Staff Report.Five-Year ForecastPREPARED BY: Gitta Ungvari
Finance Director
Reviewed by: Town Manager and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 02/21/2023 ITEM NO: 15
DATE: February 15, 2023
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Review and Provide Comments Regarding the Five-Year Forecast (FY 2023/24
–2027/28) and Scenarios and Provide Input for the FY 2023/24 Budget
Direction
RECOMMENDATION:
Review and provide comments regarding the Five Year Forecast (Fiscal Years 2023/24 –
2027/28) and scenarios, and provide input for the FY 2023/24 budget direction.
EXECUTIVE SUMMARY:
The base case Five-Year Forecast (FY 2023/24 – 2027/28) (Attachment 2) identifies deficits for
all future years, using the recent labor agreements for FY 2023/24 and the 2% salary increase
assumption approved by the Town Council for the FY 2024/25 budget and other assumptions
(see Attachments 3 and 4). The deficits are on the order of approximately $3M per year and
can currently be resolved through expenditure controls and the use of one-time funds. The
persistent presence of a deficit indicates that the Town needs to consider new revenue
measures if it wants to maintain high levels of municipal services.
The sensitivity of the Forecast to its assumptions is demonstrated in this report. The Town
Council can provide recommendations on the scenario assumptions for the FY 2023/24 budget
and provide other budget direction as appropriate. The Capital Program is scheduled for a
separate discussion at the next Council meeting.
DISCUSSION:
An important aspect of the Town’s budget development process is taking a multi-year approach
to understand revenue and expenditure trends over time. Serving as the foundation of the
budget planning process (Attachment 1), the Town develops a Five-Year Financial Forecast
PAGE 2 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
(“Forecast”) beginning in the winter of each year. The Forecast enables the Town to evaluate
the Town’s fiscal condition and to help guide policy, programmatic planning, and budget
decisions. Development of a financial forecast as part of the budget development process has
been identified as a best practice by the Government Financial Officers Association (GFOA).
The Forecast takes a forward look at the Town's General Fund revenues and expenditures and
is updated regularly. Its purpose is to identify financial trends, potential shortfalls, and other
issues so the Town can proactively address them and budget accordingly. It does so by
projecting out into the future the fiscal results of continuing the Town's current service levels
and policies. This process helps to provide a snapshot of what the future may look like as a
result of the decisions made to date.
The initial Forecast (FY 2023/24 – 2027/28) is predicated on estimates derived from the FY
2022/23 Mid-Year review and includes updates to Town revenues and expenditures based on
the Mid-Year end of year projections. Like any forecast, the Forecast’s revenue estimates for
the first year is the most critical in the process as they ultimately define the expenditure
limitations for the upcoming budget year.
This report contains detailed information that contributes to the preparation of the annual
budget, including the Town’s “Base Case” Five-Year Forecast, its data sources, and budget
assumptions. This report also provides two additional forecast scenarios utilizing a sensitivity
analysis for four of the major revenue assumptions. These additional forecast scenarios
illustrate the effects on future budgets of a more optimistic revenue scenario (“Greater
Growth”) and a pessimistic revenue one (“Lower Growth”).
The Five-Year Financial Forecast is not a budget, nor a proposed plan. The Five-Year Financial
Forecast sets the stage for the upcoming budget process and is a tool in facilitating both the
Town Council and Town Manager in establishing priorities and allocating resources
appropriately.
National and Local Economic Backdrop
The UCLA Anderson School of Business publishes an annual economic forecast for the nation
and California. The results of the forecast are utilized as a portion of the macroeconomic basis
of the Five-Year Forecast development. In their September 2022 Economic Outlook, they
mentioned that based on their analysis, the chance of recession in U.S. in the next 12 months is
less than 50%. Their assumption is that the economy will grow 1.5% in 2022, 0.3% in 2023, and
2.0% in 2024. Their assessment was backed by their study of strong consumer spending as we
ease from COVID related supply chain issues. Another assumption is that business investment
PAGE 3 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
is expected to occur domestically rather than internationally due to mounting geopolitical
instability over the past year.
