HomeMy WebLinkAboutStaff Report 425-07City of Palo Alto
City Manager’s Report
TO:
ATTN:
FROM:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:DECEMBER 11, 2007 CMR: 425:07
SUBJECT:UPDATE TO LONG RANGE FINANCIAL FORECAST
RECOMMENDATION
Staff recommends that the Finance Committee review and comment on the attached forecast of
revenues, expenses, and reserve levels and forward it to the full Council.
DISCUSSION
Attached to this report is the updated General Fund Long Range Financial Forecast (LRFF) for
the years 2007-08 through 2017-18. The LRFF identifies key issues that will guide the
upcoming 2008-09 budget process and affect the City’s future financial condition.
This year the LRFF includes a discussion of the City Council Top 4 priority, "Sustainable
Budget." Some of the questions raised in an earlier report (CMR: 387:07) to the Finance
Committee include: What are the City’s basic program and spending priorities; can the current
level of expenditures continue and if not what costs can be reduced; are there new or additional
revenue sources to be obtained; and should the City incur more debt to fund capital
improvements?
In addition, this year’s LRFF includes brief, but informative information on the status of the
Utility Enterprise Funds. This represents the first, small step toward a more comprehensive,
citywide Long Range Financial Forecast.
RESOURCE IMPACT
As with any financial forecast, the fiscal impacts shown are estimates. Estimates of future
deficits and surpluses, as well as the estimated costs of future financial challenges, are meant to
guide future policy and budget decisions.
POLICY IMPLICATIONS
The Long Range Financial Forecast is a tool for Council’s use in making policy decisions
regarding the allocation of resources.
CMR:425:07 Page 1 of 2
TAB
INTRODuc~
Purpose of the Fc~ecast
Executive Summary
TEN YEAR FORECA~~T
Key Points
Forecast Model
Key Drivers and Assumptions
Risks
Sustainable Budget
2
5
7
9
16
ENTERPRISE FUNDs
Enterprise Utility Funds Overview
APPENDICes
2O
2008
INTRODUCTION
INTRODUCTION
PURPOSE OF THE FORECAST
The Long Range Financial Forecast takes a forward look at the City’s General Fund
revenues and expenditures. Its purpose is to identify financial trends, shortfalls, and
issues so the City can proactively address them. It does so by’projecting out into the
future the fiscal results of continuing the City’s curr6nt service levels and policies,
providing a snapshot of what the future will look like as a result of the decisions made
in the recent past. Any needed course corrections are thereby illuminated.
This Long Range Financial Forecast is not intended
as a budget, nor as a proposed plan. The City has
changed the name of the report from "Long Range
Financial Plan" to "Long Range Financial Forecast" to
make it clear that this document does not present a
comprehensive financial plan for achieving City or
Council objectives.
The Long Range Financial Forecast sets the stage for the upcoming budget process,
facilitating both the City Manager and Council in establishing priorities and allocating
resources appropriately. In this year’s forecast the concept of a "sustainable" budget is
introduced. The word "sustainable" raises fundamental questions about what services
and programs can be supported over a long period of time within the revenue con-
straints faced by the City. These questions are designed to initiate a process and plan
that ensure future balanced budgets and services to the community.
City of Palo Alto
2008
INTRODUCTION
EXECUTIVE SUMMARY
Over the past three years the economy has slowly but steadily recovered from the dot-com
bust of 2001-2004. To address the fall-off in revenues during the downturn as well as rising
benefit costs, the City made changes resulting in long-term, structural cost reductions of $20
million. This included the reduction of 70 General Fund positions, or 10 percent. As a result
of the expenditure curbs and a ooTadually improving revenue environment, the City is in a
relatively stable financial position to address the significant financial challenges that lie
ahead.
These challenges include the need, for example, to:
¯ Maintain annual funding for the retiree medical liability
¯Enhance funding for infrastructure due to sharp increases in construction costs and a consequent
backlog in projects
¯Deal with threats to the City’s economic base such as erosion of the City’s Utility Users Tax (UUT)
telephone revenue stream and the loss of key revenue generators such as automobile dealerships
¯Increase healthcare costs
¯Address new facility needs and consequent increases in equipment and operating costs
Examples of the sio~-dficant changes the City has made that result in long-term cost controls
include:
This fiscal year, SEIU and Management/Professional employees began contributing to their PERS
retirement fund - for the first time since 1983
¯This fiscal year, the City will limit its funding to the second-most-expensive health plan for
employees and future retirees- setting a new precedent of capping the City’s liability for health
care premiums
¯New hires must have 20 years of service to qualify for the full retiree medical benefit
¯The elimination of 70 General Fund positions and $20 million from the base budget
In addition to reigning in costs, the City has been active in maintaining and enhancing
revenues. Recent voter approval of the Transient Occupancy Tax (TOT) rate increase from
10 to 12 percent marked a revenue milestone for the community and will add an estimated
$1.2 million to General Fund revenues. Moreover, the City has been active in working with
automobile dealerships to identify sites that will allow them to stay in Palo Alto. Whether
2 City of Palo Alto
2008
INTRODUCTION
located on the recently purchased Los Altos Treatment Plant site, or on other City owned
land along the freeway, a solution will hopefully result in the space and visibility
required by modern dealerships and in additional revenues for the City.
This ten-year forecast assumes that the City will continue to invest, above base funding,
$4.0 million annually in the Infrastructure Reserve; sufficient funds will be set aside to
fund the annual required contribution for the retiree medical liability; the local economy
and City revenues will continue to grow slowly; and a mild recession will appear in
2010-11, following the once-per-decade pattern of the State’s recession history. Given
those assumptions, the General Fund breaks even until 2011-12, when annual deficits
begin to appear.
It is important to note, however, that there are a number of adverse economic develop-
ments that could eventually influence the local economy. These include the severe down-
turn in the housing market, the credit crisis and losses facing major financial institutions,
the steep increase in oil prices, and the deficit the State faces which could be as high as
$10 - $12 billion. A slowdown in the sales tax revenue growth rate emerged in the Ist
quarter of 2007-08 and this may be an indication of eroding consumer confidence. On the
positive side, local job growth continues at an annual rate of 1-2 percent, technology
company profits remain robust, and exports are strong. At of this writing, the local
economy appears to have weathered the negative forces affecting the state and national
economies. The duration of these forces, however, will be key to the future condition of
the local economy.
In an effort to reduce the length of the text describing the forecast, some information has
been moved to the Appendices. The Appendices include: the definitions of the revenue
and expenditure categories; a general summary of the Forecast’s methodology; a variety
of professional economic forecast information; and historical trends in City revenues,
expenditures, population, and other demographic information.
City of Palo AIto 3
2008
INTRODUCTION
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4 City of Palo Alto
2008-20 8
LOnG RANGE Fi ANC IAL FORECAST
DECEMBER 2007
TEN-YEAR FORECAST
KEY POINTS
The following highlights the sigTdficant issues incorporated into the 2008-18 Long
Range Financial Forecast:
Revenues
Sales tax revenues reflect a slowdown for 2007-08. The ~owth rate is less than 1
percent for 2007-08. Tt~s is supported by the actual first quarter results for 2007-
08 received in September
Transit Occupancy Tax revenues reflect the voter approved 2 percent increase
effective January 2008
A two year recession be~nning in 2010-11 has been factored into the forecast
Expenditures and Transfers to Other Funds
$2.9 million has been included to meet the Retire Medical liability expense. This is
funding for the General Fund portion of the annual required contribution
¯An additional $4 million is transferred to the Infrastructure Reserve beginning in
2007-08 and is inflated through 2017-18
Also included in this year’s Long Range Financial Forecast is a line (shaded) depict-
City of Palo Alto
2008
TEN YEAR FORECAST
ing the anticipated non-operating items that will either draw down or add to the General Fund
Budget Stabilization Reserve (BSR). By year, they are as follows:
2007-08
$2.3 million drawdown on the BSR for the purchase of the Los Altos Treatment Plant property
(LATP). This is the first of three payments
$0.4 million drawdown on the BSR for the payment of the purchase option at Park Boulevard for
the new Police building. This is the first of three payments
¯$1.0 million drawdown on the BSR for a short-term inter-fund loan to the Storm Drain Fund for
CIP projects
2008-09
¯$2.3 million drawdown on the BSR for the purchase of the LATP property
¯$0.3 million drawdown on the BSR for the payment of the purchase option at Park Boulevard for
the new Police building
2009-10
¯$2.2 million drawdown on the BSR for the final payment to purchase the LATP property
¯$0.2 million drawdown on the BSR for the final payment on the purchase option at Park Blvd for
the new Police building
¯$0.5 million add back to the BSR for the loan re-payment from the Storm Drain fund
2010-11
¯$0.5 million add back to the BSR for the loan re-payment from the Storm Drain fund
It is important to note that the $5.1 million surplus realized in 2006-07 (which will go to the General
Fund BSR) nearly offsets the one-time transactions that appear from 2007-08 through 2010-11.
Finally, the narrative includes a discussion on "Sustainable Budget" and a new chapter has been
added that begins the process of incorporating the Enterprise Utility Funds into a citywide Long
Range Financial Forecast.
