HomeMy WebLinkAboutStaff Report 3248
City of Palo Alto (ID # 3248)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 12/18/2012
City of Palo Alto Page 1
Summary Title: Fiscal Years 2013 to 2023 Long Range Financial Forecast
Title: Review of Fiscal Years 2013 to 2023 Long Range Financial Forecast
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and comment on the attached draft
forecast of revenues and expenses and forward it to the full Council for review and input
Executive Summary
The City’s General Fund Long Range Financial Forecast (LRFF) illustrates the City’s financial
future based on a variety of assumptions. It is a fiscal portrait of the next ten years painted at
one point in time. (See Attachment A.)
The LRFF shows better “bottom line” results than in last year’s presentation. This is due to
employee benefit concessions, budget reductions, and higher revenues. The City must
continue, however, to find additional structural savings as benefit costs are increasing at a
higher rate than revenue increases. Although healthy revenue increases ranging between 1 to 4
percent are projected over the next 10 years, expense forecasts begin to exceed revenues in
Fiscal Year 2021. In addition, funding for General Fund infrastructure improvements, a key City
priority, continues to be a challenge. To maintain prudent fiscal stewardship, the City must
continue to explore its benefit structure, alternative forms of service delivery, and more
efficient operations.
We are also including a summary of the California Public Employees’ Pension Reform Act of
2013 (PEPRA) that was enacted in fall of 2012. (See Attachment B.)
City of Palo Alto Page 2
Background
Attached to this report is the City’s updated General Fund LRFF for Fiscal Years 2013 through
2023. The LRFF identifies key issues that affect the City’s future financial condition and will
guide the upcoming Fiscal Year 2014 annual budget process.
Discussion
This report serves as a forecast and is not a plan or commitment. It is contingent upon a
number of assumptions which are outlined in the report and serves as a view of the future at
one point in time. The goal is to identify key issues that must be addressed in the near term to
improve the City’s long-term outlook. Below is a summary of the Base Model contained in the
attached report.
Table 1:Table 1:
Base Model Base Model
Fiscal Years 2013 to 2023 Fiscal Years 2013 to 2023
Projected
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Revenues 154,593 156,817 163,384 168,722 174,176 179,664 185,790 192,232 197,624 203,540 210,614
Total Expenditures 153,401 156,246 161,190 165,620 171,671 177,965 185,547 191,412 198,602 206,122 213,992
Net Surplus (Gap)1,191 571 2,194 3,102 2,506 1,699 243 820 (978) (2,582) (3,379)
Budget Stabilization Reserve
Projection 29,313 29,884 32,079 35,180 37,686 39,385 39,628 40,448 39,470 36,888 33,510
Minimum Reserve - 18.5%28,379 28,905 29,820 30,640 31,759 32,924 34,326 35,411 36,741 38,133 39,589
Amount Exceeding/(Below)
Minimum 934 979 2,259 4,541 5,927 6,462 5,302 5,037 2,729 (1,244) (6,079)
Attachments:
Attachment A: Long Range Financial Forecast Fiscal Years 2013 to 2023 (PDF)
Attachment B: AB340 Pension Reform Summary (DOCX)
LONG
RANGE
FINANCIAL
Fiscal Years 2013 to 2023
FORECAST
Finance Committee Draft—December 18, 2012
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY 1
II. ECONOMIC OUTLOOK 3
III. UPDATED MODEL 6
CHARTS:
- 2013-2023 BASE MODEL 20
- PERCENTAGE CHANGES IN BASE MODEL 22
IV. RESERVES 24
V. ALTERNATE SCENARIOS 25
VII. APPENDIX 28
VIII. ENDNOTES 30
VI. CHALLENGES & CONCLUSIONS 26
EXECUTIVE SUMMARY
This forecast summarizes the General Fund outlook for Fiscal Years (FY) 2014 through 2023. Rather than a
prediction or commitment, a forecast is a financial snapshot based on a number of assumptions. This Long
Range Financial Forecast (LRFF) is a tool to allow staff and Council members to see the longer‐term results
of choices made up to date, and identify issues that must be addressed in the near term in order to improve
the City’s long‐term outlook.
The national and state economies continue to show improvement. At the national level, growth in the next
one to two years ranges between 2‐3 percent, with potential growth of over 3 percent in 2014. With Cali‐
fornia being one of the top ten labor markets in the country, a 1.5 percent unemployment rate decrease
between September 2011 and 2012, a strong export market, and concentrated interest of venture capital
investors in Silicon Valley, the state has cause for optimism. Locally, job growth is steady and the housing
market increasingly robust. A few recent challenges for the City, such as providing adequate parking down‐
town and at California Avenue, reflect the noticeable increase in economic activity.
FY 2011 and 2012 ended with net positive results. FY 2011 ended with a $3.2 million General Fund surplus,
and FY 2012 financial results included a $4.5 million surplus. Therefore, staff recommended a transfer or
$7.6 million from the General Fund to the Infrastructure Reserve to support of the Council’s Infrastructure
priority.
The LRFF Base Model shows a continuing positive trend. FY 2013 is projected to end with a $1.2 million sur‐
plus. In the LRFF Base Model, the combined Net Surpluses for FY 2014 to 2023 (ten years) are $4.2 million.
The Base Model can be found on page 20 of this report. Below is a summary.
The Base Model includes two assumptions indicated by Council: (1) 10 percent annual medical cost in‐
creases from FY 2014 on and (2) 3‐percent annual pension rate increases beginning FY 2017. The PERS actu‐
arial report received November, 2012 provides the base rates used in FY 2014 to 2016. PERS rates used in
this forecast can be found on page 17 of this report.
EXECUTIVE SUMMARY
Projected
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Revenues 154,593 156,817 163,384 168,722 174,176 179,664 185,790 192,232 197,624 203,540 210,614
Total Expenditures 153,401 156,246 161,190 165,620 171,671 177,965 185,547 191,412 198,602 206,122 213,992
Net Surplus (Gap) 1,191 571 2,194 3,102 2,506 1,699 243 820 (978) (2,582) (3,379)
Budget Stabilization Reserve
Projection 29,313 29,884 32,079 35,180 37,686 39,385 39,628 40,448 39,470 36,888 33,510
Minimum Reserve ‐ 18.5% 28,379 28,905 29,820 30,640 31,759 32,924 34,326 35,411 36,741 38,133 39,589
Amount Exceeding/(Below)
Minimum 934 979 2,259 4,541 5,927 6,462 5,302 5,037 2,729 (1,244) (6,079)
BASE MODEL SUMMARY
2
The Base Model also includes savings from the recent agreements with the Palo Alto Police Officers’ Associa‐
tion (PAPOA), the Service Employees International Union (SEIU) and the Management/Professional group.
The savings from these three agreements add to $2.7 million in FY 2013.
Additional assumptions incorporated into the Base Model are detailed beginning on page 6.
In addition to the Base Model, two alternate scenarios are included. One allocates additional funding to the
Capital Fund, creating additional expenditures of $36.8 million and bringing the cumulative surplus of $4.2
million down to a combined deficit of $32.6 million. The other assumes 4.5% annual PERS rate increases from
2017‐2023, rather than the Base Model’s assumed 3% increases. This scenario changes the combined bottom
line from a $4.2 million surplus to $22.5 million deficit from FY 2014‐2023—a total negative change of $26.7
million. Both scenarios can be found beginning on page 24 of this report.
The following pages of this report provide a summary of national, state, and local economic outlook; the up‐
dated Base Model, the assumptions used, and a brief discussion of major categories; two alternative scenar‐
ios for pension cost and increased funding to infrastructure; and a summary of employee concessions to date.
EXECUTIVE SUMMARY
3
ECONOMIC OUTLOOK
Economic growth – on national, state, and local levels ‐ has finally begun to look more robust in the past year.
The following indicators contribute to the impression that the economy is on a more stable footing:
National
• Predictions for growth in next 1‐2 years range from 2‐3% (Beacon Economics) to potentially above 3% for
2014 (Anderson School of Business Forecast).
• Home values are now 2% to 3% above where they were last year at this time. See Housing Summary Ta‐
ble on page 4 for details on national, state and local housing market progress.
• In September, the national unemployment rate fell to 7.8%, its lowest level since January 2009, followed
by a 0.1% increase in October. So far in 2012, overall job growth has averaged 143,000 a month, com‐
pared with 153,000 in 2011.1 The small increase in October is attributed to the increasing re‐entry of
workers into the work force.
• Lower labor costs helped push corporate profits to a record 10.6 percent of US GDP in the first three
months of 2012.2
ECONOMIC OUTLOOK
HOUSING MARKET SUMMARY
USA • Home values are now 2% to 3% above where they were last year at this
time.3
CALIFORNIA • Since hitting bottom in April 2009, the median price of a home is up
more than 24%.
• Beacon Economics expects home prices to grow at roughly 7% in 2012 at
about 5% in 2013 before settling out in the mid‐3% range in 2016‐2017.4
• Sales of existing, single family detached homes were up 15.3 percent
from a year earlier (July to July). Pace of existing home sales during first
seven months of 2012 was up 7 percent from the same months of
2011.5
SF BAY AREA • Single‐family home prices climbed 16 percent in the Bay Area between
September 2011 and September 2012.
