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Attachment 1Five Year Financial Forecast 1 EXECUTIVE SUMMARY The Town of Los Gatos produces a Five Year Financial Forecast and updates it regularly to evaluate the Town’s fiscal condition and to guide policy, programmatic planning, and budget decisions. Development of a financial forecast as part of the budget development process is identified as a best practice by the Government Financial Officers Association (GFOA). The key assumptions used for the current forecast period (Fiscal Year 2017/18 through FY 2021/22) include:  Conservative revenue projections with specific growth rates determined by historical data or forecasts from external sources based on economic trends,  No new revenue sources,  Status quo in program and service delivery to maintain existing service levels,  Expenditure growth in areas with built-in escalation clauses over which the Town has no control [including benefits, pension, and Other Post-Employment Benefits (OPEB)],  2.5% of salary growth for all Town’s employees in each FY 2016/17 and FY 2017/18. Applying the above assumptions in the preparation of the financial forecast results in an estimated $200,000 of additional revenues over expenditures at the end of the current FY 2016/17 and a $400,000 surplus in FY 2017/18. FY 2018/19 to FY2020/21 of the forecast show revenue shortfalls while FY 2021/22 forecasts a moderate operating surplus. The additional estimated $600,000 available over the next two fiscal years should be viewed as one-time revenue and budgeted accordingly. The $2.5 million of undesignated reserve at the end of FY 2015/16 is also available for capital improvements or services on a one-time basis based on Council’s direction. FIVE YEAR FINANCIAL FORECAST Staff updates the forecast at least three times a year. Each forecast includes a cycle of review and evaluation for each year of the financial forecast. At the end of the first quarter of the fiscal year, prior year revenue and expenditure actual data is available and provides a context for the development of the upcoming fiscal year’s budget. The first quarter forecast provides baseline data which the Council can use during its upcoming Strategic Priority Setting on January 31, 2017. The second quarter update is presented at the mid -year report based on each Department’s detailed line-item revenue and expenditure year-end estimates for the current fiscal year. This update provides the context for the budget planning process for the following year’s budget. Data from the third quarter is used to capture any late current fiscal year changes to incorporate into the proposed budget. These items typically include the Governor’s May Revised Budget update, which often contains fiscal implications for cities and FY 1 FY 2 FY 3 FY 4 FY 5 Account Revenue Category 2016/17 Estimated 2017/18 Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast NET REVENUES LESS EXPENDITURES 0.2$ 0.4$ (1.0)$ (0.9)$ (0.3)$ 0.2$ ATTACHMENT 1 Five Year Financial Forecast 2 towns and any major events and changes that have a significant impa ct on the forecast, such as results of new labor negotiation contracts. The following table reflects the most recent financial forecast for the General Fund for FY 2016/17 – FY 2021/22. Updated Five Year Financial Forecast ($ millions) FY 1 FY 2 FY 3 FY 4 FY 5 Account Revenue Category 2016/17 Estimated 2017/18 Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 4100 Property Tax 11.0$ 11.3$ 11.7$ 12.0$ 12.3$ 12.8$ 4110 VLF Backfill Property Tax 3.2 3.3 3.3 3.3 3.4 3.4 4200 Sales & Use Tax 8.8 8.0 8.0 8.2 8.4 8.6 4250 Franchise Fees 2.2 2.3 2.3 2.4 2.5 2.5 4251 Transient Occupancy Tax 2.0 2.1 2.1 2.2 2.3 2.3 4400 Business License Tax 1.4 1.4 1.4 1.4 1.4 1.4 4400 Licenses & Permits 2.9 3.0 3.1 3.2 3.3 3.4 4500 Intergovernmental 0.7 0.7 0.7 0.7 0.7 0.7 4600 Charge for Services 2.4 2.2 2.3 2.3 2.4 2.5 4700 Fines & Forfeitures 0.7 0.7 0.7 0.7 0.7 0.7 4800 Interest 0.2 0.2 0.2 0.2 0.2 0.2 4850 Other Sources 3.1 3.1 3.1 3.2 3.2 3.3 4900 Fund Transfers In 0.4 