© PFM 1
San Pablo Multi-Year Financial
Planning Model
Presentation to City Council
44 Montgomery Street
3rd Floor
San Francisco, CA 94104
1735 Market Street
42 nd Floor
Philadelphia, PA 19103
Sarah Schirmer, Managing Director
Danielle Scott Parker, Director
Lieke Janssen, Analyst
Presented and Prepared By:
December 13, 2023
© PFM 2
What We Do
FINANCIAL
ADVISORY
transaction management &
bond pricing | credit strategies
| capital planning
CONSULTING
fiscal planning & budgeting | organizational
efficiency & effectiveness | policy & program
analysis | workforce strategy & negotiation
support
FINANCIAL
PLANNING
ALTERNATIVE
FINANCE
public private partnerships &
economic development | developer
selection & negotiation | asset &
real estate portfolio analysis &
monetization | environmental
finance | tax credit & incentive
policies
SPECIALIZED
SERVICES
derivatives advisory | treasury
management consulting | retirement
finance
INVESTOR
RELATIONS
powered by Munite®
investor intelligence &
outreach | analytics
| customized dashboards
Synopsis powered by SynarioTM
© PFM 3
PFM Offers Local Service and a National Reach
© PFM 4
The PFM Team
Sarah Schirmer is a Managing Director with PFM’s Management and Budget Consulting practice. Sarah has more than 15 years experience working in and with local government on issues related to budgeting and policy. Sarah worked in municipal government for 8 years prior to joining PFM.
Danielle Scott Parker is a Director with PFM’s Management and Budget Consulting practice. Danielle joined PFM in 2015 and provides budgetary and financial analysis to local governments and develops multi-year financial plans to help municipal governments overcome their fiscal challenges. Danielle has previously completed five multi- year financial plans in California.
Lieke Janssen is an Analyst based in PFM’s Management and Budget Consulting practice. Lieke has worked on financial and operational analyses for various cities in Pennsylvania, Virginia, and Maryland. Prior to joining PFM, Lieke was the Director of Finance in Ranlo, North Carolina, where she managed all aspects of financial operations.
© PFM 5
Project Overview
In September 2023, the City of San Pablo contracted with PFM Group Consulting LLC to develop a multi-year financial plan.
This Plan provides San Pablo with a series of fiscal policy recommendations to balance and stabilize the City’s projected long-term fiscal trajectory. PFM assessed San Pablo’s historical and anticipated General Fund revenues and expenditures to determine the drivers of the City’s historical and projected finances and forecast potential long-term constraints that could impact future service levels. The San Pablo Plan focuses on the below objectives:
• Forecasting the City’s financial trajectory
• Identifying opportunities to align City finances to best practices • Projecting the impact of possible changes in casino revenue and policy decisions in the form of various options
At the conclusion of this study, PFM will provide the forecast model to City leadership to support future decision making.
© PFM 6
I. SAN PABLO’S BASELINE BUDGET
FORECAST
Agenda II. BASELINE MODEL ASSUMPTIONS
III. A PATH FORWARD
© PFM 7
San Pablo’s Baseline Budget Forecast
© PFM 8
Multi-Year Financial Forecasts Offer a Diagnosis of City Finances The forecast provides a baseline projection,
similar to the diagnosis your doctor gives you
after a physical. The forecast reflects San Pablo’s
current fiscal condition, absent significant policy
changes.
In response to this diagnosis, City leadership and
elected officials can make informed decisions on
corrective actions to change the city’s anticipated
trajectory if the baseline projection identifies a
structural budget gap.
The forecast is provided through a dynamic,
easy-to-update budget model that will help
decision-makers to balance policy and
operational goals in future years.
“Multi -year planning is a critical exercise.
These plans will often have out-year
gaps projected which allow governments
to work out, in advance, the optimal way
to restore fiscal balance.”
– Standard & Poor’s
“The multiyear plan’s value is to
anticipate future challenges that may be
encountered due to projected revenue
and expenditure imbalances. This allows
executives and legislators to ‘get in front
of’ potential budget stress, and take
corrective action long before budgetary
gaps develop into crises.”
