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HomeMy WebLinkAboutStaff Report 2526 City of Palo Alto (ID # 2526) City Council Staff Report Report Type: Action ItemsMeeting Date: 5/7/2012 May 07, 2012 Page 1 of 5 (ID # 2526) Council Priority: City Finances Summary Title: Long Range Financial Forecast 2012-2022 Title: Acceptance of the Long Range Financial Forecast for Fiscal Years 2012 to 2022 From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Council review, comment on, and accept the attached forecast of revenues and expenses. Background Attached to this report is the City’s updated General Fund Long Range Financial Forecast (LRFF) for fiscal years 2012 through 2022. The LRFF identifies key issues that will guide the upcoming 2012-2013 budget process and affect the City’s future financial condition. A first draft of the LRFF was presented to the Finance Committee on February 28, 2012. They recommended that Council accept the LRFF pending specific modifications to the model which they directed staff to make before presenting to Council: 1. Include $2.2 million per year in additional infrastructure investment to address additional “keep-up” needs 2. Reduce the annual amount set aside for Retiree Medical Annual Required Contribution to reflect the three assumption changes the Committee authorized earlier that evening. In FY 2012 this reduction is $0.63 million, and in FY 2013 the reduction is $1.0 million. 3. Remove any assumed employee concessions that have not already been negotiated. For example, do not assume in the model that the May 07, 2012 Page 2 of 5 (ID # 2526) Miscellaneous group will begin paying its entire employee share of pension rates. This removed $14.3 million in savings from the ten-year model presented on February 28. 4. On the other hand, assume that any concessions already approved, or well in progress, will continue through the length of the forecast. Palo Alto Police Officers and Fire Chief Association concessions’ savings from 2014 to 2022 added about $14 million in savings over the ten years. 5. Include additional expenses expected from library remodels. Of the coming work, Library staff was able to derive estimates only for the Mitchell Park and Main Library projects. These cost impacts are incorporated into the model, adding $8.0 million in costs over the ten-year forecast. The above changes have been incorporated into the Forecast now being presented to Council. Discussion The economy has finally begun to show some longer-term improvement, both at the national and state levels. National unemployment is down to 8.3% as of January 2012, and state unemployment reached 10.9 percent in January, its lowest level since 2009. Gross Domestic Product and Gross State Product are both showing consistent growth, as are venture capital investment and new technology jobs in Silicon Valley. Even more positive is that Silicon Valley is leading the state in job growth. Less positive is the number of still-unemployed: 13 million nationwide, of which 5.5 million have been unemployed for 6 or more months; and 2 million Californians. Correspondingly, the City’s revenue projections are more positive than they have been in a few years. However, benefit costs continue to outpace the rate of revenue growth. Though the City has made considerable progress in addressing the structural deficit, there is still more work to be done. A report to Council in December 2011 from the Infrastructure Blue Ribbon Commission (IBRC) addressed the long-standing shortfall in infrastructure investment. The IBRC report recommended that the City try to find $41.5 million to fund its “catch-up” projects; invest an additional $2.2 million per year to more May 07, 2012 Page 3 of 5 (ID # 2526) adequately fund its capital operating and maintenance (“keep-up”) costs, and seek voter approval to fund a new public safety building and rebuild the MSC, among other City facilities. At the Finance Committee’s direction, the LRFF Base Model includes the additional $2.2 million per year recommended for “keep-up.” The remaining needs identified in the IBRC report – $4.2 million per year for “catch-up” and an estimated $211 million for new construction – are not incorporated into the Forecast. The Base Model is summarized in the chart below. It shows a balanced budget in FY 2012, after a $2.3 million draw on the Budget Stabilization Reserve, and a projected deficit of $1.0 million in FY 2013. For fiscal years 2013 to 2022 (ten years), the combined deficits are projected at $88.2 million. 2012-2022 LRFF - SUMMARY OF BASE MODEL FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 150,203 150,978 154,887 158,830 163,765 168,727 173,930 179,931 186,294 191,718 197,901 TOTAL EXPENDITURES 153,988 152,000 158,628 164,623 170,860 177,310 184,000 190,997 197,878 205,530 213,320 GRAND NET SURPLUS (DEFICIT) $ (0) $ (1,022) $ (3,741) $ (5,794) $ (7,095) $ (8,583) $ (10,070) $ (11,065) $ (11,584) $ (13,812) $ (15,419) Two directives from last year’s Council are incorporated into the Base Model: (1) assume medical costs will increase by 10 percent per year, and (2) assume that PERS rates will increase 3 percent each year beyond FY 2015. Note that PERS actuarial reports provided the base PERS rates used for FY 2013-2015; staff added another 1.5 to 2.5 percent as a result of the PERS Board’s decision on March 14 2012 to adopt a lower discount rate. Given the PERS discount rate change, it might be overly conservative to assume additional PERS rate increases of 3% per year after 2015. The lower discount rate assumption will cause pension rates to rise beginning in FY 2014 by 1-2% for Miscellaneous employees and by 2-3% for Safety employees. Council’s recommendation last year that staff assume “the worst” – i.e., an annual increase of 3% - has partly come true via this discount rate change. Therefore, easing this May 07, 2012 Page 4 of 5 (ID # 2526) “worst case” assumption by 1 to 1.5 percentage points may be defensible. If Council chooses to assume increases of 1.5% instead for FY 2016-2022, the averted costs would be $25.7 million. Unlike the Forecast presented to the Finance Committee on February 28, this version of the Forecast incorporates Proposed FY 2013 Budget figures, including $2.6 million in one-time savings due to frozen positions, along with $1.6 million in one-time expenses. In the Base Model, these savings and costs are backed out after FY 2013 to project the remaining years of expenditures – contributing to the cumulative deficit of $88.2 million over ten years. An Alternate Scenario (pages 22-23) assumes the one-time frozen positions are made permanent, which reduces the projected gaps by $29.5 million – bringing the combined deficit to $58.7 million. The model includes savings from recent concessions achieved with the International Association of Firefighters (IAFF) and the Fire Chiefs Association (FCA) as well as from the tentative agreement with the Palo Alto Police Officers Association (PAPOA). As directed by the Finance Committee on February 28, 2012, no concession savings are assumed if not already negotiated with the bargaining unit. Lastly, the Forecast incorporates anticipated savings resulting from library closures at Main and Mitchell Park during construction, as well as additional operating costs after project completion. In FY 2013, the Library Department anticipates $0.45 million in salary and benefit savings during the remodeling of the two libraries, partly offset by an additional $0.34 million in expenses. In FY 2014, salary and benefit savings are expected to be completely offset by additional expenses and from FY 2015 onwards, an additional $1 million in expenses are anticipated due to the completed Mitchell Park and Main Library projects. As we say each year, this Forecast is not a prediction. It is a snapshot contingent upon a number of assumptions. It is staff’s hope that by examining this snapshot, Council members and staff may identify issues that must be addressed in the near term to improve the City’s long-term outlook. May 07, 2012 Page 5 of 5 (ID # 2526) 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. While staff incorporates salary increases for forecasting purposes, there is no obligation to implementing these increases unless committed to during negotiations. Staff introduced to the Council the Proposed FY 2013 Budget on April 30, 2012 and will continue with the 2012-13 budget process. Policy Implications The Long Range Financial Forecast is a tool for Council’s use in making policy decisions regarding the allocation of resources. Environmental Review This report does not require California Environmental Quality Act (CEQA) review. Attachments: This page has intentionally been left blank (PDF) Attachment A: Long Range Financial Forecast 2012-2022 (PDF) Attachment B: Excerpt Minutes from Finance Committee Meeting Feb. 28 2012 (PDF) Prepared By: Nancy Nagel, Senior Financial Analyst Department Head: Lalo Perez, Director City Manager Approval: ____________________________________ James Keene, City Manager This page has intentionally been left blank. City of Palo Alto 2012    LONG RANGE FINANCIAL Fiscal Years 2012 to 2022 FORECAST Draft Council Version—May 7, 2012 TABLE OF CONTENTS I. EXECUTIVE SUMMARY 1 II. ECONOMIC OUTLOOK 3 III. UPDATED MODEL 7 CHARTS: - 2012-2022 BASE MODEL 18 - PERCENTAGE CHANGES IN BASE MODEL 20 IV. ALTERNATE SCENARIO 22 VI. ENDNOTES 30 V. CHALLENGES & CONCLUSIONS 24 City of Palo Alto 2012    EXECUTIVE SUMMARY I. EXECUTIVE SUMMARY This report is the City’s updated Long Range Financial Forecast (LRFF) for the fiscal years 2012 through 2022.  The  LRFF identifies key issues that impact the upcoming FY 2013 Budget process as well as the City’s future financial  condition.  It also allows Council and staff to explore some “what‐if” scenarios to see what alternative assump‐ tions would do to the City’s bottom line. The economy has finally begun to show longer‐term improvement both at the national and state levels.  By Janu‐ ary 2012, national unemployment had decreased to 8.3 percent, and state unemployment reached 11.1 percent  in December 2011, its lowest level since 2009. Gross Domestic Product and Gross State Product both showed con‐ sistent growth, as did venture capital investment and new technology jobs in Silicon Valley.  Even more positive  was that Silicon Valley led the state in job growth. Less positive was (and is) the number of still‐unemployed:  13  million nationwide, of which 5.5 million have been unemployed for 6 or more months; and 2 million in California.      The City’s revenue projections look rosier than they have for a couple years, but benefit costs continue to outpace  the rate of revenue growth. A new actuarial valuation of the City’s unfunded retiree medical liability indicated  that the General Fund needs to set aside an additional $2.0 million* in FY 2012 to fund that liability.  The City still  has its work cut out for it in addressing its structural deficit.    In December 2011, the Infrastructure Blue Ribbon Commission (IBRC) presented to Council a report addressing  the under‐funding of the City’s infrastructure.  The IBRC report recommended that the City fund $41.5 million to  in “catch‐up” projects; invest an additional $2.2 million per year to more adequately fund its capital operating and  maintenance (“keep‐up”) costs, and seek voter approval to fund a new public safety building and rebuild the MSC,  among other reconstruction projects — to the tune of $210 million. These recommendations are being reviewed  and discussed at the Special Council Retreats. Meanwhile, as requested by the Finance Committee in February,  the Forecast incorporates the additional $2.2 million per year in infrastructure investment for “keep‐up” needs.   Other categories of needs defined by the IBRC Report—the $4.2 million per year in “catch‐up” needs and the $210  million in new construction needs—are not incorporated into the Forecast.     