April 13, 2023
10-Year Budget Forecast
FY 2023-24 Informational Update
Key Forecast Drivers
Forecast Assumptions
Forecast
Budget-Balancing Strategies
Potential Service Impacts
Agenda
2 Key Forecast Drivers
• California Department of Tax and Fee
Administration (CDTFA) Audit
• Staffing
• Labor Negotiations
• Next Recession
• Post-COVID-19 Impacts
Key Forecast Drivers
California Department of Tax and Fee
Administration (CDTFA) Audit
Letter received advising the
City of the audit
Dec. 2021
Letter received updating the
City on the years the audit is
covering
May 2022
CDTFA advised the City of their
decision verbally with dollar
impacts to follow in 4-6 months
Mar. 2023
Sales Tax Collection Process
6 Business
collects sales
tax
Business
sends sales
tax to the
State
State
distributes
sales tax
City receives
sales tax
revenue from
State
• Based on taxpayer reporting to the CDTFA
• Due to confidentiality regulations,
detailed reporting is not provided to the City
• 73% ongoing reduction in overall Sales Tax, which
includes a proportional reduction to County pools
• Potential payback of revenues already received
CDTFA Audit
7 • Used to distribute use tax and any sales tax that
cannot be easily tied to a permanent place of sale
• The tax is first assigned to the county of use and
then distributed to each jurisdiction in that county
on a pro-rata share of taxable sales each quarter
• For example, if a city generated 8% of the county’s
total taxable sales, it would receive 8% of the
county pool
County Pools
Forecast Assumptions
9 • No additional development projects included
• Facility debt paid off in FY 2029-30
• Other Post Employment Benefits (OPEB/Retiree
Health) costs funded by the Section 115 OPEB Trust
starting FY 2022-23
• Recession (no growth) in FY 2024-25 and FY 2028-29
for all revenue categories
Forecast Assumptions
• Sheriff’s contract expected to grow at the current
rate of CPI + 2%. Contract expires in FY 2023-24
• No cost-of-living adjustments (COLAS), excluding
payroll growth forecasted by CalPERS as part of
the annual actuarial valuation
• No payback of already received sales tax revenue
Forecast Assumptions
Forecast Revenue Assumptions
Account Assumption Description
Sales Tax Conservative
(1.6% AAGR)
HdL’s forecast in FY 2023-24 with sales tax loss
Conservative trend after
Property Tax Moderate
(3.1% AAGR)
HdL’s forecast in FY 2023-24
Moderate trend after
Transient
Occupancy
Tax
Moderate
(1.9% AAGR)
Recovery to $7.5M in FY 2023-24
Moderate trend after
Note: Forecasts assume recession (no growth) in FY 2024-25 and FY 2028-29 for all revenue categories
Forecast Expenditure Assumptions
Account Assumption Description
Compensation CalPERS
projections
No cost-of-living adjustments (COLAS), excluding
payroll growth forecasted by CalPERS
Benefits 0.6% AAGR Based on CalPERS projections
Materials 2.5% AAGR Average of State and County CPI
Contracts 6.2% AAGR Average of State and County CPI
Law enforcement contract = CPI + 2%
Special
Projects
1 3.0% AAGR $0.5M base + CPI annually
Contingencies 2.5% AAGR 1.25% of Materials and Contracts Transfers Baseline +
CPI $8.1M base + CPI annually
1Will impact ability to fund work program and other one-time items Forecast
15 Category FY 2023-24
Status Quo
FY 2023-24
Forecast
Change
($)
Change
(%) Description
Sales Tax 42.1 11.4 (30.6) -73%
Other Revenues 69.0 69.0 - 0%
Total Revenues 111.1 80.4 (30.6) -28%
Compensation and
Benefits 42.1 35.8 (6.3) -15%
Position reductions through the elimination of
vacant positions (15 FTE in FY 2023-24 increasing
to 45 FTE by FY 2032-33)
Materials 8.2 4.9 (3.3) -40% 40% reduction
Contract Services 27.7 25.7 (2.0) -7% 20% reduction except for Law Enforcement Cost Allocation 10.4 10.4 - -
Transfers 12.2 8.1 (4.2) -34% reduction in transfers to other funds Other Expenditures 3.6 1.6 (2.0) -56% reduction to special projects + contingencies Total Expenditures 104.2 86.5 (17.8) -17%
Net Revenues -
Expenditures 6.8 (6.1) (12.8) Funded by Unassigned Fund Balance Expenditure Reduction Strategies
($ In Millions)
$16.7M
-$6.1M
-$12.2M
-$7.0M -$8.1M
-$6.7M
-$8.9M -$8.9M
-$6.3M -$6.3M -$6.5M
General Fund Annual Operating Surplus/(Deficit)
73% drop in sales tax revenue
Recessionary
assumption
Debt fully repaid
$134.2M
$80.4M
$97.5M
$117.5M
$86.5M
$104.1M
General Fund Revenues and Expenses
Revenues Expenses
162.75 164.75 169.75
179.75 185.75
192.75 196.75 197.75 198.75 203.75
225
210 207 204 201 198 195 192 188 184 180
Historical and Forecasted Staffing
FY 2022-23 FY 2032-33 Change
General Fund
Unassigned 53.1 - (53.1)
Capital Projects Reserve 10.0 - (10.0)
Section 115 Pension Trust 17.2 5.4 (11.8)
Economic Uncertainty Reserve 24.0 24.0 -
Total $104.4 $29.4 $(75.0)
Capital Project Funds (420 & 429)
Unassigned $13.4 TBD TBD
Fund Balance Impacts -10 Years
($ In millions)
Potential Budget Balancing
Strategies
Budget Balancing Strategies
22 Strategy Description Potential Impact
Section 115 Pension Trust
In FY 2017-18, the City established a Section 115
Pension Trust to mitigate pension rate volatility
when CalPERS investment returns are below the
discount rate or when CalPERS changes
assumptions. The City can also use it to offset
pension costs in any given year.
