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: 12/06/2016
ITEM NO: 5
DATE: NOVEMBER 29, 2016
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: ACCEPT THE COUNCIL FINANCE COMMITTEE’S RECOMMENDATION TO RECEIVE
THE FISCAL YEAR 2016/17 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2016 – SEPTEMBER 30, 2016
RECOMMENDATION:
Accept the Council Finance Committee’s recommendation to receive the Fiscal Year (FY)
2016/17 First Quarter Budget Performance Report for the period July 1, 2016 through
September 30, 2016.
EXECUTIVE SUMMARY:
This report has two primary goals. First, the report informs the Town Council on the status of
the Town’s Fiscal Year 2016/17 Adopted Budget revenues and expenditures during the first
quarter. Second, staff provides the Town Council an update on the preliminary General Fund
financial results (unaudited) as of June 30, 2016.
BACKGROUND:
At its November 17, 2016 meeting, the Council Finance Committee heard public testimony,
reviewed, discussed, and recommended to the Town Council to receive the Fiscal Year (FY)
2016/17 First Quarter Budget Performance Report for the period Jul y 1, 2016 through
September 30, 2016 (see Attachment 1). Public comments submitted to the Finance
Committee before and after the 11 a.m. deadline are contained in Attachment 2. Attachment 3
BACKGROUND (cont’d):
PAGE 2 OF 3
SUBJECT: FISCAL YEAR 2016/17 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2016 – SEPTEMBER 30, 2016
DATE: DECEMBER 6, 2016
S:\COUNCIL REPORTS\2016\12-06-16\05 FY 2016-17 First Quarter Budget Report\05 Staff Report FINAL.docx 12/1/2016 6:35 PM SLL
summarizes the questions submitted by the public and provides staff answers to those
questions. Staff verbally provided the responses to the Committee at its meeting.
The attached Quarterly Budget Report covers the first three months of the fiscal year beginning
July 1, 2016 and ending September 30, 2016. The report presents an analysis related to key
General Fund revenues by category and expenditures.
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. Though financial results are limited to the first
three months, staff is able to provide an update based on early revenue trends for the current
fiscal year, and advise on potential future revenue and expenditure challenges which may
materialize during the fiscal year.
DISCUSSION:
The attached First Quarter Budget Report includes a recap (subject to final audit) of the prior
fiscal year’s General Fund fiscal results. The preliminary fund balance of approximately $2.6
million in FY 2015/16 revenues above expenditures is reflective of a number of events
impacting the year end results. The $2.6 million is derived from $1.2 million in personnel
vacancy savings; $1 million from General Fund revenues coming in stronger than expected
including transient occupancy tax, business license tax, property tax, and development related
licenses and permit revenues; and $400,0000 in one-time unexpected surplus Educational
Revenue Augmentation Fund (ERAF) revenues.
The final year end reserve balance calculations for FY 2015/16 incorporate amounts assigned
for Council-authorized uses including $300,000 for the CalPERS Reserve, $100,000 for legal
services for North 40 lawsuit, and $34,414 for additional funding for the Pageant Way Parking
Lot improvements.
An analysis of FY 2016/17 General Fund revenues confirms that the Town is tracking slightly
above budgeted revenues for the first quarter when compared to prior years. Key economic
revenues such property tax, business license tax, franchise fees, and transient occupancy tax
have all experienced increases from prior year first quarter results, while development-related
fees decreased. It should be noted that while the first quarter FY 2016/17 sales tax proceeds
show significant increase, the general sales tax revenue is declining. The first quarter FY
2016/17 sales tax proceeds include the final, one-time “triple flip” true up adjustment of sales
tax from prior fiscal years.
DISCUSSION (cont’d):
PAGE 3 OF 3
SUBJECT: FISCAL YEAR 2016/17 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2016 – SEPTEMBER 30, 2016
DATE: DECEMBER 6, 2016
S:\COUNCIL REPORTS\2016\12-06-16\05 FY 2016-17 First Quarter Budget Report\05 Staff Report FINAL.docx 12/1/2016 6:35 PM SLL
Staff also reviewed first quarter budget results for all Town departments and found that
General Fund expenditures are trending well below budgeted levels. Staff cautions that first
quarter results cannot be relied on for projecting year end results since this report only covers
the first three months of the fiscal year.
CONCLUSION:
While the long-range outlook for the Town indicates a positive fiscal year ahead, evidenced
prior year favorable closing results and positive first quarter preliminary data, staff will continue
its conservative fiscal planning efforts to monitor expenditures and the Town’s economically
sensitive revenues.
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 September 30, 2016.
2. Public comment received before and after 11 a.m. on November 21, 2016
3. Staff Responses to Questions posed in Public Comments
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
1
INTRODUCTION
Purpose
This is the first quarterly budget performance report
for Fiscal Year 2016/17, for the three month period
ending September 30, 2016. The purpose of this
quarterly public reporting is twofold. First, it
ensures that the Town is consistently monitoring its
revenues and expenditures so that it can proactively
respond to unanticipated changes or emerging
trends. Second, and equally important, these
reports increase the transparency of the Town’s
finances. The Town is ultimately accountable to its
residents to use the revenue it brings in efficiently
and effectively to provide the highest quality
services, and quarterly public reporting provides the
Council Finance Committe and taxpayers with
information that demonstrates the Town is meeting
this standard.
Content
This quarterly report presents an overview of the
Town’s operating revenues and expenditures for the
quarter ending September 30, 2016, as compared to
previous years, and explains any notable changes or
trends in these numbers. This report also provides
information on any recommended budget
adjustments.
Timeframe and Limitations
The information in this report is the most accurate
and up-to-date information available at the time of
publication. However, this report is not an audited
financial statement and the numbers provided
herein are preliminary and subject to change as the
year progresses. No data on revenues and
expenditures are final until the Town has completed
its annual comprehensive audit and finalized its
Comprehensive Annual Financial Report (CAFR),
which is released in the winter of each year for the
prior fiscal year.
With respect to revenues: The Town regularly
monitors and adjusts its year-end revenue
projections based on revenue performance and
other developments that may affect Town revenues
in order to develop a more accurate picture of the
Town’s anticipated year-end financial position.
With respect to expenditures: The expenditure
information in this report is extracted directly from
the Town’s financial management system, and
adjustments are made to account for certain known
payments, reimbursements, or transfers between
Town departments and funds that have not yet been
processed in the system at the time of publication.
It represents a snapshot of Town expenditures at a
certain point in time and does not reflect final
adjustments made to prepare the Town’s CAFR.
