Los Gatos City Council
February 15, 2022

28 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Recipients may use SLFRF funds to cover payroll and covered benefits through the period of performance; these employees must have begun their employment on or after March 3, 2021. Recipients may only use SLFRF funds for additional FTEs hired over the March 3, 2021 level (i.e., the actual number of FTEs).
• Supporting and retaining public sector workers. Recipients can also use funds in other ways that support the public sector workforce.10 These include:
o Providing additional funding for employees who experienced pay reductions or were furloughed since the onset of the pandemic, up to the difference in the employee’s pay, taking into account unemployment benefits received.
o Maintaining current compensation levels to prevent layoffs. SLFRF funds may be used to maintain current compensation levels, with adjustments for inflation, in order to prevent layoffs that would otherwise be necessary.
o Providing worker retention incentives, including reasonable increases in compensation to persuade employees to remain with the employer as compared to other employment options. Retention incentives must be entirely additive to an employee’s regular compensation, narrowly tailored to need, and should not exceed incentives traditionally offered by the recipient or compensation that alternative employers may offer to compete for the employees. Treasury presumes that retention incentives that are less than 25 percent of the rate of base pay for an individual employee or 10 percent for a group or category of employees are reasonably proportional to the need to retain employees, as long as other requirements are met. • Covering administrative costs associated with administering the hiring, support, and retention programs above.

Effective Service Delivery
SLFRF funding may be used to improve the efficacy of public health and economic programs through tools like program evaluation, data, and outreach, as well as to address administrative needs caused or exacerbated by the pandemic. Eligible uses include:
• Supporting program evaluation, data, and outreach through:
10 Recipients should be able to substantiate that these uses of funds are substantially due to the public health emergency or its negative economic impacts (e.g., fiscal pressures on state and local budgets) and respond to its impacts. See the final rule for details on these uses.

29 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
✓ Program evaluation and evidence
resources
✓ Data analysis resources to gather,
assess, share, and use data
✓ Technology infrastructure to improve
access to and the user experience of
government IT systems, as well as
technology improvements to increase
public access and delivery of
government programs and services
✓ Community outreach and engagement
activities
✓ Capacity building resources to support
using data and evidence, including
hiring staff, consultants, or technical
assistance support
• Addressing administrative needs, including:
✓ Administrative costs for programs
responding to the public health
emergency and its economic impacts,
including non-SLFRF and non-federally
funded programs
✓ Address administrative needs caused
or exacerbated by the pandemic,
including addressing backlogs caused
by shutdowns, increased repair or
maintenance needs, and technology
infrastructure to adapt government
operations to the pandemic (e.g.,
video-conferencing software, data and
case management systems)

30 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

CAPITAL EXPENDITURES
As described above, the final rule clarifies that recipients may use funds for programs, services, and capital expenditures that respond to the public health and negative economic impacts of the pandemic.

Any use of funds in this category for a capital expenditure must comply with the capital expenditure requirements, in addition to other standards for uses of funds.

Capital expenditures are subject to the same eligibility standard as other eligible uses to respond to the pandemic’s public health and economic impacts; specifically, they must be related and reasonably proportional to the pandemic impact identified and reasonably designed to benefit the impacted population or class.

For ease of administration, the final rule identifies enumerated types of capital expenditures that Treasury has identified as responding to the pandemic’s impacts; these are listed in the applicable subcategory of eligible uses (e.g., public health, assistance to households, etc.). Recipients may also identify other responsive capital expenditures. Similar to other eligible uses in the SLFRF program, no preapproval is required for capital expenditures.

To guide recipients’ analysis of whether a capital expenditure meets the eligibility standard, recipients (with the exception of Tribal governments) must complete and meet the requirements of a written justification for capital expenditures equal to or greater than $1 million. For large-scale capital expenditures, which have high costs and may require an extended length of time to complete, as well as most capital expenditures for non-enumerated uses of funds, Treasury requires recipients to submit their written justification as part of regular reporting. Specifically:

If a project has
total capital
expenditures
of
and the use is enumerated by Treasury
as eligible, then
and the use is beyond those
enumerated by Treasury as eligible,
then
Less than $1
million
No Written Justification required No Written Justification required Greater than or
equal to $1
million, but
less than $10
million
Written Justification required but
recipients are not required to submit as
part of regular reporting to Treasury Written Justification required and recipients must submit as part of regular
reporting to Treasury
$10 million or
more
Written Justification required and
recipients must submit as part of regular
reporting to Treasury
A Written Justification includes:
• Description of the harm or need to be addressed. Recipients should provide a description of the specific harm or need to be addressed and why the harm was exacerbated or caused by the public health emergency. Recipients may provide quantitative information on the extent and the type of harm, such as the number of individuals or entities affected.

31 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
• Explanation of why a capital expenditure is appropriate. For example, recipients should include an explanation of why existing equipment and facilities, or policy changes or additional funding to pertinent programs or services, would be inadequate. • Comparison of proposed capital project against at least two alternative capital expenditures and demonstration of why the proposed capital expenditure is superior. Recipients should consider the effectiveness of the capital expenditure in addressing the harm identified and the expected total cost (including pre-development costs) against at least two alternative capital expenditures.

Where relevant, recipients should consider the alternatives of improving existing capital assets already owned or leasing other capital assets.

Treasury presumes that the following capital projects are generally ineligible:
 Construction of new correctional
facilities as a response to an increase in
rate of crime
 Construction of new congregate
facilities to decrease spread of COVID-19
in the facility
 Construction of convention centers,
stadiums, or other large capital projects
intended for general economic
development or to aid impacted
industries
In undertaking capital expenditures, Treasury encourages recipients to adhere to strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions. Treasury also encourages recipients to prioritize in their procurements employers with high labor standards and to prioritize employers without recent violations of federal and state labor and employment laws.

32 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

FRAMEWORK FOR ELIGIBLE USES BEYOND THOSE ENUMERATED
As described above, recipients have broad flexibility to identify and respond to other pandemic impacts and serve other populations that experienced pandemic impacts, beyond the enumerated uses and presumed eligible populations. Recipients should undergo the following steps to decide whether their project is eligible:

Step 1. Identify COVID-19 public health or
economic impact

2. Design a response that addresses or
responds to the impact
Analysis
• Can identify impact to a specific
household, business or nonprofit or to
a class of households, businesses or
nonprofits (i.e., group)
• Can also identify disproportionate
impacts, or more severe impacts, to a
specific beneficiary or to a class
• Types of responses can include a
program, service, or capital
expenditure
• Response should be related and
reasonably proportional to the harm
• Response should also be reasonably
designed to benefit impacted
individual or class

1. Identify a COVID-19 public health or negative economic impact on an individual or a class.

Recipients should identify an individual or class that is “impacted” or “disproportionately impacted” by the COVID-19 public health emergency or its negative economic impacts as well as the specific impact itself.
• “Impacted” entities are those impacted by the disease itself or the harmful consequences of the economic disruptions resulting from or exacerbated by the COVID19 public health emergency. For example, an individual who lost their job or a small business that saw lower revenue during a period of closure would both have experienced impacts of the pandemic.
• “Disproportionately impacted” entities are those that experienced disproportionate public health or economic outcomes from the pandemic; Treasury recognizes that preexisting disparities, in many cases, amplified the impacts of the pandemic, causing more severe impacts in underserved communities. For example, a household living in a neighborhood with limited access to medical care and healthy foods may have faced health disparities before the pandemic, like a higher rate of chronic health conditions, that contributed to more severe health outcomes during the COVID-19 pandemic.

The recipient may choose to identify these impacts at either the individual level or at a class level. If the recipient is identifying impacts at the individual level, they should retain documentation supporting the impact the individual experienced (e.g., documentation of lost revenues from a small business). Such documentation can be streamlined in many cases (e.g., self-attestation that a household requires food assistance).

Recipients also have broad flexibility to identify a “class” – or a group of households, small businesses, or nonprofits – that experienced an impact. In these cases, the recipients should

33 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
first identify the class and the impact that it faced. Then, recipients only need to document that the individuals served fall within that class; recipients do not need to document a specific impact to each individual served. For example, a recipient could identify that restaurants in the downtown area faced substantial declines in revenue due to decreased foot traffic from workers; the recipient could develop a program to respond to the impact on that class and only needs to document that the businesses being served are restaurants in the downtown area.

Recipients should keep the following considerations in mind when designating a class:
• There should be a relationship between the definition of the class and the proposed response. Larger and less-specific classes are less likely to have experienced similar harms, which may make it more difficult to design a response that appropriately responds to those harms.
• Classes may be determined on a population basis or on a geographic basis, and the response should be appropriately matched. For example, a response might be designed to provide childcare to single parents, regardless of which neighborhood they live in, or a response might provide a park to improve the health of a disproportionately impacted neighborhood.
• Recipients may designate classes that experienced disproportionate impact, by assessing the impacts of the pandemic and finding that some populations experienced meaningfully more severe impacts than the general public. To determine these disproportionate impacts, recipients:
o May designate classes based on academic research or government research publications (such as the citations provided in the supplementary information in the final rule), through analysis of their own data, or through analysis of other existing data sources.
o May also consider qualitative research and sources to augment their analysis, or when quantitative data is not readily available. Such sources might include resident interviews or feedback from relevant state and local agencies, such as public health departments or social services departments. o Should consider the quality of the research, data, and applicability of analysis to their determination in all cases.
• Some of the enumerated uses may also be appropriate responses to the impacts experienced by other classes of beneficiaries. It is permissible for recipients to provide these services to other classes, so long as the recipient determines that the response is also appropriate for those groups.
• Recipients may designate a class based on income level, including at levels higher than the final rule definition of "low- and moderate-income." For example, a recipient may identify that households in their community with incomes above the final rule threshold for low-income nevertheless experienced disproportionate impacts from the pandemic and provide responsive services.

