Staff Report
PREPARED BY: STEPHEN CONWAY
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: 02/21/2017
ITEM NO: 11
DATE: FEBRUARY 16, 2017
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
A. RECEIVE FY 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT, INCLUDING FY 2016/17 YEAR-END PROJECTIONS;
B. CONSIDER AUTHORIZING BUDGET ADJUSTMENTS AS RECOMMENDED IN
THE ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT;
C. RECEIVE THE TOWN’S FIVE-YEAR FINANCIAL PROJECTION FROM FY
2017/18 TO FY 2021/22;
D. APPROVE A RESOLUTION TRANSFERRING $1,984,402 MILLION EXCESS
BALANCE FROM THE BUDGET STABILIZATION RESERVE TO THE CALPERS
RESERVE; AND
E. APPROVE THE UPDATED GENERAL FUND RESERVE POLICY TO RENAME
THE CALPERS RESERVE TO ENCOMPASS ALL POST-EMPLOYMENT
LIABILITIES BY CHANGING ITS TITLE TO CALPERS/OPEB RESERVE.
RECOMMENDATION:
Staff recommends that the Town Council:
A. Receive the Fiscal Year (FY) 2016/17 Mid-Year Budget Performance and Status
Report, including FY 2016/17 year-end projections;
B. Consider authorizing budget adjustments as recommended in the attached second
quarter budget performance report;
C. Receive the Town’s five-year financial projection from FY 2017/18 to FY 2021/22;
PAGE 2 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
RECOMMENDATION (cont’d):
D. Approve a resolution transferring $1,984,402 million excess balance from the Budget
Stabilization Reserve to the CalPERS Reserve; and
E. Approve the updated General Fund Reserve Policy to rename the CalPERS Reserve to
encompass all post-employment liabilities by changing its title to CalPERS/OPEB
Reserve.
EXECUTIVE SUMMARY:
The purpose of this report is to provide the Town Council with a status of th e adopted FY
2016/17 Operating Budget at the mid-year point, including a brief discussion of the Town’s
current year General Fund Reserve status, proposed mid-year adjustments, and a transfer of
$1.9 million excess fund balance from the Budget Stabilization Reserve to the CalPERS Reserve
consistent with Council direction on January 31, 2017. Staff is also requesting to rename the
CalPERS Reserve to CalPERS/OPEB Reserve by updating the General Fund Reserve Policy. An
update to the Town’s five-year financial projections (FY 2017/18 – FY 2021/22) is provided to
give context for the FY 2017/18 budget development process and recommended budget
approach.
BACKGROUND:
Staff provides the Town Council periodic updates on the status of the current year’s adopted
budget revenues and expenditures, and the projected financial condition of Town funds,
concentrating on the Town’s General Fund. The report provides analysis and recommendations
related to the current year’s adopted budget revenues and expenditures and the projected
financial condition of all Town funds.
DISCUSSION:
The attached Mid-Year Budget Report (Attachment 1) covers the first six months of the fiscal
year beginning July 1, 2016 and ending December 31, 2016. The report presents analysis and
recommendations related to the current year’s adopted budget revenues and expenditures and
the projected financial condition of all Town funds.
General Fund Projected Year-End Balances June 30, 2017
Current fiscal year-end projections for FY 2016/17 reflect an anticipated $1.2 million surplus of
operating revenues over expenditures. As discussed in Attachment 1, revenues are tracking
higher than budgeted and actual expenses typically occur lower than budgeted.
PAGE 3 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
DISCUSSION (cont’d):
Operating Revenue Trends and Proposed Mid-Year Adjustments
Overall second quarter General Fund revenues are trending favorably when compared to the
second quarter of Fiscal Year 2015/16. Due to some projected revenue increases, staff is
recommending a net General Fund increase of revenues, offset by expenditure increases, of
approximately $1.2 million from adopted budgeted estimates. The current forecast expects a
substantial increase in property tax, motor vehicle in lieu, transient occupancy tax (TOT), and
business license tax due to the continued surge in the local economy as well as tourism within
the Bay Area. It should be noted that while the second quarter FY 2016/17 sales tax proc eeds
indicate a significant increase, the overall sales tax revenue is declining. Sales tax proceeds at
mid-year FY 2016/17 include a one-time “triple flip” true-up adjustment of sales tax from prior
fiscal years. Revenues such as licenses and permits, and franchise fees are all trending
favorably, a strong indication that the economy remains strong.