6 City of Palo Alto
2008
TEN YEAR FORECAST
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Actual Projected
Revenues
Sales Tax es
Property Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Serv ice Agreements
(Stanford University)
Interest Earnings
Other rev enues
22,195 22,400 23.072 23,649 23,294 22,712 24,245 26,003 27,563 28,665 29,668 30,410
21,467 22.685 23,487 24,203 24,341 24.482 26,098 27.823 29,735 31,782 33,815 36,066
9,356 9,793 10,522 !!.123 11,742 12,371 13,169 14.029 14,832 15.688 16,586 17,568
6,708 7,500 8,424 8,748 8,625 8,418 8,846 9,430 10,193 !0,917 11,473 12,058
8;757 8,260 8,531 8,813 8,927 8.912 9,466 10,080 10,703 11,281 !1,8!9 12,346
68,483 70,638 74,036 76,536 76,929 76,895 81,824 87,365 93,026 98,333 103,361 108,448
17,916 19,091 19,756 20,692 21,234 21,717 22,117 22,757 23,649 24,577 25,543 26,545
6,822 7,260 7,690 7,934 8,402 8,765 9,162 9,558 9,999 10,464 10,953 11,468
2,365 2,291 2,383 2,471 2,557 2,653 2,759 2,883 3,033 3,181 3,333 3,474
16,371 14,633 14,943 15,181 15,428 15,707 13.918 14,270 14,632 15,005 15,389 15,785
Reimbursements from Other Funds
Total Revenues
Transfers from Other Funds
TOTAL SOURCE OF FUNDS
Expenditures
Salaries & Benefits
Retiree Medical Liability
Con~act Serv ices
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Allocated Expenses
Total Expenditures
Transfers to Other Funds
GF transfer for In#astucture ClP
GF bansfer for other capital projects
Debt Serv ice
Other
TOTAL USE OF FUNDS
Net Operating Surplus/(Deficit)
9,896 10,680 11,053 11,428 11,874 12,187 12,5!4 12,917 13,410 13,942 14,487 15.055
121,853 124,593 129,861 134,242 136,424 137,924 142,294 149,750 157,749 165,502 173,066 180,775
15,644 17,207 17,807 18,930 19,648 19,635 20,162 20.811 21,605 22,463 23.340 24,256
137,497 141,800 147,668 153,172 156,072 157,559 162,456 !70,561 179,354 187,965 196,406 205,031
84,043 86,920 91,542 94,831 99,250 102,391 105,595 109,399 114,111 119,044 124,207 129,613
2,900 2,940 3,028 3.119 3,213 3.309 3,408 3,511 3,616 3,724 3,836 3.951
9,135 10,409 10,747 11,123 11,374 11,544 11,717 11,893 12.226 12,618 12,996 13,386
2,656 3,569 3,685 3,814 3.900 3,958 4.018 4,078 4,192 4.326 4,456 4,590
8,734 9,802 10,088 10,392 10,678 10.934 11,205 11,503 11,828 12,106 12,390 12.681
985 1,166 1,204 1,246 1,274 1,293 1,312 1,332 !,369 1,413 1.456 1.499
14,10!13,566 14,007 14,497 14.823 15,046 15,271 15,653 16,123 !6,606 17,105 17,618
122,554 128,372 134,301 139,023 144,512 148,475 152,527 157,370 163,466 169,837 176,446 183,338
6,987 7,600 7,880 8,180 8,501 8,844 9,211 9,604 10,024 10,474 10,955 11.470
1,749 2.077 1,682 1,579 1,626 1.675 1,725 1.776 1,828 1~882 1,936 1,993
!.092 1,162 1,171 1,177 1,173 929 752 749 649 763 763 763
19 948 13 13 13 14 14 15 15 15 15 15
132,401 !40,159 145,047 149,971 155,825 159,937 164,229 169,513 175,982 182,970 190,115 197,579
5,096 1,641 2,621 3,201 247 (2,378)(1,773)1,048 3,372 4,995 6,291 7,452!
City of Palo Alto 7
2008
TEN YEAR FORECAST
Revenues
Sales Tax es
Property Tax es
Ul~lity User Tax
Transient Occupancy Tax
Olher Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Serv ice Agreements
(Stanford U niv ersity )
Interest Earnings
Other rev enues
2006-07 2007-08 2008-09 2009.!0 2010.11 2011-12 2012-13 2013.14 2014-15 2015.16 2016-17 201’
%%%%%%%%%%%
Change Change Change Change Change %Change Change Change Change Change Change Change
9.25%0.92%3.00%2.50%(1.50%)(2.50%)6.75%
14.61%5;67%3.54%3.05%0.57%0.58%6.60%
6.80%4.67%7.44%5.71%5.57%5.36%6.45%
4.93%11.81%12.32%3.85%(1.41%)(2.40%)5.08%
4.61%(5.68%)3.28%3.31%1.29%(0.17%)6.22%
9,45%3.15%4,81%3.38%0.51%(0.04%)6.41%
7.82%6.56%&48%4.74%2.62%2.27%1.84%
5.13%
7.25%6.00%4.00%3.50%2.50%
6.61%6.87%6.88%6.40%6.66%
6.53%5.72%5.77%5.72%5.92%
6.60%8.09%7.10%5.09%5.!0%
6.49%6.18%5~40%4.77%4.46%
6.77%6.48%5.70%5.11%4.92%
2.89%3.92%3.92%3,93%3.92%
6.42%5.92%3.17%5.90%4.32%4.53%4.32%4.61%4.65%4.67%4.70%
5.25%(3.13%)4.02%3.69%3.48%
5.87%(10.62%)2.12%1.59%1.63%
3.75%4.00%
1.81%(11.39%)
4.49%5,20%4.88%4.78%4.23%
2,53%2.54%2.55%2.56%2.57%
Reimbursements from Other Funds 4.39%
Total Revenues 7,96%
Transfers from Other Funds 1.68%
TOTAL SOURCE OF FUNDS 7.21%
Expenditures
Salaries & Benefits
Retiree Medical Liability
Contract Serv ices
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Allocated Expenses
Total Expenditures
Transfers to Other Funds
7.92%3.49%3.39%3.90%2.64%2.68%
2.25%4.23%3.37%1.63%1.10%3.17%
9.99%3,49%6.31%3.79%(0.07%)2.68%
3.13%4.14%3.73%1,89%0.95%3,11%
1.34%3.42%5.32%3.59%4.66%
0.00%100.00%3,00%3.00%3.00%
5.46%13.95%3.25%3.50%2.25%
(1.63%)34.38%3.25%3.50%2.25%
2.08%12.23%2.92%3.01%2.75%
(77.48%)18.38%3.26%3.48%2.25%
18.85%(3.79%)3.25%3.50%2.25%
2.91%4.75%4.62%3.52%3.95%
GF b’ansfer for Infrasbucture CIP 73.38% 8.77% 3.68% 3.80% 3.92%
GF l~ansfer for other capital projects 74.90% 18.75% (19.02%) (6.12%) 2.98%
3.16%3.13%
3.00%3.00%
1.50%1.50%
1.50%1.50%
2.40%2.48%
1.50%1.50%
1.50%1.50%
2.74%2.73%
4.04%4,15%
3.01%2.99%
3.22%3.82%3.97%3.91%3.92%
5.24%5.34%4.91%4.57%4.45%
3.22%3.82%3.97%3.90%3.92%
4.99%5.16%4.80%4.49%4.39%
3.60%4.31%4.32%4.34%4.35%
3.00%3.00%3.00%3.00%3.00%
1.50%2.80%3.20%3.00%3.00%
1.50%2.80%3.20%3.00%3.00%
2.66%2.83%2.35%2.35%2.35%
1.50%2.80%3.20%3.00%3.00%
2.50%3.00%3.00%3.00%3.00%
3.18%3,87%3.90%3.89%3.91%
4.26%4.38%4.48%4.60%4.70%
2.96%2.93%2.95%2.89%2.95%
~btService (6.44%) 6,38% 0.76%0.50%(0.29%)(20.84%) (19.07%)(0.40%) (13.34%)17.54%0.00%0.00%
Other (96,82%) 4889.47% (98.63%)0.00%2.84%2.84% 2.84%2.84%2,84%0.00%0.00%0.00%
TOTAL USE OF FUNDS 5.18% 5.86% 3,49%3,39%3.90%2.64% 2.68%3.22%3.82%3.97%3.90%3.93%
Net OperatingSurplus/(Deficit) 115.08% (67.80%) 59.73%22.13%(92.28%)(1062.19%) (25.45%)(159.12%)221.72%48.12%25,97%18.45%
80ty of Palo Alto
2008
TEN YEAR FORECAST
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 20!7-18
Budget Stabilization Reserve
Beginning Balance 22,731 27,480 25,388 25,442 26,727 27,492 25,114 23,341 24,389 27,76!32,756 39,047
To/(From) Reserves 5,096 (2,092)54 1,285 765 (2,378)(1,773)1,048 3,372 4,995 6,291 7,452
Yeady BAOs (347)0 0 0 0 0 0 0 0 0 0
Ending Batance
% ofTo~l Expendi~res
27,480 25,368 25,442 26,727 27,492 25,114 23,341 24,389 27,761 32,756 39,047 46,499
20.8%18.1%17.5%17.8%17.6%15.7%14.2%14.4%15.8%17.9%20.5%
KEY DRIVERS AND ASSUMPTIONS
AFFECTING THE FORECAST
The Long Range Financial Forecast is based on
assumptions regarding what will happen in the
regional and State economy over the next few
years, and on near-term and long-term revenue
and expenditure drivers.
ECONOMIC ASSUMPTIONS
The Forecast assumes continued slow economic
growth over the next few years,
followed by a recession beginning in
2010-11. These assumptions are
based on both the local economy’s
recent performance and on outside
expert forecasts. The presumed
recession is based upon the fact that,
in the past, California has had a
recession approximately once per
decade. A recession could come sooner or later
than projected. The rationale for including a
recession in the model is that cyclical economic
downturns will occur, and fiscal discipline is nec-
essary to cope with consequent revenue declines.
The General Economic Outlook
The general economic picture is decidedly mixed.
On the one hand, the housing market, credit
crisis, and higher oil prices threaten to throw the
national economy into recession. On the other
hand, GDP, productivity, and job growth remain
steady. Silicon Valley appears to be doing well as
exports, corporate profits, and jobs increase.
In testimony before Congress’ Joint Economic
Committee (as reported by Forbes.corn, Novem-
ber 8, 2007), the Federal Reserve Chairman, Ben
Bernanke, stated that the U.S. economy is in for a
rough winter and a better spring.
Mr. Bernanke went on to say that,
the moderate 3.9% gross domestic
product growth rate of the economy
in the third quarter will slow in the
months ahead, amid turmoil in the
housing and credit markets and
rising energT prices, but "by spring,
the broader resiliency of the econ-
omy" will help it recover "to a more reasonable
growth pace."
City of Palo Alto 9
2008
TEN YEAR FORECAST
In another report (AFP, Google News, November
8, 2007), the Fed chief said the contraction in
housing-related activity "seemed likely to inten-
sify" because of tighter credit, and that consumer
spending is likely to grow more slowly in view of
higher ener~oy prices, credit issues and continu-
ing weakness in housing. As for corporate spend-
ing, he observed that "heightened uncertainty
about economic prospects could lead business
spending to decelerate as well."
