12 Attachment 21
Subject:86% Increase in Net Governmental Expenditures - FY 2015 vs FY 2020
Attachments:Pages from AgendaPacket-Finance Commission-February 8, 2021 5.00 PM (6).pdf; Achieving a
Structurally Balanced Budget.pdf; TC response.pdf
From: Phil Koen <pkoen@monteropartners.com>
Sent: Friday, February 12, 2021 8:35 AM
To: Rob Rennie <RRennie@losgatosca.gov>; Matthew Hudes <MHudes@losgatosca.gov>; Marico Sayoc
<MSayoc@losgatosca.gov>; Maria Ristow <MRistow@losgatosca.gov>; Mary Badame <MBadame@losgatosca.gov>; Ron
Dickel <>; ; Rick Tinsley <>;
Cc: Laurel Prevetti <LPrevetti@losgatosca.gov>; Arn Andrews <aandrews@losgatosca.gov>; Stephen Conway
<sconway@losgatosca.gov>; ; Lee Fagot <>
Subject: 86% Increase in Net Governmental Expenditures ‐ FY 2015 vs FY 2020
Dear Council and Finance Commission Members,
I offer the attached with the hope you might find it useful information.
Phil Koen
ATTACHMENT 2
Most state and local governments are subject to a requirement to pass a balanced budget. However, a budget that may fit the
statutory definition of a "balanced budget" may not, in fact, be financially sustainable. For example, a budget that is balanced by
such standards could include the use of non-recurring resources, such as asset sales or reserves, to fund ongoing expenditures, and
thus not be in structural balance. A true structurally balanced budget is one that supports financial sustainability for multiple years
into the future. A government needs to make sure that it is aware of the distinction between satisfying the statutory definition and
achieving a true structurally balanced budget.
GFOA recommends that governments adopt rigorous policies, for all operating funds, aimed at achieving and maintaining a
structurally balanced budget. The policy should include parameters for achieving and maintaining structural balance where
recurring revenues are equal to recurring expenditures in the adopted budget.
As a first step, the government should identify key items related to structural balance. These include: recurring and non-recurring
revenues, recurring and non-recurring expenditures, and reserves.
Recurring revenues are the portion of a government's revenues that can reasonably be expected to continue year to year, with some
degree of predictability. Property taxes are an example of recurring revenue. A settlement from a lawsuit is a good example of non-
recurring revenue.
Some revenue sources may have both non-recurring and recurring components. These sources require finance o!cials to exercise
judgment in determining how much of the source is truly recurring. For instance, a government may regularly receive sales tax
revenues, but a large part of its base may be made up of retailers with highly volatile sales. In this case, it may be prudent to regard
unusually high revenue yields as a non-recurring revenue under the assumption that such revenues are unlikely to continue, making
it imprudent to use them for recurring expenditures. Another example might be building permit revenues in a period of high growth
in the community. Governments should review their revenue portfolio to identify non-recurring revenues and revenues with
potentially volatile components, such as the examples above.
Recurring expenditures appear in the budget each year. Salaries, benefits, materials and services, and asset maintenance costs are
common examples of recurring expenditures. Capital asset acquisitions are typically not thought of as recurring because although
some capital assets may be acquired every year, they are not the same assets year after year. In general, recurring expenditures
should be those that you expect to fund every year in order to maintain current/status quo service levels. In general, a government
has a greater degree of flexibility to defer non-recurring expenditures than recurring ones.
Reserves are the portion of fund balance that is set aside as hedge against risk. The government should define a minimum amount of
funds it will hold in reserve.2 This serves as a "bottom line measure" to help determine the extent to which structural balance goals
BEST PRACTICES
Achieving a Structurally Balanced Budget
Adopt rigorous policies, for all operating funds, aimed at achieving and maintaining a structurally balanced
budget
funds it will hold in reserve.2 This serves as a "bottom line measure" to help determine the extent to which structural balance goals
are being achieved. If reserves are maintained at their desired levels, it is an indication that the organization is maintaining a
structurally balanced budget. If reserves are declining, it may indicate an imbalance in the budget (e.g., if reserves are being used to
fund on-going expenditures). It should be noted that reserves levels are not a perfect measure of structural balance, but are a good
and readily available measure.
With the forgoing terms defined, a government should adopt a formal policy calling for structural balance of the budget. The policy
should call for the budget to be structurally balanced, where recurring revenues equal or exceed recurring expenditures. The policy
should also call for the budget presentation to identify how recurring revenues are aligned with or not aligned with recurring
expenditures.3
For a variety of reasons, true structural balance may not be possible for a government at a given time. In such a case, using reserves
to balance the budget may be considered but only in the context of a plan to return to structural balance, replenish fund balance, and
ultimately remediate the negative impacts of any other short-term balancing actions that may be taken. Further, the plan should be
clear about the time period over which returning to structural balance, replenishing reserves, and remediating the negative impacts
of balancing actions are to occur.4
Notes:
Note that this Best Practice excludes non-operating funds like capital and debt funds. While governments should ensure that
these funds are financially sustainable as well, the specific recommendations found in this Best Practice may not always be a
match to the circumstances of non-operating funds.
