HomeMy WebLinkAboutStaff Report 434-09TO:
ATTENTION:
FROM:
DATE:
SUBJECT:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
DECEMBER 1,2009
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 434:09
Fiscal Year 2009 General Fund Discussion and Fiscal Year 2010
Financial Results as of November 20, 2009
RECOMMENDATION
Staff recommends:
1. That the Finance Committee review and provide input on the General Fund financial
results for FY 2009 and preliminary results for FY 2010, including staffs proposed
financial plans for each ofthe two fiscal years.
2. After Finance Committee review, direct staff to present this report to the full Council in
January 2010.
BACKGROUND
Staff is providing the 2009 fiscal year-end financial results for the General Fund (GF) earlier
than usual due to the severe downturn in the economy and the impacts it has caused to the City's
financial position. Because of a higher than anticipated budget gap in Fiscal Year (FY) 2009,
staff is presenting year-end results in this report and will provide the final audited financial
statements to the Finance Committee December 15.
Looking at the current fiscal year, the continuing economic downturn requires revisiting revenue
and expense performance and potential options to close a higher than expected year-end budget
gap. In the FY 2010 budget process, a $10 million General Fund deficit was identified. This gap
was closed with a three pronged approach that relied on one-time reductions, program cuts, and
reductions in employee benefits and salaries. The latter was achieved through reductions in
benefits to SEIU and management employees and a postponement of a police union salary
increase. Unfortunately, these reductions of approximately $10 million have proven insufficient
to stem the tide of declining revenues and the City is facing an additional $5.4 million deficit.
This deficit could continue to grow if revenues do not remain stable in the second half of this
fiscal year.
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The City of Palo Alto is not alone in facing this disturbing situation. The cities of San Francisco
and Oakland have already pared their budget several times and are likely to face additional future
drops in property taxes. Jurisdictions up and down the Peninsula are facing fluid, if disruptive
revenue environments in which multiple budget adjustments are needed. Moreover, the size and
nature of the revenue shortfalls, such as shifts in consumer spending patterns, likely require long-
term structural expense changes. An updated Long Range Financial Forecast (Attachment A) is
provided to show the projected deficits the City faces in FY 20 I 0 and beyond.
DISCUSSION
Fiscal Year 2009 General Fund Results
The drop in key revenue sources in FY 2009 required midyear budget adjustments to GF
revenues and expenditures. Early in the year, staff estimated the FY 2009 budget deficit to be $8
million and a plan was implemented to close this gap. The adjustments made to revenues at
midyear were close to projections. Unfortunately, however, the adjusted expense budget
underestimated expenditures at year end and resulted in a GF deficit of $4.8 million (in addition
to the $8 million projection). This additional shortfall was mentioned briefly during the October
5, 2009 Council meeting, but since staff did not have the specific data reviewed by the outside
auditor at that time, it has not been discussed in detail until this report. The components of the
shortfall are outlined in the following table and explained below.
Table 1
FY 2009 General Fund Deficit Summary
Salaries ($2,100,000)
Overtime
Police ($ 650,000)
Fire ($ 250,000)
Benefits ($1,800,000)
Total ($4,800,000)
Salaries
The salary line item was over budget due to a miscalculation in the amount of expected salary
savings. The adopted operating budget includes an annual factor for salary savings. These
savings result from 1) an expected vacancy rate or the number of positions that are not filled at
any given time throughout the fiscal year; and 2) a salary expense "cushion" resulting from
salaries being budgeted at the top step compared to actual salaries that are, for many employees
lower (e.g., new hires). During the midyear budget process, staff included a second round of
salary savings that did not materialize. The miscalculation was not recognized in time to make
additional expense adjustments. Staffhas implemented monthly variance reports, as well as other
controls, to avoid such occurrences in the future.
CMR:434:09 Page 2 of 13
Overtime
Overtime costs in the Police and Fire departments exceed the budget every year due to vacancies,
disabilities, minimum staffing requirements, and staffing of Station 8 for fire protection in the
summer and emergencies. In a typical year, these overages are covered by salary savings
citywide or in the public safety departments. With the salary savings factor overestimated,
however, the savings were not there to absorb the overtime excess. Therefore, the $900,000 in
excess overtime for these two departments contributed to the FY 2009 deficit. It should be noted
that Stanford University reimburses 30.3 percent of all operating expenditures including
overtime and the State of California provided reimbursements for Fire Strike Team activities.
The $900,000 is not offset by these reimbursements. The City will receive these reimbursements
in FY 2011.
Benefits
The City has a General Benefit Fund (GBF) from which it pays its benefit expenses such as
medical and workers compensation costs. This fund, like other Internal Service Funds (e.g.,
Technology, Vehicle), typically carries a positive balance in the form of retained earnings which
covers operations and project or capital needs. In the past, the balance in retained earnings in the
General Benefits Fund helped cushion against year-end benefit expense adjustments.
Specifically, workers compensation and general liability costs, which reflect yearend actuarial
adjustments (based on incurred but not reported expenditures) can fluctuate considerably but are
not known until year end as they are based on the volume and severity of claims. In most years,
the GBF and the Fund's retained earnings are sufficient to cover unexpected liabilities as well as
any overages in other benefit categories such as medical premium expenses.
Anticipating that retained earnings in the GBF were sufficient to cover benefit expenses in FY
2009, General Fund benefit expenses were held constant from FY 2008 to FY 2009. This
practice has been implemented in past budget years in an effort to keep a reasonable balance
between retained earnings balances in the GBF and what expenses are budgeted in and allocated
to GF departments each year. Disappointingly, benefit expenses at the end of FY 2009 carne in
$1.8 million over budget due to higher than anticipated claims.
Establishing an annual budget depends on a number of variables that can be difficult to predict
and are subject to change. In high performing years, the City has enjoyed considerable cushion
in its budget that has allowed midyear adjustments with negligible impact on the bottom line. In
times of sustained economic downturn, cushions such as higher than anticipated revenues, are no
longer present. Margins that are extremely tight due to falling revenues, low Internal Service
Fund reserve balances, and prior expense reductions have become tighter and more difficult to
maintain. Of the $4.8 million FY 2009 deficit shown in Table 1, only the $2.1 million in
underestimated salary expenses could have been foreseen at midyear (midyear report was
presented to the Finance Committee on March 10) and later. The remaining expenditures, on the
other hand, are finalized at year-end and thus sufficient data is not available for earlier
adjustments.
CMR:434:09 Page 3 of 13
Budget Balancing Plan for Fiscal Year 2009
In order to solve the $4.8 million deficit for FY 2009, staff proposes postponing a budgeted $4.8
million transfer to the Technology Fund. This will have the effect of lowering GF expense and
eliminating the General Fund deficit. This one-time deferral will reduce the Technology Fund's
retained earnings to $51,000 net of encumbrances and re-appropriations. The $4.8 million
transfer will result in planned technology projects such as radio infrastructure improvements and
library RFID implementation being delayed. In addition, technology infrastructure replacement
schedules will need to be revisited and adjusted accordingly. As a consequence of this action,
the Technology Fund is at an exceptionally low balance and will need to be replenished via
future transfers from the GF so as to not severely impact technology operations. Currently,
repayment over a four year period is being contemplated. The only other immediately available
option to solve the deficit would be to draw down the General Fund Budget Stabilization
Reserve, but since the City is experiencing extremely volatile economic conditions which have
implications for FY 2010 a reserve drawdown in FY 2009 is not recommended.
Fiscal Year 2010 Financial Results To Date
On September 8 and October 5 (CMR: 394:09 and CMR 358:09 in Attachment B), staff
informed Council of potential further deterioration in General Fund revenues and the possible
need for budget adjustments in excess of the $10 million in reductions already incorporated in
the Adopted FY 2010 Budget. Due to the extended recession, City revenues will fall
significantly below budget in FY 2010. Since FY 2008, sales, transient occupancy,
documentary, and interest income have fallen by a combined $8.2 million. In addition, permit,
golf course fee, and traffic fine revenue also have dropped by $1.1 million since FY 2008 due to
the economic environment. Cumulatively, this represents a $9.3 million downward swing in GF
resources over two years and it has caused an additional budget deficit for FY 2010 which is
estimated now at $5.4 million. Attachment C shows the performance of revenues through
November 20, 2009 relative to the budget. Due to the timing of payments (e.g., sales and
property taxes) and seasonal factors, these results must be viewed cautiously.
Revenue Performance in FY 2010
Sales Tax
Sales Tax revenue is the General Fund's third highest revenue equaling 14 percent of its
resources. In recent years sales tax has become a highly volatile and fragile source of City
income. Whereas FY 2008 actual revenues were $22.6 million; it now appears the City will
realize $17.7 million in FY 2010. This represents a $5 million or 22 percent decline in a very
short period oftime. To place it in perspective, this $5 million drop equals 77% of the FY 2010
Library budget.
The projected $17.7 million in sales tax revenue is $2.0 million below the FY 2010 Adopted
Budget. The primary cause for the decline is economic and the secondary cause is a dramatic
decrease in the amount remitted by the State in its semi-annual "triple flip" payments for FY
2010. With the exception of one economic segment (electronic equipment), all sales tax
segments autos, department stores, miscellaneous retail, furniture/appliance had dreadful
results in the second quarter. In fact, all of these areas had the lowest "benchmark year"
performance in this quarter compared to 8 prior "benchmark year" quarters (a benchmark year is
the current quarter reporting period plus the prior 3 quarters). New auto sales fell to $1.1 million
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compared to $1.8 million in the second quarter of 2007. For the same periods, department store
sales have fallen from $2.7 million to $2.2 million, while miscellaneous retail sales dropped from
$1.9 million to $1.5 million. Even the normally resilient restaurant sector has turned downward.
The City's outside sales tax consultant believes that sales taxes may fall as much as 15 percent in
the upcoming third quarter compared to the prior third quarter. This would be consistent with
the prior 2 quarters and would not bode well for the critical fourth quarter holiday sales season.
Furthermore, on October 14, the State notified jurisdictions of lower "triple flip" payments.
Whereas the State advanced the City $5.7 million in FY 2009, in FY 2010 its payment dropped
to $4.3 million, a 24.6 percent reduction. While there is a solid rationale for reducing the City's
"triple flip" payment given the economy and statewide sales tax receipts dropping by 20.8% in
the second quarter, the State seems to have underestimated what the City will realize in sales
taxes at year end by around $0.4 million. The State eventually will reconcile its payments to
actual results for FY 2010, but not until the following fiscal year.
In contrast, the State's "triple flip" payment to the City for FY 2009 was higher than justified by
actual results. Since the State reconciles its payments to actual results in the following fiscal
year, consequently the "true up" for FY 2009 will result in a $0.8 million reduction in payment
for FY 2010. By adopting the "triple flip" payment system to solve its budget dilemmas, the
State has further complicated sales tax projections.
Transient Occupancy Tax (TOT)
City TOT revenues have been soft. Revenues from January through June 2009 were 29 percent
below those of the prior year. In July 2009, revenues were below July 2008 by 21.3 percent.
The Senior Games did have a salutary impact in that August revenues were only 8.7 percent
below the previous August; but September's results resumed this sector's weak trend line being
21 percent below September 2008. Based on performance to date, a downward adjustment of
around $0.2 million will be recommended at midyear.
