12 Desk Item
PREPARED BY: Stephen Conway
Finance Director
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 406-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 01/21/2020
ITEM NO: 12
DESK ITEM
DATE: January 21, 2020
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on the Other Budget
Assumptions, and Provide any Specific Direction for the Preparation of the
Town’s Fiscal Year 2020/21 Operating and Capital Budgets
REMARKS:
The summary table on page 2 of the staff report was not updated prior to posting to reflect the
pension scenario analysis. The base case scenario was reflected correctly but the less growth
and greater growth summaries have been revised. The summary tables on page 13 of the
report were correct.
(values in millions)
Scenario Surplus/Deficit
2020/21
Forecast
2021/22
Forecast
2021/22
Forecast
2023/24
Forecast
2024/25
Forecast
Greater Growth Scenario $1.0 $2.9 $3.6 $5.2 $7.0
Base Case
Modest Growth
$0.5 $1.7 $1.6 $2.3 $3.1
Less Growth Scenario ($0.4) $0.2 ($0.6) ($1.2) ($1.0)
In addition to the above revision, a Councilmember requested that staff respond to public
comment received to date. Following are staff responses to the comments which directly
relate to Item #12 as it appears on the agenda. Public comments not directly related to the
item are not be addressed at this time in conformance with the Brown Act.
PAGE 2 OF 6
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on Other Budget Assumptions,
and Provide Direction on the Preparation of the Town’s FY 2020/21 Operating and Capital
Budgets
DATE: January 21, 2020
REMARKS (continued):
Why does the Town build a 5-year forecast using a format which presents expenses by natural
expense category (such as salary, benefits, utilities, etc.) as opposed to the format presented in
the Comprehensive Annual Financial Report (CAFR) where expenses are presented by
government activity (such as public safety, general government, etc.)? If the 5 -year forecast
used the CAFR format, Council could compare historical actuals by government activity to the
projections. The 5-year forecast format that is being used does not present any historical
information. Only a budget vs budget view is presented. Furthermore the 5-year format is not
used in the CAFR and therefore it is impossible to track audited numbers with this for mat. Why
not adopt the CAFR format to develop a 5-year forecast? I have attached the relevant page from
the 2019 CAFR which compares the original adopted budget to actuals. This in itself is
enlightening.
The 5 Year Forecast is a planning tool compiled at a higher summary level intended to provide
the Council with a forward glimpse of total General Fund anticipated revenues above or under
expenditures for the next five years. This tool enables the Council to understand any potential
constraints/opportunities for multi-year policy initiatives or staffing augmentation. The nature
of the forecast presentation is intended to differ from the more detailed line
item/departmental summaries as provided in the annual budget and CAFR documents. The
Forecast helps establish the context for the more detailed presentations compiled for the
proposed budgets. To illustrate the difference between document intent, there are certain
items such as lease payments and debt service between the Town and the Town’s
Redevelopment Successor Agency that are eliminated for the CAFR presentation, making
comparisons confusing, with multiple reconciling items. While the Town can forecast salaries
and benefits in total for all Town staff in the 5 -Year Forecast, staff does not know the allocation
of actual staffing (Full Time Equivalent allocations to Town’s budgeted programs) until the FY
1920-21 proposed budget is compiled and adopted by Council.
Why does the 5-year forecast not show the “beginning” and “ending” General Fund Balance for
each forecast year? How does the Council know the impact on the General Fund Balance over
the 5-year period?
The Forecast was not developed for this purpose. The Forecast’s primary purpose focuses on
the question of whether or not there are anticipated surpluses or deficits that will be added to
the fund balances in the future based upon current projections of total revenues and
expenditures. Ending audited fund balances are actually reported in the Town’s CAFR and
projections of fund balances for the next year also presented in the Town’s annual proposed
budget in the Financial Summaries section.
