HomeMy WebLinkAbout2003-12-09 City Council (3)City of Palo Alto
City Manager’s Report
TO:
ATTN:
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
DECEMBER 9, 2003 CMR: 534:03
UPDATE TO LONG RANGE FINANCIAL PLAN
REPORT IN BRIEF
This report presents the City’s updated General Fund Long Range Financial Plan
(LRFP), one of the City’s Top 5 priorities. It contains a discussion of: the economy;
current revenues and expenditures and their trends, and a forecast of future revenue
streams and expenses; and the financial challenges that lie ahead. Because of the City’s
"Strengthening the Bottom Line" (SBL) effort since 2001-02 and Council’s direction to
reduce base expenditures by 5 percent, the forecast shows modest net operating surpluses
through 2009-10. During this period, the City can maintain its commitments to healthy
reserves, contributions to the Infrastructure Reserve, and maintaining payments under the
Covenant Not to Develop to the Palo Alto Unified School District.
The LRFP displays a mild deficit of $0.5 million in 2010-11. This results from expenses
rising at a faster pace than revenues in the model during the prior period. The deficit rises
substantially in 2011-12 and 2012-13 since an economic downturn with accompanying
lower revenues is projected for 2011-12. At this time, the model does not incorporate
additional expense reductions or revenue enhancements to offset the projected deficits.
Staff is working diligently, however, on several efforts that will alter these results. These
include, for example:
¯an organizational restructuring effort to reduce staffing levels
¯an analysis of how to contain rising employee benefit costs
¯entrepreneurial efforts to enhance the City’s revenue base (e.g., providing
information technology and animal control services to other public agencies)
CMR:534:03 Page 1 of 30
reaching out to businesses to understand and respond to their concerns, helping to
maintain a viable economic base
¯auditing City planning and permitting processes to accelerate
improving the business climate of the City
¯the Shop Palo Alto campaign
¯the proposed downtown Business Improvement District.
response times,
As these endeavors yield results, the City’s bottom line will improve and be incorporated
in future forecasts.
CMN:534:03 Page 2 of 30
RECOMMENDATION
Staff recommends that the Finance Committee review and comment on the attached
forecasts of revenues, expenses, and reserve levels.
BACKGROUND
A Long Range Financial Plan (LRFP) is presented to the Finance Committee annually.
Last year’s LRFP coincided with the initiation of a new two year budget and was
comprehensive in scope. It explained in detail, for example, the forecast methodology
used and all of the known financial challenges facing the City. Staff has attached the
2002-2012 Plan for reference and background (Attachment 1). Staff views this current
report as part of the interim budget process. It updates critical information used for
assessing and plaiming City finances. It focuses, therefore, on such areas as current
economic conditions, the analysis of current revenue and expense trends, a revised
forecast, and on new or changed financial challenges. The "updated" 2003-2012 Plan is
provided below in traditional CMR format.
DISCUSSION
LONG RANGE FINANCIAL PLAN 2003-13
STATE OF THE ECONOMY
In the third quarter of 2003, the national economy appeared to be trending upwards, with
the state and local economy following this trend, but in a lagging and less pronounced
fashion.
National Econom’q Trending Upwards
The U.S. economy appeared to rebound in the three-month period beginning July 1 and
ending September 30, 2003. Growth for the quarter came in at an 8.2 percent annual rate,
the highest growth since the first quarter of 1984.1 The growth was fueled by consumer
spending. Retail sales grew at 12.2 percent annual rate in the third quarter, according to
an October 15 report from the Commerce Department, and the Conference Board
reported an increase in its Consumer Confidence Index from 77.0 in July to 81.3 in
August. Many analysts attribute the increased consumer spending to the tax cut, which
went into effect July 1. They expect the tax cut’s impact on spending to fade, with
economic growth dropping back to a 3 percent annual rate for the rest of this year and
through 2004.2
Todd Wallack, "Growth rate revised upward," San Franc&co Chronicle, Nov. 26, 2003
John Berry, "Signs indicate faster economic growth," San Francisco Chronicle, October 16, 2003, and Todd
Wallack, "Growth rate revised upward," San Francisco Chronicle, Nov. 26, 2003
CMR:534:03 Page 3 of 30
The employment picture appeared to improve only at the end of the third quarter, though
the quarter as a whole saw a decrease in total jobs. In September, the number of jobs
increased for the f~rst time since January 2003; the Labor Department reported an
increased of 57,000 jobs. Yet non-farm jobs decreased by 41,000 over the entire quarter,
and the percentage of adults with jobs fell to its lowest level in 10 years. (Estimates of
jobs lost in the economy since the start of 2001 range from 1.1 million to 5.0 million.)3
Unemployment is expected to remain at about 6.2 percent through 2004, 4 though some
economists predict it will drop to the 5.8 percent range in 2004 and drop further in 2005.5
Although September’s numbers gave many cause for hope, others are concerned about
long-term structural problems in the economy, such as a flood of U.S. jobs going
overseas. Some reports estimate 5 million jobs will be lost to other countries by 2015.
This is of particular concern in the technology industry. (See further discussion under
Local Economy section.) If hiring doesn’t improve, the recovery could be in jeopardy
because consumers worded about their job prospects will stop spending. 6*
(Not seasonally adjusted)
2000 2001 2002
Average Average Average Sept. 2002 Sept. 2003
U.S. 4.00 4.70 5.80 5.40 5,80
California 5.00 5,30 6.70 6.50 6.10
San Francisco 2,80 5.20 5.60 7.50 6,00
Santa Clara County 2.00 4.50 8,40 8.80 7.50
Palo Alto 1,00 2.30 4.40 4.40 3.90
Source: US DepL of Labor and California Economic De,/. Dept, LMI
3 David Leonhardt, "For First Time in 8 months, US Businesses add new jobs," New York Times, Oct. 3, 2003, and
The Washington Post, Sept. 16, 2003
4 Congressional Budget Office, The Budget and Economic Outlook: An Update, August 26, 2003
5 University of Michigan News Service, August 18, 2003: "U-M forecasters.’. U.S. economy is poised for strong
growth"6 Leigh Strope, "Jobless Rate Falls to 6.1 percent in August," Associated Press, September 5, 2003
* Some analysts point out that "real unemployment" is higher than the 6.1% reported by the government. According
to an outplacement expert, the real unemployment rate is 9.1%, since 4.8 million people nationwide want jobs but
are not actively seeking because they’re so frustrated w/the economy. Plus, over 4.4 million people are working part
(source San Franmsco Chromcle September 13 2003 Da~e Murphy)time because no full time jobs are available.:"" ¯
CMR:534:03 Page 4 of 30
Other structural issues affecting employment include the impact of the "capital deepening
process" on the labor market.8 Companies have invested more heavily in technology and
other capital to increase the productivity of their workers. That means as the economy
picks up, fewer workers will be re-hired to meet the renewed demand for products and
services.
Local Economy Showing Preliminary_ Signs of Recovery
As late as August, there was little evidence of recovery in the Bay Area. Job losses had
slowed, yet area employers were still shrinking payrolls. In June, the jobless rate was 6
percent in the San Francisco metropolitan area, 6.2 percent in the Oakland area and 8.5
percent in the San Jose area, near cyclical highs. Furthermore, the Bay Area Council’s
latest business confidence survey showed local executives, while increasingly confident
about the near future of the economy, were extraordinarily reluctant to hire. Some 70
percent of those responding to the July survey said that, even if local economic
conditions improved, they did not expect to increase their workforces. Some 18 percent
planned to reduce staff further in the next six months, 67 percent planned to keep
employment the same, and only 10 percent expected increases.9
By September, the numbers were a bit more positive. It appeared that employment was
in the early stages of recovery after a long slide. Retail and business sales were climbing,
and there was more optimism in a broad range of sectors, including the technology sector.
Especially encouraging was the 15.4 percent growth rate in spending by businesses on
equipment and software in the third quarter - up from an 8.3 percent growth rate in the10second quarter.
Lastly, the statewide unemployment rate had dropped from 6.7 percent to 6.4 percent in
August; in Santa Clara County, it fell from 8 percent to 7.5 percent. 11 Furthermore,
evidence from local employers, as well as job seekers, also suggested an increase in
hiring activity. 12
However, experts again cautioned that much of the improvement in the unemployment
rate stemmed from people leaving the job market altogether: statewide, 24,500 people
dropped out of the labor force in September and were no longer counted as
unemployed.13 Furthermore, continued job losses loomed. Sun Microsystems announced
in September a new layoff of 1,000 worldwide. At 35,800 employees, Sun had already
eliminated nearly 8,000 j obs (18 %) since 2001.14
Merrill Lynch, The Market Economist, 26 September 2003
San Francisco Chronicle, August 3, 2003 and Bay Area Council’s August 5, 2003 press release10 Jeannine Aversa, "Economy grows at fastest pace since 1984," Associated Press, October 30, 2003
11 Sam Zuckerman, "Job picture may be brightening," San Francisco, Chronicle, October 11, 200312Bay Area Economic Pulse: An Economic Report on the Nine-County Bay Area, Fall 2003, Bay Area Council, pub.13 Sam Zuckerman, San Francisco Chronicle, October 11, 2003, op.cit.14Dean Takahashi, "Sun will lay off 1,000 in bid to stay on plan," San Jose Mercury News, September 19, 2003
CMR:534:03 Page 5 of 30
It will take years for the economy to recover from these job losses. A report
commissioned by the Silicon Valley Manufacturing Group states it will take an additional
seven years for the Silicon Valley economy to recover the 200,000 jobs it lost when the
technology investment bubble collapsed.15
The relationship between jobs and City sales tax revenues is evident from the following
graph:
Santa Clam County Jobs
and City of Palo Alto Sales Tax Revenues (000)
1,000
800
700
600
I--IF-Jobs ~sales tax ~Linezr (Jobs) ,.....,,.-.Linear (sales tax)
$28,000
$25,000
$22,000
$19,000
$16,00O
$13,000
$10,000
Of further concern to technology workers is the trend of midlevel jobs being shipped
overseas. San Jose’s Office of Economic Development reported that tech jobs in the
$40,000 to $80,000 range will move offshore to Asian nations.16 Market researcher
Gartner, Inc. estimated that one out of ten technology jobs will move outside the United
States by next year. Oracle is moving more than 2,000 development jobs to India, while
HP shifted 1,200 Compaq customer service jobs from Florida to its India center.
On the other hand, several industry insiders note that sales and marketing jobs are
unlikely to be outsourced. One outsourcing specialist claimed that sales and marketing "is
something you can’t really outsource because you’re dealing with people and customer
requirements" 18
San Francisco Chronicle, Sept. 23, 2003
San Jose Mercury News, August 22, 2003
Tom Kaneshige, "Fab Four," Silicon Valley Biz Ink, Oct. 3-9, 2003
Rhonda Ascierto, ’"Insourcing’ to the valley," Silicon Valley Biz Ink, Oct. 3-9, 2003
CMR:534:03 Page 6 of 30
General Outlook
The regional economy’s dive seems to be reaching an end. Tentative growth is evident
and expected to continue through 2004, albeit slowly and without certainty. According to
the "Bay Area Economic Pulse," a publication of the Bay Area Council:
"The regional economy still faces additional risks going forward. While there are at
least some signs of national recovery, rising interest rates and political
developments within the state pose new risks...Higher state and local taxes appear
likely, and increased business taxes - in workers compensation and unemployment
insurance, the loss of the manufacturer investment tax credit, and possibly
substantial property tax increases - will weigh on the business community in the
coming year, just as a recovery may appear on the horizon.19
San Francisco Federal Reserve Bank President Robert Parry referred to the region as a
"slowpoke" recovering from recession. "The economy is expanding at a pretty rapid
pace," he said. But "the Bay Area probably will not do as well as some areas.’’2°
The pace and size of the nascent recovery will likely be slow and moderate. According to
the Silicon Valley Manufacturing Group, "... there is little reason to expect job growth
and profits rivaling those of the late 1990s in the near future. The Silicon Valley economy
will show stronger signs of recovery in 2004, but will grow more slowly than the national
average through 2005 as it continues to restructure and redeploy capital after the tech
boom of the late 1990s.’’21
The statewide unemployment rate is expected to average in the 6.7 percent range through
2003, while Santa Clara County’s rate will be higher.22
The region’s gradual economic growth is likely to continue for another several months.
According to the State Board of Equalization, this is due to:
*continued low interest rates
¯the federal tax cut (economists expect the tax cut to add about one percent to the
growth rate of real GDP on an annualized basis over the next several quarters)
¯businesses need to purchase more capital equipment just to keep up with economic
depreciation.23
¯renewed flows of venture capital funding into area business
¯rising sales posted by key technology companies headquartered in the region24
19 Bay Area Economic Pulse: An Economic Report on the Nine-County Bay Area, Fall 2003, Bay Area Council, pub.
z0 Sam Zuckerman, "Bay Area Behind," San Francisco Chronicle, October 17, 2003
21 Projections: 04 by the Silicon Valley Manufacturing Group
22 Projections: 04 by the Silicon Valley Manufacturing Group, quoting UCLA economists.
23 State Board of Equalization, Economic perspective, August 2003
CMR:534:03 Page 7 of 30
However, the region’s improving fortunes have not yet translated to increased City
revenues. In fact, sales tax and transient occupancy tax revenues continue to decline, as
of this writing. Just as the state’s growth has lagged behind the nation’s, Silicon Valley’s
growth has lagged behind the overall state’s, and cities like Palo Alto, Mountain View,
and San Jose seem to be lagging yet further. The revenue forecast includes modest
improvements in 2004, but staff intends to monitor carefully revenues throughout the
year.
ANALYSIS OF REVENUES AND EXPENDITURES AND PROJECTIONS
REVENUE ANALYSIS
Methodology
As in last year’s LRFP update, staff has assumed that the compound annual rate of
growth (CAGR) for economically sensitive revenue sources between the years 2003-04
and 2012-13 will be the same as that for the years 1992-93 through 2002-03. For
example, the CAGR for sales taxes between 1992-93 ($13.2 million) and 2002-03 ($18.6
million) was 3.4 percent. The growth rate applied to the forecast was the same. This
methodology has several benefits. While it does not recognize the exceptional, one-time
revenue gains experienced in 1999-00 and 2000-01, the CAGR method, over a ten-year
time horizon, allows the City to better align ongoing expenditures with more realistic
revenue streams. Implicitly, this assumes that should the City experience revenue
bonanzas as in the "dot.com" era, it will channel them to reserves or to one-time capital
improvements and not to ongoing programs.
An important assumption in using the CAGR method is that future performance will
mimic that of prior years. Should significant structural changes occur in how resources
are generated (e.g., departure of automobile dealerships), the City would have to revamp
its forecast. The revenue forecast includes the impact of an economic downturn on
revenues. Given the duration of the current down cycle and the delayed recovery, staff
has revised its 2002 Long Range Plan forecast of a recession in 2009-10. Instead, staff
projects a decline in 2011-12, during which sales tax and TOT revenues decline
somewhat compared to the prior year, within the CAGR parameters described above.
24 Sam Zuckerman, "Tech jobs continue to disappear," San Francisco Chronicle, November 3, 2003
CMR:534:03 Page 8 of 30
Overview of Revenues
As indicated in the "State of the Economy" section, there are signs that the national, state,
and local economies are improving. While this is positive news, there are several areas of
concern regarding City revenue. These include:
¯competition from surrounding malls and discount chains and the potential loss of
automobile dealerships
¯continuing weakness in the hotel and travel sectors
¯recent and potential future State actions
The first two factors have a major impact on two key, economically sensitive General
Fund (GF) revenue sources--sales and transient occupancy taxes--that comprise 18 to 20
percent of GF resources.
The revenue downturn that began in 2001-02 has fingered stubbornly into 2003-04. Since
reaching their peak in 2000-01, combined sales and transient occupancy tax (TOT)
revenues have dropped by $11.3 million or 32.1 percent.
Analysis of first quarter 2003-04 data reveals further declines in these categories.
Preliminary sales tax data indicated a 6.5 percent decline over the same quarter last year.
Upon further analysis of numerous accounting adjustments by the State Board of
Equalization, however, the decline now ranges as high as 12.5 percent. Early TOT data
follow suit, with 2003-04 first quarter revenues falling 12.4 percent below the same
period in 2002-03. This information indicates that the City’s revenue problems have not
"bottomed-out" as yet. As a result of the ongoing declines in these key revenue sources,
adjustments to last year’s forecast and to the 2003-04 budget will be necessary.
State actions may also impact City revenues. With a budget deficit now estimated at $24
billion, the State may target local sales and property taxes to close the gap. The new
Governor has reinstated the Vehicle License Fee (VLF) cut while promising to maintain
the State’s General Fund backfill, but members of the legislature do not appear to support
the necessary appropriation. Without the backfill, the City would lose nearly $2.6 million
in revenue--an event that is not incorporated in the forecast.
2003-13 Projected Revenues: Changes from November 2002 Forecast
Sales tax and transient occupancy tax revenues for 2003-04 have been reduced
from $20.3 and $7.5 million in last year’s forecast to $17.4 and $5.5 million,
respectively. The Adopted 2003-04 budget shows $19.3 and $6.3 million for these
categories and will be changed at midyear--a $2.7 million reduction.
CMR:534:03 Page 9 of 30
¯Average annual growth rates for sales and TOT taxes are anticipated to be 3.3 and
5.5 percent from 2003-04 through 2012-13 compared to average growth rates of
3.2 percent and 7.8 percent used in last year’s forecast. Although there has been no
growth in these sources in the past two years, it is expected that they will "bottom-
out" toward the end of 2003-04 and experience relatively modest growth rates in
future years.
¯Average annual growth rates for tax revenues and total sources of funds have
slowed to 4.7 and 3.7 percent compared to 4.9 and 3.9 percent in the November
2002 forecast.
¯The 2003-04 Vehicle License Fee (VLF) revenue (part of "Other Taxes") is
reduced by $0.7 million due to the State’s delay in implementing the higher fee.
¯Potential revenue "take-backs" from the State to solve its budget crisis are not
included in the forecast.
In 2010-11, revenues are not expected to cover ongoing expenses unless additional
expenditure reductions or new revenues are realized.
The first step in developing the 2003-13 revenue forecast is to understand the recent and
past performance of the City’s revenue sources.