In its December 2022 Economic Outlook, Anderson mentioned that the “national economy has
proved resilient as consumers continue to spend and businesses continue to invest.” This is
demonstrated by the Gross Domestic Product (GDP) increase of 3.2% in the third quarter and
2.9% (advance estimate) in the fourth quarter of 2022. As the graph below illustrates, the 2.9%
increase is partly offset by the decrease in housing investment. Inventory investment and
consumer spending helped this downturn amidst the inflation, unemployment, and supply-
chain issues.
Based on this report, it was noted that the Federal Reserve actions will cushion California’s
economy. The sectors of logistics, technology, and health care helped California’s GDP growth.
Its growth has been faster than the U.S. since high-income earners tend to belong in these
sectors. In terms of the housing market, the increase of interest rates affected the decline of
the median price of single-family homes. According to the report, “the median price was 8.4%
below its previous peak but had returned to early 2021 levels.” With this assumption, the surge
of accessory dwelling units (ADU) and growth in industrial space sector will help shield the
state. This in turn makes the 2023 forecast for California more of a moderate slowing than for
the U.S. overall.
Operating Revenue Trends and Five-Year Forecast Scenarios
The Town is highly dependent on four economically sensitive revenues comprising 54% of
General Fund forecasted revenues. Following are summaries of the Town’s major revenues of
property tax, sales tax, business license tax, and transient occupancy tax (TOT). To provide
context for the development of the Five-Year Forecast (FY 2023/24 – 2027/28), the prior year’s
PAGE 4 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
growth assumptions and resulting revenue projections are provided. The Base Case Forecast
can be found in Attachment 2.
With that context, updated growth assumptions are provided for each revenue source, and the
resultant projected revenues for the new Forecast period. The revenue assumptions provided
are informed by the County Tax Assessor, the Town’s sales tax consultant, and direct
communication with the Town’s hospitality industry. In addition, alternative forecast scenarios
are discussed in this report for these three revenue streams. Please see Attachment 3 for a
description of all revenue categories with a comprehensive listing of revenue forecast
assumptions.
Property Tax
Property tax is the single largest revenue source for the Town and comprised approximately
42% of total Town projected revenues for FY 2022/23. As the following table illustrates, Los
Gatos has benefited from the economic expansion as evidenced by year-over-year (YOY) roll
growth in property assessment since 2013. For the 10-year period, the average annual growth
rate was 6.3%.
Los Gatos Assessment Roll Growth (values in billions)
Source: Santa Clara County Assessors Annual Reports
The County of Santa Clara provides property tax collection updates and projections throughout
the year. The following table illustrates the most recent estimates relative to the Adopted FY
2022/23 Budget and FY 2021/22 actuals. The current County estimate indicates $617,332 more
than the Adopted Budget. The increase is a combined effect of higher than expected
Redevelopment Agency (RDA) Residual Apportionment, and Vehicle License Fees (VLF),
decrease in secured property tax estimates, and no change to property transfer tax and the
Educational Revenue Augmentation Fund (ERAF) estimates.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Total Roll 9.46 9.99 10.63 11.54 12.29 13.15 13.84 14.9 15.6 16.8
Percent
Growth 9.06 5.62 6.4 8.56 6.54 6.95 5.23 7.7 4.33 2.7
FY 2021/22
Actual
FY 2022/23
Adjusted Budget
County Estimate
with 70% ERAF
$21.1 M $20.9 M $21.5 M
Property Tax Revenue &
Vehicle License Fee Backfill
PAGE 5 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
The Town has been monitoring ongoing developments regarding the distribution of excess
ERAF funds. A portion of property tax revenue goes to the ERAF to support local school
districts. When the amount contributed to ERAF is more than the minimum cost of funding
local schools, excess funds have traditionally been returned to the county, cities, and special
districts. Five counties, including Santa Clara, have been using a redistribution allocation
formula that has been contested by the State. The Town received the full amount for FY
2021/22; however, the Santa Clara County Assessor’s Office recommends budgeting only 70%
of the FY 2022/23 projected number. The Adopted FY 2022/23 Budget included a $1,5 million
ERAF estimate, 70% of the current ERAF base revenue estimate is still the same.
The following table illustrates the growth factors used in the development of the Five-Year
Forecast (FY 2022/23 – 2026/27).