Investment Income
With the Federal Open Market Committee (FOMC) keeping interest rates low for a longer than
expected period, the City's interest income has declined. Although short-term interest rates on
Treasury instruments are close to zero percent, the City is earning nearly 4 percent on its
portfolio. This rate of return is a consequence of earlier, long-term investments that have not yet
matured. This rate will decrease and staff believes a downward adjustment in income of $0.2
million is necessary.
Property and Documentary Transfer Taxes
Property taxes are tracking close to budget and are expected to be on target at year end. Despite
a weak housing market, property values in Palo Alto have remained relatively stable. There are
indications from the County, however, that a large number of commercial properties throughout
the County are filing for reassessments which will lower future property tax receipts. No hard
numbers are available at this time, but an impact on this revenue category can be expected in the
next few years.
Although the transfer tax has fallen from $5.4 million in FY 2008 to $3.1 million in FY 2009,
receipts from July through October are only slightly lower compared to the same period of the
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prior year. This may indicate that the bottom of this revenue source has been reached and will
hold steady until year end. At this time, the budget of $2.8 million in FY 2010 for the transfer
tax appears realistic and will likely be increased to $2.9 million at midyear.
Utility Users Tax
Results to date indicate the telephone tax will exceed estimates, while utility related revenues
will be lower than anticipated. The net result is that this revenue source will likely be adjusted
upward at midyear by around $0.2 million.
Parking Violation Revenue
The City has collected $0.4 million or 20 percent of the $2.0 million budgeted in Parking
Violations to date. The number of first quarter citations issued is 29 percent lower than previous
first quarter results, while, due to a decline in downtown occupancy and the slowdown of retail
spending, the number of vehicles monitored has decreased 16 percent. Based on the 16 percent
checked for compliance, year end Parking Violation revenue is projected to be $1.5 million, or
$0.5 million short of budget. Staff will be reevaluating the cost recovery levels of the program
and make recommendations to balance revenues and expenses.
Permits
Permit processing has declined approximately 14 percent or $0.6 million. Although the
valuation of projects submitted for permit issuance is higher than the prior year, stricter lending
qualifications and conservative spending practices have lengthened the time applicants require to
finalize their projects. While some permit fees are collected at the beginning, most are
recognized when the permit is finally issued. Projects that do not go to completion do not pay
the costs of processing their permits part way. This collection system should be reevaluated to
ensure that the program is covering its costs throughout the permit process.
Plan Checking Fees
Fees for the processing of applications have declined approximately 14 percent due to the
recession. This line item is expected to be decreased at midyear by $0.3 million.
Golf Course Revenue
The economic environment has affected the number of golf rounds played in Palo Alto and
throughout the industry. The projection for FY 2010 of 76,000 rounds at the course is being
revised downward to 72,000 rounds, thus reducing revenues by an estimated $0.2 million. CSD
is examining ways to keep the golf course competitive with other nearby municipal golf courses.
It will be important to develop a long-term plan for the golf course (which is in need of
additional maintenance and upgrades) given the significant drop in rounds and as the associated
costs of running and maintaining the course continue to increase. It is important to note that the
Golf Course suffered a $0.3 million loss in FY 2009. Staff will return during the fiscal year with
further recommendations on how to address the golf course deficits and a long-term plan.
Class Registration Fees
The Community Services Department (CSD) experienced a 6 percent decline in program and
camp registrations this summer, demonstrating that the recession has had an impact on class and
program activity. CSD fee revenue will be adjusted downward at midyear by approximately
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$0.4 million. The department is working with class producers to look at new programs and
revamp old ones by using evaluation information from participants. CSD will look at new
methods of marketing (including banners through the city, school flyers and e-mail blasts from
Friends groups).
Cost recovery levels will need to be reviewed and difficult policy decisions made regarding
programs that may not be recovering their costs or are being duplicated by surrounding
competition. The City is likely at a point where it will no longer be able to sustain the number of
Community Services programs offered, and a prioritization of programs will be needed with
input from all stakeholders.
Other Revenues
This revenue source includes facility rentals, special events fees, and other miscellaneous
revenues. It will be decreased by approximately $0.3 million, due to an economy related
decrease in demand for these services.
Attachment D shows, in considerable detail, GF revisions to revenue projections for FY 2010
and FY 2011 based on the discussion above.
Expense Performance in FY 2010
With the exception of overtime, regular salary expenses are in line with their budgeted levels.
This is supported by the discussion below on the salary savings expected in FY 2010 due to
vacancies. These savings represent one of the proposed steps for solving the expected year-end
deficit.
Overtime Expenditures Compared to Adjusted Budget
General Fund Overtime Analysis:
The following chart shows total overtime expenditures reaching 73 percent of the adjusted
budget on a citywide basis while straight line usage would indicate 39 percent usage through
November 20. The table below shows that Fire, Police, and Public Works Departments are the
principal departments exceeding their budget.
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Table 2: FY 2010 General Fund Overtime As of November 20
CITY OF PALO ALTO
FISCAL YEAR 2010 MIDYEAR FINANCIAL REPORT
AS OF NOVEMBER 20, 2009
GENERAL FUND OVERTIME
(in thousands of dollars)
I Adopted I Adjusted % of
Categories Budget Budget Actual Adj Budget
City Attorney
City Auditor
City Clerk 7 7
City Council
City Manager 3 3
Administrative Services 45 45 12 27%
Community Services 105 105 42 40%
Library 58 58 22 38%
Fire 1,018 1,018 1,041 102%
Human Resources 4 4
Planning and Community Environment 67 67 18 27%
Police 1,000 1,000 568 57%
Public Works 113 113 75 66%
Total Overtime 2,420 2,4201 1,7781 73%
• The Fire Department has used 102 percent of its annual overtime budget through
November 20, 2009. This is due to Station #8 staffing ($0.2 million) and Medic-l
staffing ($0.1 million), with the remaining amount of $0.7 million resulting from backfill
for minimum staffing requirements due to sick leave, vacations, and workers'
compensation light duty assignments.
• The Police Department's has used 57 percent of its annual overtime budget. The
customary work of busy shifts, case writing, investigations, and court appearances on off
days as well as an increase in the 9-1-1 dispatch center as more senior Police Dispatchers
train newer employees are the cause of Police exceeding budget to date. Traffic control
services at Stanford football games and other events are partially offset by
reimbursements from the university and organizations.
• The Public Works department has used 66 percent of its overtime budget. The
department has had limited staffing in custodial and maintenance areas and has used
overtime to maintain minimum service levels. The department is currently using limited
hourly personnel to assist with custodial and maintenance services. Overtime costs are
expected to rise further as the temporary salary budget is exhausted. This department's
OT budget is small in comparison to the Fire and Police departments.
CMR:434:09 Page 8 of 13
For historical and more detailed information on public safety overtime costs see Attachment E.
Budget Balancing Plan for Fiscal Year 2010
Although department expense budgets, as a whole, are within their expected target range, the
dramatic fall in revenues requires immediate action to achieve a balanced budget. The following
table shows the revenue adjustments discussed above and the actions recommended to close the
expected $5.4 million gap. These actions are explained below.
Table 3: FY 2010 Proposed Budget Balancing Plan
Revenue Impacts -OOOs-
Sales Taxes -2,005
Parking Violations -460
Fees/Permits -1,551
Return on Investments -238
Other Revenue -186
Increases in Specific Revenues 144
Total Revenue Impacts -4,296
Expense Impact -1,131
Total GF Impact -5,427 i
Expense Offsets -Proposed
Salary savings -hiring freeze 1,500
Public Safety Building 2,700
Budget Stabilization Reserve 1,2
Repayment of the IT Loan -1,225
Non-Salary Savings 1,000
$3 Million Solution Salary and Benefit
Gap to Offset 173
Total Proposed Offsets 5,427
Net Change 0
Salary Savings
Staff is now monitoring salary savings due to vacant positions on a monthly basis. The General
Fund's has 622.51 Full-Time Equivalents (FTE) of which there are currently 45 vacant FTE.
Should the City maintain this vacancy rate, an estimated $4.1 million in savings can be realized
by year end. Of the 45 FTE, however, 10 positions are considered critical for public health and
safety and operations will be filled. This will reduce the vacancy savings by approximately $1.0
million. In addition and because of overtime costs annually exceeding budget, anticipated salary
CMR:434:09 Page 9 of 13
savings must be further reduced by $1.6 million. The net anticipated vacancy or salary savings
at year end is anticipated to equal $1.5 million at year end. Attachment F shows these savings by
department.
Public Safety Building
It is proposed that the remaining encumbrance for the public safety building capital project be
reduced by $2.7 million. These funds were designated for completing design work and since this
project has been postponed and there is no land currently identified for the building, it is
recommended they be returned to the original source of funding the General Fund's Budget
Stabilization Reserve. This project will then retain $0.3 million to allow for evaluation of
alternative facilities.
Budget Stabilization Reserve
The extraordinary economic conditions, precipitous fall in revenues, and time required for
implementing further expense reductions, cause staff to reluctantly recommend a one-time draw
on the General Fund Budget Stabilization Reserve (BSR) of $1.3 million. With the City's
participation in the California Securitization Program (CMR 413 :09), the $2.5 million property
tax "loan" by the State (cited in CMR: 394:09) that would have required a draw on the Budget
Stabilization Reserve has been neutralized. The City will now receive bond proceeds through
the Program at the time property taxes are deducted from the State, thereby keeping the GF
whole.
The one-time $1.3 million drawdown will reduce the BSR to $24.6 million or 17.4 percent of
budgeted expenditures. City policy requires that the BSR remain at a minimum of 15% of
expenditures. If the reserve falls below this level the policy will need to be amended or an
exception will need to be approved by the Council. Having a healthy level of reserves is critical
for emergencies or severe economic dislocations such as the one we are enduring. Therefore, it
is appropriate to use it in FY 2010. In future years, however, additional expenditure reductions
or revenue enhancements will be required to avoid drawing down the BSR below required
minimum levels (see Attachment A -the Long Range Financial Forecast).
Additional FY 2010 Budget Reductions and Expenses
To minimize the draw on the BSR, staff will attempt this fiscal year to find $1.2 million in non-
salary and other savings. Contracts, travel and training, and materials and services will be
scrutinized to achieve this before year end. Staff had hoped to find such savings in FY 2009 (to
offset the $1.131 million expense impact cited in Table 3 above), but was unable to identify
them. Without these reductions, an additional draw on the BSR may be needed. This will be a
challenging but necessary exercise to close the anticipated gap.
Because of the $4.8 million drawdown on the Technology Fund in FY 2009, it is important to
replenish the Technology Fund. To do so requires a $1.2 million annual payback over four
years. This payment is reflected in the Table 3 above.
FY 2010 and Future Fiscal Year Challenges
Although staff believes that if all of the above budget solutions are implemented and revenues do
not further decline, a balanced budget would result at year end, the tenuousness of the economy
and uncontrollable expenses such as general liability losses and workers compensation could
CMR:434:09 Page 10 of 13
further adversely impact the budget. The City has already made repeated and painful expense
reductions to balance its budget beginning with the dot.com bust and earlier and there are only
more painful reductions left. Meanwhile, the City faces sizeable, new expense challenges.
The Long Range Financial Forecast (LRFF) presented to Council on October 5, 2009 (CMR:
394:09) has been updated based on recent revenue and expense data. The Net Operating Surplus
(Deficit) line in the forecast for FY 2010 shows a deficit of $5.4 million in FY 2010. Below this
line are the recommended solutions (discussed above) to solve the projected deficit. Even with
the solutions proposed for FY 2010, the General Fund still shows continuing Net Operating
Deficits in Fiscal Years 2011 through 2020.
