city of palo alto (ca) long range financial forecast (2013)

7/30/2019 City of Palo Alto (CA) Long Range Financial Forecast (2013)

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City of Palo Alto (ID # 3742)City Council Staff Report

Report Type: Action Items Meeting Date: 5/13/2013

City of Palo Alto Page 1

Summary Title: Long Range Financial Forecast for Fiscal Years 2013 to 2023

Title: Acceptance of Long Range Financial Forecast for Fiscal Years 2013 to

2023

From: City Manager

Lead Department: Administrative Services

Recommendation

Staff recommends that the City Council review, comment on, and accept the attached forecast

of revenues and expenses.

Motion

I move to accept the Fiscal Year 2013 to 2023 Long Range Financial Forecast as staffs latest

projection of the Citys revenue and expenditure picture given current and projected

developments.

Executive Summary

The Citys General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on

a variety of assumptions (See pages 6-19 of Attachment A). It is a portrait of the Citys financial

condition painted at one point in time.

The LRFF was presented to the Finance Committee on December 18, 2012. Staff was directed to

return with a forecast based on specific, revised assumptions and comments provided by the

Committee. In addition, some revenues and expenditures were changed based on additionaldata and information that came to light after December 2012. The revised ten year forecast

was brought back to the Finance Committee on March 5, 2013, with discussion continuing on

March 19, 2013.

Again, after the March 19, 2013 Finance Committee meeting, new developments occurred


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which altered staffs calculations of revenues and expenditures for 2014 and beyond. This

latest version of the Forecast shows a ten-year cumulative shortfall of $34.8 million.

Table 1 is a Summary of the Base Model of the Forecast.

Background

On December 18, 2012, the Finance Committee directed staff to return with a revised Forecast

addressing the issues and information requests cited below. Staff updated the forecast given

these requests and incorporated other information that came to light since December.

Discussion

Finance Committee Point 1: Historical Revenue Trends

Staff was asked to review 20 year and 10 year historical growth rates for economically sensitive

revenue sources and consider adjusting the forecasted growth rates to more closely match the

historical rates. Staff believes that the 20-year historical rates provide a more meaningfulreference point since that period incorporated two dramatic economic cycles (dot.com boom

and bust and the Great Recession).

Staff analyzed 20-year revenue growth rates for combined General Fund tax revenues,

combined Total General Fund revenues, and for each of the five major tax categories: property,

sales, documentary transfer, transient occupancy, and utility user taxes. Staff controlled the

calculations for extrinsic developments such as the States intermixing of Vehicle License Fees

with property taxes beginning 2004, and the 2 percent TOT rate increase in January 2007.

The table below shows historical growth rates over the 10-year and 20-year historical periods;

and the rates used in the Forecast versions presented December 2012, March 2013, and today.

The term CAGR refers to Compound Annual Growth Rate, or an average annual rate of

growth over the given period of time.


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*Documentary Transfer Tax was available beginning in 1993 so a 19 year CAGR is displayed in the 20 year category.

Comparing the 20-year CAGR for the five major tax revenue sources (4.1 percent) with the

CAGR of the current version of the forecast (4.13%) shows the forecast is fairly consistent with

historical growth rates. However, individual tax growth rates show some variations. Sales tax in

the last 20 years grew at an anemic 2.07 percent growth rate, slightly below staffs projected

2.30% annual growth. On the other hand, the Utility Users Tax grew an average 3.79% over the

last 20 years; staff is projecting just 2.85% growth for the next ten.

Finance Committee Point 2: Overall Change in 10-Year Cumulative Budget Shortfall

The Finance Committee asked for a breakdown of what caused the change from last years

(May 2012) Forecasted $88 million shortfall over ten years to the current Forecasts ten -year

shortfall, now at $35 million. It will help to look at the same ten-year period: FY 2013 to FY

2022. For that period the current Forecast shows a combined shortfall of $26.5 million. Why

the $61 million improvement?

The main reason is an improved revenue outlook. Tax revenues were projected last May at$916 million for the ten years; now staff projects $968 million in combined tax revenues from

FY 2013-FY 2022 an increase of $52 million over the ten years. The main sources of the

increase were Documentary Transfer Tax ($59 million more), Property Taxes ($28 million more);

and TOT ($24 million more); offset somewhat by more conservative outlooks for Sales Tax ($12

million less) and UUT ($48 million less).

Category 20-yr CAGR(1992-2012)

10-yr CAGR

(2002-2012)

Dec 2012 LRFF

CAGR (2013-

2023)

Feb 2013

LRFF CAGR

(2014-2023)

May 2013

LRFF CAGR

(2014-2023)

Property Tax 4.67% 4.88% 4.29% 4.97% 4.97%

Sales Tax 2.07% 0.98% 3.96% 3.38% 2.30%

Transient Occupancy

Tax

4.88% 1.99% 4.50% 4.58% 4.79%

Doc. Transfer Tax* 7.30%* 5.31% 4.58% 5.56% 7.42%

Utility User Tax 3.79% 5.31% 2.80% 2.85% 2.85%

Total of All 5 Major

Taxes (adjusted)

4.10% 3.12% 4.04% 4.23% 4.13%

Total Revenues (all) 4.56% 2.55% 3.14% 3.32% 3.27%


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Non-tax revenues also look better by $38 million in this Forecast than in last years. This is

partly offset by an $18 million hit to Operating Transfers-In, due to a recent change in the

Equity Transfer methodology (discussed below).

On the expense side, pension rates are higher than they looked last year. After a March 18,2013 CalPERS Board meeting, two assumption changes will be implemented: changing the

smoothing period from 15 to 5 years, and using a closed-end amortization period. These

changes are estimated to add 8.5 percent to Miscellaneous group pension rates over five years,

and 14 percent over five years for Safety. These rate increases, along with other likely changes

in the next 2-3 years, are incorporated into the Forecast.

Note that from the March 2013 version of the Forecast to the current version, PERS assumption

changes described above as well as others projected in the near future have caused a

significant increase in projected pension rates. For Miscellaneous, the increase averages 3.5

percent per year for the ten years of the Forecast, and for Safety, the increase averages 8.7percent per year. In dollar terms, the combined ten-year projected pension expense in this

version of the Forecast is about $23 million more than that projected in the March version.

These pension increases are a significant factor in the shortfalls shown in the Forecast

beginning in FY 2016. The City has two years in which to restructure and prepare for these

changes.

Substantive Changes To Revenue and Expense Since December 2012 Forecast

Since the December 2012 presentation of the LRFF to the Finance Committee, new data and

information have prompted staff to make adjustments to revenue and expenses both in FY

2013 and in future years. These are outlined below:

Recent activity for tax revenues has resulted in an upward revision to FY 2013 revenuesof $1.7 million

Because of a decrease in PG&Es rate of return by the California Public UtilitiesCommission which affects a key component of the Citys equity transfer formula, the

transfer from the Citys Electric and Gas Enterprise Funds is decreasing by $0.7 million inFY 2014 (More information on equity transfer is provided on page 14 of Attachment A)

Salary and benefit projections in FY 2014 were changed based on the Citys ServiceEmployees International Union (SEIU) contract.

Tentative decisions that were made at the March 18, 2013 CalPERS Board meetingimpact projected pension rates from FY 2016 onwards. These changes are discussed in


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detail in the LRFF report (pages 15-16 of Attachment A).

Lastly, the Cost of Services Study is nearing completion, with results expected to Council this

summer. Following that, staff is planning a review of City non-fee services as well as of

administrative operations to further inform any upcoming structural changes.

As with all forecasts, revenues and expenses are moving targets that change with circumstance

and time. Nevertheless, the forecast serves as a critical tool in developing the FY 2014 budget

and in identifying the Citys most pressing, future challenges.

Attachments:

Attachment A: Long Range Financial Forecast Fiscal Years 2013-2023, Council Versiondated May 13, 2013 (PDF)

Attachment B: CMR ID# 3618 - Fiscal Years 2013 to 2023 Long Range Financial Forecast(Continued) (PDF)

Attachment C: Excerpt Minutes from Finance Committee Meeting 03-05-13 (PDF) Attachment D: Excerpt minutes from Finance Committee meeting 03-19-13 (PDF)


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L ONG

R A N G E

FINANCIAL

Fiscal Years 2013 to 2023

FORECAST

Council VersionMay 13, 2013


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TABLE OF CONTENTS

I. EXECUTIVE SUMMARY 1

II. ECONOMIC OUTLOOK 3

III. UPDATED MODEL 6

CHARTS:

- 2013-2023 BASE MODEL 20

- PERCENTAGE CHANGES IN BASE MODEL 22

IV. RESERVES 24

V. ALTERNATE SCENARIO 25

VII. APPENDIX 28

VIII. ENDNOTES 30

VI. CHALLENGES & CONCLUSIONS 26


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EXECUTIVESUMMARY

ThisforecastsummarizestheGeneralFundoutlookforFiscalYears(FY)2013through2023.Ratherthanaprediconorcommitment,aforecastisafinancialsnapshotbasedonanumberofassumpons. ThisLong

RangeFinancialForecast(LRFF)isatooltoallowstaffandCouncilmemberstoseethelongertermresults

ofchoicesmadetodate,andidenfyissuesthatmustbeaddressedinthenearterminordertoimprove

theCityslongtermoutlook.

Thenaonalandstateeconomiesconnuetoshowimprovement,andfortheCity,FY2011and2012end

edwithnetposiveresults. FY2011endedwitha$3.2millionGeneralFundsurplus,andFY2012financial

resultsincludeda$4.5millionsurplus.

The

LRFF

Base

Model

shows

a

con

nuing

posi

ve

trend.

FY

2013

is

projected

to

end

with

a

$3.1

million

sur

plus.IntheLRFFBaseModel,thecombinedshorallforFY2014to2023(tenyears)is$34.8million.The

BaseModelcanbefoundonpage20ofthisreport.Table1,below,summarizestheBaseModel.

