Staff Report
PREPARED BY: ARN ANDREWS
Assistant Town Manager
Reviewed by: Town Manager, Finance Director, 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: 2/19/2019
ITEM NO: 12
DATE: FEBRUARY 11, 2019
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: DISCUSS THE FIVE-YEAR FORECAST AND OTHER BUDGET ASSUMPTIONS
THAT ARE THE FOUNDATION FOR THE TOWN’S BUDGET.
RECOMMENDATION:
Discuss the Five-Year Forecast and other budget assumptions that are the foundation for the
Town’s budget.
BACKGROUND/EXECUTIVE SUMMARY:
In response to the Town Council’s interest in detailed information that contributes to the
preparation of the annual budget, this report focuses on 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
three of the major revenue assumptions and forecasted pension contributions. These
additional forecast scenarios provide Council with an understanding of the effects on future
budgets of a more optimistic scenario (“Greater Growth”) and a pessimistic one (“Lower
Growth”).
As the summary table below illustrates the Town’s financial condition will be highly dependent
on the economic regime experienced during the forecast period.
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(values in millions)
Scenario Surplus/Deficit
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Greater Growth Scenario ($0.9) ($1.1) ($0.3) $0.6 $1.6
Base Case
Modest Growth
($1.5) ($2.0) ($1.8) ($1.5) ($1.1)
Less Growth Scenario ($2.0) ($2.8) ($3.1) ($3.4) ($4.1)
In addition, in response to Council Members’ questions, the Report also explains additional
one-time budget considerations, the General Fund Capital/Special Projects Reserve, and the
flow of monies to the Town’s Capital Improvement Program.
ANALYSIS:
Purpose of the Five-Year Financial Forecast
An important aspect of our budget development process is t aking 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
(“Forecast”) beginning in the late fall 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 will look like as a
result of the decisions made to date.
This 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.
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ANALYSIS (continued):
Economic Outlook
The Federal Reserve Bank of San Francisco (FRBSF) in a January 10, 2019 publication indicated
that the economy has continued to grow at a robust pace, primarily driven by solid gains in
consumer income and spending. The report projects that the Gross Domestic Product (GDP)
growth rate averaged 3.1% for 2018. However, the report forecasts that growth will slow down
to 2.0% in 2019, as monetary policy continues to normalize and fiscal stimulus wanes and
continue to fall gradually to an estimated long-term potential rate of 1.7%.
The FRBSF forecast is consistent with the final quarterly report for 2018 produced by the UCLA
Anderson Forecast. The UCLA forecast also indicates that the economy is in the process of
downshifting from 3% growth in real GDP this year to 2% in 2019, and 1% in 2020. Recognizing
that the nation and California are experiencing full employment, the Forecast asserts that 3%
quarterly growth is not sustainable. The report continues that with the Federal Reserve raising
interest rates, trade tensions rising, the impact of the fiscal stimulus from tax cuts and spending
increases waning, financial markets will likely experience increased turbulence. The report
cautions that the big question In California, which has benefited from rapid growth in the tech
industry, is how long that boom can continue.
In his latest essay, Will the Tech-Boom Falter if NASDAQ Enters a Long-Term Bear Market?,
UCLA Anderson Forecast Director Jerry Nickelsburg shares analysis that illustrates a strong
statistical correlation between venture capital and payroll jobs in the tech sector. The analysis
suggests that 62% of variations in venture capital are captured by variations in the NASDAQ
index and that 80% of the variation in tech employment is associated with variations in venture
capital. As such the report states that “Were we to enter a long-term bear market in 2019, this
would be cause for concern and it clearly represents a negative risk to the forecast.”
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ANALYSIS (continued):
Town of Los Gatos Forecast Introduction
As with all forecasts, there is a level of uncertainty regarding future revenue and expenditure
estimates. For example, General Fund revenues may exceed or fall below expectations based
on changes in economic or non-economic conditions. The Town’s two largest General Fund
revenues, Property Tax and Sales Tax, have experienced these fluctuations in the past. Various
cost elements can also vary from year to year. As seen in recent years, retirement costs
fluctuate but will likely continue to experience upward pressure based on changes in actuarial
economic and demographic assumptions approved by CalPERS.