For purposes of the Forecast, the “Base Case” utilizes a growth factor of 3.0% and the “Greater
Growth” and “Lower Growth” scenarios utilize a 2% differential from the Base Case. In addition
to the growth factor, staff continues to assume $400,000 residual excess ERAF revenue in the
base case scenario, 70% of the FY 2022/23 proceeds in the “Greater Growth,” and no ERAF
revenues and the “Lower Growth” scenarios.
Sales Tax
Sales tax is the second largest revenue source for the Town and comprised approximately 16%
of total Town projected revenues for FY 2022/23. The following table illustrates the most
recent projections from the Town’s sales tax consultant MuniServices relative to the Adjusted
FY 2022/23 budget and FY 2021/22 actuals.
2023/24 2024/25 2025/26 2026/27 2027/28
Forecast Forecast Forecast Forecast Forecast
Proposed Growth 3%3%3%3%3%
Property Tax
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Greater Growth Scenario $22.40 $23.50 $24.60 $25.90 $27.30
Base Case
Modest Growth
Lower Growth Scenario $20.00 $20.20 $20.50 $20.60 $20.90
$23.50
Property Tax
(Property Tax & VLF)
$20.80 $21.40 $22.10 $22.70
PAGE 6 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Current total sales tax estimates include $7,559,566 ($301,422 decrease) in proceeds from
regular sales tax and $1,287,690 ($26,266 decrease) in proceeds from the Measure G one-
eighth cent district tax. Actual receipts net of administrative fees collected by the State will be
confirmed at the close of the fiscal year and per prior Council direction, the Measure G funds
are allocated 50% for capital improvement projects and 50% for operating expenses.
The table below provides the MuniServices Most Likely scenario which staff is utilizing for
development of the FY 2023/24 Five-Year Forecast.
The following tables illustrates MuniServices Most Likely scenario relative to their
“Conservative” and “Optimistic” scenarios.
FY 2021/22
Actual
FY 2022/23
Adjusted Budget
January 18, 2023
MuniServices
Estimate
Base Sales Tax $7.2 M $7.9 M $7.5 M
FY 2021/22
Actual
FY 2022/23
Adjusted Budget
January 18, 2023
MuniServices
Estimate
Measure G – 1/8 District Tax $1.3 M $1.3 M $1.3 M
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Most Likely $7.70 $8.00 $8.20 $8.50 $8.70
Base Sales Tax
Measure G
1/8 District Tax
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Most Likely $1.30 $1.30 $1.40 $1.40 $1.40
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Conservative $7.00 $7.20 $7.40 $7.60 $7.80
Most Likely $7.70 $8.00 $8.20 $8.50 $8.70
Optimistic $8.50 $8.80 $9.00 $9.30 $9.60
Base Sales Tax
PAGE 7 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Further Information related Sales Tax context are included as Attachment 5.
Transient Occupancy Tax
TOT is an important revenue source for the Town and comprises approximately 4% of total
Town estimated revenues in the amount of $2.0 million for FY 2022/23. The Town levies a 12%
transient occupancy tax (TOT) on all hotel and motel rooms within the municipal limits of Los
Gatos
The following table illustrates TOT FY 2021/22 actuals, the Adjusted FY 2022/23 Budget, and
year-end collection estimates.
The FY 2022/23 Adopted Budget modeled a 17.3% increase from FY 2021/22 adjusted budget.
During the pandemic, TOT experienced the most significant percentage decline relative to
historical trends. Due to a significant rebound in leisure “staycation” travel and modest
improvements in business travel, current TOT collections are trending higher than anticipated
and average occupancy rates are rebounding as well.
The table below illustrates the growth projections utilized for development of the Five-Year
Forecast (FY 2023/24 – 2027/28) for TOT and corresponding estimated revenues.
Measure G
1/8 District Tax
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Conservative $1.20 $1.20 $1.30 $1.30 $1.30
Most Likely $1.30 $1.30 $1.40 $1.40 $1.40
Optimistic $1.40 $1.40 $1.50 $1.50 $1.60
FY 2021/22 Actual FY 2022/23
Adjusted Budget Year-end Estimate
TOT $1.9 M $1.6 M $2.0 M
2023/24 2024/25 2025/26 2026/27 2027/28
Forecast Forecast Forecast Forecast Forecast
Proposed Growth 5%3%3%3%3%
Estimated Revenues $2.1 M $2.2 M $2.2 M $2.3 M $2.4 M
TOT
PAGE 8 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
For purposes of the Forecast, the “Base Case” utilizes a growth factor as illustrated above and
the “Greater Growth” and “Lower Growth” scenarios utilize a 1% differential from the Base
Case.