TheBaseModelincludesincreasedpensionratesduetoimpendingchangesinCalPERSmethodologiesas

wellaspossibleaddionalrateincreasesinthefuture.Oneimpendingchangeisaswitchfromafieen

yearsmoothingperiodforrecoupingPERSporoliogainsandlossesdowntoafiveyearperiod. Asecondis

duetoincreasedlifeexpectancyamongrerees,andthethirdisthelikelyloweringoftheassumeddis

countrateonthePERSporoliofrom7.5percentto7.25percent. Inaddion,staffhasaddedanaddional

1percentperyearbeginninginFY2017forunforeseenpensioncostincreases.

Staffincludedanalternatescenariothatassumesthediscountratedeclinesby0.5percentratherthan0.25percentaddinganaddional$14.5millionincostsovertheeightyearperiodfromFY20162023.

Staffwillbehiringandworkingwithanactuaryinthecomingmonthstohelpvalidatethecostesmates

andassumponsdiscussedinthisreport.

E X E C U T I V E S U M M A R Y


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Note:Theforecastdoesnotincludethesavingsfromthenewthirdpension erimplementedasofJanuary

2013aspartoftheCaliforniaPublicEmployeesPensionreformAct(seepage26).Atthemoment,thedollar

impactofthislegislaonisunknown,andstaffwillprovideCouncilwithupdatesasnewinformaonemerges.

TheBaseModelalsoincludessavingsfromtherecentagreementswiththePaloAltoPoliceOfficersAssocia

on(PAPOA),theServiceEmployeesInternaonalUnion(SEIU)andtheManagement/Professionalgroup.

Thesavingsfromthesethreeagreementsaddto$2.7millioninFY2013.

AddionalassumponsincorporatedintotheBaseModelaredetailedbeginningonpage6.

Thefollowingpagesofthisreportprovideasummaryofthenaonal,state,andlocaleconomicoutlook;a

detailedlookatthetenyearForecast;thealternatescenariowithhigherpensionrates;andadiscussionof

thechallengesandconclusionsderivedfromtheForecast.

E X E C U TI V E S U M M A R Y


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ECONOMICOUTLOOK

Economicgrowthonnaonal,state,andlocallevels hasbeguntolookmorerobustinthepastyear. The

followingindicatorscontributetotheimpressionthattheeconomyisonamorestablefoong:

Naonal

Thenaonalunemploymentratewas7.6percentinMarch,downfrom7.9percentinJanuary2013and

8.2percentinMarch2012.1

BeaconEconomicsisexpecngtheU.S.economytogrowby3%through2013,andtheunemployment

ratetodropto7%bytheendoftheyear.2

AccordingtoBeaconEconomics:

Opmismfortherestof2013isbeingpartlydrivenbyaresurgenthousingmarket.Homeprices

havebeenclimbingatasignificantpaceandwillconnuetorisethroughthisyearand2014,ataminimum.Thereasonforthejumpinpricesissimpleghtinventoriesandincredibleaffordabil

ity.

Overall,theUSeconomyisonthemend.Buttherearemanylongertermissuesthenaonmust

addressincludingworkingthroughchangestothenaonalhealthcaresystemandtacklingfunda

mentalissuesrelatedtounderfundedFederalentlementsandstateandlocalpesnions.2

State

Thestatesunemploymentratefellto9.6percentinFebruaryitslowestlevelinoverfouryears.

ThemedianpriceofexisngsinglefamilyhomessoldinMarchwas$313,000,up8.3percentfromFebru

aryand

24.7

percent

from

March

2012.

TheBayAreamedianhomepricewas$436,000inMarch,up7.7percentfromFebruaryand21.8percent

fromMarch2012.3

E C O N O M I C O U T L O O K

From The Weekly Update, State Treasurers Office, April 15, 2013

OnebrightspotintheFebruaryjobsreportfromtheEmploymentDevelopmentDepartmentwas

thedeclineinlongtermunemploymentoverthepastyear.Californiansoutofworkforayearor

longerdroppedbothinnumberandasashareoftheunemployedmorethananyothercategoryofjoblessduraon.

InFebruary,617,000Californianswerejoblessfor52weeksorlonger,comparedto728,000in

February2012.Thatsadeclineof111,000,or15.2percent.

Overthesameperiod,asashareoftotalunemployed,workersjoblessfor52weeksorlonger

fellfrom34.7percentto32.8percent.4


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ChartSource: StateTreasurersOfficestaff,TheWeeklyUpdate,April15,2013

Local

CaltrainAnnualPassengerCountsshowa15.7%increaseinridershiptoPaloAltobetweenFeb

ruary2011andFebruary2012.5

PaloAltoisseeinganoceableincreaseincommercialacvity,asevidencedbytheopeningof

severalnewretailstores,andareneweddearthofparkingcapacity,withCouncilandstaffnow

weighingarangeofsoluons. Thelasttwoyearshavebeenaperiodofsteadygrowthinrevenuesforlocalhotels,andfive

hotelsareinthepipeline,including:

HiltonGardenInn:175Rooms. Expectedopening:2014

HiltonHomewoodSuites:138Rooms,Expectedopening,2014

CasaOlga: 86rooms. ApprovedJuly23,2012. Renovaonsarecurrentlyundercon

strucon. Expectedopening,summer2013.

Mings(1700Embarcadero): 147Rooms. Councilapprovalrequiresthatbuildingpermits

mustbeobtainedandconstruconcommencemuststartbyApril2014.

Wesnannex(711ElCaminoReal)(Clement): 23roomexpansion. Preliminaryarchitec

turalreviewoccurredinMay2012. Noformalapplicaonhasbeenreceived.

E C O N O M I C O U T L O O K


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E C O N O M IC O U T L O O K

IMPACTOFECONOMICOUTLOOKONASSUMPTIONSUSEDINMODEL

Asaresultofthefactorsdiscussedabove,theForecastincludesrelavelyhealthygrowthinsales,property,

transientoccupancyanddocumentarytaxrevenues.Thefollowingchapterdiscusseseachrevenuesourcein

detail.

State&LocalUnemploymentRates,January20122013

Source:EDDLaborMarketInformaonDivision,April9,2013

Jan.2012 Jan.2013PaloAltoCivilianUnemploy

mentRate 4.8% 4.2%

SantaClaraCountyUnemploy

mentRate 9.0 8.0%

CAUnemploymentRate 11.0% 9.8%


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ASSUMPTIONSINCLUDEDINTHEMODEL

ThefollowingdescribesfactorsassumedintheBaseModel.

TheFY2013revenuesandexpendituresincludeanumberofonemeexpendituresandsavings.TheBase

Modelexcludestheseonemeitemsfromthesucceedingyears,beginninginFY2014:

$1.3millioninsalarysavingsduetofrozenposions(increasingFY2014expenditures)

$0.2millioninoneme,nonsalarycosts,including$80,000foraPoliceServiceStudy;$50,500forCom

prehensivePlanfunding;and$70,000foranorganizaonalstudyofthePlanningandCommunityEnvi

ronmentdepartment(decreasingFY2014expenditures)

Thepaybackofa$4.9millionloantotheTechnologyFund. Thelastpaymentof$1.2milliononthisloan

wascompletedinFY2013(decreasingFY2014expenditures)

Inaddiontotheseitems,theFY2014projectedbudgetassumesaonemenetdecreaseinrevenuesof

$1.4millionfortheGolfCourseReconfiguraonproject. Theenretenyearperiodincludes$1millioninad

dionalannualoperaonalexpensesaributabletotheLibraryrenovaons.

RecentagreementswiththePaloAltoPoliceOfficersAssociaon(PAPOA),thePoliceManagementAssocia

on(PMA),ServiceEmployeesInternaonalUnion(SEIU),andtheManagement/Professionalgroupre

sulnginacombinedsavingsof$1.9millioninFY2013areincludedintheBaseModel.

Totalrevenuesareprojectedtogrowatannualratesrangingfrom1.7to4.7percentoverthenexttenyears.

Althoughthisisasignofimprovedcityresources,loomingpensionandrereemedicalobligaonsandinfrastructureneedsexceedavailableresources.ThemostrecentvaluaonreportfromCalPERSincreasedtheFY

2014Citypensionrates,resulngin$1.9millioninaddionalGeneralFundexpenseforFY2014comparedto

FY2013. Furthermore,theGeneralFundsrereemedicalobligaonis$9.1millioninthecomingfiscalyear

andisexpectedtogrow3.25percentannually.

Staffperformedananalysisonrevenuegrowthgoingbackto1992,reviewingoverallGeneralFundrevenues

aswellasgrowthratesinthefivemajortaxcategories(PropertyTax,SalesTax,DocumentaryTransferTax,

TransientOccupancyTax,andUlityUserTax). Toensurethatthecompoundannualgrowthrates(CAGR)

foreachanalysisreflectedrealchangesratherthanrecategorizaons,adjustmentstoprioryearactualcol

leconsweremadewhereappropriate.

AhistoricaltwentyyearCAGRanalysisforallGeneralFundrevenuesshowsaverageannualgrowthof4.56

percent. Withinthatfigure,therearesignificantvariancesbetweentheCAGRsforeachofthetaxcategories.

Forinstance,the20yearCAGRforPropertyTax(thelargesttaxcategory)is4.67percent,whiletheCAGRfor

SalesTax(thesecondlargesttaxcategory)is2.07percent.

U P D A TE D M O D E L


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IntheBaseModel,theCAGRforprojectedoverallGeneralFundrevenuesis3.27percent,wellbelowthead

justed20yearhistoricalCAGRof4.56percent. Oneoftheprimaryreasonsforthedecreaseisa$0.7million

reduconintheequitytransfer.

AsrecommendedbytheInfrastructureBlueRibbonCommission(IBRC)report(December,2011),andap

provedbyCouncilbeginninginFY2013,theBaseModelincorporatesanaddional$2.2millioninannual

capitaloperangandmaintenancefunding(keepup).TheIBRCreportrecommendedthatanaddional

$4.2millionbecontributedannuallytowardstheCitysinfrastructurecatchupneedsandthatfundingbe

foundforotherprojectandconstruconneedstotalingapproximately$210million.Theseneeds,includinga

newPublicSafetyBuildingandrebuildingtheMunicipalServiceCenter,andthecatchupfundingarenot

includedintheBaseModel.