Given the potential transition in the economy and the residual effects on revenue and expense
estimates, staff is providing alternative scenarios to the “Base Case” scenario in this year’s
Forecast. The Base Case Forecast is built on the assumption of slow, but still positive, economic
growth. Two alternative forecasts have been developed to model the range of budgetary
scenarios possible under varying economic conditions. “Greater Growth” and “Lower Growth”
scenarios have been created to model economic conditions considered possible. The “Base
Case” scenario provided is believed to be the best estimation at this time and will be utilized for
development of the budget. In addition, it is assumed that between the “Lower Growth”
scenario and the “Greater Growth” scenario, the “Lower Growth” scenario is more plausible.
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Five-Year Financial Forecast
The following table reflects the most recent “Base Case” financial forecast for the General Fund
for Fiscal Year (FY) 2018/19 – FY 2023/24.
Account Revenue Category 2018/19
Budget
2018/19
Estimates
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
4100 Property Tax 12.5$ 13.0$ 13.1$ 13.0$ 14.0$ 14.5$ 15.0$
4110 VLF Backfill Property Tax 3.5 3.7 3.8 3.9 4.0 4.1 4.3
4200 Sales & Use Tax 7.7 7.6 8.3 8.4 8.5 8.6 8.7
4250 Franchise Fees 2.4 2.4 2.5 2.5 2.6 2.7 2.8
4251 Transient Occupancy Tax 2.3 2.6 2.6 2.7 2.7 2.7 2.8
4400 Business License Tax 1.7 1.7 1.7 1.7 1.7 1.7 1.7
4400 Licenses & Permits 3.3 3.3 2.9 3.0 3.1 3.2 3.3
4500 Intergovernmental 0.6 0.7 0.7 0.7 0.7 0.7 0.7
4600 Charge for Services 4.5 4.5 3.3 3.3 3.4 3.5 3.5
4700 Fines & Forfeitures 0.6 0.6 0.6 0.6 0.6 0.6 0.6
4800 Interest 0.3 0.3 0.3 0.3 0.3 0.3 0.3
4850 Other Sources 2.5 2.5 2.1 2.2 2.2 2.2 2.2
4900 Fund Transfers In 0.5 0.5 0.5 0.5 0.5 0.5 0.5
TOTAL OPERATING REVENUES & TRANSFERS 42.4$ 43.4$ 42.4$ 42.8$ 44.3$ 45.3$ 46.4$
Use of Capital/Special Project Reserve - Capital 2.3 2.3 0.6 0.6 0.6 0.6 0.6
Use of Pension/OPEB Reserve 3.1 3.1 0 0 0 0 0
Use of Capital/Special Project Reserve - Other 0.5 0.6 0 0 0 0 0
48.3$ 49.4$ 43.0$ 43.4$ 44.9$ 45.9$ 47.0$
Account Expenditure Category 2018/19
Budget
2018/19
Estimates
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
5110 Salary 17.6$ 18.5$ 19.3$ 19.5$ 19.7$ 19.7$ 19.7$
5120 CalPERS Benefits 5.6 6.0 7.0 7.5 8.1 8.5 8.7
5200 All Other Benefits 3.9 4.0 4.2 4.3 4.3 4.4 4.5
6211 OPEB Pay as You Go 1.2 1.2 1.2 1.2 1.3 1.3 1.4
6000 Operating Expenditures 6.7 6.7 5.4 5.5 5.6 5.7 5.8
7200 Grants & Awards 0.2 0.2 0.2 0.2 0.3 0.3 0.3
7400 Utilities 0.6 0.6 0.6 0.6 0.6 0.6 0.7
8060 Internal Service Charges 2.5 2.5 2.6 2.6 2.7 2.8 2.9
8900 Debt Service 1.9 1.9 1.9 1.9 1.9 1.9 1.9
TOTAL OPERATING EXPENDITURES 40.2$ 41.6$ 42.4$ 43.3$ 44.5$ 45.2$ 45.9$
9900 GASB 45 Retiree Medical Actuarial 1.1 1.1 1.1 1.1 1.2 1.2 1.2
9900 Pension Pre-funding to PARS 0.4 0.4 0.4 0.4 0.4 0.4 0.4
TOTAL OPERATING & DISCRETIONARY
EXPENDITURES 41.7$ 43.1$ 43.9$ 44.8$ 46.1$ 46.8$ 47.5$
9900 Capital Transfers Out to GFAR 2.3 2.3 0.6 0.6 0.6 0.6 0.6
9900 Reserve to Internal Service Funds 0.5 0.5 0 0 0 0 0
9900 Pension/OPEB Transfer to PARS 3.1 3.1 0 0 0 0 0
47.6$ 49.0$ 44.5$ 45.4$ 46.7$ 47.4$ 48.1$