2. Design a response that addresses or responds to the impact. Programs, services, and other interventions must be reasonably designed to benefit the individual or class that experienced

34 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
the impact. They must also be related and reasonably proportional to the extent and type of impact experienced. For example, uses that bear no relation or are grossly disproportionate to the type or extent of the impact would not be eligible. “Reasonably proportional” refers to the scale of the response compared to the scale of the harm, as well as the targeting of the response to beneficiaries compared to the amount of harm they experienced; for example, it may not be reasonably proportional for a cash assistance program to provide a very small amount of aid to a group that experienced severe harm and a much larger amount to a group that experienced relatively little harm. Recipients should consider relevant factors about the harm identified and the response to evaluate whether the response is reasonably proportional. For example, recipients may consider the size of the population impacted and the severity, type, and duration of the impact. Recipients may also consider the efficacy, cost, cost-effectiveness, and time to delivery of the response.

For disproportionately impacted communities, recipients may design interventions that address broader pre-existing disparities that contributed to more severe health and economic outcomes during the pandemic, such as disproportionate gaps in access to health care or pre-existing disparities in educational outcomes that have been exacerbated by the pandemic.

35 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Premium Pay
The Coronavirus State and Local Fiscal Recovery Funds may be used to provide premium pay to eligible workers performing essential work during the pandemic. Premium pay may be awarded to eligible workers up to $13 per hour. Premium pay must be in addition to wages or remuneration (i.e., compensation) the eligible worker otherwise receives. Premium pay may not exceed $25,000 for any single worker during the program.

Recipients should undergo the following steps to provide premium pay to eligible workers.

1. Identify an “eligible” worker. Eligible workers include workers “needed to maintain continuity of operations of essential critical infrastructure sectors.” These sectors and occupations are eligible:
✓ Health care
✓ Emergency response
✓ Sanitation, disinfection & cleaning
✓ Maintenance
✓ Grocery stores, restaurants, food
production, and food delivery
✓ Pharmacy
✓ Biomedical research
✓ Behavioral health
✓ Medical testing and diagnostics
✓ Home and community-based health care
or assistance with activities of daily living
✓ Family or child care
✓ Social services
✓ Public health
✓ Mortuary
✓ Critical clinical research, development,
and testing necessary for COVID-19
response
✓ State, local, or Tribal government
workforce
✓ Workers providing vital services to
Tribes
✓ Educational, school nutrition, and other
work required to operate a school
facility
✓ Laundry
✓ Elections
✓ Solid waste or hazardous materials
management, response, and cleanup
✓ Work requiring physical interaction with
patients
✓ Dental care
✓ Transportation and warehousing
✓ Hotel and commercial lodging facilities
that are used for COVID-19 mitigation
and containment
Beyond this list, the chief executive (or equivalent) of a recipient government may designate additional non-public sectors as critical so long as doing so is necessary to protecting the health and wellbeing of the residents of such jurisdictions.

2. Verify that the eligible worker performs “essential work,” meaning work that:
• Is not performed while teleworking from a residence; and • Involves either:
a. regular, in-person interactions with patients, the public, or coworkers of the individual that is performing the work; or
b. regular physical handling of items that were handled by, or are to be handled by, patients, the public, or coworkers of the individual that is performing the work.

36 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

3. Confirm that the premium pay “responds to” workers performing essential work during the COVID-19 public health emergency. Under the final rule, which broadened the share of eligible workers who can receive premium pay without a written justification, recipients may meet this requirement in one of three ways:
• Eligible worker receiving premium pay is earning (with the premium included) at or below 150 percent of their residing state or county’s average annual wage for all occupations, as defined by the Bureau of Labor Statistics’ Occupational Employment and Wage Statistics, whichever is higher, on an annual basis; or
• Eligible worker receiving premium pay is not exempt from the Fair Labor Standards Act overtime provisions; or
• If a worker does not meet either of the above requirements, the recipient must submit written justification to Treasury detailing how the premium pay is otherwise responsive to workers performing essential work during the public health emergency. This may include a description of the essential worker’s duties, health, or financial risks faced due to COVID-19, and why the recipient determined that the premium pay was responsive. Treasury anticipates that recipients will easily be able to satisfy the justification requirement for front-line workers, like nurses and hospital staff.

Premium pay may be awarded in installments or lump sums (e.g., monthly, quarterly, etc.) and may be awarded to hourly, part-time, or salaried or non-hourly workers. Premium pay must be paid in addition to wages already received and may be paid retrospectively. A recipient may not use SLFRF to merely reimburse itself for premium pay or hazard pay already received by the worker, and premium pay may not be paid to volunteers.

37 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Water & Sewer Infrastructure
The Coronavirus State and Local Fiscal Recovery Funds may be used to make necessary investments in water and sewer infrastructure. State, local, and Tribal governments have a tremendous need to address the consequences of deferred maintenance in drinking water systems and removal, management, and treatment of sewage and stormwater, along with additional resiliency measures needed to adapt to climate change.

Recipients may undertake the eligible projects below:

PROJECTS ELIGIBLE UNDER EPA’S CLEAN WATER STATE REVOLVING FUND (CWSRF) Eligible projects under the CWSRF, and the final rule, include:
✓ Construction of publicly owned
treatment works
✓ Projects pursuant to implementation
of a nonpoint source pollution
management program established
under the Clean Water Act (CWA)
✓ Decentralized wastewater treatment
systems that treat municipal
wastewater or domestic sewage
✓ Management and treatment of
stormwater or subsurface drainage
water
✓ Water conservation, efficiency, or
reuse measures
✓ Development and implementation of a
conservation and management plan
under the CWA
✓ Watershed projects meeting the
criteria set forth in the CWA
✓ Energy consumption reduction for
publicly owned treatment works
✓ Reuse or recycling of wastewater,
stormwater, or subsurface drainage
water
✓ Security of publicly owned treatment
works
Treasury encourages recipients to review the EPA handbook for the CWSRF for a full list of eligibilities.

PROJECTS ELIGIBLE UNDER EPA’S DRINKING WATER STATE REVOLVING FUND (DWSRF) Eligible drinking water projects under the DWSRF, and the final rule, include:
✓ Facilities to improve drinking water
quality
✓ Transmission and distribution,
including improvements of water
pressure or prevention of
contamination in infrastructure and
lead service line replacements
✓ New sources to replace contaminated
drinking water or increase drought
resilience, including aquifer storage
and recovery system for water storage
✓ Green infrastructure, including green
roofs, rainwater harvesting collection,
permeable pavement
✓ Storage of drinking water, such as to
prevent contaminants or equalize
water demands
✓ Purchase of water systems and
interconnection of systems
✓ New community water systems
Treasury encourages recipients to review the EPA handbook for the DWSRF for a full list of eligibilities.

38 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

ADDITIONAL ELIGIBLE PROJECTS
With broadened eligibility under the final rule, SLFRF funds may be used to fund additional types of projects— such as additional stormwater infrastructure, residential wells, lead remediation, and certain rehabilitations of dams and reservoirs — beyond the CWSRF and DWSRF, if they are found to be “necessary” according to the definition provided in the final rule and outlined below. ✓ Culvert repair, resizing, and removal,
replacement of storm sewers, and
additional types of stormwater
infrastructure
✓ Infrastructure to improve access to
safe drinking water for individual
served by residential wells, including
testing initiatives, and
treatment/remediation strategies that
address contamination
✓ Dam and reservoir rehabilitation if
primary purpose of dam or reservoir is
for drinking water supply and project
is necessary for provision of drinking
water
✓ Broad set of lead remediation projects
eligible under EPA grant programs
authorized by the Water
Infrastructure Improvements for the
Nation (WIIN) Act, such as lead
testing, installation of corrosion
control treatment, lead service line
replacement, as well as water quality
testing, compliance monitoring, and
remediation activities, including
replacement of internal plumbing and
faucets and fixtures in schools and
childcare facilities
A “necessary” investment in infrastructure must be:
(1) responsive to an identified need to achieve or maintain an adequate minimum level of service, which may include a reasonable projection of increased need, whether due to population growth or otherwise,
(2) a cost-effective means for meeting that need, taking into account available alternatives, and (3) for investments in infrastructure that supply drinking water in order to meet projected population growth, projected to be sustainable over its estimated useful life.

Please note that DWSRF and CWSRF-eligible projects are generally presumed to be necessary investments. Additional eligible projects generally must be responsive to an identified need to achieve or maintain an adequate minimum level of service. Recipients are only required to assess costeffectiveness of projects for the creation of new drinking water systems, dam and reservoir rehabilitation projects, or projects for the extension of drinking water service to meet population growth needs. Recipients should review the supplementary information to the final rule for more details on requirements applicable to each type of investment.

APPLICABLE STANDARDS & REQUIREMENTS
Treasury encourages recipients to adhere to strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions. Treasury also encourages recipients to prioritize in their procurements employers with high labor standards and to prioritize employers without recent violations of federal and state labor and employment laws.

39 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Broadband Infrastructure
The Coronavirus State and Local Fiscal Recovery Funds may be used to make necessary investments in broadband infrastructure, which has been shown to be critical for work, education, healthcare, and civic participation during the public health emergency. The final rule broadens the set of eligible broadband infrastructure investments that recipients may undertake.

Recipients may pursue investments in broadband infrastructure meeting technical standards detailed below, as well as an expanded set of cybersecurity investments.