0.4 0.4 0.4 0.4 0.4 TOTAL REVENUES 39.0 38.7 39.3 40.2 41.2 42.2 Use of Reserves Capital Reserve 10.0 0.4 0.4 0.4 0.4 0.5 Use of FY 2017/18 Salary Allocations 1.0 49.0$ 40.1$ 39.7$ 40.6$ 41.6$ 42.7$ Account Expenditure Category 2016/17 Estimated 2017/18 Forecast 2018/19 Forecast 2019/20 Forecast 2020/21 Forecast 2021/22 Forecast 5110 Salary - Regular Employees 15.0$ 15.8$ 15.8$ 15.8$ 15.8$ 15.8$ 5130 Salary -Temporary Employees 0.7 0.7 0.7 0.7 0.7 0.7 5140 Salary - Overtime 0.4 0.4 0.4 0.4 0.4 0.4 5170 Salary - Other Salary 0.1 0.1 0.1 0.1 0.1 0.1 5200 Benefits 8.1 8.7 9.3 9.8 9.9 10.3 6000 Operating Expenditures 5.8 5.6 5.7 5.9 6.0 6.1 7200 Grants & Awards 0.2 0.2 0.2 0.2 0.2 0.2 7400 Utilities 0.4 0.5 0.5 0.5 0.5 0.5 8060 Internal Service Charges 3.7 3.8 4.1 4.2 4.4 4.5 8900 Debt Service 1.9 1.9 1.9 1.9 1.9 1.9 TOTAL EXPENDITURES 36.3$ 37.7$ 38.7$ 39.5$ 39.9$ 40.5$ 9900 Operating Transfers Out - - - - - - 9900 Capital Transfers Out to GFAR 9.9 0.4 0.4 0.4 0.4 0.4 9900 GASB 45 Retiree Medical Actuarial 1.6 1.6 1.6 1.6 1.6 1.6 TOTAL BUDGETED EXPENDITURES 47.8 39.7 40.7 41.5 41.9 42.5 9900 FY 2017/18 Salary Allocations 1.0 9900 Transfer to Capital Projects Reserve - - - - - - 9900 Transfer to Stabilization Reserve - - - - - - 48.8$ 39.7$ 40.7$ 41.5$ 41.9$ 42.5$ REVENUES LESS EXPENDITURES 0.2$ 0.4$ (1.0)$ (0.9)$ (0.3)$ 0.2$ TOTAL REVENUES & TRANSFERS TOTAL EXPENDITURES & ALLOCATIONS REVENUES EXPENDITURES Five Year Financial Forecast 3 The Town Council adopted a balanced budget for FY 2016/17 with approximately $0.8 million surplus. Since the adoption of the budget several changes in revenues and the assumed changes in salary increases related expenditures have resulted in a $0.2 million surplus for the current fiscal year. The forecast shows a one-time available funding surplus of $0.4 million for FY 2017/18. For FY 2018/19 to FY 2020/21, the forecast reflects revenue shortfalls ranging from $1 million to $0.3 million and the fifth year of the forecast show a $0.2 million surplus. No specific budget balancing recommendations are being proposed at this time. Budget balancing measures will be brought forward with the development of FY 2018/19 budget. As presented in the FY 2016/17 First Quarter Budget Performance Report, the Town anticipates having $2.5 million revenues above expenditures at the close of FY 2015/16. The $2.5 million unassigned fund balance per Reserve policy will be added to the Capital Improvement Reserve at the final close of the fiscal year unless the Town Council determines other one -time uses at the January 31, 2017 Council’s Priority Setting meeting. The following section provides a more detailed description of the Town’s revenue and expenditure forecasting methods and assumptions. Revenue Forecasting Methodology The Town uses the most common combination of hybrid techniques which combines historical trend analysis and professional expertise. In this combination the conventional historical trend analysis is performed and the results are then adjusted according to expert experience. The Government Financial Offices Association has indicated that most jurisdictions use a hybrid approach to gain multiple perspectives and mitigate the disadvantages of a single technique when forecasting revenues. Hybrid Approach Used by Los Gatos Historical trend analysis: Trend analysis determines the historical average rate of change in a revenue source and then uses this rate to predict future revenue yields. Professional Expertise: When using professional expertise (also known as professional judgment forecasting), the forecaster relies on his or her professional expertise to predict future values. These estimates can be as simple as basing forecast on the last normal period, plus some adjustment factor (e.g., inflation, rate of change over the previous period), or sound educated estimates based on the estimator’s knowledge of relevant variables (i.e., domain knowledge about economic variables) that impact revenue yield and notable special events techniques and contextual information such as new