Staff Report
PREPARED BY: STEPHEN CONWAY
FINANCE DIRECTOR
Reviewed by: Town Manager, Assistant 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: 02/20/2018
ITEM NO: 09
DATE: FEBRUARY 14, 2018
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
A. RECEIVE FY 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT, INCLUDING FY 2017/18 YEAR-END PROJECTIONS;
B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE
ATTACHED SECOND QUARTER BUDGET PERFORMANCE REPORT;
C. RECEIVE THE TOWN’S FIVE-YEAR FINANCIAL PROJECTION FROM FY
2018/19 TO FY 2022/23.
RECOMMENDATION:
Staff recommends that the Town Council:
A. Receive the Fiscal Year (FY) 2017/18 Mid-Year Budget Performance and Status
Report, including FY 2017/18 year-end projections;
B. Authorize budget adjustments as recommended in the attached second quarter
budget performance report;
C. Receive the Town’s five-year financial projection from FY 2018/19 to FY 2022/23.
EXECUTIVE SUMMARY:
The purpose of this report is to provide the Town Council with a status of the adopted FY
2017/18 Operating Budget at the mid-year point, including a brief discussion of the Town’s
current year General Fund Reserve status and proposed mid-year adjustments. An update to
the Town’s five-year financial projections (FY 2018/19 – FY 2022/23) is provided to give context
for the FY 2018/19 budget development process.
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SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
DATE: FEBRUARY 14, 2018
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BACKGROUND:
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. The report provides analysis and recommendations
related to the current year’s adopted budget revenues and expenditures and the projected
financial condition of all Town funds.
DISCUSSION:
The attached Mid-Year Budget Report (Attachment 1) covers the first six months of the fiscal
year beginning July 1, 2017 and ending December 31, 2017. The report presents analysis and
recommendations related to the current year’s adopted budget revenues and expenditures and
the projected financial condition of all Town funds.
General Fund Projected Year-End Balances June 30, 2018
Current fiscal year-end projections for FY 2017/18 reflect an anticipated $0.3 million surplus of
operating revenues over expenditures. As discussed in Attachment 1, revenues are tracking
higher than budgeted and actual expenses are trending lower than budgeted.
Operating Revenue Trends and Proposed Mid-Year Adjustments
The current forecast expects a substantial increase in property tax, motor vehicle in lieu,
transient occupancy tax (TOT), franchise fees, and business license tax due to the continued
surge in the local economy as well as tourism within the Bay Area. Sales tax revenues are
continuing to decline due to the current Netflix business model and the impact of online retail
sales. Revenues such as licenses and permits, and fees for services are all trending favorably, a
strong indication that the economy continues to rebound. Specific revenue adjustments are
shown beginning on page 13 of Attachment 1.
Operating Expenditure Trends and Proposed Mid-Year Adjustments
General Fund expenditure totals for the second quarter are trending in accordance with
forecasts, with total operational expenditures at the end of the second quarter at about 46% of
the adopted budget. With six months of data now available, staff can better predict the next
six months of expenditure trends, although unexpected costs can occur. Should any budget
adjustments be necessary to balance operating revenue and expenditures, staff will advise the
Council accordingly. Expenditure additions include increased gas utility expenses, mandatory
well testing expenses, recruitment and training expenses, and legal services expenses (see
Attachment 1).
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SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
DATE: FEBRUARY 14, 2018
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DISCUSSION (cont’d):
STATUS OF GENERAL FUND RESERVES
General Fund Reserves, exclusive of the Compensated Absences Fund, closed on June 30, 2017
with a balance of approximately $2.7 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 the Town
Council General Fund Reserve Policy, the combined total of these two reserves is 25% of t he
General Fund operating expenditures.
The CalPERS/OPEB (California Public Employees’ Retirement System/Other Post Employment
Benefit) Reserve was established in June 2016 in an initial amount of $300,000 to mitigate the
Town’s unfunded pension liabilities. According to the Council action, an annual payment of
$300,000 is deposited from available year-end savings. In addition Town Council can appropriate
any additional funding to this reserve by a formal Council action. Due to robust investment
earnings during the “dot com” years preceding 2001, the Town’s pension trust was determined
by CalPERS to be “superfunded”. As such, the Town was not required in those years to make
pension contributions and placed them into a General Fund deposit account dedicat ed for future
CalPERS employer pension cost. In FY 2016/17 the Town has reclassified
Committed
Budget Stabilization Reserve $4.97
Catastrophic Reserve $4.97
CalPERS Reserve $3.39
Almond Grove Reserve $1.80
Assigned
Carryforward Appropriation $0.03
Strategic Planning $2.60
Capital Improvements $8.27
Open Space $0.56
Sustainability Reserve $0.14
Total General Fund Reserves $26.73
General Fund Reserves
6/30/2017
Amount
(millions)
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SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
DATE: FEBRUARY 14, 2018
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DISCUSSION (cont’d):
$1.8 million deposit account as a prior year adjustment, increasing the General Fund Reserve
for CalPERS/OPEB.
The reserve for Capital and Special Projects, funded from annual available General Fund budget
savings, 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
$8.3 million available in Capital Improvement Reserve, $3.6 million is already committed for
capital projects in FY 2017/18. In addition, the Council set aside money the Almond Grove
Reserve to provide funding to the Almond Grove Street Rehabilitation Project.
The availability of approximately $26.7 million in committed and assigned General Fund
Reserves provides the Town with resources to manage through current and/or future fiscal
challenges and opportunities. The $2.6 million Strategic Planning balance and the savings from
the Almond Grove Reserve were incorporated into the FY 2017/18 adopted budget.