Operating Expenditure Trends and Proposed Mid-Year Adjustments
General Fund expenditure totals for the second quarter are trending in accordance with
forecasts, with total operational expenditures at the end of the second quarter at about 46% of
the adopted budget. With six months of data now available, staff can better predict the next
six months of expenditure trends, although unexpected costs can occur. Should any budget
adjustments be necessary to balance operating revenue and expenditures, staff will advise the
Council accordingly.
Expenditure additions include increased water utility expenses, mandatory well testing
expenses, increased waste management service costs, one-time sales tax discovery services,
funding to provide additional emergency tree services, medical examinations, recruitment
expenses, and labor negotiation expenses.
GENERAL FUND RESERVE STATUS
General Fund Reserves, exclusive of the Compensated Absences Fund, closed on June 30, 2016
with a balance of approximately $27.5 million in committed and assigned reserves which is in
accordance with Town financial policies and operating and capital budget requirements.
PAGE 4 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
DISCUSSION (cont’d):
The Budget Stabilization Reserve was established to serve as a transitional “bridge” funding
source to mitigate or smooth out cyclical ups and downs in locally generated revenues due to
fluctuations in the local economy or “one-time” revenue losses where the revenue base is likely
to be restored in the near future. The Catastrophic Reserve was established to mitigate costs
associated with unforeseen emergencies, such as a disaster or catastrophic event. Per the Town
Council’s General Fund Reserve Policy, the combined total of these two reserves is 25% of the
General Fund operating expenditures.
The CalPERS Reserve was established by the Town Council in the initial amount of $300,000 to
mitigate the Town’s unfunded pension liabilities in June 2016. Accordi ng to the June action, an
annual payment of $300,000 is deposited from available year-end savings. On January 31, 2017
the Town Council directed the transfer of approximately $2 million from the Budget
Stabilization Reserve to the CalPERS Reserve. Specifically, the required minimum Budget
Stabilization Fund balance is $4,637,406, or 12.5% of the FY 2016/17 budgeted revenues as
specified in the Town’s General Fund Reserve Policy. To maintain this minimum, the Budget
Stabilization Fund would be reduced from $6,621,808 and $1,984,402 would be added to the
committed fund balance of the CalPERS Reserve.
In addition, staff recommends changing description of the CalPERS Reserve to include all post-
employment liabilities by changing its title to CalPERS/OPEB Reserve. See Draft Resolution and
red-lined General Fund Reserve Policy in Attachment 2 and Attachment 3.
The Reserve for Capital and Special Projects, funded from annual available General Fund budget
savings, serves as the primary source for replenishment to the Town’s General Fund
Appropriated Reserves (GFAR), which is the Town’s Capital Improvement Fund. This Reserve
Committed
Budget Stabilization Reserve $6.6
Catastrophic Reserve $4.6
CalPERS Reserve $0.3
Almond Grove Reserve $8.5
Assigned
Carryforward Appropriation $0.1
Strategic Planning $2.6
Capital Improvements $4.0
Open Space $0.6
Sustainability Reserve $0.1
FY 2016/17 Commitments $0.1
Total General Fund Reserves $27.5
General Fund Reserves
6/30/2016
Amount
(millions)
PAGE 5 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
DISCUSSION (cont’d):
functions as a potential funding source for new capital projects or augmentations to authorized
projects funded through the Town’s Five Year Capital Improvement Program (CIP). Out of the
$4 million available in the Capital and Special Projects Reserve, $1.4 million is already
programmed for capital projects in FY 2016/17.
The availability of approximately $27.5 million in committed and assigned General Fund
reserves provides the Town with resources to manage through current and/or future fiscal
challenges and opportunities. The $2.6 million Strategic Planning assigned balance will be
incorporated into the FY 2017/18 budget process based on Council January 31, 2017 budget
priority directions.
FY 2017/18 BUDGET DEVELOPMENT PROCESS
Council provided direction on the preparation of the FY 2017/18 Operating and Capital budget
at the January 31, 2017 budget priority setting study session. Concurrent with the direction,
the update of the Five-Year Financial Plan and in anticipation of a status quo budget, staff
began budget development discussions in early February 2017. This process includes the
conceptual development of staffing changes, revenue enhancements, and adjustments to the
User Fee Schedule. Staff is currently working on preparing the FY 2017/18 budget which will be
presented to Council in May 2017. The FY 2017/18 budget will continue to fund essential public
services at the current level of service. Contractual obligations and unfunded mandates will
also be incorporated into the proposed budget.
