HomeMy WebLinkAboutStaff Report 13800
City of Palo Alto (ID # 13800)
City Council Staff Report
Meeting Date: 1/10/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Review and Accept the FY 2023 - FY 2032 Long Range Financial Forecast
(LRFF) and FY 2023 Budget Development Guidelines
From: City Manager
Lead Department: Administrative Services
Recommended Motion
The Finance Committee and staff recommend that the City Council accept the Fiscal Year (FY)
2023 to 2032 General Fund Long Range Financial Forecast (Attachment A) and annual Budget
Development Guidelines (Attachment B) and direct staff to use this forecast as the starting
point for the initiation of the FY 2023 budget process.
Executive Summary
The FY 2023 - 2032 Long Range Financial Forecast (LRFF) was reviewed with the Finance
Committee on December 7, 2021 (Attachment A) along with the annual Budget Development
Guidelines (Attachment B). This report summarizes the key discussion points with the Finance
Committee and includes additional information requested by the Finance Committee to provide
context and/or additional data points of reference to the City Council. Per the City Council
policies, this item, unanimously approved by the Finance Committee, would be a consent
agenda item. However, staff and the Committee have placed this item on the City Council’s
action agenda for the full Council deliberation in acknowledgement of the importance for
financial planning in the continued varied economic conditions due to the ongoing pandemic.
Discussion
The FY 2023 - 2032 General Fund Long Range Financial Forecast (LRFF) marks the beginning of
the FY 2023 annual budget process and provides the projected General Fund financials over the
next ten years based on current City Council approved service levels (“Base Case”) as well as
alternative financial models.
As of the timing of this LRFF, the local economy is showing positive signs of recovery, and these
trends are expected to continue in the coming year. Staff is cautiously optimistic and the onset
of the Omicron variant at the time of the development of this forecast continues to
demonstrate the variability in the economic recovery. Economists agree, the economy and
recovery activities follow closely the projections and status of the COVID-19 pandemic. This
City of Palo Alto Page 2
forecast assumes that major tax revenues continue to rebound, though it does anticipate that
in some instances it may take several years to recover to pre-pandemic levels.
The Base Case forecast projects a surplus of $2.4 million in FY 2023, followed by a $1.0 million
shortfall in FY 2024, with small but increasing surpluses in FY 2025 through FY 2032. Critically
important this year, as noted by the Finance Committee are two alternative scenarios that are
more closely aligned with City service needs:
• Scenario A) an immediate Restoration of Service to Pre-COVID-19 Service Levels, and
• Scenario B) a Competitive Market Compensation Adjustment.
Scenario A would result in a budget shortfall of $11.0 million in FY 2023 and continued
shortfalls through 2030. Scenario B would result in a lower surplus of $0.9 million in FY 2023
and a slightly longer period of shortfall through FY 2025. Though the alternative scenarios are
modeled separately, it is the intent that elements of one or both scenarios are considered in
budget development. As discussed with the Finance Committee, both staff and the committee
agree that the most likely scenario is not any of the models in isolation, however likely some
combination of the Base Case, Scenario A, and Scenario B will ultimately be the reality of the
near-term financial future for the City’s General Fund.
Additionally, a one-time funding surplus was reported in the FY 2021 Annual Comprehensive
Financial Report (ACFR) (CMR 13501), which resulted in Budget Stabilization Reserve (BSR)
levels that currently exceed the 18.5 percent funding target by $4.6 million in FY 2022. In
addition, this LRFF estimates that FY 2022 could end the year with a surplus of up to
approximately $10 million. These one-time funding surpluses have not been factored into the
2023-2032 forecast years. The Committee and staff acknowledged the important to recognizing
the one-time versus ongoing revenues and costs. This was discussed further during the budget
development guidelines which encourages matching one-time sources of funding with one-time
uses of funds.
As directed by the City Council, staff will include recommendations for addition of resources
and appropriation of funds as part of the FY 2022 Midyear process, scheduled in the first
quarter of the new calendar year and expects to provide recommendations for these surplus
funds as part of this report
Additional Information Requested by the Finance Committee
As part of the Finance Committee’s review of the LRFF, a few requests were made to provide
context and/or additional data points of reference. Staff has compiled these items below.
Transfer of Property Ownership: At the December 7, 2021 meeting, the Finance Committee
requested additional information relating to the turnover status of properties and impact to
overall Property Tax revenues. The table below is provided by the City’s property tax
consultant, HdL Coren & Cone, and includes a historical summary of the original assessed value
versus the sales price (in millions), by ownership type. This analysis is one of many variables
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used in the development of Property Tax estimates. Of the overall assessed value (AV) growth
in FY 2022, approximately two (2) percent of the annual AV growth is attributed to the transfer
of property ownership; this is consistent with recent years.
Single Family Residential Multifamily, Commercial,
Industrial, Vacant TOTALS
Tax
Year
#
Sales
Orig.
Value
Sale
Price
%
Chg
#
Sales
Orig.
Value
Sale
Price
%
Chg
#
Sale
Orig.
Value
Sale
Price
%
Chg
$
Chg
2021 489 $844 $1,620 92% 48 $221 $337 53% 537 $1,065 $1,957 84% $892
Est. Revenue Change: $828
2020 483 $752 $1,511 101% 39 $450 $598 33% 522 $1,202 $2,108 75% $906
Est. Revenue Change: $841
2019 448 $656 $1,396 113% 53 $413 $737 78% 501 $1,069 $2,132 99% $1,063
Est. Revenue Change: $992
2018 494 $705 $1,662 136% 51 $575 $1,065 85% 545 $1,279 $2,727 113% $1,448
Est. Revenue Change: $1,363
2017 537 $737 $1,678 128% 45 $177 $402 127% 582 $914 $2,080 128% $1,166
Est. Revenue Change: $1,100
Each value indicated above (i.e., “Original Value” or “Sales Price”) is the sum of the full value of all parcel transactions in
millions. For example, in 2021, the original value of $844 million increased to $1.6 million once the new sale price was
accounted for, a growth of $776 million in assessed value or 92% change.
Inflation: At the December 7, 2021 meeting, the Finance Committee requested additional
information pertaining to the impact of inflation on the organization. As a service driven
organization, nearly 60 percent of General Fund costs are salaries and benefits. Salaries and
benefits are increased each year in accordance with applicable Memorandum of Agreements
(MOA’s). In instances where no MOA is in place, the City’s practice is to use a general 2.0
percent increase. This is consistent with prior Council direction in previous long range financial
forecasts to use the 2.0 percent increase as a forecasting assumption, not as a commitment to
future negotiations. It is a standard convention used in good times and bad, not a prediction of
what will happen in the coming few years. As the general cost of living grows, staff are
monitoring current contracts with neighboring jurisdictions and seeing upward trends in
general wage increases, likely due in-part because of this inflationary period.
Staff has factored in the most recent California Consumer Price Index1 in the San Francisco Bay
Area for non-salary expenses in FY 2023. While this assumption assists in aligning expenses with
routine increases, it does not account for new contracts. As staff address new projects or
sunsetting multi-year service contracts, typically a public procurement process is completed for
a new contract. Through this public process, these new multi-year agreements may see growth
from prior costs at higher rates due to the growing cost of business. For example, on the
January 10, 2021 calendar, the City recently completed a procurement process for power
washing of City facilities and sidewalks. The lowest bid was over $200,000 above the engineers
estimate of approximately $700,000. Staff monitors these and works to offset cost increases to
the extent possible, however will continue to identify any gaps as new contracts are entered.
1 State of California Department of industrial Relations. https://www.dir.ca.gov/OPRL/capriceindex.htm
City of Palo Alto Page 4
Inflation is not anticipated to impact the City’s current long-term debt, as these debt structures
are financed at fixed rates. Should the City consider financing investments in the future, staff
will review the market and adjust the cost of the financing accordingly.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2023 represents the beginning of the fiscal year 2023 budget
development process. As in previous years, the City Council discussion of LRFF will provide
guidance to staff in the budget development process. It is anticipated that conversations with
City Council and the community will occur through public budget hearings in Spring 2022,
according to the standard budget adoption process.
RESOURCE IMPACT
Financial implications from this report and input from the City Council will be considered in the
City Manager’s development of the Fiscal Year 2023 budget.
ENVIRONMENTAL IMPACT
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachments:
• Attachment A: FY 2023-2032 Long Range Financial Report (LRFF), CMR 13502
• Attachment B: FY 2023 Budget Development Guidelines
City of Palo Alto (ID # 13502)
Finance Committee Staff Report
Meeting Date: 12/7/2021
City of Palo Alto Page 1
Title: Review and Recommend That Council Accept the FY 2023 - FY 2032
Long Range Financial Forecast (LRFF) and FY 2023 Budget Development
Guidelines
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council
accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2023-2032 and the
FY 2023 annual Budget Development Guiding Principles (Attachment A) and direct staff to use
this forecast as the starting point for the initiation of the FY 2023 budget process.
EXECUTIVE SUMMARY
Historically, the City has presented a ten-year General Fund Long Range Financial Forecast
(LRFF) in December that marks the beginning of the annual budget process. This preliminary
forecast is based on the most current information available, actual revenues for FY 2021, and
expected results through FY 2022. General Fund expenditures are based on current City Council
approved service levels compared to projected revenues over the next year.
The Base Case Long Range General Fund forecast projects a surplus of $2.4 million in FY 2023,
followed by a $1.0 million gap in FY 2024, with small but increasing surpluses in FY 2025
through FY 2032. This forecast maintains current service levels approved in FY 2022 and should
be used for planning purposes to assist in gauging effects of major policy interventions against a
likely “status quo” version of the future. The level of uncertainty in this forecast is reduced from
where it was a year ago, but the City is first and foremost continuing to manage through the
unpredictable nature of the pandemic and impacts on the local economy.
In addition to the Base Case Forecast, staff modeled two alternate forecast scenarios that could
more closely align with the City’s service needs and financial outcome from the pandemic. The
two scenarios are A) an immediate Restoration of Service to Pre-COVID-19 Service Levels, and
B) a Competitive Market Compensation Adjustment. These scenarios are modeled separately
for purposes of this report, but impacts from both of these scenarios could happen during the
forecast period. Compared to the Base Case, both of these scenarios increase the General Fund
gap over the next ten years. In Scenario A, FY 2023 changes from a surplus to a gap of $11.0
Attachment A - 1
Attachment A
City of Palo Alto Page 2
million, and revenues are not anticipated to be able to fund the annual expenditures until FY
2030. In Scenario B, the surplus in FY 2023 decreases to $0.9 million, the General Fund has a
larger gap in FY 2024 of $2.6 million, and the gap continues into FY 2025 ($1.0 million) before
returning to a surplus in FY 2026.
The difficult and significant actions that Council took to reduce services and balance the budget
during the pandemic were never meant to be permanent; however, restoration of impacted
services would require deliberate action. As mentioned in the preliminary FY 2022 Q1 financial
status report (CMR 13439), there are several issues across the City impacting the ability to
transition out of the pandemic including staff turnover, recruitment and retention, and supply
chain issues that could continue into FY 2023. Development of the FY 2023 budget and planning
for the subsequent years outlined in the forecast will need to be done strategically over the
next several months in order to balance the increased service level needs of the community
with the financial resources currently projected.
City staff will continue to review and refine these projections to establish the FY 2023 budget
and use this forecast to begin internal planning for budget balancing solutions. Based on this
forecast, it is anticipated that the prioritization of spending and consideration of measured
restoration of services are necessary to ensure continued financial stability. More detailed
guidelines or Budget Policies to inform the development of the FY 2023 budget are discussed at
the end of this document (Attachment A).