Please note that the best practice is not advocating that recurring revenues be formally allocated or "earmarked" to recurring
expenditures, but rather is advocating that the budget presentation provide transparency as to whether recurring revenues and
recurring expenditures are balanced.
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
FINANCE COMMISSION REPORT
MEETING DATE: 02/08/2021
ITEM NO: 3
DESK ITEM
DATE: February 8, 2021
TO: Finance Commission
FROM: Laurel Prevetti, Town Manager
SUBJECT: Provide Advice to the Town Council Regarding Mid-Year Budget Options and
Five-Year Forecast Scenarios
REMARKS:
Attachment 5 contains public comment received between 11:00 a.m. on February 5, 2021 and
11:01 a.m. on February 8, 2021.
A member of the public provided a communication to the Finance Commission (distributed as
an Addendum on February 5, 2021) regarding the growth in net governmental expenses
between FY 2014/15 and FY 2019/20, noting an 86% total increase from FY 2014/15 to FY
2019/20. In addition, the resident noted a lack of dedicated revenue sources for future capital
project funding and had questions on the restricted pension trust activities. A Commission
member subsequently asked if staff could provide a high-level response.
Staff response:
To arrive at an 86% increase in Net Governmental Expenses, the resident selected FY
2014/15 as the base year. The resident selected a year when the Town recorded $16.5M in
program revenues versus 2020 when the Town recorded $15.0M in program revenues.
Base year selection is important in that the Statement of Activities presents program
expense less program revenues. The higher the program revenues in a given year, the
lower the net program expenses which also means lower net governmental expenses.
Program revenues are increased in years when the Town receives substantial grants and/or
donations on the capital side of the ledger, so program revenues vary by this key factor
from year to year. The beginning base year selected was a year where there were an
additional $1.5M in program revenues than shown in 2020 (FY 14/15 had substantial grant
revenues and $450K in new library project donations), the result is to indicate a “growth” in
Page 134
Item 3.
PAGE 2 OF 3
SUBJECT: Mid-Year Budget and Five-Year Forecast
DATE: February 8, 2021
REMARKS (continued):
net governmental expenses that includes the $1.5M gap between program revenues
received in 2015 versus 2020 and thus impacting the percent growth of net governmental
expenses from FY 2014/15 to the end of FY 2019/20.
It is difficult to compare the growth of net governmental expenses due to the variability of
program revenues received each fiscal year; therefore, it might be more relevant
to compare the General Fund 2014/15 Adopted Operating Budget to the FY 2019/20
Adopted Operating Budget for a true percentage increase as shown below:
The resident's observations on the lack of dedicated capital funding are correct and
have been well documented in the Town's Capital Improvement Plan (CIP) budget each
year. Each year, the CIP notes that the Town continues to be challenged to find an
ongoing reliable revenue to fund Town infrastructure projects and that this challenge
remains a top priority. In addition, during discussions of the Measure G Sales Tax in
2018, staff documented over $70 Million in unmet infrastructure needs for projects,
such as pothole, street, and road repair.
The resident had questions on the restricted pension trust activities. Staff’s mid-year
analysis focused on operating revenues and expenditures and did not include the
revenues that relate to the restricted pension trust. The funds available either in the
restricted pension fund or in the General Fund Pension/OPEB reserve are likely either to
be sent directly to CalPERS or remain in the restricted asset account at the end of the
current fiscal year pursuant to future Council action.
FY 2014/15 FY 2019/20 Increase(Decrease)
Total Adopted Budget 43,493,413$ 52,914,515$ 9,421,102$
Less GFAR capital transfers (6,991,491) (6,681,884) 309,607
Less "one-time" capital transfers to Workers Comp Internal Service Fund (1,061,256) (1,061,256)
Less "one-time" capital transfers to Non-Point Source Fund (100,000) (100,000)
Less "one-time" capital transfers to Successor Agency RDA Housing (50,200) 50,200
Net Operating General Fund Budget 36,451,722$ 45,071,375$ 8,619,653$
Net General Fund Operating Expenditure Budget Growth Over 5 FY's 8,619,653$
% Total Growth over 5 Years 23.65%
% Average Annual Growth FY 2014/15 to FY 2019/20 4.73%
General Fund Adopted Expenditure Budget Comparison FY 2014/15 to FY 2019/20
Page 135
Item 3.