Sales Tax
Sales tax revenues in 2002-03 declined for a second year to $18.0 million. Including a
one-time, negative prior year adjustment of $0.54 million, revenues fell $2.0 million or
10.2 percent compared to 2001-02. This is in addition to a $5.7 million or 22.1 percent
decline in 2001-02 over 2000-01. The downward trend continued into 2003-04 with first
quarter receipts off as much 13.5 percent from the prior year quarter. Key declines in
2002-03 came in new automobile and department store sales. Heavily dependent upon
consumer spending and a stable employment environment, these sectors fell by 16.7
percent ($0.4 million) and 10.9 percent ($0.3 million), respectively.
Geographically, the steepest declines came from Embarcadero Road, E1 Camino Real,
and the Stanford Shopping Center - areas in which the auto dealers and department stores
are located.
CMR:534:03 Page 10 of 30
Major Sales Taxes - Ten Year History ($millions)
$6,
$31
$2 I
$1 I
93-94 94-95 95-96 96-97 97-98 98-99 99-2000 00-01 01-02 02-03
--e,-.- Dept. Stores ~ Office Equip & Mis.~ Restaurants
---X---Mis. Retail ~Auto Sales ~ Bus Services
While the principal cause for the revenue falloff is the weak employment and business
environment, emerging competition from surrounding malls and "big-box" stores are also
having an effect. Several stores in the Stanford Shopping Center that are replicated at
Santana Row and Valley Fair have experienced sharper declines in sales than other
outlets.
Deficiencies in space and location for automobile dealerships in Palo Alto have hurt sales
and the potential for growth. The departure of Carlsen Porsche to Redwood City and the
desire of Anderson Honda to relocate provide additional evidence that a structural change
in this key revenue source is occurring.
After adjustments to the sales tax revenue base, receipts are projected to increase by 3.3
percent, on average annually, over the next nine years.
Transient Occupancy Taxes (TOT)
TOT revenues continued to erode in 2002-03, winding up the year at $5.3 million. Year-
end revenues were $1.3 million or 19.4 percent below the prior year. This decline
compounds the $2.9 million or 30.5% percent drop of 2000-01 to 2001-02. Occupancy
rates also dropped for the second consecutive year, falling from an average of 73 percent
in 2000-01 to 58 percent in 2001-02 to 54 percent in 2002-03. Average revenue per day
fell from $156 to $136 to $122 during the same period. TOT revenues deteriorated
further in the first quarter of 2003-04. Receipts were $.2 million or 12.4 percent below
the prior year quarter. This primarily resulted from room rates falling below $110 per
day. Occupancy rates, however, remained fairly steady at 58 percent.
CMR:534:03 Page 11 of 30
Although revenue declines in this category are not unique to Palo Alto (the average room
and occupancy rates in the San Jose/Peninsula area are slightly below Palo Alto’s), there
is a possibility that City hotels and motels are experiencing competition on its southern
and eastern borders. With new hotels opening on the Palo Alto/Los Altos border and
another in East Palo Alto, pressure on City occupancy and room rates may be having an
effect on revenues.
Overall, TOT revenues are expected to increase by an annual average of 5.5 percent over
the next nine years.
Property Taxes
Property taxes in 2002-03 came in $0.6 million or 4.4 percent over 2001-02 levels. The
rate of growth in these tax receipts, however, significantly slowed from the 9.9 percent
experienced in 2001-02. In addition to revising the assessed value of "high-end" homes
for 2002-03, the county received a significant number of appeals from commercial and
residential property owners that constrained revenues. Pressure on commercial property
values will continue into 2003-04 as vacancy rates remain high. With low interest rates,
activity in the residential property market appears strong and may prevent additional
slippage in revenues from this sector. On a positive note, the reappraisal of the Stanford
Shopping Center, based on a new lease, is expected to add to the revenue base for 2003-
04.
The LRFP assumes that property taxes will increase by an annual average of 5.4 percent
over the next nine years.
Utility Users Tax (UUT)
UUT revenues were $0.6 million or 9.5 percent above the prior year. This increase was
primarily a consequence of the utilities rebate program in 2001-02 and not due to rising
usage or rates. Actual telephone UUT receipts were $0.1 million or 4.3 percent under
prior year levels. Utility user taxes from utility sales came in $0.7 million or 15.9 percent
higher compared to the prior year.
The model assumes that the UUT taxes will increase by an annual average of 4.1 percent
over the next nine years.
Vehicle License Fees (VLF)
VLF revenues were healthy in 2002-03. Including a prior year adjustment, these fees
were $0.4 million or 10.8 percent above prior year receipts. For the first 3 months of
2003-04, however, the City is expected to lose $0.7 million. This is a consequence of the
State not backfilling revenues during the period the DMV needed to implement the VLF
increase. According to the State, the $0.7 million is to be repaid in 2005-06. With the new
Governor’s restoration of fee reductions, considerable uncertainty surrounds this revenue
CMR:534:03 Page 12 of 30
source for 2003-04. The situation will be closely monitored, with adjustments at midyear
if necessary.
Staff has assumed in the model that VLF revenues will continue to be backfilled, with an
average annual growth rate of 5.5 percent.
Documentary Transfer Tax
Receipts of documentary t~ansfer taxes were strong in 2002-03. Based on a tax of $3.30
per one thousand dollars of value when properties change hands, they came in $.06
million or 22.2 percent growth over the prior year. A number of sizable commercial
transactions, such as one for $0.4 million, contributed to the positive results. Low
mortgage rates and a slowing of home price increases also appear to have kept the
residential market active.
Although it is difficult to predict given the dynamic change in mix and volume of
property transactions, staff projects an average annual growth rate of 8.4 percent.
Interest Income
Interest on the City’s portfolio declined in 2002-03 by $0.5 million or 10.2 percent. This
results from a combination of low interest rates and a lower General Fund cash position
relative to other City funds such as the Electric Fund. Over the past two years, yields on
the City’s portfolio have decreased from 5.4 percent at the end of 2001-02 to 4.75 percent
at the end of 2002-03. Yields will continue to decline in 2003-04 as older, higher yielding
investments mature. At the end of the ftrst quarter of this fiscal year, the yield declined to
4.65 percent. Interest income is expected to grow by an annual average of 4.4 percent
through 2012-13.
Service Fees and Permits
This revenue source increased 5.6 percent or $0.7 million overall in 2002-03 over 2001-
02. It includes fee and permit revenue from a variety of activities mostly in the Planning,
Fire, and Community Services departments. In Community Services (CSD), higher
revenue was seen from class registration and admission fees, which increased 2 percent
or $0.1 million in 2002-03 over the prior year due to the continued popularity of CSD
programs. Class revenue is expected to remain strong in furore years. Revenue from golf
course fees was 1.5% lower in 2002-03 than in the prior year. OVerall revenue from
permit, plan check, zoning and other fees within the Planning Department increased 18
percent or $0.7 million in 2002-03 when compared with 2001-02. The increase is due to
fee increases coupled with large development projects. Overall, this revenue category is
projected to increase annually an average of 3% over the next ten years.
CMR:534:03 Page 13 of 30
Joint Service Agreements
This category consists largely of the contract with Stanford University for fire and
communication services, and decreased to $6.1 million in 2002-03 - a 4.5% drop from
2001-02. Stanford’s fire and communications services expense was less due mainly to
salary savings that resulted from retirements, unfilled vacancies, and fewer staff on long-
term disability. The Fire Deparlxnent, among other departments, also reduced operating
expenses due to ongoing fiscal constraints. Overall, this revenue category is projected to
increase annually an average of 4% over the next ten years.
Reimbursements
Reimbursements consist of payments to the General Fund (GF) for services rendered.
Fund-based accounting dictates that all enterprise funds pay their "fair share" of
associated expense as it relates to administration of their activities. These services range
from the Administrative Services Department’s accounting and payroll functions to
Public Works Department’s surveying services. It is important to note that these revenues
offset GF expenditure specifically dedicated to providing service to another fund. In other
words, 7 percent of the 2003-04 GF expense budget is dedicated to providing services to
another fund, and thus, is reimbursed.
With extensive program growth in the 1990’s, the previous ten-year period saw average
annual increases of 10 percent. Over the next ten-year period, however, this growth will
slow with little if any staff and non-salary expense additions to the City’s expenditure
base. Overall, this revenue category is projected to increase annually an average of 4%
over the next ten years.
Transfers
This category gets its name from its accounting roots. Within governmental fund
accounting, transfers between funds are both a common and necessary means of moving
resources for both general operations as well as capital projects. In another words, the
transfer moves the resources to the fund that will be performing the service and incurring
the expense.
The main component is the equity transfer from the enterprise funds ($13.6 million),
which represents a return on the City’s original capital investment in the City’s utilities
more than 100 years ago. This important source of funding contributes 10 percent of the
City’s annual expenditure budget--including both operations and capital work. The
growth of this funding source is associated with the stable equity transfer methodology,
currently a 3 percent annual increase. With the volatile operating environment of energy-
related businesses, staff has proposed developing an equity transfer reserve that will
allow the enterprise funds the flexibility of funding the General Fund transfer when their
business models allow. This reserve will maintain the levels of this important funding but
CMR:534:03 Page 14 of 30
not handicap the enterprise during times of energy price spikes. Overall, this revenue
category is projected to increase annually an average of 3% over the next ten years.
EXPENDITURE ANALYSIS
Overview of Expenditures
The City has taken action, based upon the November 2002 LRFP, to bring projected
expenses in line with anticipated revenues. Significant adjustments have occurred in both
base expenses as well as in policies that drive future expense growth. The Council-
mandated 5 percent reduction in ongoing base expense during the 2003-05 budget
process contributed significantly to the realignment of expense with projected future
revenue. Recent efforts to control growth in employee salary and benefit expense have
also helped in this area.
Unlike in a "production-based" business environment, the overall demand for
government services changes little during an economic downturn, necessitating a
thoughtful approach to "downsizing" staffing and spending levels and aligning expenses
with projected revenues. The City of Palo Alto was recently recognized for this approach
to deficit correction, receiving the widely respected Helen Putnam Award for
Administration from the League of California Cities for its "Strengthening the Bottom
Line" (SBL) program. SBL followed three basic principles as it approached the budget
balancing challenge: maintain quality service delivery to the community; maintain
commitments to fund furore infrastructure projects; and maintain the vitality of the
organization.
2003-13 Projected Expenditures: Changes from November 2002 Forecast
¯Reductions in expense during the 2003-05 budget process slowed the expense
growth rate from 4.6 percent to 4.0 percent projected over the next ten years.
¯Recently enacted expense cuts and projected cost avoidance measures will reduce
annual spending by over $22.6 million by 2012-13.
¯Salaries and benefits growth represent 74 percent of expenditure growth over the
forecast period---down from 82 percent projected in November 2002.
¯Average annual salary growth has slowed to 2.3 percent from the 3.9 percent
predicted in November 2002, due to position reductions and continued labor
market weakness in 2003-04.
Recent stock market gains along with changes in employee benefit plans have
reduced projected annual benefit growth from 11 percent to 9.3 percent annually.
CMR:534:03 Page 15 of 30
SALARIES AND BENEFITS
As an expense category, employee salaries and benefits are projected to remain at about
two-thirds of General Fund (GF) expense over the period. The growth of the category,
however, has been slowed from an average annual rate of 5.8 percent predicted in
November 2002 to a 4.5 percent annual rate. In dollar terms, the category is projected to
grow about 55 percent over the ten-year period - quite a bit slower than that projected
just a year ago (75 percent). The main factors leading to this slower growth projection
include:
¯the elimination of 33.5 GF positions ($3.3 million) during 2003-05 budget process
¯an extended near-term economic slowdown
¯three recently concluded labor agreements including the concept of a healthcare
cap on benefits and no wage increase
¯the recent stock market recovery portending slower growth in pension expense
Three recent Council approved labor agreements (International Association of Fire
Fighters, Fire Chief’s Association, and Management and Professional) did not include
cost of living adjustments (COLAs) or classification differential adjustments based on
market conditions. This reflects the atypical weakness in the labor markets, with
employees placing greater value on job security and healthcare benefit coverage. The Bay
Area consumer price index (CPI) has been near the 2 percent annual level for a year,
resulting in minimal pressures on wages in the short-term. Over the upcoming ten-year
period, it is expected that salary expense will grow at an average annual rate of 2.3
percent, reflecting mild inflationary influences on wage growth. All of the recently
concluded labor agreements, along with those currently in place (Palo Alto Peace
Officers Association and Service Employees International Union), have included
employee contributions towards a furlough averaging 3 days in unpaid leave for each
employee, or similar measures, totaling approximately $1.0 million in savings.
Negotiations will begin in early 2004 with SEIU, as the current agreement expires in
April 2004. The contract with PAPOA expires in June 2007, and it is expected the 2004
COLA for this unit will be near the lower end of the 3-6 percent range allowed in the
agreement. It is anticipated that continued near-term sluggishness in the local and
regional economies will translate into mild wage pressures for the next three years, with
stronger economic growth fueling greater salary gains three to eight years out.
In contrast to salary expense, the growth of employee benefit expense is expected to be
near 9.3 percent annually over the next ten-year period. This is somewhat slower than the
11 percent projected a year ago; however, this is still about twice the rate of growth of
any other expense category. This expenditure category is more difficult to control as
changes to benefit levels must, for the most part, be done at the collective bargaining
CMR:534:03 Page 16 of 30
table. The recently concluded labor agreements did contain important first steps in
slowing expense growth in this area, including:
¯a two-tiered retiree medical benefit, with employees hired after 1/1/04 receiving a
reduced benefit (longer vesting period).
¯a cap on medical premiums for all current employees at the PERS Choice level
¯elimination or reductions in backup childcare, employee referral, and new
employee relocation benefits.
All of the City’s labor agreements - except for the one with PAPOA - will be
renegotiated in fiscal 2004-05. It is expected the City will negotiate further benefit cost-
containment strategies within these upcoming agreements; however, it should be noted
that many of the current employee benefits have been negotiated in lieu of salary gains.
The challenge to slowing benefit expense growth further must include both negotiating
net reductions to benefit levels as well as lowering costs with service providers and
insurers.
Pension Contributions
Annual pension contributions are projected to increase from $5.0 million in 2002-03 to
$17.7 million in 2012-13, more than a threefold increase in ten years. This growth is the
result of two years of losses in the CALPERS portfolio that pays both the defined benefit
and an enhanced benefit given to public safety employees in 2001-02. Recent reductions
in authorized staffing levels, along with June 2003 gains in the CALPERS investment
pool, reduced projected pension expense by approximately 16 percent since last year’s
Long Range Financial Plan.
Healthcare Costs
It is anticipated that the recent 18-22 percent annual premium increases cannot be
sustained in the near-term, and will taper to the 8-12 percent annual growth level. Recent
reductions in employee benefit levels include a two-tiered retiree medical benefit for new
hires, a cap on current employee medical benefits at the PERS Choice level, and the
reduction or elimination of some minor benefits. While these changes improve the "worst
case" scenario for benefit expense, they do not result in dramatic improvement in
projected expense as the City sets its budget at the "most likely" levels of expenditure.
The capping of healthcare benefits at the PERS Choice level is nonetheless a critical first-
step towards sharing growth in healthcare expense with employees.
It will be important for the City to move towards a "total compensation" model for the
collective bargaining process. This model will need to include all forms of compensation,
including salary and benefits, when assessing regional benchmarking standards for a
particular classification.
CMR:534:03 Page 17 of 30
Non-Salary Expenses
Primarily driven by growth in the regional CPI rate, non-salary expense includes contract
services; supplies and materials; general expense; and rents, leases and equipment.
Reductions in 2003-05 spending levels translate to nearly a 9 percent decrease ($3
million) in annual projected non-salary spending by 2012-13. Citywide program growth
also contributes to this expense category. Additional program spending on new or
existing programs will be limited over the next ten years, due to slow revenue growth.
Over the next ten years, both new program spending along with CPI influences are
projected to average 4.4 percent annually, increasing annual non-salary spending from
$22 million to $31.1 million.
Infrastructure Management Plan (IMP)
The City continues to dedicate significant resources annually to completing original
projects identified within the IMP, as well as new projects added to the IMP with Council
approval. Progress has been made in the four main categories of IMP capital work:
buildings and facilities, parks and open spaces, streets and sidewalks, and transportation.
Capital spending is projected to continue at nearly $10 million per year over the next ten
years. This LFRP model includes a Finance Committee recommendation to re-establish
the annual $2 million General Fund support of future IMP capital expense over the 2004-
06 period. In December 2002, the City Auditor recommended moving the Infrastructure
Reserve (IR) to the Capital Fund as a way to clearly define the reserves associated with
IMP work. The moving of these reserves will be examined during the 2004-05 budget
process.
TI~ BOTTOM LINE
There have been significant accomplishments since November 2002 in eliminating $100
million in projected cumulative deficits over the next ten years. Efforts in controlling
employee salary and benefit expense growth along with a reduction of 5 percent in base
expense are two of the main components in this realignment of projected expenses to
revenues. City operations now reflect a slight $3.5 million cumulative deficit over the
period. The model, however, indicates economic weakness beginning in 2010-11, leading
to a recession in 2011-12. Without knowing the exact timing of this furore recession, it is
expected revenue growth will slow towards the end of the period (2011-12) and expense
growth will slow the following year. This future recession is predicted to end a period of
slow to moderate economic growth, with cost-containment pressures continuing over the
ten years.
While sizeable deficits are indicated in the latter years in the model, it is anticipated that
these will be addressed by ongoing efforts to control expense growth along with
identifying new revenue sources. Specifically, citywide restructuring efforts continue to
focus on restructuring around retirement and vacancies, based on internal audits and
CMR:534:03 Page 18 of 30
department staffing studies. It is also assumed that the City would adapt to a further
extension of the current economic downturn or unforeseen actions from the gubernatorial
change in Sacramento. Adaptive mechanisms may include the implementation of a
business license tax or other new revenue streams not currently under consideration.
GENERAL FUND RESERVES
Reserves represent unencumbered "retained earnings" or operational savings, which may
be used for emergency or unplanned expenditures. Undesignated reserves total $54.8
million as of June 30, 2003 - an increase of $1.9 million (3.5 percent) from the prior
year. This includes a Budget Stabilization Reserve (BSR) of $21.4 million and an
Infrastructure Reserve (IR) of $33.4 million.