– Fitch Ratings
Financial forecasts are at the crux of
foresight. [Use] forecasts to identify the
parameters within which to develop and
execute strategies, rather than to try to
“predict” the future.
- GFOA, Building a Financially Resilient
Government through Long-term Financial
Planning
© PFM 9
Developing a Baseline Projection
The process of creating the ten-year budget model starts with analyzing ten years of the City’s historical General Fund actuals and budget data.
Line-item detail is organized into categories representing the City’s major revenues and expenses.
Growth rates are applied to these categories to project revenues and expenses in future years.
The project team works with the City to understand the drivers of revenues and expenses in order to select appropriate growth rates.
For the baseline forecast, growth rates reflect inflation, known or assumed growth in revenues and expenditures, and other known events.
The model uses the FY2024 adopted budget in its baseline forecast and applies growth rates to those amounts to project future years.
The baseline forecast is intended to show what the City’s financial results could be with no corrective action.
© PFM 10
Baseline Projection (Status Quo)
San Pablo is expected to have a deficit in each of the 10 years of the baseline projection.
The cumulative deficit over those years is $44.1 million. Between FY2025 and FY2034, the City’s annual operating deficit is projected to increase from $2.1 million to $5.5 million, after which it drops back to $4.4 million. The City’s Unassigned Fund Balance would reduce from $63.0 million to $21.1 million in those 10 years, an amount which does not meet the City’s minimum reserves policies. 1 The minimum reserve policy line includes the Catastrophic Reserve and Budget Stabilization Reserve.
© PFM 11
Baseline Projection (Status Quo)
San Pablo maintains several designated reserves in its Unassigned Fund Balance, including the Catastrophic Reserve and Budget Stabilization Reserve. When considering its fund balance policies, the City’s “true” Unassigned Fund Balance (the spendable fund balance) will be depleted within the ten-year period, as early as FY2032.
© PFM 12
Unaligned General Fund Revenues and Expenditures
© PFM 13
Key Drivers of the Structural Deficit
Reliance on casino revenue
• Given that casino revenue makes up 64 percent of the City’s budget, any slowing or stagnation of this revenue has a major impact on the City’s surpluses and deficits. • Casino revenue is projected to grow 0.6 percent per year, significantly slower than the previous 10- year compound annual growth rate (CAGR) of 5.6 percent. • While tax revenues are expected to grow at an average 3.5 percent per year, the impact of such growth is limited given that taxes only make up 19 percent of the City’s budget. • Tax revenues or other small revenues (e.g., fees, licenses) cannot make up for the revenue loss if casino contributions stagnate.
Expenditure growth outpaces revenue growth
• Expenditure growth is driven by increasing pension costs, health insurance, and transfers out to other funds. The baseline assumes 0 percent wage growth after the current employee labor MOUs expire at the end of FY2026-2027.
© PFM 14
Key Drivers of the Structural Deficit
1 Note that the Total Budget number used here is based on the baseline projection – i.e., a status quo scenario in which the City does not alter its spending behaviors. Historical costs represent actual expenditures that reflect vacancies, while projected retirement costs are based on an approach that assumes zero vacancies. Increasing CalPERS costs
• Increasing CalPERS costs will be a challenge for the City to fund, especially as a percentage of the General Fund budget.
• Pension payments have grown from $1.9 million in FY2014 to $6.3 million in FY2023 and are projected to grow to $11.6 million in FY2034 (22 percent increase). Some savings may be expected through position vacancies each year.
© PFM 15
Baseline Model Assumptions
© PFM 16
General Fund Budget Surplus/Deficit
1 For at least the years FY2022 and FY2023, PFM is aware that other funds (numbered between 101 and 200) are included in the General Fund audited budget surplus/deficit. That results in a positive balance in FY2022 of $3.8 million and increases the surplus for FY2023 to $8.6 million. The graph above includes strictly Fund 100 (General Fund) for all years.
Since FY2017, San Pablo’s expenditures have met or exceeded its revenues. This is due in part to the City’s change in reserve policies that year. Since FY2017, the City has increased annual transfers out to build a more robust reserve.
