HomeMy WebLinkAboutStaff Report 128-08City of Palo Alto
Manager’s Report
TO:
FROM:
HONORABLE CITY COUNCIL
CITY MANAGER
10
DEPARTMENT: ADMINISTtL4.TIVE
SERVICES
DATE:
SUBJECT:
FEBRUARY 4, 2008 CMR: 128:08
FINANCE COMMITTEE RECOMMENDATION THAT COUNCIL
REVIEW AND COMMENT ON THE UPDATE TO THE LONG RANGE
FINANCIAL FORECAST AND "SUSTAINABLE BUDGET" REPORTS
RECOMMENDATION:
After review of the City’s 2007 update to the Long Range Financial Plan on December 11, 2007.
and review of the "Sustainable Budget" report on October 16, 2007, the Finance Committee
recommended that the City Council review and comment on the forecast of revenues, expenses
and reserve levels. The Finance Committee also recommended, on October 16, 2007. that the
Council review and comment on the "Sustainable Budget" report.
COMMITTEE REVIEW:
On December 11. 2007. the Finance Committee reviewed the Long Range Financial Plan. The
Finance Committee’s review included questions about the Budget Stabilization Reserve (BSR)
level and one-time expenditures that impact the BSR in 2007-08.
On October 16, 2007, the Finance Committee reviewed the staff report on the "Sustainable
Budget", which described the issues and tradeoffs that would lead to a sustainable budget for the
City of Palo Alto. The Committee recommended that the full Council review the report and
provide comment. In discussion, the Committee agreed that it was important to include the
community in the priority setting process necessary to achieve a sustainable budget.
During the January 12, 2008 priority, setting retreat, the Council selected a new priority,
"Economic Health of the City." In the future, deliberations involving what has been described as
a "Sustainable Budget" will be subsumed under the new priority.
CMR: 128:08 Page 1 of 2
ATTACHMENTS
AUachment A: CMR 42~ :07 - "Update to Long Range Financial Forecast’:
Attachment B: CMR 387:07 -"Discussion of Council’s Top 4 Priority Sustainable Budget"
PREPARED BY:
JOSEPH ~’~CCIb "
..Deputy Dl~.ctor of Adm]nlstratlve Services
sfi-ZRob BOZbL~N
Senior F’inancial Analyst
DEPARTMENT HEAD APPROVAL:
LAL~Z \
Director, Administrative ~s,..
....................... Y i’-",, Kt (:z.~ /CITY MA_NAGER APPROVAL:t,.~!ji., /,,. 1.~ "-.-..~"x-...--~
E~Y HARRISON’
Assistant City Manager
CMR: 128:08 Page 2 of 2
ATTACHMENT A
City of palo Alto
City Manager’s Report
TO:
ATTN:
FROM:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:DECEMBER 11, 2007 CMR: 425:07
SUBJECT:UPDATE TO LONG RANGE FINANCIAL FORECAST "
RECOMMENDATION
Staff recommends that the Finance Committee review and comment on the attached forecast of
revenues, expenses, and reserve levels and forward it to the full Council.
DISCUSSION
Attached to this report is the updated General Fund Long Range Financial Forecast (LRFF) for
the years 2007-08 through 2017-18. The LRFF identifies key issues that will guide the
upcoming 2008-09 budget process and affect the City’s future financial condition.
This year the LRFF includes a discussion of the City Council Top 4 priority, "Sustainable
Budget." Some of the questions raised in an earlier report (CMR: 387:07) to the Finance
Committee include: What are the City’s basic program and spending priorities; can the current
level of expenditures continue and if not what costs can be reduced; are there new or additional
revenue sources to be obtained; and should the City incur more debt to fund capital
improvements?
In addition, this year’s LRFF includes brief, but informative information on the status of the
Utility Enterprise Funds. This represents the first, small step toward a more comprehensive,
citywide Long Range Financial Forecast.
RESOURCE IMPACT
As with any financial forecast, the fiscal impacts shown are estimates. Estimates of future
deficits and surpluses, as well as the estimated costs of future financial challenges, are meant to
guide future policy and budget decisions.
POLICY IMPLICATIONS
The Long Range Financia! Forecast is a tool for Council’s use in making policy decisions
regarding the allocation of resources.
CMR:425:07 Page 1 of 2
ENVIRONMENTAL REVIEW
This report is not a project under the California Environmental Quality Act (CEQA).
PR£PARED BY:
JOE I~{~CCIO -
Deputt~ Director
~@.RS RON BOZMANSenior Financial Analyst
DEPARTMENTAL HEAD APPROVAL:
CITY MANAGER APPROVAL:
CARL/igEATS --’-’--
Dire~or, Administrative Services
-tiL~MILY i~i2RRISON
Assistant City Manager
ATTACHMENTS
Attachment 1’ Long Range Financial Forecast.
CMR:425:07 Page 2 of 2
ATTACHMENT 1
INTRODUCTION
Purpose of the Forecast
Executive Summary
TEN YEA
Key Points
Forecast Model
Risks
]
ENTERPRISE FUNDs
E nterprise Utility Funds Overvie~
APPENDICE~
Definitions of Revenue and Expen
B. Basic Forecast Methodology
D. Historical Trends 3]
and Other Economic Forecasts 32
2008
INTRODUCTION
NTRODUCT ON
PURPOSE OF THE FORECAST
The Long Range Financial Forecast takes a forward look at the City’s General Fund
revenues and expenditures. Its purpose is to identify financial trends, shortfalls, and
issues so the City can proactively address them. It does so by projecting out into the
future the fiscal results of continuing the City’s current service levels and policies,
providing a snapshot of what the future will look like as a result of the decisions made
in the recent past. Any needed course corrections are thereby illuminated.
This Long Range Financial Forecast is not intended
as a budget, nor as a proposed plan. The City has
changed the name of the report from "Long Range
Financial Plan" to "Long Range Financial Forecast" to
make it clear that this document does not present a
comprehensive financial plan for achieving City or
Council objectives.
The Long Range Financial Forecast sets the stage for the upcoming budget process,
facilitating both the City Manager and Council in establishing priorities and allocating
resources appropriately. In this year’s forecast the concept of a "sustainable" budget is
introduced. The word "sustainable" raises fundamental questions about what services
and pro~ams can be supported over a long period of time within the revenue con-
straints faced by the City. These questions are desig-ned to initiate a process and plan
that ensure future balanced budgets and services to the community.
City of Palo Alto I
2OO11
INTRODUCTION
EXECUTIVE SUMMARY
Over the past three years the economy has slowly but steadily recovered from the dot-com
bust of 2001-2004. To address the fall-off in revenues during the downturn as well as rising
benefit costs, the City made changes resulting in long-term, structural cost reductions of $20
million. This included the reduction of 70 General Fund positions, or 10 percent. As a result
of the expenditure curbs and a ~adually improving revenue environment, the City is in a
relatively stable financial position to address the sigTtificant financial challenges that lie
ahead.
These challenges include the need, for example, to:
+Maintain annual funding for the retiree medical liability
¯Enhance funding for infrastructure due to sharp increases in construction costs and a consequent
backlog in projects
¯Deal with threats to the City’s economic base such as erosion of the City’s Utility Users Tax (UUT)
telephone revenue stream and the loss of key revenue generators such as automobile dealerships
¯Increase healthcare costs
¯Address new facility needs and consequent increases in equipment and operating costs
Examples of the significant changes the City has made that result in long-term cost controls
include:
This fiscal year, SEIU and Management/Professional employees began contributing to their PERS
retirement fund - for the first time since 1983
This fiscal year, the City will limit its funding to the second-most-expensive health plan for
employees and future retirees- setting a new precedent of capping the City’s liability for health
care premiums
New hires must have 20 years of service to qualify for the full retiree medical benefit
The elimination of 70 General Fund positions and $20 million from the base budget
In addition to reig-ning in costs, the City has been active in maintaining and enhancing
revenues. Recent voter approval of the Transient Occupancy Tax (TOT) rate increase from
10 to 12 percent marked a revenue milestone for the community and will add an estimated
$1.2 million to General Fund revenues. Moreover, the City has been active in working with
automobile dealerships to identify sites that will allow them to stay in Palo Alto. Whether
2 City of Palo Alto
2008
INTRODUCTION
located on the recently purchased Los Altos Treatment Plant site, or on other City owned
land along the freeway, a solution will hopefully result in the space and visibility
required by modern dealerships and in additional revenues for the City.
This ten-year forecast assumes that the City will continue to invest, above base funding,
$4.0 million annually in the Infrastructure Reserve; sufficient funds will be set aside to
fund the annual required contribution for the retiree medical liability; the local economy
and City revenues will continue to ~ow slowly; and a mild recession will appear in
2010-11, following the once-per-decade pattern of the State’s recession history. Given
those assumptions, the General Fund breaks even until 2011-12, when annual deficits
begin to appear.
It is important to note, however, that there are a number of adverse economic develop-
ments that could eventually influence the local economy. These include the severe down-
turn in the housing market, the credit crisis and losses facing major financial institutions,
the steep increase in oil prices, and the deficit the State faces which could be as high as
$10 - $12 billion. A slowdown in the sales tax revenue ~owth rate emerged in the Ist
quarter of 2007-08 and this may be an indication of eroding consumer confidence. On the
positive side, local job ~owth continues at an annual rate of 1-2 percent, technology
company profits remain robust, and exports are strong. At of this writing, the local
economy appears to have weathered the negative forces affecting the state and national
economies. The duration of these forces, however, will be key to the future condition of
the local economy.
In an effort to reduce the length of the text describing the forecast, some information has
been moved to the Appendices. The Appendices include: the definitions of the revenue
and expenditure categories; a general summary of the Forecast’s methodolog3z; a variety
of professional economic forecast information; and historical trends in City revenues,
expenditures, population, and other demographic information.
City of Palo Alto 3
2008
This page is intentionally left blank.
4 City of Palo Alto
TEN-YEAR FORECAST
KEY POINTS
The following highlights the sig-nificant issues incorporated into the 2008-18 Long
Range Financial Forecast:
Sales tax revenues reflect a slowdown for 2007-08. The ~owth rate is less than 1
percent for 2007-08. This is supported by the actual first quarter results for 2007-
08 received in September
Transit Occupancy Tax revenues reflect the voter approved 2 percent increase
effective January 2008
A two year recession beginning in 2010-11 has been factored into the forecast
Expenditures and Transfers to Other Funds
$2.9 million has been included to meet the Retire Medical liability expense. This is
funding for the General Fund portion of the annual required contribution
An additional $4 million is transferred to the Infrastructure Reserve beginning in
2007-08 and is inflated through 2017-18
Also included in this year’s Long Range Financial Forecast is a line (shaded) depict-
Oty of Palo Alto 5
008
ing the anticipated non-operating items that will either draw down or add to the General Fund
Budget Stabilization Reserve ~SR). By year, they are as follows:
2007-08
$2.3 million drawdown on the BSR for the purchase of the Los Altos Treatment Plant proper~,
(LATP). This is the first of three payments
$0.4 million drawdown on the BSR for the payment of the purchase option at Park Boulevard for
the new Police building. This is the first of three payments
$1.0 million drawdown on the BSR for a short-term inter-fund loan to the Storm Drain Fund for
CIP projects
2008-09
¯$2.3 million drawdown on the BSR for the purchase of the LATP property
¯$0.3 million drawdown on the BSR for the payment of the purchase option at Park Boulevard for
the new Police building
2009-10
¯$2.2 million drawdown on the BSR for the final payment to purchase the LATP property
¯$0.2 million drawdown on the BSR for the final payment on the purchase option at Park Blvd for
the new Police building
$0.5 million add back to the BSR for the loan re-payment from the Storm Drain fund
2010-11
$0.5 million add back to the BSR for the loan re-payment from the Storm Drain fund
It is important to note that the $5.1 million surplus realized in 2006-07 (which will go to the General
Fund BSR) nearly offsets the one-time transactions that appear from 2007-08 through 2010-11.
Finally, the narrative includes a discussion on "Sustainable Budget" and a new chapter has been
added that be~6_ns the process of incorporating the Enterprise Utility Funds into a citywide Long
Range Financial Forecast.