Looking forward, the City continues to face several pressures from the uncertain recovery from
the financial impacts of the COVID-19 pandemic, to funding and completing the 2014 Council
approved Infrastructure Plan projects, and the growing costs of pension benefits and labor
costs due to the current labor market and cost of living in the Bay Area. The continued policy
direction from the City Council regarding proactively addressing the pension obligations,
including the direction to assume a lower discount rate in calculating pension costs, is
contained in the forecast model. The City continues to face critical choices in order to balance
short term revenue projections based on the current economic situation and lingering impacts
of COVID-19, with future financial challenges including any unforeseen program needs, any
additional proactive funding contributions to pension liabilities, and evaluating service
restorations to pre-pandemic levels. The review of this forecast and the planning that follows
will be critical since the City is facing many requests and has identified several key programs
that the community would like to fund and complete.
Included in this report and subsequent documents are the following:
- Discussion of the current financial climate of the United States to the local economy of
the City of Palo Alto
- Current financial forecast including Revenue and Expense assumptions in FY 2023-2032
o Current financial status of the General Fund as of the FY 2022 Adopted Budget,
and a brief discussion of revised FY 2022 revenue estimates by category (a more
Attachment A - 2
Attachment A
City of Palo Alto Page 3
detailed discussion is in the preliminary 1st Quarter Financial Status Report CMR
#13439)
- FY 2023 Budget Development Policies to inform the Budget process (Attachment A)
- Alternate scenarios to the base case forecast to demonstrate financial impacts to the
City from:
o Full restoration of services to pre-pandemic levels; reductions in FY 2021 and FY
2022 as a result of the COVID-19 Pandemic, and
o Modeled potential market-based compensation adjustments
BACKGROUND
Annually the Office of Management and Budget produces a ten-year General Fund Long Range
Financial Forecast (LRFF). The LRFF reflects staff’s best estimates on the projected revenues and
expenditures over the next ten years based on the information that is currently available. It is
important to note that the LRFF is a planning document and is separate and distinct from the
development of the City’s annual Operating and Capital Budgets. There are assumptions and
parameters modeled in the LRFF, but these assumptions are revised and refined as more
information becomes available through the budget development process.
The LRFF contains a comprehensive review of the costs to provide current City Council
approved service levels, including current contracts, updates to salaries and benefits based on
the current population of employees, and the current labor contracts in effect. Important to
note in this LRFF is the ongoing budget adjustments that were approved in the FY 2022
Adopted Budget and in the FY 2022 Q1 Preliminary Financial Status Report (CMR 13439). The
LRFF also reviews the status of the current economy and various economically sensitive
revenues such as Sales Tax, Documentary Transfer Tax, Property Tax, and Transient Occupancy
Tax to explain key trends in those areas. This Forecast allows staff and City Council to look at
both the short-term and long-term financial status of current service levels in the General Fund
to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
Palo Alto serves a diverse community with a broad range of unique services that adds to the
significant complexity of managing a balanced budget and healthy financial outlook. The
demands and conflicts coupled with an economy that is recovering with some uncertainty after
the COVID-19 pandemic have heightened the intensity of the financial forecasting and budget
development processes. New analyses and data generation demands require deep-dives into
complex problem-solving within an engaged public process across a wide range of issues. These
forecast figures present staff with the challenge of prioritizing the growing needs of the City
with the fiscal sustainability of these needs.
The Economy
National, state, regional and local economic indicators are mixed, while the national economy
performance is strong it has cooled as summer ends. The local economy on the other hand had
strong performance in the second and third (calendar) quarters of 2021 with the expectation
this will continue into calendar year 2022 and beyond, albeit at a slower growth rate, as
Attachment A - 3
Attachment A
City of Palo Alto Page 4
progress on vaccinations allow economic activity to resume and/or expand particularly in
previously shut-down sectors like restaurants, hotels, entertainment, and travel. Increased
spending of household pandemic-era savings due to pent-up demand for services created by
the pandemic restrictions could result in stronger economic growth as the pandemic
restrictions further wane. However, increased spending on services may slow spending on
durable goods which has increased and added to the strain to the supply chain. Business
investments continue to be robust, particularly in information processing equipment and
software. Overall housing construction remains strong, but it is expected to gradually decline
since building is outpacing population growth and demand. This is expected to a lesser degree
in high demand and densely populated areas like the San Francisco Bay Area. With the recent
passage of the bipartisan infrastructure bill in Congress, the concern about the impact of the
Federal stimulus packages ending, that contributed to the positive economic indicators over the
past year, has lessened though there remains uncertainty about the infrastructure spending
timing in the short-term.
As of the printing of this report, the rising vaccination rate, declining hospitalizations, and
slowing of the spread of the virus in California and particularly in the Bay Area bodes well for
Palo Alto’s economic recovery. On a national level, areas of the country that are slower to
address the pandemic might cause a slower national economic recovery in calendar year 2022.
Another impediment to growth, both nationally and locally, is the labor market contraction. The
pre-pandemic employment declined by about 10 million nationally, and businesses of all types
are impacted by labor shortages. Employment remains down by millions over the pre-pandemic
level even with the population growing over the past year. Some of this is explained by lack of
childcare preventing a parent from re-entering the labor force, health concern especially those
at higher risk and/or cannot be vaccinated due to a high risk of complications, and the long
known and expected baby boomers' retirement trend that the pandemic is thought to have
accelerated. This has created the conditions for companies to offer higher wages and/or
benefits to both skilled and lower-skilled workers to attract and retain them. However, issues
like the labor shortages, supply chain challenges, and rising gas and oil prices are stoking
inflationary pressures which could, if unchecked, dampen economic growth. The Federal Open
Market Committee (FOMC), whose actions during the pandemic kept the financial markets
liquid and operating, is carefully monitoring the economy and has already taken steps to
address the rising inflation, although the ability to keep this in an acceptable range is uncertain.
According to the US Bureau of Economic Analysis (BEA), the “advance” estimate of the U.S.
economy’s national gross domestic product (GDP) percentage change from the preceding
quarter grew in the second and third (calendar) quarters by 6.7 percent and 2 percent,
respectively. According to the BEA, “the increase in real GDP in the third quarter reflected
increases in private inventory investment, personal consumption expenditures (PCE), state and
local government spending, and nonresidential fixed investment that were partly offset by
decreases in residential fixed investment, federal government spending, and exports. Imports,
which are a subtraction in the calculation of GDP, increased (see below Table 1). The increase in
third quarter GDP performance reflected the continued economic impact of the COVID-19
Attachment A - 4
Attachment A
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pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the
reopening of establishments in some parts of the country. Government assistance payments in
the form of forgivable loans to businesses, grants to state and local governments, and social
benefits to households all decreased. The national consumer price index (CPI), as of the third
calendar quarter has grown 5.3 percent and exceeds smaller increases in first and second
quarters of 1.9 percent and 4.8 percent. More households could see their finances as worse if
inflation erodes their nominal wage gains and shrinks their real purchasing power. The recent
inflation spike has driven pandemic pessimism, but it’s not clear if this will lead into reduced
retail spending. The following graphs depict the GDP and consumer price index (CPI) over the
past few years and CPI forecast in calendar year 2022.
Table 1: National Gross Domestic Product (GDP)
Table 2: National Consumer Price Index
Attachment A - 5
Attachment A
City of Palo Alto Page 6
The nation’s unemployment rate fell to 5.1 percent in the third quarter, compared to a record
high of 13.1 percent at the height of the pandemic in the second (calendar) quarter of 2020. It
is expected, by the U.S. Bureau of Labor Statistics, that the unemployment rate will decline
below the pre-pandemic low of 3.5 percent. Per the State of California's Employment
Development Department, the state’s unemployment rate as of September 2021 is 6.4 percent
and the County of Santa Clara is 3.9 percent. Nationally, the improved unemployment rates are
driven by job gains in the leisure and hospitality; trade, transportation and utilities; professional
and business services; education and health services; manufacturing, and construction. As
shown in Table 2, these trends are expected to continue in calendar year 2022. Historically, the
Bay Area job growth has been led by the Peninsula for the past several years. The
unemployment rate for the San Francisco Peninsula improved to 4.7 percent in September
2021 compared to 9.0 percent in September 2020.
Table 3: U.S. Unemployment Rate
Attachment A - 6
Attachment A
City of Palo Alto Page 7
DISCUSSION
Included in this section are the Base Case and revenue and expense assumptions. As with all
forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in
this document. For example, General Fund revenues may exceed or fall below expectations
based on changes in economic or non-economic conditions. Various cost elements can also vary
from year to year. Adding to this complexity is the uncertain recovery from the financial
impacts of the COVID-19 pandemic. This forecast assumes a gradual improvement of economic
conditions and the continued easing of public health restrictions. In this forecast major tax
revenues continue to rebound from prior year levels, reserves for economically sensitive
revenues are phased out as modified or canceled programs return, and investments in Capital
projects are restored to pre-pandemic levels. It also recognizes legislative responses to the
pandemic that have boosted the City’s financial outlook in the near term, such as the
Coronavirus Aid, Relief, and Economic Securities Act (CARES Act), and American Rescue Plan Act
(ARPA). As one-time sources, these funds are eliminated in FY 2024.
Base Case
The following table displays the projected General Fund revenues and expenditures over ten
years and the cumulative net operating margin. The operating margin reflects the variance
between the projected General Fund revenues and expenditures for each year of the forecast
or the annual surplus or shortfall. The net operating margin is presented on a one-time basis, as
the annual surplus or shortfall for a given year, and on an incremental basis. The incremental
forecast assumes that each shortfall is addressed completely with ongoing solutions in the year
Attachment A - 7
Attachment A
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it appears and that each surplus is completely expended with ongoing expenditures. Because it
is the City’s goal to remain in balance on an ongoing basis, the incremental figure is useful to
illustrate the additional surplus and/or shortfall attributed to a particular fiscal year. To the
extent that a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is
important to understand that the remaining budget gap or surplus will carry over to the
following year.
The current Base Case financial forecast projects a surplus of $2.4 million in FY 2023, followed
by a $1.0 million shortfall in FY 2024, with small but increasing surpluses in FY 2025 through FY
2032. As outlined above, if the City spends the projected FY 2023 surplus of $2.4 million on an
ongoing basis, the available projected gap for FY 2024 will be approximately $3.4 million. Based
on these assumptions, the cumulative net operating margin, or ongoing surplus, during the
forecast period is $34.3 million.
TABLE 4: FY 2023 – 2032 Long Range Financial Forecast (Base Case)
TABLE 5: FY 2023 – 2032 Long Range Financial Forecast Net Operating Margin (Base Case)
Attachment A - 8
Attachment A
City of Palo Alto Page 9
Revenue Assumptions
On October 25, 2021, the City Council reviewed and discussed the preliminary Q1 FY 2022
financial status report (CMR 13439). This report provided a snapshot in time, with some
revenues projected to exceed the FY 2022 Adopted Budget estimates that reflected a slow to
moderate recovery pace as directed by the City Council (CMR 11954).
Tax revenues constitute nearly 60 percent of General Fund resources and the FY 2022 forecast
projects a 10.5 percent, or $11.6 million, increase over adopted levels that is driven by higher
than anticipated receipts in Sales Tax, Property Tax, and Transient Occupancy Tax (TOT)
categories. In FY 2023, the forecast projects a $9.1 million, or 7.5 percent, tax revenue increase
compared to the FY 2022 projected levels. The forecast assumes that major tax revenues
continue to rebound from prior-year levels; however, overall tax revenues in FY 2022 remain
below pre-pandemic levels by $12.3 million, or 9.1 percent, and are not expected to reach pre-
pandemic levels until FY 2024 in this LRFF.
