City of Fort Bragg
Mid-Year Budget FY 2023/24
LONG-TERM FINANCIAL PLANNING
Long-term financial planning is an important tool used to help maintain ongoing financial sustainability and helps governments provide a consistent level of services to their citizens. The General Fund Financial forecast is intended to be a tool that provides a rational forecast of where the City’s financial position will be in five years.
Staff annually updates a five-year General Fund financial forecast to evaluate the City’s financial condition and help develop the City’s Budget.
Economic Trends
It caps off a year in which the economy defied expectations that it would plunge into recession. The economic outlook for the United States through 2024 suggests that the actions of the Federal Reserve will play a crucial role in shaping the pace of economic growth. The substantial growth in real GDP during the last quarter of 2023, which increased by 4.9%, highlights a robust period of economic expansion, significantly outpacing the annual growth rate of 2.9%. This surge is attributed mainly to an uptick in consumer spending, asset investments, and government expenditures, indicating a strong demand-side boost to the economy.
Despite this optimistic growth, the economic landscape is clouded by persistent uncertainties around inflation, which, although reduced from 6.5% in the previous year to 3.3% year-over-year by the end of December 2023, remains a concern for policymakers and economists. The reduction in inflation suggests that previous measures might be starting to bear fruit, yet the current rate still exceeds the Federal Reserve's long-term target of 2%, keeping the debate around further monetary tightening or policy adjustments alive.
Interest rates, which are a primary tool for the Federal Reserve in managing economic stability and inflation, are said to be moderating. However, the lack of clarity regarding potential major revisions to these rates adds another layer of uncertainty. The Federal Reserve's future decisions will likely hinge on balancing the need to control inflation without stifling economic growth, especially in a context where consumer spending and investment are driving expansion.
On the employment front, the increase in the state unemployment rate to 5.1% in December 2023 from 4.1% in the previous year indicates a slight softening in the labor market. This change might reflect various factors, including adjustments in the economy post-pandemic, shifts in workforce participation, or sectors' differing paces of recovery. While higher than in 2022, the unemployment rate is notably lower than the 7.7% seen in December 2021, suggesting a significant recovery from the pandemic's peak impacts.
In summary, the U.S. economy is at a critical juncture as it enters 2024. The Federal Reserve's policy decisions will be instrumental in steering the economy toward sustained growth while managing inflationary pressures. The interplay between continued consumer spending, investment, government expenditures, and the evolving monetary policy landscape will define the economic trajectory in the coming months. The ultimate challenge for policymakers will be to navigate these dynamics effectively, ensuring that growth is not only preserved but also inclusive, laying a solid foundation for long-term economic stability.
Based on the latest sales tax forecast ending September 30, 2023, statewide taxable sales down by 3.2% overall compared with the previous year and the County-wide recording declines of 6.4%, with the City gaining 0.7%.
Revenue of Autos & Transportation sales tax revenue is up 2.7% year-over-year, and nearly 10% in the last quarter alone. Fuel & Service Stations are up 1.9% from prior year though overall fuel prices have been steadily coming down. Therefore, the conservative approach taken in this forecast has limited growth in the near term to 2% with steady incremental increases over the five-year forecast horizon.
City of Fort Bragg
Mid-Year Budget FY 2023/24
Long-term forecast
Sales tax revenues have decreased slightly in recent months, but this is inevitable in the face of declining inflation.
Ultimately, such declines are often mitigated by the increases in other revenue sources. For instance, property taxes are counter-cyclical to a high inflation environment, so when high inflation abates, interest rates will also fall creating higher value to homeowners and greater tax revenues to the City as well as relieving pressure on those unwilling to refinance in a high-rate environment. This means more revenue through property development and existing home sales.
Although the City still faces significant needs for services and capital improvements, it remains in a strong financial position with reserves over the Council’s 25% goal to meet unforeseen needs. Also, it is important to note that the pension cost calculated in this forecast uses the latest actuarial report issued in June 2023 and through June 30, 2022, which reflects -6.1% investment loss that was reported by CalPERS for the fiscal year ending June 20, 2022. Such losses are driving significant increases to the City’s unfunded accrued liability (UAL) determined by CalPERS. Pension costs have been projected to increase in 24/25 and thereafter as a result of new Unfunded liability (UAL) added by the -7.5% return recorded by CALPERS and almost 0% return projected for 2023.
This is an estimated 1% higher than prior CalPERS estimates to factor in the yet unknown impact of CalPERS not reaching the target earnings rate for the last two years. The target earnings rate is 6.8% but the investment return for FY 2018-19 was 6.7% FY 2019-20, just 4.7% and a very strong performance of 21.3% for FY 2020/21.