development, business closing, etc.). The Town staff closely follows legislative changes that affect revenues while analyzing historical trends to make sure that the forecasting is as accurate as possible, mindful of the impact of one-time revenues and timing differences Five Year Financial Forecast 4 In addition, the Town takes advantage of resources through collaboration with other governmental agencies (Santa Clara County, State of California, and municipalities), professional organizations (Government Financial Officer Association and California Society of Municipal Financial Officers) and outside consultants (MuniServices for sales tax revenue forecast). Major Revenue Categories Property Tax: Property tax budget projections are based on valuations projected by the Santa Clara County Assessor’s Office, including transfer tax and other items. Property Tax estimates are updated quarterly by the County. Vehicle License Fee (VLF) Backfill Property Tax: VLF Backfill Property tax budget projections are based on valuations projected by the Santa Clara County Assessor’s Office. VLF Backfill Property Tax estimates are updated quarterly by the County. Sales Tax: Sales tax budget projections are based on sales tax and economic projections provided by the Town’s consultant, MuniServices, who provides actual sales tax data and annual sales tax estimates for five years. Franchise Fee: Franchise fee budget projections are based on current trends. Franchise fees are collected by the Town for the privilege of operating a utility service within Los Gatos. 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. Transient Occupancy Tax: Transient Occupancy Tax budget projection is based on current trends. The Town will adjust baseline of FY 2016/17 since the TOT rate has changed from 10% to 12% as a result of voter approval in the November 2016 election. Business License Tax: Business license tax budget projection is based on current trends. Business license FY 2016/17 baseline will be adjusted based on increased business increase tax from Netflix and other businesses. License & Permits: License and permits budget projection is based on current trends. License and permits consist mainly of building permit fee s which are collected by the Town to offset administrative costs associated with overseeing the proper permitting aspects of development. Town Services: Town services budget projection is based on current trends of activity in the Community Development Department. Town services consist primarily of planning, building, inspection, and engineering fees assessed on local building and development activity. Development fees and charges are based on a cost recovery basis. Five Year Financial Forecast 5 Fine & Forfeitures: Based on actual revenue. Fines and Forfeitures are revenues received upon municipal infraction such as parking violation, library fines and other fines related to Town Code violation. Interest: Based on monthly average of invested balance and the Town’s weighted portfolio yield. Other Sources: Based on actual revenue. This revenue reflects lease reimbursement revenue received from the Successor Agency to the Los Gatos Redevelopment Agency for 2002 and 2010 Certificates of participation debt service payment for the bond issues and other miscellaneous revenues. Revenue Baselines and Projection Factors * Growth rate is based on historical trends. ** Business License tax rate does not change, baseline gets adjusted annually. *** Interest growth is based on average monthly portfolio balance and portfolio yield. Type of Revenue FY 2016/17 FY 2017/18 FY 2018/19 FY 2019/20 FY 2020/21 Property Tax*Current baseline set by SCC Assessor Office 11/7/2016 meeting report. 3%3%3%3% VLF Backfill Property Tax* Current baseline set by SCC Assessor Office 11/7/2016 meeting report. 