERS once
funding levels exceed a single-year employer contribution. This level of funding is expected in
the next couple of years. This analysis does not consider future contributions to the Pension
Trust using excess BSR, since these amounts are one-time and tend to vary from year to year.
Alternatively, the City may elect to keep contributions in the Pension Trust, with payments to
CalPERS made at a later date. Or, the City may direct one or both components as an ADP to
CalPERS. For example, the City may elect to direct one-time contributions using excess BSR as
an ADP to CalPERS to directly pay down the liability, whereas supplemental contributions using
a lower discount rate would continue to be made to the Pension Trust, or vice versa.
Modify actuary reporting from 3 to 4 years to align with CalPERS Asset Liability Management
(ALM) process and Experience Study
Every four years, CalPERS completes a comprehensive Asset Liability Management (ALM)
process to review the capital market assumptions and strategic asset allocation to ascertain
2
Packet Pg. 67
2 Late Packet
City of Palo Alto Page 7
whether a change in the discount rate, investment profile, and other economic assumptions is
warranted. Additionally, the Actuarial Office completes an Experience Study to review pension
demographics for potential modification. This most recent study was completed in No vember
2021 and resulted in notable changes to reduce the discount rate from 7.0 to 6.8 percent,
reduce price inflation assumptions from 2.5 to 2.3 percent, and revise the asset allocation to
target 1/3 investment in private assets, add 5 percent leverage, and reduce public equity
exposure. Revising policy requirements for actuary reporting from 3 to 4 years will align the
studies and ensure that the City’s analysis includes the most up to date changes approved by
the CalPERS board, including changes to economic and demographic assumptions that inform
overall liability and employer cost.
Resource Impact
Revisions and updates to the City’s Pension Funding Policy will inform the development of the
annual budget, financial planning and analysis of operation, and other long term financial
planning. The funding elements of this policy are intended to support the financial sustainability
of the organization by limiting the risk of generating long-term liabilities due to actual pension
and retiree healthcare plan experience that differs from assumptions, such as lower than
anticipated investment returns.
Stakeholder Engagement
Staff continues to use external consultants for updates on the status and forecast of long -term
liabilities associated with pension and retiree healthcare programs. As in prior years, these
results are used to inform funding policy discussions with the Finance Committee and City
Council. All communication is structured around public hearings to facilitate opportunities for
community input and provide guidance to staff in the budget development process.
Environmental Review
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental Review is not required.
Attachments:
•Attachment A: Foster and Foster Actuarial Analysis_City of Palo Alto Pension Plans
•Attachment B: Pension Funding Policy Overview and Potential Revisions
2
Packet Pg. 68
2 Late Packet
CITY OF PALO ALTO
MISCELLANEOUS & SAFETY PLANS
CalPERS Actuarial Analysis – 6/30/21 Valuation
Preliminary Results
Mary Elizabeth Redding, FSA, EA, MAAA, FCA
Bianca Lin, FSA, EA, MAAA, FCA
Matthew Childs
Foster & Foster, Inc.
October 21, 2022
Contents
n:\calpers\city_of_palo_alto\6-30-21\ba paloaltoci 22-10-21 calpers misc & safety 21.docx
Topic Page
Background 1
Miscellaneous Plan:
Historical Information 15
Projections 25
Safety Plan:
Historical Information 41
Projections 51
Combined Funded Status 65
Leaving CalPERS 67
PEPRA Cost Sharing 69
Paying Down the Unfunded Liability 71
Miscellaneous Projection 81
Safety Projections 91
Actuarial Certification 99
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 69
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 1
DEFINITIONS
PVB - Present Value of all Projected
Benefits:
The value now of amounts due to be
paid in the future
Discounted value (at valuation date -
6/30/21), of all future expected benefit
payments based on various (actuarial)
assumptions
Current Normal Cost (NC):
Portion of PVB allocated to (or “earned” during) current year
Value of employee and employer current service benefit
Actuarial Liability (AAL):
Discounted value (at valuation date) of benefits earned through valuation date
[value of past service benefit]
Portion of PVB “earned” at measurement
October 21, 2022 2
DEFINITIONS
Target- Have money in the bank to cover Actuarial Liability (past service)
Unfunded Liability (UAAL or UAL) - Money short of target at valuation date
If all actuarial assumptions were always exactly met, then the plan assets would
always equal AAL
Any difference is the unfunded (or overfunded) AAL
Every year, the actuary calculates the difference between the expected UAAL and
Actual UAAL. This is a new layer or amortization base
Each new layer gets amortized (paid off) over a period of time as part of the
contribution [rate]
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 70
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 3
HOW WE GOT HERE
Investment Losses
CalPERS Contribution Policy
Enhanced Benefits
Demographics
October 21, 2022 4
HOW WE GOT HERE – INVESTMENT RETURN
Returns (after 2001) shown are gross returns, unreduced for administrative expenses, from CalPERS valuation
reports, when available. The discount rate is based on expected returns net of administrative expenses.