• Bay Area home values increased 8.2 percent between the 3rd quarter of
2011 and that of 2012, but are still down 29.5 percent from their peak in
2006.6
• Silicon Valley home prices are close to an all‐time high. In the 3rd quar‐
ter of 2012, Los Altos, Palo Alto, and Burlingame reached home prices
just several percentage points away from peak levels in 2008.7
4
State
• California remains one of the top ten labor markets in the country. The state accounted for half
of all the jobs created nationwide in May and all of the job growth in the US in June.8
• The state unemployment rate declined to 10.6% in August and 10.2% in September, down from
11.7% in September 2011. Moreover, state job growth was broad‐based. Every sector besides
Farm, Manufacturing and Government, posted job growth over the last 12 months. Construc‐
tion has led the charge adding 6% to its payrolls.9
• UCLA Anderson Forecast predicted unemployment levels of 9.8% in 2012 and 8.5% in 201410 ;
Beaconomics forecasts job growth of 2% through 2012 and 2013, increasing to 2.5% to 3.0% per
year from 2015 to 2017. Taxable sales rose 9.2% on a year‐over‐year basis in Q1 2012, and are
forecasted to grow an average of 7% over the next year, reaching their pre‐recession peak by
the end of 2012.11
• Venture capital investments continue to be concentrated in Silicon Valley and California vs. rest
of nation.12
• See Housing Market Summary, page 4 for info on the state housing market.
Local
• The Bay Area has been the strongest regional economy in California. Two of its three major ur‐
ban centers, the South Bay and the SF‐San Mateo‐Marin region, in recent months have posted
the fastest rate of annual employment growth in the entire country.13
• Total nonfarm employment in the San Jose area increased for each of the last 10 months and
has now added back 83% of all nonfarm jobs lost in the South Bay since March 2008. The tech‐
nology industry has led the way.14
• Caltrain Annual Passenger Counts show a 15.7% increase in ridership to Palo Alto between Feb‐
ruary 2011 and February 2012.15
• Home prices in Silicon Valley are at an all‐time high. (See Housing Table on page ___ for de‐
tails.)
• Palo Alto is seeing a noticeable increase in commercial activity, as evidenced by the opening of
several new retail stores, and a renewed dearth of parking capacity, with Council and staff now
weighing a range of solutions
• The last two years have been a period of steady growth in revenues for local hotels, and five
hotels are in the pipeline, including:
♦ Hilton Garden Inn: 175 Rooms. Expected opening: 2014
♦ Hilton Homewood Suites: 138 Rooms, Expected opening, 2014
♦ Casa Olga: 86 rooms. Approved July 23, 2012. Renovations are currently under con‐
struction. Expected opening, summer 2013.
♦ Mings (1700 Embarcadero): 147 Rooms. Council approval requires that building permits
must be obtained and construction commence must start by April 2014.
♦ Westin annex (711 El Camino Real) (Clement): 23 room expansion. Preliminary architec‐
tural review occurred in May 2012. No formal application has been received.
ECONOMIC OUTLOOK
5
ECONOMIC OUTLOOK
IMPACT OF ECONOMIC OUTLOOK ON ASSUMPTIONS USED IN MODEL
As a result of the factors discussed above, the Forecast includes relatively healthy growth in sales, property,
transient occupancy and documentary tax revenues. The following chapter discusses each revenue source in
detail.
Unemployment Rates, 2011‐2012
Source: EDD Labor Market Information Division, October 19, 2012
Sept. 2011 Sept. 2012
(prelim.)
Palo Alto Civilian Unemploy‐
ment Rate
5.1% 4.2%
Santa Clara County Unemploy‐
ment Rate
9.6% 7.9%
CA Unemployment Rate
11.5% 9.7%
US Unemployment Rate
8.8% 7.6%
6
UPDATED MODEL
ASSUMPTIONS INCLUDED IN THE MODEL
The following describes factors assumed in the Base Model. Some descriptions refer to the Compound An‐
nual Growth Rate, or CAGR, which is the average rate of growth over a period of time for a revenue or ex‐
pense category. The Base Model uses the CAGR over FYs 2008 to 2012, as noted in the discussions of each
revenue and expense category, as a guideline for future rates of increase.
The FY 2013 revenues and expenditures include a number of one‐time expenditures and savings. For fore‐
casting purposes, beginning FY 2014, the Base Model does not include these one‐time items. During the an‐
nual budget process, staff will have the opportunity to review the impacts of operational changes and deter‐
mine whether positions can be permanently eliminated and whether one‐time cost saving items can be sus‐
tained on an ongoing basis.
Specifically, the Base Model removes from the FY 2014 base budget the following:
• $1.1 million salary and benefits net increase due to the release of previously frozen positions and budget
reductions (increasing FY 2014 expenditures)
• $0.2 million in one‐time, non‐salary costs, including $80,000 for a Police Service Study; $50,500 for Com‐
prehensive Plan funding; and $70,000 for an organizational study of the Planning and Community Envi‐
ronment department. (decreasing FY 2014 expenditures)
• The payback of a $4.9 million loan to the Technology Fund. The last payment of $1.2 million on this loan
was completed in FY 2013. (decreasing FY 2014 expenditures)
In addition to these items, the FY 2014 projected budget assumes a one‐time net decrease in revenues of
$1.4 million for the Golf Course Reconfiguration project. The entire ten‐year period includes an assumed $1
million in additional operational expenses attributable to the Library renovations.
Recent agreements with the Palo Alto Police Officers’ Association (PAPOA), the Police Management Associa‐
tion (PMA), Service Employees International Union (SEIU), and the Management/Professional group – result‐
ing in a combined savings of $1.9 million in FY 2013 – are included in the Base Model.
Revenue increases ranging from 1 to 4 percent are projected over the next 10 years. Although this is a good
sign of improved city resources, looming pension and retiree medical obligations and infrastructure needs
exceed available resources. The most recent valuation report from CalPERS increases the FY 2014 City contri‐
bution by 1.6 percent and 3.4 percent for the City’s Miscellaneous and Safety groups, respectively, and re‐
UPDATED MODEL
7
sults in $1.8 million in additional General Fund expense for FY 2014 compared to FY 2013. Furthermore, the
General Fund’s retiree medical obligation is $9.1 million in the coming FY and is expected to grow 3.25 per‐
cent annually.
As recommended by the Infrastructure Blue Ribbon Commission (IBRC) report (December, 2011), and ap‐
proved by Council beginning in FY 2013, the Base Model incorporates an additional $2.2 million in capital op‐
erating and maintenance funding (“keep‐up”). Although the Base Model reflects a balanced budget for the
next seven fiscal years, the IBRC report recommended that an additional $4.2 million be contributed annually
towards the City’s infrastructure “catch‐up” needs. In addition to funding these “catch‐up” needs, the IBRC
report also recommends other project and construction needs totaling approximately $210 million. These
needs, including a new Public Safety Building and rebuilding the Municipal Service Center, are not included in
the Base Model or either of the alternate scenarios. The Council started discussions on how to address these
new or replacement needs.
Lastly, the LRFF contains two alternate scenarios that address pension costs in addition to the Base Model
and the financial outlook of providing additional funding to the City’s capital Fund. These concerns and can
be found beginning on page 24 of this report.
REVENUES
Tax revenues in Palo Alto have improved markedly since the beginning of the Great Recession and are ex‐
pected to continue their upward trend in the near future.
Sales Tax
This economically sensitive revenue source is bouncing back from its recession low of $18.0 million in FY
2010. Receipts rose to $20.7 million in FY 2011 and to $22.1 million in FY 2012. Staff is currently projecting
sales tax revenues of $23.4 million in FY 2013, nearly $0.8 million above the adopted budget. Receipts in the
first quarter of FY 2013 which are 6.7 percent above the prior year’s first quarter support this forecast. Ro‐
bust economic segments include electronic equipment, apparel stores, restaurants, and service stations.
Weak performers include furniture/appliance and business services. Staff’s forecast is in line with that of the
City’s sales tax consultant Muni‐Services, with annual growth rates in the 3.5% to 4.4% range over the next
ten years. Staff estimates that sales tax revenue will rise to $24.3 million in FY 2014, a 4.1 percent or $1.0 mil‐
lion increase, above estimated FY 2013 year end revenue.
UPDATED MODEL
8
Property Tax
Unlike many California jurisdictions, Palo Alto’s property taxes did not take a material “hit” as a consequence
of the Great Recession. Revenues have remained relatively stable as shown below:
For the past several years, staff has primarily relied on County estimates to develop its property tax budget.
The County has regular meetings to inform cities and school districts on assessment roll growth and events
that can impact revenues (e.g. appeals from commercial and residential properties). Based on recent County
data, it is likely that receipts will exceed the FY 2013 adopted budget of $27.3 million by some $0.5 million.