Table of Contents
Introduction .............................................................. 1
Executive Summary .................................................. 2
Status of FY 2016/17 Adopted Budget ....... 2
Prior Fiscal Year Closing Results ................. 2
General Fund Reserve Status ..................................... 2
U.S. Economic Outlook ............................... 3
State Budget Update .................................. 3
General Fund – Key Revenue Analysis ..................... 4
Property Tax ............................................... 5
Sales Tax ..................................................... 6
Franchise Fees ............................................ 8
Business License Tax ................................... 9
Transient Occupancy Tax .......................... 10
Charges for Services ................................. 11
Licenses & Permits .................................... 12
Interest Income ........................................ 13
Financial Summaries and Projections ..................... 14
General Fund ............................................ 14
Special Revenue Fund ............................... 15
Capital Projects Funds .............................. 16
Internal Service Funds .............................. 17
Trust and Agency Funds ........................... 18
Conclusion .............................................................. 19
Attachment 1
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
2
EXECUTIVE SUMMARY
Status of FY 2016/17 Adopted Budget
First quarter revenues are generally trending higher
when compared to the first quarter of Fiscal Year
2015/16. Key economic revenues such property tax,
business license tax, franchise fees, and transient
occupancy tax have all experienced increases from
prior year first quarter results, while development-
related fees decreased. It should be noted that
while the first quarter FY 2016/17 sales tax proceed
shows significant increase, the general sales tax
revenue is declining. The first quarter FY 2016/17
sales tax proceeds include a one-time “triple flip”
true up adjustment of sales tax from prior fiscal
years.
General Fund expenditure totals for the first quarter
are trending favorably, with total operational
expenditures at the end of the first quarter at about
19% of the budget. With only three months of data
available, however, it is difficult to predict revenues
and expenditures for the remainder of the year. In
light of this, staff continues to be cautiously
optimistic while monitoring fiscal developments very
closely.
Prior Fiscal Year Closing Results
The Fiscal Year 2015/16 closing financial results
affirm the positive effects of the Town’s budgetary
actions taken in response to prior downturns in key
operating revenues. Conservative budgeting,
vacancy savings, receipt of “one-time” revenues, and
a recovering economy, coupled with ongoing Town-
wide expenditure reductions, generated a favorable
General Fund closing balance of approximately $2.6
million of available revenues over expenditures at
fiscal year-end, June 30, 2016. This amount is
preliminary and subject to final audit.
General Fund Reserve Status - 6/30/16
General Fund reserves are classified into categories –
Restricted, Committed, Assigned, and Unassigned.
Restricted reserves are those which are restricted in
use by accounting standards or legal agreements and
are not considered as available for use for another
purpose. With the dissolution of the Town of Los
Gatos Redevelopment Agency (RDA), the Town no
longer has restricted reserves. Committed reserves
are established by Council Policy for an intended
purpose. Assigned fund balance describe a portion
of fund balnce that reflects a government’s intended
use of resources. Unassigned fund balance is
available for appropriation
General Fund Reserves closed on June 30, 2016 with
a balance of approximately $27.7 million in
committed and assigned reserves which is in
accordance with Town financial policies and
operating and capital budget requirements.
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 Reserve Policy the combined total of
these two reserves is 25% of the General Fund
operating expenditures.
The CalPERS Reserve was established to mitigate the
the Town’s unfunded pension liabilities in June 2016.
According to the June action, Council directed staff
to establish a CalPERS Reserve up to $2.5 million
funded from available FY 2014/15 year end savings
with an additional annual payment of $300,000 if
available at year-end savings.
The reserve for Capital and Special Projects, funded
from annual available General Fund budget savings,
Committed
Budget Stabilization Reserve $4.4
Catastrophic Reserve $4.4
Almond Grove Reserve $8.5
Assigned
Carryforward Appropriation $0.1
CalPERS Reserve $2.8
Capital Improvements $3.7
Open Space $0.6
Special Studies $0.3
Sustainability Reserve $0.2
FY 2016/17 Commitments $0.1
Available for Allocation (Subject to Final Audit)$2.6
Total Designated General Fund Reserves $27.7
General Fund Reserves
6/30/2016
Amount
(millions)
Estimated
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
3
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 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
$3.7 million available in Capital Imrpovment reserve
$1.4 million is already committed for capital projects
spending in FY 2016/17.
The availability of approximately $27.7 million in
committed, assigned, and currently unassigned
General Fund reserves provides the Town with
resources to manage through current and/or future
fiscal challenges and opportunities. The $2.6 million
unassigned fund balance per Reserve Policy will
added to the Capital Improvements Reserve at the
final close of the fiscal year unless there is different
Council direction.
U.S. Economic Outlook
The Congressional Budget Office (CBO) anticipates
that the economy will expand at a solid pace over
the next few years. Real Gross Domestic Product
(GDP) is aniticipated to grow by about 2% in 2016
and by 2.4% in 2017. Economic growth is expected
to slow in 2018.
According to CBO’s estimates, the growth in output
will heighten demand for labor over the next year
and a half, leading to solid employment gains and
eliminating labor market slack in 2017, thereby
putting upward pressure on wages. The agency
projects that the unemployment rate will fall below
the estimated natural rate of unemployment
bottoming out at 4.5% in the fourth quarter of 2017.
Increased hiring will also encourage more people to
enter or stay in the labor force.
The CBO also estimates that the rate of inflation in
the price index for personal consumption
expenditures will rise to 1.5% from 0.5%in 2015. In
2017, the rate of inflation is projected to rise to the
Federal Reserve’s longer-run goal of 2.0%.2017, the
rate of inflation is projected to rise to the Federal
Reserve’s longer-run goal of 2.0%.
The CBO expects that the interest rates on Treasury
securities, which have been exceptionally low since
the recession, will remain lower than they were, on
average, in previous decades.
In addition, federal lawmakers still face the longer-
term budget issues posed by the large projected
national debt and the implementation of rising
health care costs and the aging population.
The US Department of Commerce reported that
home construction rose 4.4% since last year.
State Budget Update
Since 2011, the State of California’s fiscal situation
has dramatically turned around. As the State’s
economy has recovered, the past three budgets
have restored some previous budget cuts and
expanded services, such as extending health care
coverage to millions of Californians. In addition, the
State has paid down its budgetary borrowing and
addressed some long standing problems - such as
implementing a plan to restore fiscal health to
teacher pensions, and making major improvements
to the state’s water system. A strengthening state
economy is continuing to push revenues higher. The
State’s unemployment rate is below 6%t for the first
time since 2007. In 2015, capital gains - the state’s
most volatile revenue source - reached an alltime
high. The economy is finishing its seventh year of
expansion, already two years longer than the
average recovery. While the timing is uncertain, the
next recession is getting closer, and the state must
begin to plan for it. If new ongoing commitments
are made now, then the severity of cuts will be far
greater - even devastating - when the recession
begins.
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
4
GENERAL FUND – KEY REVENUE ANALYSIS
The following discussion provides a status of significant General Fund revenue sources as of the first quarter,
ending September 30, 2016.
Staff monitors each revenue source closely and may recommend certain revenue adjustments based on revenue
actuals or state budget action.
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
5
Property Tax
Property tax is the largest revenue source for the Town’s General Fund, accounting for 27.6% of budgeted General
Fund revenues in FY 2016/17. Property tax is levied by the Santa Clara County Assessor’s Office at 1% of a
property’s assessed value, of which the Town receives approximately 9.5 cents per dollar paid on property located
within the municipal limits of Los Gatos. In compliance with Proposition 13, the assessed value of real property is
based on the 1975/76 assessment roll value, adjusted by 2% inflation factor thereafter. However, when property
changes hands or new construction occurs, property is reassessed at its current market value. Real property
values critically impact revenues. With the passage of Proposition 13, voters limited the tax rate that can be
imposed by the Town on property. With the limitation on rates, therefore, higher revenues are generated by a
higher aggregate property value.