BROADBAND INFRASTRUCTURE INVESTMENTS
Recipients should adhere to the following requirements when designing a broadband infrastructure project:

1. Identify an eligible area for investment. Recipients are encouraged to prioritize projects that are designed to serve locations without access to reliable wireline 100/20 Mbps broadband service (meaning service that reliably provides 100 Mbps download speed and 20 Mbps upload speed through a wireline connection), but are broadly able to invest in projects designed to provide service to locations with an identified need for additional broadband investment.

Recipients have broad flexibility to define need in their community. Examples of need could include:
✓ Lack of access to a reliable high-speed
broadband connection
✓ Lack of affordable broadband
✓ Lack of reliable service
If recipients are considering deploying broadband to locations where there are existing and enforceable federal or state funding commitments for reliable service of at least 100/20 Mbps, recipients must ensure that SLFRF funds are designed to address an identified need for additional broadband investment that is not met by existing federal or state funding commitments. Recipients must also ensure that SLFRF funds will not be used for costs that will be reimbursed by the other federal or state funding streams.

2. Design project to meet high-speed technical standards. Recipients are required to design projects to, upon completion, reliably meet or exceed symmetrical 100 Mbps download and upload speeds. In cases where it is not practicable, because of the excessive cost of the project or geography or topography of the area to be served by the project, eligible projects may be designed to reliably meet or exceed 100/20 Mbps and be scalable to a minimum of symmetrical 100 Mbps download and upload speeds.

Treasury encourages recipients to prioritize investments in fiber-optic infrastructure wherever feasible and to focus on projects that will achieve last-mile connections. Further, Treasury encourages recipients to prioritize support for broadband networks owned, operated by, or affiliated with local governments, nonprofits, and co-operatives.

40 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

3. Require enrollment in a low-income subsidy program. Recipients must require the service provider for a broadband project that provides service to households to either:
✓ Participate in the FCC’s Affordable
Connectivity Program (ACP)
✓ Provide access to a broad-based
affordability program to low-income
consumers that provides benefits
commensurate to ACP
Treasury encourages broadband services to also include at least one low-cost option offered without data usage caps at speeds sufficient for a household with multiple users to simultaneously telework and engage in remote learning. Recipients are also encouraged to consult with the community on affordability needs.

CYBERSECURITY INVESTMENTS
SLFRF may be used for modernization of cybersecurity for existing and new broadband infrastructure, regardless of their speed delivery standards. This includes modernization of hardware and software.

APPLICABLE STANDARDS & REQUIREMENTS
Treasury encourages recipients to adhere to strong labor standards, including project labor agreements and community benefits agreements that offer wages at or above the prevailing rate and include local hire provisions. Treasury also encourages recipients to prioritize in their procurements employers with high labor standards and to prioritize employers without recent violations of federal and state labor and employment laws.

41 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Restrictions on Use
While recipients have considerable flexibility to use Coronavirus State and Local Fiscal Recovery Funds to address the diverse needs of their communities, some restrictions on use of funds apply.

OFFSET A REDUCTION IN NET TAX REVENUE
• States and territories may not use this funding to directly or indirectly offset a reduction in net tax revenue resulting from a change in law, regulation, or administrative interpretation beginning on March 3, 2021, through the last day of the fiscal year in which the funds provided have been spent. If a state or territory cuts taxes during this period, it must demonstrate how it paid for the tax cuts from sources other than SLFRF, such as by enacting policies to raise other sources of revenue, by cutting spending, or through higher revenue due to economic growth. If the funds provided have been used to offset tax cuts, the amount used for this purpose must be repaid to the Treasury.

DEPOSITS INTO PENSION FUNDS
• No recipients except Tribal governments may use this funding to make a deposit to a pension fund. Treasury defines a “deposit” as an extraordinary contribution to a pension fund for the purpose of reducing an accrued, unfunded liability. While pension deposits are prohibited, recipients may use funds for routine payroll contributions connected to an eligible use of funds (e.g., for public health and safety staff). Examples of extraordinary payments include ones that:
 Reduce a liability incurred prior to the
start of the COVID-19 public health
emergency and occur outside the
recipient's regular timing for making the
payment
 Occur at the regular time for pension
contributions but is larger than a regular
payment would have been

ADDITIONAL RESTRICTIONS AND REQUIREMENTS
Additional restrictions and requirements that apply across all eligible use categories include:
• No debt service or replenishing financial reserves. Since SLFRF funds are intended to be used prospectively, recipients may not use SLFRF funds for debt service or replenishing financial reserves (e.g., rainy day funds).
• No satisfaction of settlements and judgments. Satisfaction of any obligation arising under or pursuant to a settlement agreement, judgment, consent decree, or judicially confirmed debt restructuring in a judicial, administrative, or regulatory proceeding is itself not an eligible use.

However, if a settlement requires the recipient to provide services or incur other costs that are an eligible use of SLFRF funds, SLFRF may be used for those costs. • Additional general restrictions. SLFRF funds may not be used for a project that conflicts with or contravenes the purpose of the American Rescue Plan Act statute (e.g., uses of funds that

42 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
undermine COVID-19 mitigation practices in line with CDC guidance and recommendations) and may not be used in violation of the Award Terms and Conditions or conflict of interest requirements under the Uniform Guidance. Other applicable laws and regulations, outside of SLFRF program requirements, may also apply (e.g., laws around procurement, contracting, conflicts-of-interest, environmental standards, or civil rights).

43 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury
Program Administration
The Coronavirus State and Local Fiscal Recovery Funds final rule details a number of administrative processes and requirements, including on distribution of funds, timeline for use of funds, transfer of funds, treatment of loans, use of funds to meet non-federal match or cost-share requirements, administrative expenses, reporting on use of funds, and remediation and recoupment of funds used for ineligible purposes. This section provides a summary for the most frequently asked questions.

TIMELINE FOR USE OF FUNDS
Under the SLFRF, funds must be used for costs incurred on or after March 3, 2021. Further, costs must be obligated by December 31, 2024, and expended by December 31, 2026.

TRANSFERS
Recipients may undertake projects on their own or through subrecipients, which carry out eligible uses on behalf of a recipient, including pooling funds with other recipients or blending and braiding SLFRF funds with other sources of funds. Localities may also transfer their funds to the state through section 603(c)(4), which will decrease the locality’s award and increase the state award amounts.

LOANS
Recipients may generally use SLFRF funds to provide loans for uses that are otherwise eligible, although there are special rules about how recipients should track program income depending on the length of the loan. Recipients should consult the final rule if they seek to utilize these provisions.

NON-FEDERAL MATCH OR COST-SHARE REQUIREMENTS
Funds available under the “revenue loss” eligible use category (sections 602(c)(1)(C) and 603(c)(1)(C) of the Social Security Act) generally may be used to meet the non-federal cost-share or matching requirements of other federal programs. However, note that SLFRF funds may not be used as the nonfederal share for purposes of a state’s Medicaid and CHIP programs because the Office of Management and Budget has approved a waiver as requested by the Centers for Medicare & Medicaid Services pursuant to 2 CFR 200.102 of the Uniform Guidance and related regulations.

SLFRF funds beyond those that are available under the revenue loss eligible use category may not be used to meet the non-federal match or cost-share requirements of other federal programs, other than as specifically provided for by statute. As an example, the Infrastructure Investment and Jobs Act provides that SLFRF funds may be used to meet the non-federal match requirements of authorized Bureau of Reclamation projects and certain broadband deployment projects. Recipients should consult the final rule for further details if they seek to utilize SLFRF funds as a match for these projects.

ADMINISTRATIVE EXPENSES
SLFRF funds may be used for direct and indirect administrative expenses involved in administering the program. For details on permissible direct and indirect administrative costs, recipients should refer to Treasury’s Compliance and Reporting Guidance. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs.

44 U.S. DEPARTMENT OF THE TREASURY
Coronavirus State & Local Fiscal Recovery Funds: Overview of the Final Rule U.S. Department of the Treasury

REPORTING, COMPLIANCE & RECOUPMENT
Recipients are required to comply with Treasury’s Compliance and Reporting Guidance, which includes submitting mandatory periodic reports to Treasury.

Funds used in violation of the final rule are subject to remediation and recoupment. As outlined in the final rule, Treasury may identify funds used in violation through reporting or other sources. Recipients will be provided with an initial written notice of recoupment with an opportunity to submit a request for reconsideration before Treasury provides a final notice of recoupment. If the recipient receives an initial notice of recoupment and does not submit a request for reconsideration, the initial notice will be deemed the final notice. Treasury may pursue other forms of remediation and monitoring in conjunction with, or as an alternative to, recoupment.

REVISIONS TO THE OVERVIEW OF THE FINAL RULE:
• January 18, 2022 (p. 4, p. 16): Clarification that the revenue loss standard allowance is “up to” $10 million under the Replacing Lost Public Sector Revenue eligible use category; addition of further information on the eligibility of general infrastructure, general economic development, and worker development projects under the Public Health and Negative Economic Impacts eligible use category.

February 9, 2022
Greetings Mayor Rennie, Vice Mayor Ristow and Council Members Hudes, Badame and Sayoc – You knew this request was coming eventually and what better time to present than right before your mid-year budget review at Tuesday’s February 15th Council Meeting! Thank you for taking the time these next few days to consider our proposal and our request for funding.

While we hesitated slightly before jumping into the production of this Promenade Series again, we feel compelled to make it happen at least for one more year. The aftermath of the Covid pandemic lingers still and with Dr. Cody’s mask mandate announcement today, people here wonder if we will ever go back to normal.

Last summer the Promenades gave people hope. The folks who came felt safe but at least could participate to the extent they wanted. Community spirit was renewed. I think you would all agree.

We learned new tricks every week which helped us streamline the workload and the cost. Based on last year’s actual budget, we are confident the costs we have outlined in this proposal are right on target.

