06 Staff Report - Budget
PREPARED BY: Stephen Conway
Finance Director
Reviewed by: Town Manager, Assistant Town Manager, Town Attorney, and Finance Director
110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 05/19/2020
ITEM NO: 6
DATE: May 14, 2020
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Operating and Capital Budgets
A. Consider the Town of Los Gatos Proposed Operating and Capital Budget
for Fiscal Year (FY) 2020/21
1. Consider the Town of Los Gatos Donation Opportunities: FY 2020/21
List of Town Needs
B. Consider the Town of Los Gatos Proposed Capital Improvement Program
for FY 2020/21 – FY 2024/25
C. Approve Budget Adjustments for FY 2019/20:
1. Authorize a Total Revenue Decrease Adjustment in the Amount of
$1,699,411 [Decrease Sales Tax by $618,744, Decrease Transient
Occupancy Tax (TOT) by $974678, and Decrease Business License Tax
by $105,989] and
2. Authorize an Expenditure Decrease Adjustment in the Amount of
$4,232,500 to Reflect that the Additional Discretionary Payment
Toward the Unfunded Pension Liability to CalPERS is Scheduled After
July 1, 2020.
RECOMMENDATION:
A. Consider the Town of Los Gatos Proposed Operating and Capital Budget for FY 2020/21
1. Consider the Town of Los Gatos Donation Opportunities: FY 2020/21 List of Town Needs
B. Consider the Town of Los Gatos Proposed Capital Improvement Program for FY 2020/21 –
FY 2024/25.
C. Approve budget adjustments for FY 2019/20:
1. Authorize a total revenue decrease adjustment in the amount of $1,699,411 [decrease
Sales Tax by $618,744, decrease Transient Occupancy Tax (TOT) by $974678, and
decrease Business License Tax by $105,989] and
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
2. Authorize an expenditure decrease adjustment in the amount of $4,232,500 to reflect
that the additional discretionally payment toward the unfunded pension liability to
CalPERS is scheduled after July 1, 2020.
BACKGROUND:
The Proposed Operating and Capital Budget for FY 2020/21 (Attachment 1) is the Town
Manager’s recommended comprehensive financial plan to provide services to the Town of Los
Gatos and address the priorities set by the Town Council. The Proposed FY 2020/21 – 2024/25
Capital Improvement Program (Attachment 2) is a five-year capital improvement plan which
identifies projects to construct and maintain the Town’s infrastructure.
Both budget documents were prepared with contributions from all Town Departments. Of
particular note, the Finance Department took the lead in developing revenue and expenditure
forecasts, ensuring that the most current information was used in the preparation of the
proposed budgets. In addition, the Department of Parks and Public Works identified high
priority projects for inclusion in the Capital Budget based on its familiarity with the Town’s
facilities, equipment, and infrastructure, and its work with various Town Commissions on these
assets.
The Town Council is being asked to consider the elements of the Operating and Capital
Proposed Budgets and provide any additional guidance. Any recommended changes and
additional direction to the Proposed Operating and/or Capital Budgets provided by Council at
the May 19, 2020 budget hearing will be incorporated into the implementing documents to be
presented for Council approval on June 2, 2020. In addition, the Council is asked to review the
annual list of donations and approve budget adjustments for FY 2019/20. The revenue
adjustments reflect decreases in Sales, Business License, and Transient Occupancy Taxes due to
the economic impact of the COVID-19 pandemic emergency.
DISCUSSION:
Five-Year Forecast
On January 21, 2020, the Town Council received the following Five-Year Forecast which became
the basis of Strategic Priority planning and budgetary considerations. As stated in January, a
modest base case revenue growth forecast best reflected the economic environment at the
time. As discussed with the Town Council in January, sensitivity analyses with respect to
revenues and expenditures demonstrate that the Town organization is vulnerable to changes in
forecasted economic conditions.
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
DISCUSSION (continued):
Original 5 Year Forecast
“Base Case”
2020/21
Forecast
($M)
2021/22
Forecast
($M)
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
Total Revenues,
Transfers & Use of
Reserves
$45.8 $47.3 $48.4 $49.6 $51.2
Total Expenses &
Allocations
$45.3 $45.6 $46.8 $47.3 $48.1
Original Surplus/Deficit $0.5 $1.7 $1.6 $2.3 $3.1
Since the development of that original forecast, the unprecedented economic impacts
associated with the local, national, and global mitigation of COVID-19 have necessitated
significant revisions to growth projections for the Town’s primary revenues of Property Tax,
Sales Tax, and Transient Occupancy Tax (TOT). In close consultation with the Santa Clara
County Assessor, Town Sales Tax consultant MuniServices, and a review of national and
regional hospitality research.