Analysis – Property Tax distributions are largely received in the third and fourth quarters. First quarter receipts
are slightly up when compared to the first quarter of the previous fiscal year. Property tax budget projections are
based on valuations projected by the Santa Clara County Assessor’s Office, given increased home sales, coupled
with anticipated adjustments in property tax distribution due to the dissolution of California Redevelopment
Agencies. Property tax revenue for FY 2016/17 was budgeted slightly lower than previous year’s actual revenues
based on these facts and projected Consumer Price Index rate. Prior year property tax revenues are up due to
receipt of “one-time” excess Educational Revenue Augmentation Funds (ERAF) from the County and higher than
expected property transfer tax collection. Staff will continue to monitor these revenues through the mid-year to
determine if a budget adjustment will be recommended at that time.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 76,842$ 123,394$ 125,091$ 109,027$ 134,884$
Fiscal Year Total Actual Revenues 9,477,043$ 9,054,908$ 10,113,287$ 10,791,743$
Fiscal Year Budgeted Revenues 10,458,633$
1st Quarter Percent of Total 0.81%1.36%1.24%1.01%1.29%
Recommended Budget Revision No Change
PROPERTY TAX
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year Budgeted
Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
6
Sales Tax
Sales tax is the second largest revenue source for the Town’s General Fund, accounting for 21.6% of budgeted
General Fund revenues for FY 2016/17. The Town receives 1 cent for every 8.75 cents of sales tax paid per dollar
on retail sales and taxable services transacted within Los Gatos. Since the implementation of the mechanism
commonly known as the “triple flip,” the State Board of Equalization retains 0.25 cents of the Town’s 1 -cent share
and requires the Santa Clara County Auditor to replace it with an equal amount of property tax revenue. Revenues
are remitted from the State to the Town on a monthly basis, a nd from the County to the Town on a biannual basis.
FY 2016/17 marks the final “final triple flip” true-up payment. From FY 2016/17 the State Board of Equalization
will distribute the full 1 percent sales tax share to the Town. These revenues are placed in the General Fund for
unrestricted uses.
Analysis –Based on the most recent Sales Tax and Economic Review update from Muni Services, the Town’s sale s
tax analysis consultant, first quarter sales tax receipts statewide grew by 1.2%, while the Town of Los Gatos sales
tax revenues declined by 4.7%. First quarter actual proceeds include $900,000 final “ triple-flip” true-up payment
from previous fiscal years including FY 2015/16; as it demonstrated in the graph below the FY 2015/16 proceeds
were less since the final triple-flip payment got distributed in FY 2016/17. The negative impact associated with the
Netflix change in business model continues to impact the Town as is the trend of increased on-line retail versus
local mortar and brick shopping compounded by lower gasoline prices.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 601,176$ 1,243,903$ 914,843$ 871,410$ 2,081,617$
Fiscal Year Total Actual Revenues 8,757,428$ 8,029,571$ 8,202,678$ 7,501,175$
Fiscal Year Budgeted Revenues 8,164,403$
1st Quarter Percent of Total 6.86%15.49%11.15%11.62%25.50%
Recommended Budget Revision No Change
SALES TAX
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter
Actual Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year
Budgeted
Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
7
As depicted in the graph there is decrease in all the categories of the sales tax revenue when compared to same
quarter results from the prior fiscal year.
Staff will continue to monitor these revenues through the mid-year to determine if a budget adjustment will be
recommended at that time.
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
8
Franchise Fees
Franchise fees are collected by the Town for the privilege of operating a utility service within Los Gatos, and as a
fee in lieu of a business license tax. Franchise fees are currently received from Comcast for cable television, PG&E
for gas and electric services, West Valley Collection and Recycling for solid waste collection services, and AT&T and
Comcast for video services. Franchise fees represent 5.8% of budgeted General Fund revenues in FY 2016/17.
Analysis – Historically, franchise payments are not remitted equally throughout the fiscal year; therefore first
quarter receipts are not necessarily predictive. Total franchise fee revenues are trending slightly higher than those
in first quarter in FY 2015/16. Staff will continue to monitor trending of this revenue source and no budget
adjustment is recommended at this time.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 251,349$ 247,426$ 275,097$ 266,431$ 290,727$
Fiscal Year Total Actual Revenues 2,028,903$ 2,063,756$ 2,215,430$ 2,258,892$
Fiscal Year Total Budgeted Revenues 2,191,120$
1st Quarter Revenue Percent of Total 12.39%11.99%12.42%11.79%13.27%
Recommended Budget Revision No Change
Franchise Fees
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
9
Business License Tax
The Town requires all businesses located within Los Gatos, or those that operate within Los Gatos, to obtain a
business license. The amount of business license tax paid by each business is based on its business activity. Fees for
activities such as wholesale sales and manufacturing are charged on a sliding scale based on gross receipts, as is
retail, but retail business licenses are capped at $975. These activities account for approximately 25% of annual
business licenses, while the remaining 75% are flat fee business licenses. Annual renewal payments are due on
January 2 of each year. Payments for new flat-fee-based businesses are pro-rated by quarter.
Analysis – As a result of the projected increase in economic activity, business license tax revenue for the current
fiscal year was budgeted slightly higher than prior year budgeted number. First quarter revenues are significantly
lower compared to prior year first quarter revenue, however first quarter revenue is trending h igher when
compared to revenues prior to FY 2014/15. FY 2014/15 actual revenues reflected below include a one-time prior
year adjustment for business license tax collection from Netflix. This adjustment was due to a reclassification that
happened in the first quarter of FY 2014/15. Generally the first quarter payments are primarily made up of
adjustments to businesses’ gross receipts for 2015. The FY 2016/17 first quarter receipt reflects the proceeds from
Netflix 2015 actual positive gross receipt adjutments. Annual business license tax renewal revenue is primarily
received in the second and third quarters of each year; therefore, first quarter performance is not necessarily
predictive.
FY 12/13 FY 13/14 FY 14/15
1st Quarter Actual Revenues 44,393$ 52,124$ $ 472,024*$ 82,439**131,955$
Fiscal Year Total Actual Revenues 1,151,579$ 1,130,020$ 1,779,307$ 1,465,547$
Fiscal Year Total Budgeted Revenues 1,300,000$
1st Quarter Revenue Percent of Total 3.85%4.61%26.53%6.63%6.60%
Recommended Budget Revision No Change
* Incudes "one-time" prior years adjustments due to Netflix recalssification to E-Commerce business
** Includes 2014 actual gross receipt adjustment for Netflix at the first time
Business License Tax
FY 15/16 FY 16/17
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
10
Transient Occupancy Tax
The Town levies a 10% transient occupancy tax (TOT) on all hotel and motel rooms within the municipal limits of Los
Gatos. This tax helps to fund Town services provided to transitory visitors to Los Gatos. At the November 8, 2016
election the Town of Los Gatos residents approved a ballot measure increase the TOT from 10% to 12%. This
measure is still subject to certification that will happen in December 2016.