The FY 2022 forecast for non-tax revenues projects a slight 0.2 percent, or $112,000 increase
over adopted levels. In FY 2023, the forecast projects a $3.6 million, or 5.0 percent, increase
compared to FY 2022 projected levels. This increase is primarily attributable to new fee-based
programs in the Fire Department and the restoration of several programs and services that
were modified due to public health orders, mainly in public safety and community services.
As part of the Federal stimulus support, the City is expected to receive $13.7 million in
American Rescue Plan Act (ARPA) funding that the Council, per the legislation, has designated
to address the immediate financial impacts resulting from the COVID-19 pandemic, specifically
the significant revenue loss. Budgetarily, and included in this forecast, is the assumed use of
$8.2 million (60 percent) appropriated in FY 2022 and $5.5 million (40 percent) appropriated in
FY 2023 to assist in smoothing the revenue loss as a result of the pandemic. As a one-time
funding source, ARPA funding is eliminated in FY 2024 and beyond which contributes to the
fluctuations in the surplus/operating gap in the first few years of the 10-year forecast. The
changes by revenue category, as well as the current expected FY 2022 status of many of the
revenue categories, are discussed in greater detail below.
Attachment A - 9
Attachment A
City of Palo Alto Page 10
TABLE 6: General Fund Revenue Forecast
TABLE 7: General Fund Revenue Forecast Year to Year Percentage Change
Sales Tax
Sales tax receipts declined in FY 2020 and FY 2021 by 16.3 percent and 4.70 percent,
respectively. However, the FY 2021 fourth quarter cash receipts increased by 28.2 percent over
the prior year’s same quarter. The general retail, food products which includes restaurants, and
transportation which includes auto sales had significant increases. This economic trend also
occurred in municipalities in the San Francisco Bay Area and in California. These significant
upward trends were partially offset by business-to-business sales which has been declining.
Sales Tax is anticipated to generate $30.6 million in FY 2022, a $2.5 million or 8.7 percent
increase over the adopted level of $28.2 million, and $1.5 million or 5.2 percent over FY 2021
actuals of $29.1 million. In FY 2023, this revenue is anticipated to increase to $32.3 million, a
$1.7 million or 5.2 percent increase over FY 2022 projected levels. Revenue in this category is
experiencing growth; however, remains below pre-pandemic levels of $36.5 million in FY 2019.
TABLE 8: City of Palo Alto Sales Tax Revenues through FY 2032
Attachment A - 10
Attachment A
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Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents
approximately 25 percent of the total revenues. Historically, the 10-year compound annual
growth rate (CAGR) was 8.2 percent with a low of –1.1 percent in FY 2011 and a high of 11.5
percent in FY 2015. During economic downturns, impacts to property tax occur a year later. As
a result, the FY 2021 actual growth was 10.7 percent and FY 2022 is forecasted to be flat. In
addition, fiscal years 2018, 2019, 2020, and 2021 included receipts of $1.4 million, $2.7 million,
$3.9 million, and $5.5 million, respectively, for excess Educational Revenue Augmentation Fund
(ERAF) distributions from the County of Santa Clara. The FY 2022 forecast includes $4.5 million
for excess ERAF. ERAF is the fund used to collect and disburse property taxes that are shifted
to/from cities, the County, and special districts prior to their reallocation to K-14 school
agencies. When the state shifts more local property tax than required to support schools these
funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not
considered a permanent local revenue source.
As discussed in the preliminary first quarter (Q1) FY 2022 financial status report (CMR 13439) ,
five counties including, Santa Clara County, and the State were in a dispute over the calculation
and disbursement of excess ERAF funds. The City had been reserving these funds, pending a
resolution of the dispute beginning in FY 2021 and through prior near-term forecasts. The
dispute between the counties and the State was settled in FY 2021 and, consistent with City
Council direction, these funds have been recognized in the Budget Stabilization Reserve (BSR)
and reallocated to the City’s reserve: Utilities Transfer Litigation (Equity Transfer). In FY 2022,
an additional $1.7 - $2.0 million above budgeted levels is anticipated as a result of the favorable
resolution.
In November 2021, the County of Santa Clara notified the cities that the California School
Boards Association and its Education Legal Alliance filed a lawsuit against the Controller of the
State of California arguing that the settlement reached with the counties is unlawful. The
County estimates that 20 percent of ERAF in FY 2022 is subject to this litigation. This forecast
assumes a slightly higher 25 percent or $1.5 million reserve for potential loss starting in FY 2022
Attachment A - 11
Attachment A
City of Palo Alto Page 12
and beyond. It’s uncertain if a similar percentage is at risk for the prior two years; staff will
continue to monitor the status of this dispute and report on any significant developments.
Transfer of ownership has been a significant driver of past growth; however, that growth is
expected to moderate in FY 2022 due to the delayed impact of the (pandemic) recession. For
example, the median sales price of single family residential in the first quarter of FY 2022
declined by 2.6 percent.
TABLE 9: City of Palo Alto Property Tax Actuals and Forecast through FY 2032
Property Tax is anticipated to generate $56.5 million in FY 2022, a $5.2 million or 10.2 percent
increase over adopted levels of $51.2 million and remains consistent with FY 2021 actuals of
$56.6 million. In FY 2023, this revenue is anticipated to increase to $58.2 million, a $1.7 million
or 5.2 percent increase over FY 2022 projected levels.
Transient Occupancy Tax (TOT)
Revenue in this category is impacted by business and other leisure/non-leisure travel and has
experienced significant reductions in prior years due to public health orders, travel restrictions,
and diminishing business and personal travel plans resulting from the pandemic. As public
health conditions improve and travel resumes, revenue in this category is anticipated to recover
and possibly grow. This revenue remains low compared to pre-pandemic actuals of $25.7
million in FY 2019; however, strong growth was realized in the FY 2021 fourth and FY 2022 first
quarters. In FY 2022, receipts are expected to generate approximately $11.1 million (57 percent
below pre-pandemic levels) versus the FY 2021 actuals of $5.2 million (80 percent below pre-
pandemic levels); a 23 percent improvement. The opening of the two Marriott hotels in the
prior fiscal year and the re-opening of several hotels in the first quarter of FY 2022 are positive
developments that will also drive recovery for this tax revenue.
Attachment A - 12
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Estimated TOT receipts of $11.1 million in FY 2022, would generate a $2.7 million or 32.1
percent increase over adopted levels of $8.4 million, and $4.9 million or 113.5 percent over FY
2021 actuals of $5.2 million. In FY 2023, this revenue is anticipated to increase to $16.9 million,
a $5.8 million or 52.3 percent increase over FY 2022 projected levels. Year-to-date, daily
average room rates increased by 37.7 percent from $120.76 per day to $166.24 per day while
occupancy rate increased by 40.4 percent from 43.2 percent to 60.6 percent.
TABLE 10: City of Palo Alto Transient Occupancy Tax Actuals and Forecast through FY 2032
Note: Jan. 2008, TOT Rate went from 10% to 12%
Jan. 2015, TOT Rate went from 12% to 14%
April 2019, TOT Rate went from 14% to 15.5%
Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.
Revenue in this category is impacted by consumption levels and has experienced reductions in
prior periods due to water reduction programs and reduced workforces and business closures
due to the pandemic. This revenue is showing early signs of recovery as public health orders
ease and workers return to the office. UUT is anticipated to generate $14.7 million in FY 2022, a
$0.3 million or 2.1 percent increase over adopted levels of $14.4 million, relatively constant
with FY 2021 levels. In FY 2023, this revenue is anticipated to increase to $14.9 million, a $0.2
million or 1.6 percent increase over FY 2022 projected levels.
TABLE 11: City of Palo Alto Utility Users Tax Actuals and Forecast through FY 2032
Attachment A - 13
Attachment A
City of Palo Alto Page 14
Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and dependent on sales volume and the mix of
commercial and residential sales. In FY 2021, DTT experienced record receipts of $10.6 million.
This milestone was a result of six large commercial transactions and robust residential sales.
During economic downturns, some investors see it as an opportunity to expand their holdings.
Revenue from July through October in FY 2021 is running 4.4 percent above the same period in
FY 2020. DTT is anticipated to generate $8.1 million in FY 2022, a $1.0 million or 13.8 percent
increase over adopted levels of $7.1 million, and $2.5 million or 23.5 percent lower than FY
2021 actuals of $10.6 million. In FY 2023, this revenue is anticipated to decrease to $7.4 million,
a $0.7 million or 9.9 percent decrease over FY 2022 projected levels.
As in past years, this revenue source is challenging to forecast and can fluctuate month to
month depending on real estate transactions. The number of transactions through October
2021 (283) are running higher than those through October 2020 (229) with the total value of
these transactions increasing by 4.4 percent. However, though performance to date is higher
than the FY 2021 peak revenue receipts, the FY 2021 DDT receipts is not expected to be
repeated in FY 2022 since the major commercial sales receipts, which made up over half the
DDT receipts in FY 2021, came in the latter half of the last fiscal year. Though the Palo Alto
housing market remains strong, as discussed in the Property Taxes section, single family
residential median sales price in Palo Alto has slightly declined, which is an expected occurrence
as the recession will impact property sales activity in FY 2022.
TABLE 12: City of Palo Alto Documentary Transfer Tax Actuals and Forecast through FY 2032
Attachment A - 14
Attachment A
City of Palo Alto Page 15
Rental Income
Rental Income of $14.5 million in FY 2022 primarily reflects rent paid to the General Fund from
the City’s Enterprise Funds and the Cubberley Community Center. There is a slight increase in
rental income 23of $1.0 million. The increase can be attributed to a review of the changes in
the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-
August period, and it is expected that revenues will be reviewed and revised subsequent to this
forecast based on updated information, typically the December to December change in the
CCPI. This also assumes rentals of City space return to pre-pandemic levels in FY 2023. Impacts
from the pandemic, including reductions related to the rent forgiveness program (CMR 12234)
which provides up to three months of rent forgiveness for active non-profit tenants should be
resolved in FY 2022. As of November 1, 2021, the program has resulted in 12 tenant
applications for $255,000 of the $744,000 budgeted for rent relief. A further round of
applications will occur prior to the program’s sunset at the end of FY 2022. Additionally, staff
are working with several tenants to resolve issues of past due rent, and the City Attorney’s
Office has become involved in ongoing discussions. It is assumed this revenue source will
decrease during FY 2022 until past due rent issues are resolved.
The City is also considering using the former Los Altos Treatment Plant (LATP) site for Project
Homekey and a water purification site. Should this occur, the site would no longer be available
for rental as a laydown yard. Please see the General Expenses section of this report for
additional information regarding future plans for the former LATP site.
Charges for Services and Permits and Licenses
Revenues in the ‘Charges for Services’ and the ‘Permits and Licenses’ categories are anticipated
to be $28.4 million and $9.5 million, respectively, in Fiscal Year 2023. These amounts are
approximately $5.6 million higher than the FY 2022 amounts, mainly due to adjustments to
revenue from new Fire Department fees and adjustments to the Economically Sensitive
Department Revenue Reserve, discussed below.
Attachment A - 15
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City of Palo Alto Page 16
Revenues in these categories were impacted by changes in FY 2023, such as increases to reflect
a full year of operation for the Junior Museum and Zoo, which includes a ticketed entry fee and
membership program. These budget categories also include revenues associated with two fee-
based programs in the Fire Department: a first responder fee (assessed on commercial
insurance companies), to cover the cost for initial response for first due engine; and an
ambulance subscription fee, to secure co-pay free ambulance transport. These fees are still in
development and are currently scheduled for implementation by Spring or Summer of 2022.