Consumer confidence is taking a drubbing as
reported by the Reuters/University of Michigan
Surveys of Consumers, "U.S. consumer senti-
ment posted a surprisingly sharp fall in early
November, hitting its lowest in two
years as higher energy costs and
falling home prices pun~a-neled con-
fidence." Within a month’s time the
consumer sentiment index fell from
80.9 in October to 75.0 in November
- the lowest reading since the index hit 74.2 in
October 2005. Adding to this bleak news, "the
outlook for the future also looked grim, with
consumer expectations slumping to a two-year
low of 64.7 front 70.1 last month." (Reuters.corn,
November 9, 2007)
Housing Crisis
While the comments above address national
trends, they have implications for the State and
re,on. As the State Department of Finance
reported in its October 2007 Monthly Finance
Bulletin, "sales of existing single-family homes
slowed for the sixth consecutive month in
August to 319,200 units on a seasonally adjusted
annual rate basis. This was nearly 28 percent be-
low the year-ago pace. August was thus the 23rd
consecutive month of declining year-over-year
home sales." As the inventory of for-sale homes
increases, downward pressure on housing prices
and construction activity occurs. This, in turn,
leads to real and perceived drops in equity
values that typically have a negative effect on
consumer spending and can lead to lower sales
tax revenue.
Credit Crisis
A crisis has emerged in the credit markets due to:
the incredibly lax lending standards in the sub-
prime market during the housing boom; the
formation and sale of collateralized debt obliga-
tions based on subprime loans; and the subse-
quent failure of subprime borrowers to meet
their mortgage payments upon the resetting of
interest rates. This crisis could throttle loans to
businesses, depressing economic activity, and
undermine consumer spending
through higher interest rates on
credit cards and other loans. Lend-
ers and financial institutions have
suffered billions of dollars in losses
and the stock market has been
shaken by these losses and the tightening of
credit. As the Chief Investment Strategist for
Charles Schwab stated, "We have an economy
driven very much by access to credit. If it gets
worse form here, it’s hard to believe it wouldn’t
have a real impact on the economy." ( SF Chroni-
cle, October 10, 2007)
Energy Prices Spikes
To date the economy has shown resiliency in
absorbing rising energy prices. But since prices
have risen from $70 and $80 per barrel to nearly
$100 per barrel, it is likely that this leap will have
an effect on the economy, especially as the holi-
day season approaches. Rising oil prices create a
double dilemma: they affect the purchasing
power of the consumer adversely while driving
up the inflation rate. Since the latter is a major
concern of the Federal Reserve, it is less likely to
lower interest rates which generally spur
consumer and business spending and stimulate
the economy.
10 City of Palo Alto
2008
TEN YEAR FORECAST
Expert Economic Forecasts
Information from economic forecasters is
ambiguous. Between April to November, a num-
ber of forecasters shifted to more sober projec-
tions.
In April, the Federal Reserve
Bank of San Francisco’s Presi-
dent and CEO, Janet Yellen,
stated that after the nation’s
economy displayed resilience
in the face of the energy price
shocks and the hurricanes, she
expected "economic activity to
settle back to a more trend-like
and sustainable rate as the year
prog-resses." This forecast was later tempered by
the more recent testimony of the Federal Reserve
Chairman cited above.
In May, The Legislative Analyst’s Office (LAO)
predicted continued, steady growth in both state
and national economies, with annual job growth
in the 1.2 percent to 1.4 percent range through
2008 for the nation and between 1.8 percent and
2.0 percent in California. In November, the LAO
modified this picture saying "statewide employ-
ment has been clearly hurt in the areas of
construction and financial services. However, job
ooTowth has continued to occur in the rest of the
economy, although the pace has only been mod-
est." Of equal concern is the status of the State’s
revenue picture: "One result of slower economic
g-rowth is that State revenues have come in below
forecast in recent months. For the period May
through September 2007, they were $1 billion
below forecast." (Le~slative Analyst’s Office
Website, Publication "The Subprime Mortgage
Situation," November 1, 2007)
In its third quarterly report of 2007, the UCLA
Anderson Forecast for California indicated that
"the end of 2007 will mark the peak of subprime,
adjustable rate mortgage resets, and mortgage
defaults are expected to peak sometime in the
first half of 2008. The real estate markets will con-
tinue to be a drag on California growth for at
least a year to come. With no other sectors pick-
ing up the slack, the Forecast expects to see over-
all job growth of less than I per-
cent through this time next year,
with unemployment reaching a
peak of 5.9 percent at the end of
next year, with corresponding
weakness in personal income and
gross state product." (Press Re-
lease of September 12, 2007,
UCLAForecast.com)
In a recent staff interview
(November 6, 2007), Stephen Levy, the Director
and Senior Economist at Palo Alto’s Center for
Continuing Study of the California Economy,
was hopeful about the local economy. He cited
Silicon Valley’s exports and link with a robust
worldwide economy, its decent job and income
growth, its innovative bent, and its prosperous
populous as reasons for withstanding the emerg-
ing and downward pressure of the housing and
credit crises. Mr. Levy did not expect the local
economy to succumb to the current turbulence in
the market as it did during the dot-com bust.
Mr. Levy did state, however, that the State of
California could be facing a $10 to $12 billion
deficit in the next year. This plus slowing job
growth could pose local problems. Staff notes
that whenever the State faces fiscal difficulties,
these difficulties usually percolate down to local
jurisdictions in the form of revenue takeaways.
From 1992-93 through this fiscal year, the State
has taken a cumulative $52 million in property
taxes and other revenue from the City of Palo
Alto to solve their budget deficits. Although pas-
sage of Proposition 1A provided some protection
against State raids on revenue, a fiscal crisis
City of Palo Alto
2008
TEN YEAR FORECAST
could negate its purpose.
As a consequence of the above forecasts com-
bined with local revenue information, the Long
Range Financial Forecast reflects a cautious view
of the economy and a somewhat conservative
projection of the City’s major revenue sources in
the next several years. It is important to remain
fiscally prudent in the event a recession does
Occur.
REVENUE DRIVERS
The City realized solid revenue growth in
2006-07. Total revenues grew by 8.5 percent over
the prior year. Economically sensitive and major
revenue sources such as sales, property, transient
occupancy, and documentary transfer taxes grew
steadily. In November 2007, Palo Alto voters
overwhelmingly approved a 2 percent rate in-
crease in the Transient Occupancy Tax, raising
the rate from 10 to 12 percent. This increase is
factored into the forecast beginning in January
2008 when the rate takes effect. The forecast
assumes a 3.65 percent compound annual growth
rate for total revenues from 2007-08 through
2017-18. This relatively modest growth rate
primarily results from the expected recession and
a near-term slowdown in sales tax growth.
The following describes the trends in the City’s
major revenue sources.
Sales Tax
In 2006-07, sales tax revenues rose 9.3 percent or
$1.9 million over 2005-06 levels. Economic
segments that showed particular strength in
2006-07 were business to business (e.g., electronic
equipment), department store, and restaurant
sales. Those displaying some weakness include
furniture/appliance outlets m~d business ser-
vices. It is of concern that growth in sales tax
receipts began to slow in the first quarter of
2007-08. Whereas prior quarter growth rates
ranged from 5.3 to 12.8 percent, the first quarter’s
growth rate was a fairly anemic 1.5 percent
above the prior year’s 1st quarter rate. This might
portend a slowing in this revenue category and
requires careful monitoring. In addition, a
sig~ficant amount of the growth in 2006-07 was
concentrated in one electronic equipment maker.
In the past, this sector has shown considerable
volatility. This spike in company revenue also
merits tracking. A growth rate of 0.9 percent is
projected for 2007-08 and 3.0 percent for 2008-09.
These projections are in alig-nl-nent with the City’s
sales tax consultant.
Property Tax
Secured property tax revenues rose by 9.6 per-
cent or $1.3 million in 2006-07 over the prior year.
This healthy increase can be attributed to a
strong commercial real estate market and a fairly
steady residential market. While there is no firm
evidence yet for a softening of home prices and
no information from the county on residential
assessment appeals or decreases, a softening in
this revenue source lags an economic downturn
by a few years. Therefore a slower growth rate of
around 5.7 percent in property tax revenues is
estimated for 2007-08 and 3.5 percent for 2008-09.
These numbers correlate closely with Santa Clara
County estimates.
Transient Occupancy Tax
As stated, voters approved an increase in the
TOT rate to 12 percent starting January 2008.
TOT revenue should grow by $0.6 million in
2007-08 and by another $0.6 million in 2008-09.
Average occupancy rates have moved up stead-
ily during the past 3 years: from 61 percent in
2004-05 to 72 percent in 2006-07. Preliminary data
12 City of Palo Alto
2008
TEN YEAR FORECAST
for 2007-08 show occupancy rates at 77 percent.
Likewise, average room rates have risen from
$119 to $137 during the same period. TOT reve-
nues are expected to show solid ~owth as long
as local business conditions remain robust.
Additional competition may be expected,
however, when new hotels come on line in
Menlo Park. The building of a "high-end" hotel
in the Stanford Shopping Center sometime in the
future should place Palo Alto in a strong
competitive position.
Documentary Transfer Tax
Documentary Transfer Tax (DTT) revenue is
acutely sensitive to the volume and value of
property sales and the mix of residential and
commercial transactions. In 2006-07, DTT
revenue rose to $5.8 million, 1.9 percent over the
prior year. This is the highest DDT level in 10
years and is due to a vibrant commercial sector
and steady residential sector. This revenue
source is projected to grow at a compound
annual rate of 4.7 percent over the next 10 years.
Refuse Fund
With the landfill expected to close in 2010-11,
annual rental payments from the Refuse Fund to
the General Fund will drop from $4.3 million to
$2.1 million starting in 2012-13. The Forecast
incorporates this expected revenue loss. Council
established a policy to extend the rent payment
schedule through 2020-21 based on an updated
analysis of the landfill area (CMR:104:07).
EXPENDITURE DRIVERS
Salaries and Benefits
Salaries and benefits represent approximately
64 percent of the 2007-08 General Fund budget.
Upward pressure on salary and benefits is con-
tinual, due to the cost of living in Silicon Valley
and the labor market in which the Cit3, negotiates
with its bargaining units.