The Base Model is summarized in the chart at the top of page 2. It shows a balanced budget in FY 2012 after a rec‐ ommended $2.3 million draw on reserves, and a deficit of $1.0 million in FY 2013. The City added $4 million to the  Budget Stabilization Reserve in FY 2011, so there is room for a commensurate withdrawal in FY 2012. The report  assumes Council will approve this request for  forecasting purposes. For FY 2013 to 2022 (ten  years), the combined deficits are projected at  $88.2 million.          *$2.0 million figure is the difference between the recommended Annual Required Contribution from the January 2011 actuarial  valuation and that of the prior, 2009 valuation.  It incorporates assumption changes approved by Council on April 16, 2012.  This Forecast is not a prediction.  It is a snapshot  contingent upon a number of assumptions.  2 City of Palo Alto 2012 2    Two directives from last year’s Council are incorporated into the Base Model: (1) assume 10 percent annual medi‐ cal cost increases, and (2) assume 3 percent annual increases in PERS rates from FY 2016 onwards. Note that PERS  actuarial reports provided the base PERS rates used for FY 2013‐2015; staff added another 1.5 to 2.5 percent as a  result of PERS’s reduced discount rate assumption.  Staff suggests that a lower PERS rate increase assumption in  the out years may be valid (for example 1.5 percent per year), given the discount rate change and higher rates al‐ ready included in the Forecast. Details on the PERS calculations are outlined on page 15 of this report.     In addition, the Forecast includes Proposed FY 2013 Budget figures, including $2.6 million in one‐time savings due  to frozen positions and $1.6 million in one‐time expenses.  In the Base Model, these savings and costs are backed  out after FY 2013 to project the remaining years of expenditures. An Alternate Scenario (pages 22‐23) assumes the  one‐time frozen positions become permanent, with a reduction in cumulative deficits of $29.5 million.      The model includes savings from recent concessions achieved with the International Association of Firefighters  (IAFF) and the Fire Chiefs Association (FCA) as well as from the potential agreement with the Palo Alto Police Offi‐ cers Association (PAPOA).  As directed by the Finance Committee on February 28, 2012, no concession savings are  assumed if not already negotiated with the bargaining unit.      Lastly, the Forecast incorporates anticipated savings resulting from library closures at Main and Mitchell Park dur‐ ing construction, as well as additional operating costs after project completion.  In FY 2013, the Library Depart‐ ment anticipates $0.45 million in salary and benefit savings during the remodeling of the two libraries, partly off‐ set by an additional $0.34 million in expenses.  In FY 2014, salary and benefit savings are expected to be com‐ pletely offset by added expenditures, and from FY 2015 onwards, an additional $1 million in expenses are antici‐ pated due to the completed Mitchell Park and Main Library projects. (See Endnotes Number 19 on page 30 for  breakout of new library costs and savings incorporated into the model.)  As we say each year, this Forecast is not a prediction.  It is a snapshot contingent upon a number of assumptions,  all of which are outlined in the report.  It is staff’s hope that by examining this snapshot, Council members and  staff may identify issues that must be addressed in the near term to improve the City’s long‐term outlook.  EXECUTIVE SUMMARY 2012-2022 LRFF - SUMMARY OF BASE MODEL FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 150,203 150,978 154,887 158,830 163,765 168,727 173,930 179,931 186,294 191,718 197,901 TOTAL EXPENDITURES 153,988 152,000 158,628 164,623 170,860 177,310 184,000 190,997 197,878 205,530 213,320 GRAND NET SURPLUS (DEFICIT) $ (0) $ (1,022) $ (3,741) $ (5,794) $ (7,095) $ (8,583) $ (10,070) $ (11,065) $ (11,584) $ (13,812) $ (15,419) City of Palo Alto 3 2012 3  II. ECONOMIC OUTLOOK Based on information available as of February 9, 2012    NATIONAL: The economy ended 2011 on a surprising upswing. After months of concern about a return to recessionary condi‐ tions, most analysts now rule out another recession. The number of people applying for unemployment benefits  reached 366,000 in the second week in December, down from a peak of 659,000 in March 2009. Employers added  100,000 jobs five months in a row, the longest streak since 2006, capped by a 200,000 increase in December and a  243,000 increase in January 2012.  The national unemployment rate fell from 9 percent in October to 8.3 percent  in January, the lowest in nearly three years.1,4    Moreover, 2011 was a record year for the nation’s retailers; sales totaled $4.7 trillion – a gain of nearly 8 percent  over 2010, the largest percentage increase since 1999.  On the flip side, December sales were just 0.1 percent  above November’s.2  Holiday spending was heavily fueled by discounts, raising concern about what it would take  to get shoppers to spend again in coming months.3    Looking forward to the rest of 2012, economists are cautious, and do not expect growth in 2012 to keep pace with  the fourth quarter of 2011. Historically, consumption accounts for 70 percent of Gross Domestic Product (GDP),  with government contributing about 20 percent, so consumer spending has to “ignite” for growth to take off.   However, inflation‐adjusted weekly earnings dropped 1.8 percent from November 2010 to November 2011, and  more than 40 percent of the new jobs in the last two years have been in low‐paying sectors like retail and hospi‐ tality. So analysts are concerned that the rate of consumer spending shown in the 4th quarter of 2011 may not be  sustainable.5    Consumers have several reasons to be cautious.  More than one in five borrowers still owe more than their homes  are worth. Turmoil in the stock markets in the late summer and early fall caused a $2.4 trillion decrease in house‐ hold wealth, and many people who borrowed heavily during the boom to make big purchases are still repaying  debt and cannot win approval  for new loans.5    On the positive side, employ‐ ment growth has begun to look  like a sustainable trend.  While  the unemployment rate dropped  to 8.3 percent in January, the  underemployment rate, which  includes people who can find  only part‐time work and those   who have stopped looking for     ECONOMIC OUTLOOK …”According to the US Labor Department, state governments  sliced 49,000 jobs over the past year while local governments  whacked 210,000 jobs. The result is that state and local gov‐ ernment job cuts have become a drag on job recovery in a way  they weren’t during the last two recessions.”    —Chris O’Brien, “Government job loss having huge eco‐ nomic impact, “San Jose Mercury News,” Dec. 22, 2011  4 City of Palo Alto 2012 4  work, also declined to 15.2 percent, down from  16.6 percent one year ago. Yet as a January 6  New York Times article put it, there remains “a  deep hole to climb out of.  There are still more  than 13 million jobless Americans, 5.5 million of  whom have been unemployed for half a year or  more. And even those finding work are often  taking salary cuts, with job creation concen‐ trated in low‐wage sectors.”6   LOOKING FORWARD Beacon Economics, in its December 2011 quarterly economic forecast, predicted that national unemployment lev‐ els would remain above 8 percent for the rest of 2012, and stay above 7.5 percent through all of 2013.7  Three  dozen private, corporate, and academic economists recently predicted the economy (as measured by the GDP)  would grow 2.4 percent in 2012, following a rate of about 2 percent in 2011. 8  The UCLA Anderson Forecast had a  more sober prediction: a sub‐2 percent growth rate for most of 2012, followed by a 3 percent growth rate in  2013.9  Citigroup also forecasted slower, 2 percent expansion in 2012.10      CALIFORNIA The state unemployment rate dipped to 11.1 percent in December 2011, its lowest rate since 2009.  Even more  encouraging was the fact that job growth was broad‐based, with strongest growth in construction (a new entrant  in the growing industry club), information, professional and business services, educational and health services.  In  December 2010, the state unemployment rate was 12.5 percent, having remained at or above 12 percent from  August 2009 until April 2011.11     The California recovery has been noteworthy for the disparity between the pace of growth in its various regions.   The Anderson Forecast described the following in September 2011: “Coastal California enjoys a recovery rooted in  exports, innovation and knowledge communities, while Inland California continues to suffer from a glut of housing  and a contraction in government spending.”12 That outlook has improved somewhat with the Central Valley now  projected to finally see its economy recover in 2012. 10 Most recently, in December, after leading the employment  recovery with 15 consecutive months of job growth, the San Jose region posted a monthly decline of 1,200 jobs.   In fact, much of the job growth across the state shifted to Southern California, with Los Angeles, the Inland Empire  (east of Los Angeles), and San Diego posting the largest gains. 13    Positive Recovery Signs include:14    • Consistent Growth—State has seen 21 straight months of uninterrupted growth in GDP.   • State Exports—State exports rose 12.7 percent over this time last year.  The boost in exports has been  ECONOMIC OUTLOOK “ Many of the jobs created in October 2011 were  primarily at small and medium‐sized companies.  Businesses with fewer than 49 workers contributed  58,000 to the net monthly increase, while businesses  with over 500 workers had zero net increase in their  payrolls.”   —Cutwater Asset Management, “Monthly     Market Review,” Oct. 2011  City of Palo Alto 5 2012 5  ECONOMIC OUTLOOK led by technology products,  though the state’s agricultural sec‐ tor has posted strong gains as  well.    • Venture Capital Investment— Since hitting a low of $1.7 billion  in the first quarter of 2009, new  venture capital investment has  risen nearly 118 percent.    Areas of Concern include:14    • Skills Mismatch in the Labor Mar‐ ket — According to Beacon Eco‐ nomics, “there is a real dichotomy  between the skill sets of the work‐ ers in...sectors that were pum‐ meled by the downturn and the  skill sets required by the sectors that are leading California out of the recession…”       • Disproportionate Impact of Recession on Lesser Educated — More than 17 percent of all adults over the  age of 25 who have less than a high school diploma were unemployed last year, compared with roughly 5  percent of all Californians with a graduate or professional degree. What might explain this phenomenon?   Again, Beacon Economics explains, “Construction, real estate, and retail trade were among the hardest‐ hit sectors in the region in terms of job losses. These sectors traditionally have low educational require‐ ments and pay relatively low wages, which are two of the predominant characteristics of our unem‐ ployed population.”     • Continued Unemployment—More than 2 million working‐age Californians remain without jobs and the  state remains well above the national jobless rate of 8.3 percent.     BAY AREA The Bay Area has enjoyed a quicker recovery than the state as a whole, but the recovery has been uneven among  cities in the area. Several Silicon Valley cities – particularly  San Jose, Sunnyvale, Mountain View and Palo Alto—  showed the biggest jumps in the employment level between August 2009 and August 2011.     “Driving the differing recovery outcomes is one overriding factor, say economists: the technology industry.  Large tech companies such as Apple Inc. and Google Inc. have been on a recruiting tear, while start‐up hir‐ ing has also been brisk, fueled by the likes of Facebook Inc. Most of that activity is concentrated in South Bay  cities such as Mountain View, Cupertino and mid‐peninsula in Palo Alto...” 15  6 City of Palo Alto 2012 6  The Bay Area is predicted to continue to outpace the state in job growth in 2012.  