Exhibit 3 projects GF reserves will remain at current levels over the next eight years, with
sizeable deficits in 2011-13 drawing down $12.0 million in reserves. These deficits are
expected to draw the BSR below its reserve target of 18.5 percent of expenditures in
those two years; however, it is expected that deficit correcting strategies would be
implemented to remedy these future imbalances.
CMR:534:03 Page 19 of 30
Exhibit 1
Revenues
Sales Taxes
Property Taxes
Ul~lib/User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal. Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Earnings
Other revenues
Reimbursements from Other Funds
Total Revenues
Transfer from Infrastructure Reserve
Transfers from Other Funds
TOTAL SOURCE OF FUNDS
Expenditures
Salades & Benefits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Allocated Expenses
Total Expenditures
Transfers to Other Funds
2001-02 2002-03 2003-04 200405 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Actual Actual Adjusted Adjusted
20,084 18,040 17,400 17,989 18,777 19,694
13229 13,806 14,629 15,190 16,174 17221
6,456 7,067 7,108 7,776 8,319 8,419
6,615 5,333 5,549 5,829 6239 6,679
8,408 9,397 9,793 9,872 11 252 11,348
54,792 53,643 54,479 56,656 60,761 63,361
13,071 13,808 15,883 16,603 17,014 17,524
6,401 6,111 6,141 6,309 6,549 6,822
20,754 21,871 22,830 23,603 22,749 23291
18,337 t9,524 20,789 22,135 22,684 23,472
9,019 9256 9,967 10,061 10,156 10252
7,149 7,889 8,484 8,996 8,686 8,993
12,310 13,364 14,421 15,074 15,512 16,556
67,569 71,904 76,491 79,869 79,787 82,564
18,050 18,591 19,149 19,723 20,315 20,925
7,122 7,438 7,762 8,073 8,358 8,692j
4,359 3,913 3,586 3,980 4,100 4248 4,655 4,939 5,117 5250 5,150 5,300
14,948 15,227 13,543 13,381 13,826 14,379 14,907 15,555 16,076 16,507 16,950 17,057
11,841 11,521 8,816 9,074 9,528 9,909 10,404 11,029 11,580 11,927 12,404 12,901
105,412 104,223 102,448 106,003 111,778 116,243 122,707 129,456 136,175 141,349 142,964 147,439
5,068 7,385 4264 3,350 3,143 3237 3,334 3,434 3,537 3,64~
13,774 15,315 14,478 14,590 15,028 15,479 15,943 16,722 17,224 17,741 18,273 18,821
119,186 119,538 121,994 127,978 131,070 135,072 141,793 149,415 156,733 162,525 164,775 169,903
72,370 76,286 73,914 79,428 83,609 87,715
11,335 10,059 10,324 9,451 9,810 10,212
3,364 3,029 3,257 3,178 3299 3,434
9,756 7,895 9,117 9,039 9,251 9,496
1,317 1,065 1,235 1 242 1289 1,342
9,430 10,184 11,116 11,304 11,734 12,215
92,538 97,896 103,904 108,892 113,984 117,937
10,703 11,302 11,878 12,567 13,321 13,721
3,599 3,800 3,994 4226 4,479 4,614
9,749 10,006 10,273 10,513 10,760 10,940
1,405 1,485 1,561 1,652 1,751 1,803
12,801 13,518 14207 15,031 15,933 16,411
107,572 108,518 108,963 113,642 118,992 124,414 130,796 138,037 145,818 152,881 160,228 165,426
GF transfer for non-IMP capital proj~1,611 1,033 1273 3,553 1221
GF transfer for IMP capital projects 7,995 7,133 7,481 7,005 6,624
Debt Service 700 1,174 983 1,187 1,157
Other 1224 1,293 2,030 1,540 1,585
TOTAL USE OF FUNDS
Net Operating Surplus/(Deficit)
Transfer to InfrastnJcture Reserve
Net of Reserve Transfer
see reserve suramary for IR transfer amount
1,571 1,605 1,845 1,845 1,845 1,845 1,845
5,106 5,351 5,309 5,309 5,309 5,309 5,309
1,160 1,164 1,161 1,170 1,161 1,163 1,160
1,632 1,679 1,729 1,779 1,831 1,885 1,940
119,102 119,151 120,710 126,927 129,579 133,863 140,596 148,051 155,921 163,027 170,430 175,681
84 387 1,284 1,051 1,491 1,189 1,197 1,364 812 (502)(5,655)(5,777)
(1,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)
84 387 1,264 51 (509)(811)(803)(536)(1,188)(2,502)(7,655)(7,777)
CMR:534:03 Page 20 of 30
Exhibit 2
2002.03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010.11 2011-12 2012-13
% Change % Change % Change % Change % Change % Change % Change % Change % Change % Change % Change
Revenues
Sales Taxes -10.2%-3.5%3.4%4.4%4.9%5.4%5,4%4.4%3.4%-3.5%2.4%Property Taxes 4,4%6.0o/o 3.8%6.5%6.5%6.5%6.5%6.5%6.5%2.5%3.5%LJtil~ User Tax 9.5%0.6%9.4°/0 7.0%12%7.1%2.6%7.7%0.9%0.9%0.9%
Transient Occupancy Tax -19.4%4.1%5.0%7.0%7.1%7.0%10.4%7.5%6.0%-3.4%3.5%
Other Taxes, Fines & Penalties 11.8%42%0.8%14.0%0.9%8.5%8.6%7.9%4.5%2.9%6.7%
Subtotal: Taxes -2.1%1.6%4.0%7.2’/o 4.3%6.6%6.4%6.4%4.4%-0.1%3.5%
Service Fees & Permits 5.6%15.0%4.5%2.5%3.0%3.0°/0 3.0%3.0%3.0°/0 3.0%3.0%
Joint Service Agreements -4.5%0.5%2.7%3.8%42%4.4%4.4%4.4%4.0°/0 3.5%4.0%
(Stanford University)
Interest Earnings -102%-8.4%11.0%3.0%3.6%9.6%6.1%3.6%2.6%-1.9%2.9%Other revenues 1.9%-11.1%-12%3.3%4.0%3.7%4.3%3.3%2.7%2.7%0.6%Reimbursements from Other Funds -2.7%-23.5%2.9%5.0%4.0%5.0%6.0°/0 5.0%3.0%4.0%4.0%
Total Revenues -1.1%-1.7%3.5%5.4%4.0%5.6%5.5%5.2%3.8%1.1%3.1%
Transfer from infrastructure Reserve 45.7%-42.3%-21.4%.62%3.0%3.0%3.0%3.0%3.0%Transfers from Other Funds 112%.6.5%0.8%3.0%3.0%3.0%4.9%3.0%3.0%3.0%3.0%
TOTAL SOURCE OF FUNDS 0.3%2.1%4.9%2.4%3.1%5.0%5.4%4.9%3.7%1.4%3.1%
Expenditures
Salaries & Benefits 5.4%-3.1%7.5%5.3%4.9%5.5%5.8%6.1%4.8%4.7%3.5%Contract Services -11.3%2.6%.6.5%3.8%4.1%4.8%5.6%5.1%5.8%6.0%3.0%Supplies & Materials -10.0%7.5%-2.4%3.8%4.1%4.8%5.6%5.1%5.8%6.0%3.0%General Expense -19.1%15.5%-0.9%2.3%2.6%2.7%2.6%2.7%2.3%2.3%1.7%
Rents, Leases, & Equipment -19.1%16.0%0.6%3.8%4.1%4.8%5.6%5.1%5.8%6.0%3.0%
Allocated Expenses 8.0%9.2%1.7%3.8%4.1%4.8%5.6%5.1%5.8%6.0%3.0%
Total Expenditures 0.9%0.4%4.3%4,7%4.6%5.1%5.5%5.7%4.8%4,8%3,2%
Transfers to Other Funds
GF transfer for non-IMP capital projects -35,9%23.2%!79.1%-65.6%28.7%22%14.9%0.0°/0 0.0°/0 0.0%GF t~anster for IMP capital projects -10.8%4.6%-6,1%-5.4%-22.9%4.8%-0.8%0.0%0.0%0.0%Debt Service 67.7%-16,3%20.8%-2.5%0.3%0.3%-0.3%0.8%-0.8%0.2%Other 5.6%57.0%-24.1%2.9%2.9%2.9%2.9%2.9%2.9%2.9%
TOTAL USE OF FUNDS 0.0%1.3%5,2%2.1%3.3%5.0%5.3%5.3%4.6%4.5%Net Operating Surplus/(Deficit)360.7%231,8%-18.1%41.8%-20.2%0.6%14.0%-40.5%-161.9%1025.6%
0.0%
0.0%
-0.3%
2.9%
3.1%
2.2%
CMR:534:03 Page 21 of 30
Exhibit 3
Department of Public Works
City Parks and Facilities
Police Dispatch
Fire Suppression Services and
Hazardous Materials
Response
Library Circulation
Junior Museum and Zoo
Sidewalk Maintenance
4,477,770 4,126,000
2,398,320 2,044,000
2,192,842 2,006,609
2,088,625 1,959,788
1,501,244 1,723,016
1,099,392 1,086,043
785,679 742,124
School Safety 382,908
or
377,670
355,141
Transient Occupancy Tax declines between FY
and FY 2003
Sales tax decline between FY 2002 and FY 2003
Sales tax from all new vehicle sales in 2002-03
Property tax from all commercial real estates in the
City in 2002-03
Sales tax from all restaurants and hotels in town in
2002-03
Sales tax from two major retail stores in 2002-03
Sales tax from all grocery, food stores and liquor
stores in town in 2002-03
Sales tax from Town and Country Shopping Center
and Edgewood Plaza in 2002-03
Sales tax from all jewelry stores in town in 2002-03
NOTE: New automobile dealerships generated 13 percent of point of sales tax revenue in 2002-03.
CMR:534:03 Page 22 of 30
FINANCIAL CHALLENGES
Introduction/Overview
The struggle to maintain a positive bottom line is expected to continue through 2003-04.
While the City has successfully dealt with financial issues over the past three years, it
continues to face a number of ongoing, long-term financial challenges. These range from
a weak local economy with high unemployment to the State budget crisis to rising health
care and retiree costs.
The City has adjusted to recent revenue shocks through its "Strengthening the Bottom
Line" effort and through entrepreneurial efforts to enhance its revenue base (e.g.,
providing information technology and animal control services to other cities). The City is
engaged actively in reaching out to businesses in order to understand and respond to their
concerns, thereby helping to maintain a viable economic base. Toward this end, the City
is auditing and re-evaluating its planning and permitting processes to accelerate response
times; teams of City staff assist businesses with City requirements; and other efforts
continue to promote City businesses and revenue, including the Shop Palo Alto campaign
and the proposed downtown Business Improvement District.
A strong General Fund revenue base is critical to delivering the wide variety of services
the Palo Alto community receives. To illustrate the potential impact of a loss in general
revenues, the table below matches a City service to a similarly sized revenue source.
(Note that these programs do not generate the revenues cited.) Naturally, any service
level reductions require community input and are subject to deliberation and policy
choices by the Council.
CMR:534:03 Page 23 of 30
~ Tax~s & ERAF ($n’illion)
8.00
4.oo
0 Tax Fle~pts |ERAF
Sensitivity Analysis
Staff conducted a sensitivity analysis of the variables incorporated in the Long Range
Plan financial model, to better understand the impact on the bottom line of changes in key
revenue variables. The analysis consisted of two parts:
Identifying the variables that fluctuate the most and the variables with the greatest
impact on the bottom line, and quantifying the impact of fluctuation in those
variables, and
Analyzing correlations between external variables, such as the state economy and
County employment levels, and internal variables such as sales tax and transient
occupancy tax (TOT).
CMR:534:03 Page 24 of 30
The revenue variables that have fluctuated most significantly over time are the sales tax
and the TOT. The sales tax is the single largest component as a percentage of the General
Fund revenues. In addition, given uncertainty surrounding the Vehicle License Fee
(VLF), staff looked at the impact of potential fluctuations in this variable as well.
The following table summarizes the impact of a one-percent fluctuation in each of the
three variables over the next 10 years, beginning in the current fiscal year (2003-04).
Sales Tax
TOT
VLF
1%
1%
1%
$ 2.100 million
$ 0.744 million
$ 0.478 million
On the expense side, salary and benefits are the most significant variables. Staff looked at
changes in the PERS contribution level, in addition to salary levels, given the possibility
of the PERS portfolio performing on a level different from the 8.25% annual returns
projected by CalPERS.
To test the impact of economic factors on City revenues, staff conducted correlation and
regression analyses on key revenue variables and two economic indicators: Gross State
Product and numbers of people employed in Santa Clara County. The analysis of data for
the last 20 years showed a very high degree of correlation25 between Gross State Product
(the sum of all income produced in California) and total general fund revenues, sales tax,
transient occupancy tax, and property tax receipts. In addition, the analysis showed a
very high correlation between the number of employed people in the County, and the
same revenue variables. Therefore it appears that projections of state income, as well as
of county employment, may be key signposts for predicting City revenues.
Correlation means the degee to which two variables co-vary, or move in the same direction.
CMR:534:03 Page 25 of 30
While staff focused on these two economic indicators, there may be additional
"predictor" indicators that correlate quite closely with City revenues, such as Gross
Domestic Product, the federal funds rate, and/or gross domestic purchases.
In addition, our regression analysis showed that General Fund revenues equal .319 times
the number of employed people in Santa Clara County.26 That means for every three
additional people who become employed, the General Fund gains approximately $1.00.
Stated otherwise, a 1% increase in employment from 2003 levels - or 8,600 additional
employees - translates to $2,863 extra in the General Fund.
In furore models, staff will be exploring further this and other relationships between
exogenous economic variables and City revenues.
Brief updates to the challenges outlined in last year’s Long Range Plan are presented
below. For a more thorough discussion of these challenges, please see Chapter 3 in
Attachment 1.
REVENUE CHALLENGES
Potential State Actions
The State’s budget crisis continues with no clear resolution in sight. Legal challenges to
the prior Governor’s bond financing of the State’s deficit have been launched, and legal
appeals are likely if the "triple-flip" bond financing solution is continued.27 This includes
swapping sales for property taxes, and would have an impact on City revenues and cash
flow. The Governor has stated that he intends to keep local jurisdictions financially whole
after rescinding the recent VLF increase (this has a $2.6 million negative impact on the
City). How he will achieve this goal is yet to be determined. Localities and schools
usually bear the brunt of the State’s fiscal duress - the most prominent example being the
ERAF shift of property taxes from cities to school districts. This has cost the City nearly
$30 million since its origin in 1992-93. Other examples of revenue taken by the State
include booking fees, cigarette tax revenue, and vehicle citation fees.
26 The exact regression was: GF revenue = Number people employed in County X .319 - $194,000.
27The "triple-flip" is an attempt by the State to bypass voter approval of bonds by swapping property and local sales
taxes to finance debt service payments.
CMR:534:03 Page 26 of 30
20.00
0.00
Property Taxes & ERAF ($million)
1
rtTax Receipts IERAF !
I
EXPENSE CHALLENGES
Pension Costs
This long-range plan includes the projected costs of all employee retirement plans. The
recent poor performance of the CALPERS investment portfolio has influenced future
City payments for these pension plans. Contribution expense is projected to nearly double
by 2004-05 to $9.6 million. Fortunately, in 2003-04 the CalPERS portfolio experienced a
gain with the rising stock market. This had the effect of lowering contributions in
upcoming years compared to those in last year’s forecast. Should future returns on the
portfolio fall below CalPERS’ assumed 8.25 percent return, furore year costs will
increase.
Retiree Medical
The City continues to annually fund a reserve to pay for future retiree medical premiums.
In June 2003, that set-aside reserve was valued at $18.1 million. It should be noted that
the Government Accounting Standards Board (GASB) is in the process of formulating a
pronouncement on appropriate funding levels for this liability. After the final regulations
are complete in 2005, the City will re-evaluate its liability and take appropriate steps to
address that liability.
Healthcare
This long-range plan includes healthcare growth rates in the 8-12 percent range over the
next ten years. Continued financial weakness among healthcare or insurance providers or
price spikes outside of this range could push growth rates above expected levels. To
mitigate a portion of these growth trends, the City has begun to contain total health cost
increases by limiting the City-funded benefit to the PERS-Choice level, as of January 1,
CMR:534:03 Page 27 of 30
2004. The City has also implemented a two-tiered medical benefit, with new hires (after
1/1/04) requiring a five-year service period to qualify for minimum benefit levels. Staff
will continue to work towards slowing the growth of the City’s healthcare costs.
Storm Drainage Fund Subsidy
After hearing the presentation and recommendations of a Blue Ribbon Storm Drain
Committee (consisting of community members), Council directed staff to develop a new
proposal with the highest priority projects and funding alternatives. This report will be
presented to Council in January 2004.
New Library Plan
The New Library Plan carries with it implications for the GF’s operating budget. In the
short term, the municipal code was amended in November 2003 to create a new Library
Department, along with Council direction to hire a new Library Director before the end
of 2003.
Several Library-related capital projects were folded into the 2003-08 CIP, but not at the
levels recommended in the Library Plan. The economic downturn has forced staff to seek
internal cost savings and operational restructuring in order to fully staff present
operations. It is possible, however, additional resources will be requested as part of the
2004-05 budget process once the new Director is hired. In addition, the Library Advisory
Commission is working, with Council’s conceptual approval, on recommendations as to
how to better use technology and renovation of the current library facilities to improve
library service provision. These are anticipated to result in capital project requests in the
upcoming 2-5 years.
New Infrastructure and Other Projects
While this long-range plan includes continuing funding for the IMP, there are other
infrastructure needs on the horizon without identified funding sources. Some of these
projects include:
¯Constructing the SOFA park at an estimated construction cost of $1.3 million
¯Renovating the Roth building with estimated costs of $9 million
¯Building an expanded police facility at an estimated cost of $38 million to $45
million
¯Major traffic calming efforts estimated at $5 million
¯Implementation of leaf blower ordinance at $2 million; deferred until fiscal 2007-
08 (anticipated to decrease in future years due to technology advancements)
¯Deferred maintenance of approximately $25 million needed on the City’s bridges,
parking lots, and bike/pedestrian paths
¯Municipal Service Center major renovation - costs to be determined
¯Civic Center Plaza waterproofing - costs to be determined
CMR:534:03 Page 28 of 30
Conclusion
Clearly, there are financial challenges ahead. For the near future, the General Fund
budget must be monitored and adjusted to align expenses with revenues. This will allow
the maintenance of sufficient reserves for unexpected events and uphold the strong
financial position of the City. While accomplishing this goal, upcoming budgets must be
developed in a thoughtful and reasonable manner as to maintain community and
organizational values, while developing constructive solutions to solve the financial
challenges that lie ahead.