In addition to reassessing revenue growth, the proposed Budget also forecasts anticipated
increases in the Town’s pension obligations. Given recent volatility in financial markets, it is
anticipated that CalPERS will not achieve its assumed investment rate of return of 7% in FY
2019/20. With two months left in the 2019/20 fiscal year, the 0% return scenario most closely
approximates CalPERS current return and is used for this Forecast. The combined effects of
changing these budget assumptions in conjunction with others is illustrated in the following
updated FY 2020/21 Proposed Operating Budget and Five-year Forecast.
COVID-19
Scenario
2020/21
Forecast
($M)
2021/22
Forecast
($M)
2022/23
Forecast
($M)
2023/24
Forecast
($M)
2024/25
Forecast
($M)
2025/26
Forecast
($M)
Total Revenues,
Transfers & Use of
Reserves
$53.2 $45.5 $46.2 $47.7 $48.2 $48.2
Total Expenses &
Allocations
$53.2 $45.5 $46.8 $47.8 $48.9 $49.3
Surplus/Deficit $0.0 $0.0 ($0.6) ($0.1) ($0.7) ($1.1)
The Town is affected economically by the COVID-19 pandemic and due to the Council’s
proactive efforts over the years, the Town is expected to be in a position to maintain the
Town’s high quality services in the short and medium terms. The updated forecast indicates
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
DISCUSSION (continued):
that for the Proposed FY 2020/21 Operating Budget and the following FY 2021/22 budget
projected revenues and expenditures are in balance.
The Town does face projected moderate deficits in the range of $100K to a maximum of $1.1M
per year in the remaining years of the forecast. The forecasted deficits represent
approximately 0.2% to 2.7% of the Town’s proposed General Fund operating budget for FY
2020/21 out of a total of $43,420,8255, (net of capital transfers out, one-time expenses, and
pass through expenditures of $6,358,150). Given that the deficits are currently projected to be
relatively modest they are within the Town’s demonstrated ability to be absorbed without
affecting services. However, the ultimate impact to the organization is not expected to be
known until the depth and breadth of the pending recession is fully understood. Given the
unknown nature of the transitioning economy, staff anticipates that more definitive
information regarding revenue trends and any subsequent necessity to address service levels
will be better known at mid-year FY 2020/21.
Positioning the Town for Economic Uncertainty
The proposed Budget addresses the Council identified Strategic Priorities and considers other
areas of importance to our community, the Council, and the Town organization. The proposed
Budget also acknowledges the current economic realities associated with the global COVID-19
pandemic and continues to position the organization for what will likely be the nation’s first
recession since 2008. This Budget also provides for limited strategic new investments toward
important wildfire vegetation management, critical improvements to evacuation-related
roadways, and other necessary infrastructure improvements, as the pandemic is not the only
threat to our community’s health and safety.
The Town’s conservative budgeting practices have historically yielded modest annual surpluses
which, among other priorities, has provided the Town Council the latitude over the years to
address increases in pension obligations. To date, the Town has allocated or programmed
approximately $35.0 million in additional discretionary payments towards its pension and OPEB
obligations.
In addition to conservative budgeting practices and proactive additional funding of pension and
OPEB obligations, the Town has also taken a conservative approach to staffing. Since 2001 the
Town has reduced its full-time employees by 16.7% to 150 FTE employees.
And lastly, the Town identified early on the threats that economic downturns could pose to the
Town’s primary revenue sources and service stability. In March 2018, the Town Council
received a presentation from staff entitled “Preparing for the Next Recession.” Among other
things, that presentation precipitated the voters of Los Gatos approving an 1/8 cent sales tax in
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
DISCUSSION (continued):
2018 which generates approximately $1.0 million in additional ongoing sales tax revenue
annually.
Additionally, in 2019, the Town Council initiated the annexation of 24 unincorporated urban
islands within the Town of Los Gatos. In addition to the efficiencies associated with the uniform
provision of municipal services to island residents, the annexation ended the diversion of
property tax revenue generated within Town limits to the County. The Council initiated
annexation resulted in approximately $1.0 million in ongoing annual property tax revenue for
the Town.
The combined effect of retaining a tradition of conservative budgeting practices, maintaining
reduced staffing levels, and enhancing ongoing revenue sources prepared the Town well for
this pending recession.
FY 2020/21 Operating Budget
Budget Principles
The proposed Operating Budget recognizes the Town’s current economic reality and long term
fiscal picture, as well as high priority service needs. Key budget principles include:
• Develop and recommend a balanced budget that maintains current, high service levels,
• Position for a multi-year recession,
• Continue to make progress on the Town Council’s Strategic Priorities, and
• Identify opportunities to enhance service delivery through new revenue sources,
technology, and open government.
Budget Balancing Strategies
The transmittal letter in the Proposed FY 2020/21 Operating Budget provides an executive
summary of the budget, including the fiscal outlook, key budget assumptions, and other
information (Attachment 1). As previously mentioned, the FY 2020/21 budget is in balance.