PAGE 3 OF 6
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on Other Budget Assumptions,
and Provide Direction on the Preparation of the Town’s FY 2020/21 Operating and Capital
Budgets
DATE: January 21, 2020
REMARKS (continued):
Why does the format not show an “excess/(deficit) of operating revenues over operating
expenditures” as shown in the CAFR format? The format that is presented makes it difficult to
determine if the forecast period is “balanced” by drawing down general fund reserves as
opposed to having operating revenues exceeding operating expenditures (i.e. structurally
balanced).
The Forecast is not intended to be a multi-year budget balancing tool. The Forecast helps the
Council understand any potential constraints/opportunities for multi -year policy initiatives or
staffing augmentation. The Town Manager is legally required to present a balanced proposed
budget annually. The Forecast does provide total operating revenues and total operating
expenditures as distinct line items in the forecast. The current base case scenario indicates
revenues above expenditures in each of the five years.
How does the Council know that the 5-year forecast will deliver the priorities the Council
established at the January 14 meeting? How are the strategic priorities outcomes linked to the
5-year forecast?
The Town Council’s annual Strategic Priorities deliberations in conjunction with the Five-Year
Forecast tool help inform areas of potential budgetary emphasis consistent with those priorities
when budgetarily permissible. .
Why does the 5-year forecast assume no salary increases starting in FY 2021/22? Salary expense
is the Town’s single largest expense and not including any increase will overstate the forecasted
“surplus”. The future pension contributions provided by CALPERS, which are in the forecast,
were built using an assumed 3% per year salary increase. If CALPERS includes a 3% salary
increase in determining the future pension contributions, shouldn’t the same assumption be
used in projecting salaries over the 5-year forecast?
Staff does not assume salary increases unless approved by Town Council through the
negotiation process. The Town has had in recent history periods of no raises for certain
bargaining units, such as after the recent Great Recession of 2008. While CalPERS actuarial
variables are informative, they are subject to revision by the CalPERS Board based on actuarial
experience studies.
Why do “total expenditures and allocations” increase at a faster rate in a “lower growth”
scenario versus the “base case” scenario? Is this a reasonable assumption?
PAGE 4 OF 6
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on Other Budget Assumptions,
and Provide Direction on the Preparation of the Town’s FY 2020/21 Operating and Capital
Budgets
DATE: January 21, 2020
REMARKS (continued):
The lower growth scenario indicates a slowing economy which staff expects to result in CalPERS
not meeting its investment targets which would result in higher pensions contributions for th e
Town. The higher pension costs associated with missing the expected rate of investment return
incurred in those years impacts the forecast at faster rates of expenditure growth than in the
base case scenario.
In computing the $4,010,185 which Staff is suggesting is available to the Council to reassign
from the Capital/Special Project Reserve, why aren’t projected future surpluses which would be
added to the Capital/Special Project Reserve according to the existing reserve policy be included
in the calculation? The base case forecast is projecting a cumulative surplus of $9.3m over the
five-year period which exceeds the annual transfer of $550k per year by $6.7m. This would
suggest that all of the future annual transfers can be safely covered by future s urpluses thus
allowing the Council to reassign up to $6.8m (the $4.0m plus $2.8M) to other critical needs such
as making an additional discretionary payment to CALPERS.
The forecasted surpluses are estimates based on information available at this time and are not
intended to be perceived as actual expendable surpluses. . In addition, as the sensitivity analysis
illustrates, the base case scenario is subject to a high degree of variability based on the
economic circumstances encountered in the coming years.
Adopt Government Finance Officers Association (GFOA) recommended best practices in
budgeting for salary & wages in the 2021-2022 budget. Breakout Salary & Benefit costs into the
following 3 components in all reporting to Town Council & the public; Salary & wages, Pension
benefit costs, OPEB benefit costs.
The Town staff has a long history of implementing GFOA practices, resulting in successive
budget and CAFR awards from GFOA. The five-year forecast incorporates many of GFOA’s
recommendations including: start dates, step dates, etc. and uses only actual salaries. One
item not included is assumed raises in future years unless they are part of a multi -year
collective bargaining agreement.