Over a 20-year period, the overall CalPERS fund performance has averaged just 5.5%. The unfunded pension liability for the fiscal year that ended June 30, 2023, is $6.4 million.
Like most cities in California, Fort Bragg will see increases in its unfunded liability in 2024/25 payments with little or no reduction in the overall unfunded liability helped by the City adopting a Pension Policy and issued $11.4 million in taxable Lease Revenue Bonds in 2021 to restructure the UAL Debt with CALPERS. Proceeds of $7.5 million were used to reduce the City's unfunded pension liability, with an additional $3.5 million set aside for City projects which were later returned to reduce the City's debt. The record positive CalPERS investment return mentioned above, the $7.5 million liability payment, and the setting up of a Section 115 Trust with PARS placed the City in a better position to manage pension obligations. However, recent negative returns by CALPERS in June 2022 have caused UAL to increase.
The table on the following page includes three years of audited results for context as well as projected results for six additional years into the future. Four "what-if" scenarios are provided, showing possible long-term results if certain revenue enhancements were enacted.
In Fiscal Year 2018-19, the citizens of Fort Bragg voted on a ballot initiative entitled Measure H. Measure H was a proposed general sales tax aimed at closing the budget gap caused by skyrocketing pension costs. With additional revenue, the City planned to enter into a shorter amortization schedule with CalPERS for payment of unfunded liabilities. Although this would have resulted in a higher annual payment, it would have saved the City nearly $4 million of interest cost over 15 years. Measure H was not successful.
With the defeat of Measure H, the City took steps to close the budget gap on the expenditure side. The Administrative Services department eliminated the position of Administrative Services Director and the Police Lieutenant. Additionally, in FY 2019-20, the Community Development Director terminated employment with the City, this position was replaced with a lower-cost Planner position.
The City's General Fund operated at a record surplus for FY 2020/21, and the fund balance improved by nearly $1.5 million. The Surplus was the result of deep budget cuts early in the Pandemic, which reduced Staff and services and the previously discussed increases in TOT and sales tax revenue as tourism rebounded. In May, 2020, the City laid off four full-time employees, froze two positions in the Police Department, and furloughed City of Fort Bragg
Mid-Year Budget FY 2023/24
another twelve employees, 50% to 75% of their regular hours. The furloughed Staff was returned to full-time status in August 2020, but several of the laid-off positions remain vacant. In addition, the City did not replace two positions (Finance Director and Assistant City Engineer) that became open in late June. As the reliance and demand for City services continue to grow, one of the challenges the City faces is the same as many other employers – recruiting and retaining qualified Staff.
The City adopted a balanced General Fund budget for FY 2022 and projected a small surplus of $47k and $175k in FY 22/23. While the Surplus was small, the budget included $150k to pay down pension obligations, a budget for the Police Chief position, and a new City Manager position with relatively modest revenue projections.
The long-term forecast indicates that in the next year or two, the City will likely be able to fill budgeted or realized deficits with appropriated fund balance. Revenue enhancements and/or additional cost-cutting measures will likely be necessary within two years. The long-term forecast includes four "what-if" scenarios showing the effect of a variety of different hypothetical revenue generators and cost reductions. Staff recommends that the City Council pursue a general sales tax measure again at the next opportunity or identify new sources of revenues.
In addition to pursuing a general sales tax measure, the City could leverage accumulated funds from the internal service funds, enterprise funds, debt borrowings, and other expense reductions or revenue-generating opportunities.
The General Fund’s main revenue source of transient occupancy taxes and sales tax are exceeding initial expectations, however recently there has been a slowdown in property sales and higher property valuations.
Sales taxes increase but at a lower level than in previous years. Uncertainties that may impact future operating positions are listed in the following table with actions to manage these uncertainties.
Uncertainty Actions to Manage/Mitigate this Uncertainty Inflation Seek other revenue sources or adjust service fees to offset increases in costs
Economic Downturn/Recession Maintain a General Fund Emergency & Operating Reserves at 25%
Future Police Association Contract
Costs 2024
Maintain a positive operating position to absorb larger cost increases in the future
Future SEIU Contract Costs 2025 Maintain a positive operating position to absorb larger cost increases in the future
Service Changes/Council Priorities:
-Housing
-Infrastructure
-Broadband
-Pension Unfunded Liability
Seek other revenue sources or adjust service fees or
levels to offset increases
These uncertainties could create annual impacts on the General Fund and its operating position. The Long Term Financial Plan is to be informational and act as a guide to Council, management, and citizens as decisions are made.