20-Year and 30-Year
average return rates on
6/30/22 are 6.9% and
7.7%, respectively
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 71
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 5
HOW WE GOT HERE – OLD CONTRIBUTION POLICY
Effective with 2003 valuations:
Slow (15 year) recognition of investment losses into funded status
Rolling 30 year amortization of all (primarily investment) losses
Designed to:
First smooth rates and
Second pay off UAL
Mitigated contribution volatility
October 21, 2022 6
HOW WE GOT HERE – ENHANCED BENEFITS
At CalPERS, Enhanced Benefits implemented using all (future & prior) service
Typically not negotiated with cost sharing
City of Palo Alto
Tier 1 Tier 2 PEPRA
Miscellaneous 2.7%@55 FAE1 2%@60 FAE1 2%@62 FAE3
Safety 3%@50 FAE1 3%@55 FAE3 2.7%@57 FAE3
Note:
FAE1 is highest one year (typically final) average earnings
FAE3 is highest three years (typically final three) average earnings
PEPRA tier implemented for new employees hired after 1/1/13
Employee pays half of total normal cost
2022 Compensation limit
Social Security participants: $134,974
Non-Social Security participants: $161,969
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 72
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 7
HOW WE GOT HERE – ENHANCED BENEFITS
Available CalPERS Benefit formulas. City’s formulas shown in red.
For any retirement age, chart shows benefit multiplier (% FAE per year of service)
Be
n
e
f
i
t
M
u
l
t
i
p
l
i
e
r
Retirement Age
October 21, 2022 8
HOW WE GOT HERE – ENHANCED BENEFITS
Retirement Age
Be
n
e
f
i
t
M
u
l
t
i
p
l
i
e
r
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 73
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 9
HOW WE GOT HERE – DEMOGRAPHIC
Around the State
Large retiree liability compared to actives
State average: 56% for Miscellaneous, 65% for Safety
Declining active population and increasing number of retirees
Higher percentage of retiree liability increases contribution volatility
City of Palo Alto percentage of liability belonging to retirees:
Miscellaneous 62%
Safety 71%
October 21, 2022 10
CALPERS CHANGES
April 2013: CalPERS adopted new contribution policy
No asset smoothing or rolling amortization
February 2018: New amortization policy for 2021/22 contributions
Fixed dollar (level) 20-year amortization rather than % pay (escalating)
5-year ramp up (not down) for investment gains and losses
CalPERS Board changed the discount rate to 7%, still phasing in to rates:
Rate Initial Impact Full Impact
6/30/16 valuation 7.375% 18/19 22/23
6/30/17 valuation 7.25% 19/20 23/24
6/30/18 valuation 7.00% 20/21 24/25
In the November 2021 meeting, CalPERS Board adopted new
Discount rate and investment allocation
Discount rate: 6.8% for 6/30/2021. UAL impact matches investment
gain amortization (5-year ramp-up)
Asset allocation has higher investment risk than current portfolio
Experience study (Demographic assumptions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 74
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 11
CALPERS CHANGES
Risk Mitigation Strategy
Move to more conservative investments over time to reduce volatility
Only when investment return is better than expected
Lower discount rate in concert
Essentially use ≈50% of investment gains to pay for cost increases
Likely get to 6.0% discount rate over 20+ years
Risk mitigation suspended from 6/30/16 to 6/30/18 valuation
Did not trigger for 6/30/19 or 6/30/20 valuations
First triggered for 6/30/21 valuation – 6.8% discount rate
October 21, 2022 12
CALPERS CHANGES
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 75
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 13
CALPERS CHANGES
Capital Market Assumptions
Asset Class Asset Segment
Near-Term
Return
(5-year)
Long-Term
Return
(20-year)
Volatility
(20-year)
Growth
Global Equity – Cap Weighted 6.8% 6.8% 17.0%
Global Equity – Non-Cap Weighted 5.1% 6.1% 13.5%
Private Equity 8.9% 9.6% 30.1%
Income
Long U.S. Treasuries 0.1% 2.6% 12.4%
Mortgage-Backed Securities 1.2% 2.8% 3.1%
Investment Grade Corporates 0.1% 3.9% 8.5%
Spread Product – High Yield 2.2% 4.7% 9.2%
Spread Product – Sovereigns 3.2% 4.5% 10.4%
High Yield Segment 2.2% 4.6% 9.0%
Real Assets Real Estate 5.3% 5.5% 12.2%
Liquidity Liquidity 0.3% 1.7% 0.8%
Other
Private Debt 6.8% 5.9% 9.9%
Emerging Market Debt 2.7% 4.8% 10.3%
October 21, 2022 14
CALPERS CHANGES
Portfolio Target Allocations
Current
Portfolio
New
Portfolio
Liquidity 1% -
Real Assets 13% 15%
Private Debt - 5%
EM Sov Bonds 1% 5%
High Yield 4% 5%
Investment Grade Corp. 6% 10%
Mtge-backed Securities 7% 5%
Treasury 10% 5%
Private Equity 8% 13%
Global Equity1 50% 42%
Leverage - (5)%
Total 100% 100%
1 Cap and non-cap weighted combined for this table; actual portfolios have specific allocations for each classification.
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 76
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 15
SUMMARY OF DEMOGRAPHIC INFORMATION - MISCELLANEOUS
2001 2011 2020 2021
Actives
Counts 892 765 777 723
Average
Age 45 45 46 46
City Service 9 10 11 11
PERSable Wages $ 58,200 $ 78,800 $ 109,300 $ 110,300
Total PERSable Wages 51,900,000 60,300,000 84,900,000 79,700,000
Inactive Members
Counts
Transferred 223 294 385 386
Separated 242 305 450 463
Retired
Service 389 778 1,028 1,073
Disability 64 73 70 71
Beneficiaries 61 90 125 132
Total 516 941 1,223 1,276
Average Annual City Provided
Benefit for Service Retirees2 $ 16,600 $ 32,300 $ 39,800 $ 41,000
2 Average City-provided pensions are based on City service & City benefit formula, and are not representative of
benefits for long-service employees.