We have business owners, residents and musicians clamoring for the dates of the Promenades to be released.

It is funny that people just think they are going to happen, but isn’t that always the case. We are collaborating with Jazz on the Plazz and with the organizers of Music in the Park so that we can effectively market all of the Sounds of Summer together. We also hope to share volunteers and other resources. Additionally, we have talked about fundraising together and eventually, I think that could become a reality. This year, however, in order to move along quickly; contract vendors and bands and get everything rolling, we need a solid commitment from you this next week. As there is not a revenue stream for the Chamber in this production, we have to rely on outside help.

When you read the ARPA Grant Guidelines and Restrictions closely, we can all argue that these Promenade events directly help with our Town’s Covid Recovery Plans. One more year of that assistance will put us in a position to get big name sponsors lined up by next fall.

These Sounds of Summer could be a huge draw. If marketed correctly, we will draw people here from all over California to come eat, drink and stay in our Town. The parklets will be ready. Our hotels have been waiting for that day. Our streets and parks will be filled with a culturally diverse group of people of all ages. The music will be tasteful and wholesome representative of some of our local musicians and we will strive to make for a safe, secure and fun environment.

And yes, I know as Marcia Jensen used to say The Chamber is always asking for money. Well, we are and we will continue to do so. We never expected the Promenade to be so successful. We think we should take a chance on them again as they are an engine or the catalyst to get everything moving. We will continue to try to make the Town of Los Gatos and its business community as vibrant and as successful as it can possibly be.

Please do not hesitate to call me this weekend if you have concerns or questions.

Sincerely,
Catherine Somers and the Staff at the Chamber of Commerce 10 Station Way, Los Gatos, CA 95030 408-354-9300 losgatoschamber.com ATTACHMENT 2

Summer Promenades

THURSDAYS
JUNE 23- AUGUST 11, 5-9PM

It seems long overdue to utilize our
amazing downtown area in this way on a
regular basis. Notwithstanding the
economic benefits to businesses, it’s really
reinvigorated the sense of community.
- Stephen Slater
Resident
What a great idea to revitalize the spirit
and economy. This spirit is the reason
we moved to Los Gatos. I’d be happy to
volunteer to keep them alive!
- Taryn Kraus
Resident
Reasons to love the Promenades
•Economic Vitality
•Diversity in all forms
•Safe and healthy space
•Builds community, spirit and vibrancy
•Good Fun
I support the continuation of Thursday
Promenades. It is awesome. Everyone
loves it. Good for the town, good for
business. Lots of room for people to
spread out.
- Charleen Renati
Resident

Economic vitality
Data taken from survey done by Economic Development Director, Monica Renn • 64% of business reported that the Promenades had a
positive impact on their business (19% saw no impact)
• 51% reported increased sales (22% saw no difference)
83% of businesses believe that the Promenades positively impacted the Los Gatos community!
Testimonials:

Very positive experience and we
should DEFINITELY do it more often.
- Just Write Arts
While we didn't really directly benefit
from the closure we believe it is a great,
overall benefit to the downtown
businesses and community. At a
minimum more people walking around
might have noticed us to come back in
the future.
- Tea on the Avenue
Sales up about $1,000 a week
-lululemon
Each Thursday I have noticed a
different crowd. Younger shoppers
have ventured into the shop.
- Blue Mercury

Diversity in all forms…
Just want to give a shout out to the town and the Chamber of Commerce for the super fun Thursday Promenade
events this summer. It is the best thing to happen in Los Gatos for a long time, and I hope that you will allow it to continue to take place every summer moving forward.

The reason I really enjoy this event is because: • all ages attend • there is a lot of space to move around (unlike Music in the Park and Jazz of the Plazz which have become way
overcrowded over the years, and grouchy people yell
at you if you try to chat to a neighbor during the
performance).
• it appears to bring a lot of business to our downtown restaurants
• the music has been excellent
We live downtown on Tait Ave, and love walking down to
the event every Thursday. We run into many friends, drink and eat, walk around, and listen to the bands. And the road closure is very nice, allowing plenty of room to mingle.

Thanks again for such an enjoyable event. - Martha Quieroz

This many smiles comes with a price tag…

BUDGET
estimated cost
per event Total Cost
Bands $3,000 8 $24,000
Sound $3,000 8 $24,000
traffic control company - for street closure $2,500 8 $20,000 Portapotties $2,000 1 $2,000
Neighbor Notification $700 1 $700
Security (private) $400 8 $3,200
Printing: posters, banners $1,000 1 $1,000
ABC License $75 8 $600
Marketing & Publicity $10,000 1 $10,000
Los Gatos Magazine Ad 1500
LG Weekly Ad-first week $1,300
LG Weekly Ad-second & third week $1,200
Sounds of summer program $3,000
Los Gatan ads $3,000
Volunteer staffing meals $100 8 $800
Supplies $100 8 $800
LGMS Police $1,400 8 $11,200
Encroachment permit for port a potties/garbage $322 1 $322 No Parking Signs $100 1 $100
Banner permit fee $113 2 $226
Special event permit fee $170 1 $170
Street Cleaning & Garbage pickup $1,200 8 $9,600
Additional entertainment $6,000 $6,000
Additional staffing $1,000 8 $8,000
5 people/ promenade@$25/hr for 8 hrs
$122,718
$15,340 each
Summer Promenades
Green items are Town Fees.

Based on actual 2021 costs

Possible Band Selections
• The Complications
• Daze on the Green
• Given To Fly
• Summit Sisters
• Cabana Boys
• Rusty Rock ‘n Roll
• Lavender Fields
• Alex Lucerros
• Crooked Branches
• Apple City Slough Band
• Hootenanny
• Suburbamore
• LGHS Teacher Band
• Alex and the Live again
• Samba Santa Cruz Quartet
• Dirty Cello
• Burroughs Brothers
• Mike Drew Band

Collaboration
Sounds of Summer in Los Gatos

PREPARED BY: Arn Andrews
Assistant Town Manager
Reviewed by: Town Manager, Town Attorney, and Finance Director 110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832 www.losgatosca.gov

TOWN OF LOS GATOS

COUNCIL AGENDA REPORT
MEETING DATE: 02/15/2021
ITEM NO: 13
DATE: February 10, 2022
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Discuss the Five-Year Forecast (Fiscal Years 2022/23 – 2026/27), Provide Direction on Budget Assumptions, and Provide any Specific Direction for the Preparation of the Town’s Fiscal Year 2022/23 Operating Budget RECOMMENDATION:

Discuss the Five-Year Forecast (Fiscal Years 2022/23 – 2026/27), provide direction on budget assumptions, and provide any specific direction for the preparation of the Town’s Fiscal Year (FY) 2022/23 Operating Budget.

EXECUTIVE SUMMARY:

The base case Five-Year Forecast (FY 2022/23 – 2026/27) (Attachment 2) identifies deficits for all future years, using the 2% salary increase assumption approved by the Town Council for the FY 2021/22 budget and other assumptions (see Attachments 3 and 4). The deficits are on the order of approximately $2M per year and can currently be resolved through expenditure controls and the use of one-time funds. The persistent presence of a deficit indicates that the Town needs to consider new revenue measures if it wants to maintain high levels of municipal services.

The sensitivity of the Forecast to its assumptions is demonstrated in this report. The Council may wish to modify the assumptions for the FY 2022/23 budget and provide other budget direction as appropriate. The Capital Program is scheduled for a separate discussion at the next Council meeting.

PAGE 2 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
BACKGROUND:

An important aspect of the Town’s budget development process is taking a multi-year approach to understand revenue and expenditure trends over time. Serving as the foundation of the budget planning process (Attachment 1), the Town develops a Five-Year Financial Forecast (“Forecast”) beginning in the winter of each year. The Forecast enables the Town to evaluate the Town’s fiscal condition and to help guide policy, programmatic planning, and budget decisions. Development of a financial forecast as part of the budget development process has been identified as a best practice by the Government Financial Officers Association (GFOA).

The Forecast takes a forward look at the Town's General Fund revenues and expenditures and is updated regularly. Its purpose is to identify financial trends, potential shortfalls, and other issues so the Town can proactively address them and budget accordingly. It does so by projecting out into the future the fiscal results of continuing the Town's current service levels and policies. This process helps to provide a snapshot of what the future may look like as a result of the decisions made to date.

The initial Forecast (FY 2022/23 – 2026/27) is predicated on estimates derived from the FY 2021/22 Mid-Year review and includes updates to Town revenues and expenditures based on the Mid-Year end of year projections. Like any forecast, the Forecast’s revenue estimates for the first year is the most critical in the process as they ultimately define the expenditure limitations for the upcoming budget year.

This report contains detailed information that contributes to the preparation of the annual budget, including the Town’s “Base Case” Five Year Forecast, its data sources, and budget assumptions. This report also provides two additional forecast scenarios utilizing a sensitivity analysis for three of the major revenue assumptions. These additional forecast scenarios illustrate the effects on future budgets of a more optimistic revenue scenario (“Greater Growth”) and a pessimistic revenue one (“Lower Growth”).

The Five-Year Financial Forecast is not a budget, nor a proposed plan. The Five-Year Financial Forecast sets the stage for the upcoming budget process and is a tool in facilitating both the Town Council and Town Manager in establishing priorities and allocating resources appropriately.

DISCUSSION:

National and Local Economic Backdrop
The UCLA Anderson School of Business publishes an annual economic forecast for the nation and California. The results of the forecast are utilized as a portion of the macroeconomic basis of the Five-Year Forecast development. The September 2021 report establishes data for a 2021-2023 forecast period.