Additionally, revenues in these categories were impacted by a phase-out of the Economically
Sensitive Department Revenue Reserve. This reserve was established to mitigate unexpected
losses from services impacted by the COVID-19 pandemic, such as the suspension of parking
enforcement, delays opening the Junior Museum and Zoo, and limited operations at
community centers, recreational facilities, and the Children's Theatre. In total, $5.0 million was
set aside for this purpose in the prior year. This forecast assumes gradual overall improvements
in the return of canceled or modified services by phasing out this reserve over three years,
appropriating $2.5 million in FY 2023, $1.25 million in FY 2024, and $0 in FY 2025 and beyond.
The revenue estimates in these categories are primarily driven by the cost of staff to provide
services to the community; therefore, revenues are impacted by the City’s personnel service
costs and modeled to increase by rates consistent with general salary and benefits and CPI
trends. One exception to this is for Development Services activities and related revenue.
Development Services fees are fully cost-recoverable and the department has been modeled as
cost-neutral in this forecast. Staff will analyze municipal fee revenue activity as part of the FY
2023 Budget development process and bring forward adjustments as appropriate.
Charges for Service - Stanford Fire and Dispatch Services
The City and Stanford have two separate agreements for the provision of fire response and
emergency dispatch services. The fire response services agreement became effective in July
2018 and outlines service level terms and a new cost allocation methodology as the baseline for
agreement costs. The term extends through June 2023, with renewals through 2028 unless
otherwise terminated. The agreement included a new staffing deployment model for
suppression and medical services, which was approved by the City Council in October 2017 and
deployed in January 2018. This forecast aligns with the new staffing model and, in accordance
with the agreement, adjustments to revenue from Stanford have been aligned with the year-
over-year changes to the operating expenses in the Fire Department for FY 2022. Similarly,
changes to the revenue received for dispatching services have been aligned with the FY 2022
adjustments to the operating expenses in the Technical Services Division of the Police
Department where the costs to provide these services are budgeted. Adjustments include
applicable costs for the Public Safety Communications Manager position approved as part of FY
2022 preliminary first quarter adjustments. For fire revenue, additional adjustments may be
applicable if a new labor agreement with IAFF is negotiated. Salary and benefits cost increases
are assumed using the CCPI in the San Francisco Bay Area from the August-to-August period of
3.7% for the base year and 2.5% for out years.
Attachment A - 16
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City of Palo Alto Page 17
Charges to Other Funds
The main source of revenues in this category is General Fund administrative cost allocation plan
charges to the Enterprise and Internal Service Funds. Internal support departments such as
Administrative Services, Human Resources, and Council Appointed Offices provide services to
Enterprise and Internal Service Funds. The costs for these services are recovered through the
administrative cost allocation plan charges. The FY 2023 estimate for Charges to Other Funds of
$13.0 million reflects a slight decrease of 8.45 percent from the FY 2022 Adopted amount of
$14.2 million; this is primarily attributed to fully adjusting the costs associated with the
allocated charges in the Internal Support Departments to the adjustments made as part of the
FY 2022 Budget as well as a technical adjustment to better align the cost plan methodology
with the system calculations.
Return on Investment
The return-on-investment category reflects the interest earnings on the City’s investment
portfolio. This category is a combination of past investments, new investments at current
market rates, and available investable cash which fluctuates seasonally and annually. Staff had
anticipated the decline in interest rates would occur sooner and at a faster rate than it has
occurred, so the City experienced a higher than anticipated return on investments in FY 2021.
In addition, prudent investments further resulted in higher investment yields and earnings.
The average portfolio rate of return for the first quarter of FY 2022 was 1.61 percent, and a 1.58
percent average yield as of the fourth quarter of FY 2021. The revised General Fund FY 2022
interest earning estimate of $0.95 million is $0.10 million higher than the Adopted Budget of
$0.85 million. In FY 2023, the forecast reflects a relatively level interest rate environment with
slight increases through the ten-year period.
TABLE 13: Palo Alto Historical Investment Portfolio Yield and Citywide Interest Earnings
Attachment A - 17
Attachment A
City of Palo Alto Page 18
Operating Transfers-in
Operating Transfers-in materialize as expenses in other funds throughout the City and as a
revenue in the General Fund. This budget category includes repayment of a previous loan from
the General Fund to the Airport Fund, funding for police patrol in the downtown area, and the
equity transfer from the Electric and Gas funds. Overall, the Operating Transfers-in are
estimated to be $22.6 million, a $0.5 million decrease from the FY 2022 level of $23.1 million
due to the removal of a one-time transfer of funding for animal services in FY 2022.
In accordance with a methodology approved by the City Council in June 2009, the equity
transfer is calculated by applying a rate of return on the capital asset base of the Electric and
Gas funds. This rate of return is based on PG&E's rate of return on equity as approved by the
California Public Utilities Commission (CPUC). The transfer amount is calculated based on the
Utility Department’s projections from the Electric and Gas Five Year Financial Forecasts, as
approved by the City Council in spring 2021 (CMR 12240). For more detail on the ordinance
adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption Ordinance for
Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed
changes to equity transfer methodology.
This estimate also considers the trial court’s decision in Green v. City of Palo Alto (Santa Clara
Superior Court Case No. 16CV300760), a class action lawsuit which challenges the City’s gas and
electric rates under Proposition 26, one of many such cases following a 2015 decision involving
the City of Redding. In Green, the trial court judge found the City’s electric rates valid, but that
the City’s gas rates were taxes requiring voter approval under California’s Proposition 26,
Attachment A - 18
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City of Palo Alto Page 19
because they were set at a level sufficient to fund an annual transfer to the City’s general fund.
The results of this lawsuit will have important implications for Palo Alto, as well as for other
municipal utilities and cities in California. In September 2021, the Council therefore authorized
an appeal to seek guidance from the Court of Appeal on these novel legal questions. The City is
also exploring a ballot measure to seek voter approval or modification of the City’s general fund
transfer so City voters can have the final word on how they want to finance City services, and at
what level. Because the appeal is pending, the exact exposure to the City’s General Fund cannot
be estimated at this time. However, the City believes it is prudent to set aside funding to cover
the $12.6 million remedy related to gas rates that the Superior Court identified in Phase II, plus
interest, as well as the estimated future reduction in the gas equity transfer, should the current
Santa Clara County Superior Court decision be upheld. While the process for calculating the
equity transfer from the Electric and Gas Funds has not changed, the funding is now being held
in a Litigation Reserve. This action continues the City’s proactive actions to address known
liabilities with the best information available at the time and sets these funds aside pending
final resolution of this dispute.
Expense Assumptions
As part of developing the FY 2023-2032 Forecast expenditure budget, the General Fund
expense categories have been adjusted by removing FY 2022 Adopted Budget one-time
expenses and updating major cost elements such as salary and benefits costs. The table below
displays the expense forecast and when compared to the FY 2022 estimated expenditures,
growth of 9.9 percent is expected in FY 2023.
TABLE 14: General Fund Expense Forecast and Year to Year Percentage Change
Expenditures & Other Uses
Actual
2021
Adopted
2022
Projected
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
CAGR 10
Years
CAGR 5
Years
Salary 67,284 69,304 66,304 72,531 74,791 76,699 78,718 80,554 82,274 83,986 85,698 87,411 89,125 2.5%1.1%
Benefits 58,509 62,245 63,745 66,247 68,738 71,045 71,867 72,088 73,581 74,650 76,004 77,392 76,430 2.1%0.8%
Subtotal: Salary & Benefits 125,793 131,549 130,049 138,778 143,529 147,744 150,584 152,641 155,855 158,636 161,701 164,803 165,554 2.3%1.0%
Contract Services 17,807 30,200 30,200 29,088 29,756 30,417 28,107 28,631 29,185 29,710 30,284 30,796 31,378 0.4%-0.2%
Supplies & Material 2,234 2,980 2,980 3,085 3,160 3,234 3,308 3,382 3,456 3,530 3,604 3,678 3,752 2.3%0.9%
General Expense 6,585 7,938 7,938 8,481 8,548 8,631 8,684 8,752 8,821 8,904 7,959 8,026 8,093 0.2%0.3%
Rents & Leases 1,709 1,298 1,298 1,332 1,367 1,404 1,442 1,481 1,522 1,563 1,605 1,649 1,693 2.7%1.1%
Facilities & Equipment 464 427 427 443 454 465 476 487 498 509 520 531 542 2.4%1.0%
Allocated Charges 17,423 20,117 20,117 22,445 23,105 23,729 24,275 24,818 25,417 26,040 26,630 27,250 27,780 3.3%1.0%
Total Non Sal/Ben Before Transfers 46,221 62,960 62,960 64,875 66,391 67,880 66,292 67,551 68,899 70,255 70,602 71,929 73,238 1.5%0.4%
Operating Transfers-Out 4,326 4,296 4,296 4,431 4,462 4,493 4,529 4,561 4,598 4,636 4,669 4,707 4,746 1.0%0.3%
Transfer to Infrastructure - Base 6,911 4,506 4,506 10,673 13,640 16,607 19,575 20,010 20,456 20,912 21,381 21,863 22,356 17.4%6.5%
Transfer to Infrastructure - TOT 2,383 5,899 5,657 9,238 12,719 14,966 15,456 15,927 16,536 17,222 18,061 18,969 19,961 13.0%5.6%
Total Use of Funds 185,634 209,210 207,468 227,995 240,741 251,691 256,437 260,691 266,344 271,661 276,414 282,271 285,855 3.2%1.3%
Expenditures & Other Uses
Actual
2021
Adopted
2022
Projected
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Salary 3.0% -4.3% 9.4% 3.1% 2.6% 2.6% 2.3% 2.1% 2.1% 2.0% 2.0% 2.0%
Benefits 6.4% 2.4% 3.9% 3.8% 3.4% 1.2% 0.3% 2.1% 1.5% 1.8% 1.8% -1.2%
Subtotal: Salary & Benefits -0.2% -0.2% 6.7% 3.4% 2.9% 1.9% 1.4% 2.1% 1.8% 1.9% 1.9% 0.5%
Contract Services 69.6% 0.0% -3.7% 2.3% 2.2% -7.6% 1.9% 1.9% 1.8% 1.9% 1.7% 1.9%
Supplies & Material 33.4% 0.0% 3.5% 2.4% 2.3% 2.3% 2.2% 2.2% 2.1% 2.1% 2.1% 2.0%
General Expense 20.6% 0.0% 6.8% 0.8% 1.0% 0.6% 0.8% 0.8% 0.9% -10.6% 0.8% 0.8%
Rents & Leases -24.1% 0.0% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%
Facilities & Equipment -8.0% 0.0% 3.7% 2.5% 2.4% 2.4% 2.3% 2.3% 2.2% 2.2% 2.1% 2.1%
Allocated Charges 15.5% 0.0% 11.6% 2.9% 2.7% 2.3% 2.2% 2.4% 2.4% 2.3% 2.3% 1.9%
Total Non Sal/Ben Before Transfers 3.1% 3.1% 3.0% 2.3% 2.2% -2.3% 1.9% 2.0% 2.0% 0.5% 1.9% 1.8%
Operating Transfers-Out -0.7% 0.0% 3.1% 0.7% 0.7% 0.8% 0.7% 0.8% 0.8% 0.7% 0.8% 0.8%
Transfer to Infrastructure - Base -34.8% 0.0% 136.8% 27.8% 21.8% 17.9% 2.2% 2.2% 2.2% 2.2% 2.3% 2.3%
Transfer to Infrastructure - TOT 147.6% -4.1% 63.3% 37.7% 17.7% 3.3% 3.0% 3.8% 4.1% 4.9% 5.0% 5.2%
Total Use of Funds 12.7% -0.8% 9.9% 5.6% 4.5% 1.9% 1.7% 2.2% 2.0% 1.7% 2.1% 1.3%
Attachment A - 19
Attachment A
City of Palo Alto Page 20
FY 2022 Preliminary First Quarter Adjustments
On October 25, 2021 the City Council received preliminary information on the City’s financial
condition as of the first quarter (Q1) of FY 2022. That report indicated a gradual improvement
in the local economic outlook, similar to national trends. During that meeting, Council also
approved several budgetary and staffing adjustments to realign resources with priorities
identified by the City Council after the FY 2022 Adopted Budget (CMR 13439). Ongoing
adjustments from FY 2022 Q1 are part of this forecast, including the addition of economic
development coordination and management staffing (1.00 FTE Assistant to the City Manager)
housing support operations program staffing (1.00 FTE Assistant to the City Manager),
Development Center front desk staffing (1.00 FTE Administrative Associate III), and the
restoration of the Public Safety Communications Manager (1.00 FTE). The City Council also
expressed interest in staff bringing forward an additional action in FY 2022 to add a Code
Enforcement Officer (1.00 FTE, approximately $170,000 including staffing and vehicle costs) to
support enforcement of the ban on gas powered leaf blowers and address the backlog of code
enforcement requests. Various one-time adjustments were also approved, which are detailed in
CMR 13439. These one-time adjustments are contemplated in this forecast in that they impact
the FY 2023 estimated beginning balance of the Budget Stabilization Reserve (BSR).