October 21, 2022 16
SUMMARY OF DEMOGRAPHIC INFORMATION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 77
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 17
PLAN FUNDED STATUS - MISCELLANEOUS
June 30, 2020 June 30, 2021
Actuarial Accrued Liability
Active $ 301,000,000 $ 298,300,000
Retiree 549,900,000 594,800,000
Inactive 58,500,000 63,100,000
Total 909,400,000 956,200,000
Assets 592,300,000 720,100,000
Unfunded Liability 317,100,000 236,100,000
Funded Ratio 65.1%75.3%
Average funded ratio for
CalPERS Public Agency
Miscellaneous Plans 72.3% 83.7%
October 21, 2022 18
PLAN FUNDED STATUS - MISCELLANEOUS
City CalPERS Assets and Actuarial Liability ($Millions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 78
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 19
PLAN FUNDED STATUS - MISCELLANEOUS
Discount Rate Sensitivity
June 30, 2021
Discount Rate
6.80% 6.30%3 5.80%
AAL $956,200,000 $1,018,100,000 $1,079,900,000
Assets 720,100,000 720,100,000 720,100,000
Unfunded Liability 236,100,000 298,000,000 359,800,000
Funded Ratio 75.3% 70.7% 66.7%
3 Estimated by Foster & Foster.
October 21, 2022 20
PLAN FUNDED STATUS - MISCELLANEOUS
Unfunded Accrued Liability Changes
Unfunded Accrued Liability on 6/30/20 $317,100,000
Expected 6/30/21 Unfunded Accrued Liability 315,200,000
Changes
•Assumption Change (demographics)500,000
•Discount Rate 7% to 6.8%21,700,000
•Asset Loss (Gain) (21.2% return for FY 2021)(94,700,000)
•Contribution & Experience Loss (Gain)(6,600,000)
•Total (79,100,000)
Unfunded Accrued Liability on 6/30/21 236,100,000
Projected Unfunded Accrued Liability on 6/30/22 319,000,000
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 79
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 21
FUNDED RATIO - MISCELLANEOUS
6/30/22 funded status estimated
October 21, 2022 22
FUNDED STATUS (MILLIONS) - MISCELLANEOUS
6/30/22 funded status estimated
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 80
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 23
CONTRIBUTION RATES - MISCELLANEOUS
Benefit
Improvement
2.7%@55 from
2%@55 Benefit
Improvement
2%@55 from
2%@60
October 21, 2022 24
CONTRIBUTION RATES - MISCELLANEOUS
6/30/20 6/30/21
2022/2023 2023/2024
Total Normal Cost 17.8% 19.3%
Employee Normal Cost 7.2% 7.6%
Employer Normal Cost 10.6% 11.7%
Amortization Payments 32.3% 33.1%4
Total Employer Contribution Rate 42.8% 44.8%
2022/23 Employer Contribution Rate 42.8%
Payroll less than Expected 2.7%
6/30/17 Discount Rate & Inflation (5th Year)0.3%
6/30/18 Discount Rate change (4th Year)0.7%
6/30/21 Demog. Assumption change (1st Year, no ramp)1.1%
6/30/21 Risk Mitigation (Normal Cost change)0.8%
Other (Gains)/Losses mainly net investment gain (3.6%)
2023/24 Employer Contribution Rate 44.8%
4 Equivalent to 13.5% of UAL. One year, 6.8% interest on the UAL is 16.7% of payroll. 2023/24 amortization
payment exceeds interest on the UAL, so there is no “negative amortization.”
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 81
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 25
CONTRIBUTION PROJECTION - MISCELLANEOUS
Market Value Investment Return:
June 30, 2022 (6.1%)5
Future returns based on stochastic analysis using 1,000 trials
Single Year Returns at6 25th Percentile 50th Percentile 75th Percentile
Current investment mix – first 10 years,
without risk mitigation -1.8% 6.0% 14.7%
Current investment mix – after 10 years,
without risk mitigation -0.7% 7.5% 16.4%
Assumes investment returns will generally be lower over the next 10 years
and higher beyond that.
