FinanceCommittee
Staff Report
From: City Manager
Report Type: ACTIONITEMS
LeadDepartment: Administrative Services
Meeting Date: December 5, 2023
Report #:2307-1773
TITLE
Review and Recommend the City Council Accept the FY2025- 2034 Long RangeFinancial Forecast and FY2025 Annual Budget Development Guidelines
RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council accept the General Fund Long RangeFinancial Forecast (LRFF) for FiscalYear2025-2034 and the FY 2025 annual Budget Development Guidelines (Attachment A) and direct staff to use this forecast as the starting point for the initiation of the FY2025 budget process.
EXECUTIVESUMMARY
Annually, the City presents a ten-year General Fund Long Range Financial Forecast (LRFF) in December that marks the beginning of the annual budget process. This preliminary forecast is based on the most current information available, actual revenues for FY 2023, and projected results through FY2024 at the point in time of release. General Fund expenditures are based on current City Council approved service levels compared to projected revenues over the next year.
The Base CaseLong Range General Fund forecast projects a $6.0 million shortfall in FY 2025, followed by shortfalls ranging from $5.4 million in FY2026 down to $0.5 million in FY2029. FY2030 has a surplus of $6.6 million which continues to grow through FY2034.
This forecast maintains current service levels approved in FY2024 and should be used for planning purposes to assistin gaugingeffects of major policy interventions against a likely status quo” version of the future. These amounts are consistent with previous projections used aspart of the two- year budget balancing strategy when adopting the FY 2024 Budget.
Staff modeled an alternate forecast scenario that reflects a 1% loss in economically sensitive revenue and the impact on the General Fund over the forecast period.
Compared to the BaseCase, this scenario reduces revenues by $2.1 million in FY2025 and maintains and increases the projected shortfalls over the next ten years, ranging from Attachment I - General Fund Long Range Financial Forecast Staff Report
8.1 million in FY2025 to $3.0 million in FY2029. FY2030 begins a surplus of $3.9 million which continues to grow through FY2034.
Staff modeled an alternate forecast that reflects a one-time compensation adjustment 1%) in FY2026 and the impacts on the General Fund over the forecast period. Compared to the Base Case, this scenario increases expenses by $ 1.2 million in FY 2026 and maintains and increases projected shortfalls over the next ten years, ranging from $ 6.7 million in FY2026 to $1.9 million in FY2029. FY2030 beginsa surplus of $5.2 million which continues to grow through FY2034.
Thesealternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.
The economy continues to demonstrate resiliency to a formal recessionand this forecast reflects a continued level of stagnation offset by inflation. Risks remain due to world conflicts and potential local economy impacts. At the national level, economic growth through the third quarter of calendar year 2023, was led by robust consumer (retail) spending despite a persistently high inflation rate and high borrowing costs with interest rates at their highest level in 22 years.
Monetary policy tightening actions by the USFederalReservecontinue to achievea “soft landing” whereby there’s a slowdown in economic growth that avoids recession for the purpose of stopping the economy from overheating and continuing to experience higher inflation. Economic uncertainty continues; however, the current outlook projects a weak economy in 2024 followed by a return to trend growth rates by 2025. Other risks that will continue to be monitored are a future protracted ( U.S.) government shutdown, geopolitical events, and election resulting in changing national economic policies in 2025. All of these factors lead to heightened intensity of financial forecasting and the budget development process. These forecast figures present staff with the challenge of prioritizing the growing needs of the City with the fiscal sustainability of these needs.
Consistent with the projections in the FY2024 Adopted Budget, this LRFFreflects deficits in the near term with revenues falling below expenses. Aspreviously recommended, the shortfall in FY 2025 will be addressedby the Uncertainty reserve, that was proactively set aside during the prior year for this purpose. Also, this LRFFassumes support from both local ballot Measures K Business Tax) and L (Gas Utility Fund Equity Transfer) that were approved by the voters in November 2022. As discussedlater in this report, funding from the GasEquity Transfer will be incrementally increased to the voter approved 18% of gasrevenue by FY2027 to support general fund activities, and BusinessTaxfunding has been programmed towards three Council approved priorities for investments in public safety, transportation and train crossingsafety, and affordable housing and unhoused support.
Several persistent issues across the City are improving but continue to impact the ability to provide fully authorized service levels. These include staff turnover, recruitment and retention, and supply chain issuesand inflation that continue to increase costsacrossall aspectsof the City.
Attachment I - General Fund Long Range Financial Forecast Staff Report Development of the FY 2025 budget and planning for the subsequent years outlined in the forecast will need to be done strategically over the next several months in order to balance the increased service level needs of the community with the financial resources currently projected.
With these variables, ongoing revenues are unable to keep pace with expensesin the short term.
The LRFFis a tool to model financial forecasting assuming resources and services are operating at authorized levels. City staff will continue to review and refine these projections to establish the FY 2025 budget and use this forecast to begin internal planning for budget balancing solutions. Individual fiscal yearswill vary from this forecast suchashigher vacancyrates in staffing or changes in revenue estimates. These circumstances, specific to a given year, typically represent one-time resources that are factored into the annual budget planning process. More detailed guidelines or Budget Policies to inform the development of the FY 2025 budget are discussedat the end of this document (Attachment A).
Included in this report and subsequent documents are the following:
The Economy: discussionof the current financial climate of the United Statesto the local economy of the City of Palo Alto (details can be found in Attachment B) Summary Long RangeFinancial Forecast including Revenue and Expenseassumptions in FY2025- 2034 (details can be found in Attachments Cand D) o Financial status of the General Fund as of the FY2024 Adopted Budget o Brief discussionof FY2023 surplus funding
o Updated FY2024 revenue assumptions based on current projections FY2025 Budget Development Guidelines to inform the Budget process (Attachment A) Alternate scenariosto the basecaseforecast to demonstrate financial impacts to the City from:
o Impacts from a moderate recession
o Impacts from a citywide 1% increase of salariesand benefits Responseto the Human ServicesResourceAllocation Process (HSRAP) Funding Referral from the FY2024 Adopted Budget process (Attachment E)
BACKGROUND
Annually the Office of Management and Budget produces a ten-year General Fund Long Range Financial Forecast (LRFF). The LRFFreflects staff’s best estimates on the projected revenues and expenditures over the next ten years based on the information that is currently available. It is important to note that the LRFFis a planning document and is separate and distinct from the development of the City’s annual Operating and Capital Budgets. There are assumptions and parameters modeled in the LRFF, but these assumptions are revised and refined as more information becomes available through the budget development process.
The LRFFcontains a comprehensive review of the costs to provide current City Council approved service levels, including current contracts, updates to salariesand benefits based on the current population of employees, and the current labor contracts in effect. The LRFFalso reviews the status of the current economy and various economically sensitive revenues such as SalesTax, Documentary Transfer Tax, Property Tax, and Transient OccupancyTax to explain key trends in those areas. This Forecast allows staff and City Council to look at both the short-term and long- Attachment I - General Fund Long Range Financial Forecast Staff Report term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
The Economy
Nationally, as of October 2023, the consumer price index (CPI) which measures changes in the prices paid by consumers for a basket of goods and services, was 3.2%. This is lower than the
7.7% CPI from a year ago, but still indicates increasing costs. The unemployment rate, as of October 2023, is 3.9% which is up from 3.4% at the beginning of the 2023 calendar year and may indicate an economic slowdown in the coming quarters. Despite these factors, economic growth through the third quarter of calendar year 2023, was led by robust consumer (retail) spending, and the gross domestic product ( GDP), a measure of all goods and services produced in the economy, increased at an annualized rate of 4.9%. The UCLAAnderson outlook is “The oft- predicted but never seen ‘recessionnext quarter’ hasnow faded in the face of expansionary fiscal policy, a new national industrial policy, and a consumer who is happy to continue spending.” This outlook projects a weak economy in 2024 followed by a return to trend growth rates by 2025.
This weaker outlook translates into 1% to 2% GDPgrowth for the remainder of 2023 with the expectation this will gradually increase to a 2% to 3% growth through 2024.
The local economy continues to show strong performance in the first half of calendar year 2023.
The UCLAAnderson outlook for California does not forecast a recession based on the state’s strong employment and economic growth, although real personal income is forecasted to remain flat in 2023 and grow between 1% to 2% through 2025. California’s unemployment rate, similar to the national trend, has risen in calendar year 2023 and is expected to be in the mid to high 4% through 2025. Additional details on economic statistics such as GrossDomestic Product (GDP), unemployment, and Consumer Price Index (CPI) can be found in Attachment B in greater length.
ANALYSIS
Palo Alto serves a diverse community with a broad range of unique services that adds to the complexity of managing a balanced budget and healthy fiscal outlook. Thisannual General Fund LongRangeFinancialForecastis being developed at a time of perceived economic stagnation and geo-political unrest. Theeconomy iscurrently not trending into recessionaryperiod that hasbeen predicted for the past several quarters; however, continued economic uncertainty heightens the intensity of financial forecasting and the budget development process. The rigor previously demonstrated by the Counciland staff to tackle the challengesof the pandemic continues asstaff works to prioritize the growing needs of the City with the fiscal sustainability of these needs.
The FY2025-2034 ‘BaseCase’ revenue and expense assumptions include updates on the status of the general fund as of the FY2024 Adopted Budget, the FY2023 fiscal year end, and current FY2024 projected assumptions. Aswith all forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in this document. Instead of a recession, this forecast assumes economic stagnation at the beginning of the ten-year period, in line with current projections from UCLAAnderson. Major tax revenues have rebounded from impacts of the Covid- 19 pandemic and projected to be at or above pre-pandemic levels through the ten-year forecast.
Expensesare programmed to maintain servicelevelsbasedon Councilapproval. Asa result, some Attachment I - General Fund Long Range Financial Forecast Staff Report limited term programs are not extended through the entire ten-year forecast, but discussedin this report to indicate that continuing the programs would require additional resources.
Investments in Capitalprojects are consistent with the 2024-2028 Capital Improvement Planwith continued focus on completing the Council approved 2014 Infrastructure Planprojects aswell as maintaining and upkeeping the City’s current facilities and infrastructure. The Uncertainty Reservethat was established aspart of the FY2023 Mid-YearReview was used to balance the FY 2024 Adopted Budget, but asplanned and approved by Council, still hasfunding available to solve the projected shortfall in FY2025. A strategic plan will be needed to solve the estimated shortfalls in the subsequent years of the forecast.
BaseCase
Table 1 displays the projected General Fund revenues and expenditures over ten years and the cumulative net operating margin.
Theoperating margin reflects the variance between the projected GeneralFund revenues and expenditures for each year of the forecast or the annual surplus or shortfall.
The net operating margin is presented on a one-time basis, as the annual surplus or shortfall for a given year, and on an incremental basis.
The incremental forecast assumes that each shortfall is addressed completely with ongoing solutions in the year it appears and that each surplus is completely expended with ongoing expenditures. It is the City’s goal to remain in balance on an ongoing basis, so the incremental figure is useful to illustrate the additional surplus and/ or shortfall attributed to a particular fiscal year. To the extent a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is important to understand that the remaining budget shortfall or surplus will remain and be pushed to the following year.
The Base Case financial forecast projects a shortfall of $ 6.0 million in FY 2025, followed by shortfalls ranging from $ 5.4 million in FY2026 down to $ 0.5 million in FY2029. FY2030 has a surplus of $6.6 million which continues to grow through FY2034. Basedon these assumptions, the cumulative net operating margin, or ongoing surplus, during the forecast period is a surplus of $36.5 million.
TABLE1: FY2025 – 2034Long RangeFinancial Forecast (BaseCase) Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE2: FY2025 – 2034 Long RangeFinancial Forecast Net Operating Margin ( BaseCase) Revenue Assumptions
TheFY2023 Annual ComprehensiveFinancialReport (ACFR), scheduled for review by the Finance Committee on November 28, 2023, reported higher annual earnings for General Fund revenues as compared to the prior year; most major tax revenues experienced growth back to pre- pandemic levels due to the improved local economy, high price trends, and inflation ( CMR2308- 18571). This increased major tax revenue trend has continued through the first quarter ( Q1) of FY2024 with several categories tracking higher than the FY2024 Adopted Budget levels. In FY 2024, staff estimates an overall increase in total revenues of $ 3.1 million from the Adopted 279.6 million to $282.7 million. Further discussionof changesto specific categories canbe found in Attachment C, but increases are anticipated in SalesTax, Property Tax, and Utility Users Tax and slightly offset by decreases in Transient Occupancy Tax and Documentary Transfer Tax. If these additional revenues continue to materialize in FY 2024, Staff anticipates returning to Council as part of the as part of the FY2024 Mid- Year Budget Review to recommend using this funding to increase the uncertainty reserve to help mitigate impacts from a recession as well as smooth the near-term shortfalls seen in the first few years of this LRFF.
A summary of revenue assumptions are discussed here, extensive information regarding each revenue category can be found in Attachment C.
Tax revenues constitute approximately 60% of General Fund resources. In FY2025, the forecast projects a $7.8 million or 5.0% increase from FY2024 projected levels ($156.8 1 Finance Committee, November 28, 2023, CMR2308-1857:
https:// cityofpaloalto. primegov. com/ portal/ viewer?id=9637&type=3 Attachment I - General Fund Long Range Financial Forecast Staff Report million to $ 164.6 million). This increase is primarily attributed to higher anticipated receipts for SalesTax, Property Tax, and Transient OccupancyTax (TOT) categories. o SalesTaxesis anticipated to increase $1.9 million or 5.1% from FY2024 ($ 37.7 million to $39.6 million). Revenuein this category continue to experience growth as consumer spending continues despite high inflation and perceptions of a looming recession.
o Property Taxes make up the largest source of the General Fund’s revenue, approximately 25%. In FY2025, this revenue is anticipated to increase $3.3 million or 5.1% from FY 2024 ($ 64.6 million to $ 67.9 million). Robust residential and commercial property sales are anticipated to continue to grow this source annually.
o Transient Occupancy Taxes are impacted by business and other leisure/ non- leisure travel and experienced significant reductions in the past few years due to a number of factors resulting from the pandemic. However, this revenue was able to return to pre-pandemic levels in FY2023. In FY2025, this revenue is anticipated to increase $1.2 million or 4.6% from FY2024 ($25.5 million to $26.7 million).
The forecast for non-tax revenues projects a $1.6 million or 3.2% increasein FY2025 from FY2024 adopted levels. Thisincreaseis primarily attributable to the alignment of revenue estimates for the Stanford agreement to provide Fireand Dispatch services, and increased rental revenue from other funds and departments that use General Fund maintained City facilities. These increases are partially offset by decreases in limited term revenue through the Staffing for Adequate Fire and EmergencyResponse (SAFER) Grant Program and decreased reimbursement revenue from other funds for administrative services.