0.7$ 0.4$ (1.5)$ (2.0)$ (1.8)$ (1.5)$ (1.1)$
NET REVENUES RESERVE TRANSFERS LESS EXPENDITURES &
RESERVE ALLOCATIONS
Town of Los Gatos General Fund 5-Year Forecast
(in $ million)
TOTAL REVENUES, TRANSFERS, AND USE OF RESERVES
TOTAL EXPENDITURES & RESERVE ALLOCATIONS
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ANALYSIS (continued):
The first column of the above table shows that the Town Council adopted a balanced budget for
FY 2018/19 with an approximate $0.7 million surplus. Since the adoption of the budget several
changes in revenues and related expenditures have resulted in an estimated $0.4 million
surplus for the current fiscal year. This estimated surplus for the close of the fiscal year on June
30, 2019 will continue to be refined and won’t be finalized until after the independent audit
and completion of the Comprehensive Annual Financial Report in late fall.
In addition to the revised current year budget estima te, the Forecast indicates moderate
deficits throughout the forecast period. A funding deficit of ($1.5) million is estimated for FY
2019/20. For FY 2020/21 to FY 2023/24, the forecast reflects estimated revenue shortfalls
ranging from ($2.0) million to ($1.1) million in the fifth year of the forecast.
The Forecast includes all revenues and transfers as well as the use of reserves to fund the
Town’s municipal services, capital improvements, and additional discretionary payments
(ADP’s) towards unfunded pension and Other Post-Employment Benefit (OPEB) obligations. In
addition, as the table above illustrates the inclusion of discretionary, yet prudent, payments
towards pension and OPEB related expenses account for the majority of future forecasted
deficits. These discretionary expenses are voluntary contributions proactively adopted by
Council to further reduce/eliminate outstanding unfunded benefit obligations.
The following section provides a more detailed description of the Town’s revenue and
expenditure forecasting methods and assumptions.
Revenue Assumptions
As discussed in the Economic Outlook section of this report, the national and regional
economies are expected to gradually slow over the coming years. The Town is highly
dependent on three economically sensitive revenues comprising 61% of Town General Fund
revenues. Property Taxes, Sales Taxes, and Transient Occupancy Taxes (TOT) are approximately
37.7%, 18.3%, and 5.4% of Town revenues, respectively. These three revenue streams will be
used for the alternative forecast scenarios. Please see Attachment 2 for a description of all
revenue categories. In addition, Attachments 3 and 4 provide a comprehensive listing of
revenue and expenditure forecast assumptions.
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. Town staff meets with the County
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ANALYSIS (continued):
quarterly to obtain the latest assessed valuation and assessment roll data used to forecast
property tax revenues. Property Tax estimates are updated quarterly by the County.
The 2018-2019 Assessor’s Annual Report details Santa Clara County’s longest post-recession
recovery, which is well into the eighth year since the height of the Great Recession in 2009.