As stated in the previous chapter, housing values in Silicon Valley are rising at a faster rate than the rest of
California and the country. According to a November “Intero Real Estate Services” update, “While the rest of
the country has been recovering…the Bay Area housing market has exploded over the last 18 to 24 months.
Most listings are selling with multiple offers and considerably over list price.” This prognosis for the Palo Alto
real estate market will likely translate into higher documentary transfer and property taxes. For FY 2014,
property tax revenue is projected at $28.9 million, a $1.1 million or 4 percent increase above the current fis‐
cal year estimate of $27.8 million.
UPDATED MODEL
Fiscal Year Property Tax Revenues
2009 $25.4 million
2010 $26.0 million
2011 $25.7 million
2012 $26.5 million
$22,194
$22,623
$20,089
$17,991
$20,746
$22,132
$23,364
$15,000
$17,000
$19,000
$21,000
$23,000
$25,000
2007 2008 2009 2010 2011 2012 2013
Sales Tax (Millions, FY 2013 Projected)
Fiscal Year
9
Transient Occupancy Tax (TOT)
Since declining to $6.9 million in FY 2010 due to the Great Recession, TOT revenues have steadily risen. In FY
2011 receipts totaled $8.1 million and in FY 2012 they moved to $9.7 million. Staff now estimates they will
increase to $10.4 million in FY 2013 and to $11.0 million in FY 2014. Average occupancy and daily rates, re‐
spectively, have surged from 66 percent and $139 per day in FY 2010 to an average of 85 percent and $174
in the first quarter of FY 2013. With increased business activity and visitors to Palo Alto, staff will adjust the
FY 2013 budget upward by approximately $0.8 million, and the out years of the Forecast include annual
growth rates of 5.7 percent in 2014 declining to 5 percent in 2015 and 4.0‐4.5 percent in the remaining
years. Note that the Base Model Forecast does not include revenue from hotels expected to open in FY2014.
Documentary Transfer Tax (DTT)
This revenue source is based on the number and value of commercial and residential property sales. In the
last decade, revenues have averaged $4.8 million per year. During the recession period, DTT revenues fell to
$3.1 million in FY 2009 and to $3.7 million in FY 2010. Results for FY 2011 and 2012 were $5.2 million and
$4.8 million, respectively. With revenue stabilizing in the last two FYs and the rising value of commercial and
residential transactions in the first quarter of FY 2013, staff is projecting receipts in FY 2013 of $5.2 million, or
about $122,000 higher than Budget. FY 2014 revenue is estimated to be $5.5 million, a 6.6 percent or $0.3
million increase above the FY 2013 year end projection.
Utility Users Tax (UUT)
FY 2013 UUT revenues are expected to be the same as actual FY 2012 revenues, or $10.8 million. The utility‐
generated UUT estimates assume the rate increases in electric, water, and gas that are shown in the table
below. Note that the assumed increases through FY 2016 come from Utility department rate projections. The
remaining years’ increases are based on the CAGR for the preceding 5 years. Telephone‐generated revenues
continue their downward decline, due to decreased landline usage.
UTILITY RATE INCREASE ASSUMPTIONS USED IN UUT PROJECTION
Other Taxes & Fines
The large part of this category is comprised of Parking Violation revenue, which staff is estimating to be $1.5
million in FY 2014. Other revenue items such as traffic violations, administrative citations, and library fines
and fees have continued to grow over the past five years. Another component of this revenue category is the
Vehicle‐in‐Lieu Fee (VLF). In FY 2012, the state legislature suspended its allocations to local agencies in order
balance the State budget. Until the legislature takes action to restore it, staff is not projecting any VLF re‐
ceipts in this forecast. Staff expects that FY 2014 revenue will end at the same level as FY 2013, which is $2.1
million.
UPDATED MODEL
FISCAL YEAR 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23
Electric 0% 4% 6% 5% 4% 4% 4% 4% 4% 4%
Water 15% 9% 3% 2% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
Gas 4% 5% 4% 4% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
10
UPDATED MODEL
$22.1
Sales Tax
$26.4 Property Tax
$9.7
TOT$10.8 Utility User's Tax
$4.8
Doc. Transfer
Tax$2
$6
$10
$14
$18
$22
$26
$30
$34
$38
Fiscal Year
General Fund Major Revenues (Millions)
* FY 2014‐2019 projected
11
Charges for Services
Total revenues in this category are projected to be $2.9 million lower in FY 2014. Most of this reduction is
attributable to the loss of $2.2 million in Golf Course revenue while the course closes for reconfiguration. Ad‐
ditionally, the FY 2013 adopted budget assumed revenue increases related to the Development Center ex‐
pansion and cost of service study implementation, totaling $0.9 million. These anticipated revenue enhance‐
ments were not assumed in the FY 2014 Base Model. Staff plans to present Council with results of the cost of
services study in January/February 2013.
Based on the National Golf Foundation estimate presented to Council, completion of the golf course recon‐
figuration will bring in $0.3 million additional revenues beyond the $2.2 million lost in FY 2014. This is in‐
cluded in Base Model. For the Charges for Services category, the forecast also assumes a 3.5 percent growth
rate for the overall Charges for Services category from FY2015 through FY 2023.
Stanford Fire and Dispatch Services
The City currently is under agreement with Stanford University to provide Fire Response and Dispatch ser‐
vices. Stanford is charged 30.3 percent of the Fire Department’s net cost and 16 percent of the Police Depart‐
ment’s Communication and Dispatch Division. With the exception of pension, healthcare, and retiree medical
obligation cost increases, the FY 2014 base does not assume any significant changes for the Fire Department
and Police Communication and Dispatch Services budgets. Stanford fire and dispatch revenue is estimated to
increase by $0.2 million in FY 2014 due to pension, healthcare, and retiree medical cost increases. The Base
Model assumes that revenue from this agreement will increase 3.5 percent annually.
Currently, the City is in negotiations with Stanford for the Fire Services component of the contract. The FY
2013 budget includes a total of $8.2 million of revenue from Stanford for Fire and Dispatch Services. In the
best scenario, the final determination of a new reimbursement agreement could result in $1.4 million in addi‐
tional revenue; in the worst scenario the agreement could be terminated entirely. The agreement requires
the University to give 12 months’ notice of termination. Assuming that negotiations are concluded in FY
2014, a modest increase of 3.5% has been built into the outer years to account for staffing and other depart‐
ment costs.
Permits and Licenses
Revenue from permits and licenses rose significantly in FY 2011 and 2012 due primarily to increased activity
at the Development Center. Budgeted revenue in FY 2013 decreased in FY 2013 because the city imple‐
mented a citywide Technology Enhancement Fee and these revenues, which had previously been charged
only to some development permits, were moved from the General Fund to the Technology Fund. This reve‐
nue category is projected to decrease slightly due to two factors. Internal street cut fees, which are based on
Utilities activities, are reduced $.11 million to reflect planned project activities. Additionally, based on his‐
toric activity, the Forecast is decreased approximately 2 percent per year to reflect an assumed slowdown in
permit activity through FY 2018, followed by a 3.5 percent annual growth in subsequent years.
UPDATED MODEL
12
Return on Investment
General Fund interest earnings have declined 82 percent from FY 2009 to projected FY 2013 levels, as higher‐
yielding maturing investments are re‐invested in a historically low interest rate environment. The Federal
Open Market Committee remains committed to keeping interest rates at exceptionally low levels through
mid‐2015 to stimulate the economy and boost job growth. This action would continue to keep downward
pressure on the City’s portfolio yield in FY 2014. The interest earnings are projected to gradually increase by
1.3 percent in FY 2015 growing to 3.0 percent in FY 2023. It is expected that FY 2013 revenue will be below
the adopted budget by $0.2 million, totaling $0.8 million. In FY 2014, return on investment revenue is esti‐
mated to remain level at $0.8 million.
Rental Income
The largest source of rental income is the City’s Enterprise Funds and the Cubberley Community Center. The
rent from the Enterprise Funds declined $2.5 million with the closure of landfill, the Middlefield Well site,
and the former Los Altos Treatment Plant (LATP) site in FY 2013. FY2014 rental income also reflects partial
closure of restaurant and pro‐shop facilities during the Golf Course Re‐Configuration Project. For this fore‐
cast period, a 2.5 percent growth was assumed for all rental properties – tied to the projected increase in the
CPI, which drives Enterprise Fund facility rental fees ‐ except for the Refuse Fund rent which remains fixed
until FY 2021.
The City is conducting an assessment of all General Fund properties which might impact the rental income
from Enterprise Funds during FY 2014 and beyond.
From Other Agencies
Revenue from Other Agencies includes income from Community Services Outreach theatre programs, Palo
Alto Unified School District (PAUSD) reimbursements, State of California grants for Police, Libraries and Com‐
munity Services, and donations from Friends groups. Many of these are less than predictable. For example,
state grants are reduced when the state experiences budget difficulties. Revenues over the past 4 years have
ranged from $0.08 million to $0.3 million. The Forecast assumes a zero growth rate from FY 2014 onwards.
Charges to Other Funds
Eighty‐six percent of this category is General Fund administrative cost plan allocation charges to the Enter‐
prise Funds. For FY 2013, the projected amount is equal to the budgeted amount of $10.9 million. In FY 2014
onward, forecasted increases are around 2 percent.