The changesby revenue category can be seen in Tables3 and 4 below. Major tax revenue trends are shown in Table 5 and discussedin greater detail in Attachment C.
TABLE3: General Fund Revenue Forecast
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE4: General Fund Revenue Forecast Year to Year Percentage Change TABLE5: City of Palo Alto Major General Fund Revenues
Attachment I - General Fund Long Range Financial Forecast Staff Report ExpenseAssumptions
As part of developing the FY2025-2034 Forecastexpenditure budget, the General Fund expense categories have been adjusted by removing FY 2024 Adopted Budget one-time expenses and updating major cost elements such as salary and benefits costs. The table below displays the expense forecast and when compared to the FY 2024 Adopted Budget, growth of 0.9% is expected in FY2025. The small overall annual growth is due to the elimination of large one-time reserves in FY2023 that offset the increase in expensesin other categories such as Salary and Benefits, Allocated Charges, and Transfers to Other Funds.
A summary of expense assumptions is discussed here, extensive information regarding each expense category can be found in Attachment D.
Salary and Benefits are projected to increase $7.1 million or 4.3% from the FY 2024 166.9 million to $ 174.0 million). This is primarily attributable to increases in salaries
2.9 million or 3.1%) and pension costs ($4.5 million or 10.2%). o A general wage adjustment of 2% is included for all employees starting in either January 2025 or July 2025 for all years of the forecast once negotiated contracts sunset.
o A reserve is included for potential changesto future labor costsincluding, changes in vacancyrates, labor and benefit rate variability, and inflation assumptions.
Long Term contributions to pension and other post-employment benefits reflect increasesover the prior year and capital investments are being phased through the first three to five years of the forecast:
o Pension 115 Trust contributions are calculated using a lower 5.3% discount rate for normal cost ascompared to CalPERS6.8%. Through FY2024, it is expected that
67.6 million ($ 44.6 million in the General Fund) in supplemental principal contributions will be made to the Pension Trust. Staff expects to reach sufficient balancesin the PensionTrust to begin paying down CalPERSunfunded liabilities in the next 1-2 years, consistent with the Retiree Benefit Funding Policy. TheFY2025 budget estimates $13.8 million ($ 8.3 million in the General Fund) in supplemental contributions, a $0.5 million or 4.1% increase from FY 2024 Adopted levels of
13.2 million.
o California Employers’ Retiree Benefit Trust (CERBT) Fund contributions for Retiree medical costs are calculated using a lower 5.75% discount rate as compared to a
6.25% assumption. Through FY 2024, it is expected that $ 11.1 million in supplemental principal contributions will be made to the CERBTTrust. TheFY2025 Budget estimates $16.9 million ($ 10.8 million in the General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY2024 levels of $16.4 million. o Capital Infrastructure transfers reflect the goal established as part of the 2022- 2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre-pandemic levels by FY2026. The local economy has recovered from the COVID-19 pandemic, and estimated transfers from TOTrevenues in FY2025 are currently projected to increase to $12.3 million and the base transfer to increase to $12.4 million for a total $24.7 million transfer to the Capital Improvement Fund.
Attachment I - General Fund Long Range Financial Forecast Staff Report Inflationary assumptions in this long range reflect the record inflation being seen at present with an assumption that the interest rate adjustments by the Federal Reservewill eventually level off inflationary increases. A 4% annual inflation is assumed throughout the ten- year forecast to estimate cost increasesfor non-salary servicesand equipment.
Expensesare programmed to maintain service levels based on Council approval. As a result, some limited term programs are not extended through the entire ten-year forecast, but discussedlater in this report to indicate that continuing the programs would require additional resources. A couple examples of these programs are the Psychiatric Emergency Response Team (PERT), and the PA Link on demand transit service. Both programs have partial funding in the LRFFbut would need additional resources to continue them through the entire ten-year period. This LRFFalso includes the City’s committed investment of $ 7.0 million in operating expenses for the partnership with LifeMoves and Project Homekey site services ($1.0 million starting in FY 2025 and is programmed through FY2031). The timing of the funding was shifted as a result of $2.0 million from FY 2023 and FY 2024 being approved by the Council to be used to fund expensesrelated to the Homekey Facilities capital project (PE-24005).
TABLE6: General Fund ExpenseForecast and Year to Year Percentage Change Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By policy, the BSRis maintained in the range of 15 to 20% of General Fund operating expenditures, with a target of 18.5%. Aspart of the FY2024 Adopted Budget, the Council approved keeping the BSRat the 20% level to mitigate risks associatedwith economic uncertainty. Maintaining the BSR at this higher level through FY 2025 is a policy decision to be determined as part of the development of the FY 2025 budget. Any reduction to the reserve below 15% requires City Council approval.
Attachment I - General Fund Long Range Financial Forecast Staff Report The BSRis used to fund unanticipated one-time costs as opposed to ongoing or recurring operating expenditures; ongoing revenue or expense trends are updated as part of the annual budget process to adjust ongoing needs. The City's intent is to fund ongoing programs and serviceswith ongoing dollars. Maintaining the BSRat 18.5% or higher provides flexibility for the City to deal with unforeseen issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has been a strong factor in the City being rated AAA by rating agencies.
Based on information reported in the FY2023 Annual Comprehensive Financial Report (ACFR) CMR 2308-18572, the City’s current BSRbalance is $57.2 million, approximately $ 3.3 million above the 20% target of $ 53.9 million for FY 2024. Staff anticipates returning to Council in February 2024 with the FY2024 Mid- Year Review and recommendations in alignment with the allocation below for the appropriation of BSRfunds above the 20% level. Theseactions will leave the BSRat $53.7 million or $0.2 million below the 20% Council recommended level.
TABLE7: Budget Stabilization Reserve (BSR) Summary (in millions) General Fund BSRBalance, June 30, 2023 $ 61.5
FY2024 Approved Adjustments to the BSRBalance ($ 4.3)
Subtotal: BSRBalance, After Approved Adjustments $ 57.2 FY2024 RECOMMENDEDAdjustments to the BSRBalance
to be considered in FY2024 Mid- Year Budget Review, 115 Trust and Infrastructure Reservecontribution)
3.5)
Current Projected FY2024 BSRLevel, (June 30, 2024)$ 53.7 As mentioned previously, the increased major tax revenue trend has continued through the first quarter (Q1) of FY2024 with several categories tracking higher than the FY2024 Adopted Budget levels. In FY2024, staff estimates an overall increase in total revenues of $3.1 million from the Adopted $279.6 million to $282.7 million. Further discussionof changesto specific categories can be found in Attachment C, but increases are anticipated in SalesTax, Property Tax, and Utility UsersTaxand slightly offset by decreasesin Transient OccupancyTaxand Documentary Transfer Tax. If these additional revenues continue to materialize in FY2024, Staff will return to Council aspart of the FY2024 Mid- YearBudget Reviewto recommend adjustments to the FY2024 budget to recognize this one-time revenue to increase the uncertainty reserve to continue to bridge the near-term shortfalls seen in the first few years of this LRFF.
In addition to the BSR, funding of approximately $10.1 million remains in an Uncertainty Reserve that was established aspart of the FY2023 Mid- YearReviewto fund the two- year budget strategy for FY2024 and FY2025. The $10.1 million was assumedto be used to fund items deferred from 2 Finance Committee, November 28, 2023, CMR2308-1857:
https:// cityofpaloalto. primegov. com/ portal/ viewer?id=9637&type=3 Attachment I - General Fund Long Range Financial Forecast Staff Report the FY 2024 Adopted Budget as part of the FY 2024 Mid- Year Review ($1.1 million) and any potential shortfalls in FY2025 ($9.0 million). Thesefunds are one-time in nature so once they are spent, they are not available for ongoing needs.
Assumptions NOTIncluded in Forecast
It should be noted that this forecast does not include several potential impacts to the FY2025- 2034 LRFFthat are outlined below. Theseitems are known projects or areas of investment that are priorities but have not been fully developed in terms of costs and timelines. This is not intended to be a comprehensive list nor in any priority order.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the Sustainability and Climate Action Plan (S/CAP) Framework to determine the goalsand key actions needed to meet its sustainability goals, including the goal of reducing greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). Investments have been made across various City funds related to S/CAP including: a new Grid Modernization for Electrification capital project ( EL-24000), realignment of staff to manage infrastructure improvement projects; scaling existing successful energy efficiency programs; performing and analyzing research in alternative energy sources, sustainable water supplies, carbon sequestration options; and increasing incentives for voluntary electrification programs. The S/CAPThree-YearWork PlanReport was approved by Councilin Spring2023; however, continued implementation will require significant resources, including internal staffing and consultant expertise.
Labor negotiations: As of the timing of this report, all labor agreements for full-time employees are scheduled to expire by June2025 except for the ServiceEmployeesInternational Union (SEIU) agreement, which expires January2025. Consistent with Council direction in previous LRFF’s, a general 2% assumption is included for all employees starting in either Januaryor July2025 for all years of the forecast sincenegotiated wage rates are not yet available for that time; this is not as a commitment to future negotiations and is for forecasting purposes. Additionally, this forecast includes a level of reserve for potential changesin employee compensation in future agreements for competitive wages and other terms of employment. Actual funding needs may differ, depending on outcomes of future labor negotiations. Additional information on salary and benefit assumptions and reservesfor future agreements is included in Attachment D.
Capital Infrastructure 2014 Plan: The2014 Councilapproved Infrastructure Planof $125.8 million in project costs was based on construction and design costs with data from 2012. The Infrastructure Plan’s funding status hasshifted, asconstruction costshave increased and the City is required to pay prevailing wages. The FY2024 Adopted Capital Budget anticipated that these projects would cost $270.7 million. Staff is working to maintain these projects within the current budget; however, project costs can fluctuate based on market conditions at the time of construction award.
Attachment I - General Fund Long Range Financial Forecast Staff Report Grade Separation: The grade separation project consists of four at-grade crossings along the Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Avenue, Meadow Drive, and Charleston Road. As part of the FY2024 Capital budget, the Council approved two capital projects to separate them, specifying the funding sources and costs associated with Churchill Avenue (PL-24001) and Meadow Drive and Charleston Road (PL-24000) which are being designed together. Currently, the RailCommittee is reviewing alternatives for these crossingsto further narrow and select the preferred alternative( s) for recommendation to the City Council.
Studieswere completed to refine underpassalternatives by seekinginput from stakeholders such asthe Pedestrian and BicycleAdvisory Committee, PaloAlto Unified SchoolDistrict, and Stanford University to assistin narrowing down grade separation alternatives.
Following locally preferred alternative selection, the next phase will include preparing preliminary engineering and environmental documents for the three crossings. The Valley Transportation Authority ( VTA) 2016 Measure B Caltrain Grade Separation funding is available to the City for additional studies and the next phases of the project which include preliminary engineering and environmental review, right-of-way, design, and construction. In addition to this, the City Council adopted advisory spending guidelines stating its intention to expend a portion of the revenues from the Business Tax on the rail grade separation project ( Supplemental Memorandum AA13).
Thefull funding needed to complete the grade crossingsproject is estimated aspart of the capital projects that were established; however, funding necessaryto complete this work will exceed funding currently identified for this project through the VTA and Business Tax revenue.
Therefore, additional resources will need to be explored to plan and fund these grade separations, including City staff pursuing additional funding through grant opportunities as they become available and other financing mechanisms. Staff hasbeen successfulin grant applications and received notifications of grant awards for $ 6 million for Preliminary Engineering and Environmental work from the Federal Rail Administration and $23.8 million for final design of Churchill Avenue from the State.
Parks Master Plan: The Parks Master Plan4was finalized in 2017; however, when approved it identified a need to develop a funding strategy and this is still in process. As such, this forecast does not yet contemplate the necessaryinvestments to fully execute this plan.
City owned assets operated by non-profit organizations: This Forecast does not include any additional capital or operating investments for partners of the City such asbut not limited to the AvenidasSenior Center, the Ventura Child CareCenter, PaloAlto Animal Shelter facility, PaloAlto History museum (300 Homer Avenue Roth facility), Project Homekey, or the SeaScout Building.
Many of these have estimates or current projected liabilities, however, as projects evolve and 3 City Council, August 10, 2022, Supplemental Memorandum # AA1:
https:// www. cityofpaloalto. org/ files/ assets/public/ agendas-minutes- reports/ at-places- memo/ 20220810apmccsm.pdf
4 Palo Alto Parks, Trails, Natural Open Space & Recreation Master Plan:
https:// www. cityofpaloalto. org/ files/ assets/public/ public-works/ palo-alto-parks-master-plan.pdf Attachment I - General Fund Long Range Financial Forecast Staff Report costs change these are not included. As costs around potential capital or operating investments for these assetssolidify, staff will return to City Council to address them as appropriate. As part of the FY 2023 Adopted Capital Budget the City Council established the Roth Building Rehabilitation Phase1 capital project ( PF-23001) and directed a funding strategy for the Roth Building Rehabilitation Project, which consists of utilizing $ 5.4 million from a variety of funding sources.
CubberleyCommunity Center Redevelopment: A new lease between the City and PAUSDfor the school district owned portion of Cubberley commenced on July1, 2020 and reduced the amount of building spaceleased to the City (discussedin the General Expense - Cubberley Leasesection of this report). On March 13, 2023 the PAUSDBoard of Education provided a letter to the City Council inviting the City to submit one or more proposals to transfer a portion of PAUSD-owned land at Cubberley to the City. This could be through a land swap, acquisition or ground lease.
Basedon discussionswith Council (CMR2380-19495) an Ad Hoc of the City Council and staff are developing the proposal. Staff is working on next steps for repair of Cubberley Gyms A and B, which have been closed since February 2022 due to damage caused by water line breaks.
Remediation work of damaged areas has started, and the final phase of the repair work is scheduled to begin in February 2024. Replacement of the gym’s heating system is not included in the scope of the remediation project.
Loans for special projects: From time to time the City’s General Fund will assist other City operations with modest cash flow loans to bridge fiscal years. Additions and other initiatives funded in other funds may need financial support from the General Fund to ensure they are fully implemented, examples include cashflow needs for the Regional Water Quality Control Plant upgrades, or major capital investments in which financing could be secured at a later time (e.g. a loan for the airport fund was established to ensure matching grant funds for major capital improvements).
Legislative Updates: Various actions at the state and federal level that could impact the City of Palo Alto have not been incorporated into this forecast due to the changing context and uncertainty of the quantitative impacts of potential legislative changes. As the potential impacts of various legislative initiatives are clarified, appropriate adjustments will be identified and brought forward as part of future budget development cycles.
Tax revenue alignment with updated ComprehensivePlan: The 2030 Comprehensive Plan was adopted in FY2018, including the potential fiscal impact of various land use scenarios. The fiscal impact of this plan and various land use scenariosare not factored into this forecast.
Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of which have been identified in the City’sADAtransition plan and by the Infrastructure Blue Ribbon Commission as requiring capital project work to bring them up to full ADA compliance and/ or 5 City Council, October 16, 2023, CMR2308-1949:
https:// cityofpaloalto. primegov. com/ portal/ viewer?id=9323&type=3 Attachment I - General Fund Long Range Financial Forecast Staff Report sufficient conditions. Facilities of concern include Cubberley Community Center, Foothills Park Restrooms, and Lucie Stern Community Theatre restrooms. Staff continues to program work needed in this area as part of the Americans with Disabilities Act Compliance capital project (PF- 93009); however, the entire scope of work needed in this area exceedscurrent resources.
GeneralLiability Umbrella ExcessPremiums: TheCity’sGeneralLiability Program provides funding to cover various insurance policies for City-owned equipment and machinery. The City is self- insured for the first $ 1.0 million in losses per occurrence and participates in a Joint Powers Authority for coverageup to $55 million per occurrence. Theseexpensesare allocated to citywide departments. General Liability Umbrella ExcessPremiums are anticipated to increase in future years due to significant national events and natural disasters such as claim costs for Hurricane Ian. Staff will bring forward adjustments for these costs as part of future budget cycles as they become available.
Significant Projects or Changing Operational Needs:
Updates to several significant programs, codes and ordinances are expected to be necessaryin the near future asstaff work to implement programs and investments to major plans such asthe City’s housing element, fee and organizational studies for services such as planning and development services, and new facility needs under review such as a fire training center. Many of these projects and organizational needs are under way or being studies for further planning and will likely have financial impacts that are unknown at this time.
Limited Term Programs: There are several programs currently in progress that are funded on a limited term basisper Councilapproval. If these programs are recommended to continue through the ten- year forecast period additional resources would be needed.
ThePsychiatricEmergencyResponseTeam (PERT) program in the PoliceDepartment pairs a police officer in plain clothes and a mental health clinician to respond to callsfor mental health emergencies. PERTis recommended to be supported with Stanford University Medical Center (SUMC) funding through FY2027. To continue the program in FY2027, an additional $ 0.2 million would be needed, with an ongoing cost of $0.4 million annually starting in FY2028.
PALink, the on-demand transit service, is currently being administered asa pilot program with grant funding from the VTA. The program is partially funded in FY 2025, but an additional $0.7 million would be needed to fully fund the program with an ongoing annual need of approximately $ 1.8 million starting in FY2026.
The Downtown Streets Team that provides cleaning services in the University Avenue area was previously funded through the Community Development Block Grant (CDBG); however, in FY2023 this funding source was determined to be ineligible for these services and costs were shifted to the General Fund on a one-time basis. Funding for the program hasbeen programmed through FY2025; however, $0.2 million would be needed annually to maintain this program.
Vehicle Fleet Electrification: Currently the City’s policy is to consider electric vehicles and then other alternative fuel vehicles when replacing existing vehicles. Transitioning the vehicle fleet to Attachment I - General Fund Long Range Financial Forecast Staff Report full Electric Vehicles (EVs) is part of the City’s sustainability goals. As part of the FY2024 budget process, it was estimated that approximately $6.0 million acrossall funds will be needed annually
2.6 million above the FY2024 budget) in order to replace all City vehicles with EVs.
FY2025 Budget Development Guidelines
As discussedearlier in this document, this preliminary forecast represents the initial steps of the FY 2025 budget development process. Due to the clear overlap of projecting the City’s fiscal condition and the need to shape service level expectations, staff recommends that the inclusion of Budget Development Guidelines be incorporated into the discussionsat the beginning of an annual budget process. The FY 2025 Budget Development Guidelines, which are detailed in Attachment A, are meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary direction to the organization. These guidelines will shape and inform the annual financial planning and the allocation of resources across the organization, especially in the General Fund.
Pairing Budget Development Guidelines with the forecast at the beginning of the budget process links the anticipated fiscal condition of the organization with the necessary context regarding service delivery prioritization and resource allocation that will be further explored through the process. This also ensures that the City is able to proactively address anticipated changesin its fiscal condition through the budget process.
Human ServicesResourceAllocation Process (HSRAP) Funding Referral As part of the FY2024 Adopted Budget, the Council directed staff to follow- up with additional work to, “Consider pegging HSRAPbudget allocations to a benchmark, such as percentage of General Fund budgeted expenditures.” In prior years funding has not been tied to a percentage of the General Fund budgeted expenditures, and the last time this was reviewed by the Policy and ServicesCommittee (CMR72896) there were four options for augmenting the HSRAPfunding, but ultimately none of them were approved for recommendation to the Council. The status quo of increasing the funding by the Consumer Price Index (CPI) as funding was available in the General Fund continued. Attachment Econtains additional historical data and analysisregarding the impacts on the LRFFbase casefor FY2025 through FY2027. 6 November 29, 2016 Policy and ServicesCMR7289:
https:// www. cityofpaloalto. org/ files/ assets/public/ v/ 1/ agendas-minutes- reports/ reports/ city-manager-reports- cmrs/ year-archive/ 2016/ id-7289-hsrap.pdf
Attachment I - General Fund Long Range Financial Forecast Staff Report Conclusion
This forecast maintains current service levels approved in FY 2024 and should be used for planning purposes to assistin gaugingeffects of major policy interventions againsta likely “status quo” version of the future. The level of uncertainty in this forecast is similar to where it was a year ago in terms of impacts from economic and geo-political uncertainty and evaluating potential impacts on the local economy. Positive trends in major tax revenue categories that occurred in FY 2023 caused a one-time surplus of $ 3.3 million. These trends continue in the forecast, although increasesin the near term may be flattened due to economic stagnation. Staff will return to Council in February 2024 with the FY 2024 Mid- Year Review to recommend, in alignment with Council policy specifying that the City Manager may direct amounts exceeding the BSRtarget, that the $3.3 million surplus be allocated to the Infrastructure Reserve (IR) in the Capital Improvement Fund ($1.65 million) and the City's Section 115 Pension Trust Fund ($1.65 million), as outlined in the Retirement Benefit Funding Policy.
The LRFFBaseCaseassumesa weak economy in 2024, followed by a return to trend growth rates by 2025 and through the remaining ten-year forecast period. Revenue growth is anticipated to stagnate through the end of FY2025 as a result of monetary policy tightening actions by the US Federal Reserve continuing in an effort to achieve a “soft landing”, whereby a slowdown in economic growth avoids recession by stopping the economy from overheating and higher inflation. Asa result, the LRFFprojects a shortfall of $6.0 million in FY2025, followed by shortfalls ranging from $ 5.4 million in FY2026 down to $ 0.5 million in FY2029. FY2030 has a surplus of
6.6 million which continues to grow through FY 2034. These amounts are consistent with previous projections used as part of the two- year budget balancing strategy when adopting the FY 2024 Budget. Additionally, this LRFFprojects $ 282.7 million in total revenues in FY 2024, reflecting $ 3.1 million or 1.1% above adopted budget levels. If these additional revenues materialize in FY 2024, staff anticipates returning to Council as part of the FY 2024 Mid- Year Budget Review to recommend using this funding to increase the uncertainty reserve to help mitigate impacts from a recessionaswell assmooth the near-term shortfalls seenin the first few years of this LRFF.
Funding of approximately $ 10.1 million remains in an Uncertainty Reservethat was established as part of the FY2023 Mid- YearReview to fund the two- year budget strategy for FY2024 and FY 2025. The $10.1 million was assumed to be used to fund items deferred from the FY 2024 Adopted Budget aspart of the FY2024 Mid-YearReview ($1.1 million) and any potential shortfall in FY2025 ($9.0 million). Thesefunds are one-time in nature so once they are spent, they are not available for ongoing needs.
Attachment I - General Fund Long Range Financial Forecast Staff Report In addition to the Base CaseForecast, staff modeled an alternate forecast scenarios that are discussedbelow. The first alternative reflects a 1% loss in economically sensitive revenue in FY 2025 compared to the Base Case, and increases the General Fund shortfall over the next ten years. FY2025 increases from a shortfall of $6.0 million to $ 8.1 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2030. Staff also modeled an alternate forecast that reflects a 1% compensation adjustment and the impacts on the General Fund over the next ten years. The surplus in FY2024 increasesto $1.1 million, the shortfall in FY 2025 reduces to $ 1.9 million, and FY2026 changes from a shortfall to a small surplus. These alternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspectsof both alternate forecasts may occur in conjunction in the future.
Alternative Scenariosfor Consideration
Alternative Forecast Scenario A: Economically Sensitive RevenueLoss This alternative forecast models the impact of a 1% revenue loss on economically sensitive revenue. Sinceit is difficult to predict the timing of a recession, this scenario shows the cost of a revenue lossin FY2025 and how it would impact the subsequent yearsof the forecast. Themajor taxes, charges for services, and permits and licenses revenue categories are typically impacted by economic changes, so the impact has been calculated on these revenue sources. The 1% loss from these revenue sources would reduce the overall revenue in FY2025 by $2.1 million. The Base Case projected that by FY 2030, the City would begin to have a positive surplus; this alternative forecast increasesthe operating shortfalls from $0.5 million to $3.0 million in FY2030.
In this alternative, the General Fund would have a shortfall of approximately $ 8.1 million in the first year of the forecast. The summary table for this alternative forecast and the Net Operating Margin graph for this alternative forecast are below.
TABLE8: FY2025 – FY2034 Long RangeFinancial Forecast
Alternative Forecast A
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE9: FY2025 –2034 Long RangeFinancial Forecast Net Operating Margin Alternative Forecast A
Alternative Forecast Scenario B: One-time Compensation Adjustment, Additional 1% Consistent with City Council direction and past practice, the Base Caseassumes a 2% general wage adjustment in the yearsbeyond the terms of existing Memorandum of Agreements (MOAs) since negotiated wage rates do not yet exist for that time. Asof the timing of this forecast, MOAs are in effect through January2025 (ServiceEmployeesInternational Union) (SEIU) and June2025 all other full-time labor groups). To support ongoing efforts for competitive wages and other terms of employment, the BaseCaseforecast includes a reserve for potential changesto future labor costs including, changes in vacancy rates, labor and benefit rate variability, and inflation assumptions. Offering competitive compensation plans aligns with industry standards for attracting and retaining a skilled and motivated workforce and better positions the City of Palo Alto as an employer of choice. This level of funding is intended to offset potential future costs and may differ from actual outcomes. Negotiations for new labor agreements are anticipated to occur in the next year for new terms beginning in FY2025-26.
This alternative scenario models the impact of a one-time adjustment in FY2026 to increase compensation by an additional 1% above assumptions in the BaseCase; this is the first full fiscal year for new MOA terms with all labor groups. Aswith other assumptions in the LRFF, this model is for forecasting purposes and does not reflect future commitment.
The one-time compensation adjustment would increase expenditures in FY2026 by $1.2 million.
The BaseCaseprojected that by FY2030, the City would begin to have a positive surplus; this alternative forecast increasesthe operating shortfalls in the near-term, resulting in lossesranging from $ 6.0 million in FY2026 to $ 1.9 million in FY2029. Basedon this scenario, the cumulative net operating margin, or ongoing surplus, during the forecast period is a surplus of $35.0 million.
The summary table for this alternative forecast and the Net Operating Margin graph for this alternative forecast are below.
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE10: FY2025 – FY2034 Long RangeFinancial Forecast
Alternative Forecast B
TABLE11: FY2025 – 2034Long RangeFinancial Forecast Net Operating Margin Alternative Forecast B
FISCAL/RESOURCEIMPACT
Financial implications from this report and input from the FinanceCommittee will be considered in the City Manager’s development of the FiscalYear2025 budget.
STAKEHOLDERENGAGEMENT
The preliminary forecast for 2025-2034 represents the beginning of the fiscal year 2025 budget development process. Information provided in this report will be discussedwith the City Council after the Finance Committee reviews and provides recommendations. Those conversations will provide direction to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2024, according to the standard budget adoption process.
ENVIRONMENTALREVIEW
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachment I - General Fund Long Range Financial Forecast Staff Report
ATTACHMENTS
Attachment A: FY2025 Budget Policy Guidelines
Attachment B: The Economy
Attachment C: General Fund BaseCaseRevenueAssumptions
Attachment D: General Fund BaseCaseExpenseAssumptions
Attachment E: Human ServicesResourceAllocation Process (HSRAP) Funding Referral APPROVEDBY:
Kiely Nose, Assistant City Manager
Attachment I - General Fund Long Range Financial Forecast Staff Report AttachmentA – FY2025BudgetDevelopmentGuidelines
1) Developa structurallybalancedbudgetthat bringsongoingrevenuesandexpensesinto alignment. Developa planfor anystructuralimbalanceto ensurethat the Citymaintains fiscalsustainabilityoverthe short, medium, andlong-term. 2) Allocate one-time resourcesfor one-time needs rather than committing one-time resourcesto ongoing services. Examineappropriate uses of revenue surplusesthat exceedforecastedlevelssuchas planningfor recessionneeds, restoration needs, and strategicinvestments.
3) Review resource allocation for City Council’s existing priorities and identify priority fundingneeds.
4) Focuson businessprocessredesignto enhancequality, flexibility, andcost-effectiveness of servicedelivery (includeexaminingopportunitiesto streamline, simplify, reorganize, andreallocateresourcesto avoidduplicationof effort).
5) Explorealternative servicedelivery models (such as partnershipswith non-profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectivelyuseresources.
6) Continueto thoroughlyanalyzenon-personnel/equipment/other costs, suchascontract services, for costsavingsopportunitiesor realignmentwith currentneeds. 7) Explorethe expansionof existing revenue sourcesor the addition of new revenue sources, includingthe alignmentof existingchargesfor servicesand the opportunity to establishnewfees, whenappropriate.
8) Continue to analyze and prioritize resource augmentations, seeking to offset augmentationswith reductionselsewherefor net-zeroimpactsto the budgetwhenever possible; however, ensuringwhenresourceaugmentationsare added, it is in alignment with one-time andongoingforecastedsources.
9) Continueto prioritize proactivelyfunding long term liabilities includingbut not limited to debt obligations, pensionobligations, and capital infrastructure in accordancewith Citypoliciesasapprovedby Council.