In addition to these actions, Council also approved the acceptance and appropriation of a
Staffing for Adequate Fire Emergency Response (SAFER) Grant to reimburse the City for an
additional 5.0 FTE Firefighter positions for three years (CMR 13643). These positions have been
assumed in this forecast along with the ongoing costs associated with the positions once the
grant funding ends in FY 2025.
Salary and Benefits
The table above depicts the estimated General Fund salaries and benefits costs. Consistent with
prior years, the FY 2023 salaries and benefits costs represent approximately 60 percent of the
General Fund budget expenditures.
Salary and Benefits are projected to increase $7.2 million or 5.2 percent from the prior year,
from $131.5 million to $138.8 million. Discussed in the following sections, this is primarily
attributable to increases in salaries ($3.2 million or 4.7 percent) and pension costs ($2.7 million
or 7.8 percent).
Salary
Consistent with the City’s salary budget methodology for recent budgets, positions are
budgeted at the actual rate of pay of employees including benefit selections as of Fall 2021.
Then, by position, salary costs are updated in accordance with applicable Memorandum of
Agreements (MOA’s) between the City and its labor groups and the Management and
Professional Personnel and Council Appointees Compensation Plan(s). It is important to note
that as of this forecast, all bargaining groups are at the end of their agreement terms. The
forecast assumes step increases for employees in applicable positions, including SEIU, IAFF, and
PAPOA, and merit increases for Management and Professional employees. A general wage
Attachment A - 20
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City of Palo Alto Page 21
adjustment of 2.0 percent is included for all employees and all years of the forecast since no
MOA’s are in effect. This is consistent with prior Council direction in previous long range
financial forecasts to use the 2.0 percent increase as a forecasting assumption, not as a
commitment to future negotiations.
Benefits
Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2020
valuation (CMR 13440) for the City’s Miscellaneous and Safety plans. CalPERS determines the
City’s total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and
Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of
payroll is the ‘blended rate’ and is used to represent total costs in the discussion below.
The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll
reporting process of active employees. Commonly referred to as the ‘pay-go’ cost, the NC is
variable and increases or decreases directly with the salary levels of the City. It represents the
necessary funding for the City to pay for employees presuming that CalPERS meets the current
set of assumptions.
In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes,
method changes, or plan experience (including investment gains/losses), there is an increase or
decrease to the Unfunded Accrued Liability (UAL). Commonly referred to as the ‘catch-up’ cost,
the UAL is expressed as a dollar amount and is calculated over an amortized period with
defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat
dollar amount as opposed to a percentage of payroll due to potential funding issues that could
arise from a declining payroll or number of active members in the plan. However, CalPERS
provides an estimated percentage of payroll for UAL to allow a consistent comparison of total
costs.
In the miscellaneous plan, total costs are projected to increase from the current 41.8 percent in
FY 2022 to 42.9 percent in FY 2023. In the safety plan, total costs are projected to increase from
the current 69.6 percent in FY 2022 to 71.1 percent in FY 2023. These rates do not consider the
employee pick-up of the employer share; that pick-up materializes as savings in the City’s
pension costs. Consistent with applicable MOAs, the FY 2023 forecast presumes that the
miscellaneous plan will pick up 1 to 2 percent of the employer pension cost and that safety plan
members will pick up 3 to 4 percent.
TABLE 15: CalPERS’ Projected FY 2022-2032 Blended Retirement Rates
(percentage of payroll)
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
20230
FY
2031
FY
2032
Miscellaneous 41.8 42.9 43.5 44.1 41.5 37.6 37.2 36.7 36.3 36.0 32.6
Safety 69.6 71.1 72.9 74.0 74.0 73.8 73.1 71.3 70.4 69.5 66.0
Attachment A - 21
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City of Palo Alto Page 22
The City has taken several proactive steps to address rising pension costs and long-term
liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115
Pension Trust (“Pension Trust”), and adopting a Pension Funding Policy. In January 2017 the
City council authorized the establishment of a Pension Trust Fund with the Public Agency
Retirement Service (PARS) (CMR 7553). Contributions were initially made to the Pension Trust
on an ad-hoc basis, using one-time savings or excess revenues. In October 2018, the City
Council directed staff to include in budget assumptions the NC for pension benefits at an
equivalent of 6.2 percent discount rate and a transfer of the additional (“supplemental”)
funding beyond CalPERS actuarial determined contribution levels to the Pension Trust Fund
(CMR 9740). Additional one-time contributions continue to be made each year if excess
revenues or unspent savings are available, subject to City Council approval. This practice was
reinforced in the development of a Pension Funding Policy, adopted by the City Council in
November 2020 (CMR 11722). As part of policy goals, the City seeks to reach a 90 percent
funded status by FY 2036. This policy is subject to modification at City Council discretion and
requires that staff report the status of the funding goal every three years. Staff anticipates
returning in Fall 2022 with this analysis. In this forecast, an approximate $5.2 million ($3.1
million in the General Fund) in supplemental contributions is assumed in FY 2023, relatively
constant to prior year contribution levels. Through FY 2022, a total of $40.2 million in principal
contributions will have been made to the Pension Trust.
In the General Fund, it is anticipated the City will spend a total of $37.3 million on total pension
costs in FY 2023, including both CalPERS contributions and supplemental Pension Trust Fund
contributions. This is approximately $2.7 million higher than the prior year costs of $34.6
million, or a 7.8 percent increase. These expenses represent approximately 16 to 17 percent of
the General Fund’s total expenses.
Healthcare: Consistent with the most recent labor agreements between the City and its
bargaining units in the General Fund, the City’s contribution amounts towards medical costs for
employees are based on a flat rate contribution from the City, with the employee contributing
towards the remaining medical plan premium. Like salaries, healthcare costs are updated in
accordance with applicable Memorandum of Agreements (MOA) between the City and its labor
groups and the Management and Professional Personnel and Council Appointees
Compensation Plan(s).
Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the
most recent actuarial study prepared by Bartel Associates, which is completed every two years.
The most recent study was completed in May 2021 to inform the development of the FY 2023
and FY 2024 operating budgets. Consistent with City Council direction (CMR 11284), this
forecast continues the practice to budget the cost for retiree healthcare at a more conservative
6.25 percent discount rate and transmit the amount above the required payment as an
additional discretionary payment (“prefunding”) to the California Employers’ Retiree Benefit
Trust (CERBT) Fund. In FY 2022, this additional contribution is approximately $2.2 million ($1.4
million General Fund). The City continues to budget for the full payment of the Actuarial
Attachment A - 22
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City of Palo Alto Page 23
Determined Contribution (ADC) for retiree healthcare. CalPERS blends active employees with
pre-Medicare retirees and charges the same medical premium, even though younger
employees on average consume less healthcare. The higher premium to younger employees
thereby subsidizes older employees and retirees who, on average, have higher claims and
premiums. This implied subsidy effectively lowers the funding necessary to meet the ADC. The
FY 2023 Budget estimates $9.3 million for ADC, an approximate $500,000 or 5.7 percent
increase from FY 2022 levels of $8.8 million.
TABLE 16: Retiree Medical General Fund Contributions (Millions)
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
$9.3 $9.5 $9.8 $10.1 $10.1 $10.9 $11.2 $11.5 $11.9 $12.3
Workers’ Compensation: The budget appropriation for workers' compensation includes an
estimate for claims incurred and reserves for current filings at an 85 percent confidence level,
based on actuarial studies completed by Bickmore. In FY 2021, claims expenditures decreased
slightly by $340,000 or 5.3 percent from $6.4 million to $6.1 million from the prior year.
Actuarial estimates completed in August 2020 informed FY 2022 budget levels of $5.9 million
($3.9 million in the General Fund). More recent actuary estimates completed in August 2021
project higher than expected levels for FY 2022 at $6.3 million ($4.2 million in the General
Fund). Staff will continue to monitor expenditures in the fund and bring forward adjustments as
necessary. Estimates for FY 2023 are $6.6 million ($4.4 million in the General Fund),
representing a $0.8 million increase ($0.5 million in the General Fund) or 12.8 percent increase
over the Adopted FY 2022 Budget of $5.9 million ($3.9 million in the General Fund). Estimates
for workers' compensation increase in the forecast at rates consistent with general CPI
increases.
Contract Services
This forecast assumes contract services of $29.1 million in FY 2023, a 3.7 percent decrease from
the FY 2022 Adopted budget of $30.2 million. This decrease is driven primarily by the removal
of one-time costs adopted in FY 2022 including funding to address continued COVID-19
recovery efforts across the City. These decreases are partially offset by service contract
increases as well as a 3.7 percent CPI cost increase in FY 2023 based on a review of the changes
in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August to
August period. It is expected that the estimated CPI increases will be substituted with further
department base budget requests as part of the FY 2023 budget process.
Contract Services - Committed Additions
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The Committed Additions included in this forecast account for anticipated operating and
maintenance (O&M) costs in the General Fund for capital projects anticipated to come online in
within the ten-year forecast period. A preliminary total estimate of $0.1 million for costs
associated with the Boulware Park Improvements (PE-17500) and Library Automated Materials
Handling (LB-21000) projects that are anticipated to come online in FY 2023. Additional cost
increases are included throughout the ten-year forecast, primarily due to estimated operating
impacts from the Public Safety Building (PE-15001), Fire Station 4 (PE-18004), Dog Park
Installations (PG-18001), and Park Restroom Installations (PG-19000).
TABLE 17: FY 2023 – FY 2032 Committed Additions (Millions)
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
$0.1 $0.5 $0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.7 $0.8
Supplies and Materials
The FY 2022 Adopted Budget for the General Fund included $3.0 million for Supplies and
Materials, which is anticipated to increase slightly by a 3.7 percent CPI cost increase in FY 2023
to $3.1 million based on a review of the changes in the California Consumer Price Index (CCPI)
in the San Francisco Bay Area from the August to August period. It is expected that the
estimated CPI increases will be substituted with department base budget requests as part of
the FY 2023 budget process.
