10 Staff Report.FY 2020-21 Revenue Expense Update
PREPARED BY: Arn Andrews
Assistant Town manager
Reviewed by: 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: 12/15/2020 ITEM NO: 10
DATE: December 8, 2020
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Receive a Fiscal Year (FY) 2020/21 Revenue and Expense Update
RECOMMENDATION:
Receive a Fiscal Year (FY) 2020/21 Revenue and Expense update.
BACKGROUND:
On January 21, 2020, the Town Council received the initial Five-Year Forecast which became the
basis of Strategic Priority planning and budgetary considerations. The development of that
original forecast did not anticipate the unforeseen economic impacts associated with the local,
national, and global effects of COVID-19.
On May 19, 2020, staff presented an updated Five-Year Forecast and the Proposed Operating
Budget which included significant revisions to growth projections for the Town’s primary
revenues of property tax, sales tax, and transient occupancy tax (TOT). The revised revenue
projections were made in close consultation with the Santa Clara County Assessor, Town sales
tax consultant MuniServices, and a review of national and regional hospitality research. The
following table contains the growth rates included in the Adopted Budget for the primary
revenues of property tax, sales tax, and TOT.
FY 2020/21 Forecast
Property Tax Growth Projection 2%
Sales Tax Growth Projection MuniServices COVID-19 Scenario
Transient Occupancy Tax (TOT) Growth Projection -15%
PAGE 2 OF 6 SUBJECT: FY 2020/21 Revenue and Expense Update DATE: December 8, 2020
BACKGROUND (continued):
Since the adoption of the FY 2020/21 budget, staff has continued to monitor revenue trends in
relation to the Adopted Operating Budget and the unprecedented impacts of COVID-19.
DISCUSSION:
While staff does not normally try to extrapolate forward trends utilizing first quarter
revenue/expense data, a review of current revenue/expense collections, disbursements, and
projections is warranted given the significant events associated with COVID-19. The intent of
this agenda item is to provide a snapshot of what is currently known for the fiscal year given
the public interest surrounding the impacts of the COVID-19 related economic downturn.
In late February, the Council will receive the Mid-Year Budget Report (July 1, 2020 – December
31, 2020) which will provide an accounting of revenue and expenditure activity. At that time,
the Council typically considers potential revenue and/or expenditure adjustments to the
Adopted FY 2020/21 Operating Budget to align financial resources with Town needs for the
remainder of the fiscal year.
Revenues
Following are summaries of major revenues to date and projections if available for property tax,
sales tax, and TOT.
Property Tax
Property tax is the single largest revenue source for the Town and comprised approximately
28% of total Town projected revenues for FY 2020/21. Most property tax revenue is received in
the second half of the year, so first quarter collections are not insightful.
The County of Santa Clara does provide updated projections throughout the year. The
following table illustrates the most recent estimates relative to the Adopted FY 2020/21 Budget
and 2019 actuals. The current County estimate indicates a modest deviation from budget of
approximately $300,000.
FY 2019 Actual
FY 2020-21 Adopted
Budget
November 6, 2020
County Estimate
Property Tax
Revenue & Vehicle
License Fee Backfill
$18.4 M
$18.7 M
$18.4 M
PAGE 3 OF 6 SUBJECT: FY 2020/21 Revenue and Expense Update DATE: December 8, 2020
DISCUSSION (continued):
It should be noted that the Town was recently informed that the County of Santa Clara intends
on withholding approximately $1.6 million over the next several fiscal years to recapture excess
RDA residual property tax revenues distributed to the Town. County Counsel has advised the
Auditor/Controller’s Office to “look back” three fiscal years to determine the total amount to be
recaptured from the Town and paid back over two fiscal years. The immediate impact to the
Town Budget will be an unanticipated withholding of approximately $789K in FY 2020/21. The
$18.4 million November 6, 2020 County estimate reflects this reduction.
In addition, the Town is continuing to monitor developments regarding the distribution of
excess Educational Revenue Augmentation Fund (ERAF) funds. A portion of property tax
revenue goes to the ERAF to support local school districts. When the amount contributed to
ERAF is more than the minimum cost of funding local schools, excess funds are returned to the
county, cities, and special districts. Five counties, including Santa Clara, have been using a
redistribution allocation formula that is being contested by the State. The Town's Adopted FY
2020/21 Budget had ERAF revenue estimated at $433,000. The November 6, 2020 County
property tax estimate includes $1.8 million of ERAF funds. If the State is successful in
contesting ERAF distribution the result would be a negative impact on budgeted revenues. The
following table illustrates the potential impacts of ERAF distribution.
County Estimate
with ERAF
County Estimate
50% of ERAF
County Estimate No
ERAF
Property Tax
Revenue & VLF
Backfill
$18.4 M
$17.5 M
$16.6 M
While the aforementioned ERAF discussion does not pertain to COVID-19 impacts, it is a
material potential revenue event the Town is monitoring.
Sales Tax
Sales tax is the second largest revenue source for the Town and comprised approximately 12%
of total Town projected revenues for FY 2020-21. The following table illustrates the most
recent projections from the Town’s sales tax consultant MuniServices relative to the Adopted
FY 2020-21 budget and 2019 actuals.