“Rebounding from the greatest economic downturn since the Great Depression, Silicon Valley
economy has surged back to record levels. Santa Clara County is well into the eighth year of
recovery since the bottom of the recession in 2010. The turnaround is tr uly remarkable,” said
County Assessor Larry Stone.
Stone further commented, “Employment growth during the past eight years has triggered an
incredible demand for office and industrial space, apartments, and homes. The result has been
a nearly two-thirds increase in the County’s net assessed values.”
Santa Clara County Property Tax Summary
Source: Santa Clara County Tax Assessor’s Office
However, the report cautioned, “Despite the strength of the local economy driven by
technology companies, Silicon Valley and California are not immune to economic cycles.
Economic adjustments are inevitable. The composite data indicates that a mild economic
slowdown may be on the horizon.”
As the table on the following page illustrates Los Gatos has benefited from the economic
expansion as evidenced by year-over-year (YOY) roll growth in property assessment since 2010.
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ANALYSIS (continued):
Los Gatos Assessment Roll Growth
(values in billions)
2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Roll 8.26 8.37 8.68 9.46 9.99 10.63 11.54 12.29 13.15
Percent
Growth
(0.67) 1.3 3.67 9.06 5.62 6.4 8.56 6.54 6.95
Source: Santa Clara County Assessors Annual Reports
For purposes of the Forecast, the “Base Case” utilizes a growth factor of 3% and the “Greater
Growth” and “Lower Growth” scenarios utilize a 2% differential from the Base Case. In
addition, the Forecast estimates additional property taxes of $350,000 in FY 2021/22 and
$700,000 per year from Phase One development of the North 40 area starting in year 2022/23
of the Forecast. The “Base Case” also assumes no distribution of supplemental E ducation
Revenue Augmentation Fund (ERAF) monies after FY 2020/21 because of potential pending
State legislation and the lack of certainty if there will be excess property tax revenue to
distribute to cities/towns based on the State distribution methodology.
(values in millions)
Property Tax
(Property Tax & VLF)
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Greater Growth Scenario $17.2 $17.7 $19.1 $20.1 $21.1
Base Case
Modest Growth
$16.9 $16.9 $18.0 $18.6 $19.3
Less Growth Scenario $16.5 $16.3 $17.0 $17.3 $17.5
Sales Tax
Sales tax estimates are based on actual sales tax data and annual sales tax estimates for five
years provided by the Town’s consultant, MuniServices. For purposes of the Town’s Forecast,
MuniServices provides a “Most-Likely” scenario which serves as the “Base Case.” In addition,
their “Optimistic” scenario serves as the “Greater Growth” case and “Conservative” scenario is
the “Lower Growth” case. In addition, they provide a “Recession Scenario” which is based on
the weighted reduction in sales tax revenues in Los Gatos during the last four recessio ns since
1990. In the event future economic and sales tax receipt data warrants the use of the
“Recession Scenario” staff will incorporate at that time.
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ANALYSIS (continued):
With the passage of Measure G, the Forecast also incorporates an additional $800,000 in
estimated annual revenues commencing in 2019/20. For the 2018/19 estimate, only $200,000
of additional revenue is recognized because collection of this new tax begins in April.
(values in millions)
Sales Tax 2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Greater Growth Scenario $8.5 $8.5 $8.7 $8.8 $8.9
Base Case
Modest Growth
$8.3 $8.4 $8.5 $8.6 $8.7
Less Growth Scenario $8.2 $8.3 $8.4 $8.5 $8.5
Transient Occupancy Tax (TOT)
CBRE Hotels Americas Research is forecasting that the nation’s hotels will enjoy a 10th
consecutive year of growth in 2019. According to the research, U.S. hotel occupancy will rise to
66.2 percent next year, a fifth straight record level. The growth in occupancy is primarily the
result of a projected 2.1 percent increase in demand. The San Jose-Santa Cruz and San
Francisco lodging markets are forecast to have 4.4 percent or more Average Daily Rate (ADR)
growth in 2019.