For FY 2020/21 the Proposed Operating Budget was balanced utilizing three primary budget
balancing strategies. The first was to budget salaries for FY 2020/21 at actual salary plus a one-
step increase, which is a departure from previous practice. While 68% of the workforce are
already at top step or one step below top step, this strategy provides budgetary savings of
approximately $550,000.
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
DISCUSSION (continued):
The second strategy reassessed and recalculated the Internal Service Fund charges for the Town’s
Equipment Replacement and Information Technology Funds. The decreased charges for
Equipment Replacement and Information Technology resulted in approximate savings of $68,000
and $200,000, respectively.
The third strategy, per the Town’s General Fund Reserves Policy, transferred approximately
$800,000 from the Capital/Special Project Reserve. It should be noted that the Capital/Special
Project Reserve transfer was from excess funds after recommended capital project additions
contained in the Proposed Capital Improvement Program.
Taken together, the FY 2019/20 budget proposes to maintain the Town’s existing high levels of
service and provide for minimal staffing changes.
Budget Allocations
Page A-11 of the proposed Operating Budget identifies specific allocations for Council
consideration. Of particular note, staff is recommending that the expected proceeds from the
sale of the Winchester property ($1.2 M) not be programmed at this time. Staff recommends
that it be considered for future Council allocation once the impacts of the COVID-19 pandemic
are known for FY 2019/20. In other words, these funds may be needed to make up for
potential shortfalls that are not known at this time.
Staff looks forward to the Council’s discussion and direction on spending priorities. If the
Council wishes to place more resources towards a specific item (e.g., pension payments), a
commensurate reduction would be needed elsewhere in the Operating or Capital Budgets.
Motions made at the May 19 hearing will be incorporated in a revised budget for consideration
in June.
Donation Opportunities - FY 2020/21 List of Town Needs
As part of the budget development process, the List of Town Needs is updated per Town
Council Donation Policy to reflect goods, services, and other contributions that would help
enhance Town services, programs, and events (Attachment 3).
FY 2020/21 – FY 2024/25 Capital Improvement Program
The FY 2020/21 – FY 2024/25 Capital Improvement Program (CIP) sets forth a five-year plan for
proposed streets, parks, and public facility projects (Attachment 2). The transmittal letter
contained in the CIP provides a summary of the program including funding sources, recently
completed projects, and the proposed projects for FY 2020/21. Only the first year of the plan is
formally adopted with funds appropriated by the Town Council as part of the budget process.
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
DISCUSSION (continued):
During the January 2020 Strategic Priorities discussion, the Town Council stated its priorities to
begin to implement the Comprehensive Parking Study, continue mobility improvements for all
transportation modes, manage the vegetation on Town lands to protect against wildfire, and
advance other needed improvements. These projects as well as others, such as annual street
maintenance, are recommended as part of the CIP. The Proposed CIP for FY 2020/21 includes a
total budget of $33.5 million of new and carry-forward funding.
Town staff go through a rigorous process to evaluate all previously funded projects and
potential new projects when preparing the CIP. There are more needs than available funding,
and staff recommends high priority projects that are consistent with the Strategic Priorities and
Core Goals. On May 13, 2020, the Planning Commission reviewed the proposed CIP, found it
consistent with the General Plan, and recommended its adoption by the Town Council.
FY 2019/20 Budget Adjustments
Given the economic impact of the COVID-19 pandemic, previous revenue estimates for the
current fiscal year are not likely to be realized. For this reason, staff is recommending budget
adjustments to Sales, Transient Occupancy, and Business License Taxes. An expenditure
adjustment is also needed to reflect that the additional discretionary payment to CalPERS will
occur after July 1, 2020.
BUDGET HEARING AND NEXT STEPS:
At its May 19, 2020 meeting, the Council will have an opportunity to listen to public testimony,
ask questions, and direct changes to the Proposed Operating and/or Capital Improvement
Program Budgets. Any changes to the Proposed Operating and/or Capital Budgets directed by
Council or identified by staff will be included for Council consideration in the resolution formally
adopting the Budgets to be considered by Council in June.
COORDINATION:
The preparation of the budget documents involved the participation of all Town Departments.
FISCAL IMPACT:
The fiscal impact is presented in summary form in the Financial Summaries chapter of the
Proposed Operating and Capital Budget for FY 2020/21. The total proposed budget is
$77.5million, an decrease of $1.2 million from the FY 2019/20 Adopted Budget.
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SUBJECT: Operating and Capital Budgets
DATE: May 14, 2020
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
Attachments:
1. FY 2020/21 Proposed Operating and Capital Budget
2. FY 2020/21 – FY 2024/25 Proposed Capital Improvement Program Budget
3. Town of Los Gatos Donation Opportunities: FY 2020/2