FY 2025 Budget DevelopmentGuidelines
Attachment I - General Fund Long Range Financial Forecast Staff Report
ATTACHMENTB
TheEconomy
At the nationallevel, economicgrowth throughthe third quarterof calendaryear2023, wasled by robustconsumer (retail) spendingdespitea persistenthighinflation rate andhighborrowing costswith interest rates at their highestlevel in 22 years, 5.25% to 5.5%. Thegrossdomestic product (GDP), a measureof all goodsand servicesproducedin the economy, increasedat an annualizedrate of 4.9%, well above the 2% range in the prior quarters and above the 2% expectation. Asof October2023, the consumerpriceindex (CPI) whichmeasureschangesin the pricespaid by consumersfor a basketof goodsand services, was3.2%. Thisis lower than the
7.7% CPIfrom a year ago, but still indicatesincreasingcosts. The unemploymentrate, as of October2023, is3.9% whichisup from 3.4% at the beginningof the 2023calendaryearandmay indicate an economicslowdown in the coming quarters. The unemploymentrate has been rangingbetween 3% to 4% as the economiccoolingdown is expectedto bring the elevated inflation closerto the 2% federal reservetarget goal. Theaboveoutlook is predicatedon the federalreserveachievinga “soft landing” wherebythere’sa slowdownin economicgrowth that avoidsrecessionfor the purposeof stoppingthe economyfrom overheatingand continuingto experiencehigher inflation. TheUCLAAndersonoutlook is “Theoft-predictedbut never seen recessionnext quarter’ hasnow fadedin the faceof expansionaryfiscalpolicy, a new national industrialpolicy, and a consumerwho is happyto continuespending.” Thisoutlook projectsa weakeconomyin 2024followedby a return to trend growth ratesby 2025. Thisweakeroutlook translatesinto 1% to 2% GDPgrowth for the remainderof 2023with the expectationthis will graduallyincreaseto a2% to 3% growththrough2024. Theelevatedcoreinflation isexpectedto comedown slowlywith lower GDPgrowth which couldallow the federalreserveto mildly cut rates in mid to late 2024. Thereare risksto monitor that could changethe expectedgrowth pattern such as a future protracted (U.S.) government shutdown, geopolitical events, and electionresultingin changingnationaleconomicpoliciesin 2025.
Thelocaleconomycontinuesto showstrongperformancein the first half of calendaryear2023.
TheUCLAAndersonoutlook for Californiadoesnot forecasta recessionbasedon the state’s strongemploymentandeconomicgrowththrough, “theonshoringof technicalactivitiesandnew investmentsin greentechnologyandAIthat shouldkeepCaliforniagrowingfasterthanthe U.S”.
The “continueddemandfor a limited housingstock, coupledwith state policiesinducingnew home building” is expectedto facilitate economicrecoveryfor the next few years. The real personalincomeisforecastedto remainflat in 2023andgrowbetween1% to 2% through2025.
California’sunemploymentrate, similarto the nationaltrend, hasrisenin calendaryear2023and isexpectedto be in the mid to high4% through2025.
Accordingto the U.S. Bureauof EconomicAnalysis (BEA), the “advance” estimateof the U.S. economy’s real grossdomesticproduct (GDP) percentagechange, from the precedingquarter, changedin the secondandthird (calendar) quartersof 2023at anannualrate of 2.1% and4.9%, respectively. RealGDPis an inflation-adjustedmeasurethat reflectsthe valueof all goodsand servicesproducedby aneconomyin a givenyear. Accordingto the BEA, in the third quarter the Attachment I - General Fund Long Range Financial Forecast Staff Report increasein real GDPreflected increasesin consumerspending, private inventory investment, exports, state and local governmentspending, federal governmentspending, and residential fixedinvestmentthat werepartlyoffsetby a decreasein nonresidentialfixedinvestment. Ofthe third quarter 4.9% increase, consumerspendingrepresentsrose 4%, led by consumptionof housing and utilities, health care, financial services and insurance, food services and accommodationsand nondurablegoods (led by prescription drugs), recreationalgoodsand vehicles. Imports, whicharea subtractionin the calculationof GDP, increased.
Table1: NationalGrossDomesticProduct (GDP)
RealGDP: PercentChangefrom PrecedingQuarter
Attachment I - General Fund Long Range Financial Forecast Staff Report Thenationalinflationrateremainedsteadybut still highcomparedto the 2% ratetargetedbythe federal reserveat 3.2% in October2023, asasofterdeclinein energypricesoffsetslowinginflationarypressures in other categories. Energycostsfell by 4.5% versus -0.5% in Septemberwith gasolinedeclining5.3%, utility gasservicefalling15.8%, andfuel oil singing21.4%. Additionally, pricesincreasedat softer rates for food (3.3%), new vehicles (1.9%), apparel (2.6%), medicalcarecommodities (4.7%), shelter (6.7%), andtransportationservices (9.2%).
Table2: NationalInflation Rate (akaConsumerPriceIndex (CPI)) Thenation’sunemploymentrateis3.9% asof October2023, comparedto arecordhighof 14.7% at the heightof the pandemicin April2020. Accordingto UCLAAndersonoutlook, the recentrise in unemploymentis due to new entrants to the labor market rather than layoffs which is at historicallow level. It isexpected, by the U.S. Bureauof LaborStatistics, that the unemployment rate will risedue actionsby the FederalOpenMarket Committee (FOMCor federalreserve) to further bring down the elevatedinflation rate aswell asmore the new entrantsinto the labor market. Per the State of California's Employment Development Department, the state’s unemploymentrate asof September2023is 4.7% with the prior yearbeing4% andthe County of SantaClarais3.2%. Historically, the BayAreajob growth hasbeenledbythe Peninsulafor the pastseveralyears. Theunemploymentrate for the SanFranciscoPeninsulaandPaloAlto is 3% and2.8% respectivelyasof September2023; lastyearit was2.3% and1.9%, respectively.
Attachment I - General Fund Long Range Financial Forecast Staff Report Table3: U.S. UnemploymentRate
Theelevatedinflation rate hasresultedin the continuederosionof purchasingpower; however, there is still growthin U.S. consumerspending. Personalconsumptionexpenditures (PCE) arethe primarymeasure of consumerspendingon goodsand servicesin the U.S. economy. It accountsfor about two-thirds of domesticfinal spending, and thus it is one of the main factors that indicatesfuture economicgrowth.
Strengthin PCEspendingtends to prompt additional businessspending. National personalspending increasedby 0.7% and0.4% overthe prior monthsin AugustandSeptember2023, respectively. Services spendingroseby 0.8% andspendingon goodsroseby 0.7%. Servicesspendingwasup for international travel, housingandutilities (mainlyhousingexpenses), healthcare, and transportation. Goodsspending wasled by prescriptiondrugs, motor vehiclesandparts, andnewmotor vehicles.
Attachment I - General Fund Long Range Financial Forecast Staff Report Table4: PersonalConsumptionSpendingGrowth
Attachment I - General Fund Long Range Financial Forecast Staff Report
ATTACHMENTC
Table1: GeneralFundBaseCaseRevenueAssumptions
SalesTax
Comparedto FY2019pre-pandemicactualsof $36.5 million, salestax revenuedeclinedby $7.4 million, or 20.2%, duringthe pandemicin FY2021. Therecovery, whichbeganin the lastquarter of FY2021, resultedin the FY2022andFY2023receiptsincreasingby $3.6million or 12.3% and
4.2 million or 12.9%, respectively. Thisrecoverygrowth hasslowedin the first quarter of FY 2024, with the City’s salestax consultantforecastinga modestincreaseoverthe prior year. The general retail, food products (includesrestaurants), and businessto business (includescar leasing) categoriesexperiencedincreases. Thiseconomictrend wasmixedin the SanFrancisco BayAreaandin California. A few municipalitieshaddoubledigit increasesin the FY2023while mosthadsingledigit gainsor decreases.
TheFY2024AdoptedBudgetfor SalesTaxis $36.3 million, a $0.6 million or 1.8% declinefrom FY 2023actualsof $36.9 million. However, in the revisedforecast, FY2024isexpectedto earn $37.7 million, a 2.2% increaseoverFY2023actuals. In FY2025, this revenueisanticipatedto increase to $39.7 million, a $2.0million or 5.3% increaseoverthe FY2024revisedforecast. TheBaseCase assumes3.2 to 5.1% growth over the length of the forecastwith a 10-year compoundannual growth rate (CAGR) of 3.4%.
30.0 $ 29.9 $ 31.1
36.5 30.6 $ 29.1
32.7 36.9 $
36.3 39.6 $ 41.2 $ 42.8 $ 44.4 $ 45.9 $ 47.5
36.6 $
39.4 42.8
47.3 51.1
56.6 $
59.4 $
63.1 $ 63.8
67.9 72.1
76.6 81.4
86.3 92.5
15.2 $
15.7 $ 16.7 $ 17.0
11.6 2.8
8.8 13.5 $ 14.4 $ 14.1 $ 14.9 $ 15.9 $ 16.6 $ 17.5 $ 18.3
12. 5
14.2 $ 15.4 $ 16.4 $
16.1 14.6 $ 15.6
18.8 $
18.5 $ 20.0 $ 20.6 $ 21.5 $ 22.5 $ 23.1 $ 24.7
6.3 $ 7.5 $ 9.2 $
6.9 $ 6.9
10.6 12.0
5.8 $ 5.9 $ 6.2 $ 6.5 $ 6.8 $ 7.1 $ 7.3 $ 7.6$7.2
7.7 $ 8.2 $ 8.7 $ 7.0
2.4 8.1 $
12.0 $ 12.4 $ 12.7 $ 13.4 $ 14.3 $ 15.0 $ 15.7 $ 16.5
0 5
10 15
20 25
30 35
40 45
50 55
60 65
70 75
80 85
90 95
Millions
Fiscal Year
Major General Fund Revenues
Sales Tax
Property Tax
TOT - General Fund
Utility User's Tax
Doc. Transfer Tax
TOT - Infrastructure
Forecast
Property Tax
Sales Tax
Utility User' s Tax
TOT -GeneralFund
TOT - Infrastructure
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE2: Cityof PaloAlto SalesTaxRevenuesthrough FY2034 PropertyTax
Propertytaxrevenueisthe GeneralFund’slargestrevenuesourceandrepresentsapproximately 25% of the total revenues. Historically, the 10-yearcompoundannualgrowth rate (CAGR) was
8.2% with a low of 4.9% in FY2022anda highof 11.5% in FY2015. Duringeconomicdownturns, impactsto propertytaxoccura yearlater, asa result, the $2.8 million or 4.9% growth in FY2022 wasthe lowest in the past decade. Thiscategoryalsoincludesreceiptsfor excessEducational RevenueAugmentationFund (ERAF) distributionsfrom the Countyof SantaClara. ERAFis the fund usedto collectanddisbursepropertytaxesthat areshiftedto/from cities, the County, and specialdistrictsprior to their reallocationto K-14 schoolagencies. Whenthe state shiftsmore local property tax than required to support schools, these funds are returned and known as excessERAF. Asa resultof the volatility of ERAF, it is not considereda permanentlocalrevenue sourceeventhoughit hasperformedstronglyin the pastdecade.
ERAFReserve: SinceFY2021, the Cityhasengagedin severaldisputesover the calculationand disbursementof excessERAFFunds. In response, the City establishedreservesfor potential estimatedlossesat 25% of total ExcessERAFreceipts. Therewerefavorableresolutionswith the StateandSantaClaraCounty, followedby the StateandCaliforniaSchoolBoardAssociation, for two prior disputes. The associatedreserveshave been releasedto the Budget Stabilization Reserve (BSR) or consolidatedfor potentialfuture at-riskamounts.
Asof the timing of this LRFF, the StateController’sOfficeissueda negativeaudit findingagainst Marin County. Thestateassertsthat former RedevelopmentAgencyfunds, whicharenow part of the regularpropertytaxes, shouldbeexcludedfrom theexcessERAFcalculation. MarinCounty ischallengingthisfinding, andit isnot knownif thiswill beelevatedto acourtcase. Theestimate is, if this audit findingis sustained, 22% of excessERAFis at riskfor fiscalyears2021, 2022, and 2023. If the findingholds, the Countyof SantaClara, aswell asother ExcessERAFcounties, could facesimilaraudit findingslikelystartingin FY2025. In FY2023, $4.1million wassetasidefor the Reserveof excessERAFfor the at-riskamount. In addition, 22% or $1.5million in FY2024budget
25.6 29.4
29.7 30.0
29. 9
31.1 36.5
30.6 29.1
32.7 36.9
36.3 39.6
41.2 42.8
44.4 45.9
47.5 49.1
50.7 52.9
55. 1
15 18
21 24
27 30
33 36
39 42
45 48
51 54
57 60Millions
Fiscal Year
Sales Tax
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report hasbeenreducedby this amount. Staffwill continueto monitor the statusof this audit finding andreport on anysignificantdevelopments.
TABLE3: Cityof PaloAlto PropertyTaxActualsandForecastthrough FY2034 Transferof ownershiphasbeenasignificantdriverof pastgrowth; however, that growthisexpected to moderatein FY2024dueto the expectedeconomicslowdownandthe highermortgagerates. For example, the mediansalespriceof singlefamilyresidentialin the first (fiscalyear) quarterof FY2024 declinedby 3% overthe prior quarter.
TheFY2024AdoptedBudgetfor PropertyTaxis $63.8 million, a $0.7 million or 1.1% increaseover the FY2023actualsof $63.1 million. However, in the revisedforecast, FY2024is expectedto earn
64.6 million or 1.3% increaseover the FY2024 adopted amount. In FY2025, this revenue is anticipatedto increaseto $67.9 million, a $3.3 million or 5.1% increaseover the FY2024revised forecastlevel. TheBaseCaseassumes5.1to 7.1% growth overthe lengthof the forecastwith a 10- yearCAGRof 5.4%.
TransientOccupancyTax (TOT)
Revenuein this category is impacted by businessand other leisure/non-leisure travel and experiencedsignificantreductionsin FY2020and FY2021due to public health orders, travel restrictions, anddiminishingbusinessandpersonaltravelplansresultingfrom the pandemic. TOT revenue declinedby $20.5 million or 79.8% in FY2021, when comparingthe FY2019 pre- pandemicactualsof $25.6million. Aspublichealthconditionsimprovedandtravelresumed, this revenuebeganto recover, significantlygrewin FY2022, andin FY2023, this revenuerecovered to pre-pandemiclevels. Theopeningof the two Marriott hotelsin mid andlate FY2021andthe re-openingof multiple hotelsin FY2021and FY2022were positivedevelopmentsthat helped driverecoveryfor this taxrevenue.
TheFY2024AdoptedBudgetfor TOTrevenueis $26.8 million, a $1.3 million or 5.3% increase overFY2023actualsof $25.5 million. In the revisedforecast, FY2024isexpectedto earn $25.5
8. 5
6. 4
11. 5
7. 3
7. 6
8. 8
10. 5
7. 9
10. 7
4. 9
6. 4
7. 5
6. 4
6. 2
6. 3
6. 2
6. 1
7. 1
5. 9
5. 3
5. 6
5. 8
28.7 $30.6 $ 34.1 $ 36.6 $ 39.4 $ 42.8 $
47.3 $
51.1 56.6 $ 59.4 $
63.1 $ 63.8 $
67.9 $
72.1 $
76.6 $
81.4 $
86.3 92.5
98.0 $
103.1
108.9
115.2
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
0$
5$
10$
15$
20$
25$
30$
35$
40$
45$
50$
55$
60$
65$
70$
75$
80$
85$
90$
95$
100$
105$
110$
115
Total % Chg.MIllions
FiscalYears
Cityof PaloAlto PropertyTaxActualsand Forecast
Forecast
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report million, whichmatchesthe FY2023actuals. In FY2025, thisrevenueisanticipatedto continueto plateau as the economyslowsdown to $26.7 million. Year-to-date (as of August2023), daily averageroom ratesdeclinedby 11.4% from $252per dayto $223per daywhile occupancyrate decreasedby 9.6% from 74.3% to 67.1%. Revenuein this categoryis experiencinga near term stagnation; however, it’santicipatedto continuegrowth in FY2026andbeyondwith 4.6to 6.5% growth overthe lengthof the forecastwith a 10-yearCAGRof 4.8%.