PAGE 3 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

Because of plateauing vaccination rates and the emergence of variants, the UCLA Anderson Forecast is projecting slower growth in average annual Gross Domestic Product (GDP) for 2022 of 4.1%, down from their previous forecast of 5.0%. However, for 2023 they have increased their forecast to 3.1% from the previous forecast of 2.2%. The report states that the “…reduction in growth in 2022 and increase in growth in 2023 represent a shifting of consumption and investment further into the future.” Other forecast assumptions include that the economy remains constrained because of COVID, that consumers continue to spend on entertainment, leisure and hospitality, and services, but that they occasionally pull back if there are new variants or if cases increase rapidly. In addition, the report assumes that the impact of COVID on economic activity diminishes through 2023.

As the graph on the next page illustrates, the report states that real GDP surpassed its preCOVID peak in Q2 2021. However, real GDP is still 2.2% below its pre-COVID trend and the report does not expect real GDP to reach its pre-COVID trend until the third quarter of 2023.

The Report notes, “although California began a significant recovery later than some other states due to the public health interventions in the state, they expect the California recovery to ultimately be, once again, faster than the U.S. The authors attribute this to two reasons. First, variants notwithstanding, the better public health outcomes should result in a more rapid return to normalcy. Second, the move to new ways of work and social interaction will disproportionately impact California through its technology laden sectors. The leisure and

PAGE 4 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):
hospitality sector will be the last to recover due to the depth of the decline in this sector, the slower return of restaurant and bar services demand, and the sub-sectors dependent upon international tourism demand. The recovery will be considerably faster in higher income technical services and faster in residential construction as California’s shortage of housing relative to demand drives new developments.”
Operating Revenue Trends and Five-Year Forecast Scenarios The Town is highly dependent on three economically sensitive revenues comprising 65% of General Fund forecasted revenues. Following are summaries of the Town’s major revenues of property tax, sales tax, and transient occupancy tax (TOT). To provide context for the development of the Five-Year Forecast (FY 2022/23 – 2026/27), the prior year’s growth assumptions and resulting revenue projections are provided. The Base Case Forecast can be found in Attachment 2.

With that context, updated growth assumptions are provided for each revenue source, and the resultant projected revenues for the new Forecast period. The revenue assumptions provided are informed by the County Tax Assessor, the Town’s sales tax consultant, and direct communication with the Town’s hospitality industry. In addition, alternative forecast scenarios are discussed in this report for these three revenue streams. Please see Attachment 3 for a description of all revenue categories with a comprehensive listing of revenue forecast assumptions.

Property Tax
Property tax is the single largest revenue source for the Town and comprised approximately 34% of total Town projected revenues for FY 2021/22. As the following table illustrates, Los Gatos has benefited from the economic expansion as evidenced by year-over-year (YOY) roll growth in property assessment since 2012. For the 10-year period, the average annual growth rate was 6.4%.

Los Gatos Assessment Roll Growth
(values in billions)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Total
Roll

8.68 9.46 9.99 10.63 11.54 12.29 13.15 13.84 14.90 15.6 Percent
Growth

3.67 9.06 5.62 6.40 8.56 6.54 6.95 5.23 7.70 4.33
Source: Santa Clara County Assessors Annual Reports

PAGE 5 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

The County of Santa Clara provides property tax collection updates and projections throughout the year. The following table illustrates the most recent estimates relative to the Adopted FY 2021/22 Budget and FY 2020/21 actuals. The current County estimate indicates a modest deviation from budget of approximately $400,000. The decrease is attributed to the combination of lower than expected secured property tax estimates and increases to Vehicle License Fees, property transfer tax, and Educational Revenue Augmentation Fund (ERAF) estimates.

FY 2020/21
Actual
FY 2021/22
Adjusted
Budget
County Estimate
with 70% ERAF
Property Tax
Revenue &
Vehicle License
Fee Backfill
$19.9 M $20.0 M $19.6 M
The Town has been monitoring ongoing developments regarding the distribution of excess ERAF funds. A portion of property tax revenue goes to the ERAF to support local school districts. When the amount contributed to ERAF is more than the minimum cost of funding local schools, excess funds have traditionally been returned to the county, cities, and special districts. Five counties, including Santa Clara, have been using a redistribution allocation formula that has been contested by the State. The Town received the full amount for FY 2020/21; however, the Santa Clara County Assessor’s Office recommends budgeting only 70% of the FY 2021/22 projected number. The Adopted FY 2021/22 Budget included a $1.45 million ERAF estimate, 70% of the current ERAF base revenue estimate is $1.5 million.

The following table illustrates the growth factors used in the development of the Five-Year Forecast (FY 2022/23 – 2026/27).

Property Tax 2022/23
Forecast
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
Proposed Growth 3% 3% 3% 3% 3%
For purposes of the Forecast, the “Base Case” utilizes a growth factor of 3.0% and the “Greater Growth” and “Lower Growth” scenarios utilize a 2% differential from the Base Case. In addition to the growth factor, staff continues to assume $372,000 additional North 40 revenue in FY 2021/22 and an additional $711.320 in FY2022/23 due to the project’s construction and sales schedule. Base non-residual excess ERAF revenue is forecasted at $400,000 annually until

PAGE 6 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):
further direction received annually from the County. FY 2022/23 also anticipates an additional $500,000 Redevelopment Agency residual allocation representing the current allocation calculation of Santa Clara County.

Property Tax
(Property Tax & VLF)
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Greater Growth Scenario $20.2 $21.0 $22.0 $23.0 $24.2
Base Case
Modest Growth
$19.9 $20.2 $20.7 $21.4 $22.0
Less Growth Scenario $19.4 $19.4 $19.7 $19.8 $20.0
Sales Tax
Sales tax is the second largest revenue source for the Town and comprised approximately 12% of total Town projected revenues for FY 2021/22. The following table illustrates the most recent projections from the Town’s sales tax consultant MuniServices relative to the Adjusted FY 2021/22 budget and FY 2020/21 actuals.

FY 2020/21
Actual
FY 2020/21 Adjusted
Budget
January 10, 2022
MuniServices
Estimate
Base Sales Tax $6.8 M $7.2 M $7.0 M
FY 2020/21
Actual
FY 2020/21 Adjusted
Budget
January 10, 2022
MuniServices
Estimate
Measure G – 1/8 District Tax $1.1 M $1.0 M $1.2 M
The current estimate indicates a total improvement from budget of approximately $64,000; however, staff will continue to monitor MuniServices updates into the close of the fiscal year and adjust as appropriate. The table below provides the MuniServices Most Likely scenario which staff is utilizing for development of the FY 2022/23 Five-Year Forecast.

PAGE 7 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

Base Sales Tax & District
Tax
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
MuniServices COVID
Scenario
$8.7 $8.9 $9.2 $9.4 $9.6
The following tables illustrates MuniServices Most Likely scenario relative to their “Conservative” and “Optimistic” scenarios.

Base Sales Tax 2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Conservative $ 6.7 $6.9 $7.1 $7.3 $7.4
Most Likely $7.5 $7.7 $7.9 $8.1 $8.2
Optimistic $8.2 $8.5 $8.7 $8.9 $9.1
Measure G
1/8 District Tax
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Conservative $1.1 $1.1 $1.1 $1.2 $1.2
Most Likely $1.2 $1.2 $1.3 $1.3 $1.4
Optimistic $1.3 $1.3 $1.3 $1.4 $1.5
Transient Occupancy Tax
TOT is an important revenue source for the Town and comprised approximately 3% of total Town projected revenues of $1.4 million for FY 2021/22. The following table illustrates TOT FY 2020/21 actuals, the Adjusted FY 2021/22 Budget, and year-end collection estimates .

PAGE 8 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

FY 2020/21 Actual FY 2021/22 Adjusted
Budget
Year-end Estimate
TOT $1.0 M $0.9 M $1.4 M
The FY 2021/22 Adjusted Budget modeled a slight increase to $900,000 in anticipated TOT revenues from $700,000 the prior year during the budget process; however, actual FY 2020/21 TOT proceed was $1.0 M. The slight increase reflected significant uncertainty around the return of corporate travel and a continuation of slower leisure travel. Due to a significant rebound in leisure “staycation” travel, current TOT collections are trending higher than anticipated and average occupancy rates are rebounding as well.

The table below illustrates the growth projections utilized for development of the Five-Year Forecast (FY 2022/23 – 2026/27) for TOT and corresponding estimated revenues.

TOT 2022/23
Forecast
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
Proposed Growth 3% 3% 3% 3% 3%
Estimated Revenues $1.4 M $1.5 M $1.5 M $1.6 M $1.6 M
Unlike sales tax forecasts which continue to predict a return to pre COVID levels in the next several years, the Town’s TOT revenue has historically been primarily driven by business travel.

Given the uncertainty around physical business travel resuming at prior levels, as opposed to a continuation of remote work and online meeting forums, staff is recommending modest growth for base case development of the FY 2022/23 Five-Year Forecast. However, given the significant reduction to the revenue base compared to prior revenue history staff is providing a base growth scenario and an additional more optimistic growth scenario.

PAGE 9 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

TOT 2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
Base Growth Scenario 20% 20% 3% 3% 3%
Estimated Revenues $1.7 M $2.0 M $2.1 M $2.1 M $2.2 M
Base Growth Scenario 30% 20% 3% 3% 3%
Estimated Revenues $1.8 M $2.2 M $2.2 M $2.3 M $2.4 M
Operating Expense Trends and Five-Year Forecast Scenarios Forecasts of future operating expenditures take into account two key factors: cost escalation and new operating expenditures. New operating expenditures refer to costs created by new or enhanced service programs approved during the annual budget process. See Attachment 4 for the expenditure assumptions.