© PFM 17
Historical Revenues: Casino Revenue
September -
November
2021
December -
February
2022
March -
May
2022
June -
August
2022
September -
November
2022
December -
February
2023
March -
May
2023
June -
August
2023
Quarterly Rev.1 $7,217,298 $7,140,707 $7,782,702 $7,466,058 $7,396,670 $7,501,638 $7,698,296 $7,512,093 % Change -1.1% 9.0% -4.1% -0.9% 1.4% 2.6% -2.4%
1 The quarterly revenues represented here sum up to the annual Incremental Municipal Services Payment. The PILOT amount is deposited semi-annually.
Quarterly Casino Revenues
Revenue from casino contributions grew from $19.8 million to $32.3 million between FY2014 and FY2023 (or 5.6 percent per year). There was a drop in revenues in FY2020 due to the COVID-19 pandemic.
Although revenue has rebounded since FY2020, quarterly reports show that casino revenues have stagnated in the last 8 quarters.
© PFM 18
Growth Rate Assumptions: Summary
Revenues
Casino revenues make up 64 percent of the FY2024
budget. While historically, casino revenues have grown at a rate of 5.6 percent, recent quarterly results show
slower, flattening growth. The baseline projection
assumes 0.6 percent annual growth through FY2034.
Property tax revenue is projected to grow at 5 percent per year, which is in line with other California cities, and the Contra Costa County projections for assessed value
growth.
Sales tax revenues from Bradley Burns are projected to grow at 1.8 percent per year in the next decade. This is a combination of recent historical growth and projected
consumer goods spending in California.
Measure Q and S sales tax revenue is projected to
grow with inflation (2.7 percent). The baseline model also assumes that a new measure will replace Measure S in
FY2033.
The baseline model does not assume any one-time
transfers. The model does include annual Successor
Agency Reimbursements of $250,000.
Expenditures
Personnel costs make up over 60 percent of the City’s expenses, of which 40 percent are salaries and wages.
The baseline assumes no changes in headcount.
The baseline accounts for current employee labor MOUs
but does not include any wage growth after FY2027.
Retirement costs are calculated using the budgeted
headcount (normal cost). The projections provided by
each pension plan’s actuarial reports are used to include the future Unfunded Actuarial Liability (UAL).
Employee health insurance costs are projected to grow at 5.8 percent, which is the national average of all plans over the last ten years. It is also in line with recent spending growth for San Pablo employee health costs.
Retiree health insurance costs are projected to grow at the same rate as they have in the last decade, 7.7
percent per year.
The baseline model does not assume any one-time
transfers. It does assume subsidies to three minor funds, an annual $1 million investment in capital projects, and annual debt service payments.
© PFM 19
San Pablo Fund Balance Policy Overview
The City adopted the Fiscal Resiliency Reserve Policy in October 2013. The policy:
• Requires “Catastrophic Reserves” at 50 percent of the general operating funds budget. • Requires “Budget Stabilization Reserve” at 5 percent of the general operating funds budget. • Establishes General Fund Designated Reserves (GFDR), which allow the City to allocate one -time funding for large, future operational and capital expenses, including things like CalPERS retirement rate increases and unfunded liabilities (e.g., compensated absences, vehicle replacements). • Establishes the Future Capital Project Reserves to earmark funding for large capital projects in the absence of RDA funding dissolved by the State in 2011.
• Establishes the City Manager (CM)
Contingency Account at 1 percent of the
general operating funds budget to pay for
unbudgeted and unforeseen expenses that
arise during the normal course of business.
In June 2016, the City added the Casino
Revenue Stability Reserve, upon Council
discretionary approval, that allows the City to set
aside up to 50 percent of unused audited fund
balance as a rainy-day fund to guard against the
sudden loss of casino revenue.
FY General Fund - Ending Fund Balance $68,160,379
Non-spendable / Restricted / Assigned $11,591,558
FY General Fund - Unassigned Fund Balance $56,568,821
50% Catastrophic Reserve $25,055,668
5% Budget Stabilization Reserve $2,505,567
Designated Reserves $750,779
Future Capital Projects $0
Casino Revenue Sustainability Reserve $0
"True" Unassigned Fund Balance $28,256,807
© PFM 20
Historical General Fund Balance and Reserves
With these policies, San Pablo’s unassigned fund balance almost doubled (180 percent growth) between FY2014 and FY2022.