In 2007-08 the City is scheduled to complete ne-
gotiations with the Palo Alto Peace Officer’s As-
sociation (PAPOA) and the Fire Chiefs’ Associa-
tion (FCA). Staff expects negotiations to focus on
salary and benefit changes. PAPOA negotiations
have demonstrated that Palo Alto is experiencing
significant salary and recruitment competition,
especially with surrounding jurisdictions.
Contract negotiations were concluded last year
with the International Association of Fire Fight-
ers (IAFF), and Service Employee’s International
Union (SEIU), with the IAFF contract scheduled
to expire in 2010 and the SEIU contract set to
expire in 2009. Council approved an average
760
740
720
700
680
660
640
General Fund Staffing- Fig. "i
annual 3.25 percent increase for IAFF over the
four-year contract and an average annual 2.5 per-
cent increase for SEIU over a three-year period.
There are two remaining groups that are not
represented by a union: Management/
Professional and Limited Hourly. For 2007-08,
Council approved a one-time 3.5 percent increase
for the Management/Professional gToup.
City of Palo Alto 13
2008
TEN YEAR FORECAST
Over the past few years General Fund staffing
has been reduced by 70 positions, or 10 percent.
(see figure 1) The annual growth for salaries and
benefits over the next ten years is projected at 4.0
percent. Within that category, salary and over-
time growth are assumed at 3.5 percent per year,
benefits are assumed to grow by 5.0 percent,
including retiree medical.
Within the benefits category, the largest drivers
are Pension and Healthcare Costs.
Pension Expense
CalPERS retirement system pension costs have
increased substantially since 2000. However, the
rapid growth of these costs has subsided in the
past two years. In 2005, the CalPERS Board
enacted a new rate policy that spreads market
gains and losses over 15 years rather than over
three years when calculating the value of assets.
The impact of this new policy appeared for the
first time in 2005-06, with rates reduced by 3-4
percent compared to the prior year. The rates for
2006-07 showed a further decline of 1-2 percent.
Moreover, CalPERS investments have improved
dramatically since the period 2000 through 2002.
For the one-year period ended June 30, 2007,
CalPERS investments earned a 19.1 percent
return. This marked the fourth consecutive year
of double-digit returns. Also, pension expenses
are expected to continue to level out in subse-
quent years.
Management/Professional and SEIU employees
are now contributing 2 percent of their salary to
their PERS retirement plan, as a consequence of
receiving the 2.7 percent at 55 package. With this
change, as with the containment of costs on
medical plans, the concept is emerging that
retiree benefit and medical costs can no longer
be fully borne by the City and need to be shared
with employees.
Healthcare and Retiree Medical Costs
The City of Palo Alto was one of the few remain-
ing jurisdictions that fully funded employee
health insurance premiums and retiree medical
costs. As mentioned earlier, that long-held prac-
tice was amended last year when the City placed
a limit on its contribution to medical premiums
for both active and retired employees.
HEAL THCARE
$24
$21
$18
$~5
$12
$9
$6
$0
Healthcare Expenses- Fig, 2
¯Active Employees [] Retirees O Retiree Medical Liability
In the past five years,
healthcare expenses have
nearly doubled. Medical
premiums are expected to
increase from $12.8 million
in 2007-08 to $16.9 million
in 2011-12.
RETIREE MEDICAL
As a result of GASB 45, the
City recently underwent an
actuarial study which val-
ued its retiree medical li-
ability at $82.6 million,
14 City of Palo Alto
2008
TEN YEAR FORECAST
(assuming the establishment of an irrevocable
trust and a 7.75 percent discount rate.) The City
has already funded a Retiree Health Benefit re-
serve valued at $30.7 million. Having this reserve
places the City at an advantage compared to
most jurisdictions. After transferring $30 million
to the trust fund, the unfunded portion of the
liability will be reduced to $52.6 million. The
2007-08 General Fund budget includes $2.9 mil-
lion, which is its portion of the annual required
contribution.
In its attempts to limit healthcare costs for both
current and retired employees, the City has ac-
complished the following:
and general expense. Consistent with last year’s
LRFF, this forecast assumes no program growth
beyond general cost inflation over the next ten
years. Figure 3 shows the breakdown of non-
salary expenditures.
General expense includes the lease payment of
$6.3 million to the Palo Alto Unified School Dis-
trict (PAUSD) for the "Covenant Not to Develop"
surplus school facilities. This contract requires
CPI adjustments to the annual lease payment,
with a projected annual growth rate for the next
ten years of 3.0 percent or a minimum of $189,000
annually.
Placed a limit on the employer’s contribu-
tion to medical premiums for both active
and future retirees, eliminating the most
expensive health plan the PERS system
offers, and reversing its long-held practice
of funding 100 percent of every available
PERS healthcare plan for employees and
retirees
2007-08 Non-Salary Expenditures-Fig. 3
Supplies &
Materials
9.3%
Rents &
Leases
3.0%Contract
Services
27.0%
Raised the full vesting requirement for
retiree medical eligibility from 5 to 20
years for new employees
Going forward, the City will continue to
explore strategies to reduce
healthcare and retiree
medical costs. $129
Non-salary
Expenditures
Non-salary expenditures
represent 28 percent of the
2007-08 General Fund
budget. These expenditures
include allocated charges,
supplies and materials, rents
and leases, contract services,
Allocated General
Charges Expenses
35.2%25.5%
Expenditures by Category - Fig. 4
Salaries +Benefits ---A--Non-Salary +Transfers
City of Palo Alto 15
20 08
TEN YEAR FORECAST
Expenditure Trends by Category
and Function
Figure 4 depicts the projected trend lines for sala-
ries, benefits, non-salary expenses, and transfers:
Please note the following:
Salaries, while trending upward, remain at
about 44 percent of total expenditures from
2007-08 through 2017-18
Benefits increase from 22 to 26 percent of
total expenditures from 2007-08 to 2017-18,
primarily due to the inclusion of the retiree
medical liability starting in 2007-08
Total expenditures increase an average of 3.7
percent per year from 2007-08 through
2017-18
Non-salary expense and transfers represent
about one-tl~ird of General Fund
expenditures
Figure 5 displays the budget by functional area:
The largest functional areas of the budget are
Police, Fire and Community Services. They com-
prise 16 percent, 20 percent and 15 percent of
total expenditures in 2007-08, respectively.
The Administrative functional areas includes
2007-08 Expenditures by Functional Area - Fig. 5
Non-Dept,Public Works,
$9.2 S13.2 Ranning,
$10.1
Administr.
S17.3
Cornrc~nity
Services,
S21.2
Transfers
Out, S10.7
-Library, S6.5
Fire, S28.0-
Police, S22.9
Administrative Services, the City Attorney, City
Auditor, City Clerk, City Council, City Manager,
and Human Resources. These functions represent
12 percent of total expenditures. Forty-four
percent of the services that the administrative
departments provide is expense is reimbursed by
the Enterprise Funds.
RISKS
The City continues to face fiscal challenges and
opportunities which create upside potential and
downside risks in the Forecast. Some of these
challenges and prospects are immediate and oth-
ers can be viewed as longer term parts of the
City’s sustainable budget effort.
DOWNSlDE RISKS
The primary downside risks on the revenue side
are the housing market, energy prices, and credit
crisis. Sales, Property and TOT revenues will
move downward it these areas worsen. Slow
to moderate growth rates are reflected in the
Forecast through 2009-10 or before an expected
recession. Starting in 2012-13, all revenue sources
are anticipated to resume more normal growth
patterns.
The following are some additional down-
side risks related to revenues forecasted in
the model.
Economic Base
The City is moving proactively to maintain
and grow its economic base. Mayoral ef-
forts to retain and grow automobile dealers
and other key revenue generators, recent
discussions to expand the Stanford Shop-
ping Center, and the effort to build a new
hotel in the Shopping Center, have all been
16 City of Palo Alto
2008
TEN YEAR FORECAST
part of a heightened awareness and action plan
to secure the City’s economic base. (Further
details appear below in "Upside Potential")
These efforts are vital given the following threats
to City businesses:
Big-box stores such as Best Buy, Home Depot,
Costco, REI, and supermarkets in Mountain
View and East Palo Alto that draw sales and
sales taxes away from Palo Alto
Nearby cities’ efforts to attract automobile
dealerships. For example, plans have
emerged in Menlo Park (in conjunction with
General Motors) to develop an automobile
mall on Willow Road and Highway 101.
Given the lack of suitable space in Palo Alto,
this could lead to the departure of key local
dealerships. The City has already lost three
auto dealerships in the past five years: Ford,
Nissan, and Porsche
Retail competition from regional shopping
centers such as Valley Fair and Santana Row
The emergence of high-end hotels in Los
Altos, Menlo Park and East Palo Alto,
generating increased competition for Palo
Alto hotels and for TOT dollars
The transformation of Stanford Research Park
from firms producing taxable sales to those
providing non-taxable research, administra-
tion, and business services
Opposition to business development within
the City
The Forecast incorporates the most recent loss of
automobile dealerships and hotels; however,
should any of these trends become more signifi-
cant, the City’s revenues will decline accordingly.
Telephone UUT Threat
Voice-Over-Internet Protocols (VOIP) technology
will impact telephone UUT revenues as it pene-
trates homes and businesses. Based on a recent
Federal Communications Commission ruling, the
City will no longer have the authority to tax
VOIP service; thus the $2 million telephone UUT
revenue source may erode over time. In addition,
since the telecommunications industry was
successful in relocating local franchise authority
to the State level, it is possible they will attempt
to do the same for UUT. A State UUT could
result in further diminution of the City’s
telephone UUT revenues.
The following are some additional downside
risks on the expenditure side.
Healthcare
Over the past five years, healthcare cost for the
City have risen from a low of 3.4 percent to a
high of 12.7 percent per year. The Forecast
assumes an average growth rate of 7.7 percent
per year. It is quite possible that healthcare costs
wil! escalate beyond that rate of growth.
Increased Salary Pressures
If prevailing labor market differentials surface as
comparisons are made with benchmark cities,
more complex labor negotiations may ensue in
the next 2-3 years. Budget-balancing require-
ments will be weighed against the need to match
regional wage standards. This may drive salaries
and benefits expenditures above the Forecast.