Discount Rate decreases due to Risk Mitigation policy – Ultimate rate 6.0%
No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements
Different from CalPERS projection
Impact of Risk Mitigation Policy:
Net impact of investment gain and discount rate change amortized over 20
years with 5 year ramp up
Same amortization method for all future years
5 Gross return based on July 2022 CalPERS press release.
6 Nth percentile means N percentage of our trials result in returns lower than the indicated rates.
October 21, 2022 26
CONTRIBUTION PROJECTION - MISCELLANEOUS
New hire assumptions:
All new hires assumed PEPRA members and none are Classic members
6/30/21 employee distribution:
Benefit Tier Count 20/21 Payroll
2.7%@55 FAE1 306 $36,349,200
2%@60 FAE1 96 12,519,900
2%@62 FAE3 (PEPRA)321 30,849,900
Employee cost sharing by bargaining group (percentage of pay):
SEIU: 2% effective 12/1/2020
All other groups: 1%
Payroll split by bargaining group: 58% for SEIU and 42% for all other
groups
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 82
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 27
CONTRIBUTION PROJECTION - MISCELLANEOUS
Impact of 21/22 Investment Return
October 21, 2022 28
CONTRIBUTION PROJECTION - MISCELLANEOUS
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 83
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 29
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 30
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 84
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 31
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 32
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 85
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 33
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 34
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 86
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 35
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 36
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 87
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 37
FILLING VACANCIES ANALYSIS - MISCELLANEOUS
Filling Employee Vacancies – Miscellaneous
All payroll increase over CalPERS projections is assumed to be from newly hired
PEPRA employees, increasing only Normal Cost
Payroll growth from permanent, higher-than-expected pay increases for current
employees would also add to the City’s UAL.
Payroll
August 2022 payroll $ 86,382,700
FY 2022/23 budget 104,962,800
Current % employee vacancy 18%
Expected % employee vacancy 7%
Current projected 2023/24 CalPERS payroll from 6/30/2021
valuation report $ 86,604,600
New projected 2023/24 payroll for analysis (22/23 budget with one
year salary inflation, * 93%)100,000,000
October 21, 2022 38
FILLING VACANCIES ANALYSIS - MISCELLANEOUS
Impact of Higher Payroll/Filled Vacancies on Contributions
Miscellaneous with EE Cost Sharing
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 88
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 39
FUNDED STATUS - MISCELLANEOUS
October 21, 2022 40
FUNDED STATUS - MISCELLANEOUS
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 89
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 41
SUMMARY OF DEMOGRAPHIC INFORMATION - SAFETY
2001 2011 2020 2021
Actives
Counts 213 185 174 163
Average
Age 41 41 41 42
City Service 13 12 11 12
PERSable Wages $ 81,800 $ 123,100 $ 155,700 $ 157,900
Total PERSable Wages 17,400,000 22,800,000 27,100,000 25,700,000
Inactive Members
Counts
Transferred 60 62 55 56
Separated 28 34 49 51
Retired
Service 193 198 241 247
Disability 56 157 146 144
Beneficiaries 27 35 48 52
Total 276 390 435 443
Average Annual City Provided
Benefit for Service Retirees7 $ 25,200 $ 47,200 $ 70,400 $ 71,500
7 Average City-provided pensions are based on City service & City benefit formula, and are not representative of
benefits for long-service employees.
October 21, 2022 42
SUMMARY OF DEMOGRAPHIC INFORMATION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 90
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 43
PLAN FUNDED STATUS - SAFETY
June 30, 2020 June 30, 2021
Actuarial Accrued Liability
Active $ 126,300,000 $ 130,300,000
Retiree 347,200,000 362,600,000
Inactive 13,700,000 16,300,000
Total 487,200,000 509,200,000
Assets 293,900,000 353,300,000
Unfunded Liability 193,300,000 155,900,000
Funded Ratio 60.3%69.4%
Average funded ratio for
CalPERS Public Agency
Safety Plans 69.2% 80.9%
October 21, 2022 44
PLAN FUNDED STATUS - SAFETY
City CalPERS Assets and Actuarial Liability ($Millions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 91