Within the unassigned fund balance, the City maintains several designated reserves. Catastrophic reserves (which must meet the minimum of 50 percent of each operating budget) have grown from $14.6 million in FY2014 to $25.1 million in FY2022.
The difference between the reserves and the total unassigned fund balance can be considered the City’s “true” unassigned fund balance. These funds, which totaled $28.3 million at year-end FY2022, may be used to tackle the City’s budget challenges along with other recommended cost-saving measures to assist with projected General Fund deficits or shortfalls.
© PFM 21
San Pablo’s Unassigned Reserves Exceed Other Local Cities At year-end FY 2022, San Pablo had $56.6 million in its unassigned fund balance, which was
1.5 times its General Fund expenditures that year.
Among five other local cities in Contra Costa County, the City of Hercules is the only city to also hold more than 100 percent of its General Fund expenditures in its unassigned fund balance.
City
Year End Unassigned Fund
Balance, FY2022
Year End Unassigned Fund
Balance as a Percent of Actual
Expenditures, FY2022
San Pablo $56,568,821 150.7%
El Cerrito $16,423,835 40.8%
Hercules $22,926,831 142.3%
Pleasant Hill* $1,398,465 3.2%
Pinole $9,405,968 42.9%
Richmond $44,935,389 26.8%
Median (excl. San Pablo) $16,423,835 40.8%
San Pablo Rank 1 of 6 1 of 6
Source: Annual Comprehensive Financial Reports
* Note: Pleasant Hill’s policies state the city should endeavor to hold $9 million for Working Capital and Budget Stabilization, which are considered “assigned.” If those were included in its unassigned fund balance, its unassigned fund balance as a percent of its expenditures would increase to 24.1 percent. © PFM 22
A Path Forward
© PFM 23
Baseline Projection (Status Quo) - Revisited
San Pablo is expected to have a deficit in each of the 10 years of the baseline projection.
The cumulative deficit over those years is $44.1 million. Between FY2025 and FY2034, the City’s annual operating deficit is projected to increase from $2.1 million to $5.5 million, after which it drops back to $4.4 million. Any use of the City’s Unassigned Fund Balance to address the forecasted deficits would deplete it from $63.0 million to $21.1 million in those 10 years, an amount which does not meet the City’s minimum reserves policies.
1 The minimum reserve policy line includes the Catastrophic Reserve and Budget Stabilization Reserve.
© PFM 24
A Path Forward
San Pablo faces a structural deficit in which its expenditures are projected to exceed its revenues in each of the next ten years unless new strategic budget initiatives are developed to address the deficit. If not addressed, the City is projected to deplete its “true” unassigned fund balance in FY2032 to cover its annual deficits.
Casino revenue is expected to grow more slowly than the previous ten-year period while pension and healthcare costs are expected to rise. Simultaneously, the City anticipates significant new operational expenses related to annual facility maintenance, vehicle/asset acquisition and meeting zero-emission vehicle (ZEV) State requirements, and meeting ongoing infrastructure needs.
San Pablo’s ability to address its annual forecasted deficit is hampered by its current fiscal resiliency reserve policies which have created a sizable fund balance. San Pablo must take steps to both increase its annual revenue and reduce its annual expenditures to ensure a sustainable financial future.
• The City must diversify its revenue sources as casino revenue becomes a less predictable vehicle for growth.
• Additionally, the City should identify opportunities to operate more efficiently and build optimization in City service delivery, both citywide and within its largest departments. © PFM 25
Possible Baseline Options Summary Chart (Over 10-Year Period) Options
10-Year
Cumulative
Deficit
FY2034 Ending
Unassigned
Fund Balance
Required Council Action
Revise Reserves Policies $0 $10.2 million Starting in FY2030, Catastrophic Reserves required to balance budget.
Cannabis Tax Revenue (5%) ($23.1 million) $42.0 million None in the next ten years. The City’s “true” unassigned fund balance would be used.