New Projects and Priorities
If the City identifies new projects or priorities
that are not included in this Forecast, new reve-
nue sources and/or expenditure cuts would have
to be identified to fund them. Capital and other
City of Palo Alto 17
2008
TEN YEAR FORECAST
costs not funded through debt financing would
require alternative resources. For example,
should new library and public safety facilities be
constructed, additional maintenance expenditure
will be required. In addition, furniture, fixtures
and equipment that cannot be covered through
specific types of debt structures must be funded
using new or existing resources.
Moreover, as the City utilizes new or existing
resources to fund expanded facilities or pro-
grams, it reduces its flexibility to cover increasing
expenses in other programs. Adhering to Sus-
tainable Budget tenets will require a mechanism
for prioritizing project and program needs.
Infrastructure Reserve Funding
One of Council’s top priorities is to restore and
maintain the City’s General Fund infrastructure.
An Infrastructure Reserve (IR) was created to
ensure future project funding. When the Infra-
structure Management Plan (IMP) was initiated
in 1998, it was estimated that the City needed to
spend $10 million annually to eliminate the
infrastructure backlog and to maintain existing
infrastructure in future years. However, that $10
million per year has not been sufficient to cover
the growth in infrastructure project costs, which
have been impacted by inflation, changes in
scope, and steep increases in the cost of construc-
tion materials. A consultant has been hired by the
City to update the Buildings and Facilities
$20
Infrastructure Reserve Balance with
Additional $3 Million Per Year Investment-Fig, 6
$15
~15.31
$10
$10.84 "--.-..,¢,.-.-’"~ $10o22
$5 $9.74 S7.53
$0
2007-08 2008-09 2009-10 2010-11 2011-12
18 City of Palo Alto
portion of the IMP. The financial impact of this
update will not be known until Winter 2008. The
Capital Improvement Program Plan for the
ensuing year will incorporate the new data from
the update.
In April 2006, the City Council directed staff to
review options to increase IMP funding by $3
million per year through a combination of expen-
diture reductions and revenue enhancements.
The LRFF assumes that the transfer of $3 million
per year will increase by an inflation factor of
seven percent per year.
State Budget Difficulties
The State of California is expected to have a defi-
cit ranging from $10 to $12 billion in 2008-09.
Although the passage of Proposition 1A includes
protections from State raids on local jurisdiction
resources, there is a provision that in emergency
situations these controls can be sidestepped. The
State’s ability to borrow its way out of the loom-
ing budget dilemma is limited, and local govern-
ments should be prepared for potential take-
aways.
UPSIDE POTENTIAL
Possible developments that would positively
impact the City’s bottom line include:
Successful Economic Development
Efforts
In the past few years, the City has engaged in
several efforts to encourage business develop-
ment. As a result of the Mayor’s Committees
on Retail and Business Attraction, several key
strate~es have been implemented:
¯The City wil! be partnering with the Simon
Group in efforts to expand the Stanford
3008
TEN YEAR FORECAST
Shopping Center and maintain its
competitive position in the marketplace
Staff has reviewed zoning requirements in
several business districts and implemented
changes to the zoning code that address
challenges to high-volume sales tax genera-
tors such as auto dealers
The City worked with auto dealerships to
identify potential land near Highway 101 to
provide greater visibility and space
Other zoning changes have protected com-
mercial zones from housing development
In addition, the Business Improvement District
(BID) has been a catalyst for businesses in the
City’s downtown. Events such as Dine Down-
town have successfully increased sales to local
restaurants. The pilot program "Destination Palo
Alto" has engaged a variety of partners (the City,
Chamber of Commerce, BID, Stanford,
commercial areas, and neighborhood associa-
tions) in promoting visitor and visitor-related
economic activity and revenues. Attraction of the
"2008 Amgen Tour de California" is a prime
example of the effort to bring high-profile events
to the City.
Business outreach efforts continue, focusing on
valued businesses and top sales tax generators.
City staff and elected officials have conducted
business outreach visits to companies such as
Communications and Power Industries, Inc.,
Varian, and VM Ware. These visits help the City
assess its strengths, weaknesses, and challenges;
they will continue to inform decisions regarding
business development efforts by the City.
To the extent that these efforts counteract the
negative competitive pressures facing the City’s
business community, City revenues may exceed
those forecasted.
Talent Crisis
The City of Palo Alto, like most other govern-
ment agencies, is facing an approaching "baby
boomer" retirement wave. Currently, 38 percent
of staff is eligible for retirement, and the figure
wi!l increase to 56 percent within five years. This
wave of retirements will create an opportunity
for restructuring, reviewing how services are
delivered, and reducing staff. This opportunity,
however, must be weighed against the challenges
of managing the loss of expertise and institu-
tional knowledge in the organization and the
response to the service needs of the community.
With retirements looming, Palo Alto faces a
related challenge: the effort to hire new workers.
Local governments find it difficult to recruit as
fewer potential entry level employees are at-
tracted to the public sector. Dr. Stuart Greenfield
of the Center for State and Local Government
Excellence recently published a study that helps
explain this relative disinterest. For example,
local government workers earn 7 percent less
than comparable private sector workers; salaries
in local government jobs increased less than in
the private sector between 1997-2005 (3.3 percent
compared to 3.8 percent); public sector workers
are better educated yet they earn 25 percent less
than those in the private sector with comparable
degrees; and while the public sector has a greater
percentage of knowledge workers, those workers
earn 25 percent less than similar workers in the
private sector. It is important to point out that
strong public sector benefit packages can com-
pensate, in part, for lower comparable earnings.
To address the recruitment challenge, Palo Alto
is working to attract potential employees through
the summer internship and management fellows
program. In addition, the City will continue to
promote itself as a great place to work providing
City of Palo Alto 19
2008
TEN YEAR FORECAST
employees with challenge and opportunity,
attractive salary and benefit packages, and a
focus on work/life balance.
LOOKING BACKWARD AND
FORWARD
In summary, this forecast shows that the City has
righted its financial course over the past several
years through expense and position reductions
and revenue enhancements. In addition, the City
can point to major accomplishments such as
increased infrastructure spending and funding of
its retiree medical liability. Few jurisdictions can
lay claim to these achievements given the finan-
cial pressures cities face. This City, however,
continues to have a plethora of existing and new
infrastructure needs, enhanced program
requests, and new demands such as in the area of
climate protection. The myriad of expenditure
pressures on General Fund resources has
prompted a discussion of developing a
"Sustainable Budget" whereby sources and uses
of available funds are in equilibrium over time.
This concept and goal has been explored in
CMR:387:07 which was presented to the
Council’s Finance Committee in October, 2007.
Highlights of this report are summarized below.
SUSTAINABLE BUDGET
The idea of a "sustainable" budget emerged from
the financial disruptions of the "dot-com" bust
and the concern that the City cannot continue to
support the variety and level of current services
over the long-term. This concern is compounded
by emer~ng new program and facility needs that
must compete with existing services for re-
sources.
A "sustainable budget" is a plan to keep spend-
ing within one’s means over the long-term.
Another definition of this type of budget is an
expenditure plan that meets the needs of the
present without compromising the ability to
provide services to future generations.
As the above "Risks" section states, the goal of
budget sustainability is not as simple as it
appears, since dynamic forces such as economic
cycles, chang-ing demographic and social needs,
rising medical and eneroo-y costs, new facility
needs, and other factors impact the best of
budget strategies; Tough questions must be
raised and addressed to provide the flexibility
necessary to achieve a balanced budget over
time. These include, for example:
What are the City’s basic program and
spending priorities now and in the future?
Balancing a rich and wide level of services
with expanding infrastructure, for example,
will present a difficult trade-off
¯How long can current expenditure patterns
continue and what costs can be reduced or
eliminated to achieve a balanced budget?
¯Can current services and service levels be
provided in a more efficient and cost-
effective manner?
¯What revenue sources can be counted upon
now and in the future, and which are likely to
decline?
¯To what extent are the City and community
able and willing to maintain and grow
revenue resources when needed?
A critical component of developing a sustainable
budget is that the City raise and respond to the
above questions on an ongoing basis, preferably
20 City of Palo Alto
2008
TEN YEAR FORECAST
annually. This implies that as new expectations,
initiatives, and programs arise, they are
grounded in the reality of available resources
and competing priorities. Maintaining such a
budget takes considerable discipline. By being
proactive in finding answers to the difficult
questions raised above, the City can avoid the
painful, abrupt and potentially near-sighted
solutions that are typically necessary to solve
budget shortfalls.
As stated in this report, the City has capably
addressed a number of structural and long-term
funding issues such as infrastructure replace-
ment, the loss of revenues during the "dot-com"
downturn, and the retiree medical liability. It has
solved these problems primarily by reducing
General Fund costs. As the City grapples with
the rising cost trends cited in this report, the
option of reallocating resources has become more
problematical.
years while those providing community and
public safety services have either remained
constant or increased. As a proportion of the
City’s budget, the public safety and community
service functions have grown from 58.3 percent
of the total in 1997 to 61.5 percent in 2007. These
numbers make sense in light of the reductions
made in the administrative departments, but
they indicate that if the City is to sustain its
budget, difficult decisions may be necessary in
areas that the public and Council see as "basic"
services. This is especially important as the City
endeavors to fund a new public safety building
and library/community center facilities.
In addition to the capital costs expected to be
debt financed, there will be incremental
equipment, maintenance, and operating costs
associated with these new facilities.
To maintain a sustainable budget, the City has
taken several actions including:
An analysis of expenditure growth by depart-
ment (see table below) shows that budgeted
resources for administrative departments have
dropped in real dollar terms over the past five
Reallocating of resources - e.g., recent
$3 million shift of operating resources to
infrastructure spending
General Fund Operating Expenditures:
Last Five Years in 2003 Dollars (in $000s)
$25,000
$20,000
$15,000
$10,000
$5,000
$o
2003 2004 2005 2006 2007
~,~,-Administration ~-- Public Works ---~.-- Planning and Comm Env
¯ --,),(-,-Police ~I~-CSD and Library ,,,-~---Fire
City of Palo Alto 21
2008
TEN YEAR FORECAST
Increasing revenues or resources - e.g., recent
2 percent increase in TOT rate
Reducing or shifting benefit expense - e.g.,
recent capping of medical premium costs and
having employees pay a share of retirement
plan contribution
Increasing use of debt versus pay-as-you-go
funding for capital projects so as to spread
costs and benefits over time
As with most budget decisions, the City will
have to make hard choices as it develops a
sustainable budget. To facilitate the decision-
making process, the following complex questions
(in addition to those raised earlier) need further
analysis, discussion, and action:
What is the optimal balance between infra-
structure and operating expenses that will
sustain the delivery of services?