The Town’s current practice is to budget only “non-public safety positions” at top step. Sworn
and management positions are budgeted at one step higher than the current step in
anticipation of potential merit increases in the upcoming fiscal year. Staff has calculated that
approximately 65% of all Town employees including management are currently at the top step
of their salary ranges. The salary savings achieved by budgeting non-public safety positions are
currently estimated to be approximately $175,000 per year for salaries and assuming a 65%
benefit allocation for these salary savings, the total approximate amount of savings would be
$283,500. This indicates that the bulk of salary savings the Town achieves each year results
PAGE 5 OF 6
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on Other Budget Assumptions,
and Provide Direction on the Preparation of the Town’s FY 2020/21 Operating and Capital
Budgets
DATE: January 21, 2020
REMARKS (continued):
primarily from unanticipated vacancies occurring during the year. The Town currently has no
frozen positions that are funded in the budget.
The Town could alter its historical practice to budget at actual step for all employees. The
downside to that practice is there would be no built-in anticipated salary and benefit savings
which are the main funding source for the Town’s capital improvement funding plan for which
the Town has few dedicated revenues available to fund. Staff could also budget an assumed
vacancy factor also potentially leading to overspending in budgeted line items should no
vacancies or very few occur.
The forecast could accommodate a further breakout of salary, pension, and OPEB costs, but the
intent was to keep costs at a high level for presentation purposes.
I would like to see the Town change from a "budget to budget" comparison as a performance
measure. There is nothing on the internet nor in GASB nor FASB that I can find that endorses
"budget to budget" as a way to measure business performance…
Comparing actuals to budget is presented in many of the Town’s financial documents, including
the budget and the Comprehensive Annual Financial Report. Comparing budget to budget is a
standard practice when explaining changes to budgeted line items that change between fiscal
years.
Budget comparison information is usually more relevant. For instance, in comparing adopted
budgets, it is important to see the changes scheduled for salaries and benefits. For example
purposes, let say a city has an adopted FY 2019/20 budget of $10,000,000 for salaries and
benefits in its current year. For the following fiscal year, the Council has approved an increase
of 2% for FY 2020/21 for a total of $10,200,000. This example indicates a 2% salary and benefit
increase for the next fiscal year as Council has approved:
If the Town were to compare actuals to actuals, then for the above example let us assume there
were unanticipated vacancies leading salary and benefit actuals for the year to finalize at
$9,700,000. Let us further assume that in the following FY 2020/21 only $100,000 of
unanticipated vacancies occur. Using the suggested approach above, the real raises would be
distorted. Comparing actuals to actuals would lead to following result:
• FY 19/20 Actuals: $9,700,0000 ($10M salary less vacancy savings)
• FY 20/21 Actuals: $10,100,000 ($10.2 M budgeted salary and benefits less $100K
vacancy savings)
PAGE 6 OF 6
SUBJECT: Discuss the Five-Year Forecast, Provide Direction on Other Budget Assumptions,
and Provide Direction on the Preparation of the Town’s FY 2020/21 Operating and Capital
Budgets
DATE: January 21, 2020
REMARKS (continued):
As the above example illustrates, a $400,000 increase between fiscal years would result if
expressed as a percentage (4% increase from the prior year). This example also demonstrates
using actuals indicates a 4% increase due to the vacancy savings incurre d each fiscal year when
in fact the actual raises for FY 20/21 approved by the Council amounted to a 2% increase from
the prior year’s budgeted amount. This is confirmed by comparing budgeted salaries and
benefits for each fiscal year.
Attachments previously distributed with the Staff Report:
1. Budget Process Timeline
2. Major Revenue Categories
3. Revenue Baseline and Projection Factors
4. Expenditure Baseline and Projection Factors
5. Community Survey Comments
6. Fiscal Year Surplus Flow of Funds and Capital Improvement Program
7. Public Comment Received before 11 a.m. on January 17, 2020
Attachment distributed with this Desk Item:
8. Public Comments Received after 11 a.m. on January 17, 2020 before 11 a.m. on January
21, 2020