Eliminate Fund Subsidy ($32.5 million) $32.7 million Starting in FY2034, Catastrophic Reserves required to balance budget.
Increased Growth in Casino
Revenue (1%) ($35.7 million) $29.4 million Starting in FY2033, Catastrophic Reserves required to balance budget.
Baseline Projection ($44.1 million) $21.1 million Starting in FY2032, Catastrophic Reserves required to balance budget.
No Growth in Casino
Revenue ($53.6 million) $11.5 million Starting in FY2031, Catastrophic Reserves required to balance budget.
Invest in City Assets and
Infrastructure (annual $1
million)
($54.1 million) $11.1 million Starting in FY2031, Catastrophic Reserves required to balance budget.
2% Salary Growth ($55.5 million) $9.6 million Starting in FY2031, Catastrophic Reserves required to balance budget.
© PFM 26
Invest in Emerging City Assets and Infrastructure Priorities The City is considering the financial impact of emerging operational and maintenance (O&M) costs.
New City O&M priorities under consideration include policies related to vehicle replacement, building maintenance for its existing and new facilities, storm drain improvement and replacement infrastructure, and pension obligation expenditures.
An increase in General Fund operational expenditures will further increase the baseline deficit Absent other changes to annual General Fund revenues or expenditures, any additional O&M investments in these areas would further increase the City’s 10-year cumulative deficit. • An annual $1 million increase in O&M investment, starting in FY2025, would increase the cumulative deficit from $44.1 million to $54.1 million. • An annual $5 million increase in O&M investment starting the same year would increase the cumulative deficit further to $94.1 million over ten years.
More General Fund spending = higher reserves
The City’s current reserve policies require a Catastrophic Reserve that equals 50 percent of the City’s General Fund budget and a Budget Stabilization Reserve that equals another 5 percent. Any additional O&M investments made to the City’s regular operating expenses equates to a proportionate increase in funding for these reserves. For example, a $1 million annual investment in City O&M priorities will cost $1.55 million to align with the City’s reserve policies. © PFM 27
Revise Fiscal Resiliency Reserves Policy
GFOA recommends that governments maintain an unrestricted budgetary fund balance of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.
In the short term, San Pablo should evaluate its fund balance reserve policy to maintain sufficient reserves in accordance with best practices while also providing greater capacity for the City to program available revenues to ongoing operating expenses.
The City’s current reserve policies have generated an unrestricted fund balance that is more than 6 times as high as the GFOA recommendation. The City could spend down its expected FY2024 year-end unassigned fund balance of $56.4 million to eliminate nine years of projected budget deficits. However, this would not remediate the City’s structural deficit. If no other changes are pursued, in FY2034, the City’s reserves would dip below the GFOA recommended amount. The graph below shows remaining reserves plus the GFOA recommended fund balance at each fiscal year-end.
© PFM 28
A Path Forward - Restructure City’s Financial Management Restructure City Manager Contingency Reserve
The City Manager contingency is a line item in the City’s General Fund budget that equates to 1 percent of the City’s total operating expenses, approximately $475,000 in the FY2024 budget.
Currently, the City leverages this General Fund line-item to address one-time and unexpected funding needs that fall outside of the City’s adopted budget. While setting aside funds for unexpected expenses is common, these funds typically reside in the City’s unassigned balance.
In line with prior recommendations on the City’s fund balance structure, the City Manager Contingency Reserve should be captured in the fund balance rather than a General Fund line- item expense. The way the City is currently using this fund, it is most in-line with a “reserve bucket” of the fund balance.
If the City maintains the current structure of the City Manager Contingency Reserve at 1 percent of the total operating costs (roughly $500,000 per year in the 10-year projection), the operational expenses should be recategorized at the time of the expenditure to correspond with the actual use to track the use of funds from year to year. Doing so, will advance support greater transparency and tracking of unexpected operational costs. © PFM 29
A Path Forward - Restructure City’s Financial Management Re-evaluate the City’s Ability to Track Strategic Investments As noted on the prior slide, the City should consider a consistent methodology for accounting for actual one-time and strategic investments (i.e., O&M priorities). Ideally, actual spending should be categorized based on its specific use to demonstrate progress on key O&M priorities in the CIP along with other budget and policy documents. Currently, City budget transfers, one-time GFDR Fund Balance, special departmental expenses, and City Manager Contingency Reserve line items have been used to invest in key O&M priorities such as building maintenance, facility improvements, and key capital project investment.