Dear Members of the Town Council and the Finance Commission:
I am writing to you to respond to the Staff memo (attached) that was submitted to the Finance
Committee in response to my letter which discussed the 86% increase in Net Governmental Expenses
over the past five years.
The Staff’s response creates unnecessary confusion regarding the trend in total actual government
expenditures. The Staff has previously acknowledged during the Joint Town Council/Finance
Commission that the Net Total Governmental Expenses have increased, and the Town’s auditors have
raised a specific concern that the Town’s current tax base is unable to provide sufficient revenue to fund
the total net governmental expenditures. So, it is perplexing that the Staff is now trying to suggest that
the 86% increase was not that large or worse is not a concern.
As to my specific comments:
• The Staff’s assertion that it is difficult to compare growth in net governmental expenses due to
variability of program revenue received is baseless. Comparing actual annual financial results is a
very common financial analysis tool which is used to determine underlying trends in revenues
and expenses. Just because there are fluctuations in revenue or expense elements in any one
year, does not diminish the value of the comparison, it helps explain what has happened. While
there were 10% more program revenues in FY 2015 than FY 2020, that does not change the fact
that total net governmental expenses increased 86% over the five-year period.
• To be very clear, over the past five years the net total cost of government for the Town has risen
at an extraordinary rate in both absolute dollar terms and relative to the growth in total tax
revenues recognized. Even if you change the base year for the comparison, which was a concern
of the Staff’s, the answer does not change. Let us select 2016 as the base year, a year in which
the Town received $1.4m less in program revenue than in FY 2020 (just the opposite of FY 2015).
Comparing FY 2016 to the FY 2020 Net Governmental Expense gives us a 71% increase over the
four-year period vs. the 86% increase over the five-year period. The 71% equates to a
compounded annual growth rate of 12.2%. Over that same four-year period total tax revenues
increased 19% or at a compounded annual growth rate of 4.4%. My original conclusion that the
cost to run the Town’s government is increasing at a rate this is 3x the rate of increase in tax
revenues is still valid. As this Council begins to debate a revised five-year forecast, please
understand it is fiscally unsustainable to have the growth rate in net government expenses
increasing at 3x the growth rate of tax revenues over a five-year period. This is a structural issue,
not a one- year budget issue, that needs to be addressed as you discuss the next five years. I
have also attached a best practices article published by the GFOA which I would encourage the
Council to read.
• The Staff memo goes on to suggest that “it might be more relevant to compare the General
Fund FY 2015 adopted budget to the FY 2020 adopted operating budget for a TRUE percentage
increase”. The statement is incorrect and even more importantly does this Town a great
disservice by distracting the reader from what has happened. Let me make several points:
a. A general fund budget does not reflect the government wide financial activity, nor does
it reflect the actual spending that has occurred. The GASB in Statement 34 mandated
that one of the basic financial statements for State and Local Governments is the
Statement of Activities. This Statement brings together on a government-wide basis all
the financial activity in one place and reports that activity on an accrual basis.
b. Using budget to budget comparisons to determine actual revenue and expenditure
trends has been discussed numerous times and has been repeatedly criticized by many,
including members of the old Finance Committee. And yet the Staff continues to put
forth this analysis which can lead to wrong conclusions. The Staff’s memo seemingly
suggests that the “true percentage increase” in total governmental expenses from FY
2015 to FY 2020 was only 23.6%. The problem is a) the General Fund represents only a
portion of the total government wide activities not the total government wide activities;
b) the General Fund budget does not reflect “actual results”; c) the General Fund budget
is not developed using accrual accounting as required by the GASB in preparing the
Statement of Activities; d) the General Fund budget does not include depreciation
expense associated with the Town’s investment in infrastructure; and e) the General
Fund budget reflects only what the Town is budgeting to fund pension and post
retirement plans not the actual pension and benefit expense recognized as required to
be reported by GASB. It provides no information when trying to understand the actual
expenditure trends over the past five years. But the real damage is if the Council were
told, not knowing any better, that the “true percentage increase” in total net
government spending over the past five years was 23.6% and they believed it, when it
was 86%. Based on this incorrect statement, there is considerable risk the Council could
make bad policy decisions regarding adding new programs or increasing the cost base of
the Town because they did not fully understand the actual financial trends.
In closing, over the past five years total net governmental expenditures have grown at a rate that is 3x
the growth in total taxes, which is the primary source of revenue for this Town. In FY 2020, for the first
time in the history of Los Gatos, total tax revenues were insufficient to fund the total net governmental
expenditures. This is a structural issue which must be addressed as the Council begins its work on a five-
year forecast.