According to a new University  of the Pacific forecast, while the state job market is expected to grow by 1.1 percent in 2012, the Bay Area is ex‐ pected to show employment expansion of greater than 1.5 percent. 16    Beacon Economics predicts the South Bay will re‐gain its pre‐recession peak by the second half of 2013. The un‐ employment rate, which peaked at 11.8 percent in the 4th quarter of 2009 and reached 9.9 percent in October  2011, is predicted to fall to 8 percent by the end of 2013. 17    ECONOMIC DEVELOPMENT IN PALO ALTO Staff continues to work with Council to develop a Policy for Economic Development, to help guide the City’s efforts  to attract and develop business activity in Palo Alto.      In the meantime, staff is working on numerous fronts, including:    • Helping shepherd current hotel projects through the City’s process  • Investigating possible auto dealership, retail or hotel usages of the Municipal Services Center (MSC)  site  • Drafted an RFP for creating a digital billboard at the MSC  • Participating in the Development Center restructuring  • Creating a “Test Bed” for innovative, green, and clean tech companies. Staff has already created a  Utilities‐based funding source for new companies developing energy‐efficiency‐related technologies  • Engaging in extensive outreach to the business community to develop lines of communication and  stay attuned to opportunities to help facilitate business growth  • Setting up meetings between business leaders, Council Members, and the City Manager  • Updating the business portion of the City’s web site    IMPACT OF ECONOMIC OUTLOOK ASSUMPTIONS ON THE MODEL The economic developments in the Bay Area and locally translate into a more positive outlook for City revenues.   Palo Alto transient occupancy and per diem rates have moved up appreciably, as they have along the entire Pen‐ insula, due to increased business activity.  Sales tax revenue has been on an upward trend with strong depart‐ ment store and electronic equipment sales.  While property tax revenue has been relatively flat due to commer‐ cial property tax appeals, once those appeals are resolved  the City expects gradual improvements in this revenue  category as well. Overall the picture is slowly improving for City revenues.  ECONOMIC OUTLOOK City of Palo Alto 7 2012 7      III. UPDATED MODEL ASSUMPTIONS USED IN THE BASE MODEL The following is a detailed description of the assumptions utilized in the Base Model.  Note that some of the de‐ scriptions refer to “CAGR” or Compound Annual Growth Rate.18  This is the average rate of growth over a period  of time in a particular revenue source or expense category. Generally, staff looked at the CAGR over fiscal years  2006‐2011 as a guideline for future rates of increase, after removing one‐time variations.     OVERALL ASSUMPTIONS FY 2013 revenues and expenditures follow the Proposed Budget working its way through the Budget Process.  The  FY 2013 Proposed Budget includes a number of one‐time expenditures and savings.  The Base Model backs out  these one‐time items starting FY 2014, for forecasting purposes, until staff has an opportunity to review the im‐ pacts of the operational changes and determine whether positions can be permanently eliminated.  In the Alter‐ nate Scenario, the savings attributable to frozen positions are assumed to become permanent reductions in head‐ count.    The specific one‐time items included in the FY 2013 Proposed Budget are as follows:    1. $2.65 million in salary and benefit savings due to the following frozen positions:  • 6 Firefighters  • 1 OES FTE  • 1 Plan Check Engineer  • 6 Police Officers  • 1 Police Captain    2. $1.6 million in one‐time costs as follows:  • $0.15 million for a Planning Organizational Study and an Animal Services Study  • $0.34 million in election costs  • $0.31 million loan to the Airport Fund  • $0.8 million in additional technology investments for Development Center    Subtotal of One‐Time Savings and Costs: $1.05 million in net savings    In addition to the one‐time savings included the FY 2013 Budget, the Proposed Budget also assumes the perma‐ nent elimination of the Animal Services program, although this policy decision has been discussed but by no  means finalized by Council.  The assumed closure impacts a few different revenue and expense categories in the  Forecast, as noted in the discussion below.    UPDATED MODEL 8 City of Palo Alto 2012 8  REVENUES Overall, City revenues are improving; expense increases, discussed on pages 11‐15, continue to outpace the  growth in revenues.  Sales Tax FY 2012 sales tax revenue is estimated at $21.6 million, an increase of $1.4 million above the Adopted FY 2012  budget, and a $0.8 million (4.1 percent) increase over FY 2011 actuals.  The increases are based on year‐to‐date  receipts and projected year‐end figures from MuniServices, the City’s sales tax consultant; they also reflect in‐ creased overall business and consumer spending in the area. In FY 2013, these revenues are estimated to increase  4.4 percent to $22.5 million.  This rate of increase drops to 3.6 for FY 2014, but then resumes growth in the 4 to 5  percent range through FY 2022.    Property Tax FY 2012 property tax revenue is projected at $26.0 million, a 1.2 percent increase over FY 2011 actuals —which  aligns with County growth expectations.  The Forecast then assumes gradual growth in property tax revenues over  the next 8 years from 3.9 percent in FY 2013 to 4.6 percent in FY 2022.  The City’s near‐term forecast assumes a  steeper growth rate than that of the Palo Alto Unified School District, which, as of January 2012, forecasted 2 per‐ cent growth for the next few years.    Transient Occupancy Tax (TOT) With the opening of Hotel Keen in May 2010 and strong receipts from existing establishments, the TOT re‐ bounded in FY 2011 after two years of declines, with a 17.8 percent increase over 2010 actual receipts.  FY 2012  first quarter receipts were 26.2 percent higher than first quarter FY 2011 receipts, and for FY 2012 TOT revenues  are projected to exceed FY 2011 revenues by $0.6 million or 7.3 percent– reaching $8.7 million.  FY 2013 revenues  are expected to be $9.6 million, or 10.6 percent above projected FY 2012 revenues.  Note that the Forecast does  not include revenues for potential new hotels.  Two hotels (Hilton Garden and Palo Alto Bowl) have submitted  plans while another two are expected to do so in the next 6‐9 months. Hilton Garden plans 170 rooms, with an  expected opening in 2014 and potential TOT revenues of $1.0 to $1.2 million.     Utility Users Tax (UUT) The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.  FY 2012 UUT revenues  are expected to be 1.7 percent below FY 2011 revenues, or $10.7 million.  The utility‐generated portion of the FY  2012 UUT comes in 1.3 percent higher than those in FY 2011, while the telephone‐generated portion comes in 9.5  percent lower.  Telephone‐generated UUT revenues are projected to decrease at an average rate of 3.4 percent  per year for the length of the Forecast, due to carriers’ unbundling of services, leaving a lower taxable portion of  users’ telephone bills.  Note that the Utility‐generated portion of projected UUT revenues assumes the rate change assumptions shown  in the table on page 10, utilizing Utility Department‐generated 5‐year revenue projections. The remaining years’  increases for Gas and Electric are based on the CAGR for the first 5 years. For the Water utility,  given the steep  expected increases in water rates over the next couple years, staff modified the CAGR downward for out years.    UPDATED MODEL City of Palo Alto 9 2012 9                  UPDATED MODEL Top 5 General Fund Tax Revenue Sources: Property Tax, Sales Tax, UUT, TOT, Doc. Transfer Tax $30 $40 $50 $60 $70 $80 $90 $100 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fiscal Year Do l l a r s ( M i l l i o n s ) FY 2012-2017 numbers are projected. General Fund Major Revenues (in millions) Sales Tax 21.6 Property Tax 26.0 TOT8.7 Utility User's Tax 10.7 Doc. Transfer Tax4.8 $4 $8 $12 $16 $20 $24 $28 $32 $36 $40 2003-04 2004-05 2005-06 2006-07 2007-08 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Fiscal Year 10 City of Palo Alto 2012 10  UTILITY RATE INCREASE ASSUMPTIONS IN UUT PROJECTIONS              Documentary Transfer Tax FY 2012 revenues are projected at $4.8 million — 7.7 percent below FY 2011 revenues. This revenue source is  challenging to forecast accurately, since it is highly dependent on sales volume and the mix of commercial and  residential sales.  For example, in FY 2011, 17 large transactions—just 2 percent of all transactions—accounted for  two‐thirds of the $1.5 million year‐over‐year increase.  The forecast for FY 2012 and beyond is based on recent  revenue trends and the real estate market outlook.  In FY 2013, the tax is projected at 6.5 percent above 2012 lev‐ els—at $5.1 million.  From FY 2014 onwards, rates of increase  are in the 5 percent range.   Other Taxes & Fines Close to 76 percent of this category is comprised of Parking Violation revenue. It is assumed that continued gaps  in staffing levels, due to disability and workers’ comp leave, will make it difficult to bring Parking Violation reve‐ nue back to 2008 levels. Experience over the past five fiscal years has shown this to be a volatile revenue stream  with year‐to‐year changes ranging from an 8 percent increase in FY 2007 to a 17 percent decrease in FY 2010. An‐ other portion of this category is the Vehicle‐in‐Lieu Fee (VLF), which is projected to be $0.2 million lower than the  Adopted Budget.  As part of FY 2012 state budget adoption, Senate Bill 89 eliminated the allocation of VLF to cit‐ ies and counties. According to the League of California Cities, Cities should expect zero VLF revenue in subsequent  years unless there is a change in the law. Therefore, staff is projecting no VLF receipts in this forecast.  In the re‐ maining categories, a 1 percent annual increase is assumed.  Charges for Services Major changes in Charges for Services are anticipated from the projected increase in activity at the Development  Center in FY 2012 and 2013, as well as from the possible contracting out of Animal Services.  For FY 2012 and  2013, the combined increase in Development Center revenue is projected at $1.4 million or 6.2 percent. However,  this is offset in FY 2013 by an assumed decrease in Animal Services fee revenue of $0.7 million.  The City is cur‐ rently undertaking a Cost of Services study which may have an impact on this revenue category starting in FY  2013.  Permits and Licenses The City’s Chief Building Official anticipates a $0.6 million or 11 percent increase in revenue for FY 2012 as compared to  the Adopted Budget, followed by five years of lower revenues, before resuming annual increases in FY 2018.  The FY  2012 projection represents a $1.4 million or 28 percent increase over FY 2011 revenues; the longer‐term forecast re‐ flects the periodic ebbs and flows in this revenue source. The Cost of Services study may also impact this category as  early as FY 2013.   UPDATED MODEL FISCAL YEAR 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 Electric 0% 0% 4% 6% 5% 4% 4% 4% 4% 4% Water 15% 15% 9% 3% 2% 4.3% 4.3% 4.3% 4.3% 4.3% Gas -10% 4% 5% 4% 4% 0.8% 0.8% 0.8% 0.8% 0.8% City of Palo Alto 11 2012 11  Return on Investment Since the recession began in FY 2009, interest income has fallen roughly by half.  In FY 2009, revenues were $2.0  million; in FY 2012 they are projected at $0.97 million. As higher yielding maturing investments continue to be re‐ invested in a historically low interest rate environment, interest income levels are expected to decline further.  Starting in FY 2015, interest income is projected to increase each year by between 1.3 percent and 2.2 percent.  Rental Income The largest components of rental income are the City’s Enterprise Funds and the Cubberley Community Cen‐ ter.  