60ty of Palo Alto
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Ac~al Proiected
Revenues
Sales Tax es
,~rope~’ Taxes
UiJli~, User Tax
Transient Occupancy Tax
O~her Taxes, Fines & Penalties
Subtotal: Taxes
Ser,,’ice Fees & Permits
Joint Serv ice Agreemen~
(Stanford U niv ersib’)
interest Earnings
22,195 22,400 23,072 23,649 23,294 22,712 24,245 26,003 27,563 28,665 29,668 30.410
21,467 22~685 23,487 24,203 24,34i 24,482 26,098 27,823 29,735 31,782 33,8i5 36,066i
9.356 9,793 10,522 11,123 11,742 12,371 13.169 14,029 14,832 15.688 16,586 17,568
6,708 7,500 8,424 8.748 8,625 8,418 8,846 9,430 10,193 10.917 11,473 12,058
8,757 8,260 8,531 8.8t3 8,927 8,912 9.466 i0,080 10,703 1i,28t 11,819 12,346
68,483 70.638 74,036 76,536 76,929 76,895 81,824 87,365 93,026 98,333 103,361 108.448
17.9!6 19,091 19,756 20,692 21,234 21,717 22,117 22,757 23.649 24.57 25,543 26,545
6.822 7,260 7.690 7,934 8,402 8,765 9,162 9,558 9,999 10.464 10,953 11,468
2,365 2,291 2,383 2,471 2,557 2~653 2,759 2,883 3,033 3.!81 3,333 3~474
16,371 14,633 14,943 i5,18i 15,428 !5.707 13,918 14,270 14,632 15,005 15,389 15,785Other rev enues
Reimbursements from Other Funds 9,898 10.680 11,053 11,428 !1.874 12,!87 12,5!".12,917 !3.410 !3,942 !4,487 15.055
Total Revenues 121,853 I24,593 129.861 134,242 136,424 137,924 142.294 149,750 157,749 165.502 173,066 180,775
Transfers from Other Funds 15,644 17,207 i7,807 18.930 i9,648 19,635 20.!62 20,811 21,605 22,463 23,340 24,256
TOTAL SOURCEOFFUNDS 137,497 141,800 147,668 153,172 156,072 157,559 162,456 170,561 179,354 187,965 196,406 205,031
Expenditures
Salades & Benefits
Re~ree Medical Liabilib,
Contact Sew ices
Supplies & Materials
General Expense
Ren~, Leases, & Equipment
Allocated Ex penses
Total Expenditures
Transfers to Other Funds
GF transfer for Infras~cture CIP
GF transfer for other capiLal projects
Debt Sew ice
Other
84,043 86,920 9i,542 94.831 99,250 i02,391 105,595 !09,399 1!4,111 119,044 !24,207 !29,613
2,900 2.940 3.028 3,119 3,2!3 3.309 3~408 3,511 3.6i6 3~724 3,836 3.951
9.135 I0,409 !0.747 11,123 11.374 11,544 11,717 1!,893 12,226 i2,618 12,996 13,386
2,656 3,569 3,685 3,8!4 3,900 3,958 4,018 4,078 4,192 4,326 4,456 4,590
8,7~9,802 i0,088 10,392 t0.678 !0,934 !i,205 Ii.503 11.828 12,106 t2,390 12,681
985 1,166 1,204 1,24.6 1.274 1,293 1,312 1,332 1.369 1,4!3 1,456 1.499
14,101 13.566 14,007 14,497 14,823 15,046 i5,27!15,653 16.123 16,606 !7,105 17,618
122,554 128,372 134,301 139,023 144,512 148,475 152,527 157.370 163.466 169,837 176,446 183.338
6,987 7,600 7.880 8,180 8,501 8.844 9.211 9,604 10,024 10,474 10,955 11,470
1,749 2,077 !,682 1,579 1,626 1,675 1.725 1,776 1,828 1.882 !,936 1.993
1,092 1,162 1,171 1,177 1,i73 929 752 749 649 763 763 763
19 948 13 13 !3 i4 14 15 15 15 15 15
TOTAL USEOFFUNDS 132,401 140,159 145,047 149,971 !55,825 159,937 164.229 169,513 175,982 182,970 190,115 197,579
Net Operating Surptus/(Deficit)5,096 1,641 2,621 3,201 247 (2,378)(1,773)1,048 3,372 4,995 6,291 7,452
.....Ot~erOne:timelncre~se= ~Decreases}~337 (2 567.~ (.3 9 b18 0 .................0 0 0 0 .......0 0
To/(From) Reserves 5,096 (2,092)54 1,285 765 (2,378) (1,773)1,048 3,372 4,995 6,291 7,452
Oty of Palo Alto 7
2008
TEN YEAR FORECAST
Revenues
Sales Taxes
Propa%, Taxes
Utiiit;; User Tax
Transient Occupancy Tax
Other Taxes. Fines & Penal~es
Subtotal: Taxes
Sere’ice Fees & Permits
Joint Sere ice Aereements
(S~nbrd Universi~’ )
Interest Earnings
Other revenues
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
%%%%%%%%%%%
Change Change Change Change Change %Change Change Change Change Change Change Change
9.25%0.92%3.00%2.50%(I ,50%)(2.50%)6.75°;;.7.25%6.00%4.00%3,50%2.509’
14.61%5.67%3.54%3,05%0.57%0.58%6.60%6.6I%6.87%6.88%6.40%6.66%
6.80%4.67%7.44%5.7t%5.57%5.36%6.45%6.53%5.72%5.77%5.72%5.921;
4.93%11.81%12.32%3.85%(1.41%)(2.40%)5.08%6.60%&09%7.10%5.09%5.105’
4.61%(5.68%)3.28%3.3!%1.29%(0.17%)6.22%6.49%6.I8%5.40%4.77%4,46::;’
9.45%3.15%4.81%3.38%0.51%(0.04%)6.41%6.77%6.48%5.70%5.11%4.92~/
7.82%6.56%3.48%4.74%2.62%2.27%1.84%2.89%3.92%3.92%3.93%3.92%
5.13%8.42%5.92%3.17%5.90%/.. 32%4.~ q’~;,.:,4.32%,.’~ 6-,~.. ,.~~.,~ ~,’~ ~ r,o,,4.67%,,~’,~:~’~ -no,
" ~4.78%4.23%5.25%(3.13%)4,02%3.69%3.48%3.75%4.00%’ ~%5 ~0 ’~~ 88~"
5.87%(10 62%)2.i2%1.59%1.63%1.81%(11.39%)2.53%2,54%2.55%2156~’~2.57%
Reimbursemen~ from Other Funds 4.39%7.92%3.49%3,39%3.90%2.64%2.68%3.22%3.82%3.97%3.9t%3.92%
7.96%2.25%4.23%3.37%1.63%1.10%3.17%5.24%5.34%4.91%4.57%4.45%
1.689::9.99%3.49%6.31%3.79%(0.07%)2.66%3.22%3.82%3.97%3.90%3.92%
7.21%3.13%4.14%3.73%1.89%0.95%3,11%4,99%5.16%4.80%4.49%4.39%
Total Revenues
Transfers from Other Funds
TOTAL SOURCE OF FUNDS
Expenditures
Sa}ades & Benefi~
Retkee Medical Liabiii.,’:y
Con~act Sew ices
Suppiies & Materials
General Expense
Rents. Leases. & Equipment
,~located Expenses
Total Expenditures
Transfers to Other Funds
GF ~ansfer for in[rasl~dcture CtP
1.3~%3.42%5.32%3.59%,:.66%3.16%3.13%3.60%4.31%4.32%4.3~%4.35%
0.00%i00.00%3.00%3,00%3,00%3.00%3,00%3,00%3.00%3.00%3,00%3.00%
5.46%i3.95"%3.25%3.50%2.25%1.50%1.50%1.50%2.80%3.20%3.00%3.00%
(1.63%)34.38%3.25%3.50%2.25%1.50%1.50%1.50%2.80%3.20%3.00%3.005
2.08%12.23%2.92%3.01%2.75%2.40%2.48%2.66%2.831,3 2 35St 2.35%2.355
(77.48%)18,38%3.26%3.48%2.25%1.50%1.50%1.50%2.80%3.20%3.00%3.00~
18.85%(3.79%)3.25%3.50%2.25%1.50%1.50%2.50%3.00%3.00%3.00%3.00’
2.91%4.75%4,62%3,52%3,95%2.74%2.73%3.18%3.87%3.90%3.89%3.91’
73.38% 8.77% 3.68% 3.80%3.92%4.04%4.15%4.26%4.38%4,48%4.60%4.705
2.~ ~o 2.89%.f..,.~0:.~ i8.75% (19.0251) ,c. 2;~,2.98%3.01%2.99%2.96%e~:~e-~;2.95%GF tansfer for other capital projects -" ~ ,~ ....o,~
Debt Service (6,44%} 6.38% 0.76%0.50%(0.29%)(20.84%)(19.07%){0.40%) (13.34%)17.54%0.00%0.00%
Other (96.82%} 4889.47% (98.63%)0.00%2.84%2.84%2.84%2.84% 2.84%0.00%0.00%0.00%
TOTAL USE OF FUNDS 5,18% 5.86% 3.49%3,39%3.90%2.64%2,68%3,22% 3.82%3.97%3.90%3.93%
Net OperatingSurplus!(Deficit)115.08% (67.80%) 5923%22.13%(92.28%)(1062.19%)(25,45%)(159.12%) 221,72%48,12%25.97%18.45’
8 ~ity of Palo Alto
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Budget Stabilization Reserve
Beginning Balance 22,731 27.480 25.388 25,442 26,727 27,492 25,114 23,341 24,389 27.761 32.756 39,047
Tof(From) Resewes 5,096 (2,092)54 1,285 765 (2,378)(1,773)1.048 3,372 4,995 6,291 7,452
Yearly BAOs (347)0 0 0 0 0 0 0 0 0 0 0
Ending Balance 27,480 25,388 25,442 26,727 27,492 25,114 23,341 24,389 27,761 32,756 39,047 46,499
% of Total Expenditures 20.8%18.1%17.5%17.8%!7.6%15.7%14.2%14.4%!5.8%17.9%20.5%23.5!4
KEY DRIVERS AND ASSU[ PTIONS
AFFECTING THE FORECAST
The Long Range Financial Forecast is based on
assumptions regarding what will happen in the
regional and State economy over the next fen,
years, and on near-term and long-term revenue
and expenditure drivers.
ECONOMIC ASSUMPTIONS
The Forecast assumes continued slow economic
g-rowth over the next fen, years,
followed by a recession beginning in
2010-11. These assumptions are
based on both the local economy’s
recent performance and on outside
expert forecasts. The presumed
recession is based upon the fact that,
in the past, California has had a
recession approximately once per
decade. A recession could come sooner or later
than projected. The rationale for including a
recession in the model is that cyclical economic
downturns will occur, and fiscal discipline is nec-
essary to cope with consequent revenue declines.
The General Economic Outlook
The general economic picture is decidedly mixed.
On the one hand, the housing market, credit
crisis, and higher oil prices threaten to throw the
national economy into recession. On the other
hand, GDP, productivity, and job ~owth remain
stead),. Silicon Valley appears to be doing well as
exports, corporate profits, and jobs increase.
In testimony before Congress’ Joint Economic
Committee (as reported by Forbes.corn, Novem-
ber 8, 2007), the Federal Reserve Chairman, Ben
Bernanke, stated that the U.S. economy is in for a
rough winter and a better spring.
Mr. Bernanke went on to say that,
the moderate 3.9% gToss domestic
product g-rowth rate of the economy
in the third quarter will slow in the
months ahead, amid turmoil in the
housing and credit markets and
rising energy prices, but "by spring,
the broader resiliency of the econ-
omy" will help it recover "to a more reasonable
g-rowth pace."
City of Paio Alto9
2008
TEN YEAR FORECAST
In another report (AFP, Google News, November
8, 2007), the Fed chief said the contraction in
housing-related activity "seemed likely to inten-
sify" because of tighter credit, and that consumer
spending is likely to ~ow more slowly in view of
higher energy prices, credit issues and continu-
ing weakness in housing. As for corporate spend-
ing, he observed that "heightened uncertainty
about economic prospects could lead business
spending to decelerate as well."
Consumer confidence is taking a drubbing as
reported by the Reuters/University of Michigan
Surveys of Consumers, "U.S. consumer senti-
ment posted a surprisingly sharp fall in early
November, hitting its lowest in two
years as higher energ-y costs and
falling home prices pummeled con-
fidence." Within a month’s time the
consumer sentiment index fell from
80.9 in October to 75.0 in November
- the lowest reading since the index hit 74.2 in
October 2005. Adding to this bleak news, "the
outlook for the future also looked g-rim, with
consumer expectations slumping to a two-year
low of 64.7 from 70.1 last month." (Reuters.corn,
November 9, 2007)
Housing Crisis
~4rhile the comments above address national
trends, they have implications for the State and
re,on. As the State Department of Finance
reported in its October 2007 Monthly Finance
Bulletin, "sales of existing single-family homes
slowed for the sixth consecutive month in
August to 319,200 units on a seasonally adjusted
annual rate basis. This was nearly 28 percent be-
low the year-ago pace. Aug-ust was thus the 23,d
consecutive month of declining year-over-year
home sales." As the inventory of for-sale homes
increases, downward pressure on housing prices
and construction activity occurs. This, in turn,
leads to real and perceived drops in equity
values that typically have a negative effect on
consumer spending and can lead to lower sales
tax revenue.