Should the City incur more debt for capital
projects so as to spread the cost burden of
improvements over current and future users?
The City has generally used a conservative,
pay-as-you go approach for capital projects.
How can the City control expenditures
growing at greater than inflation rates yet
preserve core services?
What opportunities does the City have to
maintain and expand revenue sources when
necessary?
To what extent is the community willing to
balance its desire for services and the
revenues that support them with its desire to
restrict business growth and its associated
traffic impacts?
What degree of risk is the City willing to
incur as it seeks to control expenses?
Can a meaningful dialogue be initiated with
City employees and unions on sharing
medical premium expenses?
What framework will the City use to evaluate
and fund new programs versus ongoing
services?
As the Finance Conm~ittee indicated in October,
2007, these questions must be vetted by the
community and Council. They will require con-
siderable discussion and consensus since they
involve real, competing interests. The City’s
practice is to conservatively and judiciously
manage its resources. With the development of a
sustainable budget it will continue this practice
into the future.
CO CLUSIO
In conclusion, this years’ LRFF incorporates
many significant changes and challenges. As the
financial forecast’s bottom line shows, the City is
in a sound financial position. The budget
continues to be balanced despite rising benefit
costs, enhanced infrastructure funding, and a sig-
nificant retiree medical liability. Although deficits
are shown in 2010-11 due to a projected recession
and the decline in Refuse Rent, the City is
expected to see reasonable surpluses in the
second half of the ten year forecast.
In addition, this year’s LRFF includes a brief, but
informative information chapter on the status of
the Enterprise Utility Funds. This next section
represents the first, small step toward a more
comprehensive citywide Long Range Financial
Forecast.
22 City of Palo Alto
2008
ENTERPRISE FUNDS
ENTERPRISE FUNDS
ENTERPRISE UTILITY FUNDS
Although the Long Range Financial Forecast’s main focus is the General Fund, the
financial outcomes of the Enterprise Utility Funds affect the City as a whole. The
addition of information on the Utility Funds represents the first step toward a
comprehensive, citywide Long Range Financial Forecast.
The City of Palo Alto has provided utility service to its citizens and businesses for
over 100 years and is the only city in California to offer a full array of utility services.
The Enterprise Utility Funds are comprised of the Electric, Gas, Refuse, Storm
Drainage, Wastewater Collection,
Wastewater Treatment and Water
Funds. Each of these Funds is
managed independently, and a
summary of the Funds is
presented below.
It is important to note that the
basic principal of the Enterprise
Utility Funds is that customers
pay the full cost of the services
they receive.
REVENUES
2007-08 E~nterprise Utility Fund
Revenue - Fig.1
(in millions of dollars)
VXkaste-St o rm waterDrainage,
$ 7 Treatment,
$21
Refuse,
$30
VVater,
$27
Electric,
$114
VVaste-
water
Co Ilectio n,
$15 Gas, $47
Revenues for the Enterprise Utility
Funds are primarily generated through rates charged to customers and are designed
to cover the full cost of delivering services. Those costs include the cost of commodi-
ties, replacement and maintenance of capital infrastructure, debt service coverage and
operation expense. Overall utility rates increased 8.9 percent in the 2007-08 adopted
budget, and additional increases were included in the proposed 2008-09 budget.
City of Palo AIto 23
2008
ENTERPRISE FUNDS
The total combined revenue for the
Enterprise Utility Funds in the 2007-08
budget is $261 million. Figure i shows
revenue by Fund.
EXPENSES
As noted on the previous page, expenses for the
Enterprise Utility Funds are driven by commod-
ity, capital infrastructure, debt service and
operational costs.
The total combined expense for the Enterprise
Utility Funds in the 2007-08 adopted budget is
$283 million. Figure 2 shows expense by Fund.
Figure 3 shows combined expense by category.
EXPENSE DRIVERS
Commodity Costs
Fluctuating commodity and electric and gas
transmission costs continue to be a challenge for
the Electric, Gas and Water Funds, since com-
modity purchases represent the largest expense
in dollars and percentage for these three Funds.
In 2007-08, total budgeted commodity expense is
$118 million or 41% of total Enterprise Utility
Fund expense.
Commodity pricing can be driven by weather,
supply availability, changes in demand and
regulatory policies. Increases in commodity
expenses may cause customer rate increases.
To mitigate marketplace volatility and dramatic
customer rate changes, staff uses a three-year
laddered purchasing strategy for electric and
gas supplies.
Capital Infrastructure
The investment in capital infrastructure is a ma-
jor priority for the Enterprise Utility Funds.
Replacing, maintaining and upgrading plant and
technology ensures continuing, reliable service
delivery. Costs incurred for capital infrastructure
can drive changes to customer rates.
The major investments that were included in the
2007-08 budget are the following:
The replacement, rebuilding and conversion
of underground electric systems-
$10.5 million
¯The replacement and upgrade of gas mains-
$6.9 million
The rehabilitation of wastewater collection
systems- $3.4 million
Water main replacement, reliability up-
grades, and emergency water supply-
$11.1 million
The construction of a new storm water pump
station and citywide storm drainage system
repairs- $5.5 million
2007-08 Enterprise Utility Fund
Expense - Fig. 2
(in millions of dollars)
Storm
Drainage,VVast e~
Refuse,$9 water
$ 31 Treat ment,
$2O
VVater,
$33
VVaste-
water
Collection,
Gas, $48
Electric,
$128
24 City of Palo Alto
2008
ENTERPRISE FUNDS
Design costs for improvements to the
disinfection facility at the wastewater
treatment plant- $1.3 million
Multi-year projects included in the 2008-09 pro-
posed budget are the replacement of a reclaimed
water pipeline to the City of Mountain View
($26 million), the construction of the ultraviolet
disinfection facility at the wastewater treatment
plant ($26 million), and the Emergency Water
Supply Project with an estimated four-year cost
of $40 million. Revenues from an anticipated
$35 million bond issuance will help fund the
Emergency Water Supply project. State of
California loans and ~ant funding may assist
with the disinfection facility and reclaimed water
pipeline projects along with $16.1 million in
reimbursements from the City of Mountain View
and wastewater treatment plant partners.
Operational Costs
Operationally, the Enterprise Utility Funds face
similar types of cost drivers as the General Fund.
After commodity expense, salary and benefits,
allocated charges, rent and the equity transfers
are the significant operational costs for the
Enterprise Utility Funds.
2007-08 Enterprise Utility Fund
Expense by Category - Fig, 3
Equity
Transfer-
5%
Capital
Imprvmnt
15%
Rent/
Lease &
Allocated-
Chgs
12%
Debt OtherServiceOper.Csts5%1~%
Salary &
Benefits
12%
Co mdity.
Purchases
41Yo
Salary and benefits expense represents 12 percent
of total budgeted expense for all Enterprise
Utility Funds in 2007-08. Included in this fignre
are negotiated salary increases and the rising cost
of health care and retiree medical benefits.
Allocated charges and rent represent 12 percent
of total budgeted expense for all Enterprise
Utility Funds. The utility funds reimburse the
General Fund for administrative services such as
attorney and payroll services, and they pay
market-based rents for the use of General Fund
land. Increases in General Fund expenditure are
allocated based on various measures to the utility
funds, and rent is adjusted annually after an
independent appraisal.
The equity transfer to the General Fund from the
Electric, Gas and Water Funds, represents 5 Yo of
the expense for the Enterprise Utility Funds.
Increases in operational costs may drive in-
creases in customer rates. Many of the cost
pressures described in the Expenditure Drivers
section of the General Fund LRFF, also apply to
the Enterprise Utility Funds.
Reserves
In addition to commodity purchasing strate~es,
Utility Fund reserve balances are also used to
mitigate the effect on customer rates on commod-
ity market price swings and operational cost in-
creases. These mitigations are typically used on a
one-time basis, since ongoing higher costs must
eventually be borne through the rate structure.
Additionally, Enterprise Utility Fund reserves
provide cash for the emergency equipment
replacement, and planned capital expenditures.
The total combined reserves for the Enterprise
Utility Ftmds per the 2006-07 Comprehensive
Annual Financial Report (CAFR) are $233
million. Figure 4 shows the reserves by Fund.
City of Palo Alto 25
2008
ENTERPRISE FUNDS
Risks
The Enterprise Utility Funds, like the General
Fund, face significant fiscal challenges and
opportunities that will impact future financial
outcomes.
DOWNSlDE RISKS
Commodity Markets
Volatile markets for commodity and transmis-
sion costs will continue to present sigTfificant
challenges for the Enterprise Utility Funds.
Wholesale electric supply costs have increased
71 percent since 2003 and 58 percent since 2004.
Water supply costs have increased almost 30
percent since 2005-06.
Currently, staff is able to mitigate the market
volatility for gas and electric purchases with its
three-year laddered purchasing strategy.
However, if a supplier defaults or staff is unable
to negotiate long-term contracts, energy
supplies will need to be purchased at the then-
current market price.
Weather-Related Concerns
Approximately 50 percent of the City’s electric
supply comes from hydroelectric projects. The
availability of hydroelectric supply is dependent
on the weather, and thus the cost to purchase
electric commodities may increase dramatically
in a dry year. The City tries to maintain suffi-
cient cash reserves to buy energy from the
market during periods of drought and replen-
ishes the cash reserves during wet periods when
production is high and purchase costs are lower.
This use of reserves to balance the hydroelectric
supply uncertainty enables the City to provide
relatively stable rates to customers.
Regulatory Concerns
Regulatory concerns include proposed changes
to the electric industry structure by the Federal
Energy Regulatory Commission (FERC) and the
California Independent System Operator (ISO)
as well as several State of California leg-islative
bills. If passed, the new regulations and laws
would increase transmission, local capacity and
reporting costs.