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 45
PLAN FUNDED STATUS - SAFETY
Discount Rate Sensitivity
June 30, 2021
Discount Rate
6.80% 6.30%8 5.80%
AAL $509,200,000 $542,500,000 $575,700,000
Assets 353,300,000 353,300,000 353,300,000
Unfunded Liability 155,900,000 189,200,000 222,400,000
Funded Ratio 69.4% 65.1% 61.4%
8 Estimated by Foster & Foster.
October 21, 2022 46
PLAN FUNDED STATUS - SAFETY
Unfunded Accrued Liability Changes
Unfunded Accrued Liability on 6/30/20 $193,300,000
Expected 6/30/21 Unfunded Accrued Liability 195,300,000
Changes
•Assumption Change (demographics)1,800,000
•Discount Rate 7% to 6.8%11,600,000
•Asset Loss (Gain) (21.2% return for FY 2021)(46,600,000)
•Contribution & Experience Loss (Gain)(6,200,000)
•Total (39,400,000)
Unfunded Accrued Liability on 6/30/21 155,900,000
Projected Unfunded Accrued Liability on 6/30/22 198,700,000
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 92
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 47
FUNDED RATIO - SAFETY
6/30/22 funded status estimated
October 21, 2022 48
FUNDED STATUS (MILLIONS) - SAFETY
6/30/22 funded status estimated
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 93
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 49
CONTRIBUTION RATES - SAFETY
Benefit
Improvement
3%@50 from
2%@50
October 21, 2022 50
CONTRIBUTION RATES - SAFETY
6/30/20 6/30/21
2022/2023 2023/2024
Total Normal Cost 30.4% 32.5%
Employee Normal Cost 9.8% 9.9%
Employer Normal Cost 20.6% 22.6%
Amortization Payments 50.6% 51.4%9
Total Employer Contribution Rate 71.1% 74.0%
2022/23 Employer Contribution Rate 71.1%
Payroll less than Expected 3.7%
6/30/17 Discount Rate & Inflation (5th Year)0.6%
6/30/18 Discount Rate change (4th Year)1.2%
6/30/21 Demog. Assumption change (1st Year, no ramp)2.0%
6/30/21 Risk Mitigation (Normal Cost change)1.4%
Other (Gains)/Losses mainly net investment gain (6.1%)
2023/24 Employer Contribution Rate 74.0%
9 Equivalent to 13.5% of UAL. One year, 6.8% interest on the UAL is 16.7% of payroll. 2023/24 amortization
payment exceeds interest on the UAL, so there is no “negative amortization.”
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 94
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 51
CONTRIBUTION PROJECTION - SAFETY
Market Value Investment Return:
June 30, 2022 (6.1%)10
Future returns based on stochastic analysis using 1,000 trials
Single Year Returns at11 25th Percentile 50th Percentile 75th Percentile
Current investment mix – first 10 years,
without risk mitigation -1.8% 6.0% 14.7%
Current investment mix – after 10 years,
without risk mitigation -0.7% 7.5% 16.4%
Assumes investment returns will generally be lower over the next 10 years
and higher beyond that.
Discount Rate decreases due to Risk Mitigation policy – Ultimate rate 6.0%
No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements
Different from CalPERS projection
Impact of Risk Mitigation Policy:
Net impact of investment gain and discount rate change amortized over 20
years with 5 year ramp up
Same amortization method for all future years
10 Gross return based on July 2022 CalPERS press release.
11 Nth percentile means N percentage of our trials result in returns lower than the indicated rates.
October 21, 2022 52
CONTRIBUTION PROJECTION - SAFETY
New hire assumptions:
All new hires assumed PEPRA members and none are Classic members
6/30/21 employee distribution:
Benefit Tier Count 20/21 Payroll
3%@50 FAE1 92 $15,866,300
3%@55 FAE3 13 2,048,900
2.7%@57 FAE3 (PEPRA) 58 7,830,300
Employee Cost Sharing by Bargaining Group (% of pay):
PAPOA: 3.5% of pay effective 7/1/2019
All other Safety: 4% of pay after 7/1/2021
Payroll: 43% PAPOA and 57% all other groups
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 95
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 53
CONTRIBUTION PROJECTION - SAFETY
Impact of 21/22 Investment Return
October 21, 2022 54
CONTRIBUTION PROJECTION - SAFETY
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 96
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 55
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 56
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 97
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 57
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 58
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 98
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 59
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 60
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 99
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 61
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 62
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 100
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 63
FILLING VACANCIES ANALYSIS - SAFETY
Filling Employee Vacancies – Safety
All payroll increase over CalPERS projections is assumed to be from newly
hired PEPRA employees, increasing only Normal Cost
Payroll growth from permanent, higher-than-expected pay increases for
current employees will also add to the City’s UAL
No adjustment has been made to CalPERS projected Safety payroll in this
analysis
Payroll
August 2022 payroll $ 22,597,100
FY 2022/23 budget 27,077,300
Current % employee vacancy 16%
Expected % employee vacancy 7%
Current projected 2023/24 CalPERS payroll from 6/30/2021
valuation report $ 27,969,300
New projected 2023/24 payroll for analysis (2022/23 budget with
one year’s salary growth * 93%)$24,500,000
Result: Use CalPERS projected payroll for this study, with no
adjustment
October 21, 2022 64
FUNDED STATUS - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 101
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 65
COMBINED – MISCELLANEOUS & SAFETY
October 21, 2022 66
COMBINED – MISCELLANEOUS & SAFETY
Funded Status Summary on June 30, 2021
(Amounts in $Millions)
Miscellaneous Safety Total
AAL $ 956 $ 509 $1,465
Assets 720 353 1,073
Unfunded AAL 236 156 392
Funded Ratio 75.3% 69.4% 73.2%
Projected Funded Status Summary on June 30, 2022
(Amounts in $Millions)
Miscellaneous Safety Total
AAL $ 987 $ 524 $1,511
Assets 668 325 993
Unfunded AAL 319 199 518
Funded Ratio 67.7% 62.1% 65.7%
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 102
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 67
LEAVING CALPERS
Participation in CalPERS is governed by State law and CalPERS rules