REVENUES

TaxrevenuesinPaloAltohaveimprovedmarkedlysincethebeginningoftheGreatRecessionandareex

pectedtocontinuetheirupwardtrendinthenearfuture. SincetheDecemberforecastpresentedtotheFi

nanceCommittee,severaltaxrevenuecategorieshavebeenadjustedforFY2013andinoutyears. These

changesarebasedondataavailablesincetheDecemberforecastandonthealignmentwithhistorical

growthratetrends.

SalesTax

Thiseconomicallysensiverevenuesourceisbouncingbackfromitsrecessionlowof$18.0millioninFY

2010. Receiptsroseto$20.7millioninFY2011andto$22.1millioninFY2012. Staffiscurrentlyprojecng

salestaxrevenuesof$23.4millioninFY2013,nearly$0.8millionabovetheadoptedbudget. Receiptsinthe

firstquarterofFY2013,whichare6.7percentabovetheprioryearsfirstquarter,supportthischange. Ro

busteconomicsegmentsincludeelectronicequipment,apparelstores,restaurants,andservicestations.

Weakperformersincludefurniture/appliancestoresandbusinessservices. Staffsforecastisinlinewiththat

oftheCityssalestaxconsultant,MuniServices,forthenexttwoyears. Asaconsequenceofrecentdata,

estimatedrevenuesforFY2014wereraised$0.5millionaboveprojectedFY2013revenues.

Thesalestaxgrowthrateusedforthenexttenyearsat2.3percentisslightlymoreoptimisticthanthe20

yearhistoricalgrowthrateof2.07percent. Whiletherearemanychallengestosalestaxgrowth,suchas

growingInternetsales,theproliferationofbigboxstoresoutsideCitylimits,andtheriseofconsumerservices(notsubjecttotax),theCityseffortsineconomicdevelopment(e.g.Teslaautosales)andmaintaining

highprofileretailerscouldboostthefuturegrowthrate. Salestaxgrowthmustbemonitoredcarefullysince

thisrevenuesourcerepresents14percentofGeneralFundresources.



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PropertyTax

UnlikemanyCaliforniajurisdictions,PaloAltospropertytaxesdidnottakeamaterialhitasaconsequence

oftheGreatRecession. Revenueshaveremainedrelativelystableasshownbelow:

Forthepastseveralyears,staffhasprimarilyreliedonCountyestimatestodevelopitspropertytaxbudget.

TheCountyhasregularmeetingstoinformcitiesandschooldistrictsonassessmentrollgrowthandevents

thatcanimpactrevenues(e.g.appealsfromcommercialandresidentialproperties). BasedonrecentCounty

data,itislikelythatreceiptswillexceedtheFY2013adoptedbudgetof$27.3millionbysome$0.6million.

Asstatedinthepreviouschapter,housingvaluesinSiliconValleyarerisingatafasterratethantherestofCaliforniaandthecountry. AccordingtoaNovemberInteroRealEstateServicesupdate,Whiletherestof

thecountryhasbeenrecoveringtheBayAreahousingmarkethasexplodedoverthelast18to24months.

Mostlisngsaresellingwithmulpleoffersandconsiderablyoverlistprice. ThisprognosisforthePaloAlto

realestatemarketwilllikelytranslateintohigherdocumentarytransferandpropertytaxes.ForFY2014,

propertytaxrevenueisprojectedat$29.1million,a$1.2millionor4.3percentincreaseabovethecurrent

fiscalyearesmateof$27.9million.


FiscalYear PropertyTaxRevenues2009 $25.4million2010 $26.0million2011 $25.7million2012 $26.5million

$22,194

$22,623

$20,089

$17,991

$20,746

$22,132

$23,364

$15,000

$17,000

$19,000

$21,000

$23,000

$25,000

2007 2008 2 009 2010 2011 2012 2013

SalesTax(Thousands,FY2013Projected)

FiscalYear


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TransientOccupancyTax(TOT)

Sincedecliningto$6.9millioninFY2010duetotheGreatRecession,TOTrevenueshavesteadilyrisen. InFY

2011receiptstotaled$8.1millionandinFY2012theymovedto$9.7million. Staffnowestimatestheywill

increaseto$10.4millioninFY2013andto$11.5millioninFY2014. Averageoccupancyanddailyrates,re

spectively,havesurgedfrom66percentand$139perdayinFY2010to85percentand$174inthefirstquar

terofFY2013. WithincreasedbusinessactivityandvisitorstoPaloAlto,staffwilladjusttheFY2013budget

upwardbyapproximately$0.8million. TheoutyearsoftheForecastincludeaCAGRof4.79percent.

NotethattheforecastincludesfuturerevenuesfromtheCasaOlgahotel,expectedtoopenthiswinter. Rev

enuesfromotherhotelsintheplanningstagesarenotincluded.

DocumentaryTransferTax(DTT)

Thisrevenuesourceisbasedonthenumberandvalueofcommercialandresidentialpropertysales.Inthe

lastdecade,revenueshaveaveraged$4.8millionperyear. Duringtherecessionperiod,DTTrevenuesfellto$3.1millioninFY2009andto$3.7millioninFY2010. ResultsforFY2011and2012were$5.2millionand

$4.8million,respectively. Withrevenuestabilizinginthelasttwofiscalyears,therisingvalueofcommercial

andresidentialtransactionsinthefirstquarterofFY2013,andseveralextraordinaryremittances,staffispro

jectingreceiptsinFY2013of$6.8million,or$1.7millionhigherthanAdoptedBudget.Duetotheunusual

streamoftransactionsthisfiscalyear,amorerealistic$5.7millionforFY2014isprojected.

UlityUsersTax(UUT)

FY2013UUTrevenuesareexpectedtobethesameasactualFY2012revenues,oraround$10.8million. The

ulitygeneratedUUTprojeconsarebasedonthemostrecentrateandprojectedrevenueinformaonfrom

theUliesdepartment. Thesenumberscouldchangeasthedepartmentdiscussesitsproposedrateplan

withtheUliesAdvisoryCommissionandtheCouncil. Telephonegeneratedrevenuesconnuetheirdown

warddecline,duetodecreasedlandlineusage.OtherTaxes&Fines

ThelargepartofthiscategoryiscomprisedofParkingViolaonrevenue,whichstaffisesmangtobe$1.6

millioninFY2014.Otherrevenueitemssuchastrafficviolaons,administravecitaons,andlibraryfines

andfeeshaveconnuedtogrowoverthepastfiveyears.Anothercomponentofthisrevenuecategoryisthe

VehicleinLieuFee(VLF). InFY2012,thestatelegislaturesuspendeditsallocaonstolocalagenciesinorder

balancetheStatebudget. Unlthelegislaturetakesacontorestoreit,staffisnotprojecnganyVLFre

ceiptsinthisforecast.StaffexpectsthatFY2014revenuewillendatthesamelevelasFY2013,whichis$2.1

million.

ChargesforServices

Totalrevenuesinthiscategoryareprojectedtobe$0.5millionhigherinFY2014thaninAdoptedFY2013.

Thisisduetotwofactors:firsttheGolfCourseReconfiguraonprojectwillbeginlaterthanoriginallyanci

pated,resulnginlessofahittoGolfCoursefeerevenueinFY2014butmoreofahitonFY2015. Second,

plancheckrevenuesareexpectedtoincreaseby$2.2millioninFY2014,morethancompensangforthe

GolfCourserelatedloss. AertheGolfCourseprojectiscompletedandthatrevenuenormalizes,theFore

castassumesanannualincreaseintheChargesforServicescategoryofbetween2.6and3.7percentbe

tweenFY2017andFY2023.



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StanfordFireandDispatchServices

TheCitycurrentlyisunderagreementwithStanfordUniversitytoprovideFireResponseandDispatchser

vices.Stanfordischarged30.3percentoftheFireDepartmentsnetcostand16percentofthePoliceDepart

mentsCommunicaonandDispatchDivision.Withtheexceponofpension,healthcare,andrereemedical

obligaoncostincreases,theFY2014basedoesnotassumeanysignificantchangesfortheFireDepartment

andPoliceCommunicaonandDispatchServicesbudgets.Stanfordfireanddispatchrevenueisesmatedto

increaseby$0.2millioninFY2014duetopension,healthcare,andrereemedicalcostincreases.TheBase

Modelassumesthatrevenuefromthisagreementwillincrease3.5percentannually.

Currently,theCityisinnegoaonswithStanfordfortheFireServicescomponentofthecontract.TheFY

2013budgetincludesatotalof$8.2millionofrevenuefromStanfordforFireandDispatchServices.Inthe

bestcasescenario,thefinaldeterminaonofanewreimbursementagreementcouldresultin$1.4millionin

addionalrevenue;intheworstcasescenariotheagreementcouldbeterminatedenrely.TheagreementrequirestheUniversitytogive12monthsnoceofterminaon.Assumingthatnegoaonsareconcludedin

FY2014,amodestincreaseof3.5%hasbeenbuiltintotheouteryearstoaccountforstaffingandotherde

partmentcostincreases.



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PermitsandLicenses

RevenuefrompermitsandlicensesrosesignificantlyinFY2011and2012dueprimarilytoincreasedacvityattheDevelopmentCenter. BudgetedrevenueinFY2013decreasedbecausetheCityimplementeda

citywideTechnologyEnhancementFeeandtheserevenues,whichhadpreviouslybeenchargedonlytosome

developmentpermits,weremovedfromtheGeneralFundtotheTechnologyFund.Thisrevenuecategoryis

projectedtodecreaseslightlyduetotwofactors:(a)internalstreetcutfees,whicharebasedonUliesac

vies,arereducedby$0.11milliontoreflectplannedprojectacvies;and(b)permitacvityisassumedto

slowby2percentperyearthroughFY2018basedonhistoricacvity,followedby3.5percentannualgrowth

insubsequentyears.