The Long Range Financial Forecast sets the stage for the upcoming budget process, facilitating the City Council to consider strategic priorities and allocate resources appropriately. This Long Range Financial Forecast is not intended as a budget nor as a proposed plan. The forecast is based on current service levels, doesn’t factor in future development, and uses general assumptions that may be different than actual amounts.
City of Fort Bragg
Mid-Year Budget FY 2023/24
The following charts depict the General Fund expenditure categories.
$0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 FY 21-22
FY 22-23
FY 23-24
FY 24-25
FY 25-26
FY 26-27
Salaries & Wages Benefits Materials & Services Allocations to Internal Service Funds Other Expenditures Debt Service City of Fort Bragg
Mid-Year Budget FY 2023/24
FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27 FY 27-28 Audited Audited Forecast Forecast Forecast Forecast Forecast Revenue: Sales Tax $ 2,215,161 $ 2,146,975 1,959,500 1,979,095 2,048,363 2,120,056 2,194,258 Property Tax 1,150,352 1,136,219 1,150,257 1,150,257 1,161,760 1,173,377 1,185,111 Transient Occupancy Tax 3,444,990 3,192,486 3,242,118 3,258,329 3,421,245 3,455,457 3,490,012 Reimbursements 3,333,187 3,278,393 3,341,622 3,341,622 3,341,622 3,341,622 3,341,622 All Other Revenue Sources 1,071,911 2,037,151 2,550,689 2,550,689 2,576,196 2,601,958 2,627,977 Total Revenue 11,215,601 11,791,224 11,720,423 12,279,992 12,549,186 12,692,471 12,838,980 Expenditures: Salaries & Wages 3,831,953 4,114,364 4,550,423 4,777,944 5,016,841 5,167,347 5,270,694 Benefits 2,728,147 2,508,092 2,843,131 2,985,288 3,134,552 3,228,588 3,293,160 Materials & Services 2,762,347 2,903,529 2,832,433 2,889,082 2,946,863 3,005,801 3,065,917 Allocations to Internal Service Funds 789,396 649,295 656,999 676,709 697,010 717,921 739,458 Other Expenditures 216,637 230,533 230,971 242,520 249,795 257,289 265,008 Debt Service 358,337 364,131 442,513 433,348 465,555 521,910 561,409 Total Expenses 10,686,817 10,769,944 11,556,470 12,004,890 12,510,617 12,898,855 13,195,645 Net Transfers: - - - -
Net Increase (Decrease) to Fund Balance 528,784 1,021,280 163,953 275,102 38,569 (206,385) (356,665) Other restricted funds 3,879,236 (5,238,178) - - - - -
Beginning Fund Balance 4,184,215 8,592,235 4,375,337 4,539,290 4,814,392 4,852,961 4,646,576 Ending Fund Balance $ 8,592,235 $ 4,375,337 $ 4,539,290 $ 4,814,392 $ 4,852,961 $ 4,646,576 $ 4,289,912 718,784 1,211,280 353,953 465,102 228,569 (16,385) (166,665) $ 4,902,999 $ 6,114,279 $ 6,468,232 $ 6,933,334 $ 7,161,903 $ 6,916,949 $ 6,995,238 958,784 1,451,280 593,953 705,102 468,569 223,615 73,335 $ 5,142,999 $ 6,594,279 $ 7,188,232 $ 7,893,334 $ 8,361,903 $ 8,116,949 $ 8,435,238 667,232 1,340,529 653,828 769,875 550,660 305,706 173,349 $ 4,851,447 $ 6,191,976 $ 6,845,804 $ 7,615,679 $ 8,166,339 $ 7,921,385 $ 8,339,688 736,455 1,826,396 898,766 1,017,262 806,705 588,636 466,182 $ 4,920,671 $ 6,747,066 $ 7,645,832 $ 8,663,094 $ 9,469,799 $ 10,058,436 $ 10,524,618 City of Fort Bragg General Fund Five Year Forecast
Storm Drain
Enterprise $190k
annually
Parcel Tax
$430k/yr.
1% TOT Tax
$310k/yr.
3/8 cent General
Sales Tax
$800k/yr.
$8,592,235
$4,375,337 $4,539,290 $4,814,392 $4,852,961 $4,646,576
$4,289,912
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
Audited Audited Forecast Forecast Forecast Forecast Forecast FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27 FY 27-28
GENERAL FUND FIVE YEAR FORECAST
Total Revenue Total Expenses Ending Fund Balance