TABLE4: Cityof PaloAlto TransientOccupancyTaxActualsandForecastthrough FY2034 Note: January2015, TOTRatewent from 12% to 14%
April2019, TOTRatewent from 14% to 15.5%
Utility User’sTax (UUT)
The UUTis levied on electric, gas, and water consumption, as well as on telephone usage.
Revenuein this categoryis impactedby consumptionlevelsandhasexperiencedreductionsin prior periodsdueto waterconservationprogramsandreducedworkforcesandbusinessclosures duringthe pandemic. Thisrevenuehasrecoveredasthe localeconomyrecoveredandworkers returned to the office in FY2023. In addition, higherutility commoditycostsresultedin sizable utility rate increasesand higherUUTrevenues. TheFY2024AdoptedBudgetfor UUTis $18.5 million, similarto the FY2023actualsof $18.8 million., however, the updatedforecastedamount for FY24isanticipatedto beto be $19.7 million. InFY2025, thisrevenueisanticipatedto increase to $20.0 million, a $0.3million or 1.5% increaseoverthe FY2024forecastedamount. Revenuein thiscategoryisexpectedto experiencegrowthat 2.6to 6.6% overthe lengthof the forecastwith a 10-yearCAGRof 3.5%.
79. 6
79. 0
78. 1
77. 0
78. 3
78. 8
77. 3
60. 9
40. 3
63. 5
68. 8
10.8 12.3
16.7 22.4 $ 23.5
24.9 25.6
18.6 5.2
16.9 $
25.5 26.8
26.7 28.3
30.2 31.6
33.2 34.8
36.6 38.5
40. 5
42.6 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 3
6 9
12 15
18 21
24 27
30 33
36 39
42 45
Occupancy %Millions
Fiscal Year
Transient Occupancy Tax Actuals and Forecast
264$208$182 $ 280$274$262
Avg.DailyRoomRates
237
265
116
Forecast
Forecast
Adopted
Budget$
195
257
ActualOccupancy %
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE5: Cityof PaloAlto Utility UsersTaxActualsandForecastthrough FY2034 DocumentaryTransferTax (DTT)
Revenuein this categoryis highly volatile and dependent on salesvolume and the mix of commercialand residentialsales. DTTexperiencedrecord receiptsin FY2021and FY2022at
10.6 million and $12.0 million, respectivelywhichwasfollowedby a sharpdeclinein FY2023at
5.8 million. In both recordyearsreceipts, thesemilestoneswere a result of largecommercial transactions, six in FY2021 and nine in FY2022, and robust residentialsales. FY2023, sales activitiesnormalized. TheFY2024AdoptedBudgetfor DTTis $5.9 million, $0.2 million or 2.9% lower than FY2023actualsof $5.8million. In FY2025, this revenueisanticipatedto increaseto
6.2 million, a $0.4million or 5.3% increase, from the FY2024forecastlevelof $5.8million.
Asin pastyears, this revenuesourceischallengingto forecastandcanfluctuatemonthto month dependingon real estatetransactions. Thenumberof transactionsthroughOctober2023 (190) isthe sameasOctober2022with the total revenuefrom thesetransactionsincreasingby15.1%.
Thoughthe PaloAlto housingmarketremainsstrong, asdiscussedin the PropertyTaxessection, singlefamilyresidentialmediansalespricein PaloAltohasslightlydeclined, whichisanexpected occurrenceasthe predicatedeconomicdownturnandhighermortgageratewill impactproperty salesactivityin FY2024.
10.9 11.0
10.9 12.5
14.2 15.4
16.4 16.1
14.6 15.6
18.8 18.5
20.0 20.6
21.5 22.5
23.1 24.7
25.5 26.4
27.3 28.2
8 10
12 14
16 18
20 22
24 26
28 30Millions
Fiscal Year
Utility Users Tax
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE6: Cityof PaloAlto DocumentaryTransferTaxActualsandForecastthrough FY2034 Returnon Investment
The return-on-investment category reflects the interest earningson the City’s investment portfolio. Thiscategoryisacombinationof pastinvestments, newinvestmentsat currentmarket rates, andavailableinvestablecashwhichfluctuatesseasonallyandannually. Asof the timing of thisLRFF, the FederalOpenMarketCommittee (FOMC) hasraisedthefederalfundsrate11times, from 0.25% to 5.55% (525basispoints) sinceit begantighteningmoneypolicyin March2022. It is expectedthat interest rateswill be held steady, asinflation is expectedto return to the 2% target in the economicoutlookoverthe mediumterm.
Theaverageportfolio rate of return for the first quarter of FY2024was 2.20%, and a 2.31% averageyield asof the fourth quarter of FY2023. Theadoptedbudget GeneralFundFY2024 interest earning is $1.8 million. This is below the FY2023 actual of $2.5 million, but the expectationisthe actualsin FY2024will comein higherat $2.9million. In FY2025, the forecast reflectsa 3.3% increasein interest earningsto $3.1 million with 3.0 to 4.2% increasesthrough the ten-yearperiod.
6.8 8.1
10.1 6.3
7.5 9.2
6.9 $ 6.9
10.6 12.0
5.8 $ 5.9
6.2 6.5
6.8 7.1
7.3 7.6
7.9 8.2
8.5 8.8
3 4
5 6
7 8
9 10
11 12
13Millions
Fiscal Year
Documentary Transfer Tax
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report TABLE7: PaloAlto HistoricalInvestmentPortfolio YieldsandCitywideInterest Earnings RentalIncome
RentalIncomeof $16.9million in FY2025primarilyreflectsrent paidto the GeneralFundfrom the City’sEnterpriseFundsandtenantsat the CubberleyCommunityCenter. Thereisanincrease in rental incomeof $1.0 million comparedto the FY2024AdoptedBudget. Theincreasecanbe attributed to a review of the changesin the CaliforniaConsumerPriceIndex (CCPI) in the San FranciscoBayAreafrom the August-to-Augustperiod, and it is expectedthat revenueswill be reviewedand revisedsubsequentto this forecastbasedon updatedinformation, typicallythe December-to-Decemberchangein the CCPI.
TheCityis no longerreceivingrental incomefrom the former LosAltosTreatmentPlant (LATP) site, becausethe site is no longeravailablefor traditional rental asa laydownyard. Thesite is planned for two uses: 1) an interim housing project with Project Homekey to provide opportunitiesfor homelessindividualsandfamilies, and2) a joint waterpurificationprojectwith the SantaClaraValleyWater District. Pleaseseethe ExpenseAssumptionsGeneralExpenses sectionof thisreport for additionalinformationregardingProjectHomekeydevelopmentsat the former LATPsite. Thewater purification project is beingfunded in the WastewaterTreatment Fund, soit is not part of the GeneralFundLRFF; however, fundingneedsfor the project will be discussedin the developmentof the FY2025budgetfor the WastewaterTreatmentFund.
Chargesfor ServicesandPermitsandLicenses
Revenuesin the ‘Chargesfor Services’ andthe ‘PermitsandLicenses’ categoriesareanticipated to be $36.9 million and $11.5 million, respectively, in FY2025. Together, theseamountstotal
5.88%
5.00%
4.17%
4.54%
Cityof PaloAlto
2.71%
1.80% 1.93% 1.66%
2.20%
3.65%
1.41%
0.81% 0.25%
2 Yr. Treasury
4.39%
4.92%
4.43%4.39%
4.98%
1.10%
5-Yr. Treasury
2.88%
2.47%
0.27%
3.23%
4.00%
4.31%
1.44%
5.25%
0.23%
LAIF
1.29%
2.63%
3.42%
0.0 0.5
1.0 1.5
2.0 2.5
3.0 3.5
4.0 4.5
5.0 0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Int. Earnings (Millions)Yields
FiscalYearQuarters
InvestmentPortfolio YieldsandInterestEarnings
Attachment I - General Fund Long Range Financial Forecast Staff Report
48.4 million and are approximately $3.1 million higher than the FY2024AdoptedBudgetof
45.3 million. Increasesin thesecategoriesare primarily due to revenueadjustmentsfor the agreementwith Stanfordto provideFireandDispatchservicesandadjustmentsto development centerrevenues.
Therevenueestimatesin thesecategoriesare basedon current activity levels. Theserevenue sourcesareprimarilydrivenby the costof staffto provideservicesto the community. Therefore, as part of the FY 2025 Municipal Fee process, staff will evaluate and bring forward recommendationsto align fees with target cost recoverylevels to cover generalsalaryand benefitsincreasesandCPItrends. Oneexceptionto this is DevelopmentServicesactivitiesand relatedrevenue. DevelopmentServicesfeesarefully cost-recoverable, andthe departmenthas beenmodeledascost-neutralin this forecast. Staffwill analyzemunicipalfeerevenueactivityas part of the FY2025Budgetdevelopmentprocessandbringforward adjustmentsasappropriate.
Chargesfor Service - StanfordFireandDispatchServices: TheCityandStanfordhavetwo separate agreementsfor the provisionof fire responseandemergencydispatchservices. Thefire response servicesagreementbecameeffectivein July2018andoutlinesserviceleveltermsandanewcost allocationmethodologyasthe baselinefor agreementcosts. Theterm extendedthrough June 2023, with annual renewalsin effect through June2028 unlessotherwise terminated. The agreementincludesa staffingdeploymentmodel for suppressionand medicalservices, which wasapprovedby the CityCouncilin October2017anddeployedin January2018. Thisforecast alignswith the new staffing model and, in accordancewith the agreement, adjustmentsto revenuefrom Stanfordhave been alignedwith the year-over-year changesto the operating expensesin the Fire Departmentover the forecastperiod. Similarly, changesto the revenue receivedfor dispatchingserviceshavebeenalignedwith the operatingexpensesin the Technical ServicesDivision of the Police Department where the costs to provide these servicesare budgeted. For fire and policerevenue, additionaladjustmentsmay be applicableif new labor agreementsare negotiatedfor the forecastperiod. Revenuesfor theseservicesare basedon current anticipatedchangesin salaryand benefitscostswithin the FireDepartmentand Police DepartmentDispatchUnit.
Chargesto OtherFunds
Themainsourceof revenuesin this categoryisGeneralFundadministrativecostallocationplan chargesto the Enterpriseand Internal ServiceFunds. Internal support departmentssuch as AdministrativeServices, HumanResources, and CouncilAppointedOfficesprovide servicesto Enterpriseand Internal ServiceFunds. Thecostsfor theseservicesare recoveredthrough the administrativecostallocationplancharges. TheFY2025estimatefor Chargesto OtherFundsof
13.2 million reflectsa decreaseof $2.3 million or 15.0% from the FY2024Adoptedamountof
15.9million. Thisisprimarilyattributedto adjustingthe proportionof the allocatedchargessplit betweenthe GeneralFundand other fundsto accountfor largecapitalprojects, mainlyin the enterprisefunds. Thisadjustmentwill accountfor the portion of projectsthat aresupportedby internal supportdepartments, but excludethe largerconstructioncostportions to better align the costplanmethodology.
Attachment I - General Fund Long Range Financial Forecast Staff Report OperatingTransfers-in
OperatingTransfers-in materializeas expensesin other funds throughout the City and as a revenuein the GeneralFund. Thisbudgetcategoryincludesrepaymentof a previousloanfrom the GeneralFundto the Airport Fund, fundingfor policepatrol in the downtown area, and the equitytransferfrom the ElectricandGasfunds. Overall, the OperatingTransfers-in areestimated to be $26.1 million, a $2.2 million increasefrom the FY2024level of $23.9 million due to the increasefrom the GasFund.
In accordancewith the methodologyapprovedby the CityCouncilin June2009, the electricto generalfund equitytransferhasbeencalculatedby applyinga rate of return on the capitalasset baseof the ElectricFund. Thisrate of return is basedon PG&E’s rate of return on equity as approvedby the CaliforniaPublicUtilities Commission (CPUC). Thegasto generalfund equity transfer calculationwas updatedbasedon the passageof MeasureL on the November2022 ballot. Asoutlinedin the ballot measurelanguage, the gasto generalfundequitytransfercanbe up to 18% of annualgrossgasretail revenue. In orderto maintainsteadygasrateprojectionsand avoida spikein the gasequitytransfer, this LRFFincreasesthe transferto 16% in FY2025andFY 2026andup to 18% by FY2027throughFY2034.
OtherRevenueandRevenuefrom OtherAgencies
Fundingin thesetwo categoriesisexpectedto be $3.8 million in FY2025, whichisslightlydown by $0.2 million from $4.0 million in FY2024. Thesetwo revenuecategoriesmainlyaccountfor grantsor reimbursementsfrom the federaland state governmentsor other localjurisdictions.
Other Revenueincreasesslightlyby $0.1 million in FY2025asa result of limited time funding from LifeMovesfor reimbursementrelated to the HomekeyFacility; however, this funding is removedin FY2026throughthe endof the LRFFperiod. Revenuefrom OtherAgenciesdecreases by $0.3 million in FY2025andthen by another $0.8 million in FY2026, becauseFY2025is the last year of the Staffingfor AdequateFire and EmergencyResponse (SAFER) grant funding awardedto the Cityin FY2022.
Attachment I - General Fund Long Range Financial Forecast Staff Report
ATTACHMENTD
GeneralFundBaseCaseExpenseAssumptions
SalaryandBenefits
Consistentwith prior years, the FY2025salariesandbenefitscostsrepresentapproximately62% of the GeneralFundbudget expenditures. Salaryand Benefitsare projected to increase $7.1 million or 4.3% from the prior year, from $166.9 million to $174.0 million. Discussedin the followingsections, this isprimarilyattributableto increasesin salaries ($2.9million or 3.1%) and pension costs ($4.5 million or 10.2%). Theseincreasesare partially offset by reductions in departmentallocationsfor Workers’ Compensationexpense (-$0.3million or -5.3%).
Salary
Consistentwith the City’ssalarybudgetmethodologyfor recentbudgets, positionsarebudgeted at the actual rate of pay of employeesincludingbenefit selectionsas of Fall 2023. Then, by position, salarycostsare updatedin accordancewith applicableMemorandumof Agreements MOA’s) betweenthe Cityandits laborgroupsandthe ManagementandProfessionalPersonnel andCouncilAppointeesCompensationPlan(s).