Credit Crisis
A crisis has emerged in the credit markets due to:
the incredibly lax lending standards in the sub-
prime market during the housing boom; the
formation and sale of collateralized debt obliga-
tions based on subprime loans; and the subse-
quent failure of subprime borrowers to meet
their mortgage payments upon the resetting of
interest rates. This crisis could throttle loans to
businesses, depressing economic activity, and
undermine consumer spending
through higher interest rates on
credit cards and other loans. Lend-
ers and financial institutions have
suffered billions of dollars in losses
and the stock market has been
shaken by these losses and the tightening of
credit. As the Chief Investment Strate~st for
Charles Schwab stated, "We have an economy
driven very much by access to credit. If it gets
worse form here, it’s hard to believe it wouldn’t
have a real impact on the economy." ( SF Chroni-
cle, October 10, 2007)
Ene~xy Prices Spikes
To date the economy has shown resiliency in
absorbing rising energy prices. But since prices
have risen from $70 and $80 per barrel to nearly
$100 per barrel, it is likely that this leap will have
an effect on the economy, especially as the holi-
day season approaches. Rising oil prices create a
double dilemma: they affect the purchasing
power of the consumer adversely while driving
up the inflation rate. Since the latter is a major
concern of the Federal Reserve, it is less likely to
lower interest rates which generally spur
consumer and business spending and stimulate
the economy.
City of Palo Alto
Expert Economic Forecasts
Information from economic forecasters is
ambiguous. Between April to November, a num-
ber of forecasters shifted to more sober projec-
tions.
In April, the Federal Reserve
Bank of San Francisco’s Presi-
dent and CEO, Janet Yellen,
stated that after the nation’s
economy displayed resilience
in the face of the energy price
shocks and the hurricanes, she
expected "economic activity to
settle back to a more trend-like
and sustainable rate as the year
prog-resses." This forecast was later tempered by
the more recent testimony of the Federal Reserve
Chairman cited above.
In May, The Le~slative Analyst’s Office (LAO)
predicted continued, steady gTowth in both state
and national economies, with annual job ~owth
in the 1.2 percent to 1.4 percent range through
2008 for the nation and between 1.8 percent and
2.0 percent in California. In November, the LAO
modified this picture saying "statewide employ-
ment has been clearly hurt in the areas of
construction and financial services. However, job
~owth has continued to occur in the rest of the
economy, although the pace has only been mod-
est." Of equal concern is the status of the State’s
revenue picture: "One result of slower economic
g-rowth is that State revenues have come in below
forecast in recent months. For the period May
through September 2007, they were $1 billion
below forecast." (Leg-islative Analyst’s Office
Website, Publication "The Subprime Mortgage
Situation," November 1, 2007)
In its third quarterly report of 2007, the UCLA
Anderson Forecast for California indicated that
"the end of 2007 will mark the peak of subprime,
adjustable rate mortgage resets, and mortgage
defaults are expected to peak sometime in the
first half of 2008. The real estate markets will con-
tinue to be a drag on California ~owth for at
least a year to come. With no other sectors pick-
ing up the slack, the Forecast expects to see over-
all job g-rowth of less than 1 per-
cent through this time next year,
with unemployment reaching a
peak of 5.9 percent at the end of
next year, with corresponding
weakness in personal income and
g-ross state product." (Press Re-
lease of September 12, 2007,
UCLAForecast.com.)
In a recent staff interview
(November 6, 2007), Stephen Levy, the Director
and Senior Economist at Palo Alto’s Center for
Continuing Study of the California Economy,
was hopeful about the local economy. He cited
Silicon Valley’s exports and link with a robust
worldwide economy, its decent job and income
g-rowth, its innovative bent, and its prosperous
populous as reasons for withstanding the emerg-
ing and downward pressure of the housing and
credit crises. Mr. Levy did not expect the local
economy to succumb to the current turbulence in
the market as it did during the dot-corn bust.
Mr. Levy did state, however, that the State of
California could be facing a $10 to $12 billion
deficit in the next year. This plus slowing job
g-rowth could pose local problems. Staff notes
that whenever the State faces fiscal difficulties,
these difficulties usually percolate down to local
jurisdictions in the form of revenue takeaways.
From 1992-93 through this fiscal year, the State
has taken a cumulative $52 million in property
taxes and other revenue from the City of Palo
Alto to solve their budget deficits. Although pas-
sage of Proposition 1A provided some protection
against State raids on revenue, a fiscal crisis
City of Palo Alto
2008
could negate its purpose.
As a consequence of the above forecasts com-
bined with local revenue information, the Long
Range Financial Forecast reflects a cautious view
of the economy and a somewhat conservative
projection of the City’s major revenue sources in
the next several years. It is important to remain
fiscally prudent in the event a recession does
OCCUr.
REVENUE DRIVERS
The City realized solid revenue growth in
2006-07. Total revenues grew by 8.5 percent over
the prior year. Economically sensitive and major
revenue sources such as sales, property, transient
occupancy, and documentary transfer taxes grew
steadily. In November 2007, Palo Alto voters
overwhelmingly approved a 2 percent rate in-
crease in the Transient Occupancy Tax, raising
the rate from 10 to 12 percent. This increase is
factored into the forecast be~nning in January
2008 when the rate takes effect. The forecast
assumes a 3.65 percent compound annual growth
rate for total revenues from 2007-08 through
2017-18. This relatively modest g-rowth rate
primarily results from the expected recession and
a near-term slowdown in sales tax growth.
The following describes the trends in the City’s
major revenue sources.
Sales Tax
In 2006-07, sales tax revenues rose 9.3 percent or
$1.9 million over 2005-06 levels. Economic
segments that showed particular stren~h in
2006-07 were business to business (e.g., electronic
equipment), department store, and restaurant
sales. Those displaying some weakness include
furniture/appliance outlets and business ser-
vices. It is of concern that growth in sales tax
receipts began to slow in the first quarter of
2007-08. ~4rhereas prior quarter growth rates
ranged from 5.3 to 12.8 percent, the first quarter’s
growth rate was a fairly anemic 1.5 percent
above the prior year’s 1st quarter rate. This might
portend a slowing in this revenue category and
requires careful monitoring. In addition, a
sigTLificant amount of the growth in 2006-07 was
concentrated in one electronic equipment maker.
In the past, this sector has shown considerable
volatility. This spike in company revenue also
merits tracking. A growth rate of 0.9 percent is
projected for 2007-08 and 3.0 percent for 2008-09.
These projections are in alig-nment with the City’s
sales tax consultant.
Property Tax
Secured property tax revenues rose by 9.6 per-
cent or $1.3 million in 2006-07 over the prior year.
This healthy increase can be attributed to a
strong commercial real estate market and a fairly
steady residential market. While there is no firm
evidence yet for a softening of home prices and
no information from the county on residential
assessment appeals or decreases, a softening in
this revenue source lags an economic downturn
by a few years. Therefore a slower growth rate of
around 5.7 percent in property tax revenues is
estimated for 2007-08 and 3.5 percent for 2008-09.
These numbers correlate closely with Santa Clara
County estimates.
Transient Occupancy Tax
As stated, voters approved an increase in the
TOT rate to 12 percent starting January 2008.
TOT revenue should grow by $0.6 million in
2007-08 and by another $0.6 million in 2008-09.
Average occupancy rates have moved up stead-
ily during the past 3 years: from 61 percent in
2004-05 to 72 percent in 2006-07. Preliminary data
12 City of Palo Alto
TEN YEAR FORECAST
for 2007-08 show occupancy rates at 77 percent.
Likewise, average room rates have risen from
.$119 to $.137 during the same period. TOT reve-
nues are expected to show solid growth as long
as local business conditions remain robust.
Additional competition may be expected,
however, when new hotels come on line in
Menlo Park. The building of a "high-end" hotel
in the Stanford Shopping Center sometime in the
future should place Palo Alto in a s~rong
competitive position.
Documentary Transfer Tax
Documentary Transfer Tax (DTT) revenue is
acutely sensitive to the volume and value of
property sales and the mix of residential and
commercial transactions. In 2006-07, DTT
revenue rose to $5.8 million, 1.9 percent over the
prior year. This is the highest DDT level in 10
years and is due to a vibrant commercial sector
and steady residential sector. This revenue
source is projected to ~ow at a compound
annual rate of 4.7 percent over the next 10 years.
Refuse Fund
With the landfill expected to close in 2010-11,
annual rental payments from the Refuse Fund to
the General Fund will drop from $4.3 million to
$2.1 million starting in 2012-13. The Forecast
incorporates this expected revenue loss. Council
established a policy to extend the rent payment
schedule through 2020-21 based on an updated
analysis of the landfill area (CMR:104:07).
EXPENDITURE DRIVERS
Salaries and Benefits
Salaries and benefits represent approximately
64 percent of the 2007-08 General Fund budget.
Upward pressure on salary and benefits is con-
tinual, due to the cost of living in Silicon Valley
and the labor market in which the City negotiates
with its bargaining units.
In 2007-08 the City is scheduled to complete ne-
gotiations with the Palo Alto Peace Officer’s As-
sociation (PAPOA) and the Fire Chiefs" Associa-
tion (FCA). Staff expects negotiations to focus on
salary and benefit changes. PAPOA negotiations
have demonstrated that Palo Alto is experiencing
sig-nificant salary and recruitment competition,
especially with surrounding jurisdictions.
Contract negotiations were concluded last year
with the International Association of Fire Fight-
ers (IAFF), and Service Employee’s International
Union (SEIU), with the IAFF contract scheduled
to expire in 2010 and the SEIU contract set to
expire in 2009. Council approved an average
760
740
720
700
680
660
640
annual 3.25 percent increase for IAFF over the
four-year contract and an average annual 2.5 per-
cent increase for SEIU over a three-year period.
There are two remaining gTOUpS that are not
represented by a union: Management/
Professional and Limited Hourly. For 2007-08,
Council approved a one-time 3.5 percent increase
for the Management/Professional g-roup.
Oty of Palo AIto 13
2008
TEN YEAR FORECAST
Over the past few years General Fund staffing
has been reduced by 70 positions, or 10 percent.
(see figure 1) The annual ~owth for salaries and
benefits over the next ten years is projected at 4.0
percent. Within that category, salary and over-
time ~owth are assumed at 3.5 percent per year,
benefits are assumed to g-row by 5.0 percent,
including retiree medical.
Within the benefits category, the largest drivers
are Pension and Healthcare Costs.
Pension Expense
CalPERS retirement system pension costs have
increased substantially since 2000. However, the
rapid g-rowth of these costs has subsided in the
past two years. In 2005, the CalPERS Board
enacted a new rate policy that spreads market
gains and losses over 15 years rather than over
three },ears when calculating the value of assets.
The impact of this new policy appeared for the
first time in 2005-06, with rates reduced by 3-4
percent compared to the prior year. The rates for
2006-07 showed a further decline of 1-2 percent.
Moreover, CalPERS investments have improved
dramatically since the period 2000 through 2002.
For the one-year period ended June 30, 2007,
CalPERS investments earned a 19.1 percent
return. This marked the fourth consecutive year
of double-di~t returns. Also, pension expenses
are expected to continue to level out in subse-
quent },ears.
Management/Professional and SEIU employees
are now contributing 2 percent of their salary to
their PERS retirement plan, as a consequence of
receiving the 2.7 percent at 55 package. With this
change, as with the containment of costs on
medical plans, the concept is emer~ngthat
retiree benefit and medical costs can no longer
be fully borne by the City and need to be shared
with employees.
Healthcare and Retiree Medical Costs
The City of Palo Alto was one of the few remain-
ing jurisdictions that fully funded employee
health insurance premiums and retiree medical
costs. As mentioned earlier, that long-held prac-
tice was amended last year when the City placed
a limit on its contribution to medical premiums
for both active and retired employees.
HEAL TH CARE
$24
$2I
$18
~ $15
:=_o_ $12
~ $9
$6
$3
$0
Healthcare Expenses- Fig, 2
[] Active Employees [] Retirees [] Retiree Medical Liability
In the past five years,
healthcare expenses have
nearly doubled. Medical
premiums are expected to
increase from $12.8 million
in 2007-08 to $16.9 million
in 2011-12.
RETIREE MEDICAL
As a result of GASB 45, the
City recently underwent an
actuarial study which val-
ued its retiree medical li-
ability at $82.6 million,
14 City of Palo Alto
2008
TEN YEAR FORECAST
(assuming the establishment of an irrevocable
trust and a 7.75 percent discount rate.) The City
has already funded a Retiree Health Benefit re-
sela, e valued at $30.7 million. Having this reselwe
places the City at an advantage compared to
most jurisdictions. After transferring $30 million
to the tanast fund, the unfunded portion of the
liability will be reduced to $52.6 million. The
2007-08 General Fund budget includes $2.9 mil-
lion, which is its portion of the an_nua] required
contribution.
In its attempts to limit healthcare costs for both
current and retired employees, the City has ac-
complished the following:
and general expense. Consistent with last },ear’s
LRFF, this forecast assumes no program growth
beyond general cost inflation over the next ten
years. Fiomare 3 shows the breakdown of non-
salary expenditures.