ReturnonInvestment

GeneralFundinterestearningshavedeclined71percentfromFY2009toprojectedFY2013levelsashigher

yieldingmaturinginvestmentsarereinvestedinahistoricallylowinterestrateenvironment.TheFederal

OpenMarketCommieeremainscommiedtokeepinginterestratesatexceponallylowlevelsthrough

mid2015tosmulatetheeconomyandboostjobgrowth. Thisaconwillkeepdownwardpressureonthe

CitysporolioyieldinFY2014. Interestearningsareprojectedtograduallyincreaseby1.3percent inFY

2015growingto3.0percent inFY2023.ItisexpectedthatFY2013revenuewillbebelowtheadoptedbudg

etby$0.2million,totaling$0.8million.InFY2014,returnoninvestmentrevenueisesmatedtoremainlevel

at$0.8million.

RentalIncome

ThelargestsourceofrentalincomeistheCitysEnterpriseFundsandtheCubberleyCommunityCenter. The

rentfromtheEnterpriseFundsdeclined$2.5millionwiththeclosureoflandfill,theMiddlefieldWellsite,andtheformerLosAltosTreatmentPlant(LATP)siteinFY2013.FY2014rentalincomealsoreflectstheparal

closureofrestaurantandproshopfaciliesduringtheGolfCourseReConfiguraonProject. Forthisfore

castperiod,a2.5percentgrowthratewasassumedforallrentalproperes,exceptfortheRefuseFundrent,

whichremainsfixedunlFY2021.TheCityisconducnganassessmentofallGeneralFundpropereswhich

mightimpacttherentalincomefromEnterpriseFundsduringFY2014andbeyond.

FromOtherAgencies

RevenuefromOtherAgenciesincludesincomefromCommunityServicesOutreachtheatreprograms,Palo

AltoUnifiedSchoolDistrict(PAUSD)reimbursements,StateofCaliforniagrantsforPolice,LibrariesandCom

munity

Services,

and

dona

ons

from

Friends

groups.

Many

of

these

are

diffi

cult

to

predict.

For

example,

state

grantsarereducedwhenthestateexperiencesbudgetdifficules.Revenuesoverthepast4yearshave

rangedfrom$0.08millionto$0.3million.TheForecastassumesazerogrowthratefromFY2014onwards.

ChargestoOtherFunds

EightysixpercentofthiscategoryisGeneralFundadministravecostplanallocaonchargestotheEnter

priseFunds. ForFY2013,theprojectedamountis$10.9million.InFY2014onward,forecastedincreasesare

around2percent.



19/5612



20/5613


OtherRevenues

MajorrevenuesourcesinthiscategoryareAnimalServiceschargestoLosAltosandLosAltosHills,dona

onsfromnonprofitsforCitylibraries,andrevenueswhichdonotbelongtoothercategories. InFY2013,OtherRevenuesareprojectedat$1.2millionthesamelevelasintheAdoptedBudget. ProjectedFY2014

revenuesof$2.0millionincludea$0.7milliondonaonfromvariousnonprofitstolibraries;a2percentan

nualincreaseisassumedthroughouttheForecastperiod.

OperangTransfersIn

OperangTransfersincludetheequitytransferfromtheElectricandGasFunds,aswellastransfersfromthe

UniversityAveParkingPermitFundandtheCaliforniaAveParkingPermitFund.Inaccordancewithameth

odologyapprovedbyCouncilinJune2009,theequitytransferiscalculatedbyapplyingarateofreturnto

thecapitalassetbaseoftheElectricandGasFunds. ThisrateofreturnisbasedonPG&E'srateofreturnon

equityasapprovedbytheCaliforniaPublicUliesCommission(CPUC). OnDecember26,2012,theCPUC

issueditsdecisiontolowerPG&E'srateofreturnonequity. Asaresult,theequitytransferfromtheElectric

andGasFundsisprojectedtodecreasefrom$17.7millioninFY2013to$17.0millioninFY2014. TheCity

Aorney'sOfficewillbeprovidingCouncilwithaddionalinformaonregardingtheequitytransferinlight

oftheprovisionsofProposion218,whichprohibitsciesfromraisingfeeswithoutvoterapproval,and

Proposion26,whichprohibitsciesfromraisingtaxeswithoutvoterapproval.

EXPENSES

Salary

A2percentannualsalaryincreaseforSEIUandManagement/ProfessionalisassumedbeginninginFY

2014.Forallotherlaborgroups,2percentannualincreasesareassumedbeginningFY2015.Theseas

sumponsareforforecasngpurposesonlyanddonotrepresentacommitmentorrecommendaon

fromstaff.

UnfreezingposionsfrozeninFY2013added$1.3millioninsalarycoststotheFY2014base.

Inaddion,thenetFTEchangefromFY2013AdoptedBudgettoFY2014ProposedBudgetisa1.26FTE

decrease.


21/5614


ThechartbelowshowshowstaffinghasdecreasedintheGFsinceFY2004,butSalary&Benefitcosthasnot.

ThechartbelowindicatesthedegreetowhichGeneralFundFTEreductionsaretemperedbyreal

locationstootherfunds. WhileoverallGFstaffhasdecreasedby180.1overthe lasttenyears,72

ofthoseFTEhavebeentransferredtootherfunds,leavinganetdecreaseof108.2FTEintheGF.


22/5615


Benefits

Pension

TheForecastusesCalPERSesmatedpensionratesforFYs2014,2015,and2016.Themostrecentrates

werereceivedinNovember2012. However,FY2014rateswillincreaseslightlysincetheCityoptednot

tophaseinanassumponchange,inordertoreduceitscostsoverthelongterm.6

TheCalPERSBoardmetonMarch18,2013andtentavelyapprovedasetofassumponchangespro

posedbytheirChiefActuary. Specifically,thechangesincludetransioningfroma15yearsmoothing

methodtoa5yearsmoothingmethod,andmovingfromanopentoaclosedamorzaonperiod.This

wouldaddapproximately1.7%peryearfromFY20162020fortheMiscellaneousgroup,and2.8%per

yearfortheSafetygroup.

Inspringof2012,Councildirectedthattheforecastassume3percentannualincreasesinpensionrates

beyondthe3yearsprojectedintheannualCalPERSActuarialreport. IntheDecember2012andMarch

2013versionsoftheForecast,staffhadincludedthose3percentincreases. However,inthisversionof

theForecast,staffhasincorporatedintotheforecastanumberofspecificpotenalrateincreasesand

substuted1percentaddionalannualincreasesratherthan3percent.Staffbelievesthattheintenon

ofthe3percentincreaseswastoreserveagainstfuturechangesinCalPERSassumponsandrateseng.

Giventhecertaintyofsmoothingandamorzaonchanges,andthelikelihoodofthemortalityincreaseandadiscountratechange,staffhasinsteadincorporatedthesespecificchangestoCalPERSrates. These

changesoffsetmostoftheneedforthe3percentannualplaceholder. (Seepage16fordetails.)

Staffhasmodifiedthealternatescenariotoreflectadiscountratechangeof0.5%ratherthanthe0.25%

changereflectedintheBaseModel. TheCalPERSBoardisexpectedtoconsiderthediscountratechange

inFebruary2014,sothischangewouldnotimpactratesunlFY2016.

StarnginJanuary2013,pensionreformrequiresnewmembersofCalPERSbeenrolledintoanewpen

sionplanthatofferslowerpensionbenefits. CalPERSiscalculangtheactualcostforPaloAlto,soanes

mateisnotavailableatthis me. TheBaseModeldoesnotincludethepotenalsavingsfroma3rd

pension erfornewemployees.

Asapointofreference,theJune30,2011CalPERSAc

tuarialValuaonindicatedthattheCitysMiscellane

ousgroupsPensionFundedrao(usingMarketValue

ofAssets)was69.5% upfrom62.2%intheprioryear.

TheCitysSafetygroupsFundedraowas71.8%

(againusingMarketValueofAssets). Theprioryears

raohadbeen64.8%.

Pensionseemstobeoneofthelargestvariableamongtheexpensecategories,withevolvingratechangesoverwhich

theCityhaslilecontrol.Staffisstayinginclosecontact

withPERSactuarialstafftostayuptodateonallpending

changes.


23/5616

ThechartbelowdetailsthecomponentsoftheCalPERSrateprojeconsusedintheBaseModelForecast.

CALCULATIONOFPENSIONRATESUSEDIN BASEMODEL

HealthCare

RereeAnnualRequiredContribuons(ARC)arebasedontheJanuary1,2011actuarialstudyforFY

2012,2013,and2014,asamendedbytheCouncilDireconofApril16,2012.InsengtheARC,theactu

aryassumesitwillincreaseeachyearby3.25percent,thepresumedannualincreaseinpayroll.

Theforecastassumesa10percentannualincreaseinmedicalcostsanda4percentannualincreasein

dentalandvisioncosts.Thisassumponresultsina$0.76millionincreasebetweenprojectedFY2013

and 2014costs.Overthenexttenfiscalyears(2014through2023),thesehealthcarecostwillincrease

from$9.5millionto$20.8million,or218percent.

TheAffordableCareAct(Obamacare)hasprovisionswhichmustbeimplementedincalendaryear2013

inpreparaonforeffecvedatesin2014. Staffisintheprocessofexaminingtheserequirementsand

planningfortheirimplementaon. Thecostsofthisimplementaonarenotincludedintheforecast.

ContractServices

FY2013ProjectedContractServicesincludes$80thousandofonemecontracts,suchasthePoliceOrgani

zaonstudy,andaplaceholderof$0.5millionforassumedsavingsfromthereorganizaonofPaloAltoAnimalServices. TheFY2014baseremovestheseonemeFY2013expensesandprojectedsavings. TheAni

malServicessavingsareallocatedacrossvariouscategoriesintheFY2014Budget.

Totalexpenseforthiscategorytotals$10.7million,a$0.4millionincreaseovertheFY2013adoptedbudget.

InFY2015andbeyond,contractexpensesareprojectedtoremainrelavelystable,witha3.0percentannual

growthratethroughouttheforecastperiod.