RESOURCE IMPACT
As with any financial forecast, the fiscal impacts shown are estimates. Estimates of future
surpluses and deficits as well as the estimated costs of future financial challenges are
meant to guide future policy and budget decisions.
POLICY IMPLICATIONS
The LRFP is an information and planning tool used by staff to make budget proposals to
Council and for Council to make policy decisions regarding City finances. This use is
consistent with the City’s policy of maintaining a balanced budget and healthy reserves.
ENVIRONMENTAL REVIEW
This report does not require California Environmental Quality Act (CEQA) review.
CMR:534:03 Page 29 of 30
ATTACHMENTS
Attachment 1: Long Range Financial Plan 2002-2013
PREPARED BY:Charles Perl, Nancy Nagel, Steve Montano, Julie Pai, Amy Javelosa-
Rio
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
~SE~-! SACCIO
puty Director
Director, Ad/ninistrative Services
Assistant City Manager
CMR:534:03 Page 30 of 30
ATTACHMENT 1
LONG RANGE
F I NAN C IAI P LAN
Forecast 2002-2012
City of Palo Alto
November 2002
For more information:
Visit our website at:
www.Ci~ofPaloAlto.org
Long Range Financial Plan
Forecast 2002-2012
CHAPTER ONE:
STATE OF THE ECONOMY
At its November 6, 2002 meeting, the Federal Reserve’s Open Market Committee (FOMC) reduced the federal funds
rate from 1.75 percent to 1.25 percent, a 0.5 percent reduction. This is the lowest rate in 41 years. Changing its outlook
from its August meeting where "the risks are weighted ... toward conditions that may generate economic weakness,"
the FOMC now states "the risks are now balanced between weakness and inflation." Although this represents a more
positive outlook, the 0.5 percent rate reduction acknowledges a sputtering or stalled economy. Unfortunately, the
economy, particularly in the Bay Area, has not been responding to the FOMC’s relaxed monetary policy or eleven rate
reductions prior to November (see below) and there is a perspective that lower interest rates may not solve local and
national economic problems.
While the auto and housing sectors have benefited from the low interest rates, other economic sectors such as tech-
nology, manufacturing, and retail remain weak.Many forces are negatively and persistently affecting the economy:
falling corporate earnings; weak corporate capital spending on technology; layoffs across business sectors; declining
exports; the Port strike and slowdown; deteriorating stock equity and option values; falling consumer confidence; slow
wage and income growth; accounting and financial statement irregularities; international tensions such as war with
Iraq; and state and federal budget deficits.
These factors have had a particularly harsh effect on the technology industry and the Bay Area economy. As Econo-
mist Tom Lieser of UCLA’s Anderson Forecast states, "California’s main problem...remains the downturn in high-
tech...which has cost the state a significant part of its most highly compensated workers in the IT business." Lieser’s
observation is reinforced by recent unemployment data shown below.
i ;1:1 ~] :1 :~;~ II ;[II ~ I ;1 ;f:~l i |
Changes in 2001
Date Decrease Level
2001 Basis Points %
03-Jan 50 6.00
31 -Jan 50 5.50
20-Mar 50 5.00
18-Apt 50 4.50
15-May 50 4.00
27-Jun 25 3.75
21 -Aug 25 3.50
17-Sep 50 3.00
02-Oct 50 2.50
06-Nov 50 2.00
11-Dec 25 1.75
2002
06-Nov 50 1.25
Source: Federal Reserve
The importance of high tech is even greater in the Bay Area. Technology "companies
account for 32% of the total value of payrolls in the Bay Area," according to Collier Inter-
national, as compared to less than 10% of Southern California payrolls. Santa Clara
county’s unemployment rate rose from 2.0 percent to 7.7 percent in the two years ending
September 2002. This rate exceeded current California and national rates of 6.1 percent
and 5.4 percent, respectively. Traditionally a low unemployment city, Pale Alto had 4.0
percent unemployment in September
2002, up from 1.0 percent in 2000.
(Not seasonally adjusted)
2000 2001 Aug Sept
Average Average 2002 2002
U.S. 4.00 4.70 5.70 5.40
California 5.00 5.30 6.30 6.10
San Francisco 2.80 5.20 5.60 5.40
Santa Clara County 2.00 4.50 7.70 7.70
Palo Alto 1.00 2.30 3.90 4.00
Source: US Dept. of Labor and California Economic Dev. Dept
The rise in local unemployment results
primarily from technology job reduc-
tions in mid-2001 and in 2002. The
Association of Bay Area Governments
recently reported that technology
declines in software and hardware
sales have "plunged the Bay Area into
its deepest downturn in terms of job
losses in 25 years .... Bay Area employ-
ers have shed more than 140,000 net
jobs; in the next deepest recession,
1991-92, the Bay Area lost about 82,000
November 2002 C#y ~/P.h) 4ho /
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
jobs" (a 71 percent increase in job cuts). Recent job cuts
have included: Intel (4,000), Sun Microsystems (4,400),
Siebel (1,100), Oracle (200), Applied Materials (estimated
at 2,000), advanced micro devices (2000), and Hewlett-
Packard/Compaq (15,000) and an equally worrisome
and increasing trend is that firms are shifting highly com-
pensated engineering and programming jobs overseas.
Well-paying jobs and income growth are keys to generat-
ing revenues-particularly sales tax revenues- upon
which the City relies. Just as the hefty payrolls and stock
options of the "dobcom" era fueled an unprecedented
growth in City revenues, recent employment decreases
have led to declines in retail and
auto sales, and may eventually
affect property and documentary
transfer taxes.
The magnitude of revenue
increases from the "dot-com" era
is illustrated in a State Legislative
Analyst Office comment on the
2001-02 budget. An analyst
stated that if state income tax
from capital gains and stock
options remained where it was,
"we’d have $22 billion more than
we have now, and that’s pretty
much the size of the state’s bud-
get deficit." Likewise, a sizeable
amount of Palo Alto’s revenue
growth (City does not receive
dropped to 79.4, its lowest level in nine years. Closer to
home, a June 2002 Silicon Valley survey showed that only
48 percent of consumers were confident that a stronger
local economy was likely in a year; in March 2002, 64 per-
cent of those surveyed had been confident.
Low confutence in theregion’s economy by business
leaders: The Bay Area Business Confidence Index
dropped from 64 points in April to 48 points in July, a
decline of 25 percent. Of 372 business executives sur-
veyed, only 42 percent believed the economy would
improve over the next 6 months.
3rd Quarter, 2002
Office Rental Research & Rental
Space Rates Dev. Space Rates
City Vacancy SF / Mo*Vacancy ISF/Mo*
Los Altos 16.16%2.39 .
Menlo Park 17.47%3.52 19.57%1.05
Mountain View 26.78%1.65 23.27%1.50
Palo Alto 23.36%2.49 10.66%1.94
Redwood City 38.19%1.71 31.37%1.53
Redwood Shores 22.62’/o 1.66 0.00%
Totals:25,05%2.24 19.49% 1.50
* Asking
Source: Cornish & Carey Commercial
capital gains tax revenues, but does receive sales and doc-
umentary transfer taxes generated from purchase of
"high-end" autos and homes), or an estimated $6.0 to $8.0
million annually, was generated by this same "wealth
effect" in 1999-00 and 2000-01.
It is unlikely that revenues will completely bounce back
any time soon. Rather, numerous indicators show a slow-
down in the economy, if not a "double-dip recession."
("Double-dip" means that after two quarters of negative
economic growth followed by a positive quarter, a second
period of negative growth will occur.) Since Silicon Val-
ley and the technology sector led the nation into reces-
sion, it is safe to assume it will be one of the last
geographical areas to exit. Factors supporting this view
include:
Both national and local drops hz consumer confhtence
levels: In September 2002, the national Consumer Confi-
dence Index stood at 93.7. In October 2002, the index
High office space vacancy rates:
In May of this year, the Urban
Land Institute of Washington,
D.C. deemed the Bay Area com-
mercial real estate market "the
worst in the nation." Bay Area
office vacancy rates rose from 4.4
percent in 2000; to 16.6 percent in
2001; to 19.2 percent in 2002.
Average national office vacancy
rates were 15.5 percent in the sec-
ond quarter of 2002; Palo Alto’s
office vacancy rate in the third
quarter was 23.4 percent. It is
estimated there are some 60 mil-
lion square feet of vacant office
space between San Jose and San
Francisco and that rent per
square foot has dropped from an average of $5.34 in 2000
to $2.67 in 2002. The table above illustrates the high
vacancy rates and low rents in Palo Alto and nearby cit-
ies.
Slow wage and income growth: High unemployment
rates and lack of overtime work are pressuring wages
downward, thereby dampening consumer spending.
According to the Senate Budget Committee’s Chief Econ-
omist (August 12, 2002 New York Times), "What we have
is a grinding slowdown in the incomes that people have
available to spend, from whatever the source."
Spiraling health care costs: Under financial pressures,
private employers and goverrmaent are expected to pass
on rising health care costs to employees. With premiums
growing anywhere from between 11 to 25 percent for
2002-03, workers and consumers may have less to spend
on non-essential goods.
2 City qfPa/o.4/ro November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
Decline in high-tech and other
exports: California’s high-tech
exports (chips, software, and com-
puters) fell by 26 percent or $8.2
billion during the first half of 2002
and by 17 percent in 2001. High-
tech comprises 52 percent of all
state exports. Demand in Europe
and Latin America dropped by
over 25 percent in 2002.
2000 2001
Gross Domestic Product 3.8 0.3
Personal Consumption Expend.4.4 2.5
Nonresidential fixed investment 7.8 -5.2
Exports of goods and services 9.7 -5.4
Imports of goods and services 13.2 -2.9
Tentative Weakness in Housing
Market: Recent evidence sug-
gests that the housing market, an otherwise bright spot in
the state and national economy, may be weakening. In
Santa Clara County, in late July, it took an average of 93
days for homes to sell compared to 38 days in April. In
addition, foreclosure and payment delinquency rates
appear to be rising. As the Wall Street Journal reported
on September 11, 2002, "the growing number of dis-
tressed borrowers is heightening fears that the nation’s
red-hot housing market is poised for a correction. If the
delinquency rate worsens, lenders could tighten lending
standards...resulting in a weaker overall housing mar-
ket." Locally, Santa Clara County home foreclosures rose
36 percent in the third quarter of 2002 (San Francisco
Chronicle, October 31, 2002).
Source: US Dept of Commerce, BEA
Economists are divided on the direction of the economy
and the timing of a recovery. One group believes that a
’"oottoming out" of declines in production, equity values,
venture capital investments, corporate profits, and
exports has occurred. This group argues that given the
drop in inventory levels, low interest rates, and a rise in
productivity, the possibility of a "double-dip" recession is
remote.
The other camp, however, sees a fragile economy that has
significant excess production capacity (e.g., telecommuni-
cations equipment and personal computers), sagging
world markets and economies, high corporate and per-
sonal debt, and a host of exogenous factors (war with Iraq
and consequent higher oil costs) that can easily push it
into another recession. To these economists, a "double-
dip" recession is likely, since the economy that appeared
to be improving in June took a downward turn beginning
in July and August. An October report from the Haas
School of Business at Berkeley states, "Although some
forecasters anticipate a continued recovery, we believe
there is a substantial chance that we may enter a full-
blown recession in late 2002 and 2003."
2001 2002
01 Q2 03 04 01 02 Q3
-0.6 -1.6 -0.3 2.7 5.0 1.3 3.1
2.4 1.4 1.5 6.0 3.1 1.8 4.2
-5.4 -1 4.5 -6.0 -1 0.9 -5.8 -2.4 0.6
¯ 6.0 -12.4 -17.3 -9.6 3.5 14.3 2.1
-7.9 -6.8 -11.8 -5.3 8.5 22.2 22.2
While Gross Domestic Product (GDP) in the first three
quarters of 2002 was positive (GDP in third quarter rose
to a 3.1 percent annual growth rate from 1.3 percent in the
2nd quarter), most of the growth was narrowly centered
on the auto and home industries. Moreover, the Federal
Reserve is clearly concerned about the economy’s course.
The fact that the FOMC reduced rates by 0.5 percent on
November 6 shows this concern.
Most economists do agree on the time it will take for the
economy to recover, predicting a 2-3 year period before
the economy returns to pre-recession levels. With the
severity of the downturn in Silicon Valley, it may well be
5-6 years before economically sensitive revenue sources
such as sales, transient occupancy, and documentary
transfer taxes rise to 2000-01 levels. Whereas the last
recession in the early 1990s lasted 23 months, it is safe to
assume that the current economic doldrums will last con-
siderably longer (the local downturn began in January
2001).
In light of the sharp drop in revenues and continuing eco-
nomic uncertainty, the City must adopt a cautious eco-
nomic view of the future. The severity of the technology
downturn and the dependence of the Bay Area economy
on technology suggest that a local recovery will take
longer than that for the national economy. Disciplined
management of resources and expenditures is necessary
to steer the City through the economic obstacles that lie
ahead.
November 20()2 Ciu q/P~th~ Alt. 3
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
CHAPTER TWO
LONG RANGE FINANCIAL FORECAST
AND 2001-02 ANALYSIS OF REVENUES
AND EXPENDITURES.
INTRODUCTION/OVERVIEW
Because of the "irrational exuberance" of revenue streams
from 1999-00 through 2000-01, the acute economic down-
turn, and the consensus that such revenues will be slow
to recover, staff has used a different approach in forecast-
ing economically sensitive revenues in this Long Range
Forecast. Instead of estimating inflation and real growth
over time, staff has assumed that the compound annual
rate of growth (CAGR) of such revenue sources between
the years 2002-03 and 2012-13 will be roughly the same as
that between years 1991-92 and 2001-02. For example,
the CAGR for sales taxes between 1991-92 ($14.7 million)
and 2001-02 ($20.1 million) was 3.2 percent. This rate of
growth does not recognize the exceptional, one-time rev-
enue gains experienced in 1999-00 and 2000-01. This con-
cept was similarly applied to transient occupancy,
documentary transfer,
and property taxes.
Attachment 3 illustrates
the methodology used
by showing a trend line
or growth rate for sales
taxes with and without
growth experienced in
1999-2001.
The revenue forecast does incorporate the cyclical impact
of recessions on revenue streams. The current economic
downturn is expected to continue through 2002-03 with
some improvement projected in the latter half of 2003-04.
Another, milder recession is anticipated toward the end
of the decade with the consequent effect of revenues
either decreasing or flattening. Although cyclical reve-
nue patterns are shown in the forecast, major revenue
category growth from 2002-03 to 2012-13 has been con-
strained to fit the historical growth rate from 1991-92 to
2001-02.
The City’s spending patterns over the past ten years have
grown at a slightly faster pace than has the revenue base.
Two factors contributed the majority of the expense
growth: inflation and new expenditures. While increased
service levels (new programs) explain most new expendi-
tures, there also are external factors affecting employee
pension contribution rates such as stock market perfor-
mance.
Three Largest External Tax Revenue Sources
$000
j ~*~Sd~ Tax ---I3--P ropT ~ ~.*.~T OT j
In the future, there will
be unknown events that
will cause exceptions to
the projected rate of rev-
enue growth. For plan-
ning purposes and in the light of numerous expenditure
challenges, however, the methodology used is prudent
for determining expenditure levels. When one-time reve-
nue growth exceeds expectations, staff recommends sav-
ing these funds rather than committing them to ongoing
programs. This will allow the City flexibility in meeting
one-time needs such as capital improvements and in
dealing with temporary revenue shortfalls or mild reces-
sions when a draw on reserves may be necessary. (All
rates for revenue and expense growth or decline can be
found in Exhibit 3 at the end of this chapter).
While San Francisco Bay Area inflation averaged 3.3 per-
cent per year in the 1992-02 period, it is assumed inflation
will trend slightly lower over the 2003-13 timeframe.
Economic downturns
tend to place down-
ward pressure on price
levels and expense
growth, but with a
delayed effect. The past
ten years saw new pro-
grams and services
grow expenses at an
average annual rate of
approximately 2.8 per-
cent-almost half of the
total expense increases
over that period. The
2003-13 period indi-
cates a slowdown-by 25 percent-in the rate of expendi-
ture growth. The rates of growth will slow due both to
recessionary effects through 2003 and in 2009-10, and to a
projected slow-down in new program expense growth.
REVENUE ANALYSIS
Accounting for one-time adjustments, total revenues
increased by 4.8 percent per year from 1991-92 through
2001-02. This rate exceeded the average annual rate of
inflation by 1.5 percentage points, making possible reno-
vation of the City’s existing infrastructure, maintenance
of City service levels, the funding of new programs and
4 City qIPa[o Alto November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
services, and the growth in City reserves. On a
go-forward basis, and accounting for one-time
adjustments in 2002-03, total revenues in the fore-
cast increase at a CAGR of 4.1 percent per year.
This rate of growth for total revenues is 0.7 per-
centage points lower than that of the prior ten
years. This is based, in part, on some revenue
sources, such as interest income, growing at a
slower pace than in the past.
In 2001-02 and in the 2002-03 budget process, the
City was compelled to adjust expenditures
because of the dramatic drop in economically sen-
sitive revenue sources. Although the City has a
well-balanced or diverse revenue base (see pie
chart), some revenue categories fluctuate more
(are more elastic) than others. Transient occu-
pancy and sales taxes, for example, are most elas-
tic and respond quickly to economic changes. In
the face of lower profits, businesses cut travel and
training expenses immediately, thus affecting TOT reve-
nues. When jobs are eliminated and equity values
decline, consumers are generally quick to cut discretion-
ary purchases, resulting in lower sales tax receipts. Other
revenue sources such as property taxes tend to fluctuate
less, taking longer to react to an economic downturn.