Other Revenues
Major revenue sources in this category are Animal Services charges to Los Altos and Los Altos Hills, reim‐
bursements from PAUSD for its share of Cubberley and athletic field maintenance, donations from non‐
profits for City libraries, and revenues which do not belong to other categories. In FY 2013, Other Revenues
are projected at $1.2 million – the same level as in the Adopted Budget. Projected FY 2014 revenues of $1.9
million include a $0.7 million donation from various non‐profits to libraries plus a 2 percent increase. The
Base Model assumes one‐time library donations of $0.6 million. In FY 2015 onwards, the base model assumes
a 2 percent annual increase for all Other Revenues.
UPDATED MODEL
13
COMPARISON OF REVENUE SOURCES FY 2008 vs. FY 2011
UPDATED MODEL
14
UPDATED MODEL
Operating Transfers In
Operating Transfers include the equity transfer from the Electric and Gas Funds, as well as transfers from the
University Ave Parking Permit Fund and the California Ave Parking Permit Fund. The equity transfers are
based upon a rate of return on the asset base of the Electric and Gas Funds, and increase roughly 2 to 3 per‐
cent per year. For FY 2013‐2016, equity transfers from Electric Fund and Gas Fund are based on Utilities Five‐
Year Financial Plan (presented to Council in April 2012), which are estimates and subject to change.
EXPENSES
Salary & Benefits
Salary
• A 2 percent salary increase for SEIU and Management/Professional is assumed in FY 2014. Beginning FY
2015 and through FY 2023, a 2 percent salary increase is assumed for all labor groups. It is important to
note that these increase are for forecasting purposes and do not represent a commitment.
• $1.1 million in salary and benefits related to position freezes is added back to the FY 2014 projected base.
This includes funding for five Library Department staff (related to the Mitchell Park Community Center
and Library Project), seven positions in the Police Department, one Plan Check Engineer, one Program
Assistant in the Fire Department, and one three‐quarter time Program Assistant in the Community Ser‐
vices Department. In addition, the FY 2014 projected base assumes three position reductions in the City’s
Animal Services operations.
15
UPDATED MODEL
Benefits
• The Base Model includes CalPERS’ estimated rates for FYs 2014, 2015, and 2016. The most recent rates
were received in November 2012.
• Per Council direction, the Base Model assumes a 3 percent per year increase in pension costs from FY
2017‐2023. Following the Base Model, an alternate scenario assuming a 4.5 percent per year increase be‐
ginning in FY 2017 is presented on page 25. Second‐tier retirement savings, estimated by Bartel & Associ‐
ates, are included in the Base Model beginning FY 2015.
• Starting in January 2013, pension reform requires new members of CalPERS be enrolled into a new pen‐
sion plan that offers lower pension benefits. CalPERS is calculating the actual cost for Palo Alto, so an es‐
timate is not available at this time. It is clear that the savings of the pension reform is in the outer years
since it impacts only new members to the pension system. Staff will provide updated cost savings once
CalPERS provides expected costs.
• Retiree Annual Required Contributions (ARC) are based on the January 1, 2011 actuarial study for FY
2012, 2013, and 2014, as amended by the Council Direction of April 16, 2012. In setting the ARC, the actu‐
ary assumes it will increase each year by 3.25 percent, the presumed annual increase in payroll.
• The forecast assumes a 10 percent annual increase in medical costs and a 4 percent annual increase in
dental and vision costs. This assumption results in a $0.76 million increase between projected FY 2013
and 2014 costs. Over the next ten fiscal years (2014 through 2023), these healthcare cost will increase
from $9.5 million to $20.8 million, or 218 percent.
16
UPDATED MODEL
17
UPDATED MODEL
Contract Services
FY 2013 Projected Contract Services include $80 thousand of one‐time contracts, such as the Police Organiza‐
tion study, and $0.5 million in assumed savings from the re‐organization of Palo Alto Animal Services. The FY
2014 base removes these one‐time FY 2013 expenses and projected savings. The forecast assumes that the
project will be completed and return to normal operations at the end of FY 2014. In addition, the FY 2014
Base Model also assumes a one‐time $0.6 million increase for use of library donations from the library foun‐
dation. Total expense for this category totals $11.1 million, a $0.4 million increase over the FY 2013 adopted
budget. In FY 2015 and beyond, contract expenses are projected to remain relatively stable, with a 3.0 per‐
cent annual growth rate throughout the forecast period.
Supplies & Materials
The base model assumes the same level of $3.2 million for this category in for FY 2013 and 2014. In FY 2015,
Community Services will see a small increase of approximately $31,000 for Supplies & Materials at the Palo
Alto Golf Course. This is based on the National Golf Foundation estimates to maintain the newly redesigned
golf course. Costs will remain relatively constant looking forward to outer years, with a consistent yearly in‐
crease based on the 3.0 percent annual increase.
In November 2012, Council was presented with the results of the contracts audit conducted by the City Man‐
ager’s Office. Staff has examined the audit findings and determined that under a new, revised contract, the
City would save an additional $40 thousand (citywide) in office supplies. Staff estimates that approximately
$24 thousand of this savings would occur in the General Fund. Staff expects to have the new contract in place
in early 2013.
General Expense
The majority of General Expense includes categories like travel and meetings, telephone and non‐city utili‐
ties, contingency accounts, and debt service payments for the newly signed Golf Course Lease/Purchase
Agreement. Projected FY 2013 expenses of $4.6 million reflect annual debt service which was originally
budgeted as a transfer to Debt Service Fund. In FY 2014, there is a 2 percent decrease, and from FY 2014 on‐
wards, annual increases of 3.0 percent are assumed.
FY
2007 FY
2008 FY
2009 FY
2010 FY
2011 FY2012 FY 2013 FY
2014 FY2015 FY2016
Miscellaneous 11.4% 17.4% 17.0% 17.1% 17.6% 21.7% 23.0% 24.6% 26.4% 26.9%
Safety 24.2% 23.6% 24.5% 23.9% 24.7% 30.1% 31.1% 33.4% 35.9% 36.6%
* FY 2008 Miscellaneous rate reflects plan change from 2% @ 55 to 2.7 % @ 55
** FY 2014, 2015, and 2016 rates are based on PERS actuarial valuation received November
2012.
Employer CalPERS Rates
18
Cubberley Lease
This category represents lease payments to PAUSD for the Cubberley facility. The Forecast assumes that the
lease contract with PAUSD will continue beyond 2014 — not as a recommendation, but just for financial im‐
pact purposes. FY 2014 onward payments are based on projected 3 percent annual CPI increases. This as‐
sumed 3 percent increase yields $7.3 million in Cubberley lease expense in FY 2014.
Rents and Leases
Expansion of the Development Center increased this expense category by $0.2 million in FY 2013. Rent and
lease expense for FY 2014 is estimated to remain flat at $1.1 million. Rents and Leases expense growth will
remain fairly steady, with 3 percent annual increases assumed.
Facilities & Equipment
An additional $0.2 million was added to Facilities & Equipment during FY 2013 due to one‐time increase for
the Development Center upgrade expansion. Facilities and equipment expense for FY 2014 is $0.5 million.
The base model assumes a 3 percent annual increase.
Allocated Charges
Allocated charges represents expense allocations to the City’s enterprise and internal services funds for ser‐
vices and products they provide to General Fund departments for items such as utilities usage, liability insur‐
ance, technology costs, and vehicle replacement costs. The last year of the General Fund loan repayment to
the Technology Fund was in FY 2013; the FY 2014 base model is reduced by this amount to total $15.8 mil‐
lion. Beyond FY 2014, the base model assumes a modest an annual growth rate of 2 percent in Allocated
Charges.
Operating Transfers Out
Operating Transfers Out includes transfers for Debt Service, Tech Fund, and the Airport Fund. Transfers out
is reduced by $0.4 million due to the refinancing of the Golf Course debt. The Golf Course debt will be paid
down by FY 2018. Funding for the Airport Fund from the General Fund continues through FY 2014 and the FY
2013 projected base model assumes an additional $0.2 million will be transferred to the Airport Fund. The
base model assumes that the Airport Fund will be self‐sustaining in FY 2015.
Transfer to Infrastructure
In FY 2013, adopted and projected transfers to capital project fund remain at $13.2 million. In FY 2014, they
are projected to grow to $13.5 million. Transfers to the Capital Projects Fund are based on several compo‐
nents described below:
1. The “annual base transfer” of $3.6 million and a “dedicated year‐end surplus” of $1.0 million remain con‐
stant.
2. The transfer for specific projects receiving General Fund reimbursements varies year‐by‐year with the 5‐
UPDATED MODEL
19
year CIP Budgets. The average annual rate of increase is 2.7 percent in the 10‐year forecast.
3. As a result of Council’s “$3 million challenge” begun in 2007, Council committed to spend an additional
$3 million on infrastructure, growing by 7 percent per year. This amount has grown to $4.9 million in FY
2014 and is reflected in the Base Model.