FY 2019/20 Actual
FY 2020/21 Adopted
Budget
October 6, 2020
MuniServices
Estimate
Sales Tax
$7.5 M
$8.0 M
$7.3 M
PAGE 4 OF 6 SUBJECT: FY 2020/21 Revenue and Expense Update DATE: December 8, 2020
DISCUSSION (continued):
The current estimate indicates a deviation from budget of approximately $700,000; however,
staff anticipates receiving the September 30, 2020 first quarter updated projection in mid-
December and the estimate will likely change.
In addition, to the projection provided by MuniServices, the Town receives actual sales tax
distributions throughout the year from the California Department of Tax and Fee
Administration. As the table below illustrates, for the quarter ended September 30, 2020, the
Town received $2.15 million in sales tax distributions or 27% of annual budgeted revenues. It is
important to note that while State distribution data is informative, due to the uneven nature of
distribution, it often makes quarter to quarter comparisons difficult. Distribution data should
be viewed in concert with MuniServices year-end estimates.
FY 2018/19 Actual
FY 2019/20 Actual
FY 2020/21 Actual
Sales Tax
1Q $1,940,462 $2,151,795 $2,150,494
2Q 1,872,921 2,372,516
3Q 1,803,171 1,151,656
4Q 2,541,598 1,855,458
Total $$8,158,152 $$7,531,425 $$2,150,494
Transient Occupancy Tax
TOT is a significant revenue source for the Town and comprised approximately 3.4% of total
Town projected revenues of $2.3 million for FY 2020-21. The following table illustrates TOT
collections through September 30, 2020 relative to the Adopted FY 2020-21 budget, FY 2018/19
actuals, and FY 2019/20 actuals.
FY 2018/19 Actual
FY 2019/20 Actual
FY 2020/21 Actual
TOT
1Q $735,349 $739,494 $316,515
2Q 632,240 599,113
3Q 608,902 434,493
4Q 715,552 96,585
Total $2,692,043 $1,869,685 $316,515
PAGE 5 OF 6 SUBJECT: FY 2020/21 Revenue and Expense Update DATE: December 8, 2020
DISCUSSION (continued):
As the table illustrates, to date TOT has experienced the most significant percentage decline
relative to budget at 57% quarter over quarter for the first quarter. In addition, on November
28, 2020, Santa Clara County issued new mandatory directives which included that hotels and
other lodging facilities will be open only for essential travel and for use to facilitate isolation or
quarantine. Staff anticipates that the current Health Order will further degrade TOT revenues
in the second quarter relative to the prior year.
Expenditures
As illustrated in the table below, Total Department Expenditures in the first quarter of FY
2020/21 as a percentage of the Adopted Budget (25%) were comparable to the prior year first
quarter of 26%.
FY 2019/20
Actual
FY 2019/20
Q1
Q1% of
2019/20
Actuals
Q1% of
2020/21
Actuals
FY 2020/21
Q1
FY 2020/21
Adopted
Expenditures
Mayor & Council $206,163 $62,150 30.1% 21.4% $52,041 $243,486
Attorney 559,010 164,678 29.5% 26.3% 169,822 645,303
Admin Services 4,380,504 1,297,422 29.6% 28.6% 1,421,711 4,974,616
Non-Departmental 7,878,468 627,652 8.0% 11.0% 379,044 3,452,007
Community Dev 4,473,790 1,240,383 27.7% 22.2% 1,223,829 5,517,030
Police 15,793,815 5,022,928 31.8% 27.8% 4,898,017 17,587,825
Parks & PWs 8,139,106 2,052,936 25.2% 26.6% 2,166,965 8,152,045
Library 2,700,802 844,265 31.3% 22.8% 671,597 2,946,509
Capital Outlay 138,384 - - -
Total Department
Expenditures
$44,270,042 $11,312,414 26% 25% $10,983,026 $43,518,821
CONCLUSION AND NEXT STEPS:
With the exception of TOT, the primary revenue sources of property tax and sales tax are
currently trending in line with the Adopted Budget. In addition, currently departmental
expenditures are consistent with prior disbursements relative to the Adopted Budget. Given
current TOT collections and expectations for continued leisure and business travel constraints,
staff anticipates recommending that the Council adjust the FY 2020/21 TOT revenue downward
at the February Mid-Year review.
In addition to the Mid-Year review, the Council will be receiving an updated Five-Year Forecast
in early 2021 as part of the FY 2021/22 Budget preparation. The Forecast is typically analyzed
PAGE 6 OF 6 SUBJECT: FY 2020/21 Revenue and Expense Update DATE: December 8, 2020
CONCLUSION AND NEXT STEPS:
with optimistic and pessimistic scenarios to provide the Council and the public with information
regarding how sensitive the forecast can be to changing assumptions and circumstances. As
part of this discussion, the Council may also provide specific budget direction for certain
assumptions, such as staff vacancy rates, budgeting at actual versus top salaries, etc.
COORDINATION:
This staff report was coordinated with the Town Manager, Town Attorney, and Director of
Finance.
FISCAL IMPACT:
No fiscal impact at this time. Staff will continue to monitor revenues and expenses and bring
forward any budget adjustment recommendations at Mid-Year.
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.