Property taxes in 2002-03, for example, are expected to
modestly increase despite the economic downturn.
While this report mainly focuses on elastic revenues, sev-
eral sources of City funds provide a fairly steady source
of income. These include rental income, equity transfers,
and reimbursements for General Fund (GF) services pro-
vided to other funds such as the utihties. These revenues
equate to around 40 percent of GF resources. Palo Alto is
fortunate to have these revenues compared to other cities,
but they do not provide immunity from the economic
cycles causing volatility in the elastic revenues. It is
Jobs
Santa Clara Jobs and City of Palo Alto Sales Tax Revenues
1100,000 28,000
tooo,ooo
900,000
800,000
700,000
600,000
500,000
198,~ 1986
18,000
16,000
!4,000
12,000
10.000
19881990199219941996199820002002
[~Jo~ ---~---Sdes Tc~ ] Sept.
26,000
24.000
22.000
20.000s ales Tax
Revenues
$ooo
General Fund Revenue byCategory
2001-02
Reimburse-Transfers from
ments Other Funds
Rents & Other 10%12%
Revenues Sales Tax
13%16%
Interest
Earninc Property Tax
4%11%Joint Service
Agreements Utility User Tax
5%5%
Service Fees &
Permits M~sc. Taxes,~ Transient
11%F~qes & " ~_.Occupancy
Penalties Tax
7%6%
staff’s view that the local economy is in the midst of an
extended period of malaise and that a "double dip" reces-
sion is a strong probability. The revenue analysis pre-
sented below supports this perspective.
SALES TAX
An elastic revenue source, sales taxes have dropped
sharply due to unemployment fears and a reverse "wealth
effect" from equity and stock options declines. In 2001-02,
there was a 22.1 percent or $5.7 million decline in sales tax
revenue compared to the prior year. The last year-to-year
decline in sales tax receipts occurred during the recession
of 1992-93; at that time revenues dropped by 9.3 percent
or $1.4 million. The more dramatic 2001-02 decline must
be viewed in the context of the previous nine years of
sales tax growth. Between 1991-92 and 1998-99, revenues
rose an average of 8.6 percent per year; then from the end
of 1998-99 through 2000-01, they rose approxi-
mately 13 percent per year. The latter years’
increase proved unsustainable. Such dramatic
swings in sales taxes caused staff to adopt the
forecast methodology discussed above.
To project sales tax revenues and uncover any
structural issues with this revenue source, staff
analyzed historical sales data for nine key eco-
nomic segments: auto, electronic equipment,
department store, miscellaneous retail, apparel,
office equipment, furniture/appliance, restau-
rant, and business service sales. No segment
escaped unscathed by the 2001-02 economic
November 2002 City qi’Pah~ Alto
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
Major Sales Tax Segments $000
4,500
4,000
3,500
3.000
2.500
2,000
].500
t000
5OO
0
199t-1992- 1993- 1994-"#95-1996- 1997- 1998- 1999-2000-2001-
92 93 94 95 96 97 98 99 00 01 02
i + Dept. S totes --1:]-- R es toJrc~ts
!i +Auto Sa~es ---X--- Mis c, R etdls
i +Electronic/ Equipment +AI3p~et Stores
downturn. Declines in sales from the prior year ranged
from 13 percent or $0.5 million in department stores to 40
percent or $1.2 million in miscellaneous retail sales.
Other drops include business services (39 percent or $0.3
million), electronic equipment (32 percent or $0.4 mil-
lion), automobiles (26 percent or $1.0 million), apparel
stores (22 percent or $0.4 million), and restaurants (17
percent or $0.5 million). The graph above shows the
breadth of the sales tax drops.
With the severity of these declines, sales tax receipts are
not expected to return to the 2001-02 level of $25.8 mil-
lion until 2008-09. In 2002-04, experts predict that sales
tax receipts will remain at around $20 million per year.
Given the widely held belief among economists that the
boom years of 1999-2001 were an extraordinary period of
economic expansion, based in part on real business
growth and productivity and in part on financial report-
ing irregularities, there is no economic foundation for a
rapid recovery to the 2000-01 revenue levels.
On a CAGR basis, sales tax revenues grew by 3.2 percent
annually between the year 1991-92 and the year 2001-02.
This moderate rate of growth is expected to continue
over the next ten years after accounting for one-time
adjustments such as the loss of Carlsen Porsche auto
sales.
In addition to the recent slide in sales taxes, the City faces
potential further erosion in its sales tax base. Events such
as the departure of additional automobile dealerships
and the long-term decline of electronic sales pose threats
to the City’s economic base. A more thorough discussion
of this issue is presented in Chapter 3: Economic Chal-
lenges.
PROPERTY TAXES
Property taxes performed well in 2001-02, exceeding
the adjusted budget by 3.1 percent or $0.4 million
and the prior year by 10.9 percent or $1.3 million.
Unlike sales taxes and TOT, property taxes do not
react immediately to an economic downturn and
they obviously track closely with assessed valuation
as shown in the graph on the following page.
Property tax revenues are expected to rise by 3 per-
cent in 2002-03. It takes time for the county to recog-
nize and reflect in the assessable base declines in
realty prices. Because of low interest rates and the
demand for homes on the Peninsula, residential
properties have not experienced notable declines in
value. Receipts in 2001-02 still reflect the hot housing
and commercial market of prior years. Sustained unem-
ployment and economic problems could, however, even-
tually lead to significant declines in property values and
tax revenues.
There are some signs of such an event on the horizon. As
the County Assessor recently reported, numerous high-
end properties in Palo Alto had their assessed valuations
reduced. While housing prices are holding firm, some
experts predict a 10-15 percent price correction across the
housing sector within the next 6 months to a year. Also,
with commercial/industrial vacancies high and busi-
nesses retrenching on capital equipment, unsecured
property taxes may drop somewhat in 2002-03. Staff
does not see a major property tax correction at this time.
It is prudent, however, to plan for a low rate of revenue
growth for the next few years. On a CAGR basis, prop-
erty tax revenues have grown by 5.4 percent annually
Property Tax Revenues by Category
2001-02
Irstitutiond
cndMiscLess 11-aq 1%
Residmtid
56%
6 CiO of Palo Alto Nm’ember 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
City of Palo Alto Assessed Property Value and Tax Receipts,
with and without ERAF Funds $000
Assessed Value
"b,O00.O00
"t2.000,000
I&CO0,O00 ............
8,000,000
&O00,O00
4.000.000
2.000,000
80-81
Tax R eceipts
18,0D0
b.O00
14,000
12.000
10,000
8,000
6,000
2.000
82-83 84-85 86-87 88-89 90-9t 92-93 94-95 96-97 98-99 2000~1
IIAss~ss-ccJVdue --o--W/ERAF tckeGvo¢ ~NoERA~= tc~eo~o¢
from 1991-92 through 2001-02. The CAGR projected in the
forecast over the next ten years is around 5.0 percent. The
composition of Palo Alto’s property tax receipts is shown
in the pie chart on preceding page.
TRANSIENT OCCUPANCY TAX -TOT
Of all outside revenue sources, TOT experienced the
steepest percentage decline from 2000-01 to 2001-02, fall-
ing by 29.3 percent or $2.7 million.
This drop is especially significant since TOT revenues
have not declined since 1990-91; they have grown 10.4 to
26.6 percent annually during 1994-95 through 2000-01.
Similar to sales taxes, TOT revenues of $6.5 million in
2001-02 have reverted to levels last seen in 1998-99.
While profits have been dropping nationally (U.S. hotel
profits plunged 19.4 percent compared to 2001 according
to PKF Consulting, a hotel industry research group), the
combination of September 11 and the technology reces-
sion have had an especially harsh affect on local hotels.
Occupancy and daily rates have fallen markedly. Com-
pared to average occupancy rates ranging from 73 to 79
percent from 1998-99 through 2000-01, the City ended
2001-02 with an anemic 58 percent. Occupancy rates in
July and August hovered around 61 percent. Average
hotel charges per day that rose from $121 in 1998-99 to
$154 in 2000-01, fell back to $136 in 2001-02. Anecdotal
evidence of the sharp change can be found along E1 Cam-
ino Real in numerous signs reading "manager’s special"
on daily rates.
TOT revenues in the last quarter
of 2001-02 showed some resil-
iency. Whereas the first three
quarters of 2001-02 showed reve-
nue declines of 32 to 38 percent
compared to the prior year, the
final quarter of 2001-02 and the
first two months of 2002-03
showed declines of 18 percent.
Unless there is a "double-dip"
recession, this data may indicate a
leveling in this sector. Neverthe-
less, according to PKF Consulting,
"it’s going to take three to four
years for the industry to get back
to where it was pre-September
11." New hotel developments in
Los Altos (bordering Palo Alto)
and East Palo Alto may offer City
hotels some competition in 2002-
03 and push Palo Alto’s recovery further out into to the
future.
On a CAGR basis, TOT revenues have grown by 7.9 per-
cent annually from 1991-92 through 2001-02. Despite the
addition of a new hotel several years ago, a similar CAGR
of around 7.8 percent is projected for the next ten years.
Based on historical data and as hotel business rebounds,
hoteliers have the flexibility to raise rates. Like sales
taxes, TOT receipts are more elastic or sensitive to eco-
nomic events.
UTILITY USERS TAX - UUT
In 2001-02, UUT revenues (telephone and utility) came in
1.9 percent or $0.1 million over the adjusted budget, but
lagged behind the prior year by 7.3 percent or $0.5 mil-
lion.
Telephone UUT receipts came in 16.1 percent or $0.3 mil-
lion above budget. They fell 18.9 percent or nearly $0.5
million below the prior year, accounting for all of the total
UUT variance when comparing 2001-02 to the prior year.
This considerable decline appears to be the result of the
business downturn and office vacancies from the
"dot.com" bust. This revenue source is not expected to
recover significantly in 2002-03.
Actual 2001-02 UUT utility revenues were close to the
budget and to 2000-01 levels. While gas and electric rates
were raised in 2001-02, the UUT rebate in effect from
August 1, 2001 through March 30, 2002 essentially offset
higher revenues from the rate increases. Since the rebate
November 2002 City q/Pal,~ Atm 7
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
has been suspended, these revenues are anticipated to
rise from $4.4 million in 2001-02 to $5.5 million in 2002-
03. These revenues are a function of water, gas and elec-
tric sales and are projected in the Utilities Depar~nent’s
ten-year forecast. Projected utility usage and consequent
UUT revenues take into account such factors as potential
rate increases, conservation efforts, and commodity price
changes.
MOTOR VEHICLE LICENSE FEES-VLF
Revenues from this source were approximately 4.7 per-
cent or $0.15 million above the 2001-02 adjusted budget
and the prior year. Since new auto registrations showed
a decline in 2001-02 compared to the prior year, staff
expects these fees to remain relatively flat in the near
future. On a positive note, the Legislature and Governor
kept the State’s General Fund VLF backfill intact for 2002-
03. This means localities will receive their full share of
fees despite the cut in fees to auto owners. The City,
however, should be vigilant given the State’s precarious
budget situation, since $2.2 million in General Funds are
in jeopardy should the backfill be eliminated. In a recent
visit to Palo Alto by State Assemblyman Joe Simitian, he
indicated that the backfill may be reviewed at midyear
due to the severity of State budget problems.
On a CAGR basis, VLF revenues grew by 6.0 percent
annually from 1991-92 through 2001-02. A growth rate of
around 5.8 percent is projected for the next ten years.
DOCUMENTARY TRANSFER TAX
These taxes came in 9.6 percent or $0.3 million over the
2001-02 adjusted budget, but fell 24.5 percent or $0.9 mil-
lion compared to the prior year. Transfer taxes, remitted
when a property is sold or transferred to another party,
are sensitive to major changes in the economy. This is
especially true for the commercial real estate transactions
that have accounted for nearly 40 percent of revenues in
1999-00 and 2000-01. The number of commercial proper-
ties changing hands in the first 3 quarters of 2001-02 were
roughly half of those in 2000-01, while residential trans-
actions declined by 23 percent. The soft local economy
and high industrial and office space vacancies have had a
significant impact on these revenues. Staff expects trans-
fer taxes to experience slow growth in the next few years.
On a CAGR basis, transfer tax revenues have grown by
9.6 percent annually from 1991-92 through 2001-02. A
similar growth rate of around 9.4 percent is projected for
the next ten years.
FINES AND PENALTIES
This source of funds rose 11.6 percent or $0.2 million over
the 2001-02 budget and 14.8 percent or $0.3 million over
the prior year. Parking fines accounted for a large share
of the positive variance and this is a result of the enforce-
ment function being fully staffed. As business improves
in the shopping districts, these revenues can be expected
to rise.
SERVICE FEES AND PERMITS
This category increased 3.5 percent or $0.4 million in
2001-02 over 2000-01, and includes fee and permit reve-
nue from a variety of activities in a number of depart-
ments. In the Community Services Department (CSD),
golf course green, play card, range and other fees
increased 3.29 percent, or $0.1 million, in 2001-02 over
2000-01. This was largely due to the successful market-
ing of play cards and slightly higher green fees. Golf
course revenues are projected to increase moderately in
the near future. Higher revenue was also seen from class
registration and admission fees, which increased 8 per-
cent or $0.4 million in 2001-02 over the prior year due to
the continued popularity of CSD programs. Class reve-
nue is expected to remain strong in future years.
In the Planning Department, revenue from permit, plan
check, zoning and other fees decreased 1.7 percent or $0.1
million in 2001-02 when compared with 2000-01. The
decrease was due to higher than normal revenues in
2000-01 that resulted from various Stanford Shopping
Center development activities. This activity did not con-
tinue in 2001-02. Revenue from the typical permit, plan
check, and zoning activities was higher in 2001-02 when
compared with 2000-01 and is expected to continue slow
growth.
JOINT SERVICE AGREEMENTS
This category consists largely of the contract with Stan-
ford University for fire and communication services.
Revenue increased 16.3 percent ($0.9 million) in 2001-02
over 2000-01. Stanford’s share of equipment purchases
accounted for 50 percent of the total increase in 2001-02,
since the billing for the acquisition and outfitting of sev-
eral vehicles from prior years was withheld until the
work was completed. Although equipment purchase
expenses were high in 2001-02, they are unlikely to
remain as high from one year to the next due to their
variable nature. The overall increase was also due to
higher wages resulting from negotiated salary increases,
higher overtime expenses resulting from vacant posi-
8 City q/’P.lo Aho November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
tions, and higher expenses for supplies and materials.
The future growth of this revenue source is closely tied to
future salary and benefit increases, since most fire service
expense consists of staffing.
INTEREST EARNINGS
The General Fund’s share of interest income came in
nearly 4 percent or $0.2 million above the 2001-02
adjusted budget and the prior year. This positive vari-
ance primarily results from the overall growth in the
City’s portfolio of $14 million. The drop in interest rates
has and will continue to impact this revenue source. The
City’s portfolio yield has moved from 5.92 percent on
June 30, 2001 to 5.39 percent on June 30, 2002 to a current
yield of around 5.26 percent. While staff has compen-
sated for interest rate declines by purchasing securities
with longer maturities, it expects portfolio yields to
decline below 5 percent in the coming months.
On a CAGR basis, interest income from the City’s invest-
ments grew 7.8 percent annually from 1991-92 through
2001-02. Due to an expected low interest rate environ-
ment for the next few years, an annual growth rate of 5.1
percent is projected for the next ten years.
REIMBURSEMENTS
The reimbursement category refers to payments to the
General Fund (GF) for services rendered. Fund-based
accounting requires all government hands to pay their
"fair share" of associated expense as it relates to adminis-
tration of their activities. These GF services range from
the Administrative Services Department’s accounting and
payroll functions to the Public Works Department’s elec-
tric line clearing and surveying services. These revenues
offset GF expenditures specifically dedicated to provid-
ing these services. In 2001-02, reimbursements to the GF
totaled $11.8 million or 9.7 percent of $119.2 million in
expenditures. In 2002-03, ten percent of the GF expense
budget is dedicated to providing services to other City
funds, such as the Electric, Gas and Wastewater Treat-
ment funds.
TRANSFERS
Within governmental fund accounting, transfers between
funds are both a common and necessary means of mov-
ing resources for both general operations as well as capi-
tal activities. The transfer moves the resources to the
fund that will be performing the service and incurring the
expense.
The main component of transfer revenues is the equity
transfer from the enterprise funds ($12.6 million), which
represents a return on the City’s capital investments in
the Utility Department operations over the past 100 years.
This important source of funding contributes to the City’s
annual expenditure budget-including both operations
and capital work. The growth of this funding source is
associated with the stable equity transfer methodology,
currently a 3 percent annual increase. With the volatile
operating environment of energy related businesses, staff
has developed an equity transfer reserve that will allow
the enterprise funds the flexibility of funding the GF
transfer when their business models allow. The reserve
will maintain the levels of this important funding source,
but not handicap the enterprise during times of energy
price spikes.
Transfer revenue has grown by approximately 3.6 percent
annually over the past 10 years. Over the next ten years,
this growth rate is projected to decrease to 2.8 percent per
year as transfers from Special Revenue funds grow at a
slower rate. These mainly involve transfers from the Gas
Tax fund and the parking district funds.
EXPENDITURE ANALYSIS
The past ten years represent the longest post-war expan-
sion in United States history. The City of Palo Alto bene-
fited from its location in one of the most prosperous
regions of the country, characterized by ample purchas-
ing power of residents and non-residents alike.
A SUMMARY OF 1992-02 EXPENDITURES:
¯ The City’s expenditure budget grew at an average annual
rate of 6.1 percent during the past ten years
¯Expenditures had an 80 percent increase from $69.9 million to
$125.9 million
Approximately half of expense growth can be attributed to
inflation price pressures; the other half represents new
expense and program growth
Most of the expense growth has been in three expense catego-
ries; salary and benefits (62 percent), capital spending (14
percent), and contract services (12 percent)
Beginning in 2001-02, the City devoted an additional $2.0 mil-
lion in annual funding for the "CityWorks" Infrastructure
Management Plan.
In April 1998, Council approved directing half of expected
revenue growth as a result of hotel expansion and develop-
ment projects to infrastructure work. It was expected that
$1.0 million annually would be raised from these sources.