Business License Tax
The Town requires all businesses located within Los Gatos and/or those that operate within Los
Gatos to obtain a business license. The amount of business license tax paid by each business is
based on its business activity. In November 2022, Los Gatos voters approved Measure J, which
modernized the Town’s business license tax program. This is the first update to the program
since 1991, strengthening funding for core Town services that are enjoyed by Town businesses.
Measure J included a 30% increase on flat rate fees, a 40% increase in retailing gross receipts,
and a 120% increase in e-commerce, manufacturing, wholesaling, and jobbing gross receipts.
Fees for activities such as wholesale sales and manufacturing are charged on a sliding scale
based on gross receipts, as is retail, with retail being capped at $1,365. These gross receipt
activities account for approximately 25% of annual business licenses, while the remaining 75%
are flat fee businesses. Annual renewal payments are due on January 2 of each year. Payments
for new flat-fee-based businesses are prorated by quarter.
Business license tax revenue for the current fiscal year was budgeted at the prior tax rate,
current estimates based on the updated tax rate predict a significant increase for the business
license tax revenue. Staff is recommending a $1,056,500 increase to this revenue source as an
adjustment to the FY 2022/23 budget.
The following table illustrates Business License FY 2021/22 actuals, the Adjusted FY 2022/23
Budget, and year-end collection estimates.
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Greater Growth Scenario $2.1 $2.2 $2.3 $2.4 $2.5
Base Case
Modest Growth
Lower Growth Scenario $2.10 $2.10 $2.20 $2.20 $2.30
$2.2 $2.3 $2.4
TOT
$2.1 $2.2
FY 2021/22 Actual FY 2022/23
Adjusted Budget Year-end Estimate
Business License $1.5 M $1.4 M $2.4 M
PAGE 9 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Business license tax revenue for the current fiscal year was budgeted at the prior tax rate.
Current estimates based on the updated tax rate predict a significant increase for business
license tax revenue. Staff is recommending a $1,056,500 increase to this revenue source and
this estimate provides the base for the Five-Year Forecast (FY 2023/24 – 2027/28) as illustrated
below.
For purposes of the Forecast, the “Base Case” utilizes a growth factor as illustrated above and
the “Greater Growth” and “Lower Growth” scenarios utilize a 1% differential from the Base
Case.
Garbage Franchise Fee
Franchise fees are collected by the Town for the privilege of operating a utility service within
Los Gatos, and as a fee in lieu of a business license tax. Franchise fees are currently received
from Comcast for cable television, PG&E for gas and electric services, West Valley Collection
and Recycling for solid waste collection services, and AT&T and Comcast for video services.
Franchise fees represent 5% of projected General Fund revenues in FY 2022/23.
As the Town previously enclosed in the FY 2021/22 Annual Comprehensive Financial Report
(ACFR), the California Supreme Court recently issued an opinion in a case challenging the
franchise fees that the city of Oakland charges to certain waste hauling companies. In Zolly v.
City of Oakland, the court concluded that it did not have enough evidence to rule as a matter of
law that the fees are exempt from the voter approval requirements that apply to taxes under
Proposition 26, Article XIII C of the California Constitution. However, there are several
exceptions to the general rule that a tax must be approved by the voters. One exception
(Article IIIC, section 1 (e)(1)) is for “a charge imposed for a specific benefit conferred or
privileged granted directly to the payor that is not provided to those not charged, and which
does not exceed the reasonable costs to the local government of conferring the benefit or
2023/24 2024/25 2025/26 2026/27 2027/28
Forecast Forecast Forecast Forecast Forecast
Proposed Growth 2%2%2%2%2%
Estimated Revenues $2.5 M $2.5 M $2.6 M $2.6 M $2.7 M
Business License
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M) ($M) ($M) ($M) ($M)
Greater Growth Scenario $2.5 $2.6 $2.7 $2.8 $2.8
Base Case
Modest Growth
Lower Growth Scenario $2.5 $2.5 $2.5 $2.5 $2.6
$2.6 $2.7
Business License
$2.5 $2.5 $2.6
PAGE 10 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
granting the privilege.” In the event the Town is unable to utilize one of the exceptions, the
potential impact is a loss of approximately $2.4 million annually.
