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Home My WebLink About2002-12-03 City CouncilManager’s Report TO:HONORABLE CITY COUNCIL ATTN:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT :ADMINISTRATIVE SERVICES DATE: SUBJECT: DECEMBER 3, 2002 CMR: 444:02 UPDATE TO LONG RANGE FINANCIAL PLAN REPORT IN BRIEF Attached to this report is the City’s updated General Fund Long Range Financial Plan (LRFP). This document contains, a discussion of: the economy (Chapter 1); current revenues and expenditures, assumptions about the growth in these categories in the future, and forecasts of future revenue streams and expenses (Chapter 2); and the financial challenges that lie ahead (Chapter 3). The base forecast presents significant financial challenges for the City over the ne~xt ten years. It represents a picture of the City’s financial condition if no action is taken to align resources and costs. The second forecast incorporates expenditure reductionsthat bring expenditures in line with revenues over the same period, while assuring healthy reserves and maintaining the City’s $6.1 million annual payment to the Palo Alto Unified School District as well as the commitment to the Infrastructure Plan. Just as the City took action in 2001-02 and in 2002-03 to balance its budget, so it will act in the future to maintain its sound financial condition. After the New Year, the City Manager will present to Council for discussion and action, a cost reduction plan that will decrease general fund operational costs by 5 percent for the next two-year budget cycle. The LRFP is designed, to serve as a guide for these discussions and the decisions that lie ahead. CMR:444:02 Page 1 of 5 RECOMMENDATION Staff recommends that the Finance Committee review the attached forecasts of revenues, expenses~ and reserve levels and determine any changes or adjustments in the assumptions utilized and discussed. BACKGROUND The backdrop for the LRFP is a national and local economy under duress. Factors contributing to this condition include: falling corporate earnings; weak corporate capital spending on technology; layoffs across all business sectors; declining exports; deteriorating stock equity and option values; falling consumer confidence.; slow wage and income growth; accounting and financial statement irregularities; international tensions; and state and federal budget deficits. Given the Federal Reserve’s recent 0.5 percent reduction in interest rates that are already at an all-time low, it is safe to assume that a prolonged period of economic weakness is at hand. Starting in January 2001, economically sensitive revenues such as sales and transient occupancy taxes began to decline dramatically. These two revenue sources dropped by $8.5 million from 2000-01 to 2001-02. Like numerous Silicon Valley businesses reacting to lower revenues, the City developed plans to reduce expenditures and enhance revenues in 2001-02 and in the 2002-03 budget. Trying to avoid permanent service level reductions, the City used a combination of ongoing and one-time revenue enhancements and cost reductions to balance the budget. The sustained economic downturn, however, calls for additional solutions to the City’s projected deficit in future years DISCUSSION " The LRFP presents a model of likely future year financial events and their, impact on the City’s financial base. The Plan cannot precisely predict revenues and expenses, but it can help the City identify its priorities, allocate its available resources efficiently, and continue to deliver ,quality services to the community. The LRFP’s base forecast shows net operating deficits ranging from $6.5 million in 2003,04 to $15.2 million in 2012-13. Two factors contribute to the majority of the deficit: the loss of local revenues due to the soft economy and potential structural changes in the sales tax base; and projected expenditure increases for employee pension and .health care costs based on recent actions and projections by the California Public Employee Retirement System (CALPERS). While economically sensitive revenues will rebound somewhat over the next several years, they are not projected to return to 2000-01 levels until around 2006-07. On the expense side, employee health care costs are expected to grow an average of 11.2 percent annually and to grow as a percentage of total City expenditures from the current 3.9 percent to 7.2 percent ten years from now. Of greater concern are rising pension costs expected to grow from 4.2 percent to 10.9 percent of all City expenditures in 2012- CMR:444:02 Page 2 of 5 13. Thirty-six (36) percent of all City expense growth is concentrated in these two areas that play a major role in projected future deficits. Looking forward, staff has analyzed the major revenue and expense challenges that lie ahead and, where appropriate, indicated actions that are underway to address them. For example, the Mayor has formed an ad-hoc committee of Council members and staff to explore ways to maintain a viable and vibrant economic base. Committee members have visited a variety of businesses such as auto dealerships, high tech firms, hotels, malls, and other retail outlets. The purpose of these visits is to determine and resolve issues that will facilitate economic vitality in Palo Alto and maintain the revenues that are essential for delivering services to residents and businesses alike. The General Fund budget must be adjusted to correct the expenditure trend, insuring sufficient reserves and revenue growth. To demonstrate the e:~tent of overall cost reductions that will be necessary,. ~taff.has included a forecast that balances revenues and expenses over the next ten years. This forecast includes a 3 percent cost cut in 2003-04 and a 2 percent reduction in 2004-05. The cumulative effect of these reductions results in annual surpluses and reserves that meet Council guidelines. These are general percentage reductions to expense and are not based on specific line item or service cuts. Staff has embarked on a review of all services and programs funded by the General Fund with the goal of eliminating projected deficits. The fiscal year 2003-2005 budget will be developed in a thoughtful and reasonable manner, in order to maintain community and organizational values, and accomplish the following: Budget scenarios that permanently reduce operating expenditures by 3% and 5% In allocating resources, continue to recognize the City Council’s Top 5 Priorities Service prioritization in order to correctly evaluate essential services A review of all current and future staff vacancies looking for opportunities to re- organize by achieving operational efficiencies Clear comrnunication of the plan indicating the reductions and service impacts to the City Council and the community Continue to work on plans that effectively control future health care, pension and retiree medical cost. 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. CMR:444:02 Page 3 of 5 POLICY IMPLICATIONS The implications of the LRFP are that the City is facing expenditure or service level reductions over the next several years. Such actions are consistent with the City’s policy of maintaining a balanced budget and Budget Stabilization Reserve requirements. ENVIRONMENTAL REVIEW This report does not require California Environmental Quality Act (CEQA) review. ATTACHMENTS J, Chapter I: State of the Economy Chapter II: Long Range Financial Forecast Exhibit 1 Base Forecast Exhibit 2 Forecast with Three and Two Percent Reductions Exhibit 3 PercentageChanges in Forecast for Revenue and Expenses Exhibit 4 General Fund Reserve Summary Chapter III: Financial Challenges Attachment 1 Attachment 2 Attachment 3 Attachment 4 Attachment 5 Attachment 6 Attachment 7 Attachment 8 Attachment 9 Attachment 10 Palo Alto Population Statistics Consumer Price index Actual Sales Tax Trend Lines California GSP and City Sales Tax Revenues City Sales Tax Receipts - The Last Twenty Years Property Tax Receipts - The Last Twenty Years TOT Receipts - The Last Twenty Years UUT Receipts - The Last Twenty Years Documentary Transfer Tax - The Last Nine Years Financial and Other Data PREPARED BY: JOE Director CHARLES PERL, Budget Manager PAI, Senior Financial Analyst ’ /STL~ MONTANO, Senior Financial Analyst CMR:444:02 Page 4 of 5 DEPARTMENTAL HEAD APPROVAL:~. CARL Y/EATS, Director AdminCtrative Services CITY MANAGER APPROVAL: ............................~ !dr~.~" ...........t EMILY HARRISON Assistant City Manager CMR:444:02 Page 5 of 5