November 2002 City q/’Palo Alto
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
The 2002-13 period indicates a slowing in expenditure
growth. This is due to a slight decline in the regions
expected inflation rate along with a slowdown in new
program spending and expansion, primarily constrained
by slow revenue growth.
A SUMMARY OF 2002-13 PROJECTED
EXPENDITURES IN BASE FORECAST
¯ Expenditures are projected to grow at an average annual rate
of 4.6 percent during the next ten years.
¯Total expenses are estimated to grow 58 percent from $125.9
million to $198.3 million in 2012-13
¯Salary and benefits growth represents 82 percent of expense
growth over the period
Average annual salary expense growth is projected to slow
from 6.1 percent over the past ten
years to 3.9 percent over the next
ten
Benefit growth is projected to
increase from 5.4 percent to 11.0
percent annually, and will fully
offset the slow-down in salary
growth
55 percent of the benefit growth is
due to increases in pension contri-
butions, and 31 percent is due to
health care expense growth
The chart to the right shows the
allocation of the City’s GF expen-
ditures. As in any service indus-
try, salary and benefits represent
the largest share of expenditures.
SALARIES AND BENEFITS
¯The statewide CalPERS pension system is based on a pooling
of assets and liabilities. While this helps to spread invest-
ment risk/reward factors to many participants, the contribu-
tion amounts are determined externally to the City.
¯Binding arbitration, approved by Palo Alto voters, requires
the City to follow the standards of "prevailing industry stan-
dards" with employee compensation issues.
Double digit growth in healthcare costs over a long period of
time.
¯The City is part of a larger employer marketplace and must
continue to be competitive in the hiring of qualified talent.
¯ Operating in a unionized environment locks in compensa-
tion levels over several years with multi-year contracts.
General Fund Expenditures by Category
2001-02
R~nts, 8’%
L~a~s &
EqJp
1%
Salaries: Increased staffing levels have influenced the
salary component of this category over the past ten years.
Other factors include the rates of
general inflation as well as the
collective bargaining process.
The City of Palo Alto strives to
T rcrsfers provide compensation near the
ods average level of comparable~6 sized municipalities in the BaySdc~i~ & Area region. This keeps the City
competitive in attracting quali-
fied candidates to its open posi-
tions, while maintaining a
strong retention incentive for
current employees. The LRFP
assumes staff levels are held
Like most local government’s, the City of Palo Alto is a
labor-intensive, service-driven organization with the
majority of costs tied to labor. Representing nearly two-
thirds of GF expenditures, salaries and benefits have
increased at an average annual rate of 6.0 percent during
1993-2002 due to new staffing and benefit levels, as well
as base salary increases. The category is expected to con-
tinue to grow at this same level (5.8 percent) over the
next ten years. Overall expense is projected to grow at a
slower 4.6 percent annually. The more rapid growth in
salaries and benefits pushes this category from about
two-thirds of GF expenses in fiscal 2001-02 to nearly
three-fourths of expenses in 2012-13.
Some factors that make salary and benefit cost-contain-
ment difficult include:
constant after 2002-03.
The salary expense category
grew at an average annual rate
of 6.1 percent through the 1993-03 period; however, this
is expected to slow to approximately 3.9 percent per year
over the next ten years. This slowdown in salary expense
growth is due to fewer projected staffing additions as
well as smaller cost-of-living-adjustments (COLAs)
resulting from the current weak economic environment.
The City’s union contracts expire as follows:
¯ International Association of Fire Fighters-June 2003
¯Fire Chief’s Association-June 2003
¯Service Employees’ International Union-April 2004
¯Palo Alto Peace Officer’s Association (PAPOA)-June 2007
Until these contracts expire, the City is locked into their
specific compensation agreements. It should be noted
the PAPOA contract links compensation increases to a
Bay Area consumer price index, within a range of 3 per-
cent to.6 percent. In the near term, compensation
10 C#y ~st’Palo Ah~,November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
increases are expected to measure at the lower end of this
range.
Benefits: As the salary component of this category slows
its growth, employee benefits are projected to nearly
triple in size over the next ten-year period. This growth
completely offsets the projected slow down in salary
expense growth, and reinforces the need to focus on total
compensation during the union bargaining process. In
other words, there must be a slowdown in salary growth
to offset anticipated benefit cost increases related in great
part to higher healthcare and pension costs in the
CalPERS system.
The past ten years had average annual benefit increases
of 5.4 percent, mainly caused by increased staffing levels,
increases in medical premium costs and to a lesser extent
by expansions of the benefit program. The 2003-13
period, however, indicates benefit expense increases
approaching 11 percent or nearly $3 million per year. This
unprecedented growth is cause for serious concern
throughout the organization. As a percent of total expen-
ditures, employee benefits are projected to grow from
12.9 percent to 23.2 percent, or nearly one quarter of the
entire GF budget-by 2012-13. The main contributors to
this anticipated expense growth are pension contribu-
tions and healthcare costs.
Pension Contributions - Annual pension contributions are
projected to increase from $2.6 million in fiscal 2001-02 to
$21.6 million in 2012-13--close to a nine-fold increase. The
main reasons for this unprecedented increase include poor
market performance of the underlying CALPERS invest-
ments for the past two years; several early retirements of
safety persormel due to injury; low-levels of contribution in
fiscal 2001-02 and 2002-03 due to surplus positions of fund
assets vis-a-vis fund liabilities; and the 2001-02 enhanced
retirement benefit for public safety retirees. This benefit
enhancement changed from "2 percent at 55" to "3 percent at
50" or 3 percent pay for each year of service for Fire and
Police department retirees. Staff is working on cost "smooth-
ing" options that would limit growth of future contribution
rates, these inctude: requesting that CALPERS extend the
amortization of portfolio losses beyond the current thirteen
years; holding the pension program to current benefit levels;
and pre-funding enterprise fund retiree contributions.
Healthcare Costs - Three of the past four years have seen
double-digit growth rates for the City’s healthcare costs. This
trend is expected to continue over the next ten years with
annual growth rates of between 8 - 15 percent. Retiree health
premiums are included in this category, but are growing at a
slightly faster rate than those for current staff. Annual GF
healthcare costs are therefore expected to increase from $5.0
million in 2002-03 to $14.3 million in 2012-13-a three-fold
increase over the period. There are many factors cited as
causing these increases including, increased prescription
drug costs, the costs of new technologies, the increasing
aging population, and mergers/financial weakness within
the healthcare industry. Staff is working on slowing the
growth of costs in this area. In the short-term, City employ-
ees will be offered incentives to switch to lower cost health
plans, while working within the construct of each union
agreement. The City will avoid approximately $0.8 million in
2003 expense by implementing this cost-saving idea. In the
longer-term, staff will enter into collective bargaining with a
position of maintaining quality healthcare along with explor-
ing cost-containment strategies such as a cafeteria health
plan, which grants the employee a fixed amount to spend on
their preferred level of benefit.
Non-Salary Expenses This category consists of non-sal-
ary expenditures such as contract services, supplies, gen-
eral expenses, rents and leases, and allocated charges. A
continued effort to align expenses with lower revenues
will result in a smaller annual growth rate of 2 to 3 per-
cent in the near-term.
Actual contract services expenses accounted for 10 per-
cent of the 2001-02 budget and were used for a variety of
program activities throughout the city. For example, the
City retains contracts for the Children’s Theatre, goff pro-
fessional services, park maintenance, class instructors,
traffic studies, and for the design and engineering of
major capital projects. Contract service expenses
decreased 4.3 percent in 2001-02 due to the mid-year
effort to cut costs.
Supplies and materials accounted for 3 percent of 2001-02
expenses. This expense group includes such items as
library collections, office supplies, and construction mate-
rial.
General expense accounted for $9.8 million, or 8 percent,
of 2001-02 expenses. The largest component of this
expense group consisted of the $6.4 million lease pay-
ment to PAUSD. Since 1990, the lease payments to
PAUSD have increased an average of 3.4 percent annu-
ally and are adjusted commensurately with the Bay Area
Consumer Price Index (CPI). At the current rate, the lease
payments grow to $9.6 million by 2009-10.
This forecast does not include any funds for Budget
Amendment Ordinances. It is prudent to keep changes to
the Adopted Budget at an absolute minimum given the
challenging revenue environment. This will necessitate
disciplined spending on the part of City departments and
Council.
November 2002 C#y ~!/Palo Alto
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
Allocated Expenses: The GF receives a number of ser-
vices from the City’s Internal Service Funds (ISF), which
are expense-specific funds that manage services such as
vehicle maintenance and replacement, printing and mail-
ing, and technology. These costs are then distributed to
all funds citywide based on specific usage methodology.
Some of the larger allocated costs in 2002-03 for the GF
include vehicle maintenance and replacement ($2.0 mil- .
lion), computer technology ($2.8 million), streetlight and
traffic signal operation and maintenance ($1.6 million),
and utility sales to City departments ($2.8 million).
In the previous ten-year period, this category of expense
grew at 5.8 percent - higher than the Bay Area inflation
rate of 3.3 percent. This growth can be attributed to
increased costs to replace legacy financial systems as well
as increased energy costs for the City in the 2000-02
period. The 2002-12 period indicates a growth rate at 4.2
percent. In the 2003-05 period, the GF is projected to fund
an additional $0.5 million in annual traffic signal capital
expense. This agreement with the Utility department
acknowledges the GF responsibility to fully reimburse
the Electric Fund’s operation and maintenance as well as
capital expense related to citywide traffic signal ser-
vices. Other portions of this category are projected to
grow at a more controlled 3 percent annual rate over the
period, as energy costs normalize.
Infrastructure Management Plan: The Infrastructure °
Management Plan (IMP) also known as "CityWorks,"
consists of four main categories of capital work: Build-
ings and Facilities, Parks and Open Spaces, Streets, Side-
walks and Transportation, and Bridges and Parking Lots.
Begun in fiscal year 1999-00, the IMP addresses infra-
structure projects identified in the 1996 Adamson Report,¯which described the City’s infrastructure deficiencies
requiring attention.
The IMP is a 10-year, $100 million plan, designed to elim-
inate the City’s backlog of infrastructure maintenance
projects and address go-forward needs. Within the past
few years, significant progress has been achieved on the
infrastructure backlog with six major park renovations
being completed in 2002-03 alone. The elimination of
backlogged street and sidewalk work is on schedule.
The City, is still working on original projects identified in
the IMP. As a result of new projects such as the Library
Plan, the Mitchell Park Community Center, a Police
building, and the Roth building, infrastructure staff has
been partially diverted. Consequently, the time line to
complete the IMP has changed. One of the current chal-
lenges is how to prioritize, schedule, and staff existing
IMP projects while at the same time addressing the needs
for other large projects.
Another significant challenge is maintaining the identi-
fied funding sources for IMP projects, since $2.0 million
annually needs to come from GF operating budget sav-
ings. The economic downturn is making it difficult to
achieve significant revenue surpluses. As of June 2002,
the IMP was in its third year of operation and had total
accumulated expenditures of $20.0 million. Actual
expenditures for the IMP in 2002-03 and 2003-04 will
increase significantly due to many of the projects enter-
ing their construction phase. This long-range plan does
include remaining funding of approximately $80 million
to complete the original $100 million IMP. The Infra-
structure Reserve has an ending balance of $30.2 million
as of June 2002.
Transfers to Other Funds: The GF maintains obligations
to other funds such as the Capital Fund and the Debt Ser-
vice funds. Considered an expense within another fund,
these transfers provide the necessary resources for a cap-
ital expenditure or a debt service payment. The LRFP
includes four main categories of transfers: IMP capital
projects, non-IMP capital projects, debt service, and other
transfers.
IMP Capital Projects - Transfers to fund IMP capital project
work are expected to average approximately $6 million per
year. This includes the GF’s base commitment to infrastruc-
ture work, plus an annual amount drawn down from the
Infrastructure Reserve. These transfers are higher than those
over the past five years as many projects will be entering the
construction phase in the near-term.
Non-IMP Capital Projects - Transfers to other capital
projects, including Public Art and technology projects, are
expected to average close to $2.1 million per year over the
period.
Debt Service - Unless new debt is incurred, transfers for debt
service are projected to remain near an average of $1.2 mil-
lion annually over the next ten years. The City was able to
refinance debt in 2001-02, lowering costs to those reflected in
the forecast. Total current outstanding GF serviced debt is
around $13.3 million and is not expected to increase over the
projected period without additional resources.
Other Transfers - The $1.0 million annual transfer to the
Storm Drainage Fund is necessary, as that enterprise fund
does not generate enough revenues to fund its operations.
At present, there is a Blue Ribbon Committee of citizens
reviewing the varied funding options available to close this
operating loss. In the foreseeable future, however, the GF
wil! be required to transfer necessary resources.
12 City qfPal~, Aho Norember 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
THE BOTTOM LINE
The net operating deficit, indicated in the base model
(Exhibit 1), ranges from $6.5 million in 2003-04 to more
than $15.2 million in 2012-13. The cumulative deficit over
the ten-year period is $104.8 million. Two factors contrib-
ute to the majority of the deficit: a loss of local revenue
due to the current economic downturn, along with poten-
tial structural changes in the sales tax base; and projected
expenditure increases for employee pension and health
care costs. The local, state and national economies have
placed extraordinary pressures on local revenue sources,
particularly sales and transient occupancy taxes. While
these revenues will rebound somewhat over the next sev-
eral years, they are not projected to return to 2000-01 lev-
els until around 2008-09. The City’s expenditure base
must be adjusted to accommodate reduced revenues and
expense challenges.
On the expense side, employee and retiree health care
costs--projected to have annual growth slowing from the
current 15 percent to near 10 percent annually--are
expected to grow as a percentage of total City expendi-
tures from the current 3.9 percent to 7.2 percent ten years
from now. Of more concern are rising pension costs
expected to grow from 4.2 percent to 10.9 percent of all
City expenditures in 2012-13. Thirty-six (36) percent of all
City expense growth is concentrated in these two areas
and play a major role in projected future deficits.
In light of the current revenue decline and projected near-
term expense increases, staff has embarked on a review of
all services and programs funded by the GF with the goal
of balancing projected deficits. The review will assist the
Council and staff in understanding where expense and
service reductions may be made. The 2003-05 budget
process will then incorporate these decisions, along with
others arising from cost containment strategies in the area
of employee benefits.
EXPENSE REDUCTION SCENARIO
Staff recognizes the need to not only realign City expendi-
tures with projected revenues, but also contain projected
expense growth in healthcare and pension costs. The
base model (Exhibit 1) includes known variables and
assumptions on the City’s revenues and expenditures for
the next ten years. This model shows projected deficits
were the City to take no action to control expenditures.
To balance revenues and expenditures, a second long-
range scenario (Exhibit 2) was modeled to demonstrate
the effect of permanently reducing operating expenses by
3 percent in 2003-04 and by an additional 2 percent in
2004-05. Salary and benefit reductions were applied to
costs that included known negotiated salary increases,
and operating transfers were excluded from this exercise.
A 3 percent reduction in GF operating expense translates
into a $6.7 million savings for 2003-04. This savings is
comprised of the 3 percent reduction from the 2002-03
base fiscal year ($3.4 million) as well as the removal of
projected expense growth between 2002-03 and 2003-04
($3.3 million). An allocation for compensation increases
(COLA) is included in these figures. This scenario
addresses the operating deficit presented by revenue
shortfalls and balances the 2003-04 budget.
An additional 2 percent reduction in 2004-05 reduces
operating expenses by $3.6 million in the second year or
$10.6 million from the base model. The $10.6 million
includes the 3 percent reduction in 2003-04 ($3.4 million),
the 2 percent reduction in 200405 ($2.3 million) and
approximately $4.9 million in projected base expense
growth over the two years. Allocations are included for
anticipated compensation increases.
These reductions would result in smaller deficits over the
next ten years, ranging from $0.7 million in 2004-05 to
$1.1 million in 2011-12 with six of the next ten years indi-
cating a surplus. The cumulative $104.8 million deficit
from the base model is completely erased with these
reductions, resulting in a $14.2 million net surplus to
reserve balance over ten years.
The City Manager does not wish to approach potential
expense reductions with an "across the board" budget
reduction methodology. Rather, staff will work with
Council directive on service prioritization and general
discretionary spending cuts throughout the 2003-05 bud-
get process. It will be necessary to eliminate vacant or
non revenue-generating positions through attrition over
the next few years, continue the hiring freeze, and curtail
the expansion of programs and non-essential services.
Both scenarios assume no growth in program spending or
service levels within the fiscal year of the expense cuts.
Also, inflation increases would need to be funded by sav-
ings in other areas. As noted, salary and benefit increases
have been included based on expected compensation
growth.