24/5617


Supplies&MaterialsThebasemodelassumesanincreaseinthiscategoryfrom$3.2millioninFY2013and$3.9millioninFY2014,

mainlyduetothepurchaseofbooksandothermaterialsfortheMitchellParkLibrary. InFY2015,Communi

tyServiceswillseeasmallincreaseofapproximately$31,000forSupplies&MaterialsatthePaloAltoGolf

Course.ThisisbasedontheNaonalGolfFoundaonesmatestomaintainthenewlyredesignedgolf

course.Costswillremainrelavelyconstantlookingforwardtoouteryears,withaconsistentyearlyincrease

of3.0percent.

GeneralExpense

ThemajorityofGeneralExpenseincludescategoriesliketravelandmeengs,telephoneandnoncityuli

es,conngencyaccounts,anddebtservicepaymentsforthenewlysignedGolfCourseLeaseAgreement.

ProjectedFY2013expensesof$4.6millionreflectannualdebtservicewhichwasoriginallybudgetedasa

transfertoDebtServiceFund.InFY2014,GeneralExpenseremainsmostlyflat,andfromFY2014onwards,

annualincreasesof2.5to3.0percentareassumed.


25/5618

CubberleyLeaseThiscategoryrepresentsleasepaymentstoPAUSDfortheCubberleyfacility.TheForecastassumesthele

contractwithPAUSDwillconnuebeyond2014. PaymentsfromFY2014onwardarebasedonprojected

percentannualCPIincreases.TheCubberleyleaseexpenseinFY2014isesmatedat$7.3million.

RentsandLeases

ExpansionoftheDevelopmentCenterincreasedthisexpensecategoryby$0.2millioninFY2013.Rentan

LeaseexpenseforFY2014isesmatedtoremainat$1.2million.FromFY2015onwards,thisexpenseise

pectedtoincreaseby3percentperyear.

FaciliesandEquipment

Anaddional$0.2millionwasaddedtoFaciliesandEquipmentduringFY2013duetoonemeincrease

fortheDevelopmentCenterupgrade.FaciliesandEquipmentexpenseforFY2014is$0.5million,increa

by5percentin2015,then4percentin2016,and3percentperyearfortheremainingyearsoftheForec

AllocatedCharges

AllocatedchargesrepresentexpenseallocaonsbytheCitysenterpriseandinternalservicesfundsforse

vicesandproductstheyprovidetoGeneralFunddepartmentssuchasuliesusage,liabilityinsurance,t

nologycosts,andvehiclereplacementcosts. ThelastyearoftheGeneralFundloanrepaymenttotheTec

nologyFundwasinFY2013;theFY2014basemodelisreducedbythisamounttototal$15.1million.Bey

FY2014,theBaseModelassumesamodestannualgrowthrateof2percentinAllocatedCharges.

OperangTransfersOut

OperangTransfersOutincludestransfersforDebtService,TechFund,andtheAirportFund. Transferso

isreducedby$0.5millionduetotherefinancingoftheGolfCoursedebt.TheGolfCoursedebtwillbepai

downbyFY2018.FundingfortheAirportFundfromtheGeneralFundconnuesthroughFY2014andthe

2013projectedbasemodelassumesanaddional$0.2millionwillbetransferredtotheAirportFund.Th

BaseModelassumesthattheAirportFundwillbeselfsustaininginFY2015.

TransfertoInfrastructure

InFY2013,adoptedandprojectedtransferstothecapitalprojectfundremainat$13.2million.InFY2014

they

are

projected

to

remain

at

$13.2

million.

Beginning

in

FY

2013,

an

addi

onal

$2.2

million

per

year

is

addedtofundtheannualmaintenanceofexisnginfrastructureorkeepupneedsasdefinedbythe(IB

InfrastructureBlueRibbonCommissionReport.Anaddional$4.2millionperyearwillberequiredtofun

deferredmaintenanceorcatchupneedsasdefinedbytheIBRCReport.Thisaddionalcontribuonisn

includedintheBaseModel.

UPDATED MODEL


26/5619

FACTORSNOTINCLUDEDINTHEBASEMODEL

TheallocatedcostofvariousITDepartmentsnewiniavessuchasmigraontocloudbasedtechnologies,purchaseofnewequipmentandrelatedmaintenance/supportcosts

TheIBRCsrecommended$4.2millionperyearincreaseininfrastructureexpenditure

Anynewrevenuestreamearmarkedforinfrastructure. Councilmayconsidersucharevenuesourcein

thefuture.

PossibleTOTrevenuesfromfourofthefiveexpectedtoopeninthenexttwoyears (Seedetailsonpage

4.CasaOlgarevenuesareincludedintheForecast;theothersarenot.)

SavingsfromthePEPRAmandated3rdpension er(2%at62)fornewemployees

CostsofimplemenngtheAffordableCareAct,beyondthecostsofextendingcoveragetodependentsup

toage26

UPDATED MODEL


27/5620

BA SE MODEL

GENERALFUNDLONG

BA

FY


28/5621

BA SE MODEL

NANCIALFORECAST


29/5622

BA SE MODEL

GENERALFUNDLONGR

BASEMODELPE


30/5623

BA SE MODEL

ANCIALFORECAST

ECHANGES


31/5624

RESERVES

RESERVES

FY2012endedwithaBudgetStabilizaonReserve(BSR)totaling$28.1million.AlthoughtheBaseModelpro

jectssurplusesinFYs2013,2014,and2015,thenextsevenyearsoftheForecastincludeshoralls,withthe

reservebalancedroppingbelowthe18.5percentminimumreserveleveltoaslowas5.8percentofpro

jectedBudgetinFY2023.

ThegraphbelowillustratestheprojectedBSRlevelsascomparedtotheminimumreservelevels.

$12.0

$17.0

$22.0

$27.0

$32.0

$37.0

$42.0

Projected

BaseModel:ProjectedBSRComparedAgainst18.5%BSRLevel

BudgetStabilizationReserveActuals&Projection Mini mumReserve 18.5%


32/5625

A LTE R NAT E SC EN A RIO

ALTERNATESCENARIO

InthisAlternateScenario,itisassumedthatinaddiontothesmoothing,mortality,andthe1%assumedaddionalincreasesbeginninginFY2017,PERSwillreducethediscountrateby0.5percentratherthan0.2

percent,resulngina7percentdiscountrate.

Theaddional0.25%cutwouldcosttheGeneralFundanextra$14.4millionovertheperiodoftheForecast.

AlternateScenario1


33/5626

CHALLENGES:PENSIONREFORM

TheCaliforniaPublicEmployeesPensionReformActof2013(PEPRA)wasenactedfall2012andhasgenerat

edincreasedaenonandquesonsfromCalPERSrerementsystemmembersandemployers.Thenewlaw

includesasuiteofchangestocurrentrerementformulas,newmembers,employer/membercontribuons,

andworkingaerrerement.PEPRAalsoestablishesacapontheamountofcompensaonthatcanbeused

tocalculatethererementbenefitforallnewCalPERSmembers.Atthis me,thedollarimpacttotheCityof

this new legislaon is unknown. Staff will provide Council with updates as more informaon and data

emerge.

CONCLUSIONS

TheLRFFshowsbeerboomlineresultsthaninlastyearspresentaon. Thisisduetoemployeebenefit

concessions,budgetreducons,andhigherrevenuesinevidencesincelastyears(May2012)forecast. Since

FY2010, theCityhas realized$16.7million in savings from structural changes, the fruitofCouncilsand

staffsthinkingdifferent.Withbenefitcostsconnuingtoincreaseatafasterpacethanrevenues,theCity

mustconnuetofindaddionalstructuralsavings.

Inaddiontoemployeebenefitobligaons,theCitysinfrastructureneedscapitaloperaonandmainte

nance,projectcatchup,andotherprojectsidenfiedintheIBRCreportshouldbeaddressedand

plannedforviathisforecast.

TheCostofServicestudyisnearlycompleteandwillallowtheCounciltothoroughlyreviewthepriceofdo

ingbusinessandmakedecisionsonwhatservicescanbeprovidedand/orhowtheycanbeprovided.There

viewwillalsoidenfyservicesandbackroomoperaonsprovidedwithnofees.

Althoughsuccessfuleffortshavebeenmade,theCitymustconnuetoexploreitsbenefitstructure,alterna

veformsofservicedelivery,andmoreefficientoperaonstorealizeasustainable,longterm,financialfu

ture.

C H A L L E N G E S & C O N C L U S I O N S


34/5627


35/5628

A P PE ND IX

CONCESSIONSTODATE

Since2009,Councilandstaffcompletedthenegoaonofagreementswithlaborgroupstoeliminatemore

than$8.5millioninsalaryandbenefitexpense.TheCityisworkingwiththePoliceManagementAssociaon

(PMA)tonegoatecostsavings.

Thefollowingisalistofcurrentlaborcontractsandagreements:

SEIU(currentcontract)

EsmatedSavings:$0.55millionperyear,or0.76percentoftotalcompensaon

Createdasecond ertoourrerementstructure(2percentat60)fornewemployeeshiredoraerJuly

17,2010. ShiedfullcostofemployeePERScontribuontoemployee.

Implementedthe90/10medicalcostsharingplan.

Decreasealternavemedicalcashoutbenefittoaflat$284permonth,effecveOctober1,2012.

1.65percentcostoflivingincreaseeffecvefirstdayofpayperiodincludingJuly1,2012

Reducedfloangholidaysbythreedays.AnaddionalfloangholidaywillbeeliminatedaerJune30,

2013.

ManagementandProfessional(currentagreement)


EliminatedtheVariableManagementCompensaonplanasofFY2009.

ShiedfullcostofemployeePERScontribuontoemployee.


Decreasealternavemedicalcashoutbenefittoaflat$284permonth,effecveOctober1,2012.

Threepercentsalaryincreasetoparallyoffsetpensioncontribuoncosts

Changestothegroupsprofessionaldevelopmentplan,includingeliminanguseofprofessionaldevelop

mentfundstopurchaseelectronictechnologyandgymmembershipsandreducingtheannualamount

peremployeefrom$1,500to$500.Gymmemberscanbereimbursedthroughmanagementexcessbene

fit.