Analysis – Visit California, formerly the California Travel and Tourism Commission, reports that the total number of
visitors to California grew 3.4% in 2015. The forecast for California visitation is increasing by 2.2% in 2016. Personal
and business related travel is gaining strength. First quarter TOT revenues are trending significantly higher than the
first quarter of FY 2015/16 due to the fact that one of the hotel paying the TOT monthly instad of quarterly.. Staff
will continue to monitor this funding source and based on the certification of the elction and the upated trend will
recommend a budget adjustment at the time mid year budget review.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 135,452$ 169,632$ 132,202$ 153,102$ 385,811$
Fiscal Year Total Actual Revenues 1,295,887$ 1,512,846$ 1,896,721$ 1,943,166$
Fiscal Year Total Budgeted Revenues 1,900,000$
1st Quarter Revenue Percent of Total 10.45%11.21%6.97%7.88%20.31%
Recommended Budget Revision No Change
Transient Occupancy Tax
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total Actual
Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
11
Charges for Services
Town service revenues consist primarily of planning, building, inspections, and engineering fees assessed on local
building and development activity. Development fees and charges are assessed based on recovery formulas, which
reflect approximate costs of providing these regulatory services.
Analysis – First quarter Town service revenues, specifically Charges for Services, are trending significantly lower
than first quarter results from the previous fiscal year. Development permits revenues are projected to be lower
than last fiscal year due to the slowing down of large scale building projects. Staff will continue to monitor this
revenue source, however no budget revisions are recommended at this time.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 552,150$ 795,289$ 706,139$ 567,913$ 352,063$
Fiscal Year Total Actual Revenues 3,070,127$ 2,684,126$ 2,643,276$ 2,677,944$
Fiscal Year Total Budgeted Revenues 2,370,070$
1st Quarter Revenue Percent of Total 17.98%29.63%26.71%21.21%14.85%
Recommended Budget Revision No Change
Charges for Services
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
12
Licenses and Permits
Licenses and permits consist mainly of Building Permit fees which are collected by the Town to offset administrative
costs associated with overseeing the proper permitting aspects of development.
Analysis – First quarter License and Permit revenue is trending lower than first quarter results from the previous
fiscal year. First quarter collections include approximately $400,000 deferred revenues from FY 2015/16 collections
as some of the big-scale development project started in last year were not completed in FY 2015/16. Staff will
continue to monitor this funding source closely to assess the need for mid-year budget adjustments; however no
budget revisions are recommended at this time.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 912,238$ 1,237,390$ 1,229,462$ 1,289,988$ 1,149,167$
Fiscal Year Total Actual Revenues 3,060,948$ 3,235,122$ 3,687,393$ 3,552,935$
Fiscal Year Total Budgeted Revenues 2,946,583$
1st Quarter Revenue Percent of Total 29.80%38.25%33.34%36.31%39.00%
Recommended Budget Revision No Change
Licenses & Permits
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Total
Actual Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
13
Interest Income
The Town earns interest income by investing monies not immediately required for daily operations in a number of
money market instruments. These investments are made within the parameters stated in the Town Council’s
Investment Policy. The Town’s investment goal is to achieve a competitive rate of return while protecting the safety
of its funds. Interest income revenue is primarily dependent on two factors: first, the cash balance in the Town’s
investment portfolio and second, the yield on those funds.
Analysis – First quarter receipts are trending slightly above those in the same period in the prior fiscal year, largely
because of small rises in interest rate levels experienced during the past twelve months. The Town’s investement
advisors expect interest rates to rise gradually in calendar year 2017. The increase of the interest earnings
experienced this fiscal year as of first quarter are reflective of the Town’s total portfolio yield increasing from 0.81%
as of September 30, 2015 to the current yield of 0.84% as of September 30, 2016 as reflected in the Town Q1 Draft
Investment Report.
The strategy for the foreseeable future continues to be to remain fairly short-term and to invest in callable agency
bonds in order to attempt to pick up a few basis points over non-callable agencies and treasuries. Treasuries are
being added into the mix of investments to attempt to keep the portfolio somewhat balanced, even though this has
the effect of lowering the overall rate of return. The Town also attempts to find good solid corporate bonds when
possible. There are no recommended changes to this revenue source at this time.
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
1st Quarter Actual Revenues 111,401$ 169,558$ 113,313$ 81,671$ 84,965$
Fiscal Year Revenues 422,840$ 514,380$ 379,154$ 317,766$
Fiscal Year Total Budgeted Revenues 438,880$
1st Quarter Revenue Percent of Total 26.3%33.0%29.9%25.7%19.4%
Recommended Budget Revision No Change
Interest Income
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17
Quarterly and Annual Revenues
5-Year History
1st Quarter Actual
Revenues
Fiscal Year Revenues
Fiscal Year Total
Budgeted Revenues
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
14
FINANCIAL SUMMARIES, PROJECTIONS, AND RECOMMENDATIONS
General Fund
The following table in the next page is the Schedule of General Fund Operating Revenues versus Operating
Expenditures for the first quarter of FY 2016/17, which includes comparison information from the prior year. In
the far right column are projections of unaudited, final balances for the current fiscal year based upon the early
trends observed through the first quarter.
Unaudited
FY15/16 FY15/16 FY15/16 FY15/16 FY16/17 FY16/17 FY16/17 FY16/17 FY16/17
Final Adjusted 1st Qtr % Adopted Adjusted 1st Qtr % Finance
Balance Budget Actuals YTD Budget Budget Actuals YTD Projection
Revenues
General Property Tax 10,791,743$ 10,269,397$ 109,027$ 1%10,458,633$ 10,458,633$ 134,884$ 1%10,458,633$
Prop Tax Car Tax Backfill - - - - - - -
Sales & Use Tax 7,501,175 8,126,309 871,410 11%8,164,403 8,164,403 2,081,617 25%8,164,403
Franchise Fees 2,258,892 2,127,660 266,431 13%2,191,120 2,191,120 290,727 13%2,191,120
Transient Occ Tax 1,943,166 1,800,000 153,102 9%1,900,000 1,900,000 385,811 20%1,900,000
Business License Tax 1,465,547 1,300,000 82,439 6%1,300,000 1,300,000 162,127 12%1,300,000
Licenses & Permits 3,552,935 3,076,162 1,289,988 42%2,946,583 2,946,583 1,149,167 39%2,946,583
Motor Vehicle In Lieu 2,984,023 2,833,750 - 0%3,013,840 3,013,840 - 0%3,013,840
Intergovernmental 972,199 930,994 32,711 4%717,684 717,684 52,806 7%717,684
Charges for Services 2,677,944 2,786,451 567,913 20%2,370,070 2,370,070 352,063 15%2,370,070
Fines & Forfeitures 858,929 666,300 151,807 23%650,900 650,900 176,271 27%650,900
Interest 317,766 424,140 81,766 19%438,880 438,880 84,956 19%438,880