1%1%1%1% Sales Tax Current baseline set by MuniServices actual estimates per 10/11/2016 report. Further adjustments for Netflix in FY 2018/19 -FY 2020/21 Based on MuniServices Actual Forecast Based on MuniServices Actual Forecast Based on MuniServices Actual Forecast Based on MuniServices Actual Forecast Franchise Fee*Current baseline set by FY 2016/17 Adopted Budget.3%3%3%3% Transient Occupancy Tax* Current baseline set by FY 2016/17 Adopted Budget. $100,000 addition based on anticipated growth from TOT rent change from 10% to 12%. 3%3%3%3% Business License Tax** Current baseline set by FY 2016/17 Adopted Budget. $100,000 addition based on anticipated growth of Netflix and other business tax base. 0%0%0%0% License & Permits*Current baseline set by FY 2016/17 Adopted Budget.3%3%3%3% Town Services*Current baseline set by FY 2016/17 Adopted Budget.3%3%3%3% Fine & Forfeitures Current baseline set by FY 2016/17 Adopted Budget.Varies Varies Varies Varies Interest***Current baseline set by FY 2016/17 Adopted Budget.0.84%0.84%0.84%0.84% Other Sources Current baseline set by FY 2016/17 Adopted Budget.Varies Varies Varies Varies Growth Rate Five Year Financial Forecast 6 Expenditure Forecasting Forecasts of future operating expenditures take into account two key factors: cost escalation and new operating expenditures. Cost escalation refers to largely unavoidable increases in the cost of doing business. It includes inflation, multi-year contract costs, increasing health care cost, and unfunded State mandates. Escalation also includes other unavoidable cost increases unique to the government organization, such as a rise in wages prescribed by a collective bargaining agreement. New operating expenditures refer to costs created by new or enhanced service programs approved during the annual budget process. Expenditure Baselines and Projection Factors * Salary increases are based on actual step increases and bargaining units’ negotiation. ** Benefit increase estimates are provided by CalPERS/Public Employees’ Medical and Hospital Care Act (PEMHCA) *** Based on historical trends. FY 2016/17 FY 2017/18 FY 2018/19 FY 2019/20 FY 2020/21 2.5%2.5%0%0%0% Current baseline set by FY 2016/17 Adopted Budget 7%7%7%7% Current baseline set by FY 2016/17 Adopted Budget 3%3%3%3% Current baseline set by FY 2016/17 Adopted Budget 0%0%0%0% Current baseline set by FY 2016/17 Adopted Budget 3% - 5%3% - 5%3% - 5%3% - 5% Current baseline set by FY 2016/17 Adopted Budget Increase Related to the 2.5%Salary Increaes are Included 3%3%3%3% Current baseline set by FY 2016/17 Adopted Budget Based on Debt Service Schedules Based on Debt Service Schedules Based on Debt Service Schedules Based on Debt Service Schedules Growth Rate Type of Expenditure Salaries* Utilities*** Debt Service Benefit - Medical** Operating Expenditures*** Grants & Awards Internal Service Charges*** Five Year Financial Forecast 7 The Town’s required contribution estimates toward retirement and unfunded liabilities are provided by CalPERS as a percentage of current payroll. The actual percentages used in the forecast are summarized in the table below. CONCLUSION: The additional estimated $600,000 available over the next two fiscal years should be viewed as one-time revenue and expended accordingly. The $2.5 million of undesignated reserve at the end of FY 2015/16 is also available for capital improvements or services on a one-time basis based on Council’s direction. Type of Expenditure FY 2016/17 FY 2017/18 FY 2018/19 FY 2019/20 FY 2020/21 Safety POA Current baseline set by FY 2016/17 Adopted Budget Increase Related to the 2.5% Salary Increaes are Included 39.36%42.86%46.36%46.36% Safety POA - PEPRA Current baseline set by FY 2016/17 Adopted Budget Increase Related to the 2.5% Salary Increaes are Included 12.25%12.25%12.25%12.25% Miscellaneous TEA/Confidential/ Management Current baseline set by FY 2016/17 Adopted Budget Increase Related to the 2.5% Salary Increaes are Included 29%30.80%32.36%32.36% Miscellaneous TEA/Confidential/ Management PEPRA Current baseline set by FY 2016/17 Adopted Budget Increase Related to the 2.5% Salary Increaes are Included Separete PEPRA rate for the Miscellanious gorup has not been established yet by CalPERS. 29%30.80%32.36%32.36% CalPERS Employer Contribution - Actual Percentage of Payroll