The following are considered “withdrawing” from CalPERS:
Exclude new hires from CalPERS & giving them a different pension
Stop accruing benefits for current employees
“Withdrawal” from CalPERS:
Treated as plan termination
Liability increased for conservative investments
Liability increased for future demographic fluctuations
Liability must be funded immediately by withdrawing agency
Otherwise, retiree benefits are cut
October 21, 2022 68
LEAVING CALPERS
CalPERS Termination Estimates on June 30, 2021 (Amounts in Millions)
Ongoing Plan Termination Basis
Discount Rate 6.80% 1.00% 2.25%
Miscellaneous
Actuarial Accrued Liability $ 956 $2,053 $1,704
Assets 720 720 720
Unfunded AAL (UAAL) 236 1,333 984
Safety
Actuarial Accrued Liability $ 509 $ 1,152 $ 951
Assets 353 353 353
Unfunded AAL (UAAL) 156 799 598
Total
Unfunded AAL (UAAL) 392 2,132 1,582
Funded Ratio 73.2% 33.5% 40.4%
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 103
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 69
PEPRA COST SHARING
Target of 50% of total normal cost paid by all employees
PEPRA members must pay greater of 50% of total normal cost or bargained
amount if higher
Employer cannot pay any part of PEPRA member required employee
contributions
Employer may impose current employees pay 50% of total normal cost (limited
to 8% of pay for Miscellaneous and 12% for Safety) if not agreed through
collective bargaining
Miscellaneous Plan 2023/24:
Classic Members New Members
Tier 1
2.7%@55 FAE1
Tier 2
2%@60 FAE1
PEPRA
2%@62 FAE3
Employer Normal Cost 15.7% 12.2% 7.00%
Member Normal Cost 8.0% 7.0% 7.25%
Total Normal Cost 23.7% 19.2% 14.25%
50% Target 11.9% 9.6% 7.13%
October 21, 2022 70
PEPRA COST SHARING
Safety Plan 2023/24:
Classic Members New Members
Tier 1
3%@50 FAE1
Tier 2
3%@50 FAE3
PEPRA
2.7%@57 FAE3
Employer Normal Cost 27.3% 26.6% 12.39%
Member Normal Cost 9.0% 9.0% 11.75%
Total Normal Cost 36.3% 35.6% 24.14%
50% Target 18.2% 17.6% 12.07%
PEPRA Member Contributions:
2022/23 2023/24
Group
Total
NC
(Basis)
Member
Rate
Total
Normal
Cost Change
Member
Rate Method
Miscellaneous 12.50% 6.25% 14.25% 1.75% 7.25% PEPRA
Members
Safety 23.54% 11.75% 23.84% 0.30% 11.75% All Active
Members
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 104
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 71
PAYING DOWN THE UAL & RATE STABILIZATION
Where do you get the money from?
How do you use the money?
October 21, 2022 72
WHERE DO YOU GET THE MONEY FROM?
POB:
Usually thought of as interest arbitrage between expected earnings and rate
paid on POB
No guaranteed savings
PEPRA prevents contributions from dropping below normal cost
Savings offset when investment return is good
GFOA Advisory
Borrow from General Fund similar to State
One time payments
Governing body resolution to use a portion of one time money, e.g.
1/3 to one time projects
1/3 to replenish reserves and
1/3 to pay down unfunded liability
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 105
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 73
ADDITIONAL PAYMENTS TO CALPERS
Internal Service Fund
Typically used for rate stabilization
Restricted investments:
Likely low (0.5%-1.0%) investment returns
Short term/high quality, designed for preservation of principal
Assets can be used by governing body for other purposes
Does not reduce Unfunded Liability
October 21, 2022 74
ADDITIONAL PAYMENTS TO CALPERS
Make payments directly to CalPERS:
Likely best long-term investment return
Must be considered an irrevocable decision
Extra payments cannot be used as future “credit”
PEPRA prevents contributions from dropping below normal cost
Option #1: Request shorter amortization period (Fresh Start):
Higher short term payments
Less interest and lower long term payments
Likely cannot revert to old amortization schedule
Savings offset when investment return is good (PEPRA)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 106
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 75
ADDITIONAL PAYMENTS TO CALPERS
Make payments directly to CalPERS (continued):
Option #2: Target specific amortization bases with an “Additional
Discretionary Payment “ADP” :
Extra contribution’s impact muted by reduced future contributions
CalPERS can’t track the “would have been” contribution
No guaranteed savings
Larger asset pool means larger loss (or gain) opportunity
Paying off shorter amortization bases: larger contribution savings over
shorter period:
e.g. 10 year base reduces contribution 13.7¢ for $1
Less interest savings vs paying off longer amortization bases
Paying off longer amortization bases: smaller contribution savings
over longer period:
e.g. 25 year base reduces contribution 8.2¢ for $1
More interest savings vs paying off shorter amortization bases
Maintaining the current payment schedule – not letting payments
reduce due to extra payment – gives the greatest long-term savings
October 21, 2022 76
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
Can only be used to:
Reimburse City for CalPERS contributions
Make payments directly to CalPERS
Investments significantly less restricted than City investment funds
Fiduciary rules govern Trust investments
Usually, designed for long term returns
Assets don’t count for GASB accounting
Are considered Employer assets
Over 100 trusts established, mostly since 2015
Trust providers: PARS, PFM, Keenan
California Employers’ Pension Prefunding Trust (CEPPT)
effective July 2019
Strategy 1: 48% stocks / 52% bonds
Strategy 2: 22% stocks / 78% bonds
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 107
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 77
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
More flexibility than paying CalPERS directly
City decides if and when and how much money to put into Trust
City decides if and when and how much to withdraw to pay CalPERS or
reimburse Agency
Funding strategies typically focus on:
Reducing the unfunded liability
Fund enough to make total CalPERS UAL = 0
Make PEPRA required payments from Trust when overfunded
Stabilizing contribution rates
Mitigate expected contribution rates to better manage budget
Combination
Use funds for rate stabilization/budget predictability
Target increasing fund balance to pay off UAL sooner
October 21, 2022 78
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
Consider:
How much can you put into Trust?