GASB Investment To Market Per Audit 310,008 (104,550) 239,189 -229%(107,687) (107,687) - 0%(107,687)
Miscellaneous/Other 3,605,671 4,706,827 1,226,655 26%3,421,579 3,421,579 2,771,638 81%3,421,579
Fund Transfers (Non Captial)329,722 454,218 57,467 13%363,428 363,428 59,302 16%363,428
Fund Transfer (Capital)2,516,795
Total Operating Revenues 42,086,515 39,397,658 5,129,905 13%37,829,433 37,829,433 7,701,369 20%37,829,433
Use of Other Funding Sources:
Use of Reserves - Capital Projects 1,400,000 1,400,000 1,400,000
Almond Grove Reserve 8,459,973 8,459,973 8,459,973
Carryforward Reserve
Special Studies
Total Other Funding Sources - - 9,859,973 9,859,973 - 9,859,973
Total Revenues plus Reserves 42,086,515$ 39,397,658$ 5,129,905$ 47,689,406$ 47,689,406$ 7,701,369$ 47,689,406$
Expenditures (includes c/f but no encumbrances)
Mayor & Council 171,530 184,557 36,895 20%202,421 202,421 42,124 21%202,421
Attorney 296,258 330,602 52,458 16%347,006 347,006 65,620 19%347,006
Administrative Services 2,883,289 3,183,780 632,146 20%3,310,379 3,310,379 554,650 17%3,310,379
Comm Development 4,032,333 4,435,444 664,751 15%4,143,098 4,143,098 763,951 18%4,143,098
Police 13,844,684 15,027,844 3,170,893 21%13,920,048 13,920,048 3,356,742 24%13,920,048
Parks & Public Works 6,226,196 6,613,251 1,101,052 17%6,452,425 6,452,425 1,277,458 20%6,452,425
Library 2,332,268 2,577,394 574,617 22%2,691,849 2,691,849 484,283 18%2,691,849 - -
Total Dept Expenses 29,786,558$ 32,352,872$ 6,232,812$ 19%31,067,226$ 31,067,226$ 6,544,828$ 21%31,067,226$
General Government 6,753,013 6,716,283 302,878 0 15,891,999 15,891,999 2,341,152 15%15,891,999
Total Non-Dept Expenses 6,753,013$ 6,716,283$ 302,878$ 5%15,891,999$ 15,891,999$ 2,341,152$ 15%15,891,999$
Total Operating Expenditures 36,539,571$ 39,069,155$ 6,535,690$ 17%46,959,225$ 46,959,225$ 8,885,980$ 19%46,959,225$
Other Uses
To Almond Grove Reserve 2,516,795
GASB 31 Adjust to Market Entry 310,008
Authorized Carryforwards 54,000
Total Other Uses 2,880,803
Total Other Expenditures and Uses 39,420,374$ 39,069,155$ 6,535,690$ 17%46,959,225$ 46,959,225$ 8,885,980$ 19%46,959,225$
Net Operating Revenues 2,666,141$ 328,503$ (1,405,785)$ 730,181$ 730,181$ (1,184,611)$ 730,181$
Town of Los Gatos
For the period ended September 30, 2016
Schedule of General Fund
Operating Revenues vs. Operating Expenditures
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
15
The following financial summaries present data by governmental fund type: Special Revenue Funds, Capital Project
Funds, Internal Service Funds, and Trust and Agency Funds. For each, the fund information starts with a beginning
fund balance, adds current year revenues, and subtracts current year expenditures, resulting in an ending fund
balance. Adopted budget amounts are provided as a basis for comparison of actuals to date.
Special Revenue Fund
Special Revenue Funds account for the proceeds derived from specific revenue sources that are legally restricted or
assigned to special purposes. The Town’s Special Revenue Funds are Community Development Block Grant Fund,
Housing Conservation Program Fund, Non-Point Urban Runoff Source Fund, and several Landscaping and Lighting
District Funds. The revenue from the Non-Point Source Program fund continues to lag the expenses. This largely
results from increased requirements associated with theTown’s storm water permit, including increased isnpections
and monitoring, trash reduction requirements, and administrative costs. Staff will develop a plan to move the
program toward a sustainable cost recovery model as part of the FY 17/18 budget process. As indicated in the chart
below, Non-Point Source fund balance is negative. It is anticipated that revenues fo the Non-Point Source program
will be received by the end of the second quarter and will be reflected in the mid-year budget report.
CDBG Non-Point LLD's
Grants Source
Beginning Fund Balance (Pre-audit)78,621$ 115,657$ 185,332$
Budgeted Revenues 70,000 367,464 38,416
Total Actual Revenues - 1st Qtr -$ -$ -$
Budgeted Expenditures 70,000 533,935 79,470
Total Actual Expenditures - 1st Qtr - 243,459 1,333
1st Quarter Ending Fund Balance 78,621$ (127,802)$ 183,999$
Special Revenue Funds
Budget to Actuals Comparisons
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
16
Capital Projects Funds
Capital Projects Funds account for resources used for the acquisition and construction of capital facilities by the
Town. Funds in this category are the General Fund Appropriated Reserve Fund (GFAR), Traffic Mitigation Fund,
Grant Funded Capital Improvement Projects Fund, Utility Underground Fund, Gas Tax Fund, and three Storm Drain
Funds. Capital Projects Funds are generally tracking in accordance with the FY 2016/17 adopted budget. Projects
budgeted from Traffic Mitigation and utility Undegrounding sources are starting later this fiscal year. Staff will
continue to monitor these expenditures throughout the remainder of the year.
GFAR Traffic Grant Fund Storm Utility Gas
Fund Mitigation CIP's Drains Undergd Tax
Beginning Fund Balance 14,781,907$ 2,596,834$ (379,926)$ 1,668,054$ 2,881,502$ 1,651,113$
Budgeted Revenues 11,347,973 1,500,185 1,056,176 103,880 50,000 631,843
Total Actual Revenues - 1st Qtr 126,676 - - 44,661 3,649 169,807
Budgeted Expenditures 25,322,000 1,500,185 994,443 - 70,000 2,043,905
Total Actual Expenditures - 1st Qtr 222,098 54,385 - - - 1,347,629
1st Quarter Ending Fund Balance 14,686,485$ 2,542,449$ (379,926)$ 1,712,715$ 2,885,151$ 473,291$
Capital Project Funds
Budget to Actuals Comparisons
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
17
Internal Service Funds
Internal Service Funds finance and account for special activities and services performed by a designated Town
department for other Town departments on a cost reimbursement basis. Included in this fund type are the
Equipment Replacement Fund, Workers’ Compensation Fund, ABAG Self Insurance Fund, Office Stores Fund,
Management Information Systems Fund, Vehicle Maintenance Fund, and the Facilities Maintenance Fund.
Internal Service Funds are generally tracking in accordance with the FY 2016/17 adopted budget. No revisions to
adopted revenues or expenditures are required at this time, and staff will continue to monitor expenditures and
propose a revised cost allocation during FY 2017/18 budget preparation.
Equipment Workers Self Office Mmgt Info Vehicle Facility
Replacemt Comp Insurance Stores Systems Maint.Maint.
Beginning Fund Balance 2,147,845$ 1,378,166$ 1,360,373$ 185,533$ 2,888,451$ 413,458$ 415,323$
Budgeted Revenues 381,322 934,118 535,838 95,000 1,129,006 573,865 1,381,875
Total Actual Revenues - 1st Qtr 95,331 261,432 134,845 1,999 226,496 143,466 285,743
Budgeted Expenditures 336,369 1,258,810 808,361 134,500 1,351,188 573,866 1,381,875
Total Actual Expenditures - 1st Qtr 122,107 313,309 442,976 24,521 242,840 98,260 225,164
1st Quarter Ending Fund Balance 2,121,069$ 1,326,289$ 1,052,242$ 163,011$ 2,872,107$ 458,664$ 475,902$
Internal Service Funds
Budget to Actuals Comparisons
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
18
Trust and Agency Funds
Town Trust and Agency Funds have fund balances as of July 1, 2016 of $524,453 for the Library Trust Funds and
$3,593.571 for Successor Agency Trust. No budget revisions are recommended at this time for these funds.