The rent from the Enterprise Funds will decline by $2.5 million — 16.5 percent of the overall category — in FY  2013 with the closure of the landfill, the Middlefield Well Site, and the former Los Altos Treatment Plant (LATP)  site.  Starting in FY 2014, staff projects that rent increases in other City properties will more than make up for the  loss of the LATP and Well site. For this forecast period, rental income is expected to increase at approximately the  same rate as the Consumer Price Index, which drives Enterprise Fund rental fees.     The City is conducting an assessment of all General Fund properties which might impact the rental income from  Enterprise Funds starting in FY 2014.    From Other Agencies Revenue from Other Agencies includes income from Community Services Outreach theatre programs, PAUSD pro‐ grams, State of California grants for Police, Libraries and Community Services, and donations from Friends groups.  Many of these are unpredictable and are influenced by the economy. For example, State grants are reduced when  the State of California experiences budget difficulties. Due to this category’s unpredictable nature, the Forecast  assumes a zero growth rate from FY 2014 onwards.  Charges to Other Funds Seventy‐eight percent of this category comprises General Fund administrative cost plan allocation charges.  The  FY 2012 projected amount is equal to the Budgeted amount of $10.5 million, rising by 3.5 percent or $0.37 million  in FY 2013.  From FY 2014 onward, forecasted increases range from 0.74 percent to 1.6 percent.    Other Revenues In FY 2012, Other Revenues are projected to be $0.7 million higher than the Adopted Budget as a result of a $0.5  million one‐time donation from the Palo Alto Library Foundation to support library programs; $0.13 million in do‐ nations to fund Community Services Department programs; and $0.06 million in reimbursements from various  agencies to public safety departments.  In FY 2013 onwards, the Forecast assumes that the City will contract out  its Animal Services program with a revenue loss in this category (from partner agencies only) of $0.6 million.  An  annual increase of under‐one‐percent is assumed from FY 2013 onwards.  Operating Transfers In Operating Transfers In include the equity transfer from the Electric and Gas Funds, as well as transfers from the  University Avenue Parking Permit Fund and the California Avenue Parking Permit Fund.  The FY 2013‐2016 equity  transfers are based on Utilities Five‐Year Projections of capital‐based returns, increasing roughly 3 percent per  year.  UPDATED MODEL 12 City of Palo Alto 2012 12  EXPENSES Salary and Benefits Salary • All bargaining units are assumed to have 4 years of salary freezes followed by 2 percent annual increases.  While it is difficult to contemplate salary increases in years in which budget gaps are forecasted, such in‐ creases are included for forecasting purposes.   • SEIU and Management (Miscellaneous) groups are assumed to receive 2 percent salary increases every  year starting FY 2014. Note that the Miscellaneous group’s last cost‐of‐living increase was July 1, 2008. • Fire unit receives 0 percent increases in 2013 and 2014, and 2 percent annual increases start 2015, pend‐ ing the absence of a budget gap, as per the contract approved October 2011. • Police unit receives 0 percent increases until 2016 when it commences 2 percent annual increases. • The Library Department has estimated $0.45 million in salary and benefit savings for 2013 and 2014 while  the Main and Mitchell Park libraries are under construction.  Starting in 2015, though, the Library Depart‐ ment estimates $0.3 million in additional salary costs for the two newly remodeled libraries.   See End‐ notes Number 19 (page 28) for breakout of new library costs and savings incorporated into the model. Benefits • Forecast includes PERS’s estimated rates for FY 2013, 2014, and 2015 (as of their October 2011 actuarial  report) ‐ as revised by their March 2012 decision to lower the assumed discount rate from 7.75% to 7.5%.   See PERS Rates Detail chart on page 15 outlining historic and projected PERS rates. • The rates are assumed to increase 3 percent per year after FY 2015, as per Council direction in March  2011. If a more moderate annual increase of 1.5 percent were assumed after FY 2015, $25.7 million in sav‐ ings would result for FY 2016‐2022. • For Two‐Tier savings, Forecast based estimates on Bartel & Associates analysis of September 26, 2011, but  delayed savings by two years from implementation of each relevant agreement, since CalPERS bases its  pension calculations on information from two years prior. • Forecast assumes 10 percent annual increases in medical costs as per previous Council direction • Forecast assumes 4 percent annual increases in Dental and Vision costs • FY 2012 medical calculation includes $86,000 in savings from partial year of cost‐sharing by the Interna‐ tional Association of Firefighters (IAFF). • FY 2013 medical calculation includes full year of cost‐sharing by IAFF, the Palo Alto Police Officers Associa‐ tion (PAPOA) and the Fire Chiefs Association (FCA). • For FCA and PAPOA concessions, model includes combined savings of $1.6 million for FY 2013 and about  $17.6 million over the remaining nine years of the Forecast • Retiree Annual Required Contributions (ARC) are based on the January 1, 2011 actuarial study for FY 2012,  2013, and 2014, as amended by the Council direction of April 16, 2012. The model also assumes 3.25 per‐ cent annual increases in ARC, as assumed in the January actuarial valuation study.           UPDATED MODEL City of Palo Alto 13 2012 13  The following chart illustrates the increasing salary and benefit costs that the City has experienced in the General  Fund, despite reduced headcount.                                            General Fund Salaries, Benefits, and Number of Employees (FTE) $48.5 $54.2 $58.9 $57.3 $53.9 $55.1 $55.6 $57.0 $60.4 $62.1 $58.4 $60.0 $60.4 $16.3 $21.0 $13.5 $19.0 $18.4 $24.5 $27.3 $29.9 $36.8$34.2$32.7$29.5$30.9 704 725 752 760 676 669 647 650 576 580623652653 $- $20 $40 $60 $80 $100 FY 200 0 FY 200 1 FY 2 0 02 FY 2 0 0 3 FY 200 4 FY 2 0 0 5 FY 2 0 0 6 FY 200 7 FY 2 0 0 8 FY 200 9 FY 201 0 FY 2 0 1 1 FY 201 2 Mi l l i o n s - 100 200 300 400 500 600 700 800 Nu m b e r o f E m p l o y e e s ( F T E ) Salaries Benefits Full-Time Equivalent Permanent Employees (FTE) ` $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Employer Contribution Employee Portion Paid by City                           12‐Year Trend ‐ Citywide Pension Expense FY 2002‐2013              Paid by City ($Millions, FY 2012 Forecasted, FY 2013 Proposed) *Don't have breakdown prior to FY 2004 31.3% 68.7%58.9% 41.1% 70.6% 29.4% 73.8% 26.2% 77.4% 22.6% 73.4% 26.6% 82.3% 17.7% 85.1% 14.9%86.3% 13.7% $3.8 $2.4 $4.7 $15.6 $18.2 $19.5 $20.8 $22.9 $20.0 $19.5 $23.9 26.6% $23.1 87% 13% 14 City of Palo Alto 2012 14  UPDATED MODEL The following two charts illustrate the trend in health care cost.    $14.9$14.3$13.7$13.5$13.0$12.2$11.8 $10.9$9.7$9.0 $6.6 $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 * FY 2002‐2012 overall growth 126%      10 Year Trend ‐ Citywide Health Care Expenditure  ($Millions, FY 2012 Adopted) 8 Year Trend ‐ Citywide Average Monthly  Medical Cost per Employee $935 $1,059 $1,019 $901 $875 $814 $768 $695 $609$600 $700 $800 $900 $1,000 $1,100 2004 2005 2006 2007 2008 2009 2010 2011 2012 * FY 2004‐2012 overall growth 74% City of Palo Alto 15 2012 15  UPDATED MODEL The following chart shows historical employer PERS rates for FY 2007 through 2012, and the projected rates used  in this Forecast for FY 2013 to 2022.    Non-Salary/Benefit Expense Contract Services FY 2012 Projected Contract Services include $0.3 million in one‐time contracts. The FY 2013 figure includes $0.11  million in additional costs for the Mitchell Park and Main Library remodeling projects.  Additional costs of $0.23  million are assumed in FY 2014, and from 2015 onwards, an additional $0.28 million per year for the two remod‐ eled libraries. This expense shows 1.5 percent annual growth from FY 2015 onwards.    The Attorney’s Office, Human Resources and Community Services have discussed the possible need to convert  many outside contractors, particularly class instructors, to hourly personnel. Were this to happen, contract ser‐ vices expense would decrease and Salaries and Benefits expense would increase. Some of these converted work‐ ers would become SEIU hourly workers, requiring benefit expense in addition to salary.   Supplies & Materials FY 2012 projected Supplies and Materials costs are about $0.6 million higher than the Adopted Budget, due  mainly to a one‐time donation from the Palo Alto Library Foundation for collection materials for the new Mitchell  Park Library.  Aside from that one‐time gift, Supplies & Materials costs are expected to remain relatively constant  in outer years, with a 1 percent yearly increase.   The FY 2013 amount is $0.1 million lower than the FY 2012  Adopted Budget, despite $13,000 in additional needs for the Mitchell Park and Main Library projects and $20,000  increase in Community Services Department related to Project Safety Net. The net decrease is due primarily to the  proposed elimination of Animal Services program.    FY 2007 2008 2009 2010 2011 2012  2013 2014 2015  Miscellaneous 11.4% 17.4% 17.0% 17.1% 17.6% 21.7% 23.0% 24.1% 25.2%  Safety 24.2% 23.6% 24.5% 23.9% 24.7% 30.1% 31.1% 32.8% 34.5%  PERS RATES DETAIL CHART              Notes:  1. FY 2013, 2014, and 2015 rates are based on PERS actuarial valuations for Miscellaneous and Safety groups received Octo‐ ber 2011.  2. For FY 2014 and 2015, base rates are revised upwards over two years by 1.5% for Miscellaneous and 2.5% for Safety due  to PERS Board's change to 7.5% discount rate assumption.   16 City of Palo Alto 2012 16  General Expense The majority of General Expense comprises the lease payments to PAUSD for the Cubberley facility.  For FY 2012 that  payment is $7.1 million or 65 percent of the $10.9 million total for the category. The current lease contract calls for the   City to make a decision on the next 5‐year option by December 2013. The Forecast assumes that the lease contract  with PAUSD will continue beyond 2014.  For FY 2012, actuals are projected at $31,000 above FY 2012 Adopted Budget,  due to the expense of an additional ballot measure in November 2011. In FY 2013 and 2014, staff projects small (less  than 1 percent) increases, and from FY 2015 onwards, annual increases of 3.3 percent are assumed.    Rents and Leases FY 2012 and FY 2013 show increases of $174,000 and $106,000 above Adopted FY 2012 Budget due to Development  Center space needs.  After FY 2013, Rents and Leases expense growth is expected to be fairly steady at a 3.5 percent  annual rate.      Facilities & Equipment The FY 2012 projected amount is $162,000 higher than budgeted, due to one‐time increases in Development Center  expenses. In FY 2013, an additional $30,000 is expected for library remodeling‐related expenses; from 2014 onwards  that number increases to $86,000.  In addition to the one‐time increases, there is an ongoing annual increase in the 4  percent range for this category.      Allocated Charges Allocated charges vary significantly from year to year, since they include a variety of  sources, such as City use of utili‐ ties, liability insurance, technology costs, and vehicle replacement costs.  Technology costs are increasing in FY 2012  and FY 2013 due to the Development Center Blueprint Process. These include one‐time charges of $1.7 million for tech‐ nology enhancements over two years, ending in FY 2013.  In addition, the remodeled Mitchell Park and Main libraries  are expected to add about $0.1 million in Allocated Charges from 2014 forward. Lastly, the General Fund has been re‐ paying the Technology Fund its $4.8 million loan at about $1.2 million per year over four years.  FY 2013 will be the last  year of the loan repayment. Beyond 2014, the Forecast assumes a 2 percent annual growth rate.     