General expense includes the lease payment of
$6.3 million to the Palo Alto Unified School Dis-
trict (PAUSD) for the "Covenant Not to Develop"
surplus school facilities. This contract requires
CPI adjustments to the annual lease payment,
with a projected annual ~owth rate for the next
ten years of 3.0 percent or a minimum of $189,000
annually.
Placed a limit on the employer’s contribu-
tion to medical premiums for both active
and future retirees, eliminating the most
expensive health plan the PERS system
offers, and reversing its long-held practice
of funding 100 percent of ever}, available
PERS healthcare plan for employees and
retirees
Raised the full vesting requirement for
retiree medical eli~bility from 5 to 20
},ears for new employees
Going forward, the City will continue to
explore strate~es to reduce
2007-08 Non-Salary Expenditures-Fig. 3
Supplies &
t~aterials
9.3%
Rents &
Leases Contract3.0%S Services
27.0%
Allocated General
Charges
35.2%25.5%
healthcare and retiree
medical costs.
Non-salary
Expenditures
Non-salary expenditures
represent 28 percent of the
2007-08 General Fund
budget. These expenditures
include allocated charges,
supplies and materials, rents
and leases, contract services,
$129
Expenditures by Category - F~g. 4
$65
$0
+ Salaries ~ BenefRs ~ Non-Sala~ ~Transfers
City of Palo Alto 15
2008
TEN YEAR FORECAST
Expenditure Trends by Category
and Function
Figure 4 depicts the projected trend lines for sala-
ries, benefits, non-salary expenses, and transfers:
Please note the following:
Salaries, while trending upward, remain at
about 44 percent of total expenditures from
2007-08 through 2017-18
Benefits increase from 22 to 26 percent of
total expenditures from 2007-08 to 2017-18,
primarily due to the inclusion of the retiree
medical liability starting in 2007-08
Total expenditures increase an average of 3.7
percent per year from 2007-08 through
2017-18
Non-salary expense and transfers represent
about one-third of General Fund
expenditures
Figure 5 displays the budget by functional area:
The largest functional areas of the budget are
Police, Fire and Community Services. They com-
prise 16 percent, 20 percent and 15 percent of
total expenditures in 2007-08, respectively.
The Administrative functional areas includes
2007-08 Expenditures by Functional Area - Fig. 5
Non-Dept.Public Works,
S9.2 ,,$13.2 P, annin9,
SlO.i
Administr,
S17.3 Transfers
S10.7
Con’~nu nity
Services.
$21.2
Library., $6.5
Fire. $28.0
F:blic e, S22.9
Administrative Services, the City Attorney, City
Auditor, City Clerk, City Council, City Manager,
and Human Resources. These functions represent
12 percent of total expenditures. Forty-four
percent of the services that the administrative
departments provide is expense is reimbursed by
the Enterprise Funds.
RISKS
The City continues to face fiscal challenges and
opportunities which create upside potential and
downside risks in the Forecast. Some of these
challenges and prospects are immediate and oth-
ers can be viewed as longer term parts of the
City’s sustainable budget effort.
DOWNSIDE RISKS
The primary downside risks on the revenue side
are the housing market, ener~, prices, and credit
crisis. Sales, Property and TOT revenues will
move downward it these areas worsen. Slow
to moderate ~owth rates are reflected in the
Forecast through 2009-10 or before an expected
recession. Starting in 2012-13, all revenue sources
are anticipated to resume more normal ~owth
patterns.
The following are some additional down-
side risks related to revenues forecasted in
the model.
Economic Base
The City is moving proactively to maintain
and ~ow its economic base. Mayoral ef-
forts to retain and g-row automobile dealers
and other key revenue generators, recent
discussions to expand the Stanford Shop-
ping Center, and the effort to build a new
hotel in the Shopping Center, have all been
16 Oty of Palo Alto
part of a heightened awareness and action plan
to secure the City’s economic base. (Further
details appear below in "Upside Potential")
These efforts are vital ~ven the following threats
to City businesses:
Big-box stores such as Best Buy, Home Depot,
Costco, REI, and supermarkets in Mountain
View and East Palo Alto that draw sales and
sales taxes away from Palo Alto
Nearby cities" efforts to attract automobile
dealerships. For example, plans have
emerged in Menlo Park (in conjunction with
General Motors) to develop an automobile
mall on Willow Road and Highway 101.
Given the lack of suitable space in Palo Alto,
this could lead to the departure of key local
dealerships. The City has already lost three
auto dealerships in the past five years: Ford,
Nissan, and Porsche
Retail competition from re~onal shopping
centers such as Valley Fair and Santana Row
The emergence of high-end hotels in Los
Altos, Menlo Park and East Palo Alto,
generating increased competition for Palo
Alto hotels and for TOT dollars
The transformation of Stanford Research Park
from firms producing taxable sales to those
providing non-taxable research, administra-
tion, and business services
Opposition to business development within
the City
The Forecast incorporates the most recent loss of
automobile dealerships and hotels; however,
should any of these trends become more signifi-
cant, the City’s revenues will decline acCordingly.
2{9
TEN YEAR FORECAST
Telephone UUT Threat
Voice-Over-Internet Protocols (VOIP) technologT
will impact telephone UUT revenues as it pene-
trates homes and businesses. Based on a recent
Federal Communications Commission ruling, the
City will no longer have the authority to tax
VOIP service; thus the $2 million telephone UL~
revenue source may erode over time. In addition,
since the telecommunications industry was
successful in relocating local franchise authority
to the State level, it is possible they will attempt
to do the same for UUT. A State UUT could
result in further diminution of the City’s
telephone UUT revenues.
The following are some additional downside
risks on the expenditure side.
Healthcare
Over the past five years, healthcare cost for the
City have risen from a low of 3.4 percent to a
high of 12.7 percent per year. The Forecast
assumes an average g-rowth rate of 7.7 percent
per year. It is quite possible that healthcare costs
will escalate beyond that rate of g-rowth.
Increased Salary Pressures
If prevailing labor market differentials surface as
comparisons are made with benchmark cities,
more complex labor negotiations may ensue in
the next 2-3 years. Budget-balancing require-
ments will be weighed against the need to match
regional wage standards. This may drive salaries
and benefits expenditures above the Forecast.
New Projects and Priorities
If the City identifies new projects or priorities
that are not included in this Forecast, new reve-
nue sources and/or expenditure cuts would have
to be identified to fund them. Capital and other
City of Palo Alto 17
TEN YEAR FORECAST
costs not funded through debt financing would
require alternative resources. For example,
should new library and public safety facilities be
constructed, additional maintenance expenditure
will be required. In addition, furniture, fixtures
and equipment that cannot be covered through
specific types of debt structures must be funded
using new or existing resources.
Moreover, as the City utilizes new or existing
resources to fund expanded facilities or pro-
g-rams, it reduces its flexibility to cover increasing
expenses in other pro~ams. Adhering to Sus-
tainable Budget tenets will require a mechanism
for prioritizing project and pro~am needs.
infrastructure Reserverunalng ’~
One of Council’s top priorities is to restore and
maintain the City’s General Fund infrastructure.
An Infrastructure Reserve (IR) was created to
ensure future project funding. When the Infra-
structure Management Plan (IMP) was initiated
in 1998, it was estimated that the City needed to
spend $10 million annually to eliminate the
infrastructure backlog and to maintain existing
infrastructure in future years. However, that $10
million per year has not been sufficient to cover
the ~owth in infrastructure project costs, which
have been impacted by inflation, changes in
scope, and steep increases in the cost of construc-
tion materials. A consultant has been hired by the
City to update the Buildings and Facilities
infrastructure Reserve Balance with
Additional $3 Million Per Year investment-Fig.
$20
$15
$1o
$5
$o
15.31
$10.84 ~ $10.22
S 9-7-4--S7=F_53
2007-08 2008-09 2009-10 2010-11 2011-12
18 Oty of Palo Alto
portion of the IMP. The financial impact of this
update will not be known until Winter 2008. The
Capital Improvement Prog-ram Plan for the
ensuing year will incorporate the new data from
the update.
In April 2006, the City Council directed staff to
review options to increase IMP funding by $3
million per year through a combination of expen-
diture reductions and revenue enhancements.
The LRFF assumes that the transfer of $3 million
per year will increase by an inflation factor of
seven percent per year.
State Budget Difficulties
The State of California is expected to have a defi-
cit ranging from $10 to $12 billion in 2008-09.
Although the passage of Proposition 1A includes
protections from State raids on local jurisdiction
resources, there is a provision that in emergency
situations these controls can be sidestepped. The
State’s ability to borrow its way out of the loom-
ing budget dilemma is limited, and local govern-
ments should be prepared for potential take-
aways.
UPSIDE POTENTIAL
Possible developments that would positively
impact the City’s bottom line include:
Successful Economic Development
Efforts
In the past few years, the City has engaged in
several efforts to encourage business develop-
ment. As a result of the Mayor’s Committees
on Retail and Business Attraction, several key
strategies have been implemented:
¯The City will be partnering with the Simon
Group in efforts to expand the Stanford
Shopping Center and maintain its
competitive position in the marketplace
Staff has reviewed zoning requirements in
several business districts and implemented
changes to the zoning code that address
challenges to high-volume sales tax genera-
tors such as auto dealers
The City worked with auto dealerships to
identify potential land near Highway 101 to
provide ~eater visibility and space
Other zoning changes have protected com-
mercial zones from housing development
In addition, the Business Improvement District
(BID) has been a catalyst for businesses in the
City’s downtown. Events such as Dine Down-
town have successfully increased sales to local
restaurants. The pilot pro~am "Destination Palo
Alto" has engaged a variety of partners (the City,
Chamber of Commerce, BID, Stanford,
commercial areas, and neighborhood associa-
tions) in promoting visitor and visitor-related
economic activity and revenues. Attraction of the
"2008 Amgen Tour de California" is a prime
example of the effort to bring high-profile events
to the City.
Business outreach efforts continue, focusing on
valued businesses and top sales tax generators.
City staff and elected officials have conducted
business outreach visits to companies such as
Communications and Power Industries, Inc.,
Varian, and VM Ware. These visits help the City
assess its stren~hs, weaknesses, and challenges;
they will continue to inform decisions regarding
business development efforts by the City.
To the extent that these efforts counteract the
negative competitive pressures facing the City’s
business community, City revenues may exceed
those forecasted.
Talent Crisis
The City of Palo Alto, like most other govern-
ment agencies, is facing an approaching "baby
boomer" retirement wave. Currently, 38 percent
of staff is eligible for retirement, and the fig-ure
will increase to 56 percent within five years. This
wave of retirements will create an opportunity
for restructuring, reviewing how services are
delivered, and reducing staff. This opportunity,
however, must be weighed against the challenges
of mana~ng the loss of expertise and institu-
tional knowledge in the organization and the
response to the service needs of the community.
With retirements looming, Palo Alto faces a
related challenge: the effort to hire new workers.
Local governments find it difficult to recruit as
fewer potential entry level employees are at-
tracted to the public sector. Dr. Stuart Greenfield
of the Center for State and Local Government
Excellence recently published a study that helps
explain this relative disinterest. For example,
local government workers earn 7 percent less
than comparable private sector workers; salaries
in local government jobs increased less than in
the private sector between 1997-2005 (3.3 percent
compared to 3.8 percent); public sector workers
are better educated yet they earn 25 percent less
than those in the private sector with comparable
de~ees; and while the public sector has a ~eater
percentage of knowledge workers, those workers
earn 25 percent less than similar workers in the
private sector. It is important to point out that
strong public sector benefit packages can com-
pensate, in part, for lower comparable earnings.
To address the recruitment challenge, Palo Alto
is working to attract potential employees through
the summer internship and management fellows
pro~am. In addition, the City will continue to
promote itself as a ~eat place to work providing
City of Palo AIto l 9
20
employees with challenge and opportunity,
attractive salary and benefit packages, and a
focus on work/life balance.
LOOKING BACKWARD AND
FORWARD
In summary, this forecast shows that the City has
righted its financial course over the past several
years through expense and position reductions
and revenue enhancements. In addition, the City
can point to major accomplishments such as
increased infrastructure spending and funding of
its retiree medical liability. Few jurisdictions can
lay claim to these achievements ~ven the finan-
cial pressures cities face. This City, however,
continues to have a plethora of existing and new
infrastructure needs, enhanced pro~am
requests, and new demands such as in the area of
climate protection. The myriad of expenditure
pressures on General Fund resources has
prompted a discussion of developing a
"Sustainable Budget" whereby sources and uses
of available funds are in equilibrium over time.
This concept and goal has been explored in
CMR:387:07 which was presented to the
Council’s Finance Committee in October, 2007.
Highlights of this report are summarized below.
SUSTAINABLE .~UDGET
The idea of a "sustainable" budget emerged from
the financial disruptions of the "dot-corn" bust
and the concern that the City cannot continue to
support the variety and level of current services
over the long-term. This concern is compounded
by emer~ng new pro~am and facility needs that
must compete with existing services for re-
sources.