Library SA
Trust Trust
Beginning Fund Balance 524,453$ 3,593,571$
Budgeted Revenues 69,150 3,872,939
Actual Revenues - 1st Qtr 500 1,923,430
Budgeted Expenditures 67,000 3,871,255
Total Actual Expenditures - 1st Qtr 6,584 3,434,425
1st Quarter Ending Fund Balance 518,369$ 2,082,576$
Trust & Agency Funds
Budget to Actuals Comparisons
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
19
CONCLUSION
The financial results from the prior fiscal year, coupled with the FY 2016/17 first quarter data, confirm the Town’s
continued conservative fiscal planning and efforts to sustain its economically sensitive revenues. Based on available
information at the time of this report and expected receipts, the long-range outlook for the Town indicates that
revenues continue to improve, with small excess revenues beyond expenditures forecasted. As the fiscal year
progresses, staff will continue to closely monitor revenue and expenditure activity and work to identify
opportunities to enhance revenue to support current and future operating capital needs.
BUDGET PERFORMANCE REPORT – 1ST QUARTER FY 2016/17
20
11-21-16
Finance Committee Meeting re year end 2015-2016, and 1Q 2016-2017
Attached is a short list and also a full list of questions that we have regarding the
financial information to be discussed in the 11-21-16 meeting. The full list are
additional questions, but those may be modified depending on the answers we get
today. If this is the only opportunity we have to present questions, then the full list is
attached at the bottom of this letter.
We think the end result of this work between Staff, the Finance Committee and us will
help to bring the Los Gatos financials into compliance with GASB standards. Though we
would like to have all questions answered in this session, we think our total list would
look like we were piling on. We’re not. We’re concerned residents of Los Gatos.
One of our goals is to have a constructive and thought-provoking session, the answers
of which will bring the town closer to full compliance with GASB, and eliminate errors in
the future. Our other goal is to be helpful in solving the problems we have found and
not to be viewed as a thorn in Staff’s side. We all want to be proud of Los Gatos, and
though the finances are generally not something the general public seeks to
understand, they are very critical to the success of our town.
We feel that all of these questions, once answered, and any mistakes corrected, could
help to make the Los Gatos financial reporting more valuable to the Council in the
management of town finances. These answers and the corrections they should bring to
the statements will provide more clarity and transparency for the citizens of Los Gatos.
This was promised to the town by both the Mayor Sayoc and Vice-Mayor Rennie in their
acceptance speeches.
Jak VanNada, Lee Fagot, Terry Duryea, Peter Hertan
The Abbreviated List:
Agenda Item 2: First Quarter Investment Report AND Restated Demand Account
Balances (February through June 2016)
· We would like to understand how the misclassification between the demand
account and the fund balance that was $12.4M by June 30, 2016 could go
undetected for 5 months.
o We view this as serious for a number of reasons:
§ If it was due to a lack of timely account reconciliations, the
foundation of any system of internal control, this represents a
serious breakdown in the Town’s system of internal control
§ If the money was sitting in a non-interest bearing demand account,
the error resulted in a loss of investment return
§ Although the Town missed it, why didn’t the financial institution or
more importantly, the investment manager catch the error?
§ Does the independent auditor feel he will need to disclose this as a
“material inadequacy in internal controls”?
§ What changes in process and oversite are to be implemented to
preclude similar future errors?
· Agenda Item 3: Quarterly Budget Performance & Operating Report
o The following questions relate to the “box” in the Executive Summary that
provides the detail of the General Fund Reserves as of June 30, 2016 in
accordance with GASB #54
§ Both the Almond Grove Reserve and the CalPERS Reserve were
established by TC resolutions, yet the former is reported as
Committed and the latter is presented as Assigned. Why are they
reported differently?
§ Where is the reserve for Compensated Absences ($1,692K after
being reduced by $589K to fund Almond Grove) and Vasona Land
Sale ($411K) per the Oct 28, 2015 Council Resolution?
§ Why is there not a reserve for post-retirement medical when this
was recorded $400,000 as an assigned general fund reserve as of
June 30, 2015. Has there been a change in spending intent?
o How do the reported Q1 ‘16/’17 amounts reflect the unresolved employee
wage negotiations? If an estimate is not provided, will the numbers be
restated at a later date?
o Page 3 of the Executive Summary, next to last paragraph before the US
Economic Outlook indicates that $1.4 of the $3.7M Capital Improvement
reserve is already committed for capital projects. What are the capital
projects?
The Full List (if there is time – the abbreviated list is included with the
longer list that follows):
Agenda Item 2: First Quarter Investment Report AND Restated Demand
Account Balances (February through June 2016)
• There’s one issue that over shadows all others. The narrative “Corrected
Demand Account Balances” attempts to explain it. I will leave it up to each TC
member if they think the explanation is sufficient once they understand what
happened. The error is reflected in multiple places in the report when compared
to the prior period reports.
o On page 1, the July 31, 2016 Summary of Investment Information shows
a “Last Month” balance (i.e. as of June 30, 2016) of $74,913,946. The
problem is that if you look at the July 15, 2016 Fourth Quarter Investment
Report that the Council approval, the June 30, 2016 balance is
$62,500,546. In summary, the TC accepted a report that had bad
numbers. You will see the month by month effect for the 5 months on
the last 5 pages of the November 17, 2016 investment report. The
collective error at June 30, 2016 was $12,413,400.
o This raises the question of what happened?
It appears that the staff was not reconciling the bank accounts on a
regular basis. This is the most basic requirement to insure good
internal accounting controls. If accounts are reconciled monthly, it
should have been identified as part of the monthly closing
processing. In this case, it took the Town at least 6 months to
identify the problem.
o It appears significant money was sitting in a “demand deposit” account,
earning no interest.
o Even if the Town missed it, why didn’t the financial institution or more
importantly, the investment manager catch the error—there was an extra
$12M sitting in a demand account at 6/30/16 and no one identified it or at
least called it to the Town’s attention?
o Fortunately, no one took advantage of the situation so no money was lost
other than the opportunity loss of the interest sitting in a demand account
• Item 2 of the Agenda asks the Finance Committee to “receive” the fiscal Q1
16/17 report and the 5 months of Reconciled Demand Account Balances. Their
appears to be a significant inadequacy of internal controls. At a minimum I
would expect the Finance Committee would want to report this to the TC. I
would expect the Finance Committee would want to get greater assurance that
the restated numbers are now accurate.
o I could imagine the Finance Committee would want to talk with the
Town’s independent auditors to get their take on how this happened.
o If this is a material inadequacy in internal control, I believe the
independent account needs to report it as such. The Finance Committee
would want to know if this was going to happen
o I would expect the Finance Committee to issue a written or oral report to
the TC explaining the restatements for 5 months.