General Expense
This category includes costs for travel and meetings, telephone and non-city utilities,
contingency accounts, bank card service charges, and subsidies and grants provided through
the Human Services Resource Allocation Program (HSRAP). The FY 2022 Adopted Budget of $7.9
million is expected to increase to $8.5 million in FY 2023, primarily due to a $1.0 million
increase for Project Homekey (discussed further below) and a 3.7 percent CPI cost increase
based on a review of the changes in the California Consumer Price Index (CCPI) in the San
Francisco Bay Area from the August to August period. These increases are partially offset by a
$0.8 million decrease for the removal of the Budget Uncertainty Reserve in FY 2023. It is
expected that the estimated CPI increases will be substituted with department base budget
requests as part of the FY 2023budget process.
General Expense – Project Homekey: On September 27, 2021 the City Council directed staff to
apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter
at the former Los Altos Treatment Plant (LATP) site (CMR 13595). This project will rapidly
deploy modular housing to provide interim housing opportunities for homeless individuals and
families in the City of Palo Alto. Project Homekey is a program, funded by the State of California
Department of Housing and Community Development, intended to provide grant funding and
facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety
of housing types. Once developed, these projects provide interim or permanent housing
options for persons experiencing homelessness and who are also at risk of health concerns. The
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site would be operated for at least fifteen years as interim housing per the program’s
durational requirement. This project would utilize a combination of funding sources including
the Project Homekey Program for capital expenses and donations, grant funds, and City support
for ongoing operations expenses. This LRFF includes the City’s committed investment of $7.0
million in operating expenses ($1.0 million annually starting in FY 2023 through FY 2029), with
actual timing of the funding still to be determined. Some operating funding support is expected
from Project Homekey as well as the County of Santa Clara. Any remaining gaps in funding will
need to be closed by fundraising, operating cost containment strategies, and/or grant funds.
General Expense - Cubberley Lease: In FY 2015, the City and Palo Alto Unified School District
(PAUSD) agreed to a five–year extension of the Cubberley lease from January 2015 to
December 2019. In October 2019, the City Council directed staff to negotiate with PAUSD to
extend the lease agreement an additional five years, through December 2024 (CMR 10730). A
new Cubberley lease was approved by the City Council in June 2020 (CMR 11460) for a smaller
portion of the Cubberley site with a correspondingly lower base rent payment(CMR 11386). As
part of the original lease agreement, the City Council approved creation of the Cubberley
Infrastructure Improvements Fund. The new lease continues the $1.9 million transfer to the
Cubberley Property Infrastructure Fund, which is classified as an Operating Transfer-Out and
discussed in further detail below. With the Cubberley Infrastructure funds set aside, the
monthly base rent for the Cubberley premises is $228,000 throughout the term or $2.7 million
annually. The monthly base rent may be reduced by $14,000 per month if the JMZ Building is
returned to PAUSD and $6,000 per month if the S Building is returned. The Community Services
Department is currently in negotiations with PAUSD to expand the Cubberley premises by
renting additional space from the M Building. Separately, the City leases extended child daycare
site from PAUSD on a two-year lease from July 2020 to June 2022. The combined monthly rent
for the child daycare sites amounts to $59,000 plus $4,000 for utilities ($756,000 annually for
rent and utilities).
Rents and Leases
The Rents and Leases expense category for FY 2023 is estimated to increase from the prior-year
level by approximately 3 percent based previously negotiated lease increases and remain at
$1.0 million. This category includes the lease agreement for Development Services staff at
locations outside City Hall (285 Hamilton and 526 Bryant) as well as lease with Stanford for El
Camino Park. A new lease agreement was executed in December 2020 for the Development
Services office location at 526 Bryant Street, limiting the space to the basement level (CMR
11426). In June 2021, the City entered into a seventh amendment for the Development Services
office lease at 285 Hamilton Avenue to extend the term from February 2022 to January 2025
(CMR 12334). As expenses for rent for Development Services are adjusted, a corresponding
revenue adjustment will be made to ensure Development Services maintains cost recovery
levels.
Facilities and Equipment
Attachment A - 25
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The Facilities and Equipment expense category is expected to increase from the FY 2022
Adopted level of $427,000 to $443,000 by a 3.7 percent CPI cost increase in FY 2023 based on a
review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay
Area from the August-to-August period. This budget category includes subscription payments
for equipment like public safety radios as well as other non-capital equipment.
Allocated Charges
Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service
Funds for services and products they provide to General Fund departments. The FY 2022
Adopted Budget for the General Fund included $20.1 million for these expenses, including
utilities usage, general liability insurance, technology costs, vehicle equipment maintenance
and replacement costs and other charges. The FY 2023 allocated charges in the Forecast update
the revenues and expenses for these various allocations based on the information available at
the time of the Forecast development. FY 2023 is anticipated to experience an increase of 11.6
percent to a total of $22.4 million. This change is primarily due to a general CPI cost increase of
3.7 percent across most allocated charges; however, several of these charges have increased
more significantly due to anticipated cost increases for Liability Insurance and Technology
services. In addition, the two-year reduction of vehicle replacement charges approved by
Council as part of the FY 2021 Adopted Budget has been restored as of FY 2023, increasing that
charge by $1.4 million.
Operating Transfers Out
Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the
Technology Fund, and various other funds but excludes transfers to the Capital Improvement
Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2022
Adopted Budget included Operating Transfers Out of $4.3 million. In FY 2023, Operating
Transfers Out are anticipated to increase to $4.4 million as a result of standard annual cost
escalators of transfers between the General Fund and the Electric and Technology funds.
Transfer to Infrastructure
Attachment A - 26
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During the development of the FY 2022 budget, uncertainties from COVID-19 were anticipated
to significantly decrease TOT revenues, which represents a significant portion of the General
Fund transfer to the Capital Improvement Fund. The anticipated impact was reflected in the FY
2022 Adopted General Fund transfer to the Capital Improvement Fund, which was $8.5 million
and comprised of a$2.6 million base transfer including interest earnings and $5.9 million from
TOT revenue generated through an additional voter-approved 3.5 percentage point TOT
increase. Incremental TOT increases from the voter-approved rate increase and new hotels are
dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan,
consistent with City Council direction. As the local economy continues to recover from the
COVID-19 pandemic, this forecast estimates transfers from TOT revenues in FY 2023 are
currently projected to increase to $9.2 million and the base transfer to increase to $10.7 million
for a total $19.9 million transfer to the Capital Improvement Fund. This forecast continues the
goal established as part of the 2022-2026 CIP to restore the base portion of this transfer to pre-
pandemic levels by FY 2026. This budget category also includes the separate $1.9 million
transfer to the Cubberley Property Infrastructure Fund, described earlier in this document.
Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By
policy, the BSR is maintained in the range of 15 to 20 percent of General Fund operating
expenditures, with a target of 18.5 percent. Any reduction to the reserve below 15 percent
requires City Council approval. At the discretion of the City Manager, any BSR balance above
18.5 percent may be transferred to the Infrastructure Reserve (IR), which was established to
provide funding for maintenance and rehabilitation of the City’s capital assets. The BSR is used
to fund unanticipated one-time costs as opposed to ongoing or recurring operating
expenditures. The City's intent is to fund ongoing programs and services with ongoing dollars.
Maintaining the BSR at 18.5 percent also provides flexibility for the City to deal with unforeseen
issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has
been a strong factor in the City being rated AAA by rating agencies.
Based on information reported in the FY 2021 Annual Comprehensive Financial Report (ACFR)
CMR 13501, the City’s current BSR balance is $43.3 million, approximately $4.6 million above
the 18.5 percent target. In addition to the additional funding from FY 2021, this report
estimates that FY 2022 could end the year with a surplus of $10.7 million, based on the current
trends of a number of major tax revenue categories, compared to the FY 2022 Adopted Budget.
This one-time funding surplus compared to the FY 2022 budget has not been factored into the
2023-2032 LRFF assumptions. Use of this funding is discussed further in the Conclusion section
of this memorandum.
Assumptions NOT Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2023-
2032 LRFF that are outlined below. This is not intended to be a comprehensive list nor in any
priority order.
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Project Homekey: On September 27, 2021, the City Council directed staff to apply for Project
Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former
Los Altos Treatment Plant (LATP) site (CMR 13595). This project will rapidly deploy modular
housing to provide interim housing opportunities for homeless individuals and families in the
City of Palo Alto. As discussed previously, this LRFF includes the City’s committed investment of
$7.0 million in operating expenses ($1.0 million annually starting in FY 2023 through FY 2029);
however, with the actual timing of the funding still to be determined, and commitments from
other local partners negotiated, City costs for this project could fluctuate up or down
throughout the ten year period.
November 2022 Ballot Initiatives: In 2019, the City Council approved the Fiscal Sustainability
Workplan (CMR 10267), which included the exploration of a revenue generating ballot
measure. Work on this initiative was suspended in March 2020 as part of the City’s pandemic
response. Resumption of this effort was outlined in the Community and Economic Recovery
Workplan and 2021 Council Priorities and on June 15, 2021, the Finance Committee (CMR
12299) recommended that the City Council approve the Ballot Measure Workplan. On August
16, 2021, the City Council (CMR 12381) approved the workplan for a revenue generating
November 2022 ballot measure that was recommended by the Finance Committee and staff.
The Ballot Measure Workplan contains three major components: analysis, polling, and
outreach. Full implementation of this workplan will require significant resources, including
internal staffing and consultant expertise as well as extensive stakeholder engagement.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the
Sustainability and Climate Action Plan (S/CAP) Framework to determine the goals and key
actions needed to meet its sustainability goals, including the goal of reducing green house gas
(GHG) emissions to 80 percent below 1990 levels by 2030 (the “80 x 30” goal). In April 2021
(CMR 12009), Council reviewed the S/CAP Update Report, provided feedback on policy tools,
directed the Mayor to form an S/CAP Ad Hoc Committee, directed staff to pursue near-term
actions in parallel to the S/CAP Update, and directed staff further develop various elements of
the S/CAP. The S/CAP Ad Hoc Committee launched in August 2021 and the City is currently in
the process of finalizing the proposed S/CAP Goals and Key Actions as well as the Three-Year
Work Plan, which was created at the direction of the April Council motion. The final S/CAP
Report and Three-Year Work Plan will be brought to Council for acceptance in Spring 2022 and
CEQA review will commence once the S/CAP Goals and Key Actions are finalized. As the S/CAP
Work Plan and final report are still in development, cost projections are not yet contemplated
in the forecast. Implementation is anticipated to require significant resources, including internal
staffing and consultant expertise as well as stakeholder engagement.
Service reductions not restored to pre-pandemic levels: The base case LRFF assumes that the
significant reductions taken in the FY 2021 and FY 2022 Adopted Budgets continue throughout
the forecast period, unless otherwise restored by subsequent City Council actions, including
those taken in FY 2022 Adopted and FY 2022 Q1. A summary of Q1 adjustments is included in
this report in the section entitled FY 2022 Preliminary First Quarter Adjustments. Full
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City of Palo Alto Page 29
restoration of remaining reductions is modeled in Alternative Scenario A. The following is a
high-level summary of the reductions in FY 2021 in response to the initial economic impacts of
COVID-19, as originally stated in the FY 2022-2031 LRFF (CMR 11954). For a detailed listing of
adjustments, including FY 2021 and FY 2022 reductions and restorations and other FY 2022
actions, see relevant CMRs including the FY 2021 Budget Adoption (CMR 11330), FY 2022
Budget Adoption (CMR 12307), FY 2022 Q1 (CMR 13439), and listing of other budgetary
amendments.