Initial seed money?
Additional amounts in future years?
When do you take money out?
Target budget rate?
Year target budget rate kicks in?
Before or after CalPERS rate exceeds budgeted rate?
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 108
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 79
COMPARISON OF OPTIONS
Supplemental Trust CalPERS
Flexible Locked In
Likely lower long-term return Likely higher long-term return
Investment strategy choice No investment choice
Does not reduce net pension
liability for GASB reporting
Reduces net pension liability for
GASB reporting
More visible More restricted
October 21, 2022 80
ASSUMPTIONS FOR SECTION 115 TRUST PROJECTIONS
Starting Balances at 6/30/2022
Miscellaneous: $26,375,724+2,273,824 = $28,649,549
Safety: $12,663,549+685,066 = $13,348,616
Future trust earnings assumed to be 4.5%, for PARS Moderately Conservative
fund.
If the Section 115 Trust balance exceeds the CalPERS required contribution,
the excess is transferred to CalPERS as an ADP.
Treated as a gain amortized (reducing future contributions) as a level 20-
year amortization payment
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 109
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 81
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (MISC)
Projected Low Discount Rate Normal Cost12
Current Low Discount
Fiscal ER Normal Cost Discount ER Normal Cost
Year Miscellaneous
13 Safety Rates Miscellaneous Safety
2022/23 $11,250 $6,050 5.8% $15,887 $ 8,194
2023/24 11,730 6,318 5.3% 18,243 9,280
2024/25 11,170 6,371 5.3% 18,380 9,381
2025/26 11,204 6,399 5.3% 18,456 9,455
2026/27 11,423 6,529 5.3% 18,555 9,541
2027/28 11,818 6,756 5.3% 18,668 9,640
2028/29 12,055 6,895 5.3% 18,803 9,742
2029/30 12,303 7,039 5.3% 18,956 9,851
2030/31 12,556 7,167 5.3% 19,120 9,945
2031/32 12,818 7,258 5.3% 19,299 10,000
2032/33 13,086 7,362 5.3% 19,487 10,073
12 Includes movement from Classic to PEPRA employees.
13 Includes higher “filled vacancies” payroll for Miscellaneous
October 21, 2022 82
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (MISC)
Projected CalPERS Normal Cost and Section 115 Trust Contributions
Expected Section 115 Trust Contributions
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 110
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 83
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Projected Total CalPERS and Section 115 Trust Contributions
October 21, 2022 84
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 111
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 85
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Funded Status Projections With and Without Section 115 Trust Balance
October 21, 2022 86
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 112
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 87
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Projected Total CalPERS Contributions and Section 115 Trust Balance
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
October 21, 2022 88
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Impact of Transfers from Section 115 Trust on Total CalPERS Contributions
50th Percentile – CalPERS Contributions 50th Percentile – CalPERS Contributions with Section 115 Trust transfers
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 113
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 89
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
50th Percentile – Post-transfer CalPERS contributions
Projected Total CalPERS + Section 115 Trust Contributions
Compared to Original CalPERS Contributions
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
October 21, 2022 90
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Funded Status Projections – Impact of Funding Policy
50th Percentile – After Section 115 Trust transfers plus Section 115 Trust balance
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 114
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 91
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (SAFETY)
Projected CalPERS Normal Cost and Section 115 Trust Contributions
Safety, with EE cost sharing
Expected Section 115 Trust Contributions
October 21, 2022 92
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Projected Total CalPERS and Section 115 Trust Contributions
Safety, with EE cost sharing
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 115
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 93
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
October 21, 2022 94
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Funded Status Projections With and Without Section 115 Trust Balance
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 116
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 95
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Projected Total CalPERS Contributions and Section 115 Trust Balance
October 21, 2022 96
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Impact of Transfers from Section 115 Trust on Total CalPERS Contributions
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 117
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 97
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Projected Total CalPERS + Section 115 Trust Contributions
Compared to Original CalPERS Contributions
October 21, 2022 98
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
50th Percentile – After Section 115 Trust transfers plus Section 115 Trust balance
Funded Status Projections – Impact of Funding Policy
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 118
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 99
ACTUARIAL CERTIFICATION
This report presents analysis of the City of Palo Alto’s CalPERS pension plans. The purpose of this report is to provide
the City:
Historical perspective on the plan investment returns, assets, funded status and contributions.
Projections of likely future contributions and the impact of investment volatility
The calculations and projections in this report are based on information contained in the City’s June 30, 2021 and earlier
CalPERS actuarial valuation reports. We reviewed this information for reasonableness, but do not make any
representation on the accuracy of the CalPERS reports.