o It would be hard to accept the report without getting comfortable in some
way that the restated numbers are accurate and that new procedures are
in place to ensure this does not happen again
Agenda Item 3: Quarterly Budget Performance & Operating Report
• On a positive note--the unaudited fiscal 15/16 showed an operating surplus of
$2.66M after setting aside $2.88M of other uses (which included $2.52M to the
“Almond Grove Reserve”
o But a question: Where is the additional $300K to be set aside in the
“CalPERS Reserve” per TC authorization?
o Why is there not a reserve for post-retirement medical when this was
recorded $400,000 as an assigned general fund reserve as of June 30,
2015. Has there been a change in spending intent?
• On a positive note—the Town is reporting the components of the General
Fund Reserve in accordance with GASB #54, separately identifying Committed
and Assigned Reserves and the remaining Unassigned Reserve (See “Box”)
o But a question—Why is the Almond Grove Reserve so much less that the
$12.2M adopted at the October 28, 2015 Council Meeting? Has the Town
already spent $3.7M?
o Another question—Both the Almond Grove Reserve and the CalPERS
Reserve were established by TC resolutions, yet the former is reported as
Committed and the latter is presented as Assigned. Why are they
reported differently and how can we establish consistency?
o In the 6/30/16 General Fund balance , where is the reserve for
Compensated Absences ($1,692K after being reduced by $589K to fund
Almond Grove) and Vasona Land Sale ($411K) per the Oct 28, 2015
Council Resolution?
o Do we therefore need to make up that difference, and if so, how and
when will that happen?
o The June 2016 General Fund Reserve Report reflects the components in
accordance with GASB #54 while the 2015 report reflects the components
using a former standard—Could we please receive a reconciliation from
the 2015 reserve presentation/classification to the 2016 reserve
presentation/classification?
o How do the reported Q1 ‘16/’17 amounts reflect the unresolved employee
wage negotiations? If an estimate is not provided, will the numbers be
restated at a later date?
o Since the fiscal 15/16 audit has not been complete the reported numbers
are unaudited, are there any remaining open audit issues at this point and
if so, what are they? When do you expect the 2015/16 numbers to be
finalized?
o What do you see as the area of greatest financial risks for the remainder
of fiscal 16/17? General[Possible answers could be i) continuing decline is
sales tax, ii) legal fees on North 40, iii) increased expense related to
employee post-retirement benefits (pensions & OPEB), iv)…
• Just to note:
o Per page 6, the Q1 16/17 sales tax income of $2,081K includes a one-time
“ ‘triple flip’ true up” payment of $900K. If this is netted out, the apples
to apples Q1 numbers for 2015 and 2016 are $871K for fiscal 2015 and
1,182K for 2016
o Per page 14, the left most column reflects the unaudited fiscal 2015/16
excess of revenues over expenses of $2.666M
o Per page 14, the 3rd column from left and 6th column from left compare
Q1 fiscal 2016 to Q1 fiscal 2017. 2016 had a deficit of $1,406K and 2017
had a deficit of $1,185K. The Q1 2016 deficit would have been $2,085K if
it weren’t for the one-time $900K triple flip payment explained on page 6.
I don’t know if Q1 2016 had any unusual items or the year to year
increase in Q1 deficit of $679K is significant or if it’s even an apples to
apples comparison.
o Per page 14, the 16/17 annual budget includes a revenue source of
$8,459K for Almond Grove Project and $1.4M for Capital Projects
o
• If the answers to the questions make sense, I see no reason why the Finance
Committee should not “receive” the fiscal Q1 16/17. But then I’m not sure what
“receive” means. I would expect the Finance Committee to issue a written or
oral report to the TC to explain the major changes in Q1 2016/17 which would
include:
o Unaudited 2015/16 results show an excess of revenue over expenditures
of $2.666M
o Adoption of GASB 54 for General Fund reserve reporting to Town Council
to be consistent with audited CAFR reporting which adopted GASB 54 in
the 2012 CAFROne time $900K triple flip sale tax revenue
o An apples to apples year over year Q1 comparison showing a $679K
greater Q1 deficit
o Anticipated employee costs do (do not) reflect the expected outcome of
union negotiations.
o Report that the audit is not completed and that it is expected that it would
be completed approximately XXXX
o On page 16 of the budget performance report, the GFAR Fund beginning
balance is $14.7m. If you add the budgeted revenues of $11.3m and
deduct the budgeted expenditures of $25.3m from the beginning balance,
this suggests the ending balance will be $807k. Does the Town think that
this is sufficient fund level to fund the future capital requirements for the
Town? What should a “normal” level be for the GFAR balance be as we
exit FY 2016?
o Why we would focus on this is that the Town has already disclosed in the
2016 Capital Plan that there is over $10m in unfunded street maintenance
projects. It is hard for us to believe that drawing the GRAR down to
$807,880 is prudent management. We are assuming that the entire
budgeted expenditures actually get spent this year.
Terry Duryea, Jak VanNada, Peter Hertan, Lee Fagot
From:Jak VanNada
To:Finance; Laurel Prevetti; Gitta Ungvari
Subject:Correction
Date:Monday, November 21, 2016 11:45:11 AM
Attachments:Questions to Finance Committee and Staff 11-21-16 V3.docx
I apologize, but the "Full Version" is not relevant to Council, the PC nor the Staff for this meeting.
Our group is split if four directions currently with people traveling and we've been communicating
when available on email within a very short window of time to prepare for this meeting. The
relevant questions for us are in the Abbreviated Version. The Full Version was our internal
document which was for instructional purposes to those of us with less knowledge as it applies to
accounting, and certainly not meant to be directions to Staff nor the FC as to how to handle any
issues. That, we do not see, is our role.
I have attached our list of questions with only the Question list so as to not confuse the FC or Staff.
Jak
From: Jak VanNada [mailto:jvannada@gmail.com]
Sent: Monday, November 21, 2016 10:43 AM
To: Steve Conway (finance@losgatosca.gov) <finance@losgatosca.gov>; Laurel Prevetti
<LPrevetti@losgatosca.gov>; 'Gitta Ungvari' <GUngvari@losgatosca.gov>
Subject: Attached are our questions for todays Finance Committee Meeting
Jak Van Nada
11-21-16
Finance Committee Meeting re year end 2015-2016, and 1Q 2016-2017
Attached is a short list of questions that we have regarding the financial information to
be discussed in the 11-21-16 meeting. We have additional questions, but those may be
modified depending on the answers we get today. If this is the only opportunity we
have to present questions, then I will give you the longer list at the meeting.
We think the end result of this work between Staff, the Finance Committee and us will
help to bring the Los Gatos financials into compliance with GASB standards. Though we
would like to have all questions answered in this session, we think our total list would
look like we were piling on.
Our goal is to have a constructive and thought-provoking session, the answers of which
will bring the town closer to full compliance with GASB, and eliminate errors in the
future. Our other goal is to be helpful in solving the problems we have found and not
to be viewed as a thorn in Staff’s side. We all want to be proud of Los Gatos, and
though the finances are generally not something the general public seeks to
understand, they are very critical to the success of our town.