4. Beginning in FY 2013, an additional $2.2 million per year is added to fund the annual maintenance of ex‐
isting infrastructure or “keep‐up” needs as defined by the (IBRC) Infrastructure Blue Ribbon Commission
Report.
5. An additional $4.2 million per year will be required to fund deferred maintenance or “catch‐up” needs as
defined by the IBRC Report. This additional contribution is not included in the Base Model.
6. In FY 2012, the General Fund closed with a $4.4 million surplus. A one‐time, additional $7.6 million was
transferred from the General Fund to the Capital Fund.
FACTORS NOT INCLUDED IN THE BASE MODEL
• The allocated cost of various IT Department’s new initiatives such as migration to cloud based technolo‐
gies, purchase of new equipment and related maintenance/support costs.
• The IBRC’s recommended $4.2 million per year increase in infrastructure expenditure – see alternate sce‐
nario following the base model to see impacts.
• Possible TOT revenues from five hotels expected to open in the next two years (see page 4 for details).
UPDATED MODEL
20
BASE MODEL
GENERAL FUND LONG RANGE
BASE MO
FY 2013‐2
Adopted Projected
2013 2013 2014 2015 2016
Revenues
Sales Taxes 22,545 23,364 24,323 25,010 25,896
Property Taxes 27,306 27,783 28,898 30,073 31,341
Transient Occupancy Tax 9,591 10,439 11,035 11,592 12,114
Documentary Transfer Tax 5,078 5,200 5,541 5,808 6,073
Utility User Tax 10,731 10,825 11,054 11,568 12,005
Other Taxes & Fines 2,058 2,058 2,058 2,078 2,099
Subtotal: Taxes 77,309 79,669 82,909 86,130 89,529
Charges for Services 15,461 15,461 12,587 15,204 15,729
Stanford Fire and Dispatch Services 8,221 8,221 8,391 8,685 8,989
Permits & Licenses 6,614 6,614 6,587 6,431 6,302
Return on Investment 959 774 769 779 793
Rental Income 12,640 12,640 12,923 13,246 13,577
From Other Agencies 157 157 157 157 158
Charges to Other Funds 10,875 10,874 11,062 11,283 11,509
Other Revenues 1,187 1,187 1,888 1,319 1,345
Total Revenues Before Transfers 56,114 55,928 54,364 57,106 58,402
Operating Transfers‐In 18,995 18,995 19,543 20,148 20,791
Total Source of Funds 152,418 154,593 156,817 163,384 168,722
Expenditures
Salaries 57,214 58,940 60,899 62,139 63,327
Benefits 37,071 35,426 37,598 40,056 41,800
Subtotal: Salaries and Benefits 94,285 94,366 98,496 102,196 105,127
Contract Services 10,733 10,698 11,092 11,518 11,777
Supplies & Materials 3,220 3,219 3,246 3,491 3,595
General Expense 4,019 4,568 4,475 4,606 4,716
Cubberley Lease 7,133 7,133 7,347 7,567 7,794
Rents & Leases 1,184 1,184 1,207 1,243 1,281
Facilities & Equipment 518 746 521 549 574
Allocated Charges 16,932 16,933 15,758 15,848 16,165
Total Expenditures Before Transfers 43,739 44,481 43,646 44,823 45,901
Operating Transfers Out 1,605 1,376 639 329 329
Transfer to Infrastructure 13,178 13,178 13,465 13,843 14,263
Total Use of Funds 152,807 153,401 156,246 161,190 165,620
Net Surplus/(Gap) (389) 1,191 571 2,194 3,102
21
BASE MODEL
E FINANCIAL FORECAST
DEL
2023
2017 2018 2019 2020 2021 2022 2023
26,907 27,970 29,148 30,416 31,754 33,100 34,466
32,679 34,123 35,699 37,383 39,011 40,642 42,267
12,643 13,181 13,724 14,277 14,869 15,504 16,204
6,343 6,585 6,803 7,066 7,371 7,705 8,137
12,296 12,629 12,966 13,298 13,624 13,940 14,271
2,120 2,141 2,163 2,184 2,206 2,228 2,251
92,988 96,629 100,503 104,624 108,836 113,120 117,595
16,266 16,632 17,010 17,401 17,803 18,220 18,650
9,303 9,629 9,966 10,315 10,676 11,049 11,436
6,177 6,043 6,255 6,474 6,733 7,069 7,423
809 828 848 869 891 914 942
13,917 14,265 14,621 14,987 14,119 13,568 13,907
158 159 160 161 161 162 163
11,739 11,974 12,213 12,458 12,707 12,961 13,220
1,372 1,400 1,428 1,456 1,485 1,515 1,545
59,742 60,930 62,501 64,119 64,575 65,459 67,287
21,446 22,106 22,786 23,489 24,213 24,961 25,731
174,176 179,664 185,790 192,232 197,624 203,540 210,614
64,540 65,776 67,037 68,323 69,635 70,973 72,338
45,080 48,535 52,192 56,042 60,123 64,437 69,002
109,620 114,311 119,229 124,365 129,758 135,410 141,341
12,054 12,326 12,605 12,894 13,190 13,496 13,809
3,703 3,814 3,929 4,047 4,168 4,293 4,422
4,829 4,945 5,065 5,189 5,316 5,447 5,582
8,028 8,269 8,517 8,773 9,036 9,307 9,586
1,319 1,359 1,400 1,442 1,485 1,529 1,575
591 609 627 646 665 685 705
16,488 16,818 17,154 17,497 17,847 18,204 18,568
47,012 48,139 49,297 50,486 51,707 52,961 54,248
329 329 329 329 329 329 329
14,710 15,186 16,693 16,233 16,809 17,422 18,075
171,671 177,965 185,547 191,412 198,602 206,122 213,992
2,506 1,699 243 820 (978) (2,582) (3,379)
22
BASE MODEL
GENERAL FUND LONG RANGE
BASE MODEL PERECENT
Adopted Projected
2013 2013 2014 2015 2016
Revenues
Sales Taxes 1.86% 3.63% 4.10% 2.82% 3.
Property Taxes 3.07% 1.75% 4.01% 4.07% 4.
Transient Occupancy Tax ‐0.75% 8.85% 5.71% 5.05% 4.
Documentary Transfer Tax 5.32% 2.40% 6.57% 4.82% 4.
Utility User Tax ‐0.95% 0.88% 2.12% 4.65% 3.
Other Taxes & Fines 1.22% ‐0.01% 0.00% 1.00% 1.
Subtotal: Taxes 1.75% 3.05% 4.07% 3.88% 3.
Charges for Services 0.61% 0.00% ‐18.59% 20.79% 3.
Stanford Fire and Dispatch Services ‐9.48% 0.00% 2.07% 3.50% 3.
Permits & Licenses ‐8.48% 0.00% ‐0.41% ‐2.36% ‐2.
Return on Investment ‐5.29% ‐19.33% ‐0.57% 1.31% 1.
Rental Income ‐11.57% 0.00% 2.24% 2.50% 2.
From Other Agencies 94.45% 0.00% 0.00% 0.25% 0.
Charges to Other Funds ‐6.56% ‐0.01% 1.73% 2.00% 2.
Other Revenues ‐52.15% 0.03% 59.00% ‐30.14% 2.
Total Revenues Before Transfers ‐8.28% ‐0.33% ‐2.80% 5.04% 2.
Operating Transfers‐In ‐16.26% 0.00% 2.88% 3.10% 3.
Total Source of Funds ‐4.64% 1.43% 1.44% 4.19% 3.
Expenditures
Salaries ‐4.60% 3.02% 3.32% 2.04% 1.
Benefits 0.86% ‐4.44% 6.13% 6.54% 4.
Subtotal: Salaries and Benefits ‐2.53% 0.09% 4.38% 3.76% 2.
Contract Services 3.22% ‐0.32% 3.68% 3.84% 2.
Supplies & Materials 3.52% ‐0.03% 0.84% 7.54% 3.
General Expense 15.23% 13.65% ‐2.03% 2.94% 2.
Cubberley Lease 3.03% 0.00% 3.00% 3.00% 3.
Rents & Leases 17.95% 0.02% 1.94% 3.00% 3.
Facilities & Equipment 62.50% 43.97% ‐30.15% 5.37% 4.
Allocated Charges ‐5.91% 0.01% ‐6.94% 0.57% 2.
Total Expenditures Before Transfers 1.16% 1.70% ‐1.88% 2.
Operating Transfers Out ‐54.04% ‐14.25% ‐53.60% ‐48.54% 0.
Transfer to Infrastructure ‐29.32% 0.00% 2.18% 2.81% 3.
Total Use of Funds ‐5.74% 0.39% 1.85% 3.16% 2.
Net Surplus/(Gap) ‐82.81% ‐406.22% ‐52.05% 284.14% 41.