FIVE-YEAR FINANCIAL PLAN UPDATE
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 OPEB),
2.5% of salary growth for all Town’s employees in each FY 2016/17 and FY 2017/18 .
PAGE 6 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
DISCUSSION: (cont’d)
Account Revenue Category
2016/17
Estimated
2017/18
Forecast
2018/19
Forecast
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
4100 Property Tax 11.1$ 11.4$ 11.7$ 12.1$ 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 2.4 2.4 2.5 2.6
4251 Transient Occupancy Tax 2.0 2.1 2.1 2.2 2.3 2.3
4400 Business License Tax 1.5 1.5 1.5 1.5 1.5 1.5
4400 Licenses & Permits 3.0 3.1 3.2 3.3 3.4 3.5
4500 Intergovernmental 0.7 0.7 0.7 0.7 0.7 0.7
4600 Charge for Services 2.4 2.2 2.3 2.4 2.4 2.5
4700 Fines & Forfeitures 0.7 0.7 0.7 0.7 0.7 0.7
4800 Interest 0.3 0.3 0.3 0.3 0.3 0.3
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 39.4 39.1 39.7 40.7 41.5 42.6
Use of Reserves Capital Reserve 9.9 0.4 0.4 0.4 0.4 0.5
Use of FY 2017/18 Salary Allocations 1.0
49.3$ 40.5$ 40.1$ 41.1$ 41.9$ 43.1$
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 8.6 9.4 10.3 11.0 11.8
6000 Operating Expenditures 5.7 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 36.2$ 37.6$ 38.8$ 40.0$ 41.0$ 42.0$
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 47.7 39.6 40.8 42.0 43.0 44.0
9900 FY 2017/18 Salary Allocations 1.0
9900 Transfer to Capital Projects Reserve - - - - - -
9900 Transfer to Stabilization Reserve - - - - - -
48.7$ 39.6$ 40.8$ 42.0$ 43.0$ 44.0$
REVENUES LESS EXPENDITURES 0.6$ 0.9$ (0.7)$ (0.9)$ (1.1)$ (0.9)$
ONGOING SHORTFALL MITIGATION -$ -$ -$ -$ -$ -$
NET REVENUES LESS EXPENDITURES 0.6$ 0.9$ (0.7)$ (0.9)$ (1.1)$ (0.9)$
TOTAL REVENUES & TRANSFERS
TOTAL EXPENDITURES & ALLOCATIONS
EXPENDITURES
Town of Los Gatos General Fund
Updated Five-Year Financial Plan
PAGE 7 OF 7
SUBJECT: FISCAL YEAR 2016/17 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2016
DATE: FEBRUARY 15, 2017
S:\COUNCIL REPORTS\2017\02-21-17\Mid- Year\Staff Report FY 2016-17 2nd Quarter Budget Report FINAL.docx 2/16/2017 5:15 PM SLL
Applying the above assumptions in the preparation of the financial forecast , results in an
estimated $600,000 of additional revenues over expenditures at the end of the current FY
2016/17 and a $900,000 surplus in FY2017/18. From FY 2018/19 to FY2020/21, the forecast
show revenue shortfalls due to the incorporation of the recently determined estimated of the
increased employer pension costs due to CalPERS discount rate change in December 2016.
CONCLUSION:
The financial results from the prior fiscal year, coupled with the FY 2016/17 second quarter data,
confirm that the second quarter financial results are stable and improving. Staff is cautious as
the five-year financial plan projects shortfalls beginning in FY 2018/19. The shortfalls are due to
the effect of implementing the anticipated increased employer pension costs due t o CalPERS
discount rate change in December 2016. Staff is actively engaged in the 2017/18 budget
process, the primary focus will continue to be on ensuring that the available Town resources are
allocated to meet the priority service needs of the community.
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
Attachments:
1. Budget Performance Report for the Three Months Ending December 31, 2017.
2. Draft Resolution of the Town Council of the Town of Los Gatos Approving Commitments of
fund balance under Government Accounting Standard Board (GASB) 54
3. Proposed update to the General Fund Reserve Policy (red-lined)