Operating Transfers Out Operating Transfers Out includes transfers to Debt Service and Capital Project (Infrastructure) Funds, which change  along with any new debt issuances or changed funding levels. Debt Service Fund transfers are based on payment   schedules for the 2002 B Downtown Parking Improvement Project Certificates of Participation (COP) and the 2011 Golf  Course debt. The Golf Course debt will be paid down by 2018.    For FY 2013‐2016, transfers to the Capital Project Fund are based on the FY 2012‐2016 Five‐Year Capital Plan.  Beyond  FY 2016, transfers to the Capital Project Fund are based on a fairly complex formula, described below:      UPDATED MODEL City of Palo Alto 17 2012 17  UPDATED MODEL 1. The “annual base transfer” of $3.6 million and a “dedicated year‐end surplus” of $1.0 million remain constant.  2. The transfer for specific projects receiving General Fund reimbursements varies year‐by‐year with the 5‐year  CIP Budgets.  The FY 2012‐2016 CIP Budget’s average annual rate of increase is 2.7 percent, so this is used as  the assumed increase in each of the years from FY 2017‐2022.  3. $5.9 million is increased by 7 percent per year, as a result of Council’s “$3 million challenge” begun in 2007,  whereby they committed to spend an additional $3 million on infrastructure, growing by 7 percent per year.    Beginning FY 2013, the base model adds an additional $2.2 million per year in infrastructure investment, as per Finance  Committee direction.  This is meant to fund remaining “keep‐up” needs defined by the Infrastructure Blue Ribbon Com‐ mission (IBRC) Report, but does not address either the “catch‐up” needs or new construction needs discussed in the  IBRC report.  FACTORS NOT INCLUDED IN THE BASE MODEL The following factors are not incorporated into the base model assumptions:  • Impacts from possible conversion of selected contractors to hourly personnel • IBRC recommendations regarding $42 million in “catch‐up” needs, as well as new construction needs, such as  for the MSC and public safety building • Any additional employee cost‐sharing needed to close budget gaps • Possible TOT revenues from hotels, such as the Hilton Garden and Palo Alto Bowl, that have not yet begun con‐ struction    BASE MODEL The Base Model may be found on the following pages (18‐21). The first table shows General Fund revenue and expense  projections for FY 2012‐2022. The second table shows year‐over‐year percentage changes in each category. The Base  Model shows a balanced budget in FY 2012 after a $2.3 million draw on the BSR.  In FY 2013 it shows a deficit of $1.0  million, and for the ten‐year period from FY 2013 through FY 2022, cumulative deficits are projected at $88.2 million. Combined additional costs in FY 2013 and 2014 due to the  Mitchell Park and Main Library remodeling projects are  projected to be 100% offset by salary and benefit savings  due to library closures during construction. However, from  FY 2015 onwards, about $1.0 million in additional costs is  expected.  18 City of Palo Alto 2012 18  UPDATED MODEL 20 1 2 - 2 0 2 2 L R F F - B A S E M O D E L FY 2 0 1 2 Ado p t e d FY 2 0 1 2 Pro j e c t e d FY 2 0 1 3 F Y 2 0 1 4 F Y 2 0 1 5 F Y 2 0 1 6 F Y 2 0 1 7 F Y 2 0 1 8 F Y 2 0 1 9 F Y 2 0 2 0 F Y 2 0 2 1 F Y 2 0 2 2 Rev e n u e s Sal e s T a x e s $ 2 0 , 2 4 6 $ 2 1 , 5 9 4 $ 2 2 , 5 4 5 $ 2 3 , 3 6 1 $ 2 4 , 2 1 8 $ 2 5 , 1 9 9 $ 2 6 , 2 4 8 $ 2 7 , 3 5 0 $ 2 8 , 5 2 9 $ 2 9 , 7 9 3 $ 3 1 , 1 4 2 $ 3 2 , 634 Pro p e r t y T a x e s 2 6 , 0 5 2 2 5 , 9 8 9 2 7 , 0 0 6 2 7 , 9 4 9 2 8 , 9 3 8 3 0 , 0 0 6 3 1 , 1 6 1 3 2 , 4 3 5 3 3 , 8 2 7 3 5 , 3 2 5 3 6 , 9 3 3 3 8 , 6 2 4 Tra n s i e n t O c c u p a n c y T a x 8 , 2 0 4 8 , 6 7 4 9 , 5 9 1 9 , 9 0 9 1 0 , 2 9 9 1 0 , 7 1 1 1 1 , 1 5 0 1 1 , 6 1 5 1 2 , 1 0 5 1 2 , 6 2 6 1 3 , 1 71 1 3 , 7 8 2 Util i t y U s e r T a x 1 0 , 8 5 9 1 0 , 6 6 6 1 0 , 7 3 1 1 1 , 0 9 9 1 1 , 4 7 3 1 1 , 8 5 5 1 2 , 1 7 6 1 2 , 4 5 9 1 2 , 7 4 5 1 3 , 0 3 4 1 3 , 3 1 9 1 3 , 6 0 1 Doc u m e n t a r y T r a n s f e r T a x 4 , 2 6 9 4 , 7 6 9 5 , 0 7 8 5 , 3 3 0 5 , 6 0 0 5 , 8 8 6 6 , 1 8 8 6 , 5 0 8 6 , 8 5 0 7 , 2 1 3 7 ,59 9 8 , 0 1 4 Oth e r T a x e s & F i n e s 2 , 3 3 0 2 , 1 5 6 2 , 0 3 7 2 , 0 5 7 2 , 0 7 8 2 , 0 9 9 2 , 1 2 0 2 , 1 4 1 2 , 1 6 2 2 , 1 8 4 2 ,20 6 2 , 2 2 8 S u b t o t a l : T a x e s 7 1 , 9 6 0 7 3 , 8 4 8 7 6 , 9 8 8 7 9 , 7 0 5 8 2 , 6 0 6 8 5 , 7 5 5 8 9 , 0 4 2 9 2 , 5 0 8 9 6 , 2 1 9 1 0 0 , 1 7 4 1 0 4 , 3 6 9 1 0 8 , 8 8 3 Cha r g e s f o r S e r v i c e s 2 1 , 8 4 1 2 2 , 7 0 2 2 3 , 1 9 7 2 3 , 4 0 6 2 4 , 2 2 5 2 5 , 0 7 3 2 5 , 9 5 0 2 6 , 8 5 9 2 7 , 7 9 9 2 8 , 7 7 2 2 9 , 7 7 9 3 0 , 8 2 1 Per m i t s a n d L i c e n s e s 5 , 7 7 8 6 , 4 0 6 6 , 4 9 5 6 , 2 4 4 6 , 0 0 3 5 , 7 6 2 5 , 5 3 2 5 , 3 0 2 5 , 5 6 7 5 , 8 4 5 6 ,13 8 6 , 4 4 4 Ret u r n o n I n v e s t m e n t 1 , 3 1 8 9 7 4 9 5 9 9 5 7 9 6 9 9 8 6 1 , 0 0 5 1 , 0 2 8 1 , 0 4 9 1 , 0 7 0 1, 0 9 3 1 , 1 1 7 Ren t a l I n c o m e 1 3 , 9 1 4 1 3 , 9 1 4 1 2 , 6 5 1 1 2 , 9 8 8 1 3 , 2 9 8 1 3 , 6 1 7 1 3 , 9 4 7 1 4 , 2 8 6 1 4 , 6 3 4 1 4 , 9 9 3 1 4 , 0 4 7 1 3 , 4 6 9 Fro m o t h e r a g e n c i e s 1 5 5 1 5 5 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 1 5 7 Cha r g e s t o O t h e r F u n d s 1 0 , 5 0 5 1 0 , 5 0 5 1 0 , 8 7 4 1 0 , 9 5 4 1 1 , 0 3 6 1 1 , 1 1 8 1 1 , 2 0 3 1 1 , 2 8 8 1 1 , 3 7 5 1 1 , 5 0 2 1 1 , 6 8 6 1 1 , 8 7 3 Oth e r r e v e n u e s 1 , 4 2 8 2 , 0 9 3 6 6 2 6 6 5 6 6 7 6 7 0 6 7 3 6 7 5 6 7 8 6 8 1 6 8 3 6 8 6 T o t a l R e v e n u e s B e f o r e T r a n s - fers 12 6 , 8 9 9 1 3 0 , 5 9 7 1 3 1 , 9 8 3 1 3 5 , 0 7 5 1 3 8 , 9 6 0 1 4 3 , 1 3 9 1 4 7 , 5 0 9 1 5 2 , 1 0 3 1 5 7 , 4 7 8 1 6 3 , 1 9 4 1 6 7 , 9 5 2 1 7 3 , 451 Ope r a t i n g T r a n s f e r s - I n 1 9 , 6 0 6 1 9 , 6 0 6 1 8 , 9 9 5 1 9 , 8 1 2 1 9 , 8 6 9 2 0 , 6 2 6 2 1 , 2 1 8 2 1 , 8 2 7 2 2 , 4 5 4 2 3 , 1 0 0 2 3 , 7 6 6 2 4 , 4 5 0 T O T A L R E V E N U E S 14 6 , 5 0 5 1 5 0 , 2 0 3 15 0 , 9 7 8 1 5 4 , 8 8 7 15 8 , 8 3 0 16 3 , 7 6 5 16 8 , 7 2 7 17 3 , 9 3 0 17 9 , 9 3 1 18 6 , 2 9 4 19 1 , 7 1 8 1 9 7 , 9 0 1 Exp e n d i t u r e s Sal a r i e s 5 7 , 4 2 2 6 0 , 3 8 9 5 6 , 9 5 7 5 9 , 7 1 9 6 1 , 5 0 9 6 2 , 7 5 2 6 4 , 0 1 9 6 5 , 3 1 2 6 6 , 6 3 2 6 7 , 9 7 8 6 9 , 3 5 1 7 0 , 7 5 2 Ben e f i t s 3 4 , 6 4 8 3 6 , 1 3 8 3 6 , 0 2 2 3 9 , 2 9 7 4 1 , 8 0 8 4 5 , 2 1 1 4 8 , 8 1 5 5 2 , 5 7 3 5 6 , 5 4 3 6 0 , 7 3 8 6 5 , 1 7 8 6 9 , 8 7 8 S u b t o t a l : S a l a r i e s a n d B e n e f i t s 9 2 , 0 7 0 9 6 , 5 2 7 9 2 , 9 7 9 9 9 , 0 1 6 1 0 3 , 3 1 7 1 0 7 , 9 6 3 1 1 2 , 8 3 4 1 1 7 , 8 8 6 1 2 3 , 1 7 5 1 2 8 , 7 1 6 1 3 4 , 5 2 9 1 40, 6 2 9 Con t r a c t S e r v i c e s 1 1 , 2 9 7 1 1 , 6 0 7 1 1 , 6 4 1 1 1 , 7 2 6 1 1 , 9 5 2 1 2 , 1 8 2 1 2 , 3 6 5 1 2 , 5 5 1 1 2 , 7 3 9 1 2 , 9 3 0 1 3 , 1 2 4 1 3 , 3 2 1 Sup p l i e s & M a t e r i a l s 3 , 2 0 6 3 , 7 6 1 3 , 1 0 4 3 , 1 5 8 3 , 3 8 1 3 , 4 1 2 3 , 4 4 4 3 , 4 7 6 3 , 5 0 8 3 , 5 4 1 3 ,57 4 3 , 6 0 8 Gen e r a l E x p e n s e 1 0 , 8 9 7 1 0 , 9 2 8 1 1 , 0 0 6 1 1 , 3 6 8 1 1 , 7 4 2 1 2 , 1 3 0 1 2 , 5 3 1 1 2 , 9 4 6 1 3 , 3 7 6 1 3 , 8 2 0 1 4 , 2 7 6 1 4 , 7 5 3 Ren t s & L e a s e s 8 3 1 1 , 0 0 5 1 , 1 1 1 1 , 1 5 0 1 , 1 9 0 1 , 2 3 2 1 , 2 7 5 1 , 3 2 0 1 , 3 6 6 1 , 4 1 4 1 ,46 3 1 , 5 1 4 Fac i l i t i e s & E q u i p m e n t 4 6 0 6 2 2 5 1 7 6 0 0 6 2 5 6 5 1 6 7 8 7 0 7 7 3 7 7 6 9 8 0 2 8 3 7 Allo c a t e d C h a r g e s 1 5 , 7 6 2 1 6 , 4 5 0 1 6 , 8 6 0 1 7 , 4 1 6 1 7 , 7 6 3 1 8 , 1 3 8 1 8 , 4 9 9 1 8 , 8 6 7 1 9 , 2 4 2 1 9 , 6 2 5 2 0 , 0 1 6 2 0 , 4 1 4 T o t a l E x p e n d i t u r e s B e f o r e T r a n s - fers 13 4 , 5 2 3 1 4 0 , 9 0 1 1 3 7 , 2 1 8 1 4 4 , 4 3 4 1 4 9 , 9 7 0 1 5 5 , 7 0 8 1 6 1 , 6 2 6 1 6 7 , 7 5 2 1 7 4 , 1 4 2 1 8 0 , 8 1 4 1 8 7 , 7 8 4 1 9 5 , 076 City of Palo Alto 19 2012 19                                              UPDATED MODEL Tra n s f e r s t o O t h e r F u n d s Ope r a t i n g T r a n s f e r s O u t 8 5 9 2 , 1 0 9 1 , 6 0 5 6 6 0 6 6 6 6 6 4 6 6 6 6 6 6 6 6 8 2 3 5 2 3 3 - Tra n s f e r t o I n f r a s t r u c t u r e 1 0 , 9 7 8 1 0 , 9 7 8 1 3 , 1 7 8 1 3 , 5 3 4 1 3 , 9 8 8 1 4 , 4 8 8 1 5 , 0 1 8 1 5 , 5 8 3 1 6 , 1 8 6 1 6 , 8 2 8 1 7 , 5 1 3 1 8 , 2 4 4 T O T A L E X P E N D I T U R E S 14 6 , 3 6 0 1 5 3 , 9 8 8 15 2 , 0 0 0 1 5 8 , 6 2 8 16 4 , 6 2 3 17 0 , 8 6 0 17 7 , 3 1 0 18 4 , 0 0 0 19 0 , 9 9 7 19 7 , 8 7 8 20 5 , 5 3 0 2 1 3 , 3 2 0 Net S u r p l u s / ( G a p ) 1 4 5 ( 3 , 7 8 5 ) ( 1 , 0 2 2 ) ( 3 , 7 4 1 ) ( 5 , 7 9 4 ) ( 7 ,095 ) ( 8 , 5 8 3 ) ( 1 0 , 0 7 0 ) (1 1 , 0 6 5 ) ( 11, 5 8 4 ) ( 1 3 , 8 12) ( 1 5 , 4 1 9 ) BAO s A p p r o v e d b y C o u n c i l : A d d ' l l e g a l c o u n s e l 1 8 5 Lo a n t o R e f u s e F u n d 1 , 2 5 0 Dev e l o p m e n t C e n t e r B l u e P r i n t P l a n 4 Mid y e a r D e c i s i o n P o i n t s S a l a r y / F T E r e l a t e d - o n g o i n g ( 4 5 1 ) R e v e n u e / N o n - S a l a r y r e l a t e d 4 8 5 P r o p o s e d M i d y e a r B S R D r a w 2 , 3 1 2 S u b t o t a l - 3 , 7 8 5 - - - - - - - - - - G R A N D N E T S U R P L U S ( G A P ) $ 1 4 5 $ ( 0 ) $ ( 1 , 0 2 2 ) $ ( 3 , 7 4 1 ) $ ( 5 , 7 9 4 ) $ ( 7 , 0 9 5 ) $ ( 8 , 5 8 3 ) $ ( 1 0 , 0 7 0 ) $ ( 1 1 , 0 6 5 ) $ ( 1 1 , 5 8 4 ) $ ( 1 3 , 8 1 2 ) $ ( 1 5 , 4 1 9 ) 20 City of Palo Alto 2012 20  UPDATED MODEL PE R C E N T A G E C H A N G E S I N B A S E M O D E L FY 2 0 1 2 Pro j e c t e d FY 2 0 1 3 F Y 2 0 1 4 F Y 2 0 1 5 F Y 2 0 1 6 F Y 2 0 1 7 F Y 2 0 1 8 F Y 2 0 1 9 F Y 2 0 2 0 F Y 2 0 2 1 F Y 2 0 2 2 Cum u l a t i v e % Ch a n g e 201 2 - 2 0 2 2 Rev e n u e s Sal e s T a x e s 4.0 9 % 4 . 4 0 % 3 . 6 2 % 3 . 6 7 % 4 . 0 5 % 4 . 1 6 % 4 . 2 0 % 4 . 3 1 % 4 . 4 3 % 4 . 5 3 % 4 . 7 9 % Pro p e r t y T a x e s 1.1 7 % 3 . 9 1 % 3 . 4 9 % 3 . 5 4 % 3 . 6 9 % 3 . 8 5 % 4 . 0 9 % 4 . 2 9 % 4 . 4 3 % 4 . 5 5 % 4 . 5 8 % Tra n s i e n t O c c u p a n c y T a x 7.3 2 % 1 0 . 5 7 % 3 . 3 2 % 3 . 9 3 % 4 . 0 0 % 4 . 1 0 % 4 . 1 7 % 4 . 2 2 % 4 . 3 0 % 4 . 3 2 % 4 . 6 4 % Util i t y U s e r T a x (1.7 0 % ) 0 . 6 1 % 3 . 4 3 % 3 . 3 7 % 3 . 3 3 % 2 . 7 1 % 2 . 3 2 % 2 . 3 0 % 2 . 2 6 % 2 . 1 9 % 2 . 1 2 % Doc u m e n t a r y T r a n s f e r T a x (7.7 0 % ) 6 . 4 8 % 4 . 9 6 % 5 . 0 6 % 5 . 1 1 % 5 . 1 3 % 5 . 1 8 % 5 . 2 6 % 5 . 2 9 % 5 . 3 5 % 5 . 4 6 % Oth e r T a x e s & F i n e s 1.2 7 % - 5 . 5 2 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % 1 . 0 0 % S u b t o t a l : T a x e s 1.6 3 % 4 . 2 5 % 3 . 5 3 % 3 . 6 4 % 3 . 8 1 % 3 . 8 3 % 3 . 8 9 % 4 . 0 1 % 4 . 1 1 % 4 . 1 9 % 4 . 3 2 % 47. 4 4 % Cha r g e s f o r S e r v i c e s 1.40 % 2 . 1 8 % 0 . 9 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % Per m i t s a n d L i c e n s e s 28 . 1 9 % 1 . 4 0 % - 3 . 8 7 % - 3 . 8 6 % - 4 . 0 1 % - 3 . 9 9 % - 4 . 1 6 % 5 . 0 0 % 5 . 0 0 % 5 . 0 0 % 5 . 0 0 % Ret u r n o n I n v e s t m e n t 82 . 3 3 % - 1 . 5 0 % - 0 . 2 4 % 1 . 3 1 % 1 . 7 6 % 1 . 9 1 % 2 . 3 1 % 2 . 0 1 % 2 . 0 4 % 2 . 1 1 % 2 . 1 9 % Ren t a l I n c o m e (2.7 6 % ) - 9 . 0 8 % 2 . 6 6 % 2 . 3 9 % 2 . 4 0 % 2 . 4 2 % 2 . 4 3 % 2 . 4 4 % 2 . 4 5 % - 6 . 3 1 % - 4 . 1 1 % Fro m o t h e r a g e n c i e s (47 . 4 6 % ) 1 . 2 9 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % 0 . 0 0 % Cha r g e s t o O t h e r F u n d s (6.8 0 % ) 3 . 5 1 % 0 . 7 4 % 0 . 7 4 % 0 . 7 5 % 0 . 7 6 % 0 . 7 6 % 0 . 7 7 % 1 . 1 2 % 1 . 6 0 % 1 . 6 0 % Oth e r r e v e n u e s 12 . 9 5 % - 6 8 . 3 7 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % 0 . 4 0 % T o t a l R e v e n u e s B e f o r e T r a n s f e r s 1.7 8 % 1 . 0 6 % 2 . 3 4 % 2 . 8 8 % 3 . 0 1 % 3 . 0 5 % 3 . 1 1 % 3 . 5 3 % 3 . 6 3 % 2 . 9 2 % 3 . 2 7 % 32. 8 1 % Ope r a t i n g T r a n s f e r s - I n 9.3 3 % - 3 . 1 2 % 4 . 3 0 % 0 . 2 9 % 3 . 8 1 % 2 . 8 7 % 2 . 8 7 % 2 . 8 7 % 2 . 8 8 % 2 . 8 8 % 2 . 8 8 % T O T A L R E V E N U E S 2.7 1 % 0.52 % 2.5 9 % 2.5 5 % 3.1 1 % 3.0 3 % 3.08 % 3.4 5 % 3.54 % 2.9 1 % 3.23 % 31. 7 6 % Exp e n d i t u r e s Sal a r i e s 0.7 3 % - 5 . 6 8 % 4 . 8 5 % 3 . 0 0 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 2 . 0 2 % 17. 