Community & Library Services: FY 2021 reductions included $0.3 million in program
revenues and $4.9 million in expenses in the General Fund, including 16.1 full-time and
21.02 part-time staffing reductions (finalized in FY 2022). These actions reduced library
hours at all branches, keeping smaller libraries (Children’s, Downtown, and College
Terrace) open three days a week and full-service branches (Mitchell Park and
Rinconada) open six days per week. This includes greater cost-recovery through changes
in service delivery, charges for services, and/or limiting operating hours for facilities
such as the new Junior Museum and Zoo (JMZ), community centers, open space
preserves, the Children's Theatre, and the Art Center. These actions also reduced or
eliminated programming such as special events, art exhibits, human services activities,
and teen programs.
Planning, Transportation, and Infrastructure: FY 2021 reductions included $2.1 million in
program revenues and $6.1 million in expense in the General Fund, including 8.25 full-
time and 1.44 part-time staffing reductions (finalized in FY 2022). Included were actions
to reduce administration, code enforcement, front counter support, and inspection
services. Understanding that this could delay services to the development community,
the building inspection and plan review team was reorganized to minimize the impacts
to lead times for inspections, progress on the Energy Reach Code, and the ability to
meet next day inspections. The Crosstown and Embarcadero shuttle programs were
eliminated, and the delivery of this service redesigned to reduce costs. Additionally,
funding for tree trimming and vehicle replacement was reduced for one year and rate
changes in various utility enterprise funds were suspended.
Public Safety: FY 2021 adjustments included an increase of $1.55 million in program
revenues and a reduction of $7.3 million in expenses in the General Fund, including
33.27 full-time and 2.28 part-time staffing reductions (finalized in FY 2022). These
actions included suspensions of specialized police units such as the traffic enforcement
and investigation units to maintain minimal police patrol services and shift the priority
of police services to urgent calls, lowering capacity to respond to nonurgent calls.
Additional changes included limited officer training, promotional testing, uniform
purchases and eliminated or changed to full cost recovery non-essential programming
such as school resource officers. Curtailed dispatch, communication, and emergency
preparedness services, as well as emergency incident response and training and work to
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adopt fees to increase revenue for first responder and ambulance subscription were
also included in the actions.
Internal Services & Council Appointed Officers: FY 2021 reductions included $2.9 million
in operating expenses in the General Fund, including 5.9 full-time and 0.96 part time
staffing reductions (finalized in FY 2022). Internal Services departments include the
Information Technology, Human Resources, and Administrative Services Departments as
well as the Council and appointed officers (City Manager, City Attorney, City Auditor and
City Clerk). Reductions in these areas align with the changes in services, increasing
timeframes for assistance and review in areas such as recruitments, procurements,
performance reporting, and risk management. Technology solutions will be constrained
to only essential contracts and systems and support equipment needs as majority of our
workforce continues to work from home. The City Council, Innovation and Special
Events, and Human Recourses contingency accounts were eliminated in FY 2021 on a
one-time basis.
Significant code and ordinance updates: Updates to several significant programs, codes, and
ordinances such as the Seismic Inventory ordinance and program, Historic Building survey and
ordinance, and a zoning code update are expected to be necessary in the near future.
Depending on future Council direction and the results of program and survey updates,
implementation is anticipated to require significant resources, including internal staffing and
consultant expertise.
Labor negotiations: As of the timing of this report, there are no agreements in effect for FY
2023 and beyond. The City’s current agreements with safety units are set to expire on June 30,
2022. These safety units are the Palo Alto Peace Officers Association (PAPOA), the International
Association of Fire Fighters (IAFF), Fire Chiefs Association (FCA), and Palo Alto Police
Management Association (PAPMA). Additionally, the City's agreement with the Management
and Professional group is set to expire June 30, 2022. Agreements with the Service Employees
International Union (SEIU) extends through December 2021 and new labor agreements are
anticipated with the Utilities Management and Professional Association (UMPAPA) whose
contract expired June 30, 2020.
CalPERS Pension Updates: As of the timing of this report, the CalPERS board completed their
Asset Liability Management (ALM) process which reviews capital market assumptions and
strategic asset allocation and sets the discount rate for future periods. This comprehensive
review is completed every four years. Most significantly, this study resulted in actions that
reduce the discount rate from 7.0 to 6.8 percent, add 5 percent leverage to the asset allocation
mix, and increase the normal cost paid by Public Employee’s Pension Reform Act (PEPRA)
employees. Most PEPRA employees will see median increases ranging from 1.2% in
miscellaneous plans to 1.5% in safety plans in their total normal cost. These changes, as well as
preliminary 21.3 percent returns for the period ending June 30, 2021, will materialize in City
finances beginning in FY 2024. Overall, CalPERS expects that many plans will see required
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employer contributions that are comparable to or slightly lower than previously determined
contribution requirements. Additional information can be found in the CalPERS news release
issued on November 15, 2021: https://www.calpers.ca.gov/page/newsroom/calpers-news.
Capital Infrastructure Plan: As referenced earlier, the June 2014 Council approved
Infrastructure Plan of $125.8 million in projects was based on construction and design costs
with data from 2012. As construction costs have increased and the City is required to pay
prevailing wages, the Infrastructure Plan’s funding status has shifted. The FY 2022 Adopted
Capital Budget anticipated that these projects would cost $259.8 million. Staff is working to
maintain these projects within the current budget; however, project costs can fluctuate based
on market conditions at the time of construction award.
Grade Separation: The grade separation project consists of the four at-grade crossings along the
Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Drive, Meadow
Avenue, and Charleston Road. The City is working on conceptual alternative plans for the
selection of the preferred alternative at Churchill Avenue, Meadow Drive, and Charleston
Avenue crossings. On April 26, 2021, the City Council eliminated two South Palo Alto Tunnel
Alternatives from consideration after receiving the final report and recommendations from the
Expanded Community Advisory Panel (XCAP) (CMR 12185). Staff is currently in process to
provide a detailed review of the alternatives in consideration and seeking Council direction for
additional studies to further narrow alternatives in consideration for selection of a preferred
alternative.
In FY 2022, staff plans to conduct additional studies as directed by the Council and work with
the Rail Committee for the selection of preferred alternative(s). Once preferred alternatives are
selected, the next phase will include preparing preliminary engineering and environmental
documents, which is anticipated in FY 2023 for the three crossings. The Valley Transportation
Authority (VTA) 2016 Measure B Caltrain Grade Separation funding will be available to the City
for funding the next phases of the project including preliminary engineering and environmental
review, right-of-way, design, and construction.
The 2016 Measure B program tax revenue amounts to a total of $700 million in 2017 dollars for
all at-grade crossings in Santa Clara County. The City anticipates allocation of 50% of said
funding. Grade Separation 2016 Measure B funding requires matching local funds as a result,
additional funding sources will need to be identified to perform this work in upcoming years (FY
2023 – FY 2032). The full funding needed to complete the grade crossings project is unknown at
this time. However, it is expected, that funding necessary to complete this work will exceed
funding currently identified for this project. Therefore, additional resources will need to be
explored to plan and fund these grade separations.
Parks Master Plan: The Parks Master Plan was finalized in 2017; however, when approved it
identified a need to develop a funding strategy and this is still in process. As such, this forecast
does not yet contemplate the necessary investments to fully execute this plan.
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Racial Equity Work: The Race & Equity Framework and action plan was approved in June 2020
(CMR 11441) and remaining funding of $0.5 million has been reappropriated to be available in
FY 2022. Staff is in the process of procuring consultants to assist with the City’s diversity, equity,
and inclusion efforts in engaging staff, the City Council, and Boards/Commissions After this
initial work, further recommendations are forthcoming and will likely require additional funding
either for more consultant assistance and or an ongoing in-house Equity Officer position (which
was discussed during the 2020 Ad Hoc Committee meetings). These recommendations are
anticipated to be brought forward as part of the FY 2023 or FY 2024 budget process.
Palo Alto Animal Shelter operations and rebuild
In early 2019, the City entered into a public private partnership with Pets In Need (PIN) to
support the operation of the City’s animal shelter. Part of PIN’s operating proposal included
robust fundraising to demolish the current shelter and build a state-of-the-art animal shelter
for the City. The City anticipated that the cost of the rebuilding would be shared between the
City and PIN; however, in November 2021 PIN announced a decision to end the operating
agreement with the City in FY 2022. Due to the recent nature of this decision, this forecast does
not contemplate alternative operating plans nor the necessary investments to execute the
rebuild.
City owned assets operated by non-profit organizations: This Forecast does not include any
additional capital or operating investments for the Avenidas Senior Center, the Ventura Child
Care Center, nor the Sea Scout Building. As costs around potential capital or operating
investments for these assets solidify, staff will return to City Council to address them as
appropriate. In FY 2022 the City Council directed a funding strategy for the Roth Building
Rehabilitation Project, which consisted of utilizing $4.0 million from a variety of funding sources
including the Stanford University Medical Center (SUMC) fund community and infrastructure
funds, parks impact fees, and community center impact fees (CMR 12307). This funding
strategy is included in the LRFF; however, if costs for rehabilitating the Roth building increase,
additional sources of funding would need to be identified.
Cubberley Community Center Concept Plan: The City and PAUSD completed a co-design process
for a Cubberley Community Center Concept Plan in 2019; however, costs to implement that
concept plan in excess of the dedicated Cubberley infrastructure funding included in the
existing agreement between the PAUSD and the City are not assumed in this Forecast. The
Concept Plan may require revision before implementation as operational changes have
occurred since its completion including execution of a new lease between the City and PAUSD
for the school district owned portion of Cubberley, which commenced on July 1, 2020, and
reduced the amount of building space leased to the City.
Loans for special projects: From time to time the City’s General Fund will assist other City
operations with modest cash flow loans to bridge fiscal years. For example, the City provided
over $3 million in loans to the Airport Fund as it works to secure significant grant funding from
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the Federal Aviation Administration (FAA) for capital improvement costs. As of FY 2020, the
Airport Fund began paying back the loan to the General Fund. Additions and other initiatives
funded in other funds may need financial support from the General Fund to ensure they are
fully implemented. Additional loans from the General Fund are not assumed in this forecast.
Legislative Updates: Various actions at the state and federal level that could impact the City of
Palo Alto have not been incorporated into this forecast due to the changing context and
uncertainty of the quantitative impacts of potential legislative changes. This includes the
Cadillac Healthcare Tax at the federal level, property tax changes at a state level, and state-level
efforts focused on the provision of affordable housing. As uncertainty regarding the potential
impact of various legislative initiatives is clarified, appropriate adjustments will be identified
and brought forward as part of future budget development cycles.
Tax revenue alignment with updated Comprehensive Plan: The 2030 Comprehensive Plan was
adopted in FY 2018, including the potential fiscal impact of various land use scenarios. The fiscal
impact of this plan and various land use scenarios are not factored into this forecast.
FY 2023 Budget Development Guidelines
As discussed earlier in this document, this preliminary forecast represents the initial steps of
the FY 2023 budget development process. In the FY 2019 – FY 2028 Long Range Financial
Forecast presented in December 2018, staff included budget development guidelines based on
the trends that were identified and the anticipated fiscal condition of the City. Due to the clear
overlap of projecting the City’s fiscal condition and the need to shape service level
expectations, staff recommends that the inclusion of Budget Development Guidelines be
incorporated into the discussions at the beginning of an annual budget process.
As the City and the County continue to move through recovery from COVID-19, the local
economy and major tax revenue categories are showing signs of rebounding. City operations,
which were adapted to best support and serve the community during County Public Health
Orders and State Public Health restrictions, are returning to in person delivery where possible.