November 2002 (50’ qi’Palo Alto t3
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
EXHIBIT 1 - BASE FORECAST
Revenues
Sales Taxes
Property Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Earnings
Other revenues
20,085 20,000 20,335 21,286 22,281 23,378 24,530 25,677 24,438 24,970 26,012 27,358
13,229 13,644 13,556 13,522 14,5!6 15,728 17,356 19,152 20,751 22,276 22,131 22,077
6,469 7,370 7,782 8,516 8,714 8,842 8,950 9,562 9,853 10,114 10,417 10,730
6,615 6,956 7,503 8,205 9,056 9,994 11,029 12,172 12,033 12,257 13,404 14,726
8,406 8,440 8,632 9,230 10,008 10,902 11,887 12,902 13,796 14,630 15,308 16,534
54,804 66,410 57,808 60,759 54,575 68,544 73,752 79,465 80,871 84,247 87,272 91,426
13,071 !4,748 15,125 15,512 15,910 16,387 16,879 17,385 17,907 18,444 18,997 19,567
6,401 6,209 6,780 7,044 7,356 7,676 8,038 8,386 8,723 9,050 9,394 9,770
4,359 3,811 4,266 4,575 5,582 6,201 5,933 6,109 5,801 5,466 5,615 6,287
14,948 14,758 12,250 12,580 13,084 13,607 14,192 t4,803 15,293 14,891 14,997 15,393
Reimbursements from Other Funds 11,841 11,827 12,300 12,792 13,432 13,969 14,667 15,547 16,325 16,815 17,487 18,187
Total Revenues 50,620 51,353 50,721 52,503 55,354 57,840 59,709 62,230 54,049 64,676 66,490 69,204
Transfer from Infrastructure Reserve 3,346 2,306 3,614 4,264 2,015 3,143 3,237 3,335 3,435 3,538 3,644
Transfers from Other Funds 13,774 14,335 14,548 14,984 15,434 15,897 16,374 16,726 17,228 17,745 18,277 18,826
TOTAL SOURCE OF FUNDS 119,198 125,444 125,383 131,860 139,637 144,596 152,979 161,659 165,482 170,102 175,577 163,098
Expenditures
Salades & Benetits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Allocated Expenses
Total Expenditures
Transfers to Other Funds
72,370 78,637 83,815 91,797 95,989 101,331 107,349 113,633 120,189 125,576 131,335 137,666
11,335 11,637 11,870 12,107 12,349 12,720 13,229 13,758 14,170 14,454 14,743 15,185
3,364 3,186 3,550 3,621 3,693 3,804 3,956 4,t14 4,238 4,323 4,409 4,497
9,756 9,046 10,170 !0,457 10,753 11,058 11,372 11,696 12,029 12,326 12,631 12,946
1,317 1,231 1,256 1,281 1,306 1,332 1,359 1,386 1,414 1,442 1,471 1,501
9,430 10,518 11,884 12,490 12,865 13,251 13,648 14,058 14,479 14,914 15,361 15,822
107,572 114,255 122,545 131,753 136,955 143,496 150,913 158,545 166,520 173,534 179,950 187,617
GF transfer for non-IMP capital pro. 1,6!1 3,433 1,762 2,627 1,88!851 2,111 2,111 2,111 2,111 2,111 2,111
GF transfer for IMP capital projects 7,995 5,830 5,260 6,534 7,151 4,876 5,930 5,930 5,930 5,930 5,930 5,930
Debt Service
Other
TOTAL USE OF FUNDS
Net Operating Surplus/(Deflcit)
Transfer to Infrasb’ucture Reserve
Net of Reserve Transfer
700 1,308 1,153 1,162 1,157 1,160 1,164 1,161 1,170 1,161 1,163 1,160
1,224 1,081 1,116 1,152 1,189 1,227 1,267 1,308 1,351 1,395 1,441 1,488
119,102 125,907 131,636 143,228 148,333 151,610 161,385 169,155 177,081 163,531 190,595 198,306
96 (453)(6,453)(11,368)(8,696)(7,014)(8,406)(7,496)(11,599)(13,529)(15,018)(15,207
(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)
(2,463)(8,453)(13,368)(10,696)(9,014)(10,406)(9,496)(13,599)(15,529)(17,018)(17,207)
EXHIBIT 2
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
3% ReducUon 2003-04, 2% Redu~on 200405
2001-02 2002-03 200304 2004-05 2005-06 200607 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
3%2%
Actual Adjusted reduction reduction
Revenues
Sales Taxes
Property Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Earnings
Other revenues
Reimbursements from Other Funds
Total Revenues
Transfer from Infrastructure Reserve
Transfers from Other Funds
TOTAL SOURCE OF FUNDS
Expenditures
Salades & Benefits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Allocated Expenses
Tota1 Expenditures
Transfers to Other Funds
GF transfer for non-IMP capital projects
GF transfer for IMP capital projects
20,085 20,000 20,335 21286 22,281 23,378 24,530 25,677 24,438 24,970 26,012 27,358
13229 13,644 13,556 13,522 14,516 15,728 17,356 19,152 20,751 22276 22,131 22,077
6,469 7,370 7,782 8,516 8,714 8,842 8,950 9,562 9,853 10,114 10,417 10,730
6,615 6,956 7,503 8,205 9,056 9,994 !1,029 12,172 12,033 12,257 13,404 14,726
8,408 8,440 8,632 9,230 10,008 10,902 11,887 12,902 13,796 14,630 15,308 16,534
54,804 56,410 57,808 60,759 54,575 68,844 73,752 79,465 80,871 84,247 87,272 91,425
13,071 14,748 15,125 15,512 15,910 16,387 16,879 17,385 17,907 18,444 18,997 19,567
6,401 6,209 6,780 7,044 7,386 7,676 8,038 8,386 8,723 9,060 9,394 9,770
4,359 3,811 4266 4,575 5,582 6,201 5,933 6,109 5,801 5,466 5,615 6,287
14,948 14,758 12250 12,580 13,084 13,607 14,192 14,803 15,293 14,891 14,997 15,393
11,841 11,827 12,300 12,792 13,432 13,969 14,667 15,547 16,325 16,815 17,487 18,187
50,620 51,353 50,721 52,503 55,354 57,840 59,709 62,230 64,049 54,676 66,490 69,204
3,346 2,306 3,614 4,264 2,015 3,143 3,237 3,335 3,435 3,538 3,644
13,774 14,335 14,548 14,934 15,434 15,897 16,374 16,726 17,228 17,745 18,277 18,826
119,198 125,444 125,383 131,860 139,537 144,596 152,979 161,659 165,482 170,102 175,577 153,098
72,370 78,637 81,301 87262 91,247 96,325 102,046 108,019 114,252 119,372 124,847 130,865
11,335 11,637 11,288 11,062 11,283 11,622 12,087 12,57!12,947 13,206 13,471 13,875
3,364 3,186 3,090 3,029 3,089 3,182 3,309 3,441 3,544 3,615 3,688 3,761
9,756 9,046 8,775 8,599 8,843 9,093 9,352 9,618 9,892 10,136 10,387 10,646
1,317 1,231 1,194 1,170 1,193 1,217 1,241 1,266 1,292 1,318 1,344 1,371
9,430 10,518 10,202 9,998 10,299 10,608 10,925 11 254 11,591 11,939 12,297 12,666
107,572 114,255 115,850 121,121 125,953 132,047 138,960 146,169 153,518 159,586 166,033 173,184
1,611 3,433 1,762 2,627 1,881
7,995 5,830 5260 6,534 7,15!
851 2,111 2,111 2,111 2,111 2,111 2,111
4,876 5,930 5,930 5,930 5,930 5,930 5,930
Debt Service
Other
TOTAL USE OF FUNDS
Net Operating Surplus/(Deficit)
Transfer to Infrastructure Reserve
Net of Reserve Transfer
700 1,308 1,153 1,162 1,157 1,160 1,164 1,161 1,170 1,161 1,163 1,160
1,224 1,081 1,116 1,152 1,189 1,227 1,267 1,308 1,351 1,395 1,44!1,488i
119,102 125,907 125,141 132,595 137,331 140,161 149,432 156,679 164,080 170,183 176,677 183,873
96 (463)242 (735)2,306 4,435 3,546 4,980 1,403 (81)(1,101)(774]
(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000}
(2,453)(1,758)(2,735)306 2,435 1,546 2,980 (597)(2,081)(3,101)(2,774]
Nov~’mber 2002 City (~/P.l,, Atto 15
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
EXHIBIT 3
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
%Change %Change %Change %Change %Change %Change %Change %Change %Change %Change %Change
Revenues
Sales Taxes
t-’ropeny i axes
Ul~lity User Tax
Transient Occupancy Tax
Other Taxes, Fines &
Penalties
Subtotal: Taxes
-0.42%1.68%4.68%4.67%4.92%4.93%4.68%-4.83%2.18%4.17°/o 5.17%
3.14%-0.64%-0.25%7.35%8.35%10.35%10.35%8.35%7.35%-0.65%-024%
13.93%5.59%9.43%2.33%1.47%122%6.84%3.04%2.65%3.00%3.00%
5.15%7.86%9.36%10.37%10.36%10.36%10.36%-1.14%1.86%9.36%9.86%
0.40%2.27%6.93%8.43%8.93%9.04%8.54%6.93%6.05%4.63%8.01%
2.93%2.48%5.10%6.28%6.61%7.13%7.75%1.77%4.17%3,69%4.76%
Service Fees & Permits
Joint Service Agreements
I~anTora unrvers~y)
Interest Earnings
Other revenues
Reimbursements from
Other Funds -0.12%4.00%4.00%
Total Revenues 1.45%-1.23%3.51%
Transfer from Infrastructure
12.83%2.56%2.56%2.57%3.00%3.00%3.00%3.00%3.00%3.00°/o 3.00°1o
-3.00%9.20%3.89%4.43%4.35%4.72%4.33%4.02%3.86%3.69%4.00%
-12.57%11.94%724%22.01%11.09%-4.32%2.97%-5.04%-5.77%2.73%11.97%
-1.27%-16.99%2.69%4.01%4.00%4.30%4.31%3.31%-2.63%0.71%2.64%
Reserve -31.08% 56.72% 17.99% -52.74% 55.99%3.00% 3.00% 3.00%3.00%
5.00%4.00%5.00%6.00%5.00%3.00%4.00%4.00%
5.45%4.47%3.23%4.22%2.92%0.98%2.81%4.08%
3.00%
Transfers from Other Funds 4.07%1.49% 3.00%3.00%
TOTAL SOURCE OF
FUNDS 5,24%-0.05%5.17%5.90%
Expenditures
Salaries & Benefits
Contract Services
Supplies & Materials
General Expense
Equipment
~,oce~eo ~-xpenses
3.00%3.00%2.15%3.00%3.00%3.00%
3.55%5.80%5,67%2.37%2.79%3.22%
8.66%6.58%9.52%4.57%5.57%
2,66%2.00%2.00%2.00%3.00%
-5.29%11.42%2.00%1.99%3.01%
-7.28%12.43%2.82%2.83%2.84%
-6.53%2.03%1.99%1.95%1.99%
11.54%12.99%5.10%3.00%3.00%
Total Expenditures 6.21%7.26% 7.51% 3.95% 4.78%
3.00%
4.28%
5.94%5.85%5.77%4.43%
4.00%4.00%3.00%2.00%
4.00%3.99%3.01%2.00%
2.84%2.85%2.85%2.47%
2.03%1.99%2.02%2.00%
3.00%3.00%3.00%3.00%
5.17%5.12%4.96%3.91%
4.59%4.82%
2.00%3.00%
2.00%2.00%
2.47%2.49%
2.00%2.00%
3.00%3.00%
4.00%4.26%
Transfers to Other Funds
GF transfer for non-IMP
capital projects
GF transfer for IMP
capital projects
Debt Service
Other
113.10% -48.67% 49.09% -28.40% -54.76% 148.04% 0.00% 0.00% 0.00%
-27.08%-9.78%24.22%9.44%-31.81%21.62%0.00%0.00%0.00%
86.86%-11.85%0.78%-0.43%0.26%0.34%-0.26%0.78%-0.77%
-11.68%3.21%3.22%3.23%3.24%3.24%3.25%3.26%3.27%
TOTAL USE OF FUNDS 5.71%4.71%8.64%3.56%2.21%6.45%4.81%4.69%3.70%
0.00%0.00%
0.00%0.00%
0.17%-0.26%
3.27%3.28%
3.79%4.05%
16 Cit.y t~i’P~do Alto
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
EXHIBIT 4
Based on 3% & 2% Cost Reduction Scenario
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007°08 2008-09 2009-10 2010-11
Actual Adjusted 3% reduction 2% reduclion
2011-12 2012-13
Budget Stabilization Reserve
Beginning Balance 23,616 22,674 22,724 23,963 25,829 26,653 27,675 29,275 30,695 32,143 33,336 34,606
BSR Funding 4,249 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500
Net Operating Surplust(Deficit)96 (463)242 (735)2,306 4,435 3,546 4,980 1,403 (81)(1,101)(774)
Yearly BAOs (2,963)(100)(100)(100)(250)(250)(250)(250)(250)(250)(250)(2501
Year End Savings 2,525 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Subtotal BSR Balance 27,523 25,611 26,366 26,628 31,384 34,338 34,471 37,505 35,347 35,312 35,486 37,081
Transfer to IR due to 18,5% Cap 4,849 2,887 2,403 799 4,731 6,663 5,197 6,810 3,204 1,976 880 1,069
Ending Balance 22,674 22,724 23,963 25,829 26,653 27,675 29,275 30,695 32,143 33,336 34,606 36,012
Infrastructure Reserve
Beginning Balance 18,788 30,189 29,889 29,986 27,172 27,639 32,287 34,340 37,913 37,782 36,323 33,666
Transfer out Capital Funding 0 (3,346)(2,306)(3,614)(4,264)(2,015)(3,143)(3,237)(3,335)(3,435)(3,538)(3,644)
Transfer in from BSR due to Cap 4,849 2,887 2,403 799 4,731 6,663 5,197 6,810 3,204 1,976 880 1,069
Other Funding 6,552 159 0 0 0 0 0 0 0 0 0 0
Subtotal IR Balance 30,189 29,889 29,986 27,172 27,539 32,287 34,340 37,913 37,782 36,323 53,666 31,091
Total General Fund Reserves 52,853 52,613 53,949 53,000 54,292 59,962 63,615 68,607 69,925 69,660 68,271 67,103
GENERAL FUND RESERVES
Reserves represent unencumbered "retained earnings" or operational savings, which may be used for emergency or
unplanned, one-time expenditures. Undesignated reserves total $52.9 million as of June 30, 2002, representing a 7.5
percent increase from the prior year’s $49.2 million. This amount includes both the Budget Stabilization Reserve (BSR)
and the Inf-rastructure Reserve (IR), with balances of $22.7 million and $30.2 million respectively. The City successfully
reduced expenditures in fiscal years 2001-02 and 2002-03 to mirror the loss of nearly 10 percent of revenues in each of
these years, thus maintaining adequate GF reserve levels. The base forecast shows reserve levels diminishing rapidly
over the next ten years if the City takes no action to curb expense growth.
Exhibit 4 depicts estimated reserve balances over the ten-year period, while incorporating the assumptions of the 2003-
04 and 2004-05 cost-reduction scenarios. The table includes the cumulative effects of each reduction. With total
reserves increasing 27 percent from the current $52.9 million to $67.1 million in 2012-13, there is some room in this sce-
nario to explore implementing a smaller reduction for 2004-05. The BSR maintains its reserve target of 18.5 percent of
GF expenditures. With infrastructure spending at par with reserve funding, the IR balance is projected to remain stable
and slightly increase from $30.2 million to $31.1 million.
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
CHAPTER THREE
FINANCIAL CHALLENGES
INTRODUCTION/OVERVIEW
The City of Palo Alto faces a number of known and
unknown financial challenges in the coming decade. The
most immediate challenge is the weak economy. To
address it, the City made permanent and one-time
expense reductions and enhanced revenues in 2001-02
and 2002-03. Given the strong probability of a more pro-
tracted economic downturn and the nature of currently
committed expenses, the City must now prepare a long-
range expenditure plan that will more permanently
reduce expenditures and services. Toward this end, staff
is preparing cost reduction scenarios as well as a priori-
tized listing of City services for Council review. Council
and staff will evaluate this list before the 2003-04 budget
process begins.
In addition to dealing with the effects of the recession, the o
City must cope with a number of long-term cost and reve-
nue issues. While some of these issues are incorporated ¯into the forecast, others are not. For example, rising
healtl~care and retirement costs and the loss of an auto
dealership are included while the long-term retiree medi-¯
cal liability estimated at $79.5 million is not.
NOTE: Those issues not included in the forecast axe
indicated below with a ;~
REVENUE CHALLENGES
THE CITY’S ECONOMIC/REVENUE BASE
The recession has highlighted a number of concerns
about the economic base that supports the City’s high
level of services to its citizens and businesses. These
include:
The closure and relocation of businesses generating substan-
tial sales taxes (e.g., loss of Carlsen Porsche to Redwood City
and potential move of Anderson Honda)
The transformation of the Stanford Research Park from firms
that produce taxable sales tothose that provide non-taxable
research and design services $~
State threats to local revenues either through revenue take-
aways (e.g., property tax and vehicle license fees) or through
regional tax reallocation plans (e.g., sales and property taxes)
¯Competition from surrounding malls, "big-box" stores, and
supermarkets #:
¯Competing priorities such as the need for housing and the
need for additional space by businesses
¯ The transition within the City from retail businesses generat-
ing sales taxes to service businesses that do not generate sales
taxes
On the last concern, Council has acted to maintain
ground floor retail space in the midtown and downtown
areas of Palo Alto.
Since businesses are responsible for generating approxi-
mately 55 percent of the City’s revenue, an understanding
of their contribution is important. Sales tax revenues, for
example, represent $20.0 million or 17 percent of the
City’s $126.2 million revenue base. Sales tax revenue is
extremely sensitive to the performance of a small group
of key businesses, as demonstrated by the following:
The top 25 sales tax generators yield nearly 50 percent or $10
million in sales tax
The top 100 businesses provide 62.6 percent or $10.9 million
of sales taxes
Automobile dealerships produce 14 percent or $2.5 million in
sales taxes
The Stanford Mall department stores and a major electronic
retail outlet generate 21.2 percent or $3.7 million in sales
taxes
Following national trends, automobile dealerships, for
example, are searching for sites that offer high visibility
and easy accessibility along major highways. In addition,
they are looking for expanded storage space to accommo-
date high volume sales. If the City cannot accommodate
some of these needs, it will lose a critical resource. The
pie charts on the next page show how important automo-
bile sales have become over time in contributing to City
sales tax revenue.
In addition to sales tax, businesses contribute to key reve-
nues such as Transient Occupancy, Documentary Trans-
fer, Property, and Utility Users taxes. Examples of
revenue generated from these sources and how they fund
City programs are provided in the table below.
Recognizing the importance of businesses to the City’s
finances, the Mayor has formed a Committee on Preserv-
ing the City’s Economic Base. This group consists of four
Council members and upper management from the City
Manager’s and Auditor’s offices as well as from the Plan-
ning, Utilities and Administrative Services depart-
City ,~t Pah, Air,,November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ments. To date the Corrunittee has
gathered data on revenues from busi-
nesses, initiated an outreach program to
gauge the needs of businesses in Palo
Alto, and identified key economic trends.
Committee members have visited auto
dealerships, high tech firms, hotels, malls,
and other retail outlets. Businesses have
raised issues such as the efficiency and
coordination of the permitting and plan-
ning process, signage, zoning, and a gen-
eral lack of awareness of business
contributions to the community. The
Committee intends to address some of
these concerns while maintaining a bal-
anced approach to the needs of residents
and businesses.
In addition to efforts by the Economic
Base Committee, City staff is assisting
downtown merchants in implementing a
Business Improvement District (BID).