While use of available funds for key priorities, particularly priorities that may reduce on-going operating expenses in the future, the City currently does not change the recording of the expenditure based on actual use (e.g., $100,000 investment in new equipment from the City Manager Contingency Reserve is not coded to the respective object code) While the finance team has been working diligently to resolve inconsistencies in the ledger, the City should work to implement a consistent system that would allow them to monitor the specifics of one-time and strategic investments in order to track spending and trends over time. © PFM 30
A Path Forward: Use Baseline Financial Model for Future Budget Planning With a baseline cumulative deficit of $44.1 million, the City will need to make tough fiscal choices over the next ten years to invest in its O&M priorities and establish an appropriate fund balance using GFOA requirements and industry best practices. San Pablo should use the projection tool as a resource to inform decision making. When developing its next Multi-Year Budget Cycle, City Council should consider major budget drivers (i.e., strategic budget initiatives) to be recommended by City Management to close projected annual deficits.
This report presents a series of options and different scenarios San Pablo can consider to understand how recent and projected trends in revenue sources and expenditures will impact its 10-year baseline deficit.
It will not be sufficient to pursue only one of the options detailed in this report. San Pablo must consider new strategic budget initiatives that address both declining revenues and increasing expenditures to reverse projected trends. San Pablo can consider the right mix of revenue raising and diversification solutions and cost savings to address its 10-year projected deficit.
As circumstances change, the forecast changes. The forecast model will allow San Pablo to incorporate “what if” analyses and the addition of new City costs or revenues. © PFM 31
Thank You!
© PFM 32
City Manager’s Recommended Next Steps
© PFM 33
NEW STRATEGIC BUDGET INITIATIVES FOR FY 2025-2027 (FOR POLICY CONSIDERATION) Following receipt of the Financial Forecast Model, the City Manager will propose new Strategic Budget Initiatives to be formally considered by the City Council to amend the City Council Adopted Workplan for inclusion into the next multi-year budget planning cycle for FY 2025-2027. These include, but are not limited to the following under consideration:
1). IMPLEMENT A ZERO-BASED BUDGET PLANNING MODEL FOR FY 2025-27 BUDGET PLANNING TO
OPTIMIZE CITY SERVICE DELIVERY AND GENERATE ANNUAL GF OPERATING COST SAVINGS FOR ALL
CITY DEPARTMENTAL EXPENSES
2). ELIMINATE OR SUBSTANTIALLY REDUCE ALL GF OPERATING SUBSIDIES 3). IDENTIFY NEW GF ANNUAL REVENUE SOURCES
4). NO (0) FTE INCREASES AUTHORIZED DURING FY 2025-2027 PERIOD (i.e. ZERO-GROWTH; STATUS-QUO) 5). EXTEND FTE HIRING FREEZE ON ALL FTE VACANCIES DURING FY 2025-2027 PERIOD 6). RE-TOOL & REVISE ADOPTED FISCAL RESILIENCY POLICY REQUIREMENTS TO REVERSE FORECASTED STRUCTURAL DEFICITS AS ONE-TIME BALANCING MEASURES (FOR FY 2025-2027 PERIOD ONLY) 7). EXPLORE USE OF ONE-TIME FUNDS FROM GFDR FUND BALANCE TO REVERSE FORECASTED STRUCURAL DEFICITS AS ONE-TIME BUDGET BALANCING MEASURES (FOR FY 2025-2027 PERIOD ONLY)
8). EXPLORE ADDITIIONAL FISCAL MEASURES USING FORECAST MODEL TO REVERSE FORECASTED
STRUCTURAL DEFICITS AS RECOMMENDED BY THE CITY MANAGER
(SUBJECT TO CHANGE AS RECOMMENDED BY THE CITY MANAGER)
© PFM 34
CITY MANAGER RECOMMENDATION: TAKE IMMEDIATE POLICY ACTION Proceed with the following policy direction by proposed Resolution:
(1) Accept the presentation on the City’s 10-year Long-range Financial Forecast Plan to include the baseline financial model, budget assumptions and preliminary recommended measures to reduce General Fund operating deficits and subsidies as forecasted for period 2024-2034; and