23
BASE MODEL
FINANCIAL FORECAST
TAGE CHANGES
2017 2018 2019 2020 2021 2022 2023
.54% 3.90% 3.95% 4.21% 4.35% 4.40% 4.24% 4.13%
.22% 4.27% 4.42% 4.62% 4.72% 4.35% 4.18% 4.00%
.50% 4.37% 4.25% 4.12% 4.03% 4.15% 4.27% 4.51%
.57% 4.44% 3.82% 3.32% 3.87% 4.32% 4.54% 5.60%
.78% 2.42% 2.71% 2.67% 2.56% 2.45% 2.32% 2.37%
.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
.95% 3.86% 3.92% 4.01% 4.10% 4.03% 3.94% 3.96%
.45% 3.42% 2.25% 2.27% 2.29% 2.31% 2.34% 2.36%
.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
.01% ‐1.99% ‐2.16% 3.50% 3.50% 4.00% 5.00% 5.00%
.76% 2.01% 2.38% 2.41% 2.46% 2.51% 2.66% 3.01%
.50% 2.50% 2.50% 2.50% 2.50% ‐5.79% ‐3.90% 2.50%
.30% 0.35% 0.40% 0.45% 0.50% 0.55% 0.60% 0.65%
.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
.27% 2.29% 1.99% 2.58% 2.59% 0.71% 1.37% 2.79%
.19% 3.15% 3.07% 3.08% 3.08% 3.09% 3.09% 3.09%
.27% 3.23% 3.15% 3.41% 3.47% 2.80% 2.99% 3.48%
.91% 1.91% 1.92% 1.92% 1.92% 1.92% 1.92% 1.92%
.35% 7.85% 7.66% 7.53% 7.38% 7.28% 7.18% 7.09%
.87% 4.27% 4.28% 4.30% 4.31% 4.34% 4.36% 4.38%
.24% 2.35% 2.26% 2.27% 2.29% 2.30% 2.32% 2.32%
.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
.38% 2.40% 2.41% 2.42% 2.44% 2.45% 2.46% 2.48%
.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
.70% 2.41% 2.42% 2.40% 2.40% 2.41% 2.42% 2.43%
.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
.03% 3.13% 3.24% 9.92% ‐2.76% 3.55% 3.65% 3.75%
.75% 3.65% 3.67% 4.26% 3.16% 3.76% 3.79% 3.82%
.36% ‐19.21% ‐32.19% ‐85.70% 237.55% ‐219.28% 163.96% 30.86%
24
RESERVES
RESERVES
FY 2012 ended with a Budget Stabilization Reserve (BSR) totaling $28.1 million. Although the Base Model
forecasts surpluses in FYs 2014 to 2020, beginning in FY 2019, total expense begins to drop below the 18.5
percent level. By FY 2023, it is forecasted that the BSR will be $9.7 million, or 14 percent of total expendi‐
tures. The graph below illustrates how the BSR projection compares to the 18.5 percent minimum reserve
level.
$22.0
$27.0
$32.0
$37.0
$42.0
Actual Actual Actual Actual Projected
Base Model: Projected BSR Compared Against
18.5% BSR Level
Budget Stabilization Reserve Actuals & Projection Minimum Reserve ‐ 18.5%
25
ALTERNATE SCENARIOS
Alternate Scenario 1
The Base Model assumes an annual 3 percent pension increase each year from FY 2017 to 2023. The follow‐
ing scenario assumes an annual 4.5 percent increase beginning in FY 2017. The 4.5 percent annual increase
is based on preliminary discussions of PERS removing their smoothing of gains and losses, and the changed
demographics of retirees. Assuming an increased pension contribution increases the cumulative deficit from
$9.761 million to $54.618 million, or 459 percent, in FY 2016 through 2023. This scenario needs to be up‐
dated to account for the pension reform changes. CalPERS has not provided a cost impact as of yet, so this
impact will be updated later in the process.
Alternate Scenario 1—4.15% annual PERS increase starting FY 2017
Alternate Scenario 2
The following scenario assumes that beginning FY 2014, General Fund funds an additional, ongoing $4.2 mil‐
lion to the Capital Fund. Assuming an increased capital contribution increases the cumulative deficit for FYs
2015 through 2023 from $7.269 million to $44.068 million.
Alternate Scenario 2—Additional $4.2 million Annual Contribution to Infrastructure Fund
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Source of Funds
156,817
163,384
168,722
174,176
179,664
185,790
192,232
197,624
203,540
210,614
Salaries
60,899
62,139
63,327
64,540
65,776
67,037
68,323
69,635
70,973
72,338
Benefits
37,598
40,056
41,800
45,961
50,332
54,941
59,780
64,890
70,272
75,946
Subtotal: Salaries and
Benefits
98,496
102,196
105,127
110,501
116,108
121,978
128,104
134,525
141,245
148,284
Total Use of Funds
156,246
161,190
165,620
172,551
179,762
188,297
195,151
203,369
211,957
220,935
Net Surplus/(Gap)
571
2,194
3,102
1,625
(98)
(2,506)
(2,919)
(5,745)
(8,417)
(10,322)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Source of Funds 156,817 163,384 168,722 174,176 179,664 185,790 192,232 197,624 203,540 210,614
Total Expenditures Before Trans‐
fers 43,646 44,823 45,901 47,012 48,139 49,297 50,486 51,707 52,961 54,248
Operating Transfers Out 639 329 329 329 329 329 329 329 329 329
Transfer to Infrastructure 13,464 18,043 18,463 18,910 19,386 19,893 20,433 21,009 21,622 22,275
Total Use of Funds 156,245 165,389 169,820 175,871 182,165 188,748 195,613 202,802 210,322 218,192
Net Surplus/(Gap) 572 (2,005) (1,098) (1,694) (2,501) (2,957) (3,380) (5,178) (6,782) (7,579)
26
CHALLENGES: PENSION REFORM
The California Public Employees’ Pension Reform Act of 2013 (PEPRA) was enacted fall 2012 and has gener‐
ated increased attention and questions from CalPERS retirement system members and employers. The new
law includes a suite of changes to current retirement formulas, new members, employer/member contribu‐
tions, and working after retirement. PEPRA also establishes a cap on the amount of compensation that can
be used to calculate the retirement benefit for all new CalPERS members. At this time, the dollar impact to
the City of this new legislation is unknown. Staff will provide Council with updates as more information and
data emerge.
CONCLUSIONS
The LRFF shows better “bottom line” results than in last year’s presentation. This is due to employee benefit
concessions, budget reductions, and higher revenues. The City must continue, however, to find additional
structural savings as benefit costs are increasing at a faster rate than revenues.
Since FY 2010, the City has realized $16.7 million in savings from structural changes, the fruit of staff
“thinking different.” The Cost of Service study is nearly complete and will allow the Council to thoroughly re‐
view the price of doing business and make decisions on what services can be provided and/or how they can
be provided.
In addition to employee benefit obligations, the City’s infrastructure needs – capital operation and mainte‐
nance, project “catch‐up”, and other projects that were identified in the IBRC report – are commitments that
should be addressed and planned for via this forecast. The Base Model and Alternate Scenario #2 show two
levels of investment in the City’s infrastructure and their impact on the bottom line.
To maintain prudent fiscal stewardship, the City must continue to explore its benefit structure, alternative
forms of service delivery, and more efficient operations. Although successful efforts have been made, staff
recognizes that it must continue to review alternatives in service delivery and the cost of such services to ad‐
dress key issues outlined in this report to realize a sustainable, long‐term, financial plan.
CHALLENGES & CONCLUSIONS
27
28
APPENDIX
APPENDIX 1 – CONCESSIONS TO DATE
Since 2009, Council and staff completed the negotiation of agreements with labor groups to eliminate more
than $8.5 million in salary and benefit expense. The City is working with the Police Management Association
(PMA) to negotiate cost savings.
The following is a list of current labor contracts and agreements:
SEIU (current contract)
Estimated Savings: $0.55 million per year, or 0.76 percent of total compensation
• Created a second tier to our retirement structure (2 percent at 60) for new employees hired or after July
17, 2010.
• Shifted full cost of employee PERS contribution to employee.
• Implemented the 90/10 medical cost sharing plan.
• Decrease alternative medical cash‐out benefit to a flat $284 per month, effective October 1, 2012.
• 1.65 percent cost of living increase effective first day of pay period including July 1, 2012
• Reduced floating holidays by three days. An additional floating holiday will be eliminated after June 30,
2013.
Management and Professional (current agreement)
Estimated Savings: $0.51 million per year, or 1.5 percent of total compensation
• Eliminated the Variable Management Compensation plan as of FY 2009.
• Shifted full cost of employee PERS contribution to employee.
• Implemented the 90/10 medical cost sharing plan.
• Decrease alternative medical cash‐out benefit to a flat $284 per month, effective October 1, 2012.
• Three percent salary increase to partially offset pension contribution costs
• Changes to the group’s professional development plan, including eliminating use of professional develop‐
ment funds to purchase electronic technology and gym memberships and reducing the annual amount
per employee from $1,500 to $500. Gym members can be reimbursed through management excess bene‐
fit.
• Eliminated car allowances for newly hired Department Directors.
International Association of Fire Fighters (current contract)
Estimated Savings: $1.6 million per year, or 6.8 percent of total compensation
• Created a second tier to our retirement structure (3 percent at 55) for new employees.