We feel that all of these questions, once answered, and any mistakes corrected, could
help to make the Los Gatos financial reporting more valuable to the Council in the
management of town finances. These answers and the corrections they should bring to
the statements will provide more clarity and transparency for the citizens of Los Gatos.
This was promised to the town by both the Mayor Sayoc and Vice-Mayor Rennie in their
acceptance speeches.
Jak VanNada, Lee Fagot, Terry Duryea, Peter Hertan
Our questions:
Agenda Item 2: First Quarter Investment Report AND Restated Demand Account
Balances (February through June 2016)
· We would like to understand how the misclassification between the demand
account and the fund balance that was $12.4M by June 30, 2016 could go
undetected for 5 months.
o We view this as serious for a number of reasons:
§ If it was due to a lack of timely account reconciliations, the
foundation of any system of internal control, this represents a
serious breakdown in the Town’s system of internal control
§ If the money was sitting in a non-interest bearing demand account,
the error resulted in a loss of investment return
§ Although the Town missed it, why didn’t the financial institution or
more importantly, the investment manager catch the error?
§ Does the independent auditor feel he will need to disclose this as a
“material inadequacy in internal controls”?
§ What changes in process and oversite are to be implemented to
preclude similar future errors?
· Agenda Item 3: Quarterly Budget Performance & Operating Report
o The following questions relate to the “box” in the Executive Summary that
provides the detail of the General Fund Reserves as of June 30, 2016 in
accordance with GASB #54
§ Both the Almond Grove Reserve and the CalPERS Reserve were
established by TC resolutions, yet the former is reported as
Committed and the latter is presented as Assigned. Why are they
reported differently?
§ Where is the reserve for Compensated Absences ($1,692K after
being reduced by $589K to fund Almond Grove) and Vasona Land
Sale ($411K) per the Oct 28, 2015 Council Resolution?
§ Why is there not a reserve for post-retirement medical when this
was recorded $400,000 as an assigned general fund reserve as of
June 30, 2015. Has there been a change in spending intent?
o How do the reported Q1 ‘16/’17 amounts reflect the unresolved employee
wage negotiations? If an estimate is not provided, will the numbers be
restated at a later date?
o Page 3 of the Executive Summary, next to last paragraph before the US
Economic Outlook indicates that $1.4 of the $3.7M Capital Improvement
reserve is already committed for capital projects. What are the capital
projects?
Staff Responses to Questions Posed in Public Comments
ATTACHMENT 3
Question: Where is the additional $300,000 to be set aside in the “CalPERS Reserve” per Town
Council authorization?
Answer: The General Fund Reserves Table on page 2 of the Budget Performance Report shows
$2.8 M in the CalPERS Reserve, inclusive of the $300,000 identified as the base funding for the
Reserve.
Question: Why is there not a reserve for post-retirement medical when this was recorded
$400,000 as an assigned general fund reserve as of June 30, 2015. Has there been a change in
spending intent?
Answer: The Post-Retirement Medical Reserve was identified and approved by Town Council as
one of the funding sources for establishing the Almond Grove Reserve. In addition, the Town has
a Post-Retirement Medical Trust that is earning interest to cover future post -retirement medical
cost obligations.
Question: Page 3 of the Executive Summary, next to last paragraph before the US Economic
Outlook indicates that $1.4 of the $3.7M Capital Improvement reserve is already committed for
capital projects. What are the capital projects?
Answer: $1 million of the $1.4 million will provide additional funding for the Almond Grove Street
Reconstruction Project. The other $0.4 million is the regular transfer to the Town’s GFAR fund
(capital projects fund) to provide annual funding for Street Reconstruction and other capital
projects per the Town’s adopted FY 2016/17 Capital Improvement Plan.
Question: Why is the Almond Grove Reserve so much less than the $12.2M adopted at the
October 28, 2015 Council Meeting? Has the Town already spent $3.7M?
Answer: The concrete pavement of all ten Almond Grove streets is estimated to cost $16,741,707
based on the February 16, 2016 report to Town Council. The Council established the Almond
Grove Reserve by resolution at its November 3, 2015 meeting in the amount of $12,155,973. The
$12,155,973 reserve balance includes the existing project balance of $3,696,000 and the
additional amount of $8,459,973 from different funding sources. Town Council authorized the
Town Manager to award a contract to Vanguard Construction in the amount not to exceed
$2,716,077 for the construction of the first two streets. All funding not expended from the current
project balance of $3,696,000 on the first two streets will provide funding for the next eight
streets.
Question: Both the Almond Grove Reserve and the CalPERS Reserve were established by Town
Council resolutions, yet the former is reported as Committed and the latter is presented as
Assigned. Why are they reported differently?
Answer: The Almond Grove Reserve Resolution set the amount to $12.2 million ($3.7 million
existing project balance and $8.5 million additional funding) while the CalPERS Reserve Resolution
only provided guidance to establish a CalPERS Reserve of up to $2.5 million funded from available
2
FY 2014/15 year end savings with an additional annual payment of $300,000 if available at year -
end FY 2015/16..No Council action was taken on the exact dollar amount to fund the CalPERS
Reserve so staff categorized this Reserve as assigned to show the intended use of the funding for
that purpose.
Question: In the 6/30/16 General Fund balance, where is the reserve for Compensated Absences
($1,692K after being reduced by $589K to fund Almond Grove) and Vasona Land Sale ($411K) per
the Oct 28, 2015 Council Resolution?
Answer: The Compensated Absences balance is accounted for separately in its own fund and is
not part of the budgeted General Fund so it is not presented in this budget report. However, the
Compensated Absences fund balance will be added to the General Fund for the Comprehensive
Annual Financial Report (CAFR) reporting only as “Assigned for Compensated Absences.”
The Vasona Land Reserve was established when the Town sold property in Vasona Park to the
County of Santa Clara. Upon sale of the property, the proceeds were set aside for establishing the
University Sports Park. After the University Sports Park project was completed and fully funded,
most of the remaining Vasona Land Reserve ($411K) was transferred to GFAR (capital project
fund).
Question: How do the reported Q1 FY2016/17 amounts reflect the unresolved employee wage
negotiations? If an estimate is not provided, will the numbers be restated at a later date?
Answer: Two out of the Town’s three bargaining units are currently negotiating their contracts.
The AFSCME contract was approved by the Council on November 15, 2016 and is not included in
this first quarter report. The Mid-Year Budget Performance Review will include all the approved
results of Town negotiations.
Question: Since the fiscal FY 2015/16 audit has not been completed the reported numbers are
unaudited, are there any remaining open audit issues at this point and if so, what are they?
When do you expect the FY 2015/16 numbers to be finalized?
Answer: The Town’s independent, third party auditor has not informed Town staff of any open
audit issues. No data on revenues and expenditures are final until the Town has completed its
annual comprehensive audit and finalized its CAFR, which is anticipated to be reviewed by the
Town Council Finance Committee in January 2017.
Question: What do you see as the area of greatest financial risks for the remainder of fiscal FY
16/17?
Answer: As discussed in the Staff and Budget Performance Reports, the general Sales Tax revenue
is declining. Revenues related to development activities are staying relatively flat. Staff will
address concerns regarding unfunded pension and other post-employment benefits liabilities and
will discuss this issue in more depth in the coming months with Town Council.