Cost escalation refers to largely unavoidable increases in the cost of doing business. It includes inflation, multi-year contract costs, health care costs, and unfunded State mandates. Cost escalation also includes other unavoidable cost increases unique to a government organization, such as a rise in wages consistent with collective bargaining agreements and annual pension payments mandated by CalPERS. The Town has three bargaining units, including the Town Employees’ Association (TEA), the American Federation of State, County and Municipal Employees (AFSCME), and the Police Officers’ Association (POA). The unrepresented groups are Management and Confidential.

For FY 2021/22, General Fund Estimated Operating expenditures (not including debt payment and transfers out) were programmed at $43.8 million. The delivery of Town services is highly dependent on talent which comprises 64% of Estimated General Fund expenditures. Given the high dependence on labor for service delivery the Town has helped manage salary escalation (and benefits) through the maintenance of lower staffing levels. As the table below illustrates, since 2001 the Town has reduced its full-time employees by 16.7% to 150 FTE employees.

PAGE 10 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

Mandated pension payments to CalPERS has consistently been one of the major cost drivers for the Town over the past decade with persistent unanticipated increases in pension costs. The Town’s plans over the past several decades, like all other CalPERS participants, have experienced unfavorable investment returns, changes in actuarial assumptions, and demographic changes which have outweighed any positive plan experiences. The outcome of these unfavorable economic and demographic results is the development of unfunded pension and Other Post-Employment Benefit (OPEB) obligations for the Town. To address the escalation in pension costs, previous Councils have allocated additional discretionary pension funding. totaling $10,400,000 million. These additional discretionary payments will ultimately yield an approximate additional $12,700,000 in contribution savings.

The Town and its bargaining groups have also worked to contain benefit costs. The Town closed the CalPERS retiree Tier 1 benefit for non-safety employees and created a new Tier 2 for nonsafety new employees in 2012, implemented the Public Employees’ Pension Reform Act (PEPRA) for all new non-classic employees starting in 2013, and participates in the CalPERS discounted prepayment option. The Town’s bargaining groups participated in wage freezes and unpaid furloughs for several years to assist in achieving balanced budgets after the 2008 recession.

In addition to the management of the Town’s pension obligations, prior Councils and the Town’s bargaining groups have worked to curb cost escalation in OPEB. In 2009, the Town initiated prefunding of the retiree healthcare benefit and has since established approximately $27.4 million in OPEB assets from zero in 2009. In 2016, the Town’s bargaining groups

PAGE 11 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):
approved the introduction of dependent cost sharing and a reimbursement cap to Medicare eligible employees, and in 2018 the elimination of the Town's existing retiree healthcare benefit prospectively.

While these collective measures have helped to slow the growth in salary and benefit expenses, the Forecast anticipates continued increases in the Town’s pension obligations.

Provided below are the expense assumptions for salary and benefits and alternate case scenarios for pension contributions. The majority of other expenses are assumed to increase at 3% per annum. Detailed expenditure assumptions and factors can be found in Attachment 4.

Salary and Benefits
Salary
The Town has historically budgeted vacant and non-sworn positions at top step of the range for the position. Sworn and management positions are budgeted at one step higher of current step in anticipation of any merit increases expected to be awarded in the upcoming fiscal year.

Based on Council’s direction for FY 2021/22, salaries were budgeted at actual salary plus a one step increase, which was a significant budgeting methodology change from previous practice.

This methodology will be continued for the development of FY 2022/23 budget.

For the Forecast, positions are budgeted at the actual rate of pay of employees including benefits as of December 2021. Then, by position, salary costs are updated in accordance with the applicable Memorandum of Understanding (MOU) between the Town and its bargaining units. The Memoranda of Understanding that outline the individual agreements between the Town and each unit related to compensation, health benefits, leave time, and grievance procedures will expire with TEA and AFSCME on June 30, 2022. POA’s MOU expired on September 30, 2021 and negotiations are currently in process. The Management and Confidential groups are unrepresented.

In addition to the economic terms of the MOUs, the Forecast assumes step increases for employees in applicable positions, and merit increases for Management and Confidential employees. In addition, based on prior Council guidance, 2% cost of living wage adjustments (COLA) are included in the Forecast for each year starting in 2022/23.

PAGE 12 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

Salaries
(Current MOUs)
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Base Case with 2% COLA $20.6 $21.2 $21.8 $22.3 $22.8
In comparison, the table below illustrates what the salary forecast would be utilizing the prior practice of not including assumptions outside of current MOUs or 0%.

Salaries
(Current MOUs)
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Base Case with 0% COLA $20.2 $20.4 $20.6 $20.7 $20.8
Pension and Other Benefits
For purposes of the Forecast, staff utilizes estimates provided by each plan’s most recent actuarial valuation received from CalPERS. Beginning in FY 2021/22, the estimates of employer contributions were credited with an anticipated reduction associated with the $5.6M additional discretionary payment (ADP) toward the 2015 unfunded amortization base paid off in early FY 2020/21.

Pension & Other
Benefits
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Base Case $10.9 $11.4 $11.9 $11.9 $12.3
As we move closer to the final development of the Proposed FY 2022/23 Operating Budget, staff will further refine these estimates taking into account CalPERS recent assumption changes, changes to the discount rate, and the 21.3% positive return experienced in FY 2020/21. Any update will not impact the initial years of the forecast due to lags in actuarial reporting but will be exhibited starting in the third year of the forecast.

Given that investment returns have one of the largest impacts on contribution variability, CalPERS provides projected employer Unfunded Actuarial Liability (UAL) contributions under alternate investment returns. The following alternative return scenarios assume that the return was experienced for FY 2020/21 through FY 2023/24. As the table below illustrates

PAGE 13 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):
returns higher than the expected return of 7% result in lower future UAL contributions and returns lower than 7% result in higher future UAL contributions.

UAL Town Contributions
(Misc & Safety)
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
Greater Investment Return
Scenario (12%)
$5,037,000 $5,065,000 $4,428,000 $3,903,000
Base Investment Return
Case (7%)
$5,213,000 $5,598,000 $5,518,000 $5,769,000
Less Investment Return
Scenario (1%)
$5,446,000 $6,297,000 $6,919,000 $8,105,000
CalPERS Actuarial Valuations as of June 30, 2020
For the year ending June 30, 2021, the Public Employees Retirement Fund (PERF) returned

21.3%. The table below illustrates the historic investment returns for five years, ten years, twenty years, and thirty years.

Five-Year Financial Forecast Alternative Scenarios
The tables below present the “Base Case” forecast contrasted against the two alternative revenue scenarios of “Greater Growth” and “Lower Growth.” As illustrated in the tables, even modest changes to the “Base Case” forecast can result in either additional surpluses or deficits during the forecast period.

Original 5 Year Forecast
“Base Case” with
2% Salary Increase
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Total Revenues,
Transfers & Use of
Reserves
$45.6 $46.6 $47.6 $48.9 $50.1
Total Expenses &
Allocations
$47.2 $48.6 $50.0 $51 $52.4
Original Surplus/Deficit ($1.6) ($2.0) ($2.4) ($2.1) ($2.3) CalPERS Compound Annual Rates
of Return (as of June 30, 2020)
5 Years 10 Years 20 Years 30 Years
Compound Annual Return 6.3% 8.5% 5.5% 8.0%

PAGE 14 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
DISCUSSION (continued):

Original 5 Year Forecast
“Base Case” with
0% Salary Increase
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Total Revenues,
Transfers & Use of
Reserves
$45.6 $46.6 $47.6 $48.9 $50.1
Total Expenses &
Allocations
$46.7 $47.5 $48.4 $48.7 $49.5
Original Surplus/Deficit ($1.1) ($0.9) ($0.8) $0.2 $0.6 Alternative Scenario
“Greater Growth” with
2% Salary Increase
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Total Revenues &
Transfers
$45.7 $47.6 $61.8 $50.6 $52.6
Total Expenses &
Allocations
$47.2 $48.6 $50.0 $51 $52.4
New Surplus/Deficit ($0.1) $0.4 $1.6 $1.1 $1.7
Alternative Scenario
“Lower Growth” with
2% Salary Increase
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
Total Revenues &
Transfers
$44.1 $44.9 $45.6 $46.3 $47.0
Total Expenses &
Allocations
$47.2 $48.6 $50.0 $51 $52.4
New Surplus/Deficit ($3.0) ($3.7) ($4.4) ($4.6) ($5.3)
CONCLUSION:

The Town Council should review and discuss the elements and assumptions of the initial FiveYear Forecast and other budget considerations. While the “Base Case” Forecast estimates deficits at this time, it is based on assumptions that are subject to change given the significant unknowns related to COVID and as shown with the alternative growth scenarios. As the Forecast is not a budget, there are no specific budget balancing recommendations being

PAGE 15 OF 15
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 10, 2022
CONCLUSION (continued):
proposed at this time. The Town Manager will bring forward for Council consideration in May a balanced proposed FY 2022/23 budget.

At this time, the preparation of the FY 2022/23 Operating and Capital Budgets is taking into account the Town’s current economic reality and long term fiscal picture, as well as maintaining the Town’s high level of municipal services. This is considered a “status quo” approach with no major new initiatives or staffing. Key budget principles include:
 Develop and recommend a balanced budget that maintains service levels;  Address projected deficits;
 Continue to make progress on Strategic Priorities identified by the Town Council; and  Identify opportunities to maintain or enhance service delivery through new revenue sources and technology.

Staff looks forward to answering the Town Council’s questions and receiving any direction for the preparation of the proposed FY 2022/23 Operating Budget that results from the discussion.

The Capital Improvement Program and direction will be discussed separately at the next Town Council meeting. The Council may also discuss budget assumptions. The Finance Commission is meeting on February 14 and its comments on the Forecast will be provided to the Town Council in a Desk Item on February 15, 2022. The Draft FY 2022/23 Operating and Capital Budgets will be available in May with the budget hearing tentatively scheduled for May 17, 2022.