The following table illustrates total franchise fees collection with and without garbage franchise
fees.
Operating Expense Trends and Five-Year Forecast Scenarios
Forecasts of future operating expenditures take into account two key factors: cost escalation
and new operating expenditures. New operating expenditures refer to costs created by new or
enhanced service programs approved during the annual budget process. Attachment 4
contains the expenditure assumptions.
Cost escalation refers to largely unavoidable increases in the cost of doing business. It includes
inflation, multi-year contract costs, health care costs, and unfunded State mandates. Cost
escalation also includes other unavoidable cost increases unique to a government organization,
such as a rise in wages consistent with collective bargaining agreements and annual pension
payments mandated by CalPERS. The Town has three bargaining units, including the Town
Employees’ Association (TEA), the American Federation of State, County and Municipal
Employees (AFSCME), and the Police Officers’ Association (POA). The unrepresented groups are
Management and Confidential.
For FY 2022/23, General Fund Estimated Operating expenditures (not including debt payment
and transfers out) are $46.9 million. The delivery of Town services is highly dependent on
talent which comprises 70% of estimated General Fund expenditures. Given the high
dependence on labor for service delivery, the Town has helped manage salary escalation (and
benefits) through the maintenance of lower staffing levels. As the table below illustrates, since
2001 the Town has reduced its full-time employees by 15% to 153 FTE employees.
2023/24 2024/25 2025/26 2026/27 2027/28
Forecast Forecast Forecast Forecast Forecast
All Franchise Fees $2.8 M $2.8 M $2.9 M $3.0 M $3.1 M
Franchise Fees without
Garbage Franchise Fee $0.9 M $0.9 M $0.9 M $1.0 M $1.0 M
Franchise Fees
PAGE 11 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Mandated pension payments to CalPERS has consistently been one of the major cost drivers for
the Town over the past decade with persistent unanticipated increases in pension costs. The
Town’s plans over the past several decades, like all other CalPERS participants, have
experienced unfavorable investment returns, changes in actuarial assumptions, and
demographic changes which have outweighed any positive plan experiences. The outcome of
these unfavorable economic and demographic results is the development of unfunded pension
and Other Post-Employment Benefit (OPEB) obligations for the Town. To address the
escalation in pension costs, previous Councils have allocated additional discretionary pension
funding. totaling $10.4 million. These additional discretionary payments will ultimately yield an
approximate additional $12.7 million in contribution savings.
The Town and its bargaining groups have also worked to contain benefit costs. The Town closed
the CalPERS retiree Tier 1 benefit for non-safety employees and created a new Tier 2 for non-
safety new employees in 2012, implemented the Public Employees’ Pension Reform Act
(PEPRA) for all new non-classic employees starting in 2013, and participates in the CalPERS
discounted prepayment option.
In addition to the management of the Town’s pension obligations, prior Councils and the
Town’s bargaining groups have worked to curb cost escalation in OPEB. In 2009, the Town
initiated prefunding of the retiree healthcare benefit and has since established approximately
$22.6 million in OPEB assets (as of 12/31/2022) from zero in 2009. In 2016, the Town’s
bargaining groups approved the introduction of dependent cost sharing and a reimbursement
cap to Medicare eligible employees, and in 2018 the elimination of the Town's existing retiree
healthcare benefit prospectively.
PAGE 12 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
While these collective measures have helped to slow the growth in salary and benefit expenses,
the Forecast anticipates continued increases in the Town’s pension obligations.
Provided below are the expense assumptions for salary and benefits and alternate case
scenarios for pension contributions. The majority of other expenses are assumed to increase at
3% per annum. Detailed expenditure assumptions and factors can be found in Attachment 4.
Salary and Benefits
Salary
The Town has historically budgeted vacant and non-sworn positions at top step of the range for
the position. Sworn and management positions are budgeted at one step higher of current
step in anticipation of any merit increases expected to be awarded in the upcoming fiscal year.
Based on Council’s direction for FY 2021/22, salaries were budgeted at actual salary plus a one
step increase, which was a significant budgeting methodology change from previous practice.
This methodology will be continued for the development of FY 2023/24 budget unless modified
by the Town Council.