1 6 % Ben e f i t s 5.5 4 % - 0 . 3 2 % 9 . 0 9 % 6 . 3 9 % 8 . 1 4 % 7 . 9 7 % 7 . 7 0 % 7 . 5 5 % 7 . 4 2 % 7 . 3 1 % 7 . 2 1 % S u b t o t a l : S a l a r i e s a n d B e n e f i t s 2.4 8 % - 3 . 6 8 % 6 . 4 9 % 4 . 3 4 % 4 . 5 0 % 4 . 5 1 % 4 . 4 8 % 4 . 4 9 % 4 . 5 0 % 4 . 5 2 % 4 . 5 3 % 45. 6 9 % Con t r a c t S e r v i c e s 24 . 3 1 % 0 . 2 9 % 0 . 7 3 % 1 . 9 3 % 1 . 9 3 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % 1 . 5 0 % Sup p l i e s & M a t e r i a l s 32 . 3 0 % - 1 7 . 4 8 % 1 . 7 3 % 7 . 0 6 % 0 . 9 3 % 0 . 9 3 % 0 . 9 3 % 0 . 9 3 % 0 . 9 4 % 0 . 9 4 % 0 . 9 4 % Gen e r a l E x p e n s e 17 . 2 0 % 0 . 7 1 % 3 . 2 9 % 3 . 2 9 % 3 . 3 0 % 3 . 3 1 % 3 . 3 1 % 3 . 3 2 % 3 . 3 2 % 3 . 3 0 % 3 . 3 4 % Ren t s & L e a s e s 57 . 2 9 % 1 0 . 5 4 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % 3 . 5 0 % Fac i l i t i e s & E q u i p m e n t 11 2 . 9 2 % - 1 6 . 8 5 % 1 5 . 9 9 % 4 . 1 6 % 4 . 1 9 % 4 . 2 2 % 4 . 2 4 % 4 . 2 7 % 4 . 3 0 % 4 . 3 2 % 4 . 3 5 % Allo c a t e d C h a r g e s 4.7 0 % 2 . 4 9 % 3 . 3 0 % 1 . 9 9 % 2 . 1 1 % 1 . 9 9 % 1 . 9 9 % 1 . 9 9 % 1 . 9 9 % 1 . 9 9 % 1 . 9 9 % T o t a l E x p e n d i t u r e s B e f o r e T r a n s - fers 6.4 7 % - 2 . 6 1 % 5 . 2 6 % 3 . 8 3 % 3 . 8 3 % 3 . 8 0 % 3 . 7 9 % 3 . 8 1 % 3 . 8 3 % 3 . 8 5 % 3 . 8 8 % 38. 4 5 % City of Palo Alto 21 2012 21  UPDATED MODEL Ope r a t i n g T r a n s f e r s O u t 84 . 5 1 % - 2 3 . 9 0 % - 5 8 . 8 5 % 0 . 8 7 % - 0 . 2 7 % 0 . 2 4 % - 0 . 0 4 % 0 . 4 3 % - 6 4 . 8 0 % - 1 . 1 4 % - 1 0 0 . 0 0 % Tra n s f e r t o I n f r a s t r u c t u r e 11 . 3 7 % 2 0 . 0 4 % 2 . 7 0 % 3 . 3 5 % 3 . 5 8 % 3 . 6 6 % 3 . 7 6 % 3 . 8 7 % 3 . 9 7 % 4 . 0 7 % 4 . 1 7 % T O T A L E X P E N D I T U R E S 7.4 3 % -1.2 9 % 4.3 6 % 3.7 8 % 3.7 9 % 3.7 8 % 3.77 % 3.8 0 % 3.60 % 3.8 7 % 3.79 % 38. 5 3 % Net S u r p l u s / ( G a p ) (23 0 . 2 1 % ) - 7 3 . 0 0 % 2 6 6 . 0 2 % 5 4 . 8 8 % 2 2 . 4 5 % 2 0 . 9 8 % 1 7 . 3 3 % 9 . 8 8 % 4 . 6 8 % 1 9 . 2 4 % 1 1 . 6 3 % 22 City of Palo Alto 2012 22  ALTERNATE SCENARIO   IV. ALTERNATE SCENARIO The following scenario assumes that positions frozen in FY 2013 are permanently cut.  This reduces the cumulative defi‐ cits from $88.2 million to $58.7 million—a reduction of $29.5 million, or 33 percent.  2012-2022 LRFF - SCENARIO "MAKE FROZEN POSITIONS PERMANENT CUTS" FY 2012 Adopted FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 TOTAL REVENUES 146,505 150,203 150,978 154,887 158,830 163,765 168,727 173,930 179,931 186,294 191,718 197,901 Expenditures Salaries 57,422 60,389 56,957 58,039 59,789 60,997 62,229 63,486 64,768 66,077 67,411 68,773 Benefits 34,648 36,138 36,022 38,230 40,676 43,987 47,493 51,150 55,011 59,093 63,413 67,985 Subtotal: Salaries and Bene- fits 92,070 96,527 92,979 96,269 100,465 104,984 109,722 114,635 119,780 125,170 130,824 136,758 Contract Services 11,297 11,607 11,641 11,726 11,952 12,182 12,365 12,551 12,739 12,930 13,124 13,321 Supplies & Materials 3,206 3,761 3,104 3,158 3,381 3,412 3,444 3,476 3,508 3,541 3,574 3,608 General Expense 10,897 10,928 11,006 11,368 11,742 12,130 12,531 12,946 13,376 13,820 14,276 14,753 Rents & Leases 831 1,005 1,111 1,150 1,190 1,232 1,275 1,320 1,366 1,414 1,463 1,514 Facilities & Equipment 460 622 517 600 625 651 678 707 737 769 802 837 Allocated Charges 15,762 16,450 16,860 17,416 17,763 18,138 18,499 18,867 19,242 19,625 20,016 20,414 Total Expenditures Before Transfers 134,523 140,901 137,218 141,687 147,117 152,728 158,514 164,501 170,748 177,268 184,079 191,205 Transfers to Other Funds Operating Transfers Out 859 2,109 1,605 660 666 664 666 666 668 235 233 - Transfer to Infrastructure 10,978 10,978 13,178 13,534 13,988 14,488 15,018 15,583 16,186 16,828 17,513 18,244 TOTAL EXPENDITURES 146,360 153,988 152,000 155,881 161,771 167,880 174,197 180,750 187,602 194,332 201,825 209,449 Net Surplus/(Gap) 145 (3,785) (1,022) (994) (2,941) (4,115) (5,470) (6,820) (7,670) (8,038) (10,108) (11,548) Subtotal Midyear items - 3,785 - - - - - - - - - - GRAND NET SURPLUS (GAP) $ 145 $ (0) $ (1,022) $ (994) $ (2,941) $ (4,115) $ (5,470) $ (6,820) $ (7,670) $ (8,038) $ (10,108) $ (11,548) City of Palo Alto 23 2012 23  ALTERNATE SCENARIO PERCENTAGE CHANGES IN SCENARIO "MAKE FROZEN POSITIONS PERMANENT CUTS" FY 2012 Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Cumulative % Change 2012-2022 TOTAL REVENUES 2.71% 0.52% 2.59% 2.55% 3.11% 3.03% 3.08% 3.45% 3.54% 2.91% 3.23% 31.76% Expenditures Salaries 0.73% -5.68% 1.90% 3.01% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 13.88% Benefits 5.54% -0.32% 6.13% 6.40% 8.14% 7.97% 7.70% 7.55% 7.42% 7.31% 7.21% Subtotal: Salaries and Benefits 2.48% -3.68% 3.54% 4.36% 4.50% 4.51% 4.48% 4.49% 4.50% 4.52% 4.54% 41.68% Contract Services 24.31% 0.29% 0.73% 1.93% 1.93% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Supplies & Materials 32.30% -17.48% 1.73% 7.06% 0.93% 0.93% 0.93% 0.93% 0.94% 0.94% 0.94% General Expense 17.20% 0.71% 3.29% 3.29% 3.30% 3.31% 3.31% 3.32% 3.32% 3.30% 3.34% Rents & Leases 57.29% 10.54% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Facilities & Equipment 112.92% -16.85% 15.99% 4.16% 4.19% 4.22% 4.24% 4.27% 4.30% 4.32% 4.35% Allocated Charges 4.70% 2.49% 3.30% 1.99% 2.11% 1.99% 1.99% 1.99% 1.99% 1.99% 1.99% Total Expenditures Before Transfers 6.47% -2.61% 3.26% 3.83% 3.81% 3.79% 3.78% 3.80% 3.82% 3.84% 3.87% 35.70% Operating Transfers Out 84.51% -23.90% -58.85% 0.87% -0.27% 0.24% -0.04% 0.43% -64.80% -1.14% -100.00% Transfer to Infrastructure 11.37% 20.04% 2.70% 3.35% 3.58% 3.66% 3.76% 3.87% 3.97% 4.07% 4.17% TOTAL EXPENDITURES 7.43% -1.29% 2.55% 3.78% 3.78% 3.76% 3.76% 3.79% 3.59% 3.86% 3.78% 36.02% Net Surplus/(Gap) (230.21%) -73.00% -2.72% 195.83% 39.92% 32.93% 24.67% 12.47% 4.79% 25.76% 14.25% 24 City of Palo Alto 2012 24    V. CHALLENGES & CONCLUSIONS Thankfully, the City’s revenue outlook has improved with the economy. Overall projected FY 2012 revenues  are  approximately $3.7 million higher than the FY 2012 Adopted Budget. While these revenue increases are welcome,  they bring the City’s tax revenues to where they last were in FY 2008.  The City will just emerge from the trough of  the Recession after four years of decline.      On the flip side, a new actuarial valuation of the City’s unfunded retiree medical liability showed an increase of  $30 million – or 29 percent ‐ since the 2009 valuation. After making the three assumption changes approved by  the Council on April 16, 2012, this translated to an increase of $2.0 million in the amount the General Fund needs  to set aside in FY 2012 to fund that liability.    In addition, the FY 2012 Adopted Budget assumed that negotiations with the City’s public safety units would yield  $3.4 million in savings for this fiscal year.  Of that, about $1 million was realized via the agreement with IAFF, and  another $0.1 million was realized via the agreements with FCA, plus about $0.2 in savings from the potential  agreement with PAPOA, leaving a $2.1 million gap between budgeted and projected savings. Therefore, the unex‐ pected $3.7 million in revenues for FY 2012 are “undone” by $2.0 million in unforeseen expenses plus $2.1 million  in unrealized savings—$4.1 million total in added costs and unrealized savings.    This Long Range Financial Forecast projects 2.8 percent average annual increases in revenues and 3.4 percent av‐ erage annual increases in expenses.  Of that, salary and benefits are expected to increase an average 3.9 percent  per year.  This gap reflects the City’s continued structural deficit, without taking into account the significant in‐ crease in infrastructure investment that will be critical to the City’s future.    The chart at the top of page 25 (at right), “10 year Trend General Fund FTE,”  shows the decreases in General Fund  staffing since FY 2002.      The rate of increase in staffing costs has varied among the City’s bargaining units, with public safety costs outpac‐ ing those of non‐safety groups. In FY 2006, approximately 25 percent of the City’s general fund was allocated to  public safety services, with the remaining 75 percent shared roughly equally between Public Works, Community  Services and Administration.  Just five years later, public safety’s portion had grown to 36 percent, due to large  salary increases for public safety employees and significant concessions made by the Miscellaneous group. The  chart at the bottom of page 25 (at right), “Public Safety % of Total General Fund Expenditures” illustrates that  trend.    This discrepancy contributed to the City’s adoption of a guiding principle of fairness across all bargaining units  while negotiating employee concessions.           CHALLENGES & CONCLUSIONS City of Palo Alto 25 2012 25  CHALLENGES & CONCLUSIONS         10 Year Trend ‐ General Fund Full Time Equivalent (FTE)  (FY 2012 Adopted)  576.4579.0 622.5 651.3644.8649.2 671.7676.4 758.2 651.5 748.2 500 550 600 650 700 750 800 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 General Fund FTE Public Safety % of Total General Fund Expenditures 24.1% 26.1% 29.8% 30.7% 35.9% 30.1% 26.5%25.3%26.3%25.6% 23.0% 25.0% 27.0% 29.0% 31.0% 33.0% 35.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Public Safety % of Total General Fund Expenditures 26 City of Palo Alto 2012 26  CHALLENGES & CONCLUSIONS The following two charts show the rates of growth of the different bargaining units’ compensation from FY 2010  to FY 2011 and from FY 2011 to FY 2012.   $0 $50,000 $100,000 $150,000 $200,000 $250,000 2010 2011 2012Management/ Professional Fire Chiefs Association IAFF PAPOA Police Mgmt Group Citywide Average Salary & Benefits by Labor Group *Management/Professional includes UMPAPA % Growth of Salary & Benefits by Labor Group 0.7% 4.6% 6.9%7.2% 6.3% 1.5% 9.0% 5.0% 5.9% 1.2% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% % change FY 2010 to FY 2011 % change FY 2011 to FY 2012 Mgmt/Prof % Growth  Fire Chief Assoc % Growth IAFF % Growth PAPOA % Growth Police Mgmt % Growth SEIU % Growth                    *Management/Professional includes UMPAPA City of Palo Alto 27 2012 27  CHALLENGES & CONCLUSIONS CONCESSIONS TO DATE With recent structural adjustments, Council and staff have eliminated more than $14 million in expenses and  over 60 positions from the General Fund budget. The following concessions have been approved since fall of  2009:      Current SEIU contract:  • Created a second tier to our retirement structure (2 percent at 60) for new employees hired  on or after July 17, 2010.  • Reduced City payment of employee share of PERS for SEIU employees 3.75 percent ‐ with em‐ ployees picking up the difference.  • Implemented a 90‐10 medical cost sharing plan that began April 1, 2011   • Implemented cost‐of‐living freezes in FY 2010, 2011, and 2012  • Eliminated Tuition Reimbursement program   Estimated Savings:  $2.7 million per year, or 4 percent of total compensation      Current Management and Professional agreement:  • Eliminated the Variable Management Compensation plan as of FY 2009  • Implemented a 90‐10 medical cost sharing plan that began April 1, 2011   • Implemented cost‐of‐living freezes in FY 2010, 2011, and 2012  • Created a second tier to our retirement structure (2 percent at 60) for new employees hired  on or after July 17, 2010.  Estimated Savings:  $1.7 million per year, or 4 percent of the total compensation     Current agreement with Fire personnel (approved October 2011):  • Created a second tier to their retirement structure (3 percent at 55) for new employees  • Ceased paying the full 9 percent of the employee portion of pension expense. Fire employees  themselves will pay the 9 percent.  • Eliminated final year “spike” of 9 percent for pension formula calculation  • Eliminated minimum staffing requirements   • Implemented a 90‐10 medical cost sharing plan   • Implemented cost‐of‐living freezes from FY 2012‐2014  • Eliminated Tuition Reimbursement program  Estimated Savings:  $1.4 million per year, or 7.14 percent of total compensation. Taking into ac‐ count the 4 percent salary increase received in FY 2010, Fire salary and benefit concessions are in  line with the 4 percent of total compensation given by SEIU and Management.    