In FY2023, the CityCouncilengagedwith laborgroupsto negotiatenew agreementsfor wages, benefits, and other terms and conditionsof employment. Theseagreementsextend through January2025 (SEIU) andJune2025 (allotherlaborgroups) for full-time staffingandincludetarget marketadjustmentsto alignsalarieswith benchmarkstudies, Costof LivingAdjustments (COLAs), andother benefitssuchasa flexiblecompensationbenefit.
The forecastassumesstep increasesfor employeesin applicablepositions, includingService EmployeesInternationalUnion (SEIU), InternationalAssociationof FireFighters (IAFF), andPalo Alto PeaceOfficers’ Association (PAPOA), andmerit increasesfor ManagementandProfessional employeesincludingUtilitiesManagement & ProfessionalAssociationof PaloAlto (UMPAPA). A generalwageadjustmentof 2% is includedfor all employeesstartingin either January2025or July2025for all yearsof the forecastsinceno MOA’s would be in effect at that time. Thisis consistentwith prior Councildirection in previousLRFFreporting to usethe 2% increaseas a forecastingassumption, not as a commitment to future negotiations. The FY2025 Budget includesMOAterms for a 4% COLAadjustment (all labor groups), 2% marketalignment (Safety only), and increasein flexible compensationpaymentfrom $100 to $200 per month (all labor groupsexceptSEIU).
A reserveis includedfor potential changesto future labor costsincludingchangesin vacancy rates, labor and benefit rate variability, and inflation assumptions. Offering competitive compensationplans alignswith industry standardsfor attracting and retaining a skilled and motivated workforceand better positionsthe Cityof PaloAlto asan employerof choice. This levelof fundingdoesnot reflectacommitmentto future negotiationsandmaydiffer from actual outcomes. Negotiationsfor new labor agreementsare anticipatedto occurin the next yearfor Attachment I - General Fund Long Range Financial Forecast Staff Report newtermsbeginningin FY2025-26. Analternativescenarioisincludedin thisreport for increases beyondthe assumptionsdescribedabove.
Additionally, the budgetincludesvacancysavingsthat are expectedto materializeaspositions arevacatedandnewemployeesarehiredthroughthe normalcourseof business. Asof the timing of thisLRFF, the vacancyrateisapproximately13.5% in the GeneralFund, excludingpublicsafety.
Thispreliminaryvacancyrate ispoint in time anddoesnot consideractionscurrentlyin progress for recruitments, promotions, and other staffing shifts. Vacancysavingsfrom public safety positionsaretypicallyexhaustedby usessuchasbackfill, hire aheadprograms, andovertime. To better align with the status of vacancies, this forecast increasesthe vacancyestimate from previously assumedrate of 3% to 5% in all years. This results in additional savingsof approximately $2.5millionannually, or $5-6milliontotal eachyear. Consistentwith pastpractice, the vacancyassumptionislowerthanthe actualvacancyrateto allowdepartmentaluseof those savingsfor other staffingstrategies, suchasfilling staffinggapsby contractingfor professional services, hiring aheadto allow overlap and smooth transitions, piloting new technologiesto increaseefficiencyin the absenceof staff, andsupportinga summerinternshipprogram.
Benefits
Pension: Pensionsare budgetedbasedon CalPERSdeterminedrates as of the June30, 2022 valuationfor the City’s miscellaneousand safetyplans (CMR2308-18601). CalPERSdetermines the City’s total contributionsfor a givenFiscalYearasthe sumof two factors: NormalCost (NC) andUnfundedAccruedLiability (UAL). Togetherthe NCandthe UALexpressedasa percentage of payrollisthe ‘blendedrate’ andisusedto representtotal costsin the discussionbelow.
TheNormalCost (NC) isexpressedasa percentageof payrolland is paid aspart of the payroll reporting processof active employees. Commonlyreferred to as the ‘pay-go’ cost, the NCis variableand increasesor decreasesdirectly with the salarylevelsof the City. It representsthe necessaryfundingfor the Cityto payfor employeespresumingthat CalPERSmeetsthe current setof assumptions.
In a yearthat CalPERSdoesnot meet assumptions, due to plan changes, assumptionchanges, methodchanges, or planexperience (includinginvestmentgains/losses), there is anincreaseor decreaseto the UnfundedAccruedLiability (UAL). Commonlyreferred to asthe ‘catch-up’ cost, the UALisexpressedasa dollaramountandiscalculatedoveranamortizedperiodwith defined annualpayments, similar to a mortgage. The contributionsfor UALare billed as a flat dollar amount asopposedto a percentageof payrolldue to potential fundingissuesthat couldarise from adecliningpayrollor numberof activemembersin the plan. However, CalPERSprovidesan estimatedpercentageof payrollfor UALto allowa consistentcomparisonof total costs. 1 FinanceCommittee, September19, 2023, CMR2308-1860:
https:// cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13152 Attachment I - General Fund Long Range Financial Forecast Staff Report In the miscellaneousplan, total costsareprojectedto increasefrom the current44.8% in FY2024 to 47.4% in FY2025. In the safetyplan, total costsare projectedto increasefrom the current
74.0% in FY2024to 83.1% in FY2025. Theseratesdo not considerthe employeepick-up of the employershare; that pick-up materializesassavingsin the City’s pensioncosts. Consistentwith applicableMOAs, the LRFFpresumesthat the miscellaneousplan will pick up 1 to 2% of the employerpensioncostandthat safetyplanmemberswill pickup 3 to 4%.
TheFY2024and FY2025budgetsare impactedby significantswingsin investmentgainsand lossesearnedby CalPERSin the periodsendingJune30, 2021and 2022. TheFY2024budget reflectssignificantinvestmentreturns of +21.3% (+6.8% target) and changesto economicand demographicassumptionsresultingfrom the CalPERSAssetLiabilityManagement (ALM) process and ExperienceStudycompletedin November2021. As part of the ALM, the CalPERSboard approvedareductionto thediscountrate (from 7.0to 6.8%), revisedactuarialassumptions (price inflation from 2.5 to 2.3%), anda newassetallocationtargeting1/3 investmentin privateassets, 5% leverage, andreducedpublicequityexposure. FY2025in the LRFFreflectsaninvestmentloss of -6.1% (+6.8% target), nearlyoffsetting the positiveimpactsexperiencedin the prior year’s investmentgains.
Sincethe issuanceof the currentvaluation, CalPERSannounceda preliminaryinvestmentreturn of +5.8% (+6.8% target) for the period endingJune30, 20232. Theseresultswill be includedin the CalPERSvaluationreport issuedin Fall2024to inform the developmentof the 2026-2035 LRFFandFY2026budget. Theresultingliability from investmentreturnsthat did not meettarget levelswill be amortizedover 20 yearswith a 5-yearramp-up period. To inform this LRFF, staff usedthe CalPERSPensionOutlookToolto calculatethe estimatedimpacts, resultingin additional costsof $0.2 million ($0.1 million in the GeneralFund) in FY2026, andincreasingto $1.2 million
0.5million in the GeneralFund) at the peakof the 5-yearrampin FY2030.
In the GeneralFund, it isanticipatedthe Citywill spenda total of $49.0 million on total pension costsin FY2025, includingboth CalPERScontributionsand supplementalPensionTrust Fund contributions. Thisisapproximately $4.6 million higherthanthe prior yearcostsof $44.4 million, or a 10.2% increase. Theseexpensesrepresentapproximately17% of the GeneralFund’s total expenses.
TABLE1: CalPERS’ ProjectedFY2024-2034BlendedRetirementRates percentageof payroll)
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
Miscellaneous 44.8 47.4 45.5 42. 0 42.4 44.6 44.1 43.4 39.7 38.1 35.2 Safety 74.0 83.1 84.5 85. 7 86.2 89.5 88.5 86.8 82.6 79.9 74.8 2 CalPERSReportsPreliminary5.8% InvestmentReturnfor 2022-23FiscalYear:
https:// www.calpers.ca.gov/page/newsroom/calpers-news/2023/calpers-preliminary-investment-return-fiscal- year-2022-23?utm_source=esubscriptions&utm_medium=email&utm_campaign=CalPERS-News Attachment I - General Fund Long Range Financial Forecast Staff Report RetireeHealthcare/OtherPost-EmploymentBenefits (OPEB): RetireeMedicalisbasedonthe June 30, 2021 actuarialstudy preparedby Foster & Foster (previouslyBartel Associates), which is completedeverytwo years. Themost recent studywascompletedin June2022to inform the developmentof the FY2023and FY2024operatingbudgets (CMR14112asamendedby CMR 145023). Anupdatedvaluationasof June30, 2023to inform FY2025andFY2026isexpectedto be transmitted in June2024. Consistentwith City Councildirection and the RetireeBenefit FundingPolicy, this forecastcontinuesthe practiceto budgetthe full paymentof the Actuarial DeterminedContribution (ADC) for retiree healthcareandusesalternativeassumptions, suchas a more conservative5.75% discountrate (6.25% assumption), to transmit amountsabovethe recommendedpaymentasan additionaldiscretionarypayment (“prefunding”) to the California Employers’ RetireeBenefitTrust (CERBT) Fund.
CalPERSblendsactive employeeswith pre-Medicareretirees and chargesthe samemedical premium, even though youngeremployeeson averageconsumelesshealthcare. The higher premium to younger employeesthereby subsidizesolder employeesand retirees who, on average, havehigherclaimsandpremiums. TheLRFFestimates $16.9million ($10.8 millionin the GeneralFund) in FY2025for ADC, an approximate $0.5 million or 2.9% increasefrom FY2024 levelsof $16.4 million ($10.5 million in the GeneralFund). Theimpliedsubsidyis $3.3million in FY2025andeffectivelylowersthe fundingnecessaryto meetthe ADC.
TABLE2: RetireeMedicalGeneralFundContributions
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
10.5 $ 10.8 $ 11.1 $ 11.4 $ 11.8 $ 12.1 $ 12.5 $ 12.9 $ 13.4 $ 13.8 $ 14.2 RetireeBenefitFundingPolicy (formerly “PensionFundingPolicy”): TheCity hastaken several proactivestepsto addressrisingpensioncostsandlong-term liabilities, includingcost-sharingin labor agreements, establishingan irrevocableSection115 PensionTrust (“PensionTrust”) and CaliforniaEmployers’ RetireeBenefit Trust (CERBT) Fund, and adopting a policy that guides financialplanningof thesebenefits (CMR11722asmodifiedby 2212-05134).
TheCityinitially contributedto the PensionTrustin FY2017on an ad-hocbasis, usingone-time savingsor excessrevenues. Beginningin FY2019, the CityCouncildirectedstaff to usea more conservativediscountrate as comparedto CalPERSfor the Normal Cost (NC) portion of the 3 FinanceCommittee, June7, 2023, CMR14112asamendedby CMR14502:
https:// www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/ 20220607/20220607pfcsm-final.pdf
4 CityCouncil, November30, 2020, CMR11722:
https:// www.cityofpaloalto.org/files/assets/public/agendasminutes-reports/ reports/city-manager-reports- cmrs/year-archive/2020-2/id-11722.pdf
CityCouncil, February6, 2023, CMR2212-0513:
https:// cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=1067 Attachment I - General Fund Long Range Financial Forecast Staff Report payment and transferring the supplemental funding beyond CalPERSrequired employer contributionsto the PensionTrust. Thispracticewas reinforcedwith Councilapprovalof the RetireeBenefitFundingPolicy, andasof FY2024the City’sNCdiscountrateis5.3% ascompared to CalPERS6.8%. Additionally, one-time contributionscontinueto be madeeachyearif excess revenuesor unspentsavingsareavailable, subjectto CityCouncilapproval. Aspartof policygoals, the Cityseeksto reacha 90% fundedstatusby FY2036.
Everyfour years, the City’s RetireeBenefit FundingPolicyrequiresthat staff consult with an actuaryto inform the CityCouncilof progressthe Cityhasmadetowardsachievinga90% funded statusgoaland assessand respondto changesimpactingthe City’s retiree benefit plans. This comprehensivereview wasmost recentlycompletedin FY2023and resultedin severalpolicy revisions, mostnotablyreducingthe discountrate usedto calculatesupplementalcontributions to the PensionTrustfrom 6.2% to 5.3% andextendingactuaryreportingfrom 3to 4 yearsto align with the CalPERSALMStudy. Additionally, the title of the policy wasrevisedfrom the Pension Policy to the Retiree Benefit Policy to recognizeactions approved by the City Council to proactivelyplanfor retiree healthcareplansin a similarmannerto pensions, includingthe useof a lower 5.75% discountrate (CMR2212-05135). Themost recent actuaryanalysisprojectsthat the Citywill meet a 90% fundedgoalfor pensionplansby FY2034 (miscellaneousplan) and FY 2036-37 (safetyplan); the City’s practiceof transmittingexcessone-time savingswill helpreach thesegoalssooner.
In this forecast, approximately $13.8 million ($8.3million in the GeneralFund) in supplemental contributionsto the City’sPensionTrustisassumedin FY2025. Thisreflectsa $0.5 million ($0.4 million in the GeneralFund) increaseover the prior year, primarily due to the addition of new staff. ThroughFY2024, a total of $67.6 million ($44.6 million in the GeneralFund) in principal contributionsare expectedto be madeto the PensionTrustfor pensionbenefits. ThroughFY 2024, it isexpectedthat $11.1 million in principalcontributionswill be madeto the CERBTFund for retiree healthcarebenefits.
Healthcare: Consistentwith the most recent labor agreementsbetween the City and its bargainingunits, the City’scontributionamountstowardsmedicalcostsfor employeesarebased on a flat rate contributionfrom the City, with the employeecontributingtowardsthe remaining medicalplanpremium. Likesalaries, healthcarecostsareupdatedin accordancewith applicable Memorandumof Agreements (MOA) betweenthe Cityandits laborgroupsandthe Management andProfessionalPersonnelandCouncilAppointeesCompensationPlan(s).
Workers’ Compensation: The budget appropriation for workers' compensationincludes an estimatefor claimsincurredandreservesfor currentfilingsat an85% confidencelevel, basedon actuarialstudiescompletedby Bickmore. In FY2023, programexpendituresdecreasedby $3.0 million or 50%, from $6.0 million to $3.0 million from the prior year. Thelower yearover year claimsisreflectiveof delaysfor claimsincurredbut not yet reported, andtrend of decliningtotal 5 CityCouncil, February6,2023, CMR2212-0513:
https:// cityofpaloalto.primegov.com/portal/viewer?id=6143&type=3 Attachment I - General Fund Long Range Financial Forecast Staff Report claims, alongwith risingcost on a per claimbasis, and reductionof claimswith high costsand severity. This forecast uses savingsaccumulated in fund balance to reduce department allocationsby $0.4 million ($0.3 million in the GeneralFund) in FY2025andmaintainsallocations at the samelevel through FY2027. Actuarialestimatescompletedin August2022informed FY 2024budgetlevelsof $7.3 million (approximately65% in the GeneralFund). More recentactuary estimatescompletedin August2023project expenselevelsconsistentwith current budgeted levels. Staffwill continueto monitor expendituresin the fund andbringforward adjustmentsas necessary. Claimestimatesandreservesfor FY2025are $7.6 million, representinga $0.3million or 4.0% increasefrom the FY2024 Adopted Budget. Estimatesfor workers' compensation increasein the forecastat ratesconsistentwith generalCPIincreases.