Compounding these deficits are additional costs and liabilities the City will face in the near
future. These "below the line" liabilities and costs cause the City's deficit to equal $5.6 million
in FY 2011 and to grow considerably until 2020. These include:
1) CalPERS will increase retirement contributions from participating jurisdictions starting in
FY 2012 due to significant losses in its investment portfolio. The City of Palo Alto
estimated increases will rise from an additional $1.0 million in FY 2012 to $5.4 million
inFY 2015.
2) The annual contribution towards the citywide employee retiree medical liability will rise
by $1.4 million per year with the General Fund's share at $0.7 million
3) The new library and community center expansions and rehabilitations require
approximately $1.0 million in incremental annual operating expenses beginning in FY
2013.
4) The current rate of funding from the General Fund and Infrastructure Reserve, which is
around $9 million per year, is about $6 million less than what is required to fund the $302
million infrastructure backlog or liability. Moreover, the Infrastructure Reserve balance
currently stands at $6.4 million and is expected to decline to $2.7 million in FY 2011.
New revenues or a reallocation of expenses are necessary to fund needed infrastructure
work.
Offsetting these deficits, but not included in the LRFF, are the savings from certain benefit
changes implemented for SEIU and management employees. These include a second tier
retirement plan (2 percent at 60) for new employees and an employee contribution to medical
expenses that is to take effect in FY 2011. Similarly, the City will need to seek salary and
benefit savings from Fire and Police whose costs represent 39 percent of the GF's budget.
It should be noted that the CalPERS Board recently adopted a plan to share excess reserves in the
preferred provider organization health plan with local agencies by providing a two month
"premium holiday." This results in a savings to the General Benefit Fund of approximately $0.7
million citywide in FY 2010. Given the minimal balance in the GBF, staff proposes that these
savings be used to bolster the Fund's balance in preparation for any year end unanticipated
liability expenses.
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The recommendations to balance the FY 2010 budget primarily consist of one-time adjustments
(e.g. draw on reserves, vacancy savings) to get us through the current fiscal year. During this
time, the Council, community, and staff will need to address the long-term deficits the City
faces. In addition to further contributions by employees, expense reductions will be necessary
and must involve prioritizing City programs. Also, additional revenues must be explored.
During the FY 2010 budgeting process, the Finance Committee discussed what has come to be
known as "Tier Two" reductions (Attachment G). These reductions were placed in abeyance
until such time as a clearer revenue picture emerged in FY 2010 and need now to be revisited. In
addition, and because of the magnitude of the City's financial challenges, a list of near, medium,
and long-term alternatives are presented to foster further discussion of how to balance the
General Fund's budget (Attachment H). It is important to note that many of these options have
significant policy ramifications and/or legal or other obstacles. They are being introduced at this
time, however, as examples of issues to discuss and with the expectation that they will generate
other related solutions. The Executive Leadership Team (EL T) has scheduled a retreat to take a
comprehensive look at these initial recommendations and it is expected that this list will undergo
further refinement before it is presented to the full Council.
ELT will examine the best practices identified in a recent League of California Cities publication
("Municipal Fiscal-Health Contingency Planning," Western City, pp. 18-23) to plan for the
difficult cost reduction process ahead and for proposals to Council. General strategies
recommended include, for example:
o Proposing reductions that reflect the fewest service impacts to the community
o Describe service impacts and make process transparent to all involved parties
o Crafting operating expenditure reductions that are real and feasible
o Reductions must be ongoing and net of any related revenues, fees or grants
o Maintain essential facilities, infrastructure and equipment at reasonable levels
Once EL T develops a process and identifies possible reductions, staff will propose these to
Council.
Conclusion
Critical revenues sources have declined by a total of $9.3 million since FY 2008. The recovery
in these revenues is expected to take multiple years, and it is entirely possible that some revenue
sources never regain the levels reached in peak years. Beginning in FY 2010 the City has taken
proactive measures to begin paring back its expenses. By establishing a two-tier retirement
structure and requiring employees to contribute to medical expenses (still to be negotiated with
Fire and Police unions), the City has taken a major step toward addressing its unsustainable
expense structure. But there is considerable work ahead. Even with the current year deficit
closed, expenses will outpace revenues in each future year. The City must decide how to cut
those expenses back -which programs and services are lowest priority. This is likely a multi-
year process.
CMR:434:09 Page 12 of 13
RESOURCE IMPACT
The discussion in this report and the financial results depicted in the LRFF indicate impacts to
the City's General Fund.
ENVIRONMENTAL REVIEW
This is not a project for the purposes of the California Environmental Quality Act.
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROV AL:
ATTACHMENTS
DA VrD RAMBERG
Assistant Director of Administrative Services
~
LALOPEREZ
Director of Administrative Services
JAMES KEENE
City Manager
Attachment A: Long Range Financial Forecast
Attachment B: CMR:394:09 Fiscal Year 2010 Budget Update
CMR:358:09 Review of Preliminary FY 2009 Revenue Analysis
Attachment C: Fiscal Year 2010 General Fund Financial Report as of November 20
Attachment D: General Fund Revenue Changes for FY 2010 and 2011
Attachment E: Police and Fire Departments Public Safety Overtime Analysis for Fiscal Years
2005 through 2009, with Fiscal Year 2010 Data through November 20,2009
Attachment F: FY 2010 Salary Savings by Department
Attachment G: Tier 2 Reductions
Attachment H: Budget Reduction Options
CMR:434:09 Page 13 of 13
CITY OF PALO ALTO LONG RANGE FINANCIAL FORECAST General Fund ($000)
Attachment A
LONG RANGE FINANCIAL FORECAST MODEL 2009 ($000)
FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2011 FY 2018 FY 2019 FY 2020
Adopted Projected
Actual Budget Budget
I Revenues
Sales Taxes $ 20,089 $ 19,650 $ 17,645 $ 17,982 $ 18,430 $ 18,983 $ 19,647 $ 20,434 $ 21,200 $ 21.941 $ 22,599 $ 23,051 $ 23,588
Property Taxes 2 44 25 752 25 778 26 379 27 325 28 379 29 689 1 1 6 32 73 34 36 36 B79 5, 5 , 3,3 5 ,337 35,9 ,804 37,
Utility User Tax 11,030 11,2SO 11.417 12,513 13,156 13,676 13,973 14,703 15,486 16,328 17,200 18,071 18,966
T ransienl Occupancy Tax 7,111 7,000 6,8SO 6,987 7,140 7,344 7,656 8,019 8,420 8,799 9,085 9,344 9,631
other Taxes, Fines & Penalties 5,440 5,633 5,274 5,390 5,510 5,656 5,828 6,016 6,181 6,336 6,418 6,484 6,592
Subtotal: Taxes 69,115 69,285 66,964 69,251 11,561 74,038 76,793 80,308 84,028 81,143 91,238 93,754 96,656
: Service Fees & Permits 16,210 17,437 15,814 16,576 17,800 18,133 18,661 19,397 20,162 20,958 21,784 22,719 23,690
Joint Se!Vice Agreements 7,796 7,857 7,857 8,166 8,529 8,940 9,356 9,818 10,306 10,820 11,360 11,932 12,533
(Stenford University)
Interest Earnings 2,008 1,900 1,662 1,646 1,676 1,724 1,765 1,652 1,923 2,002 2,053 2,095 2,163
Other revenues 17,246 15,352 15,235 15,484 15,764 13,977 14,330 14,695 15,070 15,456 15,854 16,264 16,686
Reimbursements from other Funds 11,483 10,643 10,644 10,799 11,078 11,392 11,785 12,260 12,755 13,274 13,815 14,382 14,930
Total Revenues 123,858 122,474 118,176 121,922 126,408 128,204 132,710 138,330 144,244 150,253 156,104 161,146 166,658
T ranslers from Other Funds 17,614 19,664 19,664 18,709 19,192 19,735 20,417 21,239 22,097 22,995 23,933 24,915 25,865
TOTAL SOURCE OF FUNDS 141,472 142,138 131,840 140,631 145,600 147,939 153,127 159,569 166,341 173,248 180,037 186,061 192,523
Expenditures
Base Salaries 62,104 63,512 63,512 64,007 66,074 67,309 69,271 72,002 74,841 77,792 80,860 84,049 87,365
Salary & Benefit Reductions to be Negotiated I" (3,000)
PAPOA Salary Increase Deferral ,tI (794)
Negotiated Savings from SEIU (1.222) (1,222) (1.246) (1.271) (1,310) (1,362) (1,416) (1,473) (1,632) (1,593) (1,657)
Negotiated Savings from Mgmt.IProl. (806) (806) (822) (839) (864) (898) (934) (972) (1,010) (1.051) (1,093)
Benefits 29,477 32,205 32,205 32,935 34,713 36.772 38,715 40,769 42,943 46,243 47.668 SO,245 52,963
Subtotal: Salaries and Benefits 91,581 92,717 92,895 94,914 98,718 101,911 105,813 110,511 115,433 120,590 125,986 131,650 137,578
Contract Services 10.100 9,076 10,076 9,804 9,951 10,120 10,373 10,684 11,005 11.335 11,675 12,025 12,386
Supplies & Materials 3,023 3,547 3,547 3,480 3,632 3,592 3,682 3,793 3,906 4,023 4,144 4,269 4,397
General Expense 9,008 10,193 10,193 9,870 10,121 10,385 10,681 11,002 11,330 11,670 12,020 12,381 12,665
Rents, Leases, & Equipment 1,014 1,212 1,212 1,213 1,231 1,252 1,283 1,322 1,362 1.402 1,445 1,488 1,532
Allocated Expenses 10,287 14,316 14,316 14,613 14,832 15,084 15,462 15,925 16,403 16,895 17,402 17,924 18.462
Total Expenditures 125,013 131,061 132,239 133,894 138,386 142,405 147,294 153,237 159,440 165,917 172,672 179,731 181,020
Transfers to Other Funds
GF transfer lOr Infrastructure t;IP 10,397 6,180 6,180 8,501 8,844 9,211 9,604 10,024 10,474 10,955 11,470 12,021 12,610
GF transfer for Olller capital projects 4,251 3,720 3,720 1,747 1,636 1,685 1,735 1,786 1,838 1,892 1,947 2,003 2,063
Debt Service 1,082 1,086 1,086 1,080 929 752 749 754 751 753 752 754 234
Other 84 42 42 42 44 46 47 49 51 51 51 51 51
TOTAL USE OF FUNDS 140,827 142,089 143,267 145,263 149,839 154,098 159,429 165,850 172,554 179,568 186,892 194,566 201,979
~rpIUs/(DeflCit) 645 49 (5,427) (4,632) (4,239) (6,159) (6,302) (6,281) (6,213) (6.3201 (6,855) (8,505) (9,456)
Additional Retirement COntribution Increase ,., (l,031) (2,774) (4,963) (5,389) (5,756) (6,140) (6,542) (6,963) (6,963)
Retiree Medical Cost Increase (735) (735) (735) (735) (735) (735) , (735) (735) (735) (735)
Library Operating Cost Increase (2SO) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000)
Infrastructure Contribution Increase (1,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000)
Technology Fund Repayment (1.225) (1,225) (1,225) (1,225)
Public Safety Bldg, Budget Savings 2,700
Non-salary Reductions to be Determined 1,000
Salary & Benefit Reductions to be Negotiated 173 967 986 1,006 1,036 1,078 1,121 1,166 1,212 1,261 1,311
Vacant Positions Salary Savings 1,SOO
Drawdown on Budget Stabilizalion Reserve 1,279
Subtotal -Other Activities --5,421 (993) (3,255) (6,728) (1,662) (8,046) (8,370) (8,709)
GRAND NET SURPLUS (DEFICIT) $ 645 $ 49 $ 0 $ (5,625) $ (1,493) $ (12,887) $ (13,964) $ (14,327) $ (14,583) $ (15,029) $ (15,919) $ (11,942) $ (18,842)
(11 In FY 2010, $2.8 million in budgeted salary savings realized, an additional $185 thousand in savings sUll needs to be achieved
(2) Police union (PAPOAI deferred their FY 2010 negotiated salary increase of $0.8 million to FY 2011
(3) Based on cUlTllnt 2.7% @ 55 fonnula
Note: AssumpUon of no salary Increase for SEIU and MgmtlProf.ln FY 2010 and FY 2011 and no salary Increase for Firefighters (IAFF) in FY 2011
LRFP 2oo9.xlo ExhIbIts 1-3 wlIh IR 11/25/20098.21 AM
I
Attachment A
CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES
FY 2009 FY 2010 AS FY 2010 PB FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
% % % % % % % % %
% Change 'k Change % Change Change Change Change Change Change Change Change Change Change % Change
Revenues
Sales Taxes
Property Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Eannings
Other revenues
Reimbursements from Other Funds
Total Revenues
Transfers from Other Funds
TOTAL SOURCE OF FUNDS
Expenditures
(11.20%)
10.23%
7.24%
(10.65%)
(30.66%)
(3.79%)
(5.43%)
12.40%
(10.04%)
(4.36%)
1.32%
(2.86%)
2.24%
(2.26%)
Base Salaries j 2.77%
Salary & Benefit Reductions to Negotiated (1)
PAPOA Salary Increase Deferral 2)
Negotiated Savings from SEIU
Negotiated Savings from Mgmt./Pmf.