A "sustainable budget" is a plan to keep spend-
ing within one’s means over the long-term.
Another definition of this type of budget is an
expenditure plan that meets the needs of the
present without compromising the ability to
provide services to future generations.
As the above "Risks" section states, the goal of
budget sustainability is not as simple as it
appears, since dynamic forces such as economic
cycles, chan~ng demog-raphic and social needs,
rising medical and energy costs, new facility
needs, and other factors impact the best of
budget strate~es. Tough questions must be
raised and addressed to provide the flexibility
necessary to achieve a balanced budget over
time. These include, for example:
V~rhat are the City’s basic pro~am and
spending priorities now and in the future?
Balancing a rich and wide level of services
with expanding infrastructure, for example,
will present a difficult trade-off
How long can current expenditure patterns
continue and what costs can be reduced or
eliminated to achieve a balanced budget?
Can current services and service levels be
provided in a more efficient and cost-
effective manner?
What revenue sources can be counted upon
now and in the future, and which are likely to
decline?
To what extent are the City and community
able and willing to maintain and ~ow
revenue resources when needed?
A critical component of developing a sustainable
budget is that the City raise and respond to the
above questions on an ongoing basis, preferably
20 City of Palo Alto
TEN YEAR FORECAST
annually. This implies that as new expectations,
initiatives, and pro~ams arise, they are
~ounded in the reality of available resources
and competing priorities. Maintaining such a
budget takes considerable discipline. By being
proactive in finding answers to the difficult
questions raised above, the City can avoid the
painful, abrupt and potentially near-sighted
solutions that are typically necessary to solve
budget shortfalls.
As stated in this report, the City has capably
addressed a number of structural and long-term
funding issues such as infrastructure replace-
ment, the loss of revenues during the "dot-corn"
downturn, and the retiree medical liability. It has
solved these problems primarily by reducing
General Fund costs. As the City ~apples with
the rising cost trends cited in this report, the
option of reallocating resources has become more
problematical.
years while those providing community and
public safety services have either remained
constant or increased. As a proportion of the
City’s budget, the public safety and community
service functions have ~own from 58.3 percent
of the total in 1997 to 61.5 percent in 2007. These
numbers make sense in light of the reductions
made in the administrative departments, but
they indicate that if the City is to sustain its
budget, difficult decisions may be necessary in
areas that the public and Council see as "basic"
services. This is especially important as the City
endeavors to fund a new public safety building
and library/community center facilities.
In addition to the capital costs expected to be
debt financed, there will be incremental
equipment, maintenance, and operating costs
associated with these new facilities.
To maintain a sustainable budget, the City has
taken several actions including:
An analysis of expenditure ~owth by depart-
ment (see table below) shows that budgeted
resources for administrative departments have
dropped in real dollar terms over the past five
Reallocating of resources - e.g., recent
$3 million shift of operating resources to
infrastructure spending
General Fund Operating Expenditures:
Last Five Years in 2003 Dollars (in $000s)
S25,000
$20,000
$15,000
$10,000
$5,000
$0
2003 2004 2005 2006
~.~,--Administration + Public Works
¯ -,,.)-(,.-.,Police -..,-.~-CSD and Library
2007
--~ Planning and Comm Env
City of Palo Alto 2i
2008
Increasing revenues or resources - e.g., recent
2 percent increase in TOT rate
Reducing or shifting benefit expense - e.g.,
recent capping of medical premium costs and
having employees pay a share of retirement
plan contribution
Increasing use of debt versus pay-as-you-go
funding for capital projects so as to spread
costs and benefits over time
As with most budget decisions, the City will
have to make hard choices as it develops a
sustainable budget. To facilitate the decision-
making process, the following complex questions
(in addition to those raised earlier) need further
analysis, discussion, and action:
V~rhat is the optimal balance between infra-
structure and operating expenses that will
sustain the delivery of services?
Should the City incur more debt for capital
projects so as to spread the cost burden of
improvements over current and future users?
The City has generally used a conservative,
pay-as-you go approach for capital projects.
How can the City control expenditures
~owing at ~eater than inflation rates yet
preserve core services?
~4Fhat opportunities does the City have to
maintain and expand revenue sources when
necessary?
To what extent is the community willing to
balance its desire for services and the
revenues that support them with its desire to
restrict business ~owth and its associated
traffic impacts?
What de~ee of risk is the City willing to
incur as it seeks to control expenses?
Can a meanin~ul dialogue be initiated with
City employees and unions on sharing
medical premium expenses?
What framework will the City use to evaluate
and fund new pro~ams versus ongoing
services?
As the Finance Committee indicated in October,
2007, these questions must be vetted by the
community and Council. They will require con-
siderable discussion and consensus since they
involve real, competing interests. The City’s
practice is to conservatively and judiciously
manage its resources. With the development of a
sustainable budget it will continue this practice
into the future.
In conclusion, this years’ LRFF incorporates
many significant changes and challenges. As the
financial forecast’s bottom line shows, the City is
in a sound financial position. The budget
continues to be balanced despite rising benefit
costs, enhanced infrastructure funding, and a sig-
nificant retiree medical liability. Although deficits
are shown in 2010-11 due to a projected recession
and the decline in Refuse Rent, the City is
expected to see reasonable surpluses in the
second half of the ten year forecast.
In addition, this year’s LRFF includes a brief, but
informative information chapter on the status of
the Enterprise Utility Funds. This next section
represents the first, small step toward a more
comprehensive citywide Long Range Financial
Forecast.
22 Oty of Palo Alto
2008
ENTERPRISE FUNDS
ENTERPRISE FUNDS
ENTERPRISE UTILITY FUNDS
Although the Long Range Financial Forecast’s main focus is the Genera! Fund, the
financial outcomes of the Enterprise Utility Funds affect the City as a whole. The
addition of information on the Utility Funds represents the first step toward a
comprehensive, cit}~vide Long Range Financial Forecast.
The City of Pa!o Alto has provided utility service to its citizens and businesses for
over 100 years and is the only city in California to offer a full array of utility services.
The Enterprise Utility Funds are comprised of the Electric, Gas, Refuse, Storm
Drainage, Wastewater Collection,
Wastewater Treatment and Water
Funds. Each of these Funds is
managed independently, and a
summary of the Funds is
presented below.
It is important to note that the
basic principal of the Enterprise
Utility Funds is that customers
pay the full cost of the services
they receive.
REVENUES
2007-08 ~-,terprise ~ilitv Fund
Revenue - Fig.i
(in mii!ions of
V’Cas t e-Storm waterD rainage,~,,/~ Treatment,$7 ’,,,$21
Refuse,
$30 ~
Water,
$27
VMast e-
water _~
Collection,
$15 Gas, $47J
Electric,
$114
Revenues for the Enterprise Utility
Funds are primarily generated through rates charged to customers and are designed
to cover the full cost of delivering services. Those costs include the cost of commodi-
ties, replacement and maintenance of capital infrastructure, debt service coverage and
operation expense. Overall utility rates increased 8.9 percent in the 2007-08 adopted
budget, and additional increases were included in the proposed 2008-09 budget.
Oty of Palo Alto 23
2008
ENTERPRISE FUNDS
The total combined revenue for the
Enterprise Utility Funds in the 2007-08
budget is $261 million. Fig-ure I shows
revenue by Fund.
EXPENSES
As noted on the previous page, expenses for the
Enterprise Utility Funds are driven by commod-
it},, capital infrastructure, debt service and
operational costs.
The total combined expense for the Enterprise
Utility Funds in the 2007-08 adopted budget is
$283 million. Figure 2 shows expense by Fund.
Fig-ure 3 shows combined expense by category.
EXPENSE DRIVERS
Commodity Costs
Fluctuating commodity and electric and gas
transmission costs continue to be a challenge for
the Electric, Gas and Water Funds, since com-
modity purchases represent the largest expense
in dollars and percentage for these three Funds.
In 2007-08, total budgeted commodity expense is
$118 million or 41% of total Enterprise Utility
Fund expense.
Commodity pricing can be driven by weather,
supply availability, changes in demand and
reg-ulatory policies. Increases in commodity
expenses may cause customer rate increases.
To mitigate marketplace volatility and dramatic
customer rate changes, staff uses a three-year
laddered purchasing strateg7 for electric and
gas supplies.
24 City ofPalo Alto
Capital infrastructure
The investment in capital infrastructure is a ma-
jor priority for the Enterprise Utility Funds.
Replacing, maintaining and up~ading plant and
tect~nology ensures continuing, reliable service
delivery. Costs incurred for capital infrastructure
can drive changes to customer rates.
The major investments that were included in the
2007-08 budget are the following:
The replacement, rebuilding and conversion
of under~ound electric systems-
$10.5 million
The replacement and up~ade of gas mains-
$6.9 million
The rehabilitation of wastewater collection
systems- $3.4 million
Water main replacement, reliability up-
~ades, and emergency water supply-
$11.1 million
The construction of a new storm water pump
station and citywide storm drainage system
repairs- $5.5 million
2007-08 ~q,~,~rprise " ~" ~".~ .U~n.~y Fund
Expense - Fig. 2
(in millions of dollars)
Refuse,
$31 ~
VVater,
$33
Storm
Drainage,Waste-
$9 water
$20
VVaste-
water
Collection,
S15
Electric,
$I28
Gas, $48
2008
ENTERPRISE FUNDS
Design costs for improvements to the
disinfection facility at the wastewater
treatment plant- $1.3 million
Multi-year projects included in the 2008-09 pro-
posed budget are the replacement of a reclaimed
water pipeline to the City of Mountain View
($26 million), the construction of the ultraviolet
disinfection facility at the wastewater treatment
plant ($26 million), and the Emergency Water
Supply Project with an estimated four-year cost
of $40 million. Revenues from an anticipated
$35 million bond issuance will help fund the
Emergency Water Supply project. State of
California loans and ~ant funding may assist
with the disinfection facility and reclaimed water
pipeline projects along with $16.1 million in
reimbursements from the City of Mountain View
and wastewater treatment plant partners.
Operational Costs
Operationally, the Enterprise Utility Funds face
similar types of cost drivers as the General Fund.
After commodity expense, salary and benefits,
allocated charges, rent and the equity transfers
are the sig-nificant operational costs for the
Enterprise Utility Funds.
Capital
tm
15%
2007-08 F-qterprise Utility Fund
Btpense by Category - Fig. 3
Equity
Debt OtherService
5%/,~ Oper,Csts\/~o%
5%
Rent/
Lease &
Allocate{
Chgs
12%
~_S alary&
Benefits
12%
Comdity.
41%
Salary and benefits expense represents 12 percent
of total budgeted expense for all Enterprise
Utility Funds in 2007-08. Included in this figure
are negotiated salary increases and the rising cost
of health care and retiree medical benefits.
Allocated charges and rent represent 12 percent
of total budgeted expense for all Enterprise
Utility Funds. The utility funds reimburse the
General Fund for administrative services such as
attorney and payroll services, and they pay
market-based rents for the use of General Fund
land. Increases in General Fund expenditure are
allocated based on various measures to the utility
funds, and rent is adjusted annually after an
independent appraisal.
The equity transfer to the General Fund from the
Electric, Gas and Water Funds, represents 5% of
the expense for the Enterprise Utility Funds.
Increases in operational costs may drive in-
creases in customer rates. Many of the cost
pressures described in the Expenditure Drivers
section of the General Fund LRFF, also apply to
the Enterprise Utility Funds.
Reserves
In addition to commodity purchasing strateg-ies,
Utility Fund reserve balances are also used to
mitigate the effect on customer rates on commod-
ity market price swings and operational cost in-
creases. These mitigations are typically used on a
one-time basis, since ongoing higher costs must
eventually be borne through the rate structure.
Additionally, Enterprise Utility Fund reserves
provide cash for the emergency equipment
replacement, and planned capital expenditures.
The total combined reserves for the Enterprise
Utility Funds per the 2006-07 Comprehensive
Annual Financial Report (CAFR) are $233
million. Figure 4 shows the reserves by Fund.
City of Palo Alto 25
3008
ENTERPRISE FUNDS
Risks
The Enterprise Utility Funds, like the General
Fund, face sig-nificant fiscal challenges and
opportunities that will impact future financial
outcomes.
DOWNSIDE RISKS
Commodity Markets
Volatile markets for commodity and transmis-
sion costs will continue to present sig-nificant
challenges for the Enterprise Utility Funds.
Wholesale electric supply costs have increased
71 percent since 2003 and 58 percent since 2004.
Water supply costs have increased almost 30
percent since 2005-06.
Currently, staff is able to mitigate the market
volatility for gas and electric purchases with its
three-year laddered purchasing strategT.
However, if a supplier defaults or staff is unable
to negotiate long-term contracts, ener~,
supplies will need to be purchased at the then-
current market price.