CBRE is not forecasting any economic or lodging industry recessions through 2022. However,
industry growth is forecast to curtail beyond 2019. CBRE sees higher interest rates, equity
market corrections, credit market problems and some shrinkage in employment as risk factors
occurring in late 2019 and 2020 that will adversely affect the lodging industry in 2021. For
purposes of the Forecast, the “Base Case” utilizes a growth factor of 1% with a 1% differential
for the “Greater Growth’ and “Lower Growth” scenarios.
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ANALYSIS (continued):
(values in millions)
Transient Occupancy Tax
(TOT)
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Greater Growth Scenario $2.7 $2.7 $2.8 $2.8 $2.9
Base Case
Modest Growth
$2.6 $2.7 $2.7 $2.7 $2.8
Less Growth Scenario $2.6 $2.6 $2.6 $2.6 $2.6
Expense Assumptions
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
costs, and unfunded State mandates. Escalation also includes other unavoidable cost increases
unique to the government organization, such as a rise in wages consistent with a collective
bargaining agreement. New operating expenditures refer to costs created by new or enhanced
service programs approved during the annual budget process.
As a service organization the delivery of Town services is highly dependent on labor which
comprised approximately 58% of budgeted General Fund expenditures in 2018/19. 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.
Salary and Benefits
Salary
For the Forecast, positions are budgeted at the actual rate of pay of employees including
benefits as of Fall 2018. Then, by position, salary costs are updated in accordance with the
applicable Memorandum of Understanding (MOU) between the Town and its labor groups. The
Town recently concluded bargaining with MOUs that continue through Fiscal Year 2021 as
approved by the Town Council. 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
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ANALYSIS (continued):
employees. No general wage adjustments are included in the Forecast starting in 2020/21
when bargaining group MOUs expire. The Forecast will be updated accordingly based on labor
negotiations with the Town’s unions at that time.
(values in millions)
Salaries
(Current MOUs)
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Base Case $19.3 $19.5 $19.7 $19.7 $19.7
In addition to the above salary forecast, the table below provides the year-over-year (YOY)
percentage change for salaries for the previous five years.
Salaries
2014/15
Actual
2015/16
Actual
2016/17
Actual
2017/18
Actual
2018/19
Estimated
YOY Percentage Change 4.4% 0.6% 2.1% 7.5% 8%
Pension Benefits
Unfunded long-term liabilities for Town employee pension plans and Other Post -Retirement
Benefits (OPEB) continue to be a prominent issue with respect to the Town’s long range
financial planning and financial health. The Town’s pension plans over the past several
decades, like all other CalPERS participants, have experienced unfavorable investment returns,
changes in actuarial assumptions, and unfavorable demographic shifts which have outweighed
any positive plan experiences.
For purposes of the Forecast, CalPERS provides projected employer Unfunded Actuarial Liability
(UAL) contributions under alternate investment returns. As the table below illustrates returns
higher than the expected return of 7% result in lower UAL contributions and returns lower than
7% result in higher UAL contributions.
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ANALYSIS (continued):
UAL Town
Contributions
(Misc & Safety)
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Greater Investment
Return Scenario (12%)
N/A N/A $4,689,000 $4,935,000 $4,884,000
Base Investment Return
Case (7%)
$3,814,392 $4,256,000 $4,795,000 $5,252,000 $5,529,000
Less Investment Return
Scenario (1%)
N/A N/A $4,924,000 $5,644,000 $6,326,000
CalPERS Actuarial Valuations as of June 30, 201
For the year ending June 30, 2018, the Public Employees Retirement Fund (PERF) returned
8.6%. The table below illustrates the historic investment returns for three years, five years, ten
years, twenty years, and since inception.
Five-Year Financial Forecast Alternative Scenarios
The tables below present the “Base Case” forecast contrasted against the two alternative
scenarios of “Greater Growth” and “Lower Growth.” 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. As indicated earlier in the report , staff believes the “Lower Growth”
scenario is the plausible alternative scenario at this time.