Benefits
Subtolal: Sataries and Benefits
Contract Services
Supplies & Materials
General Expanse
Rents, leases, & Equipment
Allocated Expanses
Tolal Expenditures
Transfers to Other Funds
GF transfer for Infrastructure (;IP
projects
Debt Service
Other
TOTAL USE OF FUNDS
(4.54%)
0.30%
7.37%
(0,10%)
(1.83%)
(10.58%)
(30.39%)
(43.21%)
46.73%
(9.96%)
(0.01%)
115.38%
(39.58%)
(2.19%) (12.17%)
1.21% 1.31%
1.99'10 3.51%
(1.56%) (3.67%)
3.55% (3.05%)
0.25% (3.11%)
7.57% (2.44%)
0.76% 0.78%
1.91% 2.49%
2.33% 3.59%
9.60% 5.14%
2.00% 2.19%
2.20% 2.23%
3.42% 3.34%
4.82% 7.38%
3.93% 4.45%
3.00%
3.86%
3.95%
2.86%
2.65%
3.46%
1.87%
4.82%
(5.38%)
(10.98%)
(7.32%)
(17.23%) (0.96%) 1.82% 2.86%
1.81% (11.34%)
2.58% 2.83%
(11.66%) 1.63%
(7.31%) 1.46%
3.50% 4.01%
4.62% 4.87%
2.17% 5.22%
4.25% 4,74%
3.04% 3.23%
3.72% 4.58%
2.91% 3.94%
4.65% 4.94%
3.54%
2.53%
3.45%
3.75%
2.55%
4.03%
3.75% 3.50%
5.14% 4.89%
5.33% 5.44%
5.00% 4.50%
2.84% 2.44%
4.63% 4A2%
3.94% 3.95%
4.97% 4.99%
3.83%
2.55%
4.04%
4.11%
2.56%
4.07%
3.00%
4.66%
5.34%
3.25%
1.26%
3.98%
3.94%
4.99%
2.55%
2.56%
4.08%
2.00%
2.42%
5.06%
2.85%
1.03%
2.76%
4.29%
5.04%
2.05%
2.59%
4.10%
(1.12%) (4.59%) 3.17% 3.68% 1.42% 3.51% 4.23% 4.28% 4.17% 3.89% 3.23%
11.64% 11.64% (4.86%) 2.58% 2.83% 3.46% 4.03% 4.04% 4.06% 4.08% 4.10%
0.47% (2.57%) 2.02% 3.53% 1.61'. 3.51% 4.21% 4.24% 4.15% 3.92% 3.35%
2.27% 0.99% 2.06% 3.23% 1.87'i'. 2.91% 3.94% 3.94% 3.94% 3.94% 3.94%
NIA NIA
9.25%
1.24%
(10.14%)
17.33%
13.15%
19.53%
39.17%
4.84%
(40.56%)
(12.49%)
0.38%
(50,00%)
0.90',
NIA
NIA
NIA
9.25% 2.27'i', 5.40% 5.93% 5.28% 5.31% 5.33% 5.36% 5.36% 5.41'1'.
1.43% 2.17% 4.01%
(0.24%) (2.70%) 1.50%
17.33% (1.89%) 1.50%
13.15% (3.17%) 2.55%
19.49% 0.12% 1.50%
39.17% 2.07% 1.50%
3.290/. 3.77', 4.44% 4.45% 4.47%
1.70% 2.50% 3.00% 3.00% 3.00%
1.70% 2.50% 3.00% 3.00% 3.00%
2.61% 2.85% 3.00% 2.99% 3.00%
1.70% 2.50% 3.00% 3.00% 3.00%
1.70% 2.50% 3.00% 3.00% 3.00%
4.47%
3.00%
3,00%
3.00%
3.00%
3.00%
4.50%
3.00%
3.00%
3.00%
3.00%
3.00%
5.78% 1.25% 3.36% 2.90% 3A3'10 4.03% 4.05% 4.06% 4.07'i', 4.09%
(40.56%)
(12.49%)
0.36%
(50.00%)
37.55%
(53.04%)
(0.54%)
0.00%
4.04%
(6.35%)
(13.99%)
4.00%
4.15% 4.26%
3.00% 2.97%
(19.07%) (0.40%)
4.00% 4.00%
4.38'1.
2.94%
0.68%
4.00%
4.48%
2.91%
(0.31%)
4.00%
4.60%
2.94%
0.15%
0.000/,
4.70%
2.91%
(0.10%)
0.00%
4.80%
2.88%
0.31%
0.00%
1.13% 1.39% 3.15% 2.84% 3.46% 4.03% 4.04% 4.06% 4.08% 4.11%
2.33%
2.92%
4.95%
3.07%
1.67%
3.10%
4.27%
5.04%
3.250/.
2.59%
3.81%
3.42%
3.81%
3.47%
3.95%
5.41%
4.50%
3.0~
3.00%
2.30%
3.00%
3.00%
4.05%
4.90%
3.00%
(69.04%)
0.00%
3.81%
LRFP 2009.xlo Exhibit. 1-3 With IR 11125/200910,18 AM
Attachment A
Reserves
adjustments
Only Increasesl{Decreases)
LRFP 2009 xis Exhibits 1-3 with IR
CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
Adopted Projected
FY2009 FY2010 FY 2010 FY 2011 FY2012 FY2013 FY2014
$ 26,102 $ 24,637 $ 24,637 $ 24,637 $ 19,012 $ 11,519 $ (1,369) $ (15,333) $ (29,660) $ (44,243) $ (59,272) $ (75,192) $ (93,134)
645 49 0 (5,625) (7,493) (12,887) (13,964) (14,327) (14,583) (15,O29) (15,919) (17,942) (18,M2)
1,581 0 0 0 0 0 0 0 0 0 0 0 0
(3,691) 0 0 0 0 0 0 0 0 0 0 0 0
17.5% 17.4% 17.2% 13.1% 7.7% (0.9%) (9.6%) (17.9%) (25.6%) (33.0%) (40.2%) (47.9%) (55.4%)
111251200910:16AM
TO: CITY COUNCIL
FROM: CITY MANAGER
DATE: OCTOBER 5, 2009
ATTACHMENTB
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 394:09
SUBJECT: Fiscal Year 2010 Budget Update
RECOMMENDATION
Staff recommends that Council review and provide input on the FY 2010 1 st Quarter Update and
structural budget issues identified in this City Manager Report (CMR).
BACKGROUND
As a consequence of the "Great Recession" and the decline in economically sensitive revenues
such as sales and transient occupancy taxes (TO,!), budget deficits were identified for FY 2009
and FY 2010. In the FY 2010 Operating Budget process, the City identified a General Fund $10
million budget gap. This projected deficit would have risen to $12 million had the City
incorporated a pay raise for management and SEm employees. Hence, the budget proposal
assumed zero increases for these groups. To solve the $10 million deficit, the City implemented
$3.7 million in savings from department and service reductions (this included the elimination of
20.3 Full Time Equivalents based on vacancies and retirements); a $1.4 million revenue
enhancement; $2.2 million in temporary reductions in transfers to the Capital Improvement and
Retiree Medical Liability Funds; and $3.0 million in employee compensation and benefit
reductions. The latter category savings was dependent on the City negotiating compensation
and/or benefit concessions from management and City unions.
The City is still in .the process of negotiating with SEIU, discussing b€mefit changes with
management, and finalizing a salary deferral with the Police union (approximately $800,000).
The Fire union has decided to take its contracted salary increase this fiscal year. The
Management and Professional Group has already made a .contribution in the variable
management compensation program (VMC) totaling $657,000 for the General Fund. The City's
latest proposal to SEIU is available on the City's website at
http://www.cityofpaloalto.org/labornegotlations
In the City Manager's FY 2010 Operating Budget transmittal letter, the possible need to revisit
deeper service cuts and savings strategies was discussed. These deeper service cuts were
described as the "Tier 2" list (Attachment C) and they included, for example: eliminating the
disaster preparedness program; eliminating the Police traffic team; and contracting out golf and
parks maintenance work. Layoffs could result with these recommendations, which the City has
CMR:394:09 Page 10f7
sought to avoid. The list was developed as a consequence of considerable uncertainty
surrounding the performance of revenues in FY 2010 due to the 'severity and length of the
recession, and the ability of the City to negotiate salary and benefit savings. With one quarter of
the fiscal year expired, it is critical for the City to reach. resolution on cost reductions in order to
allow sufficient time for changes to have an impact on the budget.
In addition to current budget issues, the Council and City management has expressed
considerable concern about ongoing, structural financial challenges that need ongoing analysis
and solutions. These range from threats to revenue streams to legacy benefit plans that, if
unchanged, will lead to unsustainable expenditure burdens and to the underfunding of already
deferred community investment needs like street repair.
DISCUSSION
This repOlt provides an update on where the General Fund stands with revenues and expenditures
compared to the FY 2010 budget; issues that"require resolution to close the $10 million gap; and
recent information that, regrettably, reinforces the factual reality that City faces systemic,
deepening revenue and expenditure gaps (structural issue) that necessitate a long-term
perspective and solution.
FY 2010 Revenues
On September 8 staff presented to the Finance Committee (Attachment A or CMR: 358:09) an
analysis of FY 2009 revenue performance and a very preliminary review of FY 2010 revenue
data. Since that time, additional, but somewhat inconclusive data on current year revenues has
arrived. Because of the seasonal and lagging nature of City revenue streams such as sales and
transient occupancy tax, it is problematic to accmateiy predict year end revenue results at this
time. Nevertheless, a read on potential trends and risks for key revenue sources is imperative.