Weather-Related Concerns
Approximately 50 percent of the City’s electric
supply comes from hydroelectric projects. The
availability of hydroelectric supply is dependent
on the weather, and thus the cost to purchase
electric commodities may increase dramatically
in a dry year. The City tries to maintain suffi-
cient cash reserves to buy ener~, from the
market during periods of drought and replen-
ishes the cash reserves during wet periods when
production is high and purchase costs are lower.
This use of reserves to balance the hydroelectric
supply uncertainty enables the City to provide
relatively stable rates to customers.
Regula.tory Concerns
Regulatory concerns include proposed changes
to the electric industry structure by the Federal
Energy Reg-ulatory Commission (FERC) and the
California Independent System Operator (ISO)
as well as several State of California leg-islative
bills. If passed, the new regulations and laws
would increase transmission, local capacity and
reporting costs.
Funding for Capital hnprovement
In recent years the cost of construction materials
has risen sharply, outpacing the general rate of
inflation. As the costs of material and labor rise,
planned projects are being re-evaluated, delayed
or scaled down.
The Storm Drainage Fund has been particularly
impacted by these concerns. In 2005, property
owners voted to approve a fee increase to fund
specific storm drain improvement projects. Per
the terms of the approved ballot measure,
annual Council-approved rate increases cannot
exceed the local rate of general inflation (which
is sig-nificantly lower than the rate of increase in
construction costs) or 6 percent, whichever is
less. Due to the rapid increases in construction
2006-07 ~qterprise b~ility Fund
Reserves - Fi9. 4
(in miil;ons of dollars)
Electric -
all others-..
$85
Gas $18 \&Paste
water
$12
$22
$6
Stoma
Drainage
$4
Electric-’
Calaveras VVaste
$ 72 water
Trtmt $14
26 City of Palo Alto
2008
ENTERPRISE FUNDS
costs, the Storm Drain Fund will be unlikely to
complete all of these projects without additional
funding from the General Fund. Staff is working
closely with the Storm Drain Oversight
Committee to develop strate~es and recom-
mendations on which projects to implement
with the available funds.
The Wastewater Treatment Fund has also been
adversely impacted by the rise in construction
and labor costs. The $26 million reclaimed water
pipeline project with the City of Mountain View
has been delayed due to construction bids
coming in over budget. Revenue from State
~ants and the Treatment plant partners will
offset a portion of the increase; however, Palo
Alto’s portion of the cost will increase as well.
Water, Gas and Electric Fund capital improve-
ment projects are also subject to the rising cost
of construction labor and materials. The
increased costs for new projects as well as
on-going up~ades for replacement and
reliability will have an effect on changes to
customer rates.
Talent Replacement Gaps
The Enterprise UtiliPy Funds, like the General
Fund, face skill shortages in a variety of techni-
cal areas. Examples include; difficulty recruiting
electrical line personnel and project en~neers
for the wastewater treatment plant.
UPSIDE POTENTIALS
The Enterprise Utility Funds have several
pro~ams and processes in place that may
positively impact their financial outcomes.
Renewable Resources
The Enterprise Utility Funds are committed to
the implementation of renewable energT pro-
~ams. Recently the Environmental Protection
Agency (EPA) desig-nated Palo Alto as the first
Green Community in California. Palo Alto’s
renewable portfolio standard has set a goal of
purchasing 20 percent of the electric commodity
supply from renewable sources by 2008 and 33
percent by 2015.
The inclusion of "~een" electricity produced by
landfill gas and wind power will diversify the
electric commodity portfolio and allow for
~eater purchasing flexibility. The current
renewable energy contracts are long-term, fixed
price contracts with a 10 to 20 year commitment.
These contracts will provide relatively low-cost
and stable electric supplies if market prices
continue to rise in the future.
Customer Energy Efficiency Programs
The Enterprise Utility Funds offer their custom-
ers a wide array of energ-y and water efficiency
pro~ams. Efficiency rebates, energy and water
usage analysis and efficiency education allow
customers to implement measures that will save
them money and reduce the demand to
purchase commodity resources.
CONCLUSION
In conclusion, this section on the Enterprise
Utility Funds is desig-ned to inform the City
Council and the public of major challenges
facing the Utilities. It is these factors that
will drive rate changes and are important to
understand.
City of Palo Alto 27
APPENDIX A
DEFINITIONS OF REVENUES AND EXPENDITURES CATEGORIES
REVENUES:
Sales Tax
is a tax collected from customers by retailers on sales of tan~ble personal property
and services. In fiscal year 2007-2008 it represents 18 percent of total Genera] Fund
revenues.
Property Tax
is a tax that the owners of real and personal property pay, equal to one percent of the
assessed value of the property. Of the one percent, the City receives 9 percent, or .09
percent of the assessed property value. Note that the bulk of Vehicle License Fees are
now remitted to the City via property tax payments from the County.
Utility Users Tax (UUT)
is a tax based on the usage of telephone, electric, water and gas utilities. The tax rate is
5 percent of the usage, with discounted rates on utility usage, available for very large
users.
Transient Occupancy Tax (TOT)
is a tax levied on short-term (30 days or less) rental of lodging. The current TOT rate is
12 percent of the price of the rental.
Documentary Transfer Tax
is a tax levied on real property bought or sold in the City at the rate of $3.30 per $1,000
of value. Revenues can vary sig-nificantly from year to year since they are sensitive to
the volume and value of property sales, and due to one-time transactions such as the¯
Stanford Shopping Center lease.....
28 City of Palo Alto
2008
APPENDICES
0 ther T,~xes, Fines, & Penalties
consists of remaining Vehicle License Fees paid
directly by the State, parking violations, library
fines, administrative citations, and other fines and
penalties. Parking violations is the largest compo-
nent in this category with projected revenues in
fiscal year 2007-08 of $1.95 million.
Service Fees & Permits
are generated from golf course fees and class
re~stration and admission fees in the Community
Services Department; permits and plan check and
zoning fees in the Planning and Community
Environment Department; and paramedic service
fees in the Fire Department. Plan check fees are
the most significant in this area, projected to be
$2.3 million in fiscal year 2007-08.
Joint Service Agreements
primarily comprise the Stanford University
contract for fire and communication services,
which funds 30 percent of the Fire Department’s
budget-approximately $7 million.
Reimbursements
refer to payments received by the General Fund
(GF) for services rendered to the Enterprise Funds,
such as accounting, payroll, purchasing, human
resources, and legal advice.
Transfers
between Funds are a common way of moving
resources for both general operations and capital
projects. The main component of this source of
funding is the equiP), transfer from the Enterprise
Funds ($15.7 million), which represents a return
on the City’s orig-inal capital investment in the
Utility Department’s operations.
0 th.e~" Revenues
are primarily comprised of the rent received for
land and facilities used by the Utilities and Public
Works Enterprise Funds. They comprise 12 per-
cent of the total sources of GF revenue in fiscal
year 2007-08.
EXPENDITURES
Salaries & Bene.fits
consist of salaries (reg-ular, temporary, and
overtime) and benefits (healthcare, retirement and
others). Salaries and Benefits account for approxi-
mately 64 percent of fiscal year 2007-08 total
expenditures.
Non-Sa Iary Expenditures
include contract services, supplies, general
expenses, rents and leases, and allocated charges.
They represent 28 percent of the GF budget in
fiscal year 2007-08.
Contract Services
include contracts for Children’s Theatre, golf
professional services, park maintenance, class
instructors, traffic studies, outside legal counsel,
auditing, and financial services. In fiscal year
2007-08, contract services represent 8 percent of
the GF budgeted expenditures.
Supplies & Materials
include office supplies, recreational and house-
keeping supplies, City employees’ uniforms,
construction and planting materials, and library
circulation. Supplies and materials expense
represents 9 percent of non-salary expenses in
fiscal year 2007-08.
City of Palo AIto 29
A P PEN DI C ES
General Expen.se
is mainly comprised of the annual Cubberley
lease payment to Palo Alto Unified School District
(PAUSD) in the amount of $6.3 million. General
expense is 25 percent of total non-salary expense
in fiscal year 2007-08.
Rents, Leases & Equipment
consist mainly of land and facility rentals, other
rents, and leases. It comprises only 3 percent of
total non-salary expense in fiscal year 2007-08.
AIlocated Expenses
include printing and mailing, vehicle replace-
ment, technolo~,, and benefits costs incurred by
internal service funds, which are allocated to vari-
ous departments based on a prescribed usage
methodology.
Transfers to Other Funds
are transfers between Funds as reimbursement for
services, overhead expenses, or other payments.
The LRFF includes four main transfer categories:
Infrastructure Management Plan (IMP) capital
projects, non-IMP capital projects, debt service,
and other transfers.
Debt Service
Is the interest and principal payments made to
bond holders on the outstanding debt principal
balance. The City of Palo Alto’s total current out-
standing debt principal is $9 million, one of the
lowest debt levels of any city in the Bay Area.
!nJ)’astructure Projects
are a subset of the Infrastructure Management
Plan, also known as "CityWorks." It began in
fiscal year 1999-00 as a 10-year, $100 million plan
desig-ned to eliminate the City’s backlog of
infrastructure rehabilitation projects.
Other Capital Projects
include projects for traffic calming, public art, and
other miscellaneous projects. They are estimated
to increase by an average annual rate of 3 percent
over the next ten years.
30 City of Palo Alto
APPENDIX B
BASIC FORECAST METHODOLOGY
REVENUE PROJECTION METHODOLOGY
Consistent with past forecasts, the compound
armua] rate of ~owth (CAGR) over the past ten
years for economically sensitive revenues is the
assumed rate of gTowth for the next ten years. In
utilizing this CAGR methodology for the past ten
years, the significant revenue gains during 1999
through 2001 and the steep losses from 2001
through 2003 are balanced. One shortcoming of
this methodo]oo~, is that it does not account for
structural changes in revenue receipts, such as
the departure or arrival of a major revenue-
generating business, lArhen this occurs, staff
modifies the base revenues prior to developing
projections.
This forecast assumes that the City will charme]
all revenue windfalls into reserves or one-time
capital improvements. This assumption ensures
that the City will not commit its resources to new
or ongoing operating progTams or labor commit-
ments in flush times, only to see them cut or
under-funded when revenues return to normal
levels.
The forecast assumes an economic downturn in
approximately three years, or in fiscal year 2010-
11. Although projecting a recession is more g-uess-
work than science, it is known that, historically,
California has experienced a recession once each
decade. Because of this cyclical phenomenon,
anticipating a two-year downturn within the next
ten years is recommended for prudent planning
and fiscal management. Due to the downturn,
decreased surpluses be~n in 2010-11, a deficit of
2008
APPENDICES
$2.3 million is projected for fiscal year 2011-12,
and a deficit of $1.7 million is projected for fiscal
),ear 2012-13. At this time, staff believes that cor-
rective action is not required. Should a recession
fail to materialize, the City will be in a better
position than projected.
EXPENDITURE PROJECTION
[~,/tETHODOLOGY
Similar to revenue projections, expenditure
projections are based on a combination of histori-.
cal trends, assumptions about future ~owth rates,
and other judgments calls. SalaD, projections are
based primarily on existing labor agreements. For
timelines beyond existing contracts, salary ~owth
is projected using a weighted average of historical
trends and re~onal labor cost increases.
Due to GASB 45, we have budgeted for retiree
medical based on our most recent actuarial study
and assumptions. Since healthcare and pension
costs have risen so rapidly over the past several
years, we expect these rates to moderate over the
next ten years. The City will continue to explore
methods of controlling the ~owth of these
expenses, but such controls are not assumed in
the plan..
Operating transfers are primarily generated in
relation to capital projects. The five-year capital
improvement plan is the basis for the first half of
the LRFF’s capital transfer projections. The last 5
years are estimated based on historical spending
patterns.
City of Palo Alto 31
APPENDIX C
LEGISLATIVE ANALYST OFFICE’S AND
OTHER ECONOMIC FORECASTS
The following table summarizes the California
Le~slative Analyst Office’s economic projections,
as published in its February 21, 2007 report enti-
tled "2007-08 Budget: Perspectives and Issues".
The Le~slative Analyst’s Office also compared its
projections with other expert projections available
at the time of publication. The table at the right
summarizes projections made by the UCLA
Business Forecast Project in December 2006, the
2007-08 Governors’ Budget Forecast, and the
consensus forecasts published in the Blue Chip
Economic Indicators in January and February
2007. To varying de~ees, all of the projections call
for slowing growth with a partial rebound in
2008, with the UCLA Business Forecast Project
anticipating a slightly more sig-nificant slowdown
than did the other California forecasters.
National Figures:
Real GDP
Unemployment
Job Growth
Personal Income
2.5%
4.9%
1.2%
5.3%
3.1%
4.9%
1.4%
5.5%
3.4%
4.6%
1.6%
6.1%
CA Figures:
Unemployment 4.9%"4.8%4.6%
Job Growth 1.4%1.7%1.8%
Personal Income 5,6%5.7%6.2%
-Forecast
2006 2007 2008
United States Real GDP:
---~ D6-~frfi~- .......................................32-- --2 .................
