The URL can be used to link to this page

Attachment 3Preparing For The Next Recession Since WWII the average economic expansion has lasted 58.4 months Level of real output Peak The Economic Cycle Peak Peak pv4 t' • > ,�. cocaL. a, 0 ��'0 Q di 1 . 4 a. n Trough ass /on Trough Time The current economic expansion has lasted 101 months and counting... 3 USD Since 1932 there have been 12 bull markets with an average S&P 500 gain of 185% GRAB SPX Index 01/03/2001 9n Compare 12/13/2017 d 1D 3D 1M 6M YID 1Y 5Y Max Daily V L l t • Table « ;;;, Chart Content 96) Actions — 97) Edit - Last Price - ■ Last Price 2670.71 High on 12/13/17 2670.71 • Average 1596.77 - Low on 03/09/09 676.53 -?i Line Chart ul 2670.71 h250.1 1504 • The current gains for the S&P 500 are nearing 300% • Making this the 2nd longest bull market in history 4 The current high stock valuations have CaIPERS worried about returns in the future 2017 Asset Liability Management Workshop Attachment 1, Page 16 of 55 Historical CAPE Measure 15 - 5 Cyclically Adjusted Price -to -Earnings Ratio (CAPE) i` vi\ v\4,1\i„ 0 ;ebt'. ,ya ;b1*> ,43,.�°�.�°f1 •.` ��i'��` 'l: '�'L 'L°� ^P�h August 2017 CAPE = 31 1c1-.2p1- Avfraaf Aar = • Data Sou*ce Stock Mare Data Used in "Irrational Exuberance• Princeton University Press, Robert J. Shirker Ca1PERS 01114TINUFTCWWKWICOV 38 t:r.kk�: m m 5 CaIPERS new capital market assumptions predict 10 year returns will be 6.4% or below 2017 Asset Liability Management Workshop Candidate Portfolios Expected Compound Return ft-so yrs.) 5.6% 5.8% 6.1% 6.4% Long Term Expected Return 01-60 yrs.) 7.8% 8.0% 8.3% 8.5% Blended Return (1-60 yrs.) 6.50% 6.75% 7.00% 7.25% A Ca1PERS Z m� > g '41 3:1 m -‹ m (1) Z -n m 73 < z 6 QUESTION: Is the Town prepared for either a downturn in the economy or financial markets? —I 2 m --i 0 z !X• 17:rr. 7 Five year forecast show small deficits even with modest growth assumptions Total Revenues & Transfers Total Expenses & Allocations Net Revenues Less Expenses 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast $40.5 $40.6 $(0.1) $41.2 $42.3 $43.2 $44.1 $41.6 $42.8 $43.7 $44.6 $(0.4) $(0.5) $(0.5) $(0.5) i *Forecast includes increased CaIPERS contributions due to adoption of lower assumed rate of return to 7% QUESTION: What does the five year forecast look like under different economic scenarios? Iui Sales Tax Recession Scenario 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast Sales Tax $8.0 $8.2 $8.4 $8.6 $8.6 Contraction $7.2 $6.9 $6.8 $7.0 $7.1 Scenario Difference $(0.8) $(1.3) $(1.6) $(1.6) $(1.5) • The Recession Scenario is based on the weighted reduction in sales tax revenues in Los Gatos during the last four recessions, since 1990. *Recessions prior to the most recent Great Recession are given greater weight, due to its abnormal severity and length in time. G 2 m � n � m w * 0 m 0:1: Z D -N) < D Property Tax Flat Growth Scenario 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast Property Tax & VLF Flat Scenario $15.3 $15.6 $16.0 $16.5 $16.9 $14.8 $14.8 $15.3 $15.6 $16.0 Difference $(0.5) $(0.8) $(0.7) $(0.9) $(0.9) • Instead of 3% growth, what if we assume revenues remain flat at 2017/18 levels for the first two years, with mild growth after that? • This modest change in the forecast results in additional projected deficits. Five year forecast incorporates lowering the discount rate to 7% Investment Return Scenario MISC PLAN 2020-21 UAL Contribution 2021-22 UAL Contribution 2022-23 UAL Contribution (3.0%) 5th Percentile 3.0% 25th Percentile 7.375% 49th Percentile 11.0% 75th Percentile 17.0% 95th Percentile $2,686,000 $3,217,000 $3,815,000 $2,625,000 $3,038,000 $3,463,000 $2,583,000 $2,545,000 $2,910,000 $3,204,000 $2,788,000 $2,955,000 $2,485,000 $2,594,000 $2,561,000 However, investment returns are volatile WiltzfiluM1110W111111.1aM �J3.1V � 12 Five year forecast incorporates lowering the discount rate to 7% Investment Return Scenario SAFTEY PLAN 2020-21 UAL Contribution 2021-22 UAL Contribution 2022-23 UAL Contribution (3.0%) 5th Percentile $1,824,000 $2,299,000 $2,828,000 3.0% 25th Percentile $1,769,000 $2,135,000 $2,504,000 7.375% $1,730,000 $2,018,000 $2,265,000 49th Percentile 11.0% $1,695,000 $1,908,000 $2,041,000 75th Percentile 17.0% $1,640,000 $1,734,000 $1,689,000 95th Percentile However, investment returns are volatile N2:1 13J13 ,N 314 d3d1V 13 Potential 5 year forecast if we have flat/negative growth Original 5 Year Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast Total Revenues & Transfers $40.5 $41.2 $42.3 $43.2 $44.1 Total Expenses & $40.6 $41.6 $42.8 $43.7 $44.6 Allocations Original Deficits $(0.1) $(0.4) $(0.5) $(0.5) $(0.5) Alternative Scenarios 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast Sales Tax Contraction $(0.8) $(1.3) $(1.6) $(1.6) $(1.5) Flat Property Tax $(0.5) $(0.8) $(0.7) $(0.9) $(0.9) Lower CaIPERS Returns NA NA $(0.6) NA NA New 5 Year Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 2022/23 Forecast Total New Deficits $(1.4) $(2.5) $(3.4) $(3.0) $(2.9) What can we do? Factors Out of Our Control: • Timing of Economic Cycle • High Dependence on Elastic Revenues • Variability of Pension Expense Factors Within Our Control: • Certain Expenses • Certain Revenues 15 During the last two recessions staffing reduced by 20% 190 180 170 160 150 140 130 120 110 100 180 176 168 160 153 151 151 153 139 138 188 144 144 136 Off' O� 00` Oy el O't O� 00 y° yy yrl' y3 y0` yr° O°y\ O°P\ o62' o°b\ o°4'\ 0°6\ o°A\ o°�\ N. oy0\ ,yON' ON' oy�\ Oy4,1 ti ry ti ti ti ti ti ti ti ti 1,0 ti ti I. ti AI r m c m�v m m 0 ><-D m p Z z (f) C/) 0 16 While staffing levels have decreased, service levels either remained the same or increased 2001/02 2015/16 % Change General Government 30.5 20.9 -31.0 Police 68.0 59.0 -13.2 Culture & Rec 4.25 0.0 -100.0 Economic Development 1.0 .75 -25.0 Library 11.5 11.0 -4.3 Planning 21.0 19.0 -9.5 Public Works 44.0 33.5 -23.9 2015/16 % Change Physical Arrests 1,062 987 70 Parking Violations 10,207 13,975 +37.0 Commercial Permits Issued 101 147 +45.5 Parks Maintained 12 12 0.0 Residential Building 868 899 +3.6 Permits Issued 17 Over 60% percent of Town GF revenues are highly tied to the economy and heavily regulated Property Tax (including VLF) • Legislated at State level (Prop 13) • Town receives only 9.3 cents of each dollar paid by property owners 37.2% of 2017/18 adopted budget GF revenues Transient Occupancy Tax (TOT) • Legislated at the local level • Town receives 12% on hotel room night cost • 5.2% of 2017/18 adopted budget GF revenues Voter approved increase from 10% to 12% in November 2016 Sales Tax • Legislated at State level (Prop 218) • Town receives only 1.0 cent of every 9 cents of sales tax per dollar • 20.3% of 2017/18 adopted budget GF revenues m < m z I-1 c m m vo DC/) O m Z r (1) r y m 18 Current Sales Tax California Sales Tax Law • Capof9.25% • Statewide rate 7.25% • Cities and Counties can add additional 2.0% 1.75% Town of Los Gatos Current Sales Tax Rate California State -Wide Tax Rate: Santa Clara County Retail Tax Transit District VTA VTA BART Silicon Valley Transportation Total 7.25% . 125% . 50% .50% . 125% . 50% 9.00% Remaining Sales Tax Capacity IJ. 9.25% State Cap 9.0% Current Rate 0.25% Remaining With the current 9.25% cap there is only 0.25% of remaining sales tax capacity z-1 v= Om * Ci) D (1)i 0(1) m 0 --1 N X Z Los Gatos is on the lower end of sales tax per capita of peers regionally Palo Alt Campbell $449 $331 Santa Clara $410 Sunnyvale $211 Cupertino $302 Los Gatos $269 Mountain View $254 21 The Town used a robust demographic profile analysis tool from Experian to better understand our residents. The dataset is one of the largest datasets ever observed by the Town. ■ 12,733 unique households identified ■ 9,412 households match Experian dataset ■ Over three-quarters of Los Gatos households represented in the analysis ■ Experian classifies households into 19 Mosaic Groups and 71 Mosaic Types representing similar behaviors and lifestyles O (1)1 � O m D Cal) Qrll m zcn cn .J 22 Los Gatos is comprised of four primary Mosaic Types : ■ American Royalty - 31.5% • Wealthy, influential couples and families • Income $250,000 + ■ Silver Sophisticates - 23.4% • Mature, upscale couples and singles • Income $100,000 + • Wired for Success - 8.5% • Young, mid -income singles and couples living socially active lives • Conspicuous consumers • Income $50,000 + • Jet Set Urbanites - 4.1% • Affluent singles and couples living fashionable lives • Income $250,000 + 23 What does an eighth cent increase mean for our community? �0 = 1.25 cents $100 = 12.5 cents $1,000 = $1.25 $10,000 = $12.50 24 Since 2008 Santa Clara County has had four general and two special sales tax measures Increase Sunset (years) General/ Special Pass or Fail Percent SC VTA 2016 0.5% (Nov) 30 Special Pass 71.7% San Jose 2016 0.25% 15 General Pass 61.4% (Jun) Gilroy 2014 0.5% 15 General Fail 45.3% (Nov) SCC 2012 0.125% 10 General Pass 56.6 (Nov) SC VTA 2008 0.125% 30 Special Pass 66.8% BART (Nov) Campbell 2008 0.25% 0 (Nov) General Pass 70.5% xi q 25 Five year forecast shows deficits even with modest growth Economy 6s in ater stages of expansion Town is h6ghly dependent on revenues tied to the economy Minor changes to the five year forecast result in widening deficits Increased deficits won't be 100% solved through staffing Sales tax is one of the few revenues unc er the `Town's control Planning for additional revenues is prudent goven late stage economy General tax measure has the highest probability passing 50+1 • 26