As reported on September 8, sales tax revenues for last year, FY 2009, were -11.2 percent or
$2.5 million below the prior year. While results of $20.1 million were close to the FY 2009
Adjusted Budget and above the projection of $19.7 million for FY 2010, staff believes there is
. potential for the current year's receipts to deteriorate further. Compared to prior year quarters
sales tax revenues declined by -14.9 percent in the 4th calendar year quarter and -14.9 percent in
the 1st calendar year 'quarter (these revenues are recognized in FY 2009). The City has received
its 2nd quarter sales tax receipts (recognized in FY 2010) on an aggregate level and the r~sults'
show a -7.2 percent decline from the prior year quarter. There are, however, two receipts that
likely Wlderestimate the decline and need further research. If we factor in these two anomalies,
receipts would be -12.8 percent under the prior year quarter. The latter result is more realistic in
that the overall decline for sales taxes in Santa Clara County was a significant -23.5 percent.
Jurisdictions such as Mountain View and Sunnyvale showed -20.2 and -25.8 percent declines,
respectively.
Although the rate of decline for Palo Alto has lessened, a continuation of this trend could result
in downward adjustments at midyear ranging from $0.4 to $0.6 million. With weakened
consumer income and the possibility of a paradigm shift to lower consumption levels and higher
rates of personal saving. the third and fourth quarters are projected to be relatively weak.
Heavily reliant on retail sales, as California cities are, especially in the auto and department store
CMR:394;09 Page 2 of7
sectors, a permanent change in consumer spending would have a substantial effect on the City's
General Fund finances.
Results to date for the transient occupancy and documentary transfer taxes have not changed
since the September 8 report. TOT receipts from January to JlUle in FY 2009 were -30 percent
lower compared to the prior year period and July 2009 revenues were -21.3 percent under those
in July 2008. As with sales ta1f, if receipts do not improve, midyear adjustments of between $0.2
and $0.5 million may be needed. Documentary transfer taxes, which fell from $5.4 million in
FY 2008 to $3.1 million in FY 2009, continue to show weakness. Revenues through September
2009 were -36 percent below the same prior year period. At this time, however, staff does not
foresee adjustments to the $2.8 million to be collected in this category for FY 201 O.
Attachment B shows actual revenue receipts through the middle of September in comparison to
the FY 2010 Adopted Budget. As mentioned, it is too early to draw firm conclusions from this
information, but in addition to the areas cited above, those that bear further scrutiny and close
monitoring are parking violations, plan checking fees, and building permits. These areas had
especially weak results in FY 2009 which may continue into FY 2010. Property taxes, the
General.FlUlds' highest single revenue source, is expected to be close to budget at year end based
on recent County projections.
FY 2010 Exgenses
As with revenues, it is too early in the year to detect important expense variances. With the
exception of overtime in the Police and Fire departments, which typically exceed their budgets
due to minimal staffing requirements, there is no discemable expense trend causing concern at
this time. If the City cannot achieve the $3 million in salary and benefit savings discussed above
and incorporated into the FY 2010 budget, a deficit would result.
"Tier 2" Items and Action
Should revenues not perform as forecast or salary 01' benefit concessions. by the unions and
management not be realized, the City will be forced to utilize "Tier 2" expenditure reductions.
During the FY 2010 Finahce Committee budget hearings, these reductions were discussed at
length and they were called to the attention of the full Council at budget adoption. Again,
Attachment C lists these items and provides a description of the potential cuts. These include,
for example:
o Eliminating the current Disaster Preparedness program
o Eliminating the City's shuttle service
o Contracting out parks and golf maintenance work
o Eliminating Police traffic control services
Tier 2 reductions will impact services to the community and will result in position reductions.
Structural or Systemic Budget Issues
To substantiate the position that the City faces structural budget issues, staff has modified the
Long Range Financial Forecast (LRFF) presented in the FY 2010 Adopted Budget. Based on
new data and known liabilities, the Net Surplus (Deficit) line in the forecast has been adjusted
CMR:394:09 Page 3 of7
"below the line" to show the financial challenges and potential deficits the City faces over time
(see Attachment D).
Staff has listed five of the most pressing and known demands on resources.
1. As a consequence of steep losses in its investment portfolio, CalPERS is going to
increase retirement contributions from participating jurisdictions. Based .on data sent by
CaIPERS, the City of Palo Alto can expect estimated increases of 1.5 percent in FY
2012, 2.5 percent in FY 2013, 2.6 percent in FY 2014, and 0.3 percent in FY 2015.
These increases are cumulative so the cumulative percentage increase in FY 2015 will be
6.9 percent. This means the General Fund can expect annual employee retirement costs
to rise from an additional $1.0 million in FY 2012 to a sobering $5.4 million in FY 2015.
These increases are in spite of efforts by jurisdictions and CalPERs to "smooth" or
soften the impacts of economic dislocations on portfolio earnings. It is possible that
once PERS earns or returns to its historical yield of 7.75 percent, contributions will be
modified just before and after 2012. On the other hand, arguments can be made that the
historical 7.75 percent PERS average over the last 30 years cannot be replicated over the
next 30 years. But the fact remains that the City will see steep increases in retirement
costs. .
2. The City has recently received an actuarial study updating its employee retiree medical
liability. Citywid~, the annual contribution necessary to meet this obligation has risen by
$1.4 million annually. The General Fund's share of this increase is $0.7 million
annually. One of the chief reasons for this jump over the prior actuarial calculation is
that employees are retiring at a faster rate than originally expected. This increase has
occurred despite a relatively mild, combined 4 percent increase in medical premiums
across all plans for FY 2010. Citywide, the current total retiree medical liability deficit
is $105 million.
3. With approval of a General Obligation Bond for library and community center
expansions and rehabilitations, the City will face approximately $1.0 million in
incremental, annual operating expenses beginning around FY 2013. This is to pay for
additional books, maintenance, computers, staff, and other expenses. This is a
significant expense that must be offset by additional revenues or expense reductions.
4. In a recently conducted consultant study, it was found that the City's General Fund needs
to commit $302 million over the next 20 years to rehabilitate and maintain its
infrastructure. This amount includes backlogged work carried over from prior years as·
well as future, required work to maintain the City's streets, sidewalks, parks, open space,
buildings, and other facilities. In addition, the report identified another $148 million to
replace existing facilities that have exceeded their useful life or need substantial
improvements. These include, for example, the replacement/improvement of: the
. Municipal Services Center, 2 Fire Stations, the Animal Shelter, and the Junior Museum
(this figure does not include a new Police Building), . The staggering estimate of $450
million in infrastructure rehabilitation and replacement needs reinforces the severity of
the City's "structural" deficit.
CMR:394:09 Page 4 of7
The current rate of funding from the General Fund and Infrastructure Reserve, which is
around $9 million per year, is inadequate to meet the annual $15 million needed to offset
the $302 million liability in any predictable or reliable way. The Infrastructure Reserve
balance currently stands at $5.2 million and is expected to decline to $1.6 million next
fiscal year. Without replenishment from General Fund surpluses over the next few years,
which will not occur, the ability to sustain $9-$10 million of annual General Fund
.infrastructure work is unlikely. New revenues are necessary.
5. Although one-time in nature and supposedly to be repaid in 3 years, the City faces a $2.5
million property tax takeaway by the State to solve its budget deficit. This cut will
decrease the General Fund's Budget Stabilization Reserve, impact the City's cash flow
and interest earnings (the City currently earns around 4 percent on its investments and
the State has proposed repaying the principal with a 2 percent interest rate), and reduce
flexibility in dealing with Wlforeseen needs. The City, with the League of California
Cities is exploring our options. Even with statutory protections against State takeaways
of local revenues, the State can withhold revenues in fiscal emergencies and the State's
record on coping with such emergencies is well-documented. Having solid and
~ubstantial reserves protects the City from the State risk.
In addition to the structural issues cited above, the City faces additional threats on the revenue
side. Outlined each year in the Long Range Financial Forecast, City revenues and the services
they fund face an array of risks. These can include, for example, risks to sales tax and the TOT
through: community opposition to new business and hotel development (e.g., the loss of Hyatt
Rickey's); the potential exodus of automobile dealerships; surroWlding big box stores that cause
leakage of local spending and sales tax to surrounding jurisdictions; loss of sales tax to Internet
sales; and, most recently, the threat of consumers spending less in retail areas such as the
downtown and. Stanford Shopping Center. It is important to note that nearly 50 percent of the
General Fund's roughly $20 million in annual sales tax is generated by 25 businesses. The loss
of one of these enterprises can have a substantial impact on continuing services as we know them
today. .
Additionally, the impact of Statewide initiatives and legislation such as Proposition 13 (property
tax); Proposition 218 (revenue thresholds); and required super majority (2/3) approval for
General Obligation bond funding limit the City's revenue raising options. And of course, the
financial markets crisis and impact on lending as well as the dysfunction of State government all
impact the City.
Conclusions
Actual revenue and expenditure data to date do not definitively indicate new downward budget
adjustments at this moment. As additional revenue and expenditure data materializes, however,
further adjustments at midyear may be necessary.
As indicated in a prior report (October 2007) on maintaining a Sustainable Budget (CMR:
387:07), the City may be faced with determining its long-term service priorities. It must be
recognized that the City provides a wide and high level of service and dedicates sizeable annual
resources in such areas as the school district ($6.6 million in FY 2009 for the Covenant Not to
Develop as well as additional expenditures on field maintenance and outreach programs) and to
CMR:394:09 Page 5 of7
human service contracts ($1.1 million for FY 2010). Prioritizing City services is fraught with
painful policy decisions.
Denial that the City faces structural budget issues heightens the risk to'the City's well~being.
One can certainly argue that the economic cycle causes revenues to move down and up and that
better times will return. Likewise, one could argue that the economic cycle is a structural
problem in itself. especially if prudent financial management practices and fiscal reserves are not
in place. But in light of the considerable liabilities cited above and the potential for permanent
changes in consumer spending that is at the core or local finances, it is difficult to ignore the
structural challenges disclosed in this report.
In conclusion, all entities have two options in balancing budgets: decreasing expenses or
increasing revenues. The former can be accomplished by increasing efficiency, reducing
employee costs (salary and benefit savings), or reducing services. Revenue or income growth
can be achieved by raising taxes, increasing fees. voter passed bond measures, and growth in
local revenue producing enterprises. The City has sought to strike a balance among these options
by reducing expenses to balance the FY 20 10 budget and in presenting a new Business License
Tax to the voters in November 2009 to assist with reducing the City's structural deficit and avoid
future ongoing service and program cuts. To weather these extraordinarily difficult economic
waters it is necessary that employees and the residents and businesses they serve must contribute
toward resolution of the City's fiscal challenges.
RESOURCE IMPACT
Potential resoW'ce impacts are discussed at length above. Staff anticipates presenting a full
analysis for the FY 2010 revenues and expenses for the first quarter in mid~to-Iate November.
The necessity for implementation of some or a11 of the Tier 2 reductions is expected to be
scheduled for Council discussion and action at that time.
POLICY IMPLICATIONS
This report does not contain information requiring a change to existing City policies.
ENVIRONMENTAL REVIEW
The actions described in this report do not constitute a project under section 21065 of the
California Environmental Quality Act.