--~F-3~6~-ry ....3;$-i --2~.~ .......
[--~-O F6~@ ....3~ ........Z5 ...........3~] ......
California Payroll Jobs:
- ~F 3&55~-@ ............................Q~ ........3~2---~ ~6 .....
California Personal Income :
.... 0 ~-- ~~7 ..................7:2---~:3
..........BiS~-~i~-~-5~S ~F~bf5~ .....5:8 ........5:3 ........5:ff ....
..... ~-0-F66-b~--62~ ........576 .....5: 7-
California Taxable Sales:
...........~Fg~fiU&~ ................... 4:5 33 .......
5 .....
8 Acron~s used applyto Legislative Anal~t’s Office (~O); Unive~ity
of Califomia, Los Angeles (UC~); and Depadment of Finance (DOF).
b Average forecast of about 50 national fi~s suweyed in Janua~ by
Blue Chip Economic ~dicators .
C Average forecast of organizations surveyed in February by Westem
Blue Chip Economic Forecast .
~ LAO 2006-07 Budget: Perspectives and Issues, 2/21/07, page 34
~ LAO "Perspectives on the Economy and Demographics" 2/21/07,
page 28
.32 Ci~ of P.alo AI.to
200
APPENDICES
APPENDIX D
HIS. ORICAL TRENDS
Historical trends help portray the con-
text in which the City operates and are
carefully considered in preparing tl~is
forecast. Please note that the total
revenue and expenditure fig-ures in
this section may differ from those of
other financial documents published
by the City due to differences in
reporting formats.
GENERAL FUND REVENUE
SOURCES
These charts show the major sources
of General Fund revenues, first in
nominal dollars (not adjusted for
inflation) and then in constant dollars
(adjusted for inflation). Both illustrate
that sales tax revenue reached a high
in 2001 and has since declined mark-
edly, while property tax revenue has
increased steadily over the past ten
years. Utility users tax revenue has
remained relatively stable, and tran-
sient occupancy tax revenue has
followed the swings of the economy
during the past ten years.
From 2005 to 2007
From 2002 to 2007
Frown 1998 to 2007
The second chart shows that, in real
dollars, sales tax revenue is lower now
than in 1998, while property tax is
higher. UUT and TOT have
remained relatively
unchanged since 1998.
$30,000
$25,000
$20,000
S15,000
$10,000
$5,000
$o
Selected Major Revenue Sources:
History in Nominal Dollars (in $000s)
+Sales Tax --~Prope~y Tax --a---UUT --ee--TOT
Selected Major Revenue Sources:
Last 10 Years in 1998 Dollars (in $000s)
$25,000 -
$20,000 1
$15,000 ....
$10,000
$5,000 ~ ....... c--~ .....
$0
+ Sales Tax ~ Property Tax
-~:~:-- Utility Users’ Tax ~ Transient Occupancy Tax
,J
Note: Administration is comprised of Ciw Coundl City Manager Ciu, Attorney, City Auditor, Administrative
Services, and Human Resources. Chart does not show separation of LibraD" from CommuniD" Sen,ices be,gin-
ning in 2005.
City of Polo Alto 33
2008
APPENDICES
GENERAL FUND OPERATING
~XPENDI~ URES
General Fund operating expendi-
tures are also shown in both nomi-
nal dollars (not adjusted for infla-
tion) and constant dollars (adjusted
for inflation). The largest percentage
of total expenditures has been de-
voted to public safety. Also, expen-
ditures for administration peaked in
2001 and have since decreased sig-
nificantly.
Genera! Fund Operating Expenditures:
Last 10 Years in Nominal Dollars (in $O00s)
$50,000 =
$40,000 i
$30,000
$20,000 I
+ ~blic Safety + ~D and Library --~-- Ad~nistration
~ ~blic Works + Ranning
General Fund Operating Expenditures:
Last 10 Years in 1998 Dollars (in $000s)
$40.000 -I
s~o,ooo ~, ~ ~--* *~ ~: * ....../$20,000
$10,000
,-- A
$0 ,,,
+ ~blic Safety ~ ~D and Library~ Ad~nistration + ~blic Works+ Ranning
From 2005 to 2007 1.1%-1.9%-3.9%0.0%-4.2%
From 2002 to 2007 1.2%0.0%-6.7%-2.5%0.9%
From 1998 to 2007 1,2%1.2%-1.8%-1,4%3.5%
34 C[ty of Palo Alto
2008
APPENDICES
CONSUMER PRICE INDEX TRENDS
Tables for U.S. and Bay Area CPI indices are presented below.
U.S. Consumer Price Index Bay Area Consumer Price Index
1997 160.3
1998 163.0 1.7%
1999 166.2 2.0%
2000 172.4 3.7%
2001 178.0 3.2%
2002 179.9 1.1%
2003 183.7 2.1%
2004 189.7 3.3%
2005 194.5 2.5%
2006 202.9 4.3%
2007 208.4 2.7%
Sou,’ce: U.S. Department of Labor
Bureau of Labor Statistics
June of each year
mast 2 Years 3.5%I
~ast 5 years 3.0%]
ILast 10 Years 2.7%]
Bureau of Labor Statistics
June of each year
1997 160.0
1998 165.5 3.4~
1999 171.8 3.8010!
2000 179.1 4.2°/~
2001 190.9 6.6°/~
2002 193.2 ! .2°/~
2003 196.3 1.6°/~
2004 ! 99.0 1.4°A
2005 201.2 1.1°A
2006 209.1 3.9%
2007 216.1 3.3%1
kast 2 Years 3.6%
[Last 5 years 2,3%[
[Last 10 Years 3.1%]
Oty of Palo Alto 35
CITY HOUSING UNITS AND POPULATION TRENDS
Tables for Palo Alto Housing Units and Population trends are presented here.
City of Palo Alto Housing Units City of Palo Alto Population
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
25,625
25,701
25,708
25,732
26048
26.841
26.934
27.019
27.522
27.767
27.763
0.3%
0.0%
0.1°/,
1.2°/,
3.0°/~
0.3°/~
0.3N
1.9°/,
0.9°A
O.O°A
1997 57,800
1998 57,900 0.2%
1999 58,300 0.7%
2000 58,500 0.3%
2001 60,200 2,9%
2002 60,500 0.5%
2003 60,465 -0.1%
2004 60,246 -0.4%
2005 61,674 2.4%
2006 62,148 0.8%
2007 62,615 0.8%
Last 2 Years 0.4%
Last 5 )’ears 0.7%[
Last 10 Years 0.8%J
State of California, Department of Finance
Demographic Research Unit
Last 2 Years 0.8°/4
Last 5 years 0.7~/~
Last 10 Years 0.8~
36 Oty of Palo Alto
Americans with Disabilities Act (ADA) of 1990,
in other accessible formats.
ADA Coordinator
285 Hamilton Avenue
(650) 329-2550
~c@ow~dgements
Contributors Sharon Bozman
Amy Javelosa-Rio
Staff thanks City Manager, Frank Benest,Chris Mogensen
Director of Administrative Services, Carl Yeats,Tarun Narayan
and Assistant Director of Administrative Services,Philip Orr
Lalo Perez for their careful revimv and support in David Ramberg
preparing this document. In addition, than-ks to Debra Joe Saccio
Remley for her conscientious administrative support.Dale Wong
Graphics Cherie McFadden
Printing Palo Alto IMnt Shop
Visit our website at: www. Cio, ofPaloA#o, org
The City of Palo Alto is located in northern Santa Clara County,
approximately 3S miles south of the City of San Francisco and 12 miles north of the
City of San Jose. Spanish explorers named the area for the tall, twin-trunked
redwood tree they camped beneath in 1 769. Palo Alto incorporated in 1894
and the State of California granted its first charter in 1909.
~A~30% post-consumer recycled
CITY OF PALO ALTO
250 HAMILTON AVE:
PALO ALTO, CA 94:30 |
www.cityofpaioalto.org
Phone:650-329-2100 Fax : 650-325-5025
ATTACHMENT B
City of Palo Alto
City Manager’s Report
TO:
ATTN:
FROM:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICEs
DATE:
SUBJECT:
OCTOBER 16, 2007 CMR: 387:07
DISCUSSION OF COUNCIL’S TOP 4 PRIORITY "SUSTAINABLE
BUDGET"
RECOMMENDATION ’
Staff requests that Council review the report and provide comments.
BACKGROUND¯ ¯
In the past decade the City 6f PiiI0 Alto has faced an re:ray of difficult budget challenges, raising
concerns and. questiofls about the City’s long-term ability to support the variety and level of
¯ services it currently provides... Itis Out of thes~e financial trials that the concept of. a "sustainable"
budget has eme{’ged as a potent!al medium for so, lutions. Before reviewing these challenges, ~}
definition of a "sustainable" budget is necessary.
A budget, by .definition, is a :plan that is designed to keep an entity’s expenditures within its
available resources, i.e. spending within your means. By adding .the Word "sustainable," the.
fundamental issue of what services and programs can be supported over a prolongedperiod of
time is raised. .In turn, this provokes questions sugh as: .
What are the Ci.ty’s basic program and spending priorities now and in the future?
How long can current expenditure patterns continue and what costs can be reduced or
eliminatedto achieve a balanced budget?
Can current ser.viees and service levels be provided in a more efficient and cost-effective
manner so as to maintain them?
What revenue sources can be counted upon now and in the future and which are likely to
decline?
To what extent are the City and community able and willing to maintain and grow
revenue resources when needed?
CMR:387:07 Page 1 of 9
A sustainable budget can be considered a spending plan that meets the needs c~f the present
withou~ c0mpi’omlsing the ability to prm, ide services to furore generations. Such a budget.would
meet the challenge of fundir..g current operational costs while at the same time funding incun’ed
long-term liabilities.
Over the past 10 ?,ears, the City has faced several major financiat chalIenges. These include:
Financing and rehabilitating the City’s aging infrastructure
Coping with the revenue shortfalls caused by the recession and dot-corn bust of 2001
Fixing a structural deficit caused by ongoingexpei~ditures, e.g., health care costs that are
rising at a greater rate than revenues
Addressing and funding the retiree medical liability incurred bythe City
In addition to these issues, the City has had to contend with State takeaways of revenue; the
exodus of key reYenue generators Such as a hotel and car dealerships; growing competition from
the Intenaet and sm’rounding big box stores and malls; and legal and regulatory threats to its
revenue base.
The City has dealt with at least two major areas of liability that could have jeopardized a
sustainable budget: infrastructure rehabilitation and retiree medical obligations.
Historically over!ooked due to a recession in the early 1990s and due to a heavy emphasis on
services in the operating budget, the City was compelled to ramp up infrastructure spending in
the late 1990s. A General Fund Infrastructure Management Plan.(IMp) ~nished:in 1997,
identified, the need to spend $10 million annually for the next ten years to address a growing
infrastructure backlog. Without the necessary, and ongoing improvements to the streets,
s~dewalks, parks, buildings, and faeilities, the ability of tl~e City to deIiver basic services would
have been put at risk. Essentially, the Cit~ recognized a structural imbalance in its spending
patterns and over the next ten years tea!located its resources.
Declaring infrastructure as one of its top priorities for several years, the City’ made progress in
Creating and funding a separate "Infrastructure Reserve" (IR).whose purpose ¯was to sustain
capitat fui~ding0ver time. It developed a policy whereby year end :operating budget sa~ings
were channeled into the IR to keep it replenished. This policy helped to significantly increase
the amount of spending on IMP infrastructure since 2000 when the funding level was $7.4
million comi~ared to $12.3 million in 2006-07. When :faced in recent years with~ steep’ increases
in construction¯ costs, expanding project scopes, and a draw on the IR for new projgcts, Council
directed staff to identify an additional $3 million for capital spending. This was a "Top 3
Priority" in2006. This was achieved through a combination of expenditure reductions and
revenue enhancements and incorporated in the Adopted Budget for 2007~09. It is expected that
the City wil! need to grow the $3 million each year to keep up with the growth in project
construction costs.
Another long-terrn liability is the unfunded but earned retiree medical benefit. .GASB .45
requires that local jurisdictions recognize, and hopefully fund, the costs of retiree medical
benefits as they are incurred rather than when the premiums must be paid. Based on investment
CMR:387:07 Page 2 of 9
of funds in a trust, an actum-y has estimated the citY’s liability at $82.6 million. OASB 45’s
purpose is to avoid having an operating budget’s services and programs suffocated by the
growing and sizeable expense of a post employment benefit. The City of Palo has dealt with this
major issue by developing .a healthy retirement medical reserve and by indentifying funding in its
operating budget to meet its annual required contribution. Moreover, the City is near to
investing its reserve and contributioiss in a trust fund whose rate of return mitigates the impact of
the overall liability.