Currently, merchants are conducting
business outreach meetings and plan to
present a petition for the formation of a
BID to the City Council in Fall 2002 or
Winter 2003. BIDs generally draw new
customers through advertising, aesthetic
improvements, and business coordina-
tion.
City Programs
Program City Tax Possible Source of Tax
Costs Revenues Revenues
Community Services
Children’s Performing Arts $1,088,483
$1,271,758Arts Commun~ Partnerships $250,216
Arts Facility Operations $332,438 $350,000
City Parks and Fadlities
Junior Museum and Zoo
Fire
Fire Suppression Service
Police
Traffic Enforcement
School Safety
Public Works
Sidewalk Maintenance
$2,236,572 $2,055,084
$822,469 $850,000
$1,857,950 $1,855,736
$1,494,562 $1,149,672
or $1,653,692
$205,103 $196,000
Average TOT Revenue in a year from One
Maior Hotel
Average Sales Tax Revenue in a year from
one Auto Dealership
City’s Telephone UUT for one year
Sales Tax from one Major Retailer in a
year
Average sales tax from one mid-size or tw(
small size geographic areas in one year
Documentary Transfer Tax from
Commercial Transactions in a year
TOT - 25% decline in a year
Sales tax from two-three large size
restaurants in a year
$718,203 $748,378 Sales tax from one large technology
company in a year
Major Economic Segments - Sales Taxes 1992
Apparel
Restaurants Stores
14%10%
Office Auto Sales
Equipment-., & Used
6%8%
M~scell-Business
aneous
Retail 6%
11%
Furniture/Department
Applianc Stores
8%21%
Equiprn
16%
Major Econom ic Segments - Sales Taxes 2001
Apparel
Restaurants Stores
! 5%8%
Office
Equipment--.
16%
Auto Sales
& Used
17%
Business
Services
4%
IV~scellaneou
s Retail Department
12%Stores
Furniture/17%Bectronic
Appliance Equipment6%5%
LONG RANGE FINANCIAL PLAN
Forecaxt 2002-2012
POTENTIAL STATE ACTIONS
As a result of the economic downturn and the State’s
energy crisis, the 2002-03 State budget includes $8.2 bil-
lion in cuts, $4.3 billion in loans, fund shifts and transfers,
and $2.4 billion in new revenue. According to State legis-
lative estimates, California will begin its next fiscal year
with an unprecedented $10 billion deficit. In fact, the
Legislative Analyst’s Office predicts $10 billion to $12 bil-
lion annual deficits for the next five years.
During its last budget crisis, the State solved its funding
gap by reducing and reallocating local jurisdictions’ reve-
nues. The most prominent example of such action was
the ERAF shift of property taxes from the City to school
districts. This shift has cost the City nearly $30 million
since its origin in 1992-93. Other examples of revenue
taken by the State include booking fees, cigarette tax reve-
nue, and vehicle citation fees. There is a strong likelihood
the State will begin another round of takeaways given the
severity and length of the current recession.
As stated in Chapter 2, the recent rebate of Vehicle
License Fees (VLF) is a likely target for State action. The
City could lose a maximum of $2.2 million of the $3.2 mil-
lion VLF revenues it receives annually. Other, potentially
smaller impacts to the City’s revenue sources include the
elimination of Police Department booking fee reimburse-
ments ($158,000), a reduction in the Public Library Foun-
dation grant ($92,000), a reduction in technology grants
for public safety ($49,000), and a reduction in arts grants
($17,000). ~
EXPENSE CHALLENGES
PENSION COSTS
CALPERS calculates the pension costs to the City as a
percentage of current payroll, with internal variables
such as number of retirees, retirement age threshold, and
payout benefit varying by employee bargaining group
(Fire, Police, Miscellaneous). External variables such as
the performance of the underlying CalPERS investment
portfolio vis-a-vis projected investment returns as well as
"prevailing industry practice" benefit levels also factor
into determining the annual contributions to pensions.
This long-range plan includes the 2000-01 prevailing
practice benefit change for public safety retirees; an
increase from "2 percent at 55" to "3 percent at 50" or 3
percent pay for each year of service when the employee
retires. There is some indication that the prevailing prac-
tice also is shifting for the other City employees from a "2
percent at 55" benefit to a "2.7 percent at 55" plan. The
City’s actuarial consultants have estimated this benefit
level to become prevailing practice near the 2004-05 fiscal
year, increasing the annual pension costs by approxi-
mately $3.0 million in the first year. ~
The recent poor performance of the CALPERS investment
portfolio also influences future City payments for the
employee pension plans. Staff has incorporated a fiscal
2001-02 loss of 6 percent along with projected investment
gains of 5 percent in subsequent years into this Long
Range Financial Plan, as suggested by the actuarial con-
sultant. If, however, the returns on the portfolio fall
below the above assumptions, future year costs will
increase. #
RETIREE MEDICAL
The City offers its vested retirees lifetime fully paid medi-
cal coverage, and partially paid coverage for their depen-
dents. In 2002, 45 percent of the cost of dependent
coverage was covered; in 2003 that coverage increases to
50 percent with the percentage increasing 5 percent per
year until full-coverage is reached.
Annual retiree benefit costs are funded from operating
funds, and in 1994, the City also began setting aside addi-
tional funds each year towards the liability of "unfunded"
retiree medical benefits. These unfunded benefits repre-
sent the present value of future benefit expenses for cur-
rent employees and retirees. The City continues to
annually fund a reserve to pay for future retiree medical
premiums. In June 2002, that set-aside reserve was val-
ued at $16.4 million.
The City Manager has begun discussing with our labor
unions the need to cap the City’s funding of dependent
care coverage and to create a two-tier system with a much
lower benefit for new employees. The City Manager will
be returning to the Council with a cost containment pro-
posal for the retiree medical benefits by the end of fiscal
2002-03.
HEAL THCARE
According to a recent report by the Kaiser Family Foun-
dation, employer-sponsored health benefit premiums are
rising at their fastest rate in a dozen years. PERS will be
paying an average of 25 percent more in 2003 to insure its
1.2 million members and has dropped two health care
providers to help mitigate costs. Moreover, PERS is
expected to combine their two preferred-provider plans
2(I Cily qf P~do Ah,~November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
(PPO) effective in the 2004 calendar year. While cost sav-
ings and efficiency gains are cited when plan options
change, the trend indicates increased out-of-pocket costs
for the employee with a reduction of benefit at the pro-
vider level.
This long-range plan includes healthcare growth rates in
the 10-15 percent range over the next ten years. Contin-
ued financial weakness among healthcare or insurance
providers, or price spikes outside of this range could
push growth rates above expected levels. The City’s
healthcare package includes a 100 percent employer-
sponsored medical benefit; thus the City retains the entire
cost risk for premium increases. Staff will continue to
work towards slowing the growth of the City’s health
care costs.
STORM DRAINAGE FUND SUBSIDY
As a consequence of voter disapproval of the 2000 storm
drain fee proposal, the Storm Drainage Fund receives an
annual transfer from the GF to cover its operating short-
fall. This shortfall represents the difference between the
revenues collected from residential storm drain fees and
the operating expenses to operate and maintain the util-
ity. Although the annual storm drain subsidy of $1.0 mil-
lion is included in the long-range plan, it continues to
represent a major draw on GF resources and reduces flex-
ibility in addressing other challenges. This subsidy will
rise in tandem with salary and benefit increases for main-
tenance work over time. For example, a 3 percent salary
increase, the GF’s subsidy increases nearly $24,000.
Moreover, the current subsidy and storm drain budget do
not provide funding for much needed utility capital
improvements.
The City is in the process of developing a plan to address
the funding issues presented by this utility subsidy. In
March 2002, the City Manager formed a Blue Ribbon
Committee of community members to develop a storm
drain funding proposal. The Committee met on a weekly
basis to assess the storm drain system, determine and pri-
oritize capital improvements, develop financing options,
and present recommendations to address the commu-
nity’s storm drain needs. The Committee finalized its
recommendations and delivered a final report to the City
Manager in October. This report along with the City
Manager recommendations was also presented to Coun-
cil in November.
NEW LIBRARY PLAN
The New Library Plan, notable for the recommended
reconstruction of several City library facilities, also
includes an increased service and staffing level that will
require additional operational funding. With the Novem-
ber 200.2 rejection of Measure D by voters; however, the
funding for the Mitchell Park library/community center
rebuild as well as the Children’s library renovation has
not been secured. The lack of funding postpones the
related operating component of this capital program,
including $3 million for furnishings and $2.2 million per
year for staff, operations and maintenance. #
The New Library Plan carries with it implications for the
GF’s operating budget. In the short term, staff will rec-
ommend amending the municipal code to create the
Library Department and reallocate current resource lev-
els from the Community Services Department. Develop-
ing the new department is seen as a necessary step in the
recruitment of a new Director of Libraries, to make the
position comparable to those around the region.
To maintain current library service levels, it will also be
necessary to address the perceived shortfall in current
Library staffing. The economic downturn has forced staff
to seek internal cost savings and operational restructur-
ing in order to fully staff present operations. It is possi-
ble, however, additional resources will be requested as
part of the 2003-05 budget process either for the establish-
ment of the Library Department or as a result of the
present service level review.
NEW INFRASTRUCTURE AND OTHER PROJECTS
While this long-range plan includes remaining funding
for the IMP, these are other infrastructure needs on the
horizon without identified funding sources. Some of
these projects include:
¯Turning SOFA land into a park at an estimated construction
cost of $1.3 million g
¯Renovating the Roth building with estimated costs of $9 mil-
lion g
¯Building an expanded police facility at an estimated cost of
$38 million to $45 million #
¯Major traffic calming efforts estimated at $5 million g~
¯Finalizing the Greer Park Master Plan estimated at $1.5 mil-
lion #
¯ Civic center waterproofing project projected at $5 million #
November 2002 City ~/’Pa/,~ ,41t~) 2!
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
Implementation of leaf blower ordinance at $2 million;
deferred until fiscal 2007-08 (expected to decrease in future
years due to technology advancements) $
¯Implementation of the Downtown Residential Parking Pro-
gram at $0.3 to $0.6 million annually; deferred until fiscal
2003-04 (expected to become cost neutral) .~
In addition to new infrastructure projects, there are other
plans that may impact City finances. These include, for
example, providing affordable housing, promoting sus-
tainability, and modernizing the City’s computer systems
and programs. These and other unanticipated expenses
will require new funds or a reallocation of existing
resources.
REFUSE FUND
The final landfill closure is scheduled to occur in August
of 2011. The GF will continue to receive rent payments of
approximately $5 million annually from the Refuse Fund
until then. Because of a planned redistribution of the GF
rental payment over a longer number of years, the City
will continue to receive rent through 2014-15. However,
the rent payment is expected to decrease in 2013 and ulti-
mately be eliminated. In 2013-14 the rent payment is
expected to diminish by $1.2 million and by 3.3 million in
2014-15. This loss will present a major shortfall in
resources that will require advanced budget planning.
CONCLUSION
The Long Range Financial Plan is a model, designed to take a forward look, and project what will occur given a certain
set of parameters. The Plan cannot precisely predict revenues and expenses, but it can help the City identify its priori-
ties, allocate its resources efficiently, and continue to deliver high quality services to the community.
For the future, the General Fund budget must be adjusted to correct the expenditure trend, insuring that we maintain
sufficient reserves and revenue growth. In doing this, the fiscal year 2003-2005 budget must be developed in a
thoughtful and reasonable manner, so that we maintain community and organizational values, and accomplish the
following:
¯Departments will develop budget scenarios that permanently reduce operating expenditures by 3% and 5%
¯In allocating resources, continue to recognize the City Council’s Top 5 Priorities
¯Expenditure review/reductions wi!l include a service prioritization process in order to correctly evaluate essential
vs. discretionary services
¯ Departments will review all current and future staff vacancies or retirements looking for opportunities to re-organize
by achieving operational efficiencies
¯ Clearly communicate the plan indicating the reductions and service impacts to the City Council and the community
¯ City Manager will continue to work on developing plans that effectively control future health care, pension and
retiree medical cost
Like any other local jurisdiction or business, the City of Palo Alto faces a plethora of challenges. By anticipating those
challenges and estimating how they will affect long-term finances, the community, Council and staff can proactively
plan the necessary solutions.
LONG RANGE FINANCIAL PLAN
ATTACHMENTS
Attachment #1
1990 55,900
1991 55,500
1992 55,700
1993 56,300
1994 56,700
1995 56,700
1996 57,000
1997 57,800
1998 57,900
1999 58,300
2000 58,500
2001 60,200
2002 60,500
Source: US Census and California
DOF
Attachment//2
All Urban Consumer
San Francisco-Oakland-
San Jose MSA
State of
California
Annual %
Year Annual Change Annual % Change
1990.132.1
1991 137.9 4.39%
1992 142.5 3.34%
1993 146.3 2.67%2.60
1994 148.7 1.64%1.40
1995 151.6 1.95%1.70
1996 155.1 2.31%2.00
1997 160.4 3.42%2.20
1998 165.5 3.18%2.00
1999 172.5 4.23%2.90
2000 180.2 4.46%3.70
2001 189.9 5.38%4.00
Attachtnent #3
28,000
26,000
24,0O0
22,000
20,000
18,000
16,000
14,000
12,000
10,000
Actual Sales Tax and Trend Lines $000
199~92 1092-93 1993-94 199z;-95 1995-96 #96-97 1:297-98 1998-99 1999-00 2000-01 2001-02
-------,..--Linear (All Revenue Years)
.. -’ ,, Linear ( Years 1991-92 and 2001-02 only)
November 2002 City of P./o Alto 23
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ATTACHMENTS
Attachtnent #4
30,000
25,000
20,000
15,000
10,000
5,000
0
California GSP and the City of Palo Alto’s Sales Tax Revenues $000
81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00 01-02
+ PA Sales Tax + Calif GSP
1,400,000
1,200.000
1,000,000
800,000
600,000
400,000
200,000
0
Attachment #5
30,000
25,000
20,000
15.000
10,000
5,000
0
City Sales Tax Receipts- The Last Twenty Years $000
81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00 01-02
24 City ~).l’Pa!o Alto November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ATTACHMENTS
Attachment #6
Property Tax Receipts - The Last Twenty Years
$000
14.000
12.000
10,000
8,000
6,000
4,000
2,000 ............................... : ................
81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00 Jan02
Attachment #7
12.000
10,000
8,000
6.000
4,000
2,000
0
TOT Receipts - The Last Twenty Years
$000
81-82 83-84 85-86 87-88 89-90 91-92 93-94 95-96 97-98 99-00 01-02
November 2002 CiL~: <~/’P~zh, Atm 25
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ATTACHMENTS
Attachlnent #8
City of Palo Alto Utility Taxes - The Last Rfteen Years
$000
8000
7OO0
6000
5OO0
4000
3000
2000
1000
0
87-88 89-90 91-92 93-94 95-96 97-98 99-00 01-02
NOTE: Utilities Users Tax was implemented in 1987.
Attachlnent #9
5,000
4,500
4,000
3,500
3.000
2,500
2.000
1.500
1.000
Documentary Transfer Tax - The Last Nine Years
$000
92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02
NOTE: Documentary Transfer Tax was implemented in 1992.
26 (’ib" of Pat~, Aim November 2002
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ATTACHMENTS
Attachment #10
Per Capita Revenue Decrease or Flat Reflecting strong economic growth, City tax revenues increased
steady in the 1990’s. But beginning in mid-2000, with the
economic downturn, revenues have declined significantly.
Per Capita Expenditure
Sales Tax Revenue
Employee per Capita
Discretionary Fund Balances
Long Term Debt
Increase
Decrease or Flat
Increase
Decrease
Increase
City expenditures increased in 2001-02 and 2002-03 to support
the Infrastructure Management Plan, Zoning Ordinance Update
and some traffic calming and maintaining current services.
Future adjustments are expected due to cost increases associated
with retirement and medical benefits.
Sales tax receipts fluctuated between increases and decreases as
the economy expands or contracts. Strong growth was
experienced in the late 1990’s. But this revenue is experiencing
large declines since early 2000 and is expected to remain
depressed for the near term.
Steady increases
Based on "$22 million Solution" Budget Stabilization Reserve
has declined from 20% to approximately 18% of total operating
budget. In addition, GF Emergency Reserve has been
transferred to Infrastructure Reserve in 2002.
City’s direct debt outstanding gradually decreased from
approximately $13.3 million in 1999 to $10.8 million in 2001.
No new debt issuance is expected at the this time.
Popul~ion
Assessed Value
Increase/Decrease
Decrease
Palo Alto’s population count stayed fairly stable for the last ten
years. Between the 1990 and 2000 census, Palo Alto’s
population increased by about 4%. However, according to
ABAG statistics, the day population or people working in Palo
Alto increased by about 20% during the same time.
Assessed value after slow growth and a decline in 1997 has
increased by about 8 to 13% each year since 1998. The current
economic slow down has not affected this growth. The
questions is how far can this continue without some correction
LONG RANGE FINANCIAL PLAN
Forecast 2002-2012
ATTACHMENTS
Attachlnent #11
City Programs
Community Services
Children’s Performing Arts
Arts Community Partnerships
Arts Facility Operations
City Parks and Facilities
Junior Museum and Zoo
Fire
Fire Suppression Service
Police
Traffic Enforcement
School Safety
Planning
Field Inspection
Public Works
Sidewalk Maintenance
Program City Tax
Costs Revenues
$1,088,483 $1,271,758
$250,216
$332,438 $350,000
$2,236,572 $2,055,084
$822,469 $850,000
$1,857,950 $1,855,736
$1,494,562 $1,149,672
$205,103 $196,000
$957,101 $950,000
$718,203 $748,378
Possible Source of Tax Revenues
Average TOT Revenue in a year from One
Major Hotel
Average Sales Tax Revenue in a year from one
Auto Dealership.
City’s Telephone UUT for one year
Sales Tax from one Major Retailer in a year.
Average sales tax from one mid-size or two
small size geographic areas in one year.
Documentary Transfer Tax from Commercial
Transactions in a year
Sales tax from two-three large size restaurants
in a year.
Sales tax from One Major Electronic Equip
Retailer in one year.
Sales tax from one large technology company
in a year
28 CiLy" of Pato Aim November 2002