ATTACHMENTS
Attachment A: CMR: 358:09 "Review or Preliminary FY 2009 Revenue .... "
Attachment B: Revenue and Expense Results through Mid~September Compared to the Adopted
FY 2009 Budget (2 pages)
Attachment C: Tier 2 Reductions and Explanations (3 pages)
Attachment D: Modified Long Range Financial Forecast
CMR:394:09 Page 6 of7
PREPARED BY:
ty DIrector of Administrative Services
DEPARTMENT HEAD APPROV AL: -U~~~r::::::=-.-c::::::--
CITY MANAGER APPROV AL: ---+-1-----"<-----++-~~-
CMR:394:09 Page 7 of7
ATTACHMENT A City of Palo Alto
City Manager's Report
TO: FINANCE COMMITTEE
FROM: CITY MANAGER
DATE: SEPTEMBER 8, 2009
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 358:09
SUBJECT: Review of Preliminary FY 2009 Revenue Analysis
RECOMMENDATION
Staff recommends that the Finance Committee review and discuss preliminary General Fund
revenue performance for FY 2009. '
BACKGROUND
As a result of the current recession and consequent decline of key General Fund revenue sources,
the Finance Committee requested a late summer assessment of FY 2009 revenue performance.
This assessment was to include a comparison 0'£ actual revenue receipts to the FY 2009 Adjusted
Budget and to prior year results. The variance analysis could lead to necessary mid year budget
a~justments and allow the City to be proactive in resolving unforeseen budget gaps.
It is critical to note that the FY 2009 numbers presented in this report are unaudited and that
there are potential accruals that may result in subsequent changes. Staff is not presenting a year
end expense analysis at this time. Since accruals and incurred, but not reported, expenses in,such
areas as workers' compensation and general liability have not been fully booked and allocated to
departments, staff beJieves an expense report is premature and could be potentially misleading.
In addition, the Committee requested an earlier review of FY 2010 quarterly 'revenue and
expense results. Staff anticipates presenting a full analysis in late October 2009, but offers the
following insights into preliminary trends in this report.
DISCUSSION
The crucial backdrop to the results jn this report is the dismal state of the economy. In what has
come to be called the "Great Recession," the City's key and economically sensitive revenue
sources have declined significantly since FY 2007~08. Rising unemployment rates, tightening
credit markets, deteriorating residential and commercial property markets, and diving consumer
confidence have driven down public revenue streams across the country. The City of Palo Alto
has not been immune from the recession.
CMR:358:09 Page 1 of 5
Attachment A shows preliminary actual revenue results for FY 2009 in comparison to the FY
2009 Adjusted Budget and to 2007-08 actual results. Attachment A reveals some notable
negative revenue variances at FY 2009 year end. Variances exceeding negative 2.5 percent
compared to the FY 2009 Adjusted Budget and FY 2008 actual results are discussed below. In
addition, potential revenue shortfalls in the FY 2010 Budget are discussed.
Sales Taxes
While actual sales taxes for FY 2009 were slightly above the Adjusted Budget, they were 11.2
percent or $2.5 milJion below actual returns for FY 2008. Compared to prior year quarters, Cit~
cas,h receipts fell by 9.7 percent in the 3rd quarter 2008, 14.9 percent in the critical, holiday 4'
quarter 2008, and 14.9 percent in th~ 1st quarter 2009. Due to the long, lag time incollecting,
tallying and remitting receipts, all of the cash collections for the above periods are recognized in
FY 2009.
Retrenchment in consumer spending is the principal reason for sales tax decJines. New
automobile, department store, and miscellaneous retail sales have been especially weak. Auto
sales tax receipts have fallen from $1.9 million in the 1 st quarter of 2007 to $1.3 million in the 1 sl
quarter of 2009. Department store sales have dropped from $2.7 miJIion to $2.4 million and
misceI1aneous retail from $1.9 million to $1.6 million during the same period. Although there
are preliminary signs that the economy may have "bottomed out," economists believe a recovery
will be lengthy and slow. Consumer spending, because of household debt, home price decreases,
hard hit stock portfolios, and concerns about employment, is likely to remain muted for the
remainder of2009 at a minimum.
The FY 2010 budget projects $19.7 million in sales tax revenues, 4 percent or $0.8 million below
actual FY 2009 revenues. Should the 151 quarter percentage decline of 14.9 percent repeat itself
in the 2nd quarter 2009 (which represents the first quarter of receipts for FY 2010) and there is
continued weakness in the 2nd quarter, it may be necessary to revise the FY 2010 budget
downward at midyear by as much as $0.4 to $0.8 million. This is a most preliminary estimate.
Transient Occupancy Tax (TOT)
TOT revenues were 2.5 percent or $0.2 million under the adjusted budget. They were 11.3
percent or $0.9 million below the prior year. It should be noted that a 2 percent TOT rate
increase was approved by voters and took effect on January 1.2008. In comparing FY 2009 to
FY 2008, the first six months of FY 2008 did not include the rl;lte increase. Therefore, had the
TOT increase not passed, the gap between FY 2008 and FY 2009 revenues would have been
worse.
Average occupancy and daily rates in FY 2009 were 65.2 percent and $145.90, respectively. In
FY 2008, the rates were 75.5 percent and $149.26. TOT revenues fell nearly 30 percent lower in
the period January --June 2009 compared to January --June 2008. If trends in the latter half of
FY 2009 continue, it is likely a negative mid year correction may be necessary. The adjustment
could range between $0.2 and $0.5 million. July 2009 TOT data was not available at the time of
this writing.
CMR:358:09 Page 2 of5
/'
DQcumentary Transfer Tax
This important revenue source, which is based on the number and value of commercial and
residential property sales, has moved down sharply during the recession. Rising to the mid $5
million level for the past 5 years, it retreated to $3.1 milJion in FY 2009. While close to the
adjusted budget, this result was 42.5 percent or $2.3 million below FY 2008 results. The poor
performance is a consequence of the commercial and residential markets coming to a virtual
standstill. Commercial transactions decreased due to low occupancy rates and residential
transactions were minimal due to sellers holding onto their homes during a period of market
softness. In addition, credit conditions were abysmal due to the collapsing credit markets for
commercial and jumbo home loans.
As with sales tax and TOT, documentary transfer tax revenue estimates for 2010 may require a
midyear adjustment. Results for the month of July 2009 were nearly 40 percent under those for
July 2008. CUTI'ently, the adopted budget for FY2010 projects $2.8 million in transfer taxes,
$0.3 million below actual FY 2009 revenues. With credit markets slowly returning to more
normal activity, staff hopes this revenue source will rebound and obviate the need for a midyear
adjustment. .
Fines & Penalties
This revenue category consists primarily of parking violations and Hbrary fines. Revenues are'
below the FY 2009 Adjusted Budget by 16.6 percent or $0.5 million, and 4.7 percent or $0.1
million below prior year results. The negative variance is primarily due to parking violations,
which came in 28 percent or $0.6 million below the adjusted budget. The combination of
industrial injuries to Community Service Officers and fewer cars in violation of parking
regulations have led to this drop. Should vacancies continue, an adjustment to adopted budget
revenues may be necessary.
Permits & Licenses
The downturn in the economy has heavily and negatively impacted building related fees. Permit
and license fees were 16.5 percent or $0.9 million below the adjusted budget and 17.4 percent or
$0.9 million below the prior year. Compared to the budget, new construction permit fees are
down 13.7 percent or $0.4 million while .plan check fees were down $0.1 million.
In the new fiscal year, July 2009 building fee revenues are up by $O~ 1 million in comparison to
July 2008. This may signal an upturn in this revenue category, which would prec]ude a midyear
adjustment.
Return on Investment
Interest income came in higher than the adjusted budget for 2009, but was under prior year
results by 6.9 percent or $0.2 million. With the Federal Reserve keeping interest rates low to
stimulate the economy, the City's portfolio yield has declined to the low 4 percent range over the'
past two years. It is expected that yields will continue to decline as higher yielding instruments
mature and the City continues to buy securities in the 3 to 4 percent range. An adjustment at
midyear may be necessary if interest rates do not trend upward.
CMR:358:09 Page 3 of5
Conclusions
In summary, the "Great Recession" continues to take a toll on City revenues. The general
consensus among economists is that the remainder of 2009 wi1l be weak, but that a slow and
mild recovery win begin in 2010. Unemployment is expected to remain stubbornly high and
personal income growth muted.. Under such conditions, sales, transient. occupancy, and
documentary transfer taxes will remain under pressure in the months to come. Consequently.
additional adjustments to these revenue sources may be required at mid year.
RESOURCE IMPACT
Based on the findings above, no adjustments to the FY 2010 budget are recommended at this
time. Depending upon revenue resu1ts from July through January, revenue and expense
adjustments may be necessary at midyear.
POLICY IMPLICATIONS
This report does not contain information requiring a change to existing City policies.
ENVIRONMENTAL REVIEW
The actions described in this report do not constitute a project under section 21065 of the
California Environmental Quality Act
ATTACHMENTS
Attachment A: Preliminary Revenue Analysis for FY 2008-09
CMR:358:09 Page 4 of5
PREPARED BY:
~,-SrtfRON ~~ .~., »
Budget Manager, Administrative Se
DEPARTMENT HEAD APPROVAL: -:;:-:;~~~;--t-::-::::;:;;;:;:;~:::......
Director of Administrative Services
~.
CITY MANAGER APPROVAL: --::--::-::::-:--::-:::7"':t-::'="-i7--=:"""""""-f---7'T----
JAMES
CityM
CMR:358:09 Page 5 of5
ATIACHMENTA
Property Taxes
Sales Taxes
Users Tax
Transient Occupancy Tax
Documentary Transfer Tax
Other Taxes. Fines & Penalties
Charges for Services
Permits & Licenses
Return On Investment
Rental Income
From Other agencies
Charges to Other Funds
Other Revenues
Transfers In
'TouHRevenlle5
Preliminary Revenue Analysis for FY 2008-09
Actual Perfonnance Compared to FY 2009 Adjusted Budget and to FY 2008
'''.2.0.08-09'.··· .'.
FY 2.0.071 FY 2.0.08 Aetu~ {t:!.~~~t:·:i\y~u~{,::;:~~~~;~~:t .. :t;~~'-;::'~f ;i~:~~~;~~~ :;f~Z~~~66$ Actual Aetua
'21.489 23,107
22,195 22,622
9,356 10,285
6,708 7,976
5,837 5,382
2,897 2,465
19,484 18,922
5,320 5,221
2,355 2,204
13,105 13,591
752 229
9,800 10,914
1,775 2,316
15,644 17,228
i,'":::i36~1l-t ·.j42;~~:':
. . ,"' .: ': ,': ~~:
25,098'
20,015
U,024···
7,ZSO;
k· '3;000
.. 2,816.
.;.' 19,938
25,382"
. 20,089
11;(:)30
. .1,071
3,09~ ..
1348 1 .. '
,.[9>V-9': .,' .,.\1
5,160"1' 'A,31O
::., . ..j,900." . 2,053.1'
>13;121
144
'13,(546"
I5S
I{ 10,9991 '11J6S I:·':
•. 2,207."·
.:11,677
::·140,349 .
2,442'1" : 17,602:;: . . :.,'; .. ' .... ;-::.-.;;
'14Qii60'
284
'74
6
,.'(179)'
92
(468)"
. ;U99)1· . .... , (j~O)' .
15:) .
'5'25" ...