In addition to 10ng-tei:m threats, there are short-term and cyclical events that endanger City
resources or revenues.~ These range from the economic cycle to the exodus of major revenue
generators, as well as State "takeaways" of revenue Soua’ces. Typically, the City deals with these
occurrences by reducing expenditures to match lower revenue expectations. During the dot-corn
downturn, for example, the city’s sales and transient occupancy taxes, which totaled $35.2
million in 2001-02, fell by a substantial $11.9 million or-33,8 percent over a two year period.
This revenue swing represented a 9.5 percent drop of total budgeted revenues. Ttie downturn,
combined with a later realization that expenses such as health care.were increasing at a faster rate
than revenu’es, led to a series of painful and prolonged expenditure reductions.. Since 200!, the
City has pared i’~s expenses by $20 million. This included the elimination of 70 positions.
DISCUSSION
The examples above provide evidence that the City has dealt with long-term, sustainable budget
issues and that ~it is in the; City’s best interests to forecast: and address long and Short-term
dislocations well.in advance o}" their’occurrence. To a considerabledegree, the City’s Long
Range Financial Forecast (LRFF) identifies the principal expense and revenue trends and risks
facing the City. It includes, for example, mention of increases in medical premiumSand health
care costs that are growing at a rate faster than inflation; anticipated losses of revenue such as
rent when the landfill closes; and the potential impact of a recession. Although -the LRFF cites
opportunities and efforts underway to maintain and erthance the City’s revenue base, it does not
recommend strategies or a plan to maintain a viable, sustainable budget over the next decades
given what is known today. Before outlining potential steps to develop a sustainable budget, a
discussion of some major expense and revenue trends is important.
Ex-oenditure Trends
Of all the expense trends facing the City, past and anticipated increases in health care costs are
the most disquieting, as depicted in the graph below. As the LRFF states, "Medical premiums
are expected to double by 2015, having grown by nearly 60 percent over the past seven years to
$12.2 million." In 2006-07, health care costs represented 9.3 percent of the City’s budget; by
20! 5 it is expected to grow- to 14.9 percent of total expenses. With health care costs constituting
a greater and greater share of national Gross Domestic Product, a similar and unsustainable
development is occurring within the City.
CMR:387:07 Page 3 of 9
$24
$21
$18
$15
$12
$9
$6
$3
$0
Healthcare Expenses
,,_o o o o o o "o o o o o o o o o, "2 o o
[]-Active Employees El Retirees .~ rq Retiree Medical.Liability
The City has taken steps to address this rising cost. Being one of the few remaining jurisdictions
to fully fund employee health insurance premiums and retiree medical costs, the City has placed
a limit on .its contribution to medical premiums for both active and retired employees. In
addition, the City has raised its vesting requirement from 5 to 20 years to obtain health care
coverage upon retirement. Given expected steep increases in health care costs, however, the City
will need to curb expenses further.. To achieve a sustainable budget, additional measures to share
rising medical expenses with. employees are necessary. Other.jurisdictions are moving toward
employee premium contributions and this practice is common in the private sector.
As the graph below shows, benefits costs in real terms have increased over the past five years.
Salaries have fallen over.the same period due to the reduction of positions.
CMR:387:07 Page 4 of 9
General. Fund: Operating .ExpenditUres:
Last Five Ye~irs in 200:3Di~llars.(in $000s)$70;000
$60,000
$50,000 "
$40,000
$30,000
$20,000
$10,000
$o ~( "X X
2003 2004 2005 2006 2007
+Salaries ~ Benefits ~Conlract Services
~ Supplies ~ General Expense ~ Rents/Leases,---+--Allocated Expenses
Another way to approach expenditure growth is by analyzing expense trends by department. The
graph below depicts the change in department expenditures in: real dollars over the past five
years.’ It shows that expenses in administrative departments (Administrative Services, Human
Resources, City Manager, City Attorney, City Clerk, ancl City Auditor), or what is commonly
termed City overhead, have dropped in real dollar terms from $!7.5: million in 2003 to $13.1
million in 2007. This significant drop occurred since most of the cost reductions made o#er the
past five years have been in administrative areas and management positions. This also suggests
that there wil! be less flexibility in the future to pare expenses in these departments.
CMR:387:07 Page
Gene~ai. Fund OperatingExpenditures:
Last. Five Yearsin-2003 Doi!ars (in$0.00s)
$25,000
$20,000
$:15,000
$10,000
,$5,000
$0
2003 2004 2005 " 2006 2007
--’~--Adn~nlsl~atJ0n ---I-- I:ub~c ~b~ks t R~nn~g and C~rml E~v ,~...M~.~ Pobc e "-~-- CSD and b~tary
In comparis.on, the public safety departments, Police and Fire, and community services (defined
as the Community Services and Library dep.artments) have grown or stayed constant in real
doltar tel,ms. In rea! dollars, the,Police. Department expenses have grown from$19.7 million in
2003 .to $21.4. million in 2007, while the Fire Departmemexpense has risen from $16.8 million
to $17.8 million. The provision of community services has remained steady,from $19.8 million
in 2003 and $19.8 .million in 2007.
The table t~elmv indicates the :rate of change of functional expenditures over the last decade.
Expenditures for public safety exhibit the most significant growth, while expenditures for
administration show the most significant decline.
From 2004 to 2007
From 2001 to 2007
From 1997 to 2007
Admin
-1.0%
-5.2%
-0.8%
Public-,
Works.
1.9%
-1.9%
-0.5%
Public
Planning,,:,:. Safety-
-1.5%4.2%
1.3%1.5%
3.2%1.5%
"CSD
and
Library
0.2%
0.6%
1.3%
As a proportion of the City’s budget, the public safety and community service functions have
grown from 58.3 percent of the total in 1997 to 61.5 percent in 2007. These numbers make sense
in light of the reductions made in the administrative departments, but it shows that if the City is
to sustain its budget, difficult decisions may be necessary in areas that the public and Counci! see
CMR:387:07 Page 6 of 9
as "basic" services. This is especially important as the City endeavors to fund a new punic
safety building and library/community center facilities. In addition to the capital costs expected
to be paid from General Obligation bonds, there will be incremental equipment, maintenance,
and operating costs associated with these new facilities.
Revenue Trends
The City of Palo Alto is fortunate to have a diverse and well-balanced portfolio of revenue
sources. Asthe following chart shows, no one revemie source excgeds 15 percent. The main
sources of total City revenues are: sales tax at 15 percent; property taxes at 15 percent; charges
for services (such as the Stanford fire contract) at 15 percent; operating transfers at 12 percent
(including Utility equity payments); and rental income at 9 percent. Many jurisdictions rely
heavily on a single source of revenue such as property, sales, or business license taxes, exposing
them to extreme volatility when economic dislocations occur.
5139. 7 Million / A dopted 2007-08
Operatirg Transfers-In
12 %
From othe~ Agencie~
Less than
R~ ~n on Invest ment
2%
Transie~,t Occupaney
5~
Permits & Ucenses
4 %for Semice~Other 7axes a~d Fines
6%
Utility U$ers Ta~
7%
An economic downturn can result in a swift and steep decline in sales and TOT revenues.
Events such as the current credit crisis and housing bubble can easily ripple down to the local
economy, threatening consumer and business spending essential to the City’s revenue base.
Long-term threats such as increasing Internet sales (which are not taxed); tYie aversion to
commercial growth and resulting traffic in the community, and retail competition are areas of
concern. Legal and regulatory challenges such as telecommunication company objections to the
CMR:387:07 Page 7 of 9
utilities users tax being paid on national plans could significantly erode over $2.4 ro!!lion in
annua! revenue. The City must be agile in maintaining and enhancing its revenue sources just as
it m~st be. vigilant in managing its expenses.
Sustainable Budget Suggestions/Options
The City has been proactive in attempting to solve budget problems. City mayors haye been
active in maintaining and attracting businesses to Pale Alto. Significant efforts have been made
to maintain automobile lealerships in Pale Alto; to make Pale Alto a destination point for
business travel and tourism; and to work in concert with Stanford University to expand the
Stanford University Shopping Center. The City also has engaged the.business community in
discussions about enhancing revenue sources such as the TOT by adding another .2 percent to the
existing tax rate, which will generate additional revenue for the General Fund if approved. There
has been very preliminary discussion 0f a Business Registry Fee and a Business License Tax
(Pale Alto is one of the few cities in California that does not have this tax) that eoutd lead to
additional revenues either by expanding information on businesses within the City or a new tax.
In terms of expenditures, the City typically has taken a conservative approach to issuing debt and
to new program spending. General Fund debt is low compared to other jurisdictions.
From a staff perspective, the following complex issues need further analysis, discussion, and
action:
What are the City’s core non-discretionaryservices?
Can these services be delivered in an alternative, cost-efficient rammer that is equally or
near to equally effective?
What are the City’s discretionary services and how will they be prioritized?
%~at framework will the: City use to evaluate and fund new programs versus ongoing
services?
What is the optimal balance between infrastructure and operating expenses that will
sustain the delivery of services?
Should the City incua" more debt for Capital projects so as tO spread the cost burden of
improvements over current and future users? The City has generally used a conservative,
pay-as-you go approach for .capital projects.
How can the City control expenditures growing at greater than inflation rates yet preserve
core services?
What opportunities does the City have to maintain and expand revenue sources when
necessary?
To what extent is the community willing ~o balance its desire for services and the
revenues that support them with its desire to restrict business growNa and its associated
traffic impacts?
What degree 0frisk is the City willing to incur as it seeks to control expenses?
Can a meaningful dialogue be initiated with City employees and unions on sharing
.medica! premium expenses?
These questions need serious attention to develop a sustainable budget plan..
CMR:387:07 Page 8 of 9
There are no easy solutions to develop a sustainable budget. The City is in a sound financi!l
position, but it faces numerous challenges. The "easy" reductions have been made in the first
half of this decade; the difficult ones can be expected in the second half. Similar to the
rebalancing of resomces and priorities that the infrastructure ~ffort required, a sustainable budget
requires analysis, ptarming, fiscal discipline, establishing priorities, and a long-term vision.
Next Steps
This report presents initial concepts for consideration by the Finance Committee. Staff is
requesting input from the Finance Committee on possible next steps to achieve a sustainable
budget plan. With this input staff will further develop the concepts and components of a
sustainable budget and include them in the Long Range Financial Forecast (LRFF). The LRFF
will be reviewed with the Finance Committee in December and with the full Com~cil in January.
Based on this discussion with Council, elements of a sustainable budget can be included in the
proposed 2008-09 budget that will be reviewed with the F~nance Committee in May 2008.
RESOURCE IMPACT
This report is for informational purposes and does not have a resource impact.
POLICY IMPLICATIONS
This report addresses a Council "Top 4" Priority.
ENVIRONMENTAL REVIEW
Discussion of these general policy issues does not represent a project under California
Environmental Quality Act (CEQA).
PREPARED BY:
SACCIO
Deputy Director
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
DAVID RAMBERG
Budget Manager
CD~reRctLo~ices
CITY MANAGER APPROVAL:
Assistant City Manager
CMR:387:07 Page 9 of 9
FINANCE COMMITTEE
MINUTES
FINANCE COMMIFI-EE MINUTES
Regular Meeting
December 11, 2007
Chairperson Morton called the meeting to order at 7:02 p.m. in the Council
Conference Room, 250 Hamilton Avenue, Palo Alto, California.
Present:Beecham, Klein, MOrton (chair) arrived at 7:03 p.m., Mossar
Absent:None
1. Oral Communications
None.
2.Maze & Associates Audit of the Financial statements as of June 30,
2007 and Management Letter
MOTION: Council Member Beecham moved, seconded by Klein, that the
Finance Committee recommend to the City Council to accept the financial
statements submitted by Maze & Associates.
MOTION PASSED 4-0.
3. Recommendation Regarding Ordinance Closing the 2006-07 Fiscal
Year, Including Reappropriation Requests, Closing Completed Capital
Improvement Projects, Authorizing Transfers to Reserves and Approval of
Comprehensive Annual Financial Report (CAFR)
MOTION: Council Member Beecham moved, seconded by Klein, that the
Finance Committee forward the ordinance of Attachment A (associated
exhibits) to the City Council to approve: the closure of the 2006-07 Fiscal
Year~ Including authorizing Reappropriation of 2006-07 funds in to the 2007-
08 budget requests supported by Ex-’hi:bits A and B; Closing Completed
Capital Improvement Projects listed in Exhibit C; Authorizing Transfers
remaining balances to Reserves and those being presented in Exhibits D and
E; Approval of Comprehensive Annual Financial Report (CAFR),
12/11/07 FIN:I
MOTION PASSED 4-0.
2006-07 Year End Capital ]:mprovement Program Projects Status
Report
No action taken,. Chairperson Morton advised that this report would
be passed on to full council
Upciate To Long Range Financial Forecast
No action taken, Frank Benest said that
Council for review and discussion
he would take this to full
Discussion for Future Meeting Schedules and Agendas
December 18, 2007
AD3OURNMENT’ The meeting adjourned at 8:33 p.m.
12/11/07 FIN’2