COORDINATION:

This Report was prepared by the Town Manager’s Office in coordination with the Finance Department.

ENVIRONMENTAL ASSESSMENT:

This is not a project defined under CEQA, and no further action is required.

Attachments:

1. Annual Budget Process

2. Base Case Five-Year Forecast

3. Forecast Revenue Assumptions

4. Forecast Expense Assumptions

BUDGET PROCESS DIAGRAM
December
January
February
May
June
July
December
Prior FY (2020/21)
June 30, 2021 Annual
Financial Report finalized and
presented for Council approval.

Annual Financial Report
surpluses assigned per the
Council Reserve Policy as of
June 30, 2021
Council deliberates Strategic
Priorities and Budget direction
for FY 2022/23.

Review of Five-year Forecast and
assumptions.

Council determines if previously
assigned surpluses should be
reallocated for FY 2022/23.

Council adoption of the FY
2022/23 Operating & Capital
Budgets
End of June 30, 2022 Annual
Financial Report period
June 30, 2022 Annual Financial
Report finalized and presented for
Council approval.

Annual Financial Report
surpluses assigned per the
Council Reserve Policy as of June
30, 2022
All Council deliberations and actions include opportunities for public input Current FY
(2021/22)
Next FY
(2022/23)
Start of new FY 2022/23
Operating Budget year
Council considers Mid-Year
Budget adjustments through
12/31/2021 for FY 2021/22
Budget.
͌
Public hearing on FY 2022/23
Operating & Capital Budgets

Finance Commission review
and comment on Proposed FY
2022/23 Operating & Capital
Budgets.

April
ATTACHMENT 1 Page 195
ATTACHMENT 2

BASE CASE
Account Revenue Category
2020/21
Actuals
2021/22
Adjusted
Budget
2021/22
Estimates
2022/23
Forecast
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
4100 Property Tax $ 15.8 $ 15.9 $ 15.4 $ 15.5 $ 15.7 $ 16.1 $ 16.6 $ 17.1 4110 VLF Backfill Property Tax 4.1 4.2 4.2 4.4 4.5 4.6 4.8 4.9 4200 Sales & Use Tax 6.8 7.2 7.0 7.5 7.7 7.9 8.1 8.2
4200 Measure G District Sales Tax 1.1 1.0 1.2 1.2 1.2 1.3 1.3 1.4 4250 Franchise Fees 2.5 2.6 2.5 2.6 2.7 2.7 2.8 2.9
4251 Transient Occupancy Tax 1.0 0.9 1.4 1.4 1.5 1.5 1.6 1.6 4400 Business License Tax 1.4 1.3 1.3 1.3 1.4 1.4 1.4 1.4 4400 Licenses & Permits 3.1 2.7 3.2 2.8 2.9 3.0 3.0 3.1 4500 Intergovernmental 1.6 4.4 1.6 1.0 1.0 1.0 1.0 1.1
4600 Town Services 4.6 3.6 3.9 3.4 3.5 3.6 3.7 3.7
4700 Fines & Forfeitures 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 4800 Interest 0.1 0.4 0.4 0.2 0.2 0.2 0.2 0.2
4850 Other Sources 3.7 2.3 2.5 2.2 2.2 2.2 2.2 2.3
4900 Fund Transfers In 0.7 0.6 0.6 0.5 0.5 0.5 0.5 0.5
Use of Capital/Special Project Reserve - $ 46.6 $ 47.3 $ 45.4 $ 44.2 $ 45.2 $ 46.2 $ 47.4 $ 48.6 Capital 3.4 0.6 0.6 0.8 0.8 0.8 0.8 0.8
Use of Pension/OPEB Reserve Use of Capital/Special Project Reserve - 4.5 - - - - - - - Other - 0.3
Use of Property Surplus Reserve - 1.2 1.2 - - - - -
Use of Measure G Reserve - 0.6 0.6 0.6 0.6 0.6 0.7 0.7
ARPA Replacement Revenue - - 1.4 - - - - -
$ 54.5 $ 49.7 $ 49.2 $ 45.6 $ 46.6 $ 47.6 $ 48.9 $ 50.1 Account Expenditure Category 2020/21
Actuals
2020/21
Budget
2021/22
Estimates
2022/23
Forecast
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
5110 Salary 20.2 20.8 20.6 20.6 21.2 21.8 22.3 22.8
5120 CalPERS Benefits 6.4 7.3 6.6 6.9 7.3 7.7 7.6 7.9
5200 All Other Benefits 3.7 4.2 3.8 4.0 4.1 4.2 4.3 4.4 6211 OPEB Pay as You Go 1.3 1.3 1.5 1.5 1.6 1.8 1.9 1.9 6000 Operating Expenditures 5.7 6.2 6.6 6.3 6.3 6.5 6.5 6.8 7200 Grants & Awards 0.3 1.0 1.1 0.2 0.2 0.3 0.3 0.3
7400 Utilities 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.7
8060 Internal Service Charges 2.3 2.7 2.6 2.9 3.1 3.2 3.5 3.6 8900 Debt Service 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9
$ 42.4 $ 46.1 $ 45.3 $ 45.0 $ 46.5 $ 48.0 $ 48.9 $ 50.3 GASB 45 Retiree Medical Actuarial 0.6 0.1 0.1 0.4 0.3 0.2 0.2 0.2 Additional Discretionary Payment - Pension 5.6 0.4 0.4 0.4 0.4 0.4 0.4 0.4 $ 48.6 $ 46.6 $ 45.8 $ 45.8 $ 47.2 $ 48.6 $ 49.5 $ 50.9 Capital Transfers Out to GFAR 3.4 2.8 2.8 1.4 1.4 1.4 1.5 1.5 Allocate to Budget
Stabilization/Catastrophic 0.1 - - - - - - -
Allocate to Compensated Absences 0.1 -
Allocate to Property Surplus Reserve 1.2 - - - - - - -
Allocate to CalPERS/Pension 0.3 -
Allocate to Measure G - Capital - 0.5 0.6 - - - - -
Allocate to ARPA Reserve - - - - - - - -
$ 53.7 $ 49.9 $ 49.2 $ 47.2 $ 48.6 $ 50.0 $ 51.0 $ 52.4 $ 0.8 $ (0.2) $ - $ (1.6) $ (2.0) $ (2.4) $ (2.1) $ (2.3) * Due to rounding of individual categories FY 2021/22 Total Expenditures and Reserve Allocations includes $0.1 million.

General Fund (111) Forecast does not include Pension Trusts activities. ($37,810 in interest proceeds inFY 2020/21)

NET REVENUES RESERVE TRANSFERS LESS EXPENDITURES &

RESERVE ALLOCATIONS FOR FINAL ALLOCATION AFTER YEAR

END CLOSE

TOTAL REVENUES, TRANSFERS, AND USE OF RESERVES

TOTAL EXPENDITURES & RESERVE ALLOCATIONS
TOTAL OPERATING REVENUES & TRANSFERS*

TOTAL OPERATING EXPENDITURES

TOTAL OPERATING & DISCRETIONARY EXPENDITURES
Town of Los Gatos General Fund 5-Year Forecast
(in $ million)

AMOUNTS AVAILABLE FOR RESERVE ALLOCATIONS

ATTACHMENT 2
Account Revenue Category
2015/16
Actuals
2016/17
Actuals
2017/18
Actuals
2018/19
Actuals
2019/20
Actuals
4100 Property Tax $ 10.8 $ 11.5 $ 12.5 $ 13.6 $ 14.5
4110 VLF Backfill Property Tax 3.0 3.2 3.4 3.7 3.9
4200 Sales & Use Tax 7.5 9.2 7.6 20.8 6.5
4200 Measure G District Sales Tax - - - 0.2 1.0
4250 Franchise Fees 2.3 2.4 2.5 2.5 2.5
4251 Transient Occupancy Tax 1.9 2.3 2.6 2.7 1.9
4400 Business License Tax 1.5 1.7 1.7 1.5 1.4
4400 Licenses & Permits 3.5 3.0 3.0 3.1 2.8
4500 Intergovernmental 1.0 0.9 1.0 26.6 1.0
4600 Town Services 4.0 3.3 4.4 30.0 4.2
4700 Fines & Forfeitures 0.9 0.9 0.7 0.5 0.3
4800 Interest 0.6 0.2 0.2 1.4 2.2
4850 Other Sources 2.3 4.4 3.2 132.9 2.8
4900 Fund Transfers In 2.4 0.3 0.8 14.4 0.6
Use of Capital/Special Project Reserve - $ 41.7 $ 43.3 $ 43.6 $ 253.9 $ 45.6 Capital - 1.4 3.2 2.8 8.0
Use of Pension/OPEB Reserve Use of Capital/Special Project Reserve - - - - - - Other - - - - -
Use of Almond Grove Reserve - 5.9 - - -
$ 41.7 $ 50.6 $ 46.8 $ 256.7 $ 53.6
Account Expenditure Category 2015/16
Actuals
2016/17
Actuals
2017/18
Actuals
2018/19
Actuals
2019/20
Actuals
5110 Salary 14.5 14.8 16.0 17.9 19.3
5120 CalPERS Benefits 3.6 3.9 4.3 5.3 6.1
5200 All Other Benefits 3.2 3.2 3.3 3.6 3.6
6211 OPEB Pay as You Go 0.9 1.0 1.1 1.2 1.2
6000 Operating Expenditures 4.7 4.8 5.0 5.6 5.1
7200 Grants & Awards 0.7 0.2 0.2 0.3 0.3
7400 Utilities 0.4 0.6 0.5 0.5 0.5
8060 Internal Service Charges 3.5 3.6 3.9 2.5 2.2
8900 Debt Service 1.9 1.9 1.9 1.9 1.9
$ 33.6 $ 34.0 $ 36.2 $ 38.8 $ 40.2
GASB 45 Retiree Medical Actuarial 1.5 2.6 1.6 1.1 1.1
$ 35.1 $ 36.6 $ 37.8 $ 39.9 $ 41.3
Capital Transfers Out to GFAR 0.5 7.3 2.6 2.3 7.0
Operating Tranfer Out 0.1 - 0.6 0.5 1.1
Fixed Assets/ Equipment Pension/OPEB Payment to Pension Trust 0.4 - - - 0.1 Fund - - 1.2 3.6 0.4
$ 5.6 $ 6.7 $ 4.6 $ 210.4 $ 3.7
Allocate to Almond Grove Reserve 2.5 - - - -
Allocate to Market Fluctuations Reserve 0.3 0.3 - - 1.2 Allocate to CalPERS/Pension Reserve - 1.8 - - -
Allocate to Measure G Reserve - - - - 1.2
Allocate to VM & Stores Surplus Reserve - - - 1.0 -
Allocate to Authorized Carryforwards 0.1 - - - -
Sales Tax Prior - Year Adjusments - 0.4 - - -
Allocate to Property Surplus Reserve - - - 1.9 -
$ 39.0 $ 46.4 $ 42.2 $ 49.2 $ 52.2
$ 2.7 $ 4.2 $ 4.6 $ 207.5 $ 1.4