EliminatedcarallowancesfornewlyhiredDepartmentDirectors.

InternaonalAssociaonofFireFighters(currentcontract)


Createdasecond ertoourrerementstructure(3percentat55)fornewemployees.


Eliminatedminimumstaffingrequirements.


36/5629

A P P E N D I X


CostoflivingfreezeforFYs20122014. Eliminatedtuionreimbursementprogram.

FireChiefsAssociaon(currentagreement)

EsmatedSavings:$91thousandperyear,or9.8percentoftotalcompensaon


ShiedfullcostofemployeePERScontribuontoemployee.InMarch2013,thecitypaidemployee

rerementcontribuonresetsto5.1percent.

EliminatedtheVariableManagementCompensaonplan.

1.33percentsalaryreducon.

Eliminatedthreeholidays.


PaloAltoPoliceOfficersAssociaon(currentcontract):




Eliminatedtuionandtrainingbenefit.

1.33percentsalaryreducon.

Eliminatedthreeholidays.


Priorto2009,between2004and2006,theCityimplementedforallbargainingunits:

20yearvesngperiodtoqualifyforlifelongCitypaidhealthcoverage

Highestcosthealthcareplanoponeliminated,savingalmost$10,000peryearforeachemployee

movedawayfromthisopon.

Theaforemenonedconcessionsandstaffingreduconshavebeentoughdecisionsthatwerenottaken

lightly.LiketheCity,ouremployeesfacerisinghouseholdcostsanddiminishedassetvalues.Further

more,theimpactoftheposioneliminaonsisthatouremployeesarestretchedthin,andourabilityto

takeonnewprojectsisreduced.


37/5630

ENDNOTES

1. BureauofLaborStascs,EconomicNewsRelease,April5,2013

2. Beaconomics,Spring2013

3. TheWeeklyBriefing,StateTreasurersOffice,April22,2013

4. TheWeeklyBriefing,StateTreasurersOffice,April15,2013

5. MuniServicesEconomicOverview3Q2012News,page14

6. InitsNovember2012actuarialreports,CalPERSpresentedtheopontophaseinanas

sumponchangeovertwoyearsresulnginthe2014ratesseenhereonpage16orto

adoptthechangesrightaway. Turningdownthephaseinoponwouldresultinabout$0.6

millioninaddionalGeneralFundpensioncostsinFY2014,butabout$1.2millioninsavings

overthesubsequent19years. TheCityoptedtoturndownthephasein.

Sincethisdecisionwasmadeinrecentweeks,theaddionalcostwasincorporatedintothe

FY2014ProposedBudget,butthesavingswerenotincorporatedintothesubsequentyears

ofthisForecast.

ENDNOTES


38/5631

Visitourwebsiteat:www.CityofPaloAlto.org

A D A S

Contributors ChrisneParas

AmberCameron

Sco Jensen

TarunNarayan

SherryNikzat

LaloPerez

JoeSaccio

DaleWong

IncompliancewithAmericanswithDisabiliesAct(ADA)of1990,

thisdocumentmaybeprovided

inotheraccessibleformats.

Forinformaoncontact:

ADACoordinator

CityofPaloAlto

285HamiltonAvenue

(650)3292550

Prinng CityofPaloAlto

NancyNagel

TonySandhu


39/5632

TheCityofPaloAltoislocatedinnorthernSantaClaraCounty,approximately

35milessouthoftheCityofSanFranciscoand12milesnorthoftheCityofSanJose.

Spanishexplorersnamedtheareaforthetall,twintrunkedredwoodtreetheycamped

beneathin1769.PaloAltoincorporatedin1894andtheStateofCalifornia

granteditsfirstcharterin1909.

30%postconsumerrecycled


40/56

City of Palo Alto (ID # 3618)Finance Committee Staff Report

Report Type: Action Items Meeting Date: 3/19/2013


Summary Title: (Continued) Long Range Financial Forecast

Title: Fiscal Years 2013 to 2023 Long Range Financial Forecast (Continued

From March 5, 2013)

From: City Manager

Lead Department: Administrative Services

Recommendation

Staff recommends that the Finance Committee review and comment on the attached forecast

of revenues and expenses and provide direction on assumptions used in the forecast.

Motion

I move to accept the Fiscal Year 2013 to 2023 Long Range Financial Forecast and forward it to

the full Council for review and input.

Executive Summary

The Citys General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on

a variety of assumptions. It is a portrait of the Citys financial condition painted at one point in

time.

Background

The LRFF was presented to the Finance Committee on December 18, 2012 (staff report ID

#3248). The Committee directed staff to revise the forecast to address the Committees

concerns and provide additional information. An updated draft of the LRFF was presented to

the Finance Committee on March 5, 2013 (staff report ID #3531). Due to the length of the

Committees agenda on March 5th

, staff was directed to continue discussion of the forecast at

the next Finance Committee meeting. No motion was made to provide staff with additional

direction or to accept the LRFF and forward the forecast to Council.

Attachment B


41/56


Although the discussion of the forecast was tabled for future discussion and no motion was

made to formally provide staff with direction to update the forecast, the Finance Committee

raised a number of concerns and issues for staff to consider:

Related tax revenue associated with hotels currently under construction and earmarkrevenue streams for infrastructure expense

Calculate the pension savings for 3rd Tier employees Clarification of CalPERS pension rate estimates included in the base model and

alternative scenario

Reconsider having Utility Users Tax (UUT) revenue increase, specifically for the ElectricUUT revenue component

Reconsider sales and documentary transfer tax estimates

Staff is requesting a formal motion with direction on changes/additional clarification requestedby the Finance Committee so that the forecast can proceed to the Council for further

discussion.

Staff would point out that the Long Range Forecast serves as a guide and is expected to be

dynamic and subject to change. Additionally, with the mid-year review each year, the City is

able to adjust revenue estimates and expenditures based on actual experience and the mid-

year allows the Council the ability to make adjustments and spending decisions based on more

current facts. In other words, some conservatism in our forecasts provides valuable flexibility in

the course of any given year.

Finally, Staff would suggest that trends concerns and assumptions can be expressed as Trends

to Watch in the report, for example, without necessarily changing the Forecast itself going

forward.


42/56

FINANCE COMMITTEE

DRAFT EXCERPT MINUTES

Page1of8

Regular MeetingTuesday, March 5, 2013

Review of Fiscal Years 2013 to 2023 Long Range Financial Forecast.

Christine Paras, Principal Financial Analyst provided corrections to pages476, 498, and 504. Economic improvements and the decreasingemployment rate were reflected in the December and current Long RangeFinancial Forecasts (LRFF). Positive results for Fiscal Year (FY) 2011 and FY2012 allowed the City to transfer $7.6 million General Fund surplus funds tothe Infrastructure Reserve. The December LRFF included projectedsurpluses over the next three fiscal years. The previous LRFF showed acombined $4.2 million surplus in the base model over FY 2014-2023. Thatwas a turnaround from May 2012 when there was an $88 million budget gapover ten years. When Staff presented the draft LRFF in December, theFinance Committee (Committee) indicated a number of concerns and follow-up items for Staff. The first one was addressing outer year projections andhow they seemed overly optimistic. The Committee asked Staff to rely on alonger period of historical data to build projections for outer years. Thesecond item was the major factor that led to a ten-year budget surplus inthe last report, compared to the $88 million shortfall. In May 2012, Staff

began with a ten-year budget shortfall of $88 million. In December 2012,Staff forecasted a $4.2 million surplus over the next ten years. Today theLRFF showed a ten-year surplus of $500,000. The main drivers behind thechange were improved tax revenues and budget savings from miscellaneousgroups. The third item was an updated Utility User Tax (UUT) revenue. Thefourth item was the California Public Employees Retirement System(CalPERS) smoothing methodology and mortality experience. TheCommittee wanted a cumulative deficit-surplus total added to the forecast.Finally, the Committee wanted Staff to show detail of true General Fund FullTime Equivalent (FTE) reductions, rather than transfers between GeneralFund and other funds. Staff updated the model and proposed changing anumber of items in the model. Changes resulted in a $500,000 hit to theGeneral Fund in FY 2014. Staff projected a $4.2 million increase in overallrevenue for FY 2013. $2.5 million of that increase was included in the LRFFpresented in December 2012. In FY 2014 Staff projected a minimal revenueincrease. Staff included in the FY 2013 numbers within the updated basemodel an additional $1.7 million in tax revenue, resulting from a one-timeDocumentary Transfer Tax receipt. The second item Staff changed in the

Attachment C


43/56

DRAFTEXCERPTMINUTES

Page2of8

FinanceCommitteeRegularMeeting

DraftExcerptMinutes030513

base model was a $1.3 million General Fund hit due to the change in equitytransfer calculation. Staff received rate updates in January 2013 regardingthe rate of return from Pacific Gas and Electric (PG&E). The Utility Fundswere based on capital assets in those funds and tied to PG&E's rate ofreturn. The calculation of the equity transfer was updated for those lowerrates. The base model presented in December 2012 reflected a total $18.3million equity transfer from Utilities. The base model now reflected a $17.4million transfer from electric and gas. The third item included in the updatewas the deferral of the Golf Course reconfiguration. The project wasdeferred from July 2013 to April 2014, resulting in a savings of $700,000.

Joe Saccio, Assistant Director of Administrative Services recalled one of themain concerns in the December 2012 Committee discussion was whetherStaff was overly optimistic in the LRFF. In addition, the Committeesuggested using historical and trends to forecast the future. Staff provided

the average ten-year and twenty-year compound annual growth ratescomparing the December 2012 LRFF and the current LRFF. The compoundannual growth rate over 20 years for the total five major taxes was 4.1percent. The December 2012 LRFF was 4.04 percent, and the current LRFFwas approximately 4.23 percent. Property Tax was 4.97 percent; sales taxwas 2.07 percent over 20 years; Transient Occupancy Tax (TOT) was 4.9percent over 20 years; Documentary Transfer Tax over 20 years was 7.3percent; and UUT was 3.8 percent. All revenues were 4.6 percent over 20years. Overall Staff used 3.32 percent for all revenue. Revenue levels forProperty Tax were stable overall. Unlike some communities, Palo Altoproperty taxes remained relatively stable. Approximately 300 homes under$500,000 turned over during the last six years. Sales tax was a concern inthat it was growing at slightly more than two percent per year, less than therate of inflation. Staff projected 3.38 percent, because Palo Alto wasattracting and maintaining businesses. TOT projected revenues wereroughly in line. The volatility in the Documentary Transfer Tax caused Staffto project a conservative figure. Staff did not include Casa Olga (new hotel)in the LRFF, nor did they include other hotels in the next two or three yearsof the LRFF. He conservatively estimated Casa Olga revenue at $450,000-$500,000.

