JANUARY 22, 2024 www.cityofpaloalto.org
FY 2025 – FY 2034
LONG RANGE
FINANCIAL FORECAST
City Council Item #12
2 OVERVIEW
• Economy continues to demonstrate resiliency to formal recession • Forecast reflects stagnation offset by inflation
• LRFF consistent with FY 24 Adopted Budget, reflects near-term deficits • FY 2025 shortfalls resolved with Uncertainty Reserve
• Consistent with FY 2024 Adopted Budget two-year strategy • Measure K (Business Tax) included for approved projects • Measure L (Equity Transfer) phased to 18% by FY 2027
• Expense projections based on current approved service levels • Assumes 20% BSR to mitigate uncertainty (typical target = 18.5%) • Cost of labor, inflation, and vacancies are key factors • Estimated surplus in FY 2024 ($3.4M) from Major Tax Revenue; to be reviewed at Mid-Year
3 FISCAL YEAR 2025 - 2034 BASE CASE FORECAST
• Revenues catch up to Expenses in FY 2030
• Mild economic stagnation through end of FY 2025
• Uncertainty Reserve offsets FY 2025 shortfall,
consistent with 2-yr balancing strategy in prior year
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Total Revenue $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 BSR Contribution (One-Time) - $3,440 $3,440 - - - - - - - - - - Reappropriated Funds (One-Time) - $15,000 $15,000 - - - - - - - - - - Total Source of Funds $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 Year over Year increase (revenue only) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% Total Expenditures $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 Total Use of Funds $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 Year over Year increase 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% Net One-Time Surplus/(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 Cumulative Net Operating Margin
(One-Time) $87,220
Net Operating Margin ($5,998) $585 $1,974 $1,751 $1,189 $7,085 $5,470 $8,832 $7,336 $8,288 Forecasted One-Time Gap after Use of Uncertainty Reserve ($0) Cumulative Net Operating Margin $36,511
Assumes that the annual shortfalls are solved with ongoing solutions and annual surpluses are spent for ongoing expenditures
4 ASSUMPTIONS NOT INCLUDED IN FORECAST
• Labor Negotiations (contracts expire in Jan/Jun 2025); LRFF includes an estimated reserve for changes in vacancy rates, labor and benefit variability, and inflation
• Capital Improvements: Parks Master Plan,Railroad Grade Separation, Vehicle Fleet Electrification
• Cubberley Community Center Redevelopment
• Limited Term Programs:
• Psychiatric Emergency Response Team (PERT)
• PA Link
• Downtown Streets Team
• Project Homekey
5 ALT SCENARIO A: ECONOMICALLY SENSITIVE REVENUE IN FY25 Models the impact of a 1% loss in revenue
from major taxes, charges for services, and
permits and licenses
Revenues decrease by $2.1M in FY 2025 and
increase projected shortfalls
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Total Revenue $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 BSR Contribution (One-Time) - $3,440 $3,440 - - - - - - - - - - Reappropriated Funds (One-Time) - $15,000 $15,000 - - - - - - - - - - Total Source of Funds $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 Year over Year increase (revenue only) 4.8% 4.8% 4.1% 3.8% 4.0% 4.4% 3.9% 3.6% 3.9% 3.7% Total Expenditures 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 Total Use of Funds $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 Year over Year increase 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% Net One-Time Surplus/(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 Cumulative Net Operating Margin
(One-Time) $61,304
Net Operating Margin ($8,128) $481 $1,876 $1,658 $1,089 $6,968 $5,363 $8,733 $7,221 $8,169 Cumulative Net Operating Margin $33,431
6 Models the impact of a 1% compensation
adjustment once negotiated agreements sunset
Expenses increase by $1.2M in FY 2026 and
increase projected shortfalls
ALT SCENARIO B: COMPENSATION ADJUSTMENT IN FY26
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Total Revenue $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 BSR Contribution (One-Time) - $3,440 $3,440 - - - - - - - - - - Reappropriated Funds (One-Time) - $15,000 $15,000 - - - - - - - - - - Total Source of Funds $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 Year over Year increase (revenue only) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% Total Expenditures 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 Total Use of Funds $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 Year over Year increase 0.8% 4.9% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% Net One-Time Surplus/(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 Cumulative Net Operating Margin
(One-Time) $74,676
Net Operating Margin ($5,998) ($661) $1,924 $1,712 $1,149 $7,057 $5,442 $8,804 $7,307 $8,258 Cumulative Net Operating Margin $34,993
7 FY 2025 BUDGET DEVELOPMENT GUIDELINES
• Develop a structurally balanced budget to maintain fiscal sustainability • Examine appropriate use of surpluses
• Review resource allocation for City Council’s identified priorities • Focus on business process redesign and explore alternative service delivery models
• Explore expansion of existing revenue sources or the addition of new revenue sources
• Continue to prioritize proactively funding long term liabilities 7 7
HSRAP FUNDING REFERRAL
Council Referral: Consider pegging the Human Services Resource Allocation Process (HSRAP) budget allocations to a benchmark, such as percentage of General Fund budgeted expenditures.