• Shifted full cost of employee PERS contribution to employee.
• Eliminated minimum staffing requirements.
29
APPENDIX
• Implemented the 90/10 medical cost sharing plan.
• Cost‐of‐living freeze for FYs 2012‐2014.
• Eliminated tuition reimbursement program.
Fire Chiefs’ Association (current agreement)
Estimated Savings: $91 thousand per year, or 9.8 percent of total compensation
• Created a second tier to our retirement structure (3 percent at 55) for new employees.
• Shifted full cost of employee PERS contribution to employee. In March 2013, the city paid employee
retirement contribution “resets” to 5.1 percent.
• Eliminated the Variable Management Compensation plan.
• 1.33 percent salary reduction.
• Eliminated three holidays.
• Implemented the 90/10 medical cost sharing plan.
Palo Alto Police Officers’ Association (current contract):
Estimated Savings: $1.4 million per year, or 7.7 percent of total compensation
• Created a second tier to our retirement structure (3 percent at 55) for new employees.
• Shifted full cost of employee PERS contribution to employee.
• Eliminated tuition and training benefit.
• 1.33 percent salary reduction.
• Eliminated three holidays.
• Implemented the 90/10 medical cost sharing plan.
Prior to 2009, between 2004 and 2006, the City implemented for all bargaining units:
• 20‐year vesting period to qualify for lifelong City‐paid health coverage
• Highest cost health care plan option eliminated, saving almost $10,000 per year for each employee
moved away from this option.
The aforementioned concessions and staffing reductions have been tough decisions that were not taken
lightly. Like the City, our employees face rising household costs and diminished asset values. Further‐
more, the impact of the position eliminations is that our employees are stretched thin, and our ability to
take on new projects is reduced.
30
ENDNOTES
1. Josh Mitchell and Sara Murray: “Unemployment Rate Falls to 7.8%,” Wall Street Journal, Oc‐
tober 15, 2012
2. MuniServices Economic Overview 3Q2012 News, page 4
3. Beaconomics, vol 5 number 2 October 2012, page 6
4. Beaconomics, Volume 5, Number 2, October 2012, page 18‐19
5. Department Of Finance: Finance Bulletin, Sept. 2012
6. Carolyn Said, “Bay Area home prices show strong rebound,” San Francisco Chronicle, Octo‐
ber 23, 2012
7. Amir Efrati, “Home Prices Near Highs in Some Cities,” The Wall Street Journal, November 7,
2012
8. Beaconomics, Volume 5, Number 2, October 2012, page 13 and Kathleen Pender, “State not
in the clear as jobless rate sinks,” San Francisco Chronicle, October 20, 2012
9. Beaconomics, Volume 5, Number 2, October 2012, page 14
10. UCLA Anderson Forecast, “The US and California Forecasts,” presentation to Bay Area Coun‐
cil Economic Institute November 8, 2012
11. Beaconomics, October 2012
12. Discussion at Bay Area Council Economic Institute meeting of November 8, 2012
13. MuniServices Economic Overview 3Q2012 News, page 14
14. Op. Cit.
15. February 2012 Caltrain Annual Counts
ENDNOTES
31
Visit our website at: www.CityofPaloAlto.org
AMERICANS WITH DISABILITIES ACT
STATEMENT
Contributors Christine Paras
Amber Cameron
Scott Jensen
Tarun Narayan
Sherry Nikzat
Lalo Perez
Joe Saccio
Dale Wong
In compliance with
Americans with Disabilities Act (ADA) of 1990,
this document may be provided
in other accessible formats.
For information contact:
ADA Coordinator
City of Palo Alto
285 Hamilton Avenue
(650) 329‐2550
Printing City of Palo Alto
Nancy Nagel
Tony Sandhu
32
The City of Palo Alto is located in northern Santa Clara County, approximately
35 miles south of the City of San Francisco and 12 miles north of the City of San Jose.
Spanish explorers named the area for the tall, twin‐trunked redwood tree they camped
beneath in 1769. Palo Alto incorporated in 1894 and the State of California
granted its first charter in 1909.
30% post‐consumer recycled
Attachment B
1
CalPERS PENSION BENEFITS:
STATE LAW, PENSION REFORM & IMPACTS ON PALO ALTO
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Pension
Formulas and
Retirement
Age
State Law as of 12/31/2012
CalPERS offers employers a menu of pre-defined basic and
enhanced benefit formulas for Miscellaneous (Non-Safety) and
Safety (Police & Fire). In general, employers contract with
CalPERS for one of the formulas after bargaining with employee
organizations. The benefit factor is a percentage of pay to which
members are entitled for each year of service. It is determined at
the member’s age at retirement and one of the following
retirement formulas that the employer has contracted for.
Misc: 2% at 55, 2% at 60. 2.5% at 55, 2.7% at 55, 3% at 60
Safety: 2% at 50. 2% at 55, 2.5% at 55, 3% at 50, 3% at 55
In 1999, the California Legislature amended the pension law to
allow the state to offer enhanced pension formulas: 3% at age 50
for Safety and 2.7% at age 55 for Miscellaneous. In XXXX, the
Legislature authorized cities and other local government agencies
to adopt the same enhanced benefit formulas.
The California Courts have held that a pension formula “vests” at
the time is promised, which generally means the promise is
binding and cannot be reduced during the employees service or
retirement, subject to certain limited exceptions. For this reason,
reduced formulas are applied only to newly hired employees.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto last moved to enhance benefit formulas in 2002 for
Police and Fire and in January 2007 for Miscellaneous
employees. Beginning in July 2010, the City has been
negotiating lower more sustainable benefits for newly hired
employees. Currently, Palo Alto’s pension formulas are:
Miscellaneous (Non-Safety) Employees
Tier 1, hired before July 16, 2010: 2.7% at 55
Tier 2, hired on or after July 17, 2010: 2% at 60
Police & Fire
Tier 1 Fire, hired before June 8, 2012: 3% at 50
Tier 1 Police, hired before December 2012
(estimated): 3% at 50
Tier 2 Fire, hired on or after June 8, 2012: 3% at 55
Tier 2 Police, estimated to change in December 2012:
3% at 55
Attachment B
2
PEPRA
Effective January 1, 2013, all newly hired employees must be
enrolled in the following pension plans:
Miscellaneous Employees: 2% at 62
Police & Fire: PEPRA includes three formulas – 2% at 57,
2.5% at 57, and 2.7% at 57 – and mandates that the
employer use the formula closest to status quo. After
January 1, 2013, an employer could bargain to use a
lower formula, but may not impose a lower formula in
the absence of an agreement.
Note: Employees who move from one CalPERS or reciprocal
employer to another after Jan. 1, 2013, are not considered new
employees, unless there is a break in service of more than six
months. PEPRA requires that employees who move from one
public employer to another be enrolled in the new employer’s
formula that would have applied on December 31, 2012.
PEPRA’s Impact on Palo Alto
PEPRA will add a 3rd pension tier for both Miscellaneous and
Safety, applicable to employees hired on or after Jan. 1, 2013
(except that employees previously employed by another
CalPERS or reciprocal employer will move into Tier 2):
Miscellaneous Tier 3: 2% at 62
(earliest eligibility 50 years @1.426% - 2.5% @ 67 years of
age)
Safety Tier 3: 2.7% at 57
(earliest eligibility 50 years @2% - 2.7% @ 57 years of age)
Attachment B
3
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Calculation of
Final
Compensation:
Single Highest
Year or
Average of
Three
Consecutive
Highest Years
State Law as of 12/31/2012
The CalPERS basic pension benefit is calculated using the average
of the three highest consecutive earning years.
CalPERS allowed employers to select an enhanced benefit of
basing pension on the single highest earning year.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto moved to single highest year in 1983 for
Miscellaneous and 1981 for Fire and Police. Beginning in
2011 for Public Safety, the City began negotiating a return to
three-year final averaging as part of its effort to adopt more
sustainable pensions for new employees. Currently, Palo
Alto plans are as follows:
Miscellaneous (Non-Safety) –
All Miscellaneous: single highest year
In August 2013, which is the earliest permissible date
under current CalPERS law, Palo Alto will request
permission to change to three-year final averaging
for employees newly hired in Palo Alto from another
CalPERS agency. (By August 2013, new employees
without prior public service will automatically be
enrolled in the new PEPRA tier, which has three-year
final averaging). It is unclear at this time whether
CalPERS will allow this change to Tier 2 due to
limiting language in PEPRA.
Safety (Police & Fire) –
Fire, hired before June 7, 2012: single highest year
Police, hired before December 6, 2012 (estimated):
single highest year
Fire, hired on or after June 8, 2011: average of three
highest years
Attachment B
4
Police, hired on or after Dec. 7, 2012: average of
three highest years
PEPRA
Effective January 1, 2013, pensions must be calculated using the
average of the three highest consecutive years. This change
applies only to new employees hired on or after Jan. 1, 2013,
except that employee with prior public service will be enrolled in
the local plan in effect on December 31, 2012.