Lalo Perez, Director of Administrative Services explained TOT for new hotelswas not included in the LRFF because Staff recommended using the TOT forInfrastructure.

Vice Mayor Shepherd inquired whether Staff included Hewlett-Packard'sreturn to Palo Alto in sales tax projections.

Mr. Saccio reported Staff and the Utilities Department were waiting for that


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to happen. Utilities did not see the expected increase in electric demand.

Mr. Perez indicated Staff was monitoring the situation.

Vice Mayor Shepherd asked if Staff had an explanation.

Mr. Perez noted Staff attempted to discuss it with Hewlett-Packard;however, they were protecting their privacy.

Mr. Saccio reported Staff used information from the Utilities Department asof February 11, 2013 to calculate the five percent growth in UUT. Ordinarilyrevenues were 5 percent; however, some large users had a step-down interms of UUT depending on usage.

Mr. Perez reported the CalPERS chief actuary will be recommending that the

CalPERS Board lower the expected rate of return; the expected amount waseither 1/4 or 1/2 percent.

Council Member Schmid asked if CalPERS was currently using 7.5 percent.

Mr. Perez stated 7.5 percent was the current rate of return. Therecommendation will be presented to the CalPERS Board around February2014, and the impact will occurr in FY 2016. The expected impact was anapproximate 2.5 percent increase for the Miscellaneous, and approximatelyfour percent for Safety. The three percent embedded in the base modelcovered a 1/4 percent increase. If the rate of return increased 1/2 percent,then the base model was not sufficient. The proposal in February 2014 wasto move from a 15 year smoothing period to a five year period. Thataccounted for approximately $34 million of the impact in the alternativescenario of $50.6 million in additional expenses. The mortality factoraccounted for approximately $17 million of the $50.6 million. If the CalPERSBoard acted on these three issues, the alternative scenario became part ofthe base model. Staff proposed hiring an actuary to assist with the nextstep. Pension reform went into effect in January 2013, and neither the basemodel nor the alternative model showed the potential savings of the newthird tier of pension reform; the City was to have a $586,000 cumulative

surplus in that period for the base model. If the CalPERS Board acted on therecommendations and impacts passed through to the City in FY 2016, theCity was to have a $50 million deficit.

Chair Burt inquired whether the $50 million deficit excluded consideration ofthe third pension tier.

Mr. Keene asked where in the alternative scenario was the additional 1/4


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percent.

Mr. Perez stated it was in the base model starting in FY 2017.

Chair Burt asked if the second 1/4 percent was included in the alternativemodel.

Mr. Perez indicated it was not in the alternative model.

Mr. Keene reported that was an additional increment on top of the $50million if that occurred.

Council Member Berman reiterated that the 1/4 percent was included in thebase and alternative models, but note the 1/2 percent.

Mr. Perez agreed. The base model contained the 1/4 percent. The potentialsecond 1/4 was not contained in either model.

Chair Burt asked how the alternative model was different from the basemodel.

Mr. Perez explained the alternative model included the smoothing changefrom 15 years to 5 years, in addition to the mortality experience.

Council Member Berman inquired whether Staff felt the CalPERS Boardwanted to take the recommended action.

Mr. Perez believed there was enough pressure from experts for the CalPERSboard to act. The third tier for pension generated some savings to offsetsome of these impacts. The City had 2,000 employees either retired orworking for other agencies, which was a large number compared to thenumber of active employees. Those 2,000 employees were not going tomove into the new tier. The question was how many of the 900 activeemployees moved to the third tier once they were replaced. An expert wasnecessary to determine the potential savings.

Mr. Keene felt many employees preferred to retire later in order to receive ahigher pension amount.

Mr. Perez reported another reason for the CalPERS Board to take action wasthe cap in the Tier 3 was tied to the Social Security number.

Council Member Berman inquired whether the increase in retirement agewas mandated by State legislature.


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Mr. Keene stated it was part of Governor Brown's plan. He inquired if therewas a sense of whether or not the CalPERS Board adopted either the 1/4 or1/2 percent.

Mr. Perez stated the CalPERS Board was concerned about the impact on localgovernments. A few agencies were in bankruptcy and had issues withpayments. He believes the CalPERS Board will adopt 1/4 percent, given theimpact to local governments.

Mr. Saccio reported Moody's and Standard &Poors had utilized a 5.75percent return rate to evaluate the liabilities to cities, and that exertedpressure on the CalPERS Board.

Vice Mayor Shepherd asked Staff to explain why they used these numbers

when Staff knew they were wrong.

Mr. Perez suggested having the discussion with an expert. The Committeeneeded to discuss options and plan for the potential impact. Using thenumbers provided an indication of the need to plan for the following twoyears.

Chair Burt believed the 1/4 percent reduction was likely, and suggestedpeople assume another 1/4 percent reduction would occur in a few years.

Mr. Perez was comfortable including an additional 1/4 percent reduction inthe alternative scenario.

Vice Mayor Shepherd inquired whether Staff included an incremental note inthe LRFF stating the monetary impact for each 1/4 percent incrementalchange.

Mr. Perez agreed to add that if it worked mathematically.

Mr. Keene said he could provide a general number, because the specificamount was to change, as the percentage changed.

Council Member Schmid believed CalPERS was in a position to take higherrisks to achieve higher rates of return, because any consequence fell tocities. With benefits growing on the order of 6 1/2 to 7 percent per year,and salaries growing at two percent, the City was in a long-term situationwhere it was not be able to pay employees to keep up with the rate ofinflation.


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Chair Burt asked if the Committee should continue the Agenda Item due tothe time.

Mr. Keene asked if the Committee had additional questions.

Mr. Perez noted the Agenda Items for the next meeting on March 19, 2013.

Chair Burt suggested continuing discussion of the LRFF.

Mr. Perez inquired whether Staff should prepare additional information forthe next discussion.

Chair Burt wanted the alternative scenario to become the base model.

Mr. Perez felt that would be assuming the CalPERS Board would approve the

change.

Chair Burt considered approval of the 1/4 percent change as the base model,and not approving it is an alternative model.

Council Member Berman stated there was no analysis of the pension thirdtier.

Chair Burt agreed that would need to be analyzed in order to have a realisticLRFF.

Mr. Keene noted the information was evolving.

Chair Burt believed a placeholder was more accurate than pretendingnothing would occur; projection required the best thinking.

Mr. Perez said he could include a simple calculation; however, the calculationwould most likely be very complex.

Chair Burt suggested including a rough number in order to have a moreaccurate forecast.

Vice Mayor Shepherd inquired whether Staff needed to return onceinformation was more certain.

Chair Burt wanted Staff to return with updates based on the Committee'sfeedback. Hotels under construction needed to be included in the long termprojection. He suggested the Committee earmark certain new revenuestreams for infrastructure; he said that could be done within the LRFF. He


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encouraged Staff to reconsider the UUT increase and the anticipated gas andwater increases in coming years. He was skeptical of the anticipated highsales tax; however, the Documentary Transfer Tax was probablyunderestimated. He wanted to make the numbers as realistic as possible,with the understanding that certain numbers were the best estimates given.

Mr. Keene reported Staff could prepare a LRFF over the next month, with thequalification that it utilized best estimates. Until June, Staff needed to beworking on the Budget.

Council Member Berman suggested including Cubberley needs, and inquiredwhether the $7.5 million lease payment was included.

Mr. Perez indicated the full amount was included, and Staff anticipated itcontinue for the modeling.

Chair Burt requested Staff to explain the radical impact of changingsmoothing from a 15-year period to a 5-year period.

Mr. Perez was going to provide information he received at the finance officerconference.

Chair Burt wanted to understand if CalPERS was restating an adjustment inlong term projections and burying it within a discussion of the shorter-termsmoothing.

Vice Mayor Shepherd inquired whether Staff had enough direction to returnwith updated information.

Mr. Keene answered yes.

Vice Mayor Shepherd noted the LRFF was utilized in Budget discussions, andexpressed concerns about changes in revenue forecasts.

Mr. Saccio suggested Staff utilize 20-year amounts into the future.

Chair Burt requested an explanation of the rationale to utilize data otherthan the 20-year data.

Council Member Schmid felt the importance of the LRFF was context for theBudget debate.

Mr. Keene stated the LRFF was used to inform Budget decisions. TheCommittee did not think about this in terms of tradeoff implications.


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Chair Burt said a reasonably accurate LRFF was an informed Budgetdecision.


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Regular MeetingTuesday, March 19, 2013

Fiscal Years 2013 to 2023 Long Range Financial Forecast (Continued FromMarch 5, 2013)

Lalo Perez, Administrative Services Director wanted to provide Staff withfeedback to the Finance Committee's (Committee) comments at the end of

the prior discussion, and to receive input for discussion with the Council.The Mayor indicated he wanted the Long Range Financial Forecast (LRFF) tobe an Action Item on the Council Agenda. The first comment concerned taxrevenue associated with hotels currently under construction, and earmarkingthose funds as revenue streams for infrastructure expense; He said Staffcould include that in the LRFF. The second comment concerned calculatingthe pension savings from the third tier pension benefits. Staff suggestedhiring an actuary firm to assist in calculating those savings because thealternative scenario contained an approximate $50 million impact betweenthe years of 2017 and 2023. He remarked that the $50 million impactshould be offset by savings. The third comment requested furtherclarification on the CalPERS pension rate estimates included in the basemodel. Staff suggested utilizing the actuary firm to validate their applicationof the CalPERS estimates. With regard to the fourth comment from theprevious meeting, Staff requested clarification. With regard to the fifthcomment, Staff was comfortable with their estimates for sales andDocumentary Transfer Taxes. If the Committee had concerns, Staff wouldnote them in documentation to the Council and in the model.