Funding for Capital Improvement
In recent years the cost of construction materials
has risen sharply, outpacing the general rate of
inflation. As the costs of material and labor rise,
planned projects are being re-evaluated, delayed
or scaled down.
The Storm Drainage Fund has been particularly
impacted by these concerns. In 2005, property
owners voted to approve a fee increase to fund
specific storm drain improvement projects. Per
the terms of the approved ballot measure,
annual Council-approved rate increases cannot
exceed the local rate of general inflation (which
is significantly lower than the rate of increase in
construction costs) or 6 percent, whichever is
less. Due to the rapid increases in construction
2006-07 Fnterprise Utility Fund
Reserves - Fig. 4
(in millions of dollars)
Electdc -
all others
$85
Electdc-
Calaveras
$72
Gas $18 Waste
water
Collect
VVat er $22
Refuse $6
Storm
Drainage
$4
VVaste
water
Trtmt $14
26 City of Palo Alto
2008
ENTERPRISE FUNBS
costs, the Storm Drain Fund will be unlikely to
complete all of these projects without additional
funding from the General Fund. Staff is working
closely with the Storm Drain Oversight
Committee to develop strategies and recom-
mendations on which projects to implement
with the available funds.
The Wastewater Treatment Fund has also been
adversely impacted by the rise in construction
and labor costs. The $26 million reclaimed water
pipeline project with the City of Mountain View
has been delayed due to construction bids
coming in over budget. Revenue from State
grants and the Treatment plant partners will
offset a portion of the increase; however, Palo
Alto’s portion of the cost will increase as well.
Water, Gas and Electric Fund capital improve-
ment projects are also subject to the rising cost
of construction labor and materials. The
increased costs for new projects as well as
on-going upgrades for replacement and
reliability will have an effect on changes to
customer rates.
Talent Replacement Gaps
The Enterprise Utility Funds, like the General
Fund, face skill shortages in a variety of techni-
cal areas. Examples include; difficulty recruiting
electrical line personnel and project engineers
for the wastewater treatment plant.
UPSIDE POTENTIALS
The Enterprise Utility Funds have several
programs and processes in place that may
positively impact their financial outcomes.
Renewable Resources
The Enterprise Utility Funds are committed to
the implementation of renewable energy pro-
grams. Recently the Environmental Protection
Agency (EPA) desig-nated Palo Alto as the first
Green Community in California. Palo Alto’s
renewable portfolio standard has set a goal of
purchasing 20 percent of the electric commodity
supply from renewable sources by 2008 and 33
percent by 2015.
The inclusion of "green" electricity produced by
landfill gas and wind power will diversify the
electric commodity portfolio and allow for
greater purchasing flexibility. The current
renewable energy contracts are long-term, fixed
price contracts with a 10 to 20 year commitment.
These contracts will provide relatively low-cost
and stable electric supplies if market prices
continue to rise in the future.
Customer Energy Efficiency Programs
The Enterprise Utility Funds offer their custom-
ers a wide array of energy and water efficiency
programs. Efficiency rebates, energy and water
usage analysis and efficiency education allow
customers to implement measures that will save
them money and reduce the demand to
purchase commodity resources.
CONCLUSION
In conclusion, this section on the Enterprise
Utility Funds is designed to inform the City
Council and the public of major challenges
facing the Utilities. It is these factors that
will drive rate changes and are important to
understand.
City of Palo Alto 27
2008
APPENDICES
APPENDIX A
DEFINITIONS OF REVENUES AND EXPENDITURES CATEGORIES
REVENUES:
Sales Tax
is a tax collected from customers by retailers on sales of tangible personal property
and services. In fiscal year 2007-2008 it represents 18 percent of total General Fund
revenues.
Property Tax
is a tax that the owners of real and personal property pay, equal to one percent of the
assessed value of the property. Of the one percent, the City receives 9 percent, or .09
percent of the assessed property value. Note that the bulk of Vehicle License Fees are
now remitted to the City via property tax payments from the County.
Utility Users Tax (UUT)
is a tax based on the usage of telephone, electric, water and gas utilities. The tax rate is
5 percent of the usage, with discounted rates on utility usage, available for very large
users.
Transient Occupancy Tax (TOT)
is a tax levied on short-term (30 days or less) rental of lodging. The current TOT rate is
12 percent of the price of the rental.
Documentary Transfer Tax
is a tax levied on real property bought or sold in the City at the rate of $3.30 per $1,000
of value. Revenues can vary significantly from year to year since they are sensitive to
the volume and value of property sales, and due to one-time transactions such as the
Stanford Shopping Center lease.
28 City of Palo Alto
2008
APPENDICES
Other Taxes, Fines, & Penalties
consists of remaining Vehicle License Fees paid
directly by the State, parking violations, library
fines, administrative citations, and other fines and
penalties. Parking violations is the largest compo-
nent in this category with projected revenues in
fiscal year 2007-08 of $1.95 million.
Service Fees & Permits
are generated from golf course fees and class
registration and admission fees in the Community
Services Department; permits and plan check and
zoning fees in the Planning and Ci~mmunity
Environment Department; and paramedic service
fees in the Fire Department. Plan check fees are
the most sigTfi_ficant in this area, projected to be
$2.3 million in fiscal year 2007-08.
Joint Service Agreements
primarily comprise the Stanford University
contract for fire and communication services,
which funds 30 percent of the Fire Department’s
budget-approximately $7 million.
Reimbursements
refer to payments received by the General Fund
(GF) for services rendered to the Enterprise Funds,
such as accounting, payroll, purchasing, human
resources, and legal advice.
Transfers
between Funds are a con~--non way of moving
resources for both general operations and capital
projects. The main component of this source of
funding is the equity transfer from the Enterprise
Funds ($15.7 million), which represents a return
on the City’s original capital investment in the
Utility Department’s operations.
Other Revenues
are primarily comprised of the rent received for
land and facilities used by the Utilities and Public
Works Enterprise Funds. They comprise 12 per-
cent of the total sources of GF revenue in fiscal
year 2007-08.
EXPENDITURES
Salaries & Benefits
consist of salaries (regular, temporary, and
overtime) and benefits (healthcare, retirement and
others). Salaries and Benefits account for approxi-
mately 64 percent of fiscal year 2007-08 total
expenditures.
Non-Salary Expenditures
include contract services, supplies, general
expenses, rents and leases, and allocated charges.
They represent 28 percent of the GF budget in
fiscal year 2007-08.
Contract Services
include contracts for Children’s Theatre, golf
professional services, park maintenance, class
instructors, traffic studies, outside legal counsel,
auditing, and financial services. In fiscal year
2007-08, contract services represent 8 percent of
the GF budgeted expenditures.
Supplies & Materials
include office supplies, recreational and house-
keeping supplies, City employees’ uniforms,
construction and planting materials, and library
circulation. Supplies and materials expense
represents 9 percent of non-salary expenses in
fiscal year 2007-08.
City of Palo Alto 29
2008
APPENDICES
General Expense
is mainly comprised of the annual Cubberley
lease payment to Palo Alto Unified School District
(PAUSD) in the amount of $6.3 million. General
expense is 25 percent of total non-salary expense
in fiscal year 2007-08.
Rents, Leases & Equipment
consist mainly of land and facility rentals, other
rents, and leases. It comprises only 3 percent of
total non-salary expense in fiscal year 2007-08.
Allocated Expenses
include printing and mailing, vehicle replace-
ment, technology, and benefits costs incurred by
internal service funds, which are allocated to vari-
ous departments based on a prescribed usage
methodolo~,.
Transfers to Other Funds
are transfers between Funds as reimbursement for
services, overhead expenses, or other payments.
The LRFF includes four main transfer categories:
Infrastructure Management Plan (IMP) capital
projects, non-IMP capital projects, debt service,
and other transfers.
Debt Service
Is the interest and principal payments made to
bond holders on the outstanding debt principal
balance. The City of Palo Alto’s total current out-
standing debt principal is $9 million, one of the
lowest debt levels of any city in the Bay Area.
Infrastructure Projects
are a subset of the Infrastructure Management
Plan, also known as "CityWorks." It began in
fiscal year 1999-00 as a 10-year, $100 million plan
designed to eliminate the City’s backlog of
infrastructure rehabilitation projects.
Other Capital Projects
include projects for traffic calming, public art, and
other miscellaneous projects. They are estimated
to increase by an average annual rate of 3 percent
over the next ten years.
30 City of Palo Alto
2008
APPENDICES
APPENDIX B
BASIC FORECAST METHODOLOGY
$2.3 million is projected for fiscal year 2011-12,
and a deficit of $1.7 million is projected for fiscal
year 2012-13. At this time, staff believes that cor-
rective action is not required. Should a recession
fail to materialize, the City will be in a better
position than projected.
REVENUE PROJECTION METHODOLOGY
Consistent with past forecasts, the compound
annual rate of growth (CAGR) over the past ten
years for economically sensitive revenues is the
assumed rate of growth for the next ten years. In
utilizing this CAGR methodology for the past ten
years, the significant revenue gains during 1999
through 2001 and the steep losses from 2001
through 2003 are balanced. One shortcoming of
this methodology is that it does not account for
structural changes in revenue receipts, such as
the departure or arrival of a major revenue-
generating business. When this occurs, staff
modifies the base revenues prior to developing
projections.
This forecast assumes that the City will channel
all revenue windfalls into reserves or one-time
capital improvements. This assumption ensures
that the City will not commit its resources to new
or ongoing operating programs or labor commit-
ments in flush times, only to see them cut or
under-funded when revenues return to normal
levels.
The forecast assumes an economic downturn in
approximately three years, or in fiscal year 2010-
11. Although projecting a recession is more guess-
work than science, it is known that, historically,
California has experienced a recession once each
decade. Because of this cyclical phenomenon,
anticipating a two-year downturn within the next
ten years is recommended for prudent planning
and fiscal management. Due to the downturn,
decreased surpluses be~n in 2010-11, a deficit of
EXPENDITURE PROJECTION
~IETHODOLOGY
Similar to revenue projections, expenditure
projections are based on a combination of histori-
cal trends, assumptions about future growth rates,
and other judg-rnents calls. Salary projections are
based primarily on existing labor agreements. For
timelines beyond existing contracts, salary growth
is projected using a weighted average of historical
trends and re~onal labor cost increases.