28 City of Palo Alto 2012 28  Current agreement with Fire Chiefs Association (approved March 2012):  • Created a second tier to their retirement structure (3 percent at 55) for new employees  • Ceased paying the full 9 percent of the employee portion of pension expense effective 3/10/12 to  3/10/13. After 3/10/13 employees will pay 5.1 percent of employee portion  • Eliminated Tuition and Professional Development Reimbursement program  • Implemented a 90‐10 medical cost sharing plan  • Eliminated Variable Management Compensation program  Estimated Savings:  $0.85 million per year, or 8 percent of total compensation    Potential agreement with PAPOA (not yet approved by Council):  • Creates a second tier to their retirement structure (3 percent at 55) for new employees  • Ceases paying the full 9 percent employee portion of PERS. Police employees to pay the 9 percent  themselves.  • Implements cost‐of‐living freezes from FY 2012‐2014  • Eliminates Tuition and Professional Development Reimbursement program  • Implements wage reduction of 1.33 percent  • Eliminates three paid holidays  • Well before this agreement was negotiated, PAPOA voluntarily postponed a scheduled salary in‐ crease of 6 percent for one year from July 1, 2009 to July 1, 2010, saving the City $0.8 million in  one‐time expenses.  Estimated Savings: $1.3 million per year, or 7.14 percent of total compensation    Prior to 2009, between 2004 and 2006, the City implemented for all bargaining units:  • All new hires have a 20‐year vesting period to qualify for lifelong City‐paid health coverage  • Highest cost health care plan option eliminated, saving almost $10,000 per year for each employee  moved away from this option      The aforementioned concessions and staffing reductions have been tough decisions that were not taken lightly.   Like the City, our employees face rising household costs and diminished asset values.  Furthermore, the impact of  the position eliminations is that our employees are stretched thin, and our ability to take on new projects is re‐ duced. We have also experienced a significant amount of staff turnover as a result of the compensation adjust‐ ments.              CHALLENGES & CONCLUSIONS City of Palo Alto 29 2012 29  CHALLENGES & CONCLUSIONS Yet the need to make additional difficult choices will remain until the structural budget gap is eliminated.  Additional employee concessions will be required. The City is in the process of realigning and recalibrating  its organization to match available staff and financial resources.  This includes looking at alternate ways to  provide services, including contracting out services, evaluating delivery of services through a regional model,  and much more.  Through the Cost of Services Study, the City will reach out to the community to determine  the services they value most.     This Forecast shows that, without further action, the City can expect more deficits in the coming years. How‐ ever, the City has received a vote of confidence in the form of a General Obligation Bond Triple‐A credit rat‐ ing from Standard and Poor’s. Staff trusts that the community, Council and staff will act, as they have in the  past, to balance the budget and to maintain the assets that make Palo Alto a renowned place to live.   Staff trusts that the community, Council and staff  will act, as they have in the past, to balance the  budget and to maintain the assets that make Palo  Alto a renowned place to live.   30 City of Palo Alto 2012 30  VI. ENDNOTES 1. Paul Wiseman, “Economy ends year on surprising upswing,” San Jose Mercury News, Dec. 22, 2012  2. Martin Crutsinger, “Retail sales hit record despite slow December,” San Jose  Mercury News, January 13,  2012  3. Anne D’Innocenzio, “Retailers pay the price for holiday deals,” San Jose Mercury News, January 6, 2012  4. “The Employment Situation—January 2012,” Bureau of Labor Statistics News Release, February 3, 2012  5. Motoko Rich and Stephanie Clifford, “For 2012, Signs Point to Tepid Consumer Spending,” New York  Times, January 3, 2012  6. Shaila Dewan, “U.S. Economy Gains Steam as 200,000 Jobs Are Added,” New York Times, January 6, 2012  7. Beaconomics, “United States: Unemployment Rate” Forecast dated December 2011  8. Paul Wiseman and Derek Kravitz, “Steady as we go with economy,” San Jose Mercury News, December  27, 2011  9. UCLA Anderson Forecast, “The National Economy Remains Mired in a Long Slump but Double‐Dip Possi‐ bilities Abate,” Press Release, December 2011  10. “U.S. Macro Focus, The Outlook for 2012: Unfinished Business,” Citigroup Global Markets, December 14,  2011  11. Don Thompson, “State’s jobless rate drops below 11%,” San Francisco Chronicle, January 21, 2012  12. UCLA Anderson Forecast, “The National Economy is Stalled, but No Recession in the Forecast,” Septem‐ ber 2011  13. The Beacon Employment Report, Beacon Economics, January 2012  14. Chistopher Thornberg, Beaconomics, September 2011  15. Pui‐Wing Tam, “Uneven Growth as Region Revives,” Wall Street Journal, November 17, 2011  16. George Avalos, “’The worst’ may be over on job front in Bay Area,” San Jose Mercury News, November  16, 2011  17. Beacon Economics, “The Regional Outlook‐South Bay,” Quarterly Update, December 2011  18. Compound Annual Growth Rate calculations use the following equation:            19. Library Costs (Savings) Projected from Mitchell Park and Main Library Remodeling (in thousands):      ENDNOTES   Fiscal Year    FY 2013    FY 2014    FY 2015  FY 2016—FY 2022  (annual costs)  Salary & Benefit ($ 453) ($ 453) $ 300 $ 300  Contracts/Supplies & Materi‐ als/Facilities & Equip  $ 200 $ 453 $ 703 $ 723  Technology $ 137   ‐       Total ($ 116)   ‐  $1,003 $1,023  City of Palo Alto 31 2012 31                                                                          n the last few years, the City and its employees have made some headway in addressing the structural  deficit by increasing the employees’ contributions towards the costs of their benefits.  The City has pur‐ sued a guiding principle that all of its bargaining units should share equally – as measured by percent of  total compensation ‐‐ in contributing to a solution to the city’s immediate and long term fiscal de‐ mands.  To date, all units, with the exception of the Policy Officers Association, have agreed to contrib‐ ute an equal amount of their total compensation towards defraying their pension and health care  costs.  Note that due to differing past agreements, different units’ compensation costs have grown at  different rates.           Visit our website at: www.CityofPaloAlto.org  AMERICANS WITH DISABILITIES ACT STATEMENT  Contributors   Nancy Nagel  Rob Braulik  Amber Cameron  Libby Dame  Tarun Narayan  Sherry Nikzat  Christine Paras  David Ramberg  Joe Saccio  Tony Sandhu  Dale Wong  In compliance with   Americans with Disabilities Act (ADA) of 1990,   this document may be provided   in other accessible formats.  For information contact:  ADA Coordinator  City of Palo Alto  285 Hamilton Avenue  (650) 329‐2550  Printing  City of Palo Alto  Scott Jensen  Lalo Perez  32 City of Palo Alto 2012 32  The City of Palo Alto is located in northern Santa Clara County, approximately  35 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 1769. Palo Alto incorporated in 1894 and the State of California   granted its first charter in 1909.  Phone:650‐329‐2100  Fax:650‐325‐5025   City of Palo Alto   250 Hamilton Ave  Palo Alto, CA 94301  30% post‐consumer recycled  Finance Meeting 2-28-12, Item #3 Excerpt 3. Long Range Financial Forecast Fiscal Years 2012 to 2022. Administrative Services Director, Lalo Perez stated that the “at place” document which was placed before the Committee was to correct a missing line item in the 2012-2022 Long Range Financial Forecast (LRFF)-Summary of Base Model table. The missing line item was in Total Revenues that reflected transferred amounts in the Report and did not change the Grand Net Surplus. He stated that on the reverse- side of the document was Scenario #3 that was added to the FY2013 Base Model to include savings resulting from Long-term Employee Concessions. Portions of the concessions still needed to be achieved. Senior Financial Analyst, Nancy Nagel gave a summary of the LRFF. She stated that City revenues were improving; however, last year’s revenues had not yet matched the FY2008 revenues. The Top 5 General Fund Tax Revenue Sources she was referring to were Property Tax, Sales Tax, Utilities User Tax (UUT), Transfer Occupancy Tax (TOT), and Documentary Transfer Tax. Certain concessions were assumed in the Base Model Assumptions (2) for FY2013 only, and not carried forward. Fire Department concessions were carried forward for the full term of the forecast. In FY2013, concessions in the amount of $2 million were assumed from the remaining Public Safety groups other than the International Association of Fire Fighters (IAFF). In 2011, the Council directed Staff to consider assumptions in the medical trend and Public Employee Retirement System (PERS) rates. A 10 percent increase in medical and a 3 percent annual increase in PERS was projected in 2015-2022 and assumed in the Base Model. A 2 percent cost-of-living adjustment (COLA) increase was assumed in FY2014 for Service Employees International Union (SEIU) and the Management Groups. Base Model Assumptions (3) noted that the full- time employees (FTEs) in the General Fund had decreased by 18 percent since FY2000, while salary and benefit costs increased by 50 percent. Pension expenses had increased by six-folds since 2002. The required medical annual contribution for retirees had grown by $2.6 million and had adjusted from $6.8 million in FY2011 to $9.4 million in FY2012. Factors not included in the Base Model were additional Mitchell Park Library expenses beyond FY2013, Infrastructure Blue Ribbon Commission (IBRC) revenues from new hotels not yet approved, additional required cost-sharing from employees beyond FY2013, and ongoing concessions from the remaining Public Safety groups. Alternate assumption scenarios included: Scenario #1: PERS rate increase of 1.5 percent per year after 2014, rather than 3 percent that would result in a $27.1 million in savings over 8 years. Scenario #2: invest an additional $6.6 million per year in infrastructure that would result in a $67 million additional deficit over 10 years. Scenario #3: continued concessions beyond 2012 that would result in $33 million in savings over a 10-year period. She referred to the visual Base Model chart in the overhead presentation that reflected combined deficits of $74.9 and said the City could anticipate improvements if concessions in 2013 were carried forward. Mr. Perez stated that the City needed to ask employees for more cost- sharing and if the organization was able to work through these challenges it would be less painful because the numbers were getting smaller. It was necessary to continue the exploration of regional service delivery and the cost-of-services study. He said the City was more complex and diversified than other agencies and had over 1,000 fees, which were more than other agencies. There were 25 percent in Community Services Division (CSD) fees, 25 percent in Police Department fees, 25 percent in Planning and Transportation Division fees, and 25 percent in the remaining City departments. Council Member Price asked why the study findings were delayed. Mr. Perez said this was a significant project for the organization to undertake. His department lacked Staff capacity and it was necessary to hire a temporary Staff member to do the work. Council Member Price asked if Staff had the ability to set the fee base for resident and non-resident fees. Mr. Perez said there was a difference in the fee structure and that non- resident fees were higher. Part of the review and analyses that was conducted was the limitations the