(2) Amend the FY 2023-25 City Council Priority Workplan under MAJOR POLICY AREA: FOCUS ON ECONOMIC DEVELOPMENT AND FISCAL
DIVERSIFICATION, Add Policy No. #414 – New strategic budget initiatives to address new structural deficits forecasted for FY 2025-2027 period to include new recommended Strategic Budget Initiatives for FY 2025-27 period as proposed by the City Manager; and
(3) Authorize the City Manager to explore feasibility and recommend future implementation of all recommended Strategic Budget Initiatives and proposed measures to reduce forecasted General Fund deficits and subsidies prior to adoption of the proposed FY 2025-2027 Multi-Year GF operating budget, effective July 1, 2024
© PFM 35
Appendix: Detail on Possible Budget
Options
© PFM 36
Cannabis Tax Revenue (5%) Starting in FY2026
At a 5 percent tax rate, additional Cannabis Tax Revenue would generate $2.2 to $2.4 million per year starting in FY2026 at the earliest.
Over ten years, this tax would generate a cumulative total of $20.9 million, and the City would not have to use more than its “true” unassigned reserves for at least ten years. Gross receipts (market projections) grow at a rate of 2.3 percent1 for three years after which it plateaus – experts note that the cannabis market will reach saturation within a few years.2 In addition to tax revenue, the City will receive an additional 1 percent sales tax revenue over the gross receipts of cannabis sales.
Forecast – Option 2
1 BDSA Q2 2023: Quarterly Cannabis Market Forecast. California Legal Cannabis Forecast, 2022-2027 CAGR. 2 Fiscal Analysis of the Commercial Cannabis Industry. Prepared for the City of San Pablo, May 3, 2023.
© PFM 37
Eliminate Subsidy to Fund 237
1 BDSA Q2 2023: Quarterly Cannabis Market Forecast. California Legal Cannabis Forecast, 2022-2027 CAGR. 2 Fiscal Analysis of the Commercial Cannabis Industry. Prepared for the City of San Pablo, May 3, 2023. The City can eliminate its annual subsidy to the Street Lighting and Landscaping Special Revenue Fund (Fund 237), which would save the City $11.6 million over ten years, or an average of $1.3 million per year starting in FY2026 (the first possible year of this option). These savings can only be realized if the City can simultaneously increase revenue in the Special Revenue Fund. The City has identified a property tax measure to achieve such additional revenue.
Even with the potential savings of the eliminated subsidy, City Council would have to allocate reserves to balance the budget in FY2034.
Forecast – Option 3
© PFM 38
Increased Growth in Casino Revenue (1% per year)
If casino revenue from the Incremental Payment increases at 1 percent per year (slightly higher than the baseline projection of 0.5 percent), the City would generate an extra $8.3 million over 10 years.
With a modest increase in casino revenue growth, the cumulative budget deficit would reduce from $44.1 million to $35.7 million. However, even more optimistic growth in casino revenue will not solve the City’s structural, recurring budget deficit.
Forecast – Option 4
© PFM 39
No Growth in Casino Revenue
Stagnating casino revenues would have severe impacts on the City’s budget forecast. If casino-related revenue does not grow beyond the FY2024 budgeted level ($31.5 million),1 representing zero percent growth, the cumulative budget deficit would grow from $44.1 to $53.6 million.
Forecast – Option 5
1 This option only includes the Incremental Municipal Services Payment. The Casino PILOT revenue would continue to grow as projected in the baseline.
© PFM 40
2% Salary Growth
Instead of a wage freeze after the expiration of current bargaining agreements, the City could implement an annual 2 percent wage increase for all bargaining units. This would increase expenditures in FY2028 when compared to the baseline. The cumulative deficit would increase beyond the baseline by $11.4 million, for a total of $55.5 million over ten years. To balance the budget, the City would have to start using reserves as early as FY2031.
Forecast – Option 7