TOTAL OPERATING & DISCRETIONARY EXPENDITURES

AMOUNTS AVAILABLE FOR RESERVE ALLOCATIONS

TOTAL EXPENDITURES & RESERVE ALLOCATIONS

NET REVENUES RESERVE TRANSFERS LESS EXPENDITURES &

RESERVE ALLOCATIONS FOR FINAL ALLOCATION AFTER YEAR

END CLOSE
* Due to rounding of individual categories Total Expenditures and Reserve Allocations may include $0.1 million.

General Fund (111) Historical presentaion does not include Pension Trusts activities.

TOTAL OPERATING EXPENDITURES
Town of Los Gatos General Fund Historical Year-End Results (in $ million)
TOTAL OPERATING REVENUES & TRANSFERS*

TOTAL REVENUES, TRANSFERS, AND USE OF RESERVES

Revenue Baselines and Projection Factors
ATTACHMENT 3
Type of
Revenue
Base Line
Estimate
FY 2022/23
Forecast
FY 2023/24
Forecast
FY 2024/25
Forecast
FY 2025/26
Forecast
FY 2026/27
Forecast
Property
Tax/VLF
Backfill
Current
baseline set
by SCC
Assessor
Office 2/4
2022 report
3% 3% 3% 3% 3%
North 40
Property
Sales
Starting in
2021/22
North 40
Phase 1 Sales 3% 3% 3% 3%
ERAF
Current
baseline set
70% of SCC
Assessor
Office 2/4
2022 report
$400K $400K $400K $400K $400K
Sales Tax
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
Sales Tax -
Measure G
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
MuniServices
1/11/2022
Most Likely
Estimates
Franchise Fee
Current
baseline set
by FY 2021/22
Estimates
3% 3% 3% 3% 3%
Transient
Occupancy
Tax
Current
baseline set
by FY 2021/22
actual
estimated
proceeds
3% 3% 3% 3% 3%
Business
License Tax
Current
baseline set
by FY 2021/22
Estimates
5% 5% 0% 0% 0%
License &
Permits
Current
baseline set
by FY 2021/22
Estimates
3% 3% 3% 3% 3%

Revenue Baselines and Projection Factors
ATTACHMENT 3
Town
Services
Current
baseline set
by FY 2021/22
Estimates
3% 3% 3% 3% 3%
Fine &
Forfeitures
Current
baseline set
by FY 2021/22
Estimates
Varies Varies Varies Varies Varies
Interest
Based on
Portfolio
Analysis and
Current and
Expected
Yields during
the forecast
period
$217K $222K $227K $232K $237K
Other Sources
Current
baseline set
by FY 2021/22
Estimates
Varies Varies Varies Varies Varies

ATTACHMENT 4

EXPENDITURE BASELINE AND PROJECTION FACTORS
Beginning in FY 2020/21, the Town started budgeting salaries at the actual salary plus a one-step increase. In the Five-Year Forecast, positions are forecasted at the actual rate of pay including salaries and benefits as of February 1, 2022, and rate is increasing in the actual anniversary date. *Salary increases are based on actual step increases and approved Memoranda of Understanding with the bargaining units plus the Council’s assumption of 2% per year cost of living adjustment. ** Benefit increase estimates are provided by CalPERS/Public Employees’ Medical and Hospital Care Act (PEMHCA)
*** Based on historical trends.

Type of
Expenditure
FY 2022/23
Forecast
FY 2023/24
Forecast
FY 2024/25
Forecast
FY 2025/26
Forecast
FY 2026/27
Forecast
Salaries* 2% 2% 2% 2% 2%
Benefit -
Medical** 3% 3% 3% 3% 3%
Operating
Expenditures*** 3% 3% 3% 3% 3%
Grants & Awards 0% 0% 0% 0% 0%
Utilities*** 3% 3% 3% 3% 3%
Internal Service
Charges***
Based on
operating
cost and
scheduled
replacement
Based on
operating
cost and
scheduled
replacement
Based on
operating
cost and
scheduled
replacement
Based on
operating
cost and
scheduled
replacement
Based on
operating
cost and
scheduled
replacement
Debt Service Debt Service Schedules

ATTACHMENT 4
The Town’s required employer contribution rate estimates were developed using estimates provided by each plan’s most recent actuarial valuation received from CalPERS. The employer contribution rates illustrated below reflect percentages of covered payroll. Beginning in FY 2021/22, the estimates of employer contributions were credited with an anticipated reduction associated with the approximate $5.6M 2015 unfunded amortization base were paid off in early FY 2020/21.

Type of
Expenditure
FY 2022/23
Forecast
FY 2023/24
Forecast
FY 2024/25
Forecast
FY 2025/26
Forecast
FY 2026/27
Forecast
Safety
POA

69.44% 72.01% 74.61% 75.68% 76.66%
Safety
Management
POA

72.44% 75.01% 77.61% 78.68% 79.66%
Safety

POA - PEPRA

14.62% 14.65% 13.78% 13.75% 13.76%
Miscellaneous
TEA/Confidential/
Management

29.43% 30.04% 30.64% 28.45% 28.73%
Miscellaneous
TEA/Confidential/
Management
PEPRA

29.43% 30.04% 30.64% 28.45% 28.73%
*Safety Classic Rate reflects 3% decrease in employer's contribution rate to reflect 3% contribution as negotiated with the Town's POA during the collective bargaining process effective FY 2019/20.

PREPARED BY: Arn Andrews
Assistant Town Manager
Reviewed by: Town Manager, Town Attorney, and Finance Director 110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832 www.losgatosca.gov

TOWN OF LOS GATOS

COUNCIL AGENDA REPORT
MEETING DATE: 02/15/2021
ITEM NO: 13

DESK ITEM
DATE: February 15, 2022
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Discuss the Five-Year Forecast (Fiscal Years 2022/23 – 2026/27), Provide Direction on Budget Assumptions, and Provide any Specific Direction for the Preparation of the Town’s Fiscal Year 2022/23 Operating Budget RECOMMENDATION:

Discuss the Five-Year Forecast (Fiscal Years 2022/23 – 2026/27), provide direction on budget assumptions, and provide any specific direction for the preparation of the Town’s Fiscal Year (FY) 2022/23 Operating Budget.

REMARKS:

On February 14, 2022, the Finance Commission received the Five-Year Forecast. After a brief presentation by staff, the Commission asked questions and provided input regarding the FiveYear Forecast. Below is a summary of the primary areas of review and comment provided by the Finance Commission.
 Commissioners asked questions about the Measure G capture of online sales tax relative to the base sales tax. Staff explained that online sales for the Measure G District tax receive sales tax based on point of delivery versus point of distribution for the base tax.  Commissioners asked if the 3% escalator for property tax was sufficient given the higher historic annual increases. Staff explained that the recommended assumption was informed by cautious input from the County Assessor and the potential of higher interest rates to thwart inflation pressures. In addition, staff explained that the forecast only incorporates a $400,000 projection for Education Revenue Augmentation Fund (ERAF) in the outyears based on continued County guidance even though the Town is expected to receive $1.5 million in the current year.

PAGE 2 OF 2
SUBJECT: Five-Year Forecast (FY 2022/23 – 2026/27)
DATE: February 15, 2022
 Commissioners inquired if there were any assumptions for CalPERS lowering the investment return assumption for the pension plan. Staff described that the reduction to a 6.8% return assumption was predicated on implementation of their risk mitigation strategy. The risk mitigation strategy uses excess portfolio returns to buy down the discount rate. Once CalPERS triggers the policy and lowers the discount rate, it remains at that level.
 A Councilmember cautioned that while the Town has navigated the financial impacts related to COVID well the past several years, it appears that structural deficits are developing.
 Commissioners inquired about the impacts of inflation on the Town’s forecast. Staff offered that higher interest associated with inflation would probably benefit the unfunded pension liability by achieving a greater proportion of returns from lower risk assets but could negatively impact property tax revenues due to higher mortgage rates.

Salaries would potentially feel the immediate impacts of inflation as the cost of good and services are felt directly by employees.
 Commissioners inquired if all the destination marketing funds had been expended. Staff explained that to date the Chamber has not expended all the funds.

There were no verbal or written public comments.