, ~:.
..{4
', .. lp9
235.'
(7~)'
'/(18,)1
1.1%
0;4% 0:1%
~2;5%
':··3.l'%,
" ".
'·-16:6% :;~~~.,
. 8d;9i5.
'4;Q%
.' 911';
.i:5o/i
.. ,10;6.* '-oA:o/<i-
i:'l'
.' 2,275:, '
..•. (2 •. ~33): ," .
745.'
. (90?):'
(2g:~jl:::
·.8'F
(911-) .• .. ~~ ... -
(1'$1') . . <.
55: ,'.
A:Jrji
.15f
...... ~~~J
~o:{%I; .. '. (2302;.r .
'.' '. . , ...
., .....
9;8%
"l.I.:to/~
7.2%
·1 L3%
.~2;,?%
-4.7% .
4.5%
.17,4~r
~6:9'1~ .
0.4%'
'~·31.0%·
'2.30/0
.' '5;4% ..
2:2%
-L6%
Note: This spreadsheet excludes the Unrealized Gain (Loss) on InvestmentS which must be reported in the City'S financial statements.
Attachment B
CITY OF PALO ALTO
REVENUE AND EXPENSE RESULTS THROUGH MID-SEPTEMBER
COMPARED TO THE ADOPTED FY 2009 BUDGET
GENERAL FUND
(In thousands of dollars)
I Adopted I Adjusted
Categories Budget Budget
Pre Adjusted I I I
%of
Encumbr Encumbr Actual Budget
Revenues & Other Sources
Sales Tax
Property Tax
Transient Occupancy Tax
Utility Users Tax
Other Taxes and Fines
Charges for Services
Permits & Licenses
Return on Investment
Rental Income
From Other Agencies
Charges To Other Funds
Other Revenues
Exeendityres & Other Uses
City Attorney
City Auditor
City Clerk
City Council
City Manager
Administrative Services
Community Services
Fire
Human Resources
Library
Planning and Community Environment
Police
Public Works
19,650
25,752
7,000
11,250
5,633
20,238
5,056
1,900
13,655
92
10,643
1
2,569
999
1,512
296
2,395
6,761
21,876
25,166
2,837
6,385
9,858
29,998
13,484
6
3,343
1,143.
1,524
309
2,646
6,910
22,770
25.546
2,970
6,668
10,603
30.239·
14.177
778
* Excludes encumbrances, reappropriation and Infrastructure reserve
21 667
246
17
35
33 61
5 187
203 2,839
99 495
126
164
658
385
934
1,682
77
578
2,357
1,204
2,613
943
5'
2,450
15
539
152
486
70
487
1,296
4,173
4,800
501
1.169
1,940
5,433
2,443
1
Attachment B
CITY OF PALO ALTO
REVENUE AND EXPENSE RESULTS
COMPARED TO THE ADOPTED FY 2009 BUDGET
GENERAL FUND OVERTIME
(In thousands of dollars)
7 7
3 3
45 45
105 105
58 58
1018 1018
4 4
66 66
1000 1000
112 112
7
34
15
733
Attachment C
\
City of Palo Alto
Internal Budget Hearings -FY 2010 Summary
Tier 2 Items
General Fund
Department Other Opti~ Revenue._ ~nse FTE
FIR
CSD
CSD
PLA
POL
POL
POL
POL
PWD
PWD
Eliminate Disaster Preparedness Div
Park Maintenance -Contract out net expense
Golf Course Maint -Contract out net expense
8iminate Shuttle
Traffic Team
School Res Officer Prg
Pol Record Specialist -Front Desk Records
Program ASst I -Crime Analysis
Eliminate Tree Trimming Contract
Contract out Tree Trimming
Subtotal
Additional Finance Committee ·Parking Lot" Recommendations
(33,400)
(100,000)
(133,400)
FIR Evaluate future organization of OES Consolidation/COordination
FIR Regionalization options for Fire Services
Police Regionalization options for Police Services
(442.826)
(122,957)
(176,352)
(256,000)
(1.00) Occupietl
(5.00) Occupied
(7.00) 7 Occupied
(626,433) (4.00) Occupied
(161.n2) (1.00) Occupied
(82, n3) (1.00) Occupied
(94,037) (1.00) Occupied
(379,000) .
(46,737) (1.00) Vacant
(2,388,887) (21 .. 00)
Police Reduce the Police Department Budget by $500,000 -Police Chief to identify reductions
Police Reduce the Police Department Budget by $492,000 -Finance COmmittee recommended reductions
Add back 0.5 Fte Volunteer Coordinator (Salary & Benefits)
Reduce the Traffic Team by one-half (instead of elimination)
1.0 FTE Police Officer (salary & benefits)
1.0 FTE Police Agent (salary & benefits)
Add back revenue
Reduce positions listed below by one-half instead of elimination
School Resource Officer (0.5 FTE Police Ag~nt)
Crime Analyst Program (0.5 FTE Crime Analyst)
Police Outreach (0.5 FTE Program Assistant I)
$ 52,000
(154.000)
(158,000)
50,000
(79,000)
(56,000)
(47,000)
Attachment C
Tier 2 Descriptions
Fire Department -$409,426
Eliminates the Disaster Preparedness Division: This would result in the reduction of
$442,826 in expenditures and $33,400 in revenue. It entails eliminating one regular FfE
and one temporary FTE. There would be a reduction in CERT and BOC training. and
would create the need to find aitemative methods for required NIMS/SEMS and EOC
training.
The Finance Committee discussed the possibility of evaluating the future
organization/coordination/consolidation of the Office of Emergency Services (OES) and
regionalization options for the Fire Department. Staff has not reviewed the cost/benefit of
these options.
Community Services Department -$299,000
This includes contracting out park maintenance for Mitchell and Rinconada Parks along
with mowing at some City facilities. 5 FTE would be eliminated and the net savings are
estimated at $123,000 annually.
Golf Course maintenance efforts also would be contracted out. 8 FTE would be cut and
an estimated $176,000 in annual savings' would be realized.
I
Planning & Community Environment -$ 256,000
Eliminate the City's shuttle service. There are not City FfE associated with this program
and its termination would result in $256,000 in annual savings. Eliminating the shuttle
program would reduce mobility and transportation alternatives within the City.
Police Department -$ 865,015
Eliminating the Traffic Team would result in the reduction of $626,000 in expenditures
and $100,000 in revenue. Included is the reduction of four FfE. The duties normal1y
assigned to the Traffic Team would be assumed by patrol units.
Eliminating the School Resource Officer (SRO) Program: During the FY 2010 budget
hearings, one vacant SRO position was eliminated. The Tier 2 reduction would eliminate
the remaining SRO position which is currently filled. The expenditure reduction is
estimated at $·162,000.
Elimination of the Crlme Analysis Program. This would result in the reduction of one
FTE with an estimated expenditure reduction of $94,000.
Elimination of Community Policing/Outreach program. This would result in the
reduction of one FfE with an estimated expenditure reduction of $83,000.
The Finance Committee also discussed the possibility of evaluating the future of
regionalization options for the Police Department. Staff has not reviewed the costlbenefit
of this option. Additionally, the Finance Committee discussed two alternative Tier 2
options for the Police Department:
1) Reduce the Police Department budget by $500,000 and let the Police Chief
make the decision as to where to apply the reductions.
2) Reduce the Police Departm~nt budget by $492,000 that would include specific
reductions as recommended by the Finance Committee
a) Add back the previously eliminated salary and benefits for 0.5 PTE
volunteer Coordinator estimated at $52,000
b) Reduce the Traffic team by one-half (instead of elimination)
• 1.0 FTE Police Officer
($154,000)
• 1.0 FIE Police Agent
($158,000)
• Add back revenue of $50,000
c) Reduce the positions listed below by one-half (instead of elimination)
• School Resource Officer (SRO) ($ 79,000)
• Crime Analyst Program
• Police Outreach
Public Works Department -$379.000 or $46,000
($ 56,000)
($ 47,000)
Elimination of the tree trimming contract: The estimated savings is $379,000. This
reduction may result in transferring responsibility for routine tree trimming in parking
strips to property owners. It would require a change to policy and to the Municipal Code.
It would not impact Utilities line or emergency tree trimming clearing.
The other alternative for the Public Works Department is the contracting out of Tree . .
Trimming. This would result in the elimination of 1 FfE and a net expenditure reduction
of $46.000.
The Public Works Department is recommending either/or for these options, not both.