Due to GASB 45, we have budgeted for retiree
medical based on our most recent actuarial study
and assumptions. Since healthcare and pension
costs have risen so rapidly over the past several
years, we expect these rates to moderate over the
next ten years. The City will continue to explore
methods of controlling the growth of these
expenses, but such controls are not assumed in
the plan..
Operating transfers are primarily generated in
relation to capital projects. The five-year capital
improvement plan is the basis for the first half of
the LRFF’s capital transfer projections. The last 5
years are estimated based on historical spending
patterns.
City of Palo Alto 31
2008
APPENDICES
APPENDIX C
LEGISLATIVE ANALYST OFFICE’S AND
OTHER ECONOMIC FORECASTS
The following table summarizes the California
Legislative Analyst Office’s economic projections,
as published in its February 21, 2007 report enti-
tled "2007-08 Budget: Perspectives and Issues".
The Legislative Analyst’s Office also compared its
projections with other expert projections available
at the time of publication. The table at the right
summarizes projections made by the UCLA
Business Forecast Project in December 2006, the
2007-08 Governors’ Budget Forecast, and the
consensus forecasts published in the Blue Chip
Economic Indicators in January and February
2007. To varying degTees, all of the projections call
for slowing ~owth with a partial rebound in
2008, with the UCLA Business Forecast Project
anticipating a slightly more significant slowdown
than did the other California forecasters.
National Figures:
Real GDP 2.5%3.1%3.4%
Unemployment 4,9%4.9%4.6%
Job Growth 12%1.4%1.6%
Personal Income 5.3%5.5%6.1%
CA Figures:
Unemployment 4.9%4,8%4.6%
Job Growth 1.4%1.7%1.8%
Personal Income 5.6%5.7%6.2%
Forecast
2006 2007 2008
United States Real GDP:
..... O~ ~err~i: .....3~2 ..........2 KI ........
.....~F 3§55~ ..............................................3.3 2.4 .....2:9 ........
Bide ~i~ ~6~6fi~US 5 3~65§~ .......33 ........Z~ ....3 .......
~ Fesr6~ry ............................3:~- 2:5 3.~
california Payroll Jobs:
O~ ~6~6~ ..............................]~5 ......0~5 ......~
......... ~F 3~56~ .....................................~8 .........]:2 .......
......Bi66 ~i~ ~5~en~us c FeSruary .........~ ~5 ........]1 ......]~2
.......... ~O FeSf6~ ............................................~9 ......1.4 ....................] ~7 ........
California Personal Income:
......... O~ ~6~6r Z2 .......~3 ............4.6
.......~F J~66~ .................................6:6 517 .......5~ .......
......... BI66 @i~ ~ns 66~6~ 8 Fe 5f6 ~ ....5.8 ........5~3 ............56 ......
.....~O FeS~sa~ ...........6] .........56 .........517 .....
California Taxable Sales:
...........UC~ ~6~ .................................................................6~2 .........~:2 ..........~7
........ ~F 3~fi6~ ............~5 ................33 .............5:~ ........
.......BI66~i~ns66~5~ cFebfS~ry 53 ..............4~ .............5 ......
....... ~OF6br6ar~ .........................................................~8 .......3:5 ...........5:2 .....
a Acronyms used apply to Legislative Analyst’s Office (LAO); University
of California, Los Angeles (UCLA); and Department of Finance (DOF).
b Average forecast of about 50 national firms surveyed in January by
Blue Chip Economic Indicators .
C Average forecast of organizations surveyed in February by Westem
Blue Chip Economic Forecast .
~ LAO 2006-07 Budget: Perspectives and Issues, 2/21/07, page 34
-~ LAO "Perspectives on the Economy and Demographics" 2/21/07,
page 28
32 City of Palo Alto
APPEN DICES
APPENDIX D
HISTORICAL TRENDS
Historical trends help portray the con-
text in which the City operates and are
carefully considered in preparing this
forecast. Please note that the total
revenue and expenditure figures in
this section may differ from those of
other financial documents published
by the City due to differences in
reporting formats.
GENERAL FUND REVENUE
SOURCES
These charts show the major sources
of General Fund revenues, first in
nominal dollars (not adjusted for
inflation) and then in constant dollars
(adjusted for inflation). Both illustrate
that sales tax revenue reached a high
in 2001 and has since declined mark-
edly, while property tax revenue has
increased steadily over the past ten
years. Utility users tax revenue has
remained relatively stable, and tran-
sient occupancy tax revenue has
followed the swings of the economy
during the past ten years.
The second chart shows that, in real
dollars, sales tax revenue is lower now
than in 1998, wl~le property tax is
higher. UUT and TOT have
remained relatively
unchanged since 1998.
From 2005 to 2007
From 2002 to 2007
From 1998 to 2007
9.5%
7.7%
7.1%
4.8%
-1.9%
-1.4%
$30,000
$25,000
$20,000
$15,000
$10,000
$5.000
$0
Selected Major Revenue Sources:
History in Nominal Dollars (in $000s)
Sales Tax -<~-- Property Tax ~ UUT ~ TOT
Selected Major Revenue Sources:
Last10 Years in 1998 Dollars (in $000s)
$25,000
$20,000
$15,000
$10,000 ~ :~:’
$5,000 .... .......... ...................
$o
~ 0 0 0 0 0 0 0 0~~0 0 0 0 0 0 0 0
+Sales Tax --~--PropertyTax
;~--.wlJtili~ Users’Tax ---~--Transient Occupancy Tax
Note: Administration is comprised of Ciw Council Cit3.’ Manager City Attorney, CitT Auditor, Administrative
Services, and Human Resources. Chart does not show separation of Library from Community Services be~n-
ning in 2005.
City of Palo Alto 33
2008
APPENDICES
GENERAL FUND OPERATING
EXPENDITURES
General Fund operating expendi-
tures are also shown in both nomi-
nal dollars (not adjusted for infla-
tion) and constant dollars (adjusted
for inflation). The largest percentage
of total expenditures has been de-
voted to public safety. Also, expen-
ditures for administration peaked in
2001 and have since decreased sig-
nificantly.
$50,000
General Fund Operating Expenditures:
Last 10 Years in Nominal Dollars (in $000s)
$30,000
$20,000
$1o,ooo
$o
+Public Safety ~=iCSDand Library ,~ Adninistration
--x--- Public Works --)K--- Planning
$40,000
$30,000
$20,000
$10,000
General Fund Operating Expenditures:
Last 10 Years in 1998 Dollars (in $000s)
$0
~0 ~0 0 0 0 0 0 0 0CO~0 -.~1"0 GO 4~0"~Ob
+ Public Safety --~-- CSD and Library
--A-- Administration ~ Public Works+ Planning
From 2005 to 2007
From 2002 to 2007
From 1998 to 2007
1.1%
1.2%
1.2%
-1.9%
0.0%
1.2%
34 City of Palo Alto
2008
APPENDICES
CONSUMER PRICE INDEX TRENDS
Tables for U.S. and Bay Area CPI indices are presented below.
U.S. Consumer Price Index Bay Area Consumer Price Index
1997 160.3
1998 163.0 1.7°/~
1999 166.2 2.0°/~
2000 172.4 3.7°/~
2001 178.0 3.2°/~
2002 179.9 1.1°/~
2003 183.7 2.1 ~
2004 189.7 3.39
2005 194.5 2.5~
2006 202.9 4.3~
2007 208.4 2.7~
Source: U.S. Department of Labor
Bureau of Labor Statistics
June of each year
Bureau of Labor Statistics
June of each year
1997 160.0
1998 165.5 3.4%
1999 17 ! .8 3.8°/~
2000 179.1 4.2°/~
2001 190.9 6.6%
2002 193.2 1.2°/~
2003 196.3 1.6%
2004 199.0 1.4°/~
2005 201.2 1.1°/~
2006 209.1 3.9°/~
2007 216.1 3.3°/c
City of Palo Alto 35
2008
APPENDICES
CITY HOUSING UNITS AND POPULATION TRENDS
Tables for Palo Alto Housing Units and Population trends are presented here.
City of Palo Alto Housing Units City of Palo Alto Population
1997 25,625
1998 25,701
1999 25,708
2000 25,732
2001 26,048
2002 26,841
2003 26,934
2004 27,019
2005 27,522
2006 27,767
2007 27,763
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1997 57,800
1998 57,900 0.2%
1999 58,300 0.7%
2000 58,500 0.3%
2001 60,200 2.9%
2002 60,500 0.5%
2003 60,465 -0.1%
2004 60,246 -0.4%
2005 61,674 2.4%
2006 62,148 0.8%
2007 62,615 0.8%
State of California, Department of Finance
Demographic Research Unit
36 City of Palo Alto
AMERICANS WITH DISABILITIES ACT STATEMENT
In compliance with
Americans with Disabilities Act (ADA) of 1990,
this document may be provided
in other accessible formats.
For information contact:
ADA Coordinator
City of Palo Alto
285 Hamilton Avenue
(650) 329-2550
Ic@ow~eargements
Contributors
7ks Cio~ Manage~; Frank Benest,
ddministrative Services, Carl Yeats,
~t Director of Administrative Sen#ces.
Lalo Perez for their careful review and support in
preparing this document. In addition, thanks to Debra
Remlev for her conscientious administrative support.
Graphics
Printing
Sharon Bozman
Am), Javelosa-Rio
Chris Mogensen
Tarun Naravan
Philip Orr
David Rarnberg
Joe Saccio
Dale Wong
Cherie McFadden
Palo Alto Print Shop
Visit our website at: www. CityofPaloAlto. org
The City of Palo Alto is located in northern Santa Clara County,
approximately 3S miles south of the City of San Francisco and 12 miles north of the
City of San Jose. Spanish explorers named the area for the tall, twin-trunked
redwood tree they camped beneath in 1 769. Palo Alto incorporated in 1894
and the State of California granted its first charter in 1909.
~30% post-consumer recycled
CITY OF PALO ALTO
250 HAMILTON AVE
PALO ALTO, CA 9430 1
www.cityofpaloalto.org
Phone:650-329-2100 Fax : 650-325-502S