JANUARY 13, 2025 www.cityofpaloalto.org
FY 2026 – FY 2035
LONG RANGE
FINANCIAL FORECAST
City Council Item #12
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Next Steps Annual Budget Process
• Feb 2025: FY 2025 Mid-Year Budget
• May 2025: FY 2026 Proposed Budget
• June 2025: FY 2026 Budget Adoption
OVERVIEW
• 2026-2035 LRFF is fairly consistent with FY 2025 Adopted Budget • Economic stagnation and potential volatility
• Focus on investing in key areas of priority or urgent needs • Uncertainty Reserve and one-time surpluses are critical to manage the near-term fiscal stability and investments in priority initiatives • Strategic planning and fiscal discipline needed to solve estimated shortfalls in subsequent years of the forecast
• Planning tool that informs the budget process
2 Fiscal Year 2026 - 2035 Base Case Forecast
• FY 2026 projected shortfall of $12.0 million, previously anticipated at $11.0 million • Uncertainty Reserve of a recommended $12M offsets projected FY 2026 shortfall • Annual Shortfall in FY 2027-2029 ranges from $7.9M to 5.6M • Budgeted revenues projected to support expenditures starting in FY 2030 3 3
BSR and Recommended FY24 Surplus Allocation
POLICY & STRATEGY:
• Maintaining FY 2025 BSR at
18.5% target level
• Multi-year strategy to balance
anticipated shortfalls
RECOMMENDATION:
• $3.0M to Infrastructure
Reserve and $5.9M to Budget
Uncertainty Reserve
APPROPRIATION ACTION:
• FY 2025 Mid-Year Review
(February 2025)
4 ALT SCENARIO A: ECONOMICALLY SENSITIVE REVENUE IN FY26 • Models the impact of a 1% loss in economically sensitive revenue categories starting in FY 2026 • Major Taxes, Charges for Services, and Permits and Licenses • Revenues decrease by $2.3M in FY 2026 and increase projected shortfalls • Gap of $14.3M in FY 2026
• Gaps of $10.2M to $0.8M in FY 2027 – FY 2030
5 • Models the impact of a 1% compensation adjustment once negotiated agreements sunset • Maintains 5% Vacancy Factor
• Increases reserve for potential changes to future labor costs and benefit rate variability • Expenses increase by $1.1M in FY 2026 and increase projected shortfalls • Gap of $13.1M in FY 2026
• Gaps of $9.0M to $6.8M in FY 2027 – FY 2029
ALT SCENARIO B: COMPENSATION ADJUSTMENT IN FY26
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FY 2026 BUDGET DEVELOPMENT GUIDELINES (Attachment A)
• 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 ASSUMPTIONS NOT INCLUDED IN FORECAST (Attachment E)
List is not comprehensive nor in any priority order
• Labor Negotiations (contracts expire in Jan/Jun 2025); LRFF includes an estimated reserve for changes in vacancy rates, labor and benefit variability, and inflation
• Housing Growth Impacts
• Cubberley Community Center Redevelopment
• Fire and Ambulance Service Expansion
• Parks Master Plan
• Railroad Grade Separation
• Vehicle Fleet Electrification
8 FINANCE COMMITTEE DISCUSSIONS
• Revenue Volatility in the Past
• Great Recession initial 4% decline moderated to 1% over time • Vacancies
• Currently 10% vacancies citywide, down from 12% pre-covid • Uncertainty Reserve
• Risk Mitigation Tools
• Updates to existing revenue sources or new revenues
• Review policies for reserves & long-term liability funding • Financing strategies for capital infrastructure
• Fiscal Discipline
9 RECOMMENDED ACTION
Finance Committee and Staff recommend that the
City Council:
Accept the Fiscal Year 2026 – 2035 Long Range Financial Forecast Base Case and the FY 2026 Budget Development
Guidelines (Attachment A).
Direct staff to use this forecast as a starting point for theFY 2026 budget process.
10 Paul Harper
Budget Manager
[email protected]
Kitty Dandan
Budget Manager
[email protected]