The fund has a balance of $17.2
million.
1 Section 115 OPEB Trust
In FY 2009-10, the City established a Section 115
OPEB Trust to help fund its retiree health
obligations, also known as other post-employment
benefits (OPEB).
The OPEB plan is fully funded. Starting in FY 2022-
23, retiree health costs will be funded by the OPEB
Trust rather than the General Fund.
The fund has a balance of $33.3
million.1
Capital Projects Reserve The City has $10 million in its Capital Projects Reserve (General Fund). The fund is currently at $10 million.
Economic Uncertainty Reserve The City has $24 million in its Economic Uncertainty Reserve (General Fund). The fund is currently at $24 million. 1 As of June 30, 2022
Expenditure Reduction Strategies
23 Strategy Description Potential Impact
No new positions Cost containment strategy $0
Vacancy control Keep non-essential positions unfilled as they become vacant.
Approximately $186,000 savings
per position on average
Employee cost-sharing of increases
to CalPERS
Negotiate to share costs of increases to CalPERS
employer rates with employees.
Approximately $250,000 savings
approximate based on a 5% rate
increase
Defer or eliminate negotiated
increases
Deferring or eliminating negotiated increases
would be subject to bargaining unit agreement.
Approximately $0.3 million savings
based on a 1% decrease
Furloughs
Employees would take up to a 10% decrease in
pay in exchange for 1 unpaid furlough day per
pay period.
Approximately $3 million savings
based on a 10% decrease
Reduction in force Identify positions to be reduced (laid off) based on MOU provisions and service level needs.
Approximately $186,000 savings
per position on average
Expenditure Reduction Strategies
24 Strategy Description Potential Impact
Reduction in capital outlays and
special projects Cost containment strategy Up to $4 million Reduction in contingencies Cost containment strategy Up to $0.4 million Defer or cancel capital projects Cost reduction strategy Varies Reduction of Community Funding
and Historical Society Funding Cost reduction strategy Up to $110,000 Reduction of festival fee waivers Cost reduction strategy Varies Revenue Generation Strategies
25 Strategy Description Potential Impact
Increase fees and cost-recovery
Matrix Consulting Group has been contracted to
conduct a fee study, which is scheduled to take
place from April to July 2023. The study aims to
assess the potential for fee increases and cost
recovery.
Varies
Sale of City-owned Properties or
Assets
The sale of city-owned assets would generate
one-time revenue. Some examples of assets that
could be sold are:
• City Hall Annex (10445 Torre Avenue)
• Byrne House
• Municipal Water System
• Blackberry Farm Golf Course
Varies
Strategy Voter Approval Additional Revenue Pros Cons
¼ Cent Transaction
and Use Tax (TUT)
2/3 vote (special);
majority vote
(general)
• $5.2M annually
• Fairly proportional to
surrounding areas
• Burden spread across
residents, businesses, and
visitors
• Not applicable to
business to busines sales
when purchaser located
outside City
Parcel Tax 2/3 vote (special)
• $3.5M flat rate
per parcel
• $3.6M variable
rate per SF
• City can define specific
purpose(s) for revenue
use
• Flexibility in design
• Requires 2/3 vote
• Flat rate tax considered
regressive
Transient Occupancy
Tax (2% increase)
2/3 vote (special);
majority vote
(general)
• $1.7M @ $10M
base
• $1.25M at $7.5M
base
• $833k at $5M
base
• Paid by non-residents
• Historically strong
approval rates in the
State
• A 2% increase to the TOT
rate would place it
second to Palo Alto in
the region and among
the highest in the State
Revenue Generation Strategies
Potential Service Impacts and Next
Steps
• Fewer festivals and events
• Fewer innovation and technology
initiatives
• Lower pavement condition index (PCI)
• Reduced maintenance for facilities and
grounds
Examples of Potential Service Impacts
• Proposed Budget available May 1st
• Proposed Budget study session May 17th
• Final Budget Adoption June 2023
Next Steps
Questions?
Thank you!