City could face with Proposition 26. He said infrastructure needed to be addressed in the 10-year forecast. Council Member Price said she felt that the additional Mitchell Park Library and other library expenses were actuals and should be factored into the Base Model. Mr. Perez said there were preliminary numbers that would get factored into the 2013 budget. Council Member Price had raised concerns regarding overtime expenditures and recovery of cost that were incurred with public- partners events. The City had waived fees that should have been collected. She asked why this was being done. Mr. Perez stated the issue needed to be addressed to determine whether the practice should continue. Council Member Price asked why Utilities Management Professionals Association of Palo Alto (UMPAPA) was not listed in the LRFF. Mr. Perez said the group was omitted because it was fairly new but it was considered in the numbers. He stated that $600K was proposed for Mitchell Park with a breakdown of $100K for Facilities Management, $200K for technology, and $300K for operations. They were preliminary figures for only half a year since the Library Community Center would be opening in the middle of the year. Council Member Shepherd asked if the $600K was in the Model. Ms. Nagel confirmed the Mitchell Park figures were included in the Model for FY2013 only and not in FY2014 going forward. The historical chart was showing trends and Staff did not have information available on UMPAPA because it was new. City Manager, James Keene clarified that the acronym UMPAPA stood for Utilities Management Professionals Association of Palo Alto. Council Member Burt asked if the revenues projected for 2012-13 had been adopted. Mr. Perez said it was projected and included in the midyear calculations. Council Member Burt asked why there was not a larger increase in revenues from FY2012 to FY2013. Mr. Perez said the big change in 2013 was the Refuse Fund rental income change that amounted to several million dollars. Council Member Burt referred to the color handout chart and said that page 7 of the Report, under Sales Tax noted an estimate of $26.1 million for FY2012, an increase of $1.4 million. He asked if that was a FY2013 projection. Ms. Nagel clarified it was a 2012 projection based on increased sales tax assumptions. Council Member Burt asked if the bases for FY2013 projections were being addressed. Ms. Nagel said not in that category. Council Member Burt said he needed clarification of what the FY2013 projections were based on. Mr. Perez said a sales tax consultant was hired by the City to help realign sales tax projections. The School District and the County were considered to determine property tax. The TOT was doing well. There was a continued concerns regarding telephone usage in the UUT, volume or rate set in utilities, and the need for sufficient volume in the Documentary Transfer Tax, parking citations, and high levels in job- related injuries. He said increased activities in the Development Center would be a good sign in terms of permits which would create job opportunities and spending that would impact sales tax. Ms. Nagel asked what level of detail the Council wanted to see in the 2013 projections. Council Member Burt stated that the forward years were more speculative. FY2013 would be based on the recent trend patterns and that certain specific projections could be used as a baseline in going forward. Mr. Keene said a 10-year forecast would be an ideal tool for planning. The goal would be to get as close to the real numbers as possible without going over. Vice Mayor Scharff said he viewed the LRFF different from the budget. He said the deficit progressively increased but would decline as revenues increased and efforts to eliminate budget cuts in the upcoming years. He supported Council Member Price’s request to include the Mitchell Park Library expense, as well as other expenses and expressed the importance to be as accurate as possible in forecasting. Revenues needed to be correct because of unexpected expenses. He said it was common to get more revenues than what was expected which could cover unanticipated costs. Expenses were usually less than what was budgeted for except in Capital Improvement Projects (CIP). Infrastructure costs must be included in the Model. There would be more in infrastructure costs and would require a policy-decision on how to fund the costs annually. He felt to not include hotel revenues that had not been approved was appropriate because there were instances where the revenues had been approved and did not move forward. He asked what the process was for hotel revenues. Assistant Director, Joe Saccio said the current focus was to work with the existing hotels and hotels currently under construction. Hotel Keen was the latest hotel that had one-year’s worth of data. Data was obtained by measuring the trend in the occupancy and per diem rate increases as well as projecting out to the near future. Vice Mayor Scharff asked if the same TOT rate was being used. Mr. Saccio said yes, which was 12 percent. Vice Mayor Scharff said his understanding was that there would be a $2 million concession in the FY2013 budget and would be subtracted in FY2014. He felt it should remain in the FY2013. Mr. Perez said it was a matter of preference. Staff was looking for guidance on what should be included in the Base Model and scenarios. Vice Mayor Scharff referred to page 16 of the Base Model and said in FY2012 salary projection was $60 million, a decreased of $57 million in 2013, and reverted back to $60 million in 2014. Ms. Nagel said most of the $2 million was put in salaries and distorted the balance of salaries and benefits in 2013. Mr. Perez said the figures would change assuming that Staff would be directed to include the ongoing employee concession. Chair Shepherd made reference to the reorganization and staff size. She felt the delivery of City services were not sustainable. There was a need to reconsider services that were optional services and to rethink how they should be delivered. She felt delivery lacked aggressiveness. For example, there were discussions to have more public-private partnership; however, strategies were not set. She expressed the need to develop cost-neutral policies or set a 5-year plan in getting to a sustainable program with minimal subsidies. She wanted “add-on” expenses to be reflected as line items in the LRFF- Summary Base Model chart such as Infrastructure Blue Ribbon Committee Report, Library, and Infrastructure and forecasted as items that were forthcoming. The data would be known and would allow the Council to make decisions on the “add-on” items. Mr. Perez asked for clarification on how “add-ons” should be displayed. Chair Shepherd said the Base Model chart had two line items: total revenues and total expenditures and asked that the Mitchell Park Library be added as a line item. She wanted Staff to expand on the Main Library and asked if the Main Library was to going to continue operating as it did. Mr. Perez said the main focus had been on the Mitchell Park Library and had not looked into specific details for the Main Library. He said he would be able to provide a table that would specify projects that were forthcoming. Mr. Keene said he viewed the LRFF as a project where current activities were considered and projected into the future with assumptions and drivers that pushed revenues and expenditures in a particular way. Strategic policy shifts happened in each budget year that caused a ripple affect into the future in re-negotiating social contract, reinvesting in assets, restructuring benefits, and redesigning work roles. It was important to capture its progress and to summarize and predict how the City shared responsibilities with the community. Council Member Shepherd said it was important that the correct figures were used if the Mitchell Park Library and the other libraries were to be added to help determine future expenditures in the LRFF. Council Member Price spoke regarding the Scenario #1 alternative that included the lower Public Employee Retirement System (PERS) increase after 2015. She found the original document in the narrative compelling because it resulted in a $27 million difference between a 1.5 and 3 percent assumption. She asked what the impact would be on the Scenario #1 alternative. Mr. Keene said a lot was based on predictions on the City’s current situation or on the inflating or deflating of things over time and would become dynamic over the 10-year period. Council Member Burt spoke regarding revenues from hotels and reviewing hotels under construction. He said hotels often get approved and do not move forward while under construction. He said a long-term projection on the anticipated school lease was not noted in LRFF. Mr. Perez said the school lease was assumed to continue, status quo, and the assumed consumer price index (CPI) was 3 percent. Council Member Burt said when looking at the lease there was a need to differentiate between the lease for the space, which could continue or diminish over a period of time, and the covenant not to develop which was antiquated. His understanding was that benefits gained in efficiency from animation and the trend towards E-Books was unknown and would not materialize until they were in place. There were uncertainties in cost. MOTION: Council Member Burt moved, seconded by Vice Mayor Scharff that infrastructure keep-up be added to the Base Model. Council Member Burt stated there needed to be a way that keep-up was part of the Base Model. He said catchup and future needs may or may not have future revenue sources to address. He did not think it was reasonable to go to the voters and ask for new revenues to achieve the keep-up element. Vice Mayor Scharff said he agreed with Council Member Burt to include keep-up and would be going down a wrong path if it was not included. It would not make sense to talk about infrastructure and not put the base keep-up. MOTION PASSED: 4-0 MOTION: Vice Mayor Scharff moved, seconded by Council Member Burt to carry forward Option 3 in the Long-term Forecast MOTION PASSED: 4-0 Vice Mayor Scharff said a reasonable number should be specified for Mitchell Park Library. Mr. Perez said Staff would come up with a suitable figure and was committed to have the figure in place by the time the item went to the Council. Chair Shepherd announced there were no more questions and discussion on the LRFF item was concluded. Chair Shepherd wanted a clear understanding of what the Library Director’s vision for the libraries in 2012-13 in terms of staffing needs. Mr. Perez noted that the last page of the forecast contained names of those who contributed in putting the LRFF together. He said it was a significant project and required a great deal of support. The goal was to have the changes ready for the April 9th Council Meeting. The next Finance Meeting was scheduled for March 6, 2012. The agenda was full and asked the Committee to accept the tentative agenda. Council had requested that the Community Services Division (CSD) Staff come back through the Finance Committee with more information on the Golf Course impacts from the San Francisquito Creek Joint Powers Authority (JPA) work. CSD was leading the effort and have additional information for the Committee to review. Additionally, there was the Water Financial Forecast, Wastewater, and the Refuse Fund Cost-of- Service Study item that have Proposition 218 notification. Vice Mayor Scharff asked if all this was going to be discussed at the March 6 meeting at 7 p.m., with the AB1234 Ethics Training at 5 p.m. Mr. Perez said yes. The group discussed topics that needed to be included in the upcoming meetings that included the Golf Course, Community Development Block Grant (CDBG), Proposition 218 and to determine which subjects would be discussed during which meetings. Upcoming Council Member absentees were also discussed. Meeting dates for consideration were April 10th, 17th and 24th. Adjournment: 10:21 pm.