(values in millions)
Original 5 Year Forecast
“Base Case”
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Total Revenues,
Transfers & Use of
Reserves
$43.0 $43.4 $44.9 $45.9 $47.0
Total Expenses &
Allocations
$44.5 $45.4 $46.7 $47.4 $48.1
Original Surplus/Deficit ($1.5) ($2.0) ($1.8) ($1.5) ($1.1)
CalPERS Total Net Investment
Return*
3 Years 5 Years 10 Years 20 Years 30 Years
*Net time-weighted rates of
return for PERF
6.7% 8.1% 5.6% 6.1% 8.4%
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ANALYSIS (continued):
(values in millions)
Alternative Scenario
“Greater Growth”
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Total Revenues &
Transfers
$43.6 $44.3 $46.3 $47.7 $49.1
Total Expenses &
Allocations
$44.5 $45.4 $46.6 $47.1 $47.5
New Surplus/Deficit ($0.9) ($1.1) ($0.3) $0.6 $1.6
(values in millions)
Alternative Scenario
“Lower Growth”
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
2023/24
Forecast
Total Revenues &
Transfers
$42.5 $42.6 $43.7 $44.4 $44.8
Total Expenses &
Allocations
$44.5 $45.4 $46.8 $47.8 $48.9
New Surplus/Deficit ($2.0) ($2.8) ($3.1) ($3.4) ($4.1)
Additional One-Time Budget Considerations
2018 Surplus and Capital and Special Projects Reserve
As presented during the 2019-2021 Strategic Priorities, the close of the June 30, 2018
Comprehensive Annual Financial Report (CAFR) resulted in a $3.7 million surplus. Per Council
Reserve Policy, the $3.7 million unassigned fund balance was allocated to the Capital /Special
Project Reserve at the final close of the fiscal year. During the Strategic Priority discussion,
Council identified the following priorities for reallocation of the surplus.
• Continue to put funds towards addressing the pension unfunded liability.
• Provide staff support and financial support of approximately $15,000 for a potential
downtown Business Improvement District.
• Support community vitality for Chamber summer events with approximately $8,000 to
10,000.
• Improve the Town’s Pavement Condition Index (PCI) as much as possible.
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ANALYSIS (continued):
• Begin to set aside funds for Downtown improvements/revitalization with approximately
$1 million.
Based on this direction, the Town Manager in conjunction with Department Directors will
prepare proposals for the FY 2019/20 Proposed Budget to be submitted in May.
In addition to the discussion of the prior year $3.7 million surplus, Council also inquired about
the nature of monies currently residing in the Capital/Special Project Reserve. The June 30,
2018 CAFR General Fund Balance indicates $14.5 million in the Capital/Special Project Reserve.
For additional information regarding the 2018 starting fund balance of $14.5 million please see
attachment 5. For Council discussion, staff combined the Capital/Special Project Reserve with
the residual balance of $129,090 from the Strategic Planning Reserve.
As illustrated in the table below, the $14.5 million includes $3.99 million of funds that were
previously allocated by Council action during the adoption of the FY 2018/19 budget and
additional Council actions during the current budget year to date. In addition, the five-year
Capital Improvement Plan anticipates an annual transfer of $550,000 from the General Fund
Capital/Special Project Reserve to the General Fund Appropriated Reserve (GFAR) Fund to
support the five-year plan. The table also shows an example of how the $3.7 million surplus
could be allocated based on Council’s identified areas of strategic emphasis.
The remaining $4.0 million has previously never been allocated and is available for future
capital projects or potential Council reallocation. It should be noted, that if the funds are
reallocated there is currently no identified revenue source to replace these monies for future
capital projects.