For the Forecast, positions are budgeted at the actual rate of pay of employees including
benefits as of January 2023. Then, by position, salary costs are updated in accordance with the
applicable Memorandum of Understanding (MOU) between the Town and its bargaining units.
The Memoranda of Understanding that outline the individual agreements between the Town
and each unit related to compensation, health benefits, leave time, and grievance procedures
will expire with TEA and AFSCME on June 30, 2024. POA’s MOU will expire on September 30,
2024. The Management and Confidential groups are unrepresented.
In addition to the economic terms of the MOUs, the Forecast assumes step increases for
employees in applicable positions, and merit increases for Management and Confidential
employees. In addition, based on prior Council guidance, 2% cost of living wage adjustments
(COLA) are included in the Forecast for each year starting in 2024/25.
The following table illustrates the base case forecast compared to a forecast with 4% vacancy
saving factor as recommended by the Finance Commission.
Salaries
(Current MOUs)
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M)($M)($M)($M)($M)
Base Case $23.10 $23.62 $24.09 $24.63 $25.17
PAGE 13 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Pension and Other Benefits
For purposes of the Forecast, staff utilizes estimates provided by each plan’s most recent
actuarial valuation received from CalPERS. The employer contribution rates reflect percentages
of covered payroll. Rates shown for FY 2023/24 are actual rates as prescribed by CalPERS.
Forecasted rates for FY 2023/24 and subsequent years are based on the most recent CalPERS
Actuarial Valuation Reports as adjusted by the impact related to the FY 2021/22 CalPERS
negative 7.5% investment return and forecasted payroll.
Beginning in FY 2021/22, the estimates of employer contributions were credited with an
anticipated reductions associated with the approximate $4.8 million additional discretionary
payment (ADP) toward the 2016 unfunded amortization base paid off in October 2019 and the
total of approximately $5.8 million in ADPs toward unfunded 2013 and 2015 amortization bases
that were paid off in FY 2020/21.
Given that investment returns have one of the largest impacts on contribution variability,
CalPERS provides projected employer Unfunded Actuarial Liability (UAL) contributions under
alternate investment returns. Analysis using the investment return scenarios from the Asset
Liability Management process completed in 2021 was performed to determine the effects of
various future investment returns on required employer contributions. The projections below
reflect the impact of the CalPERS Funding Risk Mitigation policy. The projected normal cost
rates reflect that the rates are anticipated to decline over time as new employees are hired into
lower-cost benefit tiers. The projections also assume that all other actuarial assumptions will
be realized and that no further changes in assumptions, contributions, benefits, or funding will
occur. The first table shows projected contribution requirements if the fund were to earn
either 3.0% or 10.8% annually. These alternate investment returns were chosen because 90%
of long-term average returns are expected to fall between these levels over the 20-year period
ending June 30, 2041. This information is included for informative purposes and is not included
in the base case, “Greater Growth,” or “Lower Growth” scenarios.
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M)($M)($M)($M)($M)
Base Case ($2.70) ($3.10) ($3.00) ($3.10) ($3.20)
with 4% Vacancy Factor ($1.30) ($1.70) ($1.50) ($1.50) ($1.60)
Surplus/Deficit
Pension & Other
Benefits
2023/24
Forecast
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2027/28
Forecast
($M)($M)($M)($M)($M)
Base Case $12.50 $12.90 $13.10 $13.70 $14.20
PAGE 14 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
Source: CalPERS Actuarial Valuations as of June 30, 2021
For the year ending June 30, 2022, the Public Employees Retirement Fund (PERF) returned
negative 7.5%. The table below illustrates the historic investment returns for five years, ten
years, twenty years, and thirty years.
Five-Year Financial Forecast Alternative Scenarios
The tables below present the “Base Case” forecast contrasted against the two alternative
revenue scenarios of “Greater Growth” and “Lower Growth.” In addition, the 4% vacancy
factor and the elimination of the garbage franchise fees are illustrated compared to the base
case. As illustrated in the tables, even modest changes to the “Base Case” forecast can result in
either additional surpluses or deficits during the forecast period.