Chair Burt indicated the Committee needed to decide whether to make thefirst comment a recommendation to the Council.

MOTION: Vice Mayor Shepherd moved, seconded by Council MemberSchmid to have Staff put the related tax revenue associated with hotelscurrently under construction in the Long Range Financial Forecast.

Chair Burt noted the comment also contained a provision to earmarkrevenue streams for infrastructure expense.

Attachment D


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Page2of7FinanceCommitteeRegularMeeting

ExcerptMinutes3/19/2013

Vice Mayor Shepherd did not want to earmark revenue for infrastructureexpense.

Council Member Schmid did not recommend earmarking funds at this time.

Chair Burt wanted to earmark funds for infrastructure. He asked if Staffneeded a Motion.

James Keene, City Manager suggested the Committee move the separateitems.

MOTION RECAPPED: Vice Mayor Shepherd moved, seconded by CouncilMember Schmid to include Transient Occupancy Tax for hotels currentlyunder construction in the Long Range Financial Forecast.

SUBSTITUTE MOTION: Council Member Burt moved to have Council

consider earmarking revenue streams for infrastructure expense.

SUBSTITUTE MOTION FAILEDDUE TO LACK OF A SECOND.

Vice Mayor Shepherd did not object to the Committee asking the Council tohold a policy discussion regarding earmarking funds.

Chair Burt inquired whether the City had other definable new revenuesources.

Mr. Perez could not recall any new revenue sources. There were some

implied such as the Utility Users Tax (UUT).

Chair Burt stated a change in the Cubberley lease could be a new revenuesource.

Vice Mayor Shepherd reported discussion from the Infrastructure Committeemeeting indicated a bond may not be needed.

Chair Burt suggested the Finance Committee recommend that full Councilconsider whether discrete new revenue streams needed to be earmarked forspecific purposes such as infrastructure.

Vice Mayor Shepherd requested Chair Burt make a suggestion that wasseparate from the Motion to prevent confusion.

Chair Burt agreed.

MOTION PASSED: 3-0, Berman Absent


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MOTION: Council Member Burt moved, seconded by Vice Mayor Shepherdthat the Finance Committee recommend the Council hold a discussion onwhether discrete new revenue streams be identified for specific purposes,such as infrastructure use.

Council Member Schmid felt the Motion was a policy change when theCommittee was considering amendments to the LRFF.

Chair Burt explained potential new revenues would have a multi-year impacton the LRFF.

Council Member Schmid believed defining new revenue sources forinfrastructure was separate from review and approval of the LRFF.

Chair Burt stated budgeting one or two new revenue streams was a part ofthe LRFF.

Vice Mayor Shepherd indicated a Committee could hold a broader discussion.She wanted the Infrastructure Committee to develop new revenue streams;however, she thought this would be a good conversation for the Council.

MOTION PASSED: 2-1, Schmid no, Berman absent

Chair Burt recalled the next topic was calculation of the pension savings forthird tier employees. Staff wished to hire an actuary. He inquired whetherStaff needed a Motion for Staff to hire an actuary.

Mr. Perez answered no and said hiring an actuary was within the CityManager's authority.

Vice Mayor Shepherd inquired whether this work was within the scope ofwork for Bartel Associates.

Mr. Perez replied no. The previous work was regarding retiree medical.

Vice Mayor Shepherd asked if this work could be added to Bartel Associates'scope of work for the next cycle.

Mr. Perez reported the City had not engaged Bartel Associates for pensionservices. Given the significant impact of Staff estimates, it was beneficial foran actuarial firm to validate Staff's calculations.

Vice Mayor Shepherd wanted to understand the importance of theinformation at the current time.


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Mr. Perez felt it was important because Staff wanted to ensure they weremaking sound decisions based on sound information and said data wasbased on actual demographics; however, some assumptions were based onCalifornia Public Employees' Retirement System (CalPERS) experience. Hesaid a pattern could develop in the next five to ten years that would shiftbecause the City will have savings from new employees moving into thethird tier.

Vice Mayor Shepherd wanted to ensure Staff worked efficiently.

Chair Burt clarified that the actuary would project the number of employeesin the third tier and the point in time that would impact City liabilities.

Mr. Perez reported the actuary would make assumptions regardingemployees' retirement dates and the likelihood of employees being in tiertwo, versus being in tier three.

Chair Burt inquired if the impact was many millions of dollars.

Mr. Perez answered yes. The unknown factor was when the impact wouldoccur.

Chair Burt acknowledged that the actuary could only provide a bestestimate. At the current time Staff did not include any estimate, and it wasa significant change.

Mr. Perez indicated Bartel Associates performed the same analysis for other

agencies.

Council Member Schmid stated the difference between tier two and tier threewas savings; however, CalPERS reform opened the possibility of losses forthe City.

Mr. Perez explained the two percent at age 60 could move to 2.418 percentat age 63. In tier three, a cap on the maximum pension allowance anemployee could earn was tied to the Social Security limit. The question washow many employees would go to in tier two.

Chair Burt stated the Committee did not need to take action on the requestto hire an actuary, and continued to the third topic.

Mr. Perez reported Staff was comfortable with their estimates. He said anactuary could validate those estimates to ensure Staff's calculations weresound.


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Vice Mayor Shepherd said she had no confidence in CalPERS' rate of return.She hoped the LRFF would include the effect of each 1/4 percent ratechange.

Chair Burt did not believe this was a point of contention.

Mr. Keene indicated Staff could include a note and some calculations in theLRFF.

Vice Mayor Shepherd wanted to ensure that was included.

Chair Burt indicated the third topic required no action by the Committee.With regard to the fourth topic, he was concerned about projecting the prioranticipated utility increases for the future. While capital expenditurescontinued to increase for various utilities, the commodity costs on gas andelectric might not rise at historic rates. Experts in the industry were

reexamining those historic trends and escalations, and suggesting theescalations may not occur at the same rate. Renewables and non-renewables were experiencing market changes, which could be new trends.He requested Staff discuss with Utilities Staff any anticipated trends thatshould be factored in.

Mr. Perez indicated Staff would do so.

Council Member Schmid agreed that Staff should review that.

Vice Mayor Shepherd noted Utilities did not provide the majority of

revenues.

Chair Burt inquired whether the Report included a breakdown of revenuesfrom different streams.

Joe Saccio, Assistant Director of Administrative Services reported the lastLRFF included a compound annual growth of approximately 2.9 percent forUUT. The historical 20-year compound annual growth was 3.8 percent, andthe prior ten years was 5.3 percent.

Chair Burt suggested the adjustment was included.

Mr. Saccio noted Staff had lowered the projected annual growth. It wasincumbent on Utilities to explain their forecasts in terms of prices ofcommodities and capital.

Chair Burt inquired about the percentage of the Budget.

Vice Mayor Shepherd stated the sales tax had been erratic.


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Chair Burt recalled the final topic was long-term projections for sales andDocumentary Transfer Taxes. The concern was that the 20-yearcompounded growth was 2.07 percent, the 10-year compounded growth wasone percent, and the forward projection was 3.38 percent for sales tax.

Mr. Saccio explained Staff reviewed the forecast and assumptions. Thosewere reasonable growth rates for the next few years. Comparing the fourquarters of calendar year 2012 to the four quarters of calendar year 2011resulted in a 12.4 percent increase.

Chair Burt felt that information was not relevant in projecting a 10-yearforecast. He requested Staff's rationale for projecting 3.4 percent growthwhen the prior growth was only one or two percent.

Mr. Saccio said Staff considered the first couple of years when preparing theLRFF.

Chair Burt indicated the LRFF did not appear to include a recession.

Mr. Saccio recalled the Committee's prior instructions were to review theprior 20 years and include all the recessions in those 20 years in order todetermine a rate of growth.

Chair Burt asked how Staff moved from 2.0 percent growth to a projected3.38 percent growth.

Mr. Perez reported Staff was comfortable with the projected growth for the

next five years. Staff reviewed the final five years, and either madeadjustments or stated the Committee was uncomfortable with Staff's long-term projections for sales tax.

Council Member Schmid felt the general economic outlook as stated onpages three and four was optimistic. He thought it would be good to have asection about persisting economic problems.

Vice Mayor Shepherd inquired whether Staff relied on any new source ofsales tax.

Mr. Saccio responded no and said the Amazon tax would go to thejurisdictions where warehouses were located.

Vice Mayor Shepherd indicated the Amazon tax would be ZIP code specific,and was projected to provide $2.5 billion to the State of California.


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EXCERPTMINUTESMr. Saccio stated the State of California would receive its share of the salestax, but the one percent of sales tax for local jurisdictions went to the localjurisdictions where the Amazon warehouse is located.

Vice Mayor Shepherd asked if the City would receive funds from the Amazon

sales tax.

Mr. Saccio replied no. Staff relied on sales tax from Hewlett Packard;however, that had not occurred.

Vice Mayor Shepherd inquired whether Staff could resolve the higherprojection for sales tax.

Mr. Perez stated Staff would review the second of the five years of the LRFFand would provide more detail. If Staff did not change their opinion, theyneeded to provide an explanation.

Vice Mayor Shepherd asked if Staff preferred to present the LRFF to theCouncil or if they preferred returning to the Committee.

Mr. Perez suggested that was preferable in light of Budget hearingsbeginning in May.

Mr. Saccio noted that the major taxes over the past five years had acumulative growth rate of 4.1 percent. The forecast contained 4.2 percentgrowth. Every year some taxes did not meet projections and othersexceeded projections. In totality, projections were close to the trend in

historical growth.

Chair Burt stated the LRFF should be as close to correct as possible. TheAmazon issue raised the question of how much Staff considered trends ofinternet sales and their impact on 10 and 20-year trend. He noted thatchanges in tax law could change that.

city of palo alto (ca) long range financial forecast (2013)

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