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ANALYSIS (continued):
General Fund Capital/Special Project Reserve and Strategic Priority Reserve
Total Reserve as of 6/30/2018
$14,550,293
FY 18/19
Prior Council
Actions
FY 19/20
5 Yr CIP
FY 20/21
5 Yr CIP
FY 21/22
5 Yr CIP
FY 22/23
5 Yr CIP
FY 23/24
5 Yr CIP
Total
CIP &
FY 18/19
$3,998,931
$550,000
$550,000
$550,000
$550,000
$550,000
$6,748,931
Available for Reallocation $7,801,362
Planned Use FY 19/20 Per Strategic Priority Direction ($3.7 m)
Pension/OPEB $1,337,500
$1,337,500
PCI Improvements $1,337,500
$1,337,500
Downtown Revitalization $1,000,000
$1,000,000
Chamber Summer Event $10,000
$10,000
Business Improvement
District
$15,000
$15,000
Available for Future CIP or Potential Reallocation
(after earmark of $3.7 million surplus) $4,101,362
In addition to the information provided in the table, staff has provided process and flow-of-
funds diagrams for fiscal year surpluses and the Capital Improvement Program in Attachment 6.
One of the ways the Town has had surplus funds for capital projects and other Council priorities
is that the Town historically budgets vacant and non-sworn positions at top step of the range
for the position. Sworn and management position are budgeted at one step higher of current
step in anticipation of any merit increases expected to be awarded in the upcoming fiscal year.
This approach also allows the Town to compete for the best talent to serve the Los Gatos
community.
Annual surpluses have historically been placed into the Town’s General Fund Capital and
Special Projects Reserve and some was programmed and transferred to the Town’s GFAR
capital projects fund. The Council also directed the use of the surplus to pay down unfunded
liabilities. Since FY 2005/06 these surpluses were allocated for the following Council priorities:
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ANALYSIS (continued):
• Approximately $40.7 million of funding for Town infrastructure including Town-wide
street improvements, curb gutter sidewalks, park improvements, retaining walls, police
operations building, a new Town library, among other vital projects.
• Approximately $4.5 million in funding used to pay off the Town’s “side fund” unfunded
pension liability.
• Approximately $3.6 million used as a funding source for the Town’s new sport park
complex on University Avenue.
• Seed funding of approximately $4.8 million through FY 2018/19 of monies placed int o
the Town’s newly established pension trust for use in addressing unfunded pension
liabilities.
Compensated Absences
According to our current financial policy, compensated absences balances are maintained
annually to fund 100% of all vested hours of vacation and sick leave. With the conclusion of
labor negotiations which resulted in the elimination of sick leave cash out prospectively staff
reevaluated the existing financial policy. Because it is unlikely that the funds will be demanded
to fully pay this liability at any one point in time, for the upcoming FY 2019/20 Budget staff is
funding the Compensated Absences at a level of 50% of vested hours. This change would
provide an approximately $1.0 million of additional one-time monies during FY 2019/20 for
further Council allocation. Please note that the balance is established at year -end based on
actual vacation/sick hours and can change year to year.
CONCLUSION AND NEXT STEPS:
The Town Council should review and discuss the elements and assumptions of the Five-Year
Forecast and other budget considerations. While the base case Forecast estimates moderate
deficits, it is based on assumptions that are subject to change as shown with the alternative
growth scenarios. As the Forecast is not a budget, there are no specific budget balancing
recommendations being proposed at this time. The Town Manager will bring forward for
Council consideration in May a balanced proposed budget for FY 2019/20 budget.
Staff looks forward to answering the Town Council’s quesitons and receiving any direction for
the preparation of the FY2019/20 proposed budget that results from the discussion. As a next
step, the Council Finance Committee will be discussing a draft Internal Service Fund Policy in
March which will then be considered by the Town Council tentatively in April. The Draft FY
2019/20 Operating and Capital Budgets will be available in May with the budget hearing
tentatively scheduled for May 21, 2019.
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COORDINATION:
This Report was prepared by the Town Manager’s Office in coordination with the Finance
Department.
Attachments:
1. Budget Process Timeline
2. Major Revenue Categories
3. Revenue Baseline and Projection Factors
4. Expenditure Baseline and Projection Factors
5. FY 2017/18 General Fund Reserve Activity
6. Fiscal Year Surplus Flow of Funds and Capital Improvement Program
7. Public Comment received by 11:00 a.m. February 14, 2019