UAL Town Contributions
(Misc & Safety)
2024/25
Forecast
2025/26
Forecast
2026/27
Forecast
2026/27
Forecast
2027/28
Forecast
Greater Investment Return Scenario (10.8%)$4,432,000 $3,131,000 $1,613,000 $56,000 $0
Base Investment Return Case (3.0%)$4,774,000 $4,587,000 $4,914,000 $5,316,000 $6,128,000
CalPERS Compound Annual Rates of Return
(as of June 30, 2021)5 Years 10 Years 20 Years 30 Years
Compound Annual Return 10.30% 8.50%6.90%8.40%
5 Year Forecast
"Base Case"
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
2027/28
Forecast
($M)
Total Revenues &
Transfers $48.9 $50.1 $51.4 $53.1 $54.5
Total Expenses &
Allocations $51.6 $53.2 $54.4 $56.2 $57.7
Surplus/Deficit ($2.7)($3.1)($3.0)($3.1)($3.2)
Alternative Scenario
"Greater Growth"
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
2027/28
Forecast
($M)
Total Revenues &
Transfers $51.4 $53.2 $55.1 $57.6 $59.5
Total Expenses &
Allocations $51.7 $53.2 $54.4 $56.3 $57.8
Surplus/Deficit ($0.3)$0.0 $0.7 $1.3 $1.7
PAGE 15 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
DISCUSSION (continued):
CONCLUSION:
The Town Council should review and discuss the elements and assumptions of the initial Five-
Year Forecast and other budget considerations. The “Base Case” Forecast estimates deficits at
this time. Staff looks forward to answering the Town Council questions and receiving direction
for the preparation of the proposed FY 2023/24 Operating Budget that results from the
discussion.
The Finance Commission reviewed the Five-Year Forecast Report at its February 13, 2023
meeting. The Finance Commission commented that actual revenues tend to be higher than
forecasted. There were no specific recommendations on the elements and assumptions of the
initial Five-Year Forecast and other budget considerations.
The preparation of the FY2023/24 Operating and Capital Budgets is taking into account the
Town’s current economic reality and long term fiscal picture, as well as maintaining the Town’s
Alternative Scenario
"Lower Growth"
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
2027/28
Forecast
($M)
Total Revenues &
Transfers $47.3 $47.9 $48.9 $49.9 $50.8
Total Expenses &
Allocations $51.6 $53.1 $54.3 $56.2 $57.7
Surplus/Deficit ($4.3)($5.2)($5.4)($6.3)($6.9)
Alternative Scenario
"4% Vacancy Factor"
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
2027/28
Forecast
($M)
Total Revenues &
Transfers $48.9 $50.1 $51.4 $53.1 $54.5
Total Expenses &
Allocations $50.2 $51.8 $52.9 $54.6 $56.1
Surplus/Deficit ($1.3)($1.7)($1.5)($1.5)($1.6)
Alternative Scenario
without Garbage
Franchise Fee
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
2026/27
Forecast
($M)
2027/28
Forecast
($M)
Total Revenues &
Transfers $47.1 $48.2 $49.4 $51.1 $52.4
Total Expenses &
Allocations $51.6 $53.2 $54.4 $56.2 $57.7
Original Surplus/Deficit ($4.5)($5.0)($5.0)($5.1)($5.3)
PAGE 16 OF 16 SUBJECT: Five-Year Forecast (FY 2023/24 – 2027/28) DATE: February 15, 2023
CONCLUSION (continued):
high level of municipal services. This is considered a “status quo” approach with no major new
initiatives or staffing. Key budget principles include:
• Develop and recommend a balanced budget that maintains service levels;
• Address projected deficits;
• Continue to make progress on Strategic Priorities identified by the Town Council; and
• Identify opportunities to maintain or enhance service delivery through new revenue
sources and technology.
The Capital Improvement Program and direction will be discussed separately at the March
meeting. The Finance Commission may also discuss budget assumptions. The Draft FY 2023/24
Operating and Capital Budgets will be available in April for the Finance Commission elaboration
with the budget hearing tentatively scheduled for May 16, 2023.
COORDINATION:
This Report was prepared by the Finance Department and the Town Manager Office.
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
Attachments:
1. Annual Budget Process
2. Base Case Five-Year Forecast
3. Forecast Revenue Assumptions
4. Forecast Expense Assumptions
5. Additional Sales Tax Context from MuniServices
6. Public Comments Received before Publishing the Staff Report