ContractServices
Thisforecastassumescontractservicesof $29.3 million in FY2025, a 2.0% increasefrom the FY 2024 Adopted budget of $28.8 million. This increaseis driven primarily by new negotiated contractsfor citywide servicessuchascustodial, landscaping, and managementof the animal shelter partially offset by the removalof one-time costsadoptedin FY2024for S/CAPstudies and Plan CheckReview. The increaseis also supported by a general4.0% CPIcost increase through the ten-year forecast period on smaller contractsthat do not have defined annual increases, basedon a reviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It isexpectedthat the estimatedCPI increaseswill be substitutedwith departmentbasebudgetrequeststo adjustcontractfunding needsaspart of the FY2025budgetprocess.
ContractServices - CommittedAdditions
The Committed Additions included in this forecast account for anticipated operating and maintenance (O&M) costsin the GeneralFundfor capitalprojectsanticipatedto comeonline within the ten-year forecastperiod. Costsfor projectsthat cameonline in FY2024havebeen annualizedinto the ongoingGeneralFundoperatingbudgetaspart of the LRFF. Thepreliminary total estimateis $44,500 for costsassociatedwith the following projectsanticipatedto come online in FY2025: DogParkInstallation (PG-18001), LibraryAutomatedMaterialsHandling (LB- 21000), andParkRestroomInstallation (PG-19000). Also, estimatedoperatingimpactsfrom the FireStation4 (PE-18004) project are includedstarting in FY2026. Additionalcost increasesof
4.0% annuallyareincludedthroughoutthe ten-yearforecastbasedon areviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to- Augustperiod. Timingandanalysisof the fundingneedsfor theseprojectswill be evaluatedas part of the FY2025Budgetprocessanddevelopmentof the 2025-2029CapitalImprovementPlan CIP).
TABLE3: FY2024 – FY2033CommittedAdditions (Millions)
FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032 FY2033 FY2034
0.04 $ 0.07 $ 0.07 $ 0.08 $ 0.09 $ 0.10 $ 0.11 $ 0.12 $ 0.13 $ 0.14 Attachment I - General Fund Long Range Financial Forecast Staff Report SuppliesandMaterials
The FY2024 Adopted Budget for the GeneralFund included $3.3 million for Suppliesand Materials, whichisanticipatedto increaseby a 4.0% CPIcostincreasein FY2025to $3.5 million basedon a review of the changesin the CaliforniaConsumerPrice Index (CCPI) in the San FranciscoBayAreafrom the August-to-Augustperiod. Thisannualincreaseiscontinuedthrough the ten-yearforecastperiod. It is expectedthat the estimatedCPIincreaseswill be substituted with departmentbasebudgetrequeststo adjustfundingfor suppliesandmaterialsaspart of the FY2025budgetprocess.
GeneralExpense
Thiscategoryincludescostsfor travelandmeetings, telephoneandnon-cityutilities, contingency accountsandreserves, bankcardservicecharges, andsubsidiesandgrantsprovidedthroughthe HumanServicesResourceAllocationProgram (HSRAP). TheFY2024AdoptedBudgetof $19.1 million isexpectedto decreaseto $9.3 million in FY2025, primarilydueto the anticipateduseof the BudgetUncertaintyReserveto balancethe FY2025budget. This $14.0 million reservewas partiallyusedto balancethe FY2024AdoptedBudget ($3.9million), leavingapproximately $10.1 million to fund one-time needsin the FY2024Mid-YearBudgetReview ($1.1 million) and an anticipatedgapin FY2025 ($9.0 million). Thereductionis partially offset by a 4.0% annualCPI cost increaseon smalleritems that do not havea set annualbudget, basedon a reviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It isexpectedthat the estimatedCPIincreaseswill besubstitutedwith departmentbasebudgetrequeststo adjustfundingfor generalexpenseitemsaspart of the FY 2025budgetprocess.
GeneralExpense – ProjectHomekey: On September27, 2021the CityCouncildirectedstaff to applyfor ProjectHomekeyfundingin conjunctionwith LifeMovesto build anemergencyshelter at the former Los Altos Treatment Plant (LATP) site (CMR135956). This project will deploy modularhousingto provideinterim housingopportunitiesfor homelessindividualsandfamilies in the City of Palo Alto. Project Homekeyis a program, funded by the State of California Departmentof Housingand CommunityDevelopment, intended to provide grant funding and facilitateapartnershipwith the Stateto quicklyacquire, rehabilitate, or masterleasea varietyof housingtypes. Oncedeveloped, theseprojectsprovideinterim or permanenthousingoptionsfor personsexperiencinghomelessnessandwho arealsoat riskof healthconcerns. Thesite will be operatedfor at leastfifteen yearsasinterim housingper the program’sdurationalrequirement.
Thisprojectwill utilizeacombinationof fundingsourcesincludingthe ProjectHomekeyProgram for capital expensesand donations, grant funds, and City support for ongoing operations expenses. This LRFFincludesthe City’s committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2025 through FY 2031). This funding was previously programmedfrom FY2023throughFY2029; however, the first two yearsof operatingfunding was redirectedto the HomekeyFacilitiescapital project (PE-24005) in order to completethe 6 CityCouncil, September27,2021, CMR13595: https:// www.cityofpaloalto.org/files/assets/public/agendas- minutes-reports/agendas-minutes/city-council-agendas-minutes/2021/09-september/20210927/210927accsm- amended-final.pdf
Attachment I - General Fund Long Range Financial Forecast Staff Report housinginfrastructure. ThisLRFFmaintainsthe original $7.0million commitmentfrom the City.
Someoperatingfundingsupportisexpectedfrom ProjectHomekeyaswellastheCountyof Santa Clara. Any remaining gapsin funding will need to be closedby fundraising, operating cost containmentstrategies, and/or grantfunds.
GeneralExpense - CubberleyLease: In FY2015, the City and PaloAlto Unified SchoolDistrict PAUSD) agreedto a five–yearextensionof the Cubberleyleasefrom January2015to December 2019. In October2019, the City Councildirected staff to negotiatewith PAUSDto extendthe lease agreement an additional five years, through December2024 (CMR 107307). A new Cubberleyleasewas approvedby the City Councilin June2020 (CMR114608) for a smaller portion of the Cubberleysitewith a correspondinglylower baserent payment (CMR113869). As part of the original lease agreement, the City Councilapproved creation of the Cubberley InfrastructureImprovementsFundsupportedbyanannual $1.9milliontransferfrom the General Fund, which is classifiedas an OperatingTransfer-Out and discussedin further detail in that sectionof this report below. With the CubberleyInfrastructurefundssetaside, the annualbase rent for the Cubberleypremisesis $2.6 million plusan additional $0.8 million for child daycare sitesandutilities. A pendingfactor at the Cubberleysite that is part of ongoingdiscussions, but not includedin the LRFFestimates, is a proposalto leasethe Cubberleysite from PAUSD (CMR 2308-194910) in order to facilitatethe developmentof a new communitycenterfacility.
RentsandLeases
TheRentsand Leasesexpensecategoryfor FY2025is estimatedto increasefrom the FY2024 AdoptedBudgetlevelbyapproximately2.7% to $1.4 million. Thisisbasedon currentleaseterms that includepreviouslynegotiatedleaseincreasesThiscategoryincludesthe leaseagreementfor DevelopmentServicesstaff at locationsoutsideCityHall (285Hamiltonand526Bryant) aswell asleasewith Stanfordfor ElCaminoPark. A new leaseagreementwasexecutedin December 2020for the DevelopmentServicesofficelocationat 526BryantStreet, limiting the spaceto the basementlevel (CMR1142611). Theleasewasamendedin September2022to extendthe term initially for 12 months with the right to automaticallyextend for four successive12-month periods, potentiallythroughJanuary31, 2028 (CMR14713). In June2021, the Cityenteredinto a seventhamendmentfor theDevelopmentServicesofficeleaseat 285HamiltonAvenueto extend the term from February 2022 to January2025 (CMR 1233412). As expensesfor rent for DevelopmentServicesareadjusted, acorrespondingrevenueadjustmentwill bemadeto ensure DevelopmentServicesmaintainscostrecoverylevels.
7 CityCouncil, October7, 2019, CMR10730: https:// www.cityofpaloalto.org/civicax/filebank/documents/73558 8 CityCouncil, June23, 2020, CMR11460: http:// cityofpaloalto.org/civicax/filebank/documents/77365 9 CityCouncil, June15, 2020, CMR11386: http:// cityofpaloalto.org/civicax/filebank/documents/77073 10 CityCouncil, October16, 2023, CMR2308-1949:
https:// cityofpaloalto.primegov.com/portal/viewer?id=9323&type=3 11 CityCouncil, December14, 2020, CMR11426: https:// www.cityofpaloalto.org/files/assets/public/agendas- minutes-reports/ reports/city-manager-reports-cmrs/year-archive/2020-2/id-11426.pdf?t=59979.32 12 CityCouncil, June21, 2021, CMR12334: https:// www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/2021/id-12334.pdf Attachment I - General Fund Long Range Financial Forecast Staff Report FacilitiesandEquipment
Along with funding for various equipment needsacrossdepartments, this budget category includes subscription payments for equipment like public safety radios. The Facilitiesand Equipmentexpensecategoryisexpectedto increasefrom the FY2024Adoptedlevelof $460,000 to $480,000due to a 4.0% CPIcostincreasebasedon a reviewof the changesin the California ConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It is expectedthat the estimatedCPIincreaseswill be substitutedwith departmentbasebudget requeststo adjustfundingfor equipmentneedsaspart of the FY2025budgetprocess.
AllocatedCharges
AllocatedChargesrepresentexpenseallocationsby the City’s Enterpriseand Internal Service Fundsfor servicesandproductstheyprovideto other departments. TheFY2024AdoptedBudget for the GeneralFundincluded $25.8 million for theseexpenses, includingutilities usage, general liability insurance, technologycosts, vehicleequipmentmaintenanceandreplacementcosts, and other chargesfor servicesprovidedby other Citydepartmentsandfunds. TheFY2025allocated chargesin the LRFFupdatethe revenuesandexpensesfor thesevariousallocationsbasedon the informationavailableat the time of the LRFFdevelopment. FY2025isanticipatedto experience anincreaseof 7.2% to atotal of $27.7 million. Thisincreaseisprimarilydueto anticipatedhigher costsassociatedwith technologyservicesandutilities for Cityfacilitiessuchaswater, electricity, andgas.
OperatingTransfersOut
OperatingTransfersOut include transfersfrom the GeneralFundto Debt ServiceFunds, the TechnologyFund, and variousother funds but excludestransfersto the CapitalImprovement Fund, whicharedetailedin the followingTransferto Infrastructuresection. TheFY2024Adopted BudgetincludedOperatingTransfersOutof $5.0million. In FY2025, OperatingTransfersOutare anticipatedto increaseto $6.5 milliondueto anticipatedfundingneedsin the UniversityAvenue, CaliforniaAvenue, and ResidentialPermit ParkingFunds. One-time loans of $ 450,000 and 50,000 to the CaliforniaAvenueand ResidentialPermit ParkingFunds, respectively, were approvedin FY2024; however, a total of $2.0 million acrossall three fundsis factoredinto this LRFF. Staffwill continueevaluatingthesefundsaspart of the FY2025budgetdevelopmentand will bringforward recommendationsasneededto keepthe parkingpermit fundssolvent.
Transferto Infrastructure
Recoveryfrom the COVID-19 pandemicis reflectedin improvedrevenuelevelsin the FY2024 budget compared to the FY 2023 budget. The total General Fund transfer to the Capital Improvement Fund budgeted in FY 2024 is $24.7 million compared to the $ 22.9 million transferred in FY2023. This is comprisedof a $12.3 million basetransfer includinginterest earnings, and $12.4 million from TOTrevenuegeneratedthroughvoter-approvedrate increases andnew hotelsthat is dedicatedto the CapitalImprovementFundto supportthe 2014Council InfrastructurePlan, consistentwith CityCouncildirection. Estimatedtransfersfrom TOTrevenues in FY2025arecurrentlyprojectedto increaseto $13.0 million andthe basetransferto increase to $15.2 million for a total $28.2 million transferto the CapitalImprovementFund. Thisforecast Attachment I - General Fund Long Range Financial Forecast Staff Report continuesthegoalestablishedaspartof the 2022-2026CapitalImprovementPlan (CIP) to restore the baseportion of this transferto pre-pandemiclevelsby FY2026. Thisbudgetcategoryalso includesthe separate $1.9 million transfer to the CubberleyPropertyInfrastructureFund. This transfer to the CubberleyPropertyInfrastructureFundsupportsfacility systemsmaintenance needsat the CubberleyCommunityCenterfacility as well as capital improvementprojectsto maintainandupkeepthe facility.
Attachment I - General Fund Long Range Financial Forecast Staff Report
ATTACHMENT E
Human Services Resource Alloca on Process HSRAP) Funding Referral As part of the FY 2024 Adopted Budget, the Council directed sta to follow up with addi onal work to, Consider pegging HSRAP budget alloca ons to a benchmark, such as percentage of General Fund budgeted expenditures.” Sta researched previous discussion of this item and found a reference of a recommenda on for increasing HSRAP funding as part of a Policy and Services mee ng on November 29, 2016 CMR 72891). There were four op ons for augmen ng the HSRAP funding, but ul mately none of them were approved for recommenda on to the Council. The status quo of increasing the funding by the Consumer Price Index CPI) as funding was available in the General Fund con nued.
Sta also compiled historical data back to FY 2001 to determine the percentage of funding for human services programs compared to the General Fund expenditures budget in each year, and what amount of funding would be needed if funding for human services programs was pegged to 1% of the General Fund expenditures budget in the future using the base case LRFF numbers.
Prior to FY 2016 funding for Avenidas and Palo Alto Community Childcare PACCC) was determined as part of the HSRAP process; however, star ng in FY 2016 these two programs were funded through a direct funding alloca on and separated from the HSRAP process. Table 1 below shows the total funding for human services programs with funding projec ons through FY 2027, the rst three years of the LRFF.