Finance Committee recommends continuation of this item in February 2024 • HSRAP funding averaged 0.26% of the General Fund budget from FY 2001 – FY 2024 • Total human services funding averaged 0.83%
• $0.8M needed annually to increase total human services funding to 1% of the General Fund budget in FY 2025 – FY 2027 of the LRFF base case
• Human services funding never approved to be tied to the General Fund budget • Prior to FY 2016 HSRAP included Avenidas & Palo Alto Community Childcare (PACCC), after FY 2016 these programs were funded through direct allocation separate from HSRAP 8 • Variability in LRFF Assumptions and Actual Results
• Economic Advisory Report issued by Office of City Auditor (OCA) (CMR 13915) • Actual results within 9% of original estimates
• Long-term financial planning models and inputs align with the OCA’s considerations and best practices • Historical Vacancy Analysis – General Fund
• Up to $1.7M savings in prior years, above budget assumptions for a 3% vacancy factor • Prior year actuals remained within 1.5% of budgeted levels • LRFF adjusts the vacancy factor to 5%, increasing potential savings by $2M 9 2019 2020* 2021* 2022 2023
Total Savings/(Loss)
actual salary and benefit costs vs. adjusted budget $1.3M $1.3M ($1.7M) $1.6M $1.7M Annual Vacancy Rate 12% 12% 15% 12% 13%
Total Adjusted Budget net of vacancy factor $123.3M $134.7M $124.1M $134.3M $148.4M Variance to Budget 1.1% 1.0% (1.4%) 1.2% 1.2%
INFO REQUESTED BY FINANCE COMMITTEE (ATTACHMENT C)
*FY20 and FY21 are anomaly years due to the pandemic
7 INFO REQUESTED BY FINANCE COMMITTEE (ATTACHMENT C)
• Grants and Funding from Other Agencies
• The General Fund is supported by diverse external funding sources, with the most significant contributions coming from federal, state, and county funding, transportation initiatives, library partnerships, and emergency response.
• External revenues supporting capital improvement projects fall into three broad categories:
local/regional grants (including Measure B), state grants, and federal grants, with local/regional grants comprising the largest sourcein three of the five years. 10 2019 2020 2021 2022 2023
General Fund $0.8M $0.8M $1.1M $8.8M $12.1M
Capital Fund $12.4M $4.3M $12.6M $4.0M $17.0M
Next Steps Annual Budget Process
• Feb 2024: FY 2024 Mid-Year Budget
• May 2024: FY 2025 Proposed Budget
• June 2024: FY 2025 Budget Adoption
7 CONCLUSION AND NEXT STEPS
• Revenue trends indicate near term economic stagnation followed by return to growth • 2025-2034 LRFF consistent with FY 2024 Adopted Budget two-year strategy • Focus on investing only in key areas of priority or urgent needs • Alternative scenarios increase projected shortfalls
• Uncertainty Reserve and one-time surpluses are critical to manage the near-term fiscal stability and investments in priority initiatives • FY 2024 Mid-Year will include recommendations for addition of key resources and appropriation of funds as directed by Council
• Review of objectives deferred as outlined in
FY 2024 Adopted Budget
11 12
RECOMMENDED ACTION
The Finance Committee and Staff recommend that
the City Council:
Accept the Fiscal Year 2025 – 2034 Long Range Financial Forecast Base Case and the FY 2025 Budget Development
Guidelines (Attachment B)
Direct staff to use this forecast as a starting point for theFY 2025 budget process
Paul Harper
Budget Manager
[email protected]
Kiely Nose
Administrative Services Director / CFO
[email protected]