Future investment returns and volatility are based on Foster & Foster’s Capital Market model which results in long term
returns summarized on page 25.
Future results may differ from our projections due to differences in actual experience as well as changes in plan
provisions, CalPERS actuarial assumptions or methodology. Other than variations in investment return, this study does not
analyze these.
To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted
actuarial principles and practices. As members of the American Academy of Actuaries meeting the Academy
Qualification Standards, we certify the actuarial results and opinions herein.
Respectfully submitted,
Mary Elizabeth Redding, FSA, EA, FCA, MAAA Foster & Foster, Inc. DRAFT
Bianca Lin, FSA, EA, FCA, MAAA Foster & Foster, Inc. DRAFT
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 119
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
ATTACHMENT B: Pension Funding Policy Overview and Potential Revisions
CalPERS Pension (baseline) Current Pension Policy Potential Policy Revisions
Title - Pension Funding Policy (-) Retiree Benefits Funding Policy; add similar language for OPEB
Funded
Status
100% 90% -
Time
frame
30 years 15 Years (FY 2036) -
Fun
d
i
n
g
Com
p
o
n
e
n
t
s
Actuarial Determined
Contribution (ADC):
Normal Cost (NC) or
‘pay-go’, and
Unfunded Accrued
Liability (UAL) amortized
over 20 years
(gains/losses)
(+) Use 6.2% discount rate for
the calculation of Pension
Normal Cost, more conservative
than CalPERS 7.0%
(+) 50% of excess BSR may be
allocated for pension costs (all
funds contribute equally)
(+) Use the CalPERS ALM review or other external investment projections to
inform discount rates for the calculation of supplemental contributions
(+) Consider alternative calculations for economic and demographic assumptions
to align with anticipated experience
Pensions (FY23/FY24)
(-) Discount rate reduced from
6.2% to 5.3% for NC, phase-in over
two years
OPEB (FY23/24)
(+) Discount rate reduced from 6.25%
to 5.75% for ADC
(+) Alternative Assumptions 1
Employee Contributions (+) Cost-sharing with employees - -
Investment Returns - - -
Inv
e
s
t
m
e
n
t
A
l
t
e
r
n
a
t
i
v
e
s
- (+) Pension Trust invested in a
Moderately Conservative
portfolio
(+) OPEB/Retiree Healthcare
Trust (CERBT) invested in a
Strategy 1 portfolio
Pension Trust
(+) More conservative strategy
when reach 75-80% funded status
OPEB Trust
(+) More conservative strategy when
reach 75-80% funded status or when
actuary recommends disbursements
(first to occur); set aside 2-3 years of
estimated disbursements
1 Finance Committee on June 7, 2022 approved several alternative assumptions for OPEB ADC including a zero percent return for 2021-22 (one-time), 5.75%
discount rate (6.25% assumed for Strategy 1), shortened amortization from 22 to 15 years, and additional funding for new staff (CMR 14112 as amended by
CMR 14502)
2.b
Packet Pg. 120
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
:
P
e
n
s
i
o
n
F
u
n
d
i
n
g
P
o
l
i
c
y
O
v
e
r
v
i
e
w
a
n
d
P
o
t
e
n
t
i
a
l
R
e
v
i
s
i
o
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
ATTACHMENT B: Pension Funding Policy Overview and Potential Revisions
CalPERS Pension (baseline) Current Pension Policy Potential Policy Revisions
All
o
w
a
b
l
e
U
s
e
s
of F
u
n
d
i
n
g
The CalPERS Trust is used to
pay retiree pension benefits
for miscellaneous and safety
plans and does not
contemplate use of the
City’s Pension Trust
Use of Pension Trust to be
addressed through annual
budget process or separate City
Council approved action. City
Manager to identify Impacts to
funding goal and timeframe
Additional Discretionary
Payments (ADPs) from PARS to
CalPERS for amounts exceeding
1-yr employer contribution
Pension Trust
(+) Rate stabilization to smooth
volatility in employer
contributions, or in difficult
economic times
(-) Additional Discretionary
Payments (ADPs)
o Alternative 1: No ADPs
o Alternative 2: ADPs for
excess BSR and/or
normal cost
OPEB Trust
(+) Actuarial determined disbursements
recommended to fund a portion of the
‘pay-go’ costs once investment goals
are met (above)
Rep
o
r
t
i
n
g
Req
u
i
r
e
m
e
n
t
s
- Every three years, staff will
consult with an actuary to
inform the City Council on the
progress towards goals
(-) Every four years; align with the CalPERS ALM study
- Status of Pension Trust
reported in the annual budget
process, including
recommended contributions
and potential ADPs for the
coming fiscal year
- OPEB Trust
(+) Status of OPEB Trust reported bi-
annually using outside actuary
consultancy services (current practice)
(+) Indicates that this is in addition to the step to the left while (-) indicates that this is instead of the step to the left.
2.b
Packet Pg. 121
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
:
P
e
n
s
i
o
n
F
u
n
d
i
n
g
P
o
l
i
c
y
O
v
e
r
v
i
e
w
a
n
d
P
o
t
e
n
t
i
a
l
R
e
v
i
s
i
o
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n