Table 1
1 November 29, 2016 Policy and Services CMR 7289:
h ps:// www. cityofpaloalto. org/ les/ assets/ public/ v/ 1/ agendas minutes reports/ reports/ city manager reports cmrs/ year archive/ 2016/ id 7289 hsrap. pdf
Fiscal
Year
HSRAP
Funding
Avenidas
PACCC
Funding
Total Human
Services
Funding
General Fund
Adopted
Budget
of GF Budget
HSRAP Total Human
Services Funding
FY 2001 386, 245 845, 716 1, 231, 961 108,778, 000 0. 36% 1. 13% FY 2002 433, 254 871, 088 1, 304, 342 125,766, 000 0. 34% 1. 04% FY 2003 444, 862 897, 221 1, 342, 083 125,908, 000 0. 35% 1. 07% FY 2004 335, 835 870, 220 1, 206, 055 116,686, 000 0. 29% 1. 03% FY 2005 375, 835 870, 220 1, 246, 055 116,015, 000 0. 32% 1. 07% FY 2006 331, 453 845, 936 1, 177, 389 120,692, 000 0. 27% 0. 98% FY 2007 331, 453 845, 936 1, 177, 389 125,074, 000 0. 27% 0. 94% Attachment I - General Fund Long Range Financial Forecast Staff Report FY 2016 was the rst year Avenidas and Palo Alto Community Childcare PACCC) were funded through separate human service contracts
For HSRAP funding, the average percentage of funding compared to the General Fund budgeted expenditures is 0. 26% from FY 2001 through FY 2024. Comparing total funding for human services programs from FY 2001 through FY 2024, including HSRAP, Avenidas, and PACCC, to the General Fund budgeted expenditures shows that the percentage has ranged from over 1% down to 0.68% with an average of 0.83%.
For FY 2025 through FY 2027, numbers from the base case LRFF indicate that human services funding will be approximately 0. 74% of the General Fund budgeted expenditures. To increase human services funding to 1% of the General Fund budgeted expenditures in the future, an addi onal 0. 8 million would need to be allocated for human services programs annually. This would increase the current projected decits in FY 2025 through FY 2027 to 6. 8 million, 6.2 million, and 4. 2 million respec vely.
Fiscal
Year
HSRAP
Funding
Avenidas
PACCC
Funding
Total Human
Services
Funding
General Fund
Adopted
Budget
of GF Budget
HSRAP
Total Human
Services Funding
FY 2008 300, 453 860, 941 1, 161, 394 139,185, 000 0. 22% 0. 83% FY 2009 300, 453 860, 941 1, 161, 394 145,308, 000 0. 21% 0. 80% FY 2010 285, 430 817, 894 1, 103, 324 142,089, 000 0. 20% 0. 78% FY 2011 285, 430 817, 894 1, 103, 324 146,711, 000 0. 19% 0. 75% FY 2012 300, 737 809, 715 1, 110, 452 146,360, 000 0. 21% 0. 76% FY 2013 300, 737 809, 715 1, 110, 452 152,800, 000 0. 20% 0. 73% FY 2014 348, 163 881, 950 1, 230, 113 159,700, 000 0. 22% 0. 77% FY 2015 425, 594 890, 583 1, 316, 177 171,100, 000 0. 25% 0. 77% FY 2016* 436, 660 913, 738 1, 350, 398 185,700, 000 0. 24% 0. 73% FY 2017 448, 013 937, 495 1, 385, 508 194,200, 000 0. 23% 0. 71% FY 2018 503, 213 960, 933 1, 464, 146 210,400, 000 0. 24% 0. 70% FY 2019 515, 793 984, 956 1, 500, 749 210,700, 000 0. 24% 0. 71% FY 2020 535, 908 1, 023, 369 1, 559, 277 230,800, 000 0. 23% 0. 68% FY 2021 549, 306 1, 048, 953 1, 598, 259 196,900, 000 0. 28% 0. 81% FY 2022 549, 306 1, 048, 953 1, 598, 259 209,200, 000 0. 26% 0. 76% FY 2023 622, 377 1, 093, 009 1, 715, 386 247,400, 000 0. 25% 0. 69% FY 2024 851, 035 1, 147, 660 1, 998, 695 279,581, 000 0. 30% 0. 71% FY 2025 885, 076 1, 193, 566 2, 078, 643 281,887, 000 0. 31% 0. 74% FY 2026 920, 479 1, 241, 309 2, 161, 789 294,473, 000 0. 31% 0. 73% FY 2027 957, 299 1, 290, 961 2, 248, 260 304,465, 000 0. 31% 0. 74% Attachment I - General Fund Long Range Financial Forecast Staff Report DECEMBER5, 2023 www.cityofpaloalto.org
FY2025 –FY
2034LONGRANGE
FINANCIALFORECAST
FinanceCommitteeItem #1
Attachment I - General Fund Long Range Financial Forecast Staff Report 2 OVERVIEW
Economycontinuestodemonstrateresiliencytoformalrecession Forecastreflectsstagnationoffsetbyinflation
LRFFconsistentwithFY24AdoptedBudget, reflectsnear-termdeficits FY2025shortfallsresolvedwithUncertaintyReserve
ConsistentwithFY2024AdoptedBudgettwo-yearstrategy
MeasureK (BusinessTax) includedforapprovedprojects
MeasureL (EquityTransfer) phasedto18% byFY2027
Expenseprojectionsbasedoncurrentapprovedservicelevels
Assumes20% BSRtomitigateuncertainty (typicaltarget = 18.5%) Costoflabor, inflation, andvacanciesarekeyfactors
EstimatedsurplusinFY2024 ($3.4M) fromMajorTaxRevenue; tobe reviewedatMid-Year
Attachment I - General Fund Long Range Financial Forecast Staff Report 3 THEECONOMY
Localeconomycontinuestoshowstrongperformanceinthefirsthalfofcalendaryear 2023andindicatorsreflectstrongemploymentandeconomicgrowth UCLAAndersonforecastinginlinewithPaloAltothatarecessionisunlikely; thisLRFF assumeseconomicstagnationatthebeginningofthe10-yearperiod NationalGrossDomesticProduct (GDP)
RealGDP: PercentChangefromPrecedingQuarter
NationalInflationRate /
ConsumerPriceIndex (CPI)
Attachment I - General Fund Long Range Financial Forecast Staff Report 4 FISCALYEAR2025 -2034BASECASEFORECAST
RevenuescatchuptoExpensesinFY2030
MildeconomicstagnationthroughendofFY2025
UncertaintyReserveoffsetsFY2025shortfall,
consistentwith2-yrbalancingstrategyinprioryear
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264,281 275, 889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353, 085 $ 365,820 $ 379,944 $ 394,026 BSRContribution (One-Time)-$ 3,440 $ 3,440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15, 000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 275, 889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353, 085 $ 365,820 $ 379,944 $ 394,026 YearoverYearincrease (revenueonly) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% TotalExpenditures $ 243,695 $ 279,581 $ 279,282 $ 281,887 $ 294,473 $ 304,465 $ 314,253 $ 325,708 $ 333,099 $ 341,030 $ 344,933 $351,721 $ 357,516 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281, 887 $ 294,473 $ 304,465 $ 314,253 $ 325,708 $ 333,099 $ 341, 030 $ 344,933 $ 351,721 $ 357,516 YearoverYearincrease 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3,440 ($ 5,998)($ 5,414)($ 3,440)($ 1, 689)($ 500)$ 6,585 $ 12,055 $ 20,887 $ 28,223 $ 36,511 CumulativeNetOperatingMargin
One-Time)$ 87,220
NetOperatingMargin ($ 5,998)$ 585 $ 1,974 $ 1,751 $ 1,189 $ 7,085 $ 5,470 $ 8,832 $ 7,336 $ 8,288 ForecastedOne-TimeGapafterUseofUncertaintyReserve ($ 0) CumulativeNetOperatingMargin $ 36,511
Assumesthattheannualshortfallsaresolvedwithongoingsolutionsandannualsurplusesarespentforongoingexpenditures Attachment I - General Fund Long Range Financial Forecast Staff Report 6 MAJORTAXREVENUEPROJECTIONS
Attachment I - General Fund Long Range Financial Forecast Staff Report 7 ASSUMPTIONSNOTINCLUDEDINFORECAST
LaborNegotiations (contractsexpireinJan/Jun2025);
LRFFincludesanestimatedreserveforchangesinvacancyrates, laborand benefitvariability, andinflation
CapitalImprovements: ParksMasterPlan,RailroadGrade
Separation, VehicleFleetElectrification
CubberleyCommunityCenterRedevelopment
LimitedTermPrograms:
PsychiatricEmergencyResponseTeam (PERT)
PALink
DowntownStreetsTeam
ProjectHomekey
Attachment I - General Fund Long Range Financial Forecast Staff Report 8 ALTSCENARIOA: ECONOMICALLYSENSITIVEREVENUEINFY25
Modelstheimpactofa1% lossinrevenue
frommajortaxes, chargesforservices, and
permitsandlicenses
Revenuesdecreaseby $2.1MinFY2025and
increaseprojectedshortfalls
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264, 281 273,760 286,825 298,692 310,138 322,682 337,041 350,335 362,971 376,979 390,943 BSRContribution (One-Time)-$ 3,440 $ 3,440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15,000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 273,760 $ 286,825 $ 298,692 $ 310,138 $ 322,682 $ 337,041 $ 350,335 $ 362,971 $ 376,979 $ 390,943 YearoverYearincrease (revenueonly) 4.8% 4.8% 4.1% 3.8% 4.0% 4.4% 3.9% 3.6% 3.9% 3.7% TotalExpenditures 243,695 279,581 279, 282 281,887 294,471 304,463 314,251 325,705 333,097 341,028 344,930 351,718 357,513 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281,887 $ 294,471 $ 304,463 $ 314,251 $ 325,705 $ 333,097 $ 341,028 $ 344,930 $ 351,718 $ 357,513 YearoverYearincrease 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3, 440 ( 8,128)($ 7,646)($ 5,771)($ 4,112)($ 3,023)$ 3,944 $ 9,307 $ 18,041 $ 25,261 $ 33,431 CumulativeNetOperatingMargin
One-Time)$ 61,304
NetOperatingMargin ($ 8,128)$ 481 $ 1,876 $ 1,658 $ 1,089 $ 6,968 $ 5,363 $ 8,733 $ 7,221 $ 8,169 CumulativeNetOperatingMargin $ 33,431
Attachment I - General Fund Long Range Financial Forecast Staff Report 9 Modelstheimpactofa1% compensation
adjustmentoncenegotiatedagreementssunset
Expensesincreaseby $1.2MinFY2026and
increaseprojectedshortfalls
ALTSCENARIOB: COMPENSATIONADJUSTMENTINFY26
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264,281 275,889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353,085 $ 365,820 $ 379,944 $ 394,026 BSRContribution (One-Time)-$ 3,440 $ 3, 440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15,000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 275,889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353,085 $ 365,820 $ 379,944 $ 394,026 YearoverYearincrease (revenueonly) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% TotalExpenditures 243,695 279, 581 279,282 281,887 295,719 305, 761 315,587 327,082 334, 501 342,460 346, 392 353, 208 359,033 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281,887 $295,719 $ 305,761 $ 315,587 $ 327,082 $ 334,501 $ 342,460 $ 346,392 $ 353,208 $ 359,033 YearoverYearincrease 0.8% 4.9% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3,440 ( 5,998)($ 6,659)($ 4,735)($ 3,023)($ 1,874)$ 5,183 $ 10,625 $ 19,429 $ 26,736 $ 34,993 CumulativeNetOperatingMargin
One-Time)$ 74,676
NetOperatingMargin ($ 5,998)($ 661)$ 1,924 $ 1,712 $ 1,149 $ 7,057 $ 5,442 $ 8,804 $ 7,307 $ 8,258 CumulativeNetOperatingMargin $ 34,993
Attachment I - General Fund Long Range Financial Forecast Staff Report 7 FY2025BUDGETDEVELOPMENTGUIDELINES (AttachmentA)
Developastructurallybalancedbudgettomaintainfiscalsustainability Examineappropriateuseofsurpluses
ReviewresourceallocationforCityCouncil’sidentifiedpriorities Focusonbusinessprocessredesignandexplorealternativeservice deliverymodels
Exploreexpansionofexistingrevenuesourcesortheadditionofnew revenuesources
Continuetoprioritizeproactivelyfundinglongtermliabilities 10 Attachment I - General Fund Long Range Financial Forecast Staff Report 7 HSRAPFUNDINGREFERRAL (AttachmentE)
CouncilReferral: ConsiderpeggingtheHumanServicesResourceAllocationProcess (HSRAP) budgetallocationstoabenchmark, suchaspercentageofGeneralFundbudgeted expenditures.
HSRAPfundingaveraged0.26% oftheGeneralFundbudgetfromFY2001 –FY2024 Totalhumanservicesfundingaveraged0.83%
0.8Mneededannuallytoincreasetotalhumanservicesfundingto1% oftheGeneral FundbudgetinFY2025 –FY2027oftheLRFFbasecase
HumanservicesfundingneverapprovedtobetiedtotheGeneralFundbudget PriortoFY2016HSRAPincludedAvenidas & PaloAltoCommunityChildcare (PACCC), afterFY2016theseprogramswerefundedthroughdirectallocationseparatefromHSRAP 10 Attachment I - General Fund Long Range Financial Forecast Staff Report NextStepsAnnualBudgetProcess
Jan2024: CouncilreviewLRFF
Feb2024: FY2024Mid-YearBudget
May2024:FY2025ProposedBudget
7 CONCLUSIONANDNEXTSTEPS
Revenuetrendsindicateneartermeconomicstagnationfollowedbyreturntogrowth 2025-2034LRFFconsistentwithFY2024AdoptedBudgettwo-yearstrategy Focusoninvestingonlyinkeyareasofpriorityorurgentneeds
Alternativescenariosincreaseprojectedshortfalls
UncertaintyReserveandone-timesurplusesarecriticaltomanagethenear-term fiscalstabilityandinvestmentsinpriorityinitiatives
FY2024Mid-Yearwillincluderecommendationsforadditionofkeyresourcesand appropriationoffundsasdirectedbyCouncil
Reviewofobjectivesdeferredasoutlinedin
FY2024AdoptedBudget
11 Attachment I - General Fund Long Range Financial Forecast Staff Report 12 RECOMMENDEDACTION
StaffrecommendsthattheFinanceCommittee:
ReviewandrecommendthattheCityCouncilaccepttheFiscal
Year2025 –2034LongRangeFinancialForecastBaseCaseand
theFY2025BudgetDevelopmentGuidelines (AttachmentA).
DirectstafftousethisforecastasastartingpointfortheFY
2025budgetprocess.
Attachment I - General Fund Long Range Financial Forecast Staff Report PaulHarper
BudgetManager
[email protected]
JessieDeschamps
BudgetManager
[email protected]
Attachment I - General Fund Long Range Financial Forecast Staff Report