PEPRA’s Impact on Palo Alto
For all employees hired on or after Jan. 1, 2013, pensions will
be based on the average of three highest consecutive years,
except that Miscellaneous employees hired from another
CalPERS or reciprocal employer may remain eligible for single
highest year, subject to further consultation with CalPERS.
Attachment B
5
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Base
Retirement
Allowance on
Regular Pay
State Law as of 12/31/2012
State law defines compensation as that which is payment for the
member's services performed during normal working hours or
for time during which the member is excused from work because
of holidays, sick, disability, and other leaves, vacation (taken, not
cashed out). State law also defines special compensation.
Special compensation is outside of base pay but still included in
pensionable earnings. Examples are bilingual pay or fire
inspector certification pay.
Palo Alto Pension Benefits as of 12/31/2012
Memoranda of Agreement may contain provisions for
special compensation for employees to receive payment for
special skills, knowledge, abilities, work assignment,
workdays or hours, or other work conditions as permissible
under PERL.
PEPRA
For employees hired on or after January 1, 2013, pension must
be calculated on normal monthly base pay. Excludes other
payments such as vacation, sick leave, overtime and other
special pay categories. In the past, agencies were able to
contract for sick leave credit and have this count as special
compensation, no longer will be an option. This did not apply to
Palo Alto as City did not permit this. New members will not be
eligible to have their uniform compensation be part of pension
calculation.
PEPRA’s Impact on Palo Alto
May exclude Public Safety uniform allowance from being
considered special compensation as well as other special
assignment pay, will be subject to further consultation with
CalPERS.
Attachment B
6
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Cap on
Pensionable
Compensation
State Law as of 12/31/2012
CalPERS limits safety pensions at either 80% or 90% of final
compensation. Miscellaneous employees are not subject to these
limits, although generally are covered by lower formulas and in
most cases are unlikely to reach 80% or 90% of final
compensation.
Otherwise, CalPERS pensions apply to all compensation up to the
federal limit in Internal Revenue Code section 401(a)(17),
currently $250,000.
Palo Alto Pension Benefits as of 12/31/2012
The limits in state and federal law apply to Palo Alto
retirees.
PEPRA
For employees hired on or after January 1, 2013, PEPRA caps the
amount of compensation that can be used to calculate a
retirement benefit at:
$ $113,700for employers participating in social security
$136,440for employers not participating in social security.
The cap is adjusted annually based on the Consumer Price Index
for All Urban Consumers or otherwise by the Legislature.
Employers are barred from adopting any supplementary defined
benefit plan. Employers may contribute to a defined contribution
plan, subject to certain limitations.
PEPRA’s Impact on Palo Alto
Palo Alto does not participate in social security. New
employees hired on or after Jan. 1, 2013, except those with
prior CalPERS or reciprocal service, will be subject to
$135,120 cap on pensionable income.
At this time, Palo Alto does not have a program in place to
make deferred compensation contributions on behalf of all
employees, only as provided for in employment agreements
with Council Appointed Officers However, employees can
make voluntary contributions to deferred compensation
plans made available.
Attachment B
7
State Law Mandates for Local Agencies Offering CalPERS Pensions
Palo Alto Benefits
Cost Sharing:
Employee
Contributions
to Pension
Costs
State Law of 12/31/2012
CalPERS establishes a fixed mandatory employee contribution:
Misc. Basic Plans (Tier 2) – 7%
Misc. Enhanced Plans (Tier 1) – 8%
Safety All Plans – 9%
Employers may agree to “pick up” part or all of the employee
contribution.
In addition to the employee contribution, which does not change
from year to year, CalPERS determines annually an amount that the
employer must pay to fund the benefits owed to retirees and
current employees. CalPERS’ actuaries determine the employer
contribution by adding the employee contributions to the system’s
investment returns and subtracting those sums from the total
amount required to fund the system.
Funds collected from employees and employers fund two types of
liabilities:
the “normal cost” of pension benefits, which is the amount
that must be set aside this year to pay for the pension
obligations earned by active employees this year,
incorporating CalPERS’ rate of return and employee
demographic assumptions, and
any “unfunded liabilities,” which are funding gaps generated
by shortfalls in the projected rate of return on investment,
changes in employee demographic assumptions (such as
employees living longer), etc.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto began “picking up” the employee contribution in
1981 for Fire and Police and in 1983 for Miscellaneous
employees. In 2007, the City began to bargain for
employees to resume paying the employee contribution for
Miscellaneous employees.
Currently:
SEIU, IAFF, Battalion Chiefs, POA and
Managers/Professionals pay full employee
contribution of 7%, 8% or 9%, depending on the
employee’s benefit formula.
PMA pays 0%.
UMPAPA pays 2%.
In addition to the employee contribution, as of June 30,
2011, CalPERS actuaries calculated Palo Alto’s pension
liabilities as follows (expressed as a percent of payroll):
Miscellaneous
Normal cost 10.360%
Unfunded liabilities 14.240%
Total = 24.600%
Safety
Normal cost 18.658%
Unfunded liabilities 14.786%
Total = 33.444%
PEPRA PEPRA’s Impact on Palo Alto
Attachment B
8
The cost-sharing provisions of PEPRA are complex and not clearly
drafted. CalPERS is working to clarify the implementation of the
new law. Clean-up legislation, implementing regulations or
litigation may be required in order to clarify the meaning of several
of the provisions.
New employees – sharing the “normal cost.” PEPRA states that
employees hired on or after Jan. 1, 2013, must pay “at least” 50% of
the normal cost of their pension or the current contribution rate of
similarly situated employees, whichever is greater. CalPERS has not
yet notified local agencies of the specific amount that new hires
must pay.
Current employees – sharing the “normal cost.” After Jan. 1, 2018,
PEPRA authorizes employers to bargain for current employees to
pay 50% of the normal cost so long as the employee contribution
does not exceed 8% for Misc and 12% for Police & Fire.
The employer contribution. PEPRA also authorizes employers and
employees to agree to share the employer contribution, but
prohibits employers from imposing cost-sharing of the employer
share in the absence of an agreement with labor.
Palo Alto is at or close to the goal set in PEPRA for employee
cost sharing. Except for Police Managers and UMPAPA, all
Palo Alto employees already pay their full employee PERS
contribution (7%, 8% or 9%).
PEPRA allows employers to negotiate an additional
increment, not to exceed 8% for Miscellaneous and 12% for
Safety, as labor contracts are open. Before 2018, any such
additional contribution would require labor’s agreement.
After that date, the standard negotiation and impasse
procedures would apply.
For new employees, Palo Alto is awaiting CalPERS actuarial
determination of the amount that Tier 3 employees should
be charged after January 1, 2013, for their employee
contribution.
Under PEPRA, the City could seek to negotiate additional
employee contributions towards the employer portion. Any
such negotiations would require agreement and would not
be subject to impasse procedures.
Finally, PEPRA will impact Palo Alto as the City seeks to
recruit or retain employees, by creating a more level playing
field with other cities that until now have continued to pay
some or all of the employee contribution.
Attachment B
9
OTHER PENSION REFORM CHANGES
Restrictions on
Hiring Retirees
PEPRA requires new retirees to sit out for at least 180 days before returning to work as a retiree. The local agency’s governing
body may make exceptions for critically needed positions. The 180-day rule does not apply to police or fire retirees.
Forfeit Pension
on Felony
Conviction
PEPRA requires a pension be forfeited upon a felony conviction related to the performance of official duties. It appears that
this requirement only applies to pension benefits earned after the date of the felony. PEPRA states the rule applies to both
new and current employees, although CalPERS has stated it believes the rule may violate the vested rights of current
employees.
Eliminate
Airtime
CalPERS allows employees to purchase service credit for years in excess of those actually worked, known as “air time.”
Effective January 1, 2013, PEPRA bans the practice of allowing the purchase of “air time.” PEPRA applies the ban to both new
and current employees. CalPERS has stated that it believes the application of this rule to current employees may violate
vested rights.
Prohibit
Retroactive
Benefit Increases
CalPERS requires benefit increases to apply to all service earned by current employees, including service already earned in
prior years. Effective January 1, 2013, PEPRA requires that any enhancements to formulas or benefits must occur
prospectively and not retrospectively.
Prohibit Pension
Holidays
CalPERS calculates the annual contribution for all employers. Participating employers must pay the full amount of the annual
required contribution as determined by CalPERS. In some past years, when high returns on investments led to funded status
well over 100%, CalPERS granted employers a “pension holiday,” meaning employers were not required to contribute to
CalPERS for that year. Effective January 1, 2013, PEPRA prohibits pension holidays, except if (a) the plan is more than 120%
funded; (b) excess earnings could result in disqualification of tax deferred status; and (c) the CalPERS board finds that
additional contributions would conflict with its fiduciary duty.
Other changes PEPRA makes other changes, including requiring local elected members first elected after January 1, 2013, to receive pensions
based on the highest average compensation earned as an elected member; instructing CalPERS to develop regulations to
adjust costs between employers where excessive compensation is paid by a successor agency; increasing Disability
Retirements for certain public safety employees; and requiring equal health benefits vesting rules for non-represented and
represented employee groups.
Attachment B
10