Attachment 0
FY 2012 FY 2013 FY 2014 FY2015 FY 2016 FY 2017 FY 2018 FY2019
$ 20,802 $ 21,759 $ 25,069 $ 26,134 $27,114 $ 28,133
26,102 27,441 29,123 35,785 37,370
12,304 12,991 13,673 16,329 16,940
Transient Occupancy Tax 7,300 8,125 10,542
OIherTaxes, Fines & Penalties
Subtotal· T aJCes
SaMOO Fees & Permits' 17,536 17,645 17,973 18,496 19,225 19,982 20,770 21,588 22,510
Joint Service Agreements 8,191 8,532 8,921 9,306 9,737 10,191 10,669 11,168 11,697
(Stanford UoivelSity)
Inlerest Earnings 1,900 1,974 2,053 2,142 2.238 2,346 2,460 2,575 2.696
OlllGr Revenues 15,251 15.522 13,768 14,116 14,476 14,845 15,227 15,618 16,021
Reimbursements from Other F ullds 10,957 11,245 11,558 11,957 12,442 12,961 13,495 14,052 14,623
125,326 129,857
19,103
148,960
96,361 .. 99,414 102,560 106,252 110,800 115,564 120,545 125,740 131,197
9,804 9,910 10,108 10,411 10,828 11.261 11,711 12,180 12,546
3,480 3,547 3,618 3,726 3,876 4,031 4,192 4,359 4,490
9,870 9,990 10,240 10,530 10,859 11,145 11,439 11,742 12,054
1,236 1,261 1,299 1.405 . 1.461 1,519
8,501 8,844 9,211 9.604 10,024 10,473 10.955 11,470 12,021
1.747 1.799 1,853 1,908 1,964 2,021 2,080 2,141 2,203
1,080 929 752 749 649 763 763
44 45
150,753 154,990
NET SURPLUS (DEFICIT) (2,676) (1,794) (2,096) (613) 408 859 865 668
other Aclivitis$
Additional Retirement Coolribution Increase • (1,031) (2.774) (4,963) (5.389) (5.756) (6,140) (6,542)
Retiree Medical Cost Increase (735) (735) (735) (735) (735) (735) (735) (735)
Library Operating Cost Increase (250) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000)
Inrrastructure Cootribution Increase (1.000) (2,000) (2.000) (2,000) (2,000) (2,000) (2.000)
Property Tax "loan' by \he State
Subtotal. Otner Activities
GRAND NET SURPLUS (DEFICIT)
* Based on current 2.1% @ 55 formula
•• Contains a 3% salary increase s.ubject to union negotiations and ability to pay
Attachment C
CITY OF PALO ALTO
FY 2010 FINANCIAL REPORT as of 11-20-09
GENERAL FUND
(in thousands of dollars)
I Adopted I Adjusted
Categories Budget Budget
Pre Adjusted I I I
% of
Encumbr Encumbr Actual Budget
Revenues & Other Sources
Sales Tax 19,650 19,650 5,510 28%
Property Tax 25,752 25,752 3,140 12%
Transient Occupancy Tax 7,000 7,000 1,781 25%
Utility Users Tax 11,250 11,250 4,360 39%
Other Taxes and Fines 5,633 5,633 2,092 37%
Charges for Services 20,238 20,238 ·6,209 31%
Permits & Licenses 5,056 5,056 1,455 29%
Return on Investment 1,900 1,900 633 33%
Rental Income 13,655 13,655 4,780 35%
From Other Agencies 92 92 62 67%
Charges To Other Funds 10,643 10,643 3,540 33%
Other Revenues 1 1 959
Exgenditures & Other Uses
City Attorney 2,569 3,343 8 601 970 47%
City Auditor 999 1,143 229 296 46%
City Clerk 1,512 1,524 16 655 44%
City Council 296 309 31 107 45%
City Manager 2,395 2,646 6 62 814 33%
Administrative Services 6,761 6,910 156 2,267 35%
Community Services 21,876 22,770 86 2,308 7,993 46%
Fire 25,166 25,546 10 648 9,156 38%
Human Resources 2,837 2,970 5 104 911 34%
Library 6,385 6,668 48 145 2,110 35%
Planning and Community Environment 9,858 10,603 158 953 3,331 42%
Police 29,998 30,239 337 319 9,877 35%
Public Works 13,484 14,177 104 936 4,510 39%
925 8,778 772
• Excludes encumbrances, reappropriation and infrastructure reserve
Attachment D
City of Palo Alto
General Fund Revenue Changes for FY 2010 and FY 2011 -Detail
($000)
Taxes
Property Taxes
Detail
Transient Occupancy Tax
Utility Users Tax
City Utilities
Telephone
Sub-total-Utility User's Tax
Other Taxes and Fines
Vehicle In-Lieu
Documentary Transfer
Parking Violations
General (Fines, Forfeitures & Penalties)
SUb-total-Other Taxes and Fines
Total Taxes and Fines
Charges for Services
Stanford Fire/Police Service Reimbursement
Golf Related Fees
Class Program Fees
Paramedic Fees
Plan Checking Fees
Cable Franchise
Other Fees
Sub-total-Charges for Services
Permits and Licenses
Street Cut Fee
Permits
Licenses
SUb-tota/-Permits and Licenses
to Other Funds
Cost Plan -Admin. Support to Other Funds
Communication -Utility Reimb. for 911 Support
Public Works Admin. Support to Ent. Funds
Other Reimbursements
SUb-total-Charges to Other Funds
Income
Utilities Facility Charges
Property Rental-Cubberley Tenants
Use of City Facilities
Other
SUb-total -Rental Income
From Other Agencies
Return on Investments (Interest Income)
Unrealized Gain/Loss on Investment
Other Revenue
Total Revenues (Prior to Oper. T'fers-In)
Operating Transfers-In
Equity & Utility Transfers
Parking Districts
Other
Sub-tota/-Operating Transfers-In
Total Source of Funds
7,832 7,832
3,153 2.919
3,087 2,727
1,754 1.754
1,763 1,460
600 600
2050 1 1
20,238 19,134
553 703 553
4,431 3.835 4,506
73 73 73
5,056 4.611 5,131
8,233
512
563
1 252
10.560
10.311 10.311
1.719 1.801
1,518 1,440
106 81
13,655 13,633
92 92
1,900 1,662
703
4,100
73
4,876
(253)
(287)
(75)
(188)
150
150
(254)
Attachment E
Police and Fire Departments
Overtime Analysis for Fiscal Years 2005 through 2009
With Fiscal Year 2010 Data Through November 20, 2009
Fiscal Year Ending June 30
2005 2006
POLICE DEPARTMENT
Overtime Expense
Original Budget $974,426 $981,862
Current Budget 1,009,705
Net Overtime Cost -see below 780,647
Remaining Budget $229,058
Overtime Net Cost
Actual Expense $1,229,851 $1,405,155
Less Reimbursements
Stanford Communications 30,941 30,937
Utilities Communications Reimbursement 17,404 17,402
Local Agencies (AI 32,617 34,565
Federal Grants
State Grants (B) 8,135 65,835
Police Service Fees 37,188 49,185
Other 7,489
Total Reimbursements 133,774 197,924
Less Department Vacancies 426,584
Net Overtime Cost $780,647
Department Vacancies (number of days) 1,642 1,733
FIRE DEPARTMENT
Overtime Expense
Original Budget $982,674 $959,389
Current Budget 982,674 959,389
Net Overtime Cost -see below 877,892 637,310
Remaining Budget $104,782 $322,079
Overtime Net Cost
Actual Expense $1,956,529 $1,582,858
Less Reimbursements
Stanford Fire Services (D) 592,828 479,606
Cal-Fire/FEMA (Strike Teams) 66,269
State Homeland Security
Grant Program (SHSGP) (C) 17,203 72,254
Urban Area Security Initiative (UASI) 26,782
Department of Homeland Security IE)
Total Reimbursements 644,911
Less Department Vacancies 300,637
Net Overtime Cost $637,310
Department Vacancies (number of days) 1,980 1,230
NOTES:
(A) Includes Animal Services contract with Los Altos, Mountain View and Los Altos Hills.
(B) State Office of Traffic Safety and ABC grants.
(e) Included in the SHSGP and UASI reimbursements is a small amount of per diem reimbursement.
(0) Stanford reimburses 30.3% of Fire expenditures.
2007 2008
$1,015,620 $1,036,815
1,074,399 1,071,005
1,025,718 1,096,894
$48,681 ($25,889)
$1,785,657 $2,009,542
39,342 65,079
22.130 36,607
36,457 41,770
63,344 4,672
43,218 67,390
12,447 18,157
216,938 233,675
678,973
$1,096,894
2,280 2,766
$1.032,674 $892,674
1.032,674 996,674
737,768 863,442
$294,906 $133,232
$1,860,757 $1,744,076
563,809 528,455
85,531 140,224
40,897 10,164
1,150
690,237
432,752
$737,768
1,740 810
(E) Reimbursement from U.S. Department of Homeland Security for HazMat Continuing Challenge Training Conference (Sep 2009)
unaudited thru 11120
2009 2010
$999,900 $999.900
1,016,900 999.900
886.568 215,550
$130,332 $784,350
$1,665,842 $567,870
42,160 17,468
23,715 9,826
37,413 13,413
10,998
53,812 48,035
15,982
184,080
595,194 263,578
$886,568 $215,550
2,402 508
$1,017,674 $1,017,674
1,017,674
513,685
$503,989
$1,591,261 $1,040,777
482,152 315,355
453,619 43,000
4,342
5,800
940,113 358,355
168,737
$513,685
780 636
11/2512009
Attachment F
FY 2010 Salary Savings by Department
In Thousands
City Attorney 1,374 124 124
City Auditor 487 25 25
City Clerk 593 67 67
City Council 65 5 5
City Manager 1,302 151 151
Administrative Services 3,709 147 147
Community Services 8,707 276 (137) 139
Library 3,297 156 156
Fire 14,182 1,539 (679) 860
Human Resources 1,544 193 193
Planning and Community Environment 4,531 390 (37) 353
Police 16,706 1,891 (691) 1,200
Public Works 4,831 337 (51) 286
Non-departmental (1,313) (2,206) (2,206)
Total 60,015 3,095 (1,595) 1,500
ATTACHMENT G
"Tier Two" Reductions
Dept. Other Options Revenue Expense FTE
Eliminate Disaster Preparedness
FIR Div (33.400) (442,826) (1.00)
Park Maintenance -Contract
CSD out net expense (122,957) (5.00)
Golf Course Maint -Contract out
CSD net expense (176,352) (7.00)
I PLA Eliminate Shuttle (256,000)
I
i POL Traffic Team (100,000) (626.433) (4.00)
School Resource Officer
POL Program (161,772) (1.00)
Program Asst I -Police Outreach
I POL Program (94,037) (1.00)
Crime Analyst -Crime Analysis I
POL Program (111,353) (1.00) I
Eliminate Tree Trimming
PWD Contract (379,00O)
PWD Contract out Tree Trimming (46,737) (1.00)
Subtotal (133.400) (2.417.467L (21.00)
Near-Term Cost Savings
Attachment H
Budget Reduction Options
1. Institute a hiring freeze except for positions absolutely required for public health
and safety. The City will look at reorganization around vacant positions (short-
term within departments and long-term among departments), but it must be noted
that significant staff reductions and efficiencies have been implemented since the
"dot-com" bust
2. Freeze or cut all travel and meeting budgets unless critical to immediate public
health and safety issues
3. Institute furloughs
4. Review all consultant contracts, particularly those just starting, to determine if
needed
5. Defer any Capital Improvement Projects (CIPs) that are not absolutely essential
6. Close public safety building design CIP and return funds to reserves
7. Evaluate need for temporary positions including retirees who have been hired
back to work
8. Review staffing levels in departments where fee, fine or permit revenue has
dropped, e.g., CSD classes, parking violations, and in development center.
Design flexible budgets for these areas
9. Consider instituting a 2.5% reduction for small departments and 5% for remaining
departments
10. Institute full cost recovery for programs that provide unique and limited service to
small populations
11. Institute full cost recovery for adult classes. Revisit the non-resident fees and
examine all programs where non-residents are not paying fees for use of City
facilities.
12. Use the Budget Stabilization Reserve to balance the budget along with other
initiatives in 2010. The goal would be to make longer term decisions during the
fiscal year 2010 timeframe. The drawdown should not take the reserve lower than
15 percent of General Fund adopted budget expenditures
Medium Term
1. Institute a 5.0-7.5% equity transfer on dark fiber fund
2. Enhance and expand the Economic Develop Plan
3. Negotiate away minimum staffing levels in Fire Department
4. Have fire department use newest employees for OT work rather than most senior
staff; same for police (Le., staff according to reverse seniority)
5. Have Fire department complete an evaluation (funds have been budgeted) on need
for current levels and configurations of fire service based on predominant number
of calls for paramedic service
6. Institute a two-tier retirement plan for public safety personnel
7. Contracting out services such as parks and golf
8. Decrease rental subsidies at Cubberley or restart negotiations with Foothill
College
9. Review all support to PAUSD to determine what the City can continue to provide
10. Review the Cubberley Lease and the Covenant Not To Develop agreement with
PAUSD to determine affordability and course of action going forward.
11. Revisit all HSRAP services to non-Palo Alto institutions with new budget cycle
and focus resources on needy seniors, children, and teens in trouble.
12. Revisit residents and businesses paying for cost for sidewalk work at 10% per
year and cap at 50% in year 5
13. Revisit policy on property rental rates to be at or close to cost recovery as
agreements come up for renewal.
14. Move all employee groups toward assuming greater share of PERs "employee"
contribution and all groups contribute towards the cost of health care.
15. Consider assessment districts parks, sidewalks, fire and/or public safety.
16. Begin GF service priority setting process with Council and community
Long-Term
17. Revisit new conference hotel in Palo Alto
18. Develop LATP site as a source of rent or sell the land to Enterprise Funds
19. Negotiate away no minimum staffing requirement for Police
20. Review all police services for efficiencies and potential reduction in least
essential services
21. Contract out, with reasonable response time specifications, paramedic service to
outside agencies e.g., AMR
22. Begin discussion with neighboring cities e.g., Mountain View on sharing public
safety services e.g. dispatch center, SWAT, white collar units, border fire
response
23. Explore and implement new revenue opportunities
24. Revisit land use policies to provide the most benefit to the community