However, as mentioned in the preliminary FY 2022 Q1 financial status report (CMR 13439),
there are several issues across the City impacting the ability to transition out of the pandemic
that could continue into FY 2023:
• Staff turnover across City departments is slowing the ability to restore programs and
services impacted by the pandemic, coupled with the addition of new projects and
priorities identified by the Council subsequent to the 2021 priority setting and FY 2022
Budget Adoption.
• Challenges with recruiting and hiring, due to the number of vacancies and the services
restored in the FY 2022 Budget, are also contributing to slower service restoration.
• Supply chain issues related to manufacturing and construction are impacting various
programs across the City, including replacement of City fleet vehicles, and acquiring
materials for construction projects.
Attachment A - 33
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This year, the FY 2023 Budget Development Guidelines, which are detailed in Attachment A, are
meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary
direction to the organization. These guidelines will shape and inform the annual financial
planning and the allocation of resources across the organization, especially in the General Fund.
Further, strategic work is underway focused on a Community and Economic Recovery Strategy.
Key to the City Council’s and staff’s fiscal and recovery planning is the important work
underway to understand the fiscal implications of a revenue generating ballot measure for the
November 2022 election. This also includes the potential for City actions to affect economic
recovery and associated impacts on City revenues. This, in turn, affects the level and nature of
services the City can deliver to the community.
When the Fiscal Sustainability Workplan (CMR 10267) was approved by the City Council on April
22, 2019 drafting a budget development policy was listed as part of the “Newly proposed or
potential activities proposed to be completed”. The inclusion of Budget Development
Guidelines in with this forecast represents staff’s recommended method of addressing this
referral. Pairing Budget Development Guidelines with the forecast at the beginning of the
budget process links the anticipated fiscal condition of the organization with the necessary
context regarding service delivery prioritization and resource allocation that will be further
explored through the process. This also ensures that the City is able to proactively address
anticipated changes in its fiscal condition through the budget process.
Attachment A - 34
Attachment A
City of Palo Alto Page 35
Conclusion
The financial impacts of the COVID-19 pandemic and health orders significantly restrained
consumer spending, resulting in a weakened job market, and uncertainty; however, positive
trends in major tax revenue categories that began in Q4 of FY 2021 and continue into Q1 of FY
2022 indicate that the economy is slowly recovering. This preliminary forecast provides context
to begin discussions on how to approach restoring services back to pre-pandemic levels while
keeping in mind the budget constraints still facing the City in the first couple years of the
forecast.
The forecast does not assume restoration of the service changes experienced in FY 2021 and FY
2022, and as seen in Alternative Scenario A below, incoming resources are not enough to
sustain full restorations in FY 2023 and beyond. Alternative Scenario B, examines a competitive
market adjustment for labor, and demonstrates that this adjustment would cause a longer gap
as compared to the base case forecast. As mentioned previously, there is one-time funding of
$4.6 million from savings in FY 2021 and there is an anticipated surplus of up to approximately
$10 million in FY 2022. This figure is above the preliminary estimate provided to the Council in
the Preliminary FY 2022 Q1 Financial Status report in October 2021 of additional revenues of $5
million - $6 million and is primarily driven by updated Sales Tax figures. When combined, these
one-time surplus funds from FY 2021 and projected in FY 2022 have not been factored into the
2023-2032 LRFF assumptions. The City Council provided staff direction as part of the
Preliminary FY 2022 Q1 Financial Status report to bring forward recommended allocation of
these surplus funds as part of the FY 2022 Mid-Year Budget Review, which staff anticipates
bringing for Council review in the first quarter of the new calendar year.
With regard to the $4.6 million, since it is savings from FY 2021 and above the 18.5 percent BSR
target, by City Council approved current policy, the funding would be allocated 50% to be
transferred to the Section 115 Pension Trust and 50% transferred to the Capital Improvement
Fund for infrastructure investment. Given the additional financial variables, additional options
for allocation may include: increase funding in the Utility Transfer Litigation Reserve,
restoration of services and/or investment in high priority projects, or left in the BSR to be
discussed as part of the FY 2023 budget. Final recommended actions will be brought forward as
part of the FY 2022 Mid-Year Budget Review as noted previously.
Alternative Scenarios for Consideration
Alternative Forecast Scenario A: Restoration of Service to Pre-COVID-19 Service Levels
As discussed in the Assumption NOT Included in Forecast section above, the base case forecast
does not include restoration of services that were impacted as a result of the COVID-19
pandemic, other than specific actions taken by Council in the preliminary FY 2022 Q1 financial
status report (CMR 13439). Those items have been outlined in the FY 2022 Preliminary First
Quarter Adjustments section of this memorandum. This alternative forecast models the impact
of restoring City Services to the pre-pandemic levels in FY 2023. The summary table for this
alternative forecast and the Net Operating Margin graph for this alternative forecast are below.
Additional discussion for this alternative follows these figures.
Attachment A - 35
Attachment A
City of Palo Alto Page 36
TABLE 18: FY 2023 – FY 2032 Long Range Financial Forecast
Alternative Forecast A
TABLE 19: FY 2021 –2030 Long Range Financial Forecast Net Operating Margin
Alternative Forecast A
Compared to the Base Case, the General Fund would have a large gap of approximately $11.0
million in the first year of the forecast. This gap would shrink gradually until 2030, which would
be the first-year revenues would be at a level to support the expenses. Although an immediate
restoration of all services to pre-pandemic levels is not feasible as evidenced by this scenario, as
mentioned previously in this report, thoughtful and measured restoration of high priority
services that can be sustained by the recovering revenue will be brought forward for Council
consideration as part of the FY 2022 Mid-Year Review as well as the FY 2023 Budget process.
Alternative Forecast B: Compensation Change Model, Near-term Adjustments
Consistent with City Council direction and past practice, the Base Case assumes a two percent
general wage adjustment in the years beyond the terms of existing MOAs. This rate is used as a
forecasting assumption and not a commitment for future negotiations. As of the timing of this
Attachment A - 36
Attachment A
City of Palo Alto Page 37
forecast, there are no MOAs in effect. Therefore, the entirety of the forecast assumes a 2.0
percent wage increase.
This alternative scenario models the impact of a one-time adjustment in FY 2023 to increase
compensation by an additional 2.0 percent above the two percent assumed in the Base Case to
better align the workforce to be competitive in the market (4.0 percent total). As with other
alternative models in the LRFF, this model is for forecasting purposes and is not a commitment
to future labor negotiations.
Similar to trends at the local and national level, the City is experiencing challenges in staffing a
high level of vacancies due to labor shortages and an uptick in resignations that are contributing
to a highly competitive labor market. As a service-driven organization, with approximately 60
percent of resources allocated to staff, the City is particularly vulnerable to the current
workforce challenges. In this competitive environment, employees have more choices, and
many are re-evaluating their career decisions with new perspectives. Recognition of the difficult
work and continued dedication is important, and City management is working on flexible work
arrangements (where feasible), advancing a positive work environment, and supporting other
programs that express appreciation and reinforce Palo Alto's reputation as an employer of
choice.
TABLE 20: FY 2023 – FY 2032 Long Range Financial Forecast
Alternative Forecast B
TABLE 21: FY 2023 – 2032 Long Range Financial Forecast Net Operating Margin
Alternative Forecast B
Attachment A - 37
Attachment A
City of Palo Alto Page 38
In FY 2023, the one-time increase of two percent adds approximately $2.8 million citywide
($1.5 million in the General Fund). Minor increases for a general 2.0 percent adjustment are
forecasted in the out years. In this scenario, the initial surplus in FY 2023 is lessened compared
to the Base Case and wider gaps between revenues and expenses occur in the out years of the
forecast. The Base Case projected that by FY 2025, the City would begin to have a positive
surplus; this alternative forecast extends the operating gap to FY 2026.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2023 represents the beginning of the fiscal year 2023 budget
development process. Information provided in this report will be discussed with the City
Council after Finance Committee and those conversations will provide direction to staff in the
budget development process. It is anticipated that conversations with City Council and the
community will occur through public budget hearings in Spring 2022, according to the standard
budget adoption process.
RESOURCE IMPACT
Financial implications from this report and input from the Finance Committee will be
considered in the City Manager’s development of the Fiscal Year 2023 budget.
ENVIRONMENTAL IMPACT
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachments:
• Attachment A - FY 2023 Budget Development Guidelines
Attachment A - 38
Attachment A
Attachment A – FY 2023 Budget Development Guidelines
1)Develop a structurally balanced budget that brings ongoing revenues and expenses into
alignment. Develop a plan for any structural imbalance to ensure that the City maintains
fiscal sustainability over the short, medium, and long-term.
2)Allocate one-time resources for one-time needs rather than committing one-time
resources to ongoing services. Examine appropriate uses of revenue surpluses that
exceed forecasted levels such as planning for recession needs, restoration needs, and
strategic investments.
3)Ensure appropriate resource allocation for City Council’s identified priorities.
4)Focus on business process redesign to enhance quality, flexibility, and cost-effectiveness of
service delivery (include examining opportunities to streamline, simplify, reorganize, and
reallocate resources to avoid duplication of effort).
5)Explore alternative service delivery models (such as partnerships with non-profits or
other public/private sector groups) to minimize overlap, maximize cost share, and
effectively use resources.
6)Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract
services, for cost savings opportunities or realignment with current needs.
7)Explore the expansion of existing revenue sources or the addition of new revenue
sources, including the alignment of existing charges for services and the opportunity to
establish new fees, when appropriate.
8)Continue to analyze and prioritize resource augmentations, seeking to offset
augmentations with reductions elsewhere for net-zero impacts to the budget whenever
possible; however, ensuring when resource augmentations are added, it is in alignment
with one-time and ongoing forecasted sources.
9)Continue to prioritize proactively funding long term liabilities including but not limited to
debt obligations, pension obligations, and capital infrastructure in accordance with City
policies as approved by Council.
FY 2023 Budget Development Guidelines
Attachment A - 39
Attachment A
Attachment B
1)Develop a structurally balanced budget that brings ongoing revenues and expenses into
alignment. Develop a plan for any structural imbalance to ensure that the City maintains
fiscal sustainability over the short, medium, and long-term.
2)Allocate one-time resources for one-time needs rather than committing one-time
resources to ongoing services. Examine appropriate uses of revenue surpluses that
exceed forecasted levels such as planning for recession needs, restoration needs, and
strategic investments.
3)Ensure appropriate resource allocation for City Council’s identified priorities.
4)Focus on business process redesign to enhance quality, flexibility, and cost-effectiveness of
service delivery (include examining opportunities to streamline, simplify, reorganize, and
reallocate resources to avoid duplication of effort).
5)Explore alternative service delivery models (such as partnerships with non-profits or
other public/private sector groups) to minimize overlap, maximize cost share, and
effectively use resources.
6)Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract
services, for cost savings opportunities or realignment with current needs.
7)Explore the expansion of existing revenue sources or the addition of new revenue
sources, including the alignment of existing charges for services and the opportunity to
establish new fees, when appropriate.
8)Continue to analyze and prioritize resource augmentations, seeking to offset
augmentations with reductions elsewhere for net-zero impacts to the budget whenever
possible; however, ensuring when resource augmentations are added, it is in alignment
with one-time and ongoing forecasted sources.
9)Continue to prioritize proactively funding long term liabilities including but not limited to
debt obligations, pension obligations, and capital infrastructure in accordance with City
policies as approved by Council.
FY 2023 Budget Development Guidelines
Attachment B - 1