FY 2018/19 BUDGET DEVELOPMENT PROCESS
Council will provide direction on the preparation of the FY 2018/19 Operating and Capital
budgets with the Strategic Priorities item later on this same Council agenda. As mentioned in
that report, staff expects next year’s budget to be “status quo” with the continuation of the
Town’s high service levels in all Departments.
In anticipation of Council direction, staff has started budget development work, including an
update of the Five-Year Financial Forecast, identification of critical Town needs, contractual
obligations, unfunded mandates, potential adjustments to the User Fee Schedule, and other
analyses. The Proposed FY 2018/19 budget will be presented to Council in May 2018.
FIVE-YEAR FINANCIAL FORECAST UPDATE
The Town of Los Gatos produces a Five Year Financial Forecast and updates it regularly to
evaluate the Town’s fiscal condition and to guide policy, programmatic planning, and budget
decisions. Development of a financial forecast as part of the budget development process is
identified as a best practice by the Government Financial Officers Association (GFOA).
The key assumptions used for the current forecast period (Fiscal Year 2018/19 through FY
2022/23) include:
• Conservative revenue projections with specific growth rates determined by historical
data or forecasts from external sources based on economic trends,
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SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
DATE: FEBRUARY 14, 2018
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DISCUSSION (cont’d):
• No new revenue sources,
• Status quo in program and service delivery to maintain existing service levels,
• Expenditure growth in areas with built-in escalation clauses over which the Town has no
control (including benefits, pension, and OPEB),
• No salary growth for all Town’s employees.
Account Revenue Category
2017/18
Adjusted
2017/18
Forecast
2018/19
Forecast
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
4100 Property Tax 11.4$ 11.9$ 12.3$ 12.6$ 13.0$ 13.4$ 13.8$
4110 VLF Backfill Property Tax 3.3 3.4 3.5 3.5 3.6 3.6 3.6
4200 Sales & Use Tax 8.0 7.7 7.7 7.8 8.0 8.2 8.4
4250 Franchise Fees 2.3 2.3 2.4 2.5 2.5 2.6 2.7
4251 Transient Occupancy Tax 2.1 2.3 2.3 2.3 2.3 2.3 2.4
4400 Business License Tax 1.6 1.7 1.7 1.7 1.7 1.7 1.7
4400 Licenses & Permits 2.9 2.9 3.0 3.1 3.2 3.3 3.4
4500 Intergovernmental 0.7 0.7 0.7 0.7 0.7 0.7 0.7
4600 Charge for Services 2.5 2.6 2.6 2.6 2.7 2.8 2.9
4700 Fines & Forfeitures 0.7 0.7 0.7 0.7 0.8 0.8 0.8
4800 Interest 0.3 0.3 0.3 0.3 0.3 0.3 0.3
4850 Other Sources 3.0 2.8 2.8 2.8 2.9 2.9 2.9
4900 Fund Transfers In 0.6 0.6 0.6 0.6 0.6 0.6 0.6
TOTAL REVENUES 39.4$ 39.9$ 40.6$ 41.2$ 42.3$ 43.2$ 44.2$
Use of Reserves Capital Reserve 0.4 0.4 0.4 0.4 0.4 0.4 0.4
Use of CalPERS/OPEB Reserve
Use of Budget Strategy/Almond Grove Reserve 3.1 3.1
42.9$ 43.4$ 41.0$ 41.6$ 42.7$ 43.6$ 44.6$
Account Expenditure Category
2017/18
Adjusted
2017/18
Forecast
2018/19
Forecast
2019/20
Forecast
2020/21
Forecast
2021/22
Forecast
2022/23
Forecast
5110 Salary 16.6$ 16.5$ 16.3$ 16.4$ 16.5$ 16.6$ 16.6$
5200 Benefits 8.9 9.0 9.7 10.4 10.9 11.4 11.7
6000 Operating Expenditures 6.1 6.3 6.1 6.1 6.3 6.5 6.7
7200 Grants & Awards 0.2 0.2 0.2 0.2 0.2 0.2 0.2
7400 Utilities 0.5 0.5 0.6 0.6 0.6 0.6 0.6
8060 Internal Service Charges 4.0 4.0 4.1 4.2 4.3 4.5 4.6
8900 Debt Service 1.9 1.9 1.9 1.9 1.9 1.9 1.9
TOTAL EXPENDITURES 38.2$ 38.4$ 38.9$ 39.8$ 40.7$ 41.7$ 42.3$
9900 Capital Transfers Out to GFAR 2.5 2.5 0.4 0.4 0.4 0.4 0.4
9900
Budget Strategy Reserve to Internal Service
Funds 0.6 0.6
9900 GASB 45 Retiree Medical Actuarial 1.6 1.6 1.6 1.6 1.7 1.7 1.8
TOTAL BUDGETED EXPENDITURES 42.9$ 43.1$ 40.9$ 41.8$ 42.8$ 43.8$ 44.5$
42.9$ 43.1$ 40.9$ 41.8$ 42.8$ 43.8$ 44.5$
NET REVENUES LESS EXPENDITURES -$ 0.3$ 0.1$ (0.2)$ (0.1)$ (0.2)$ 0.1$
Town of Los Gatos General Fund
TOTAL REVENUES & TRANSFERS
TOTAL EXPENDITURES & ALLOCATIONS
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SUBJECT: FISCAL YEAR 2017/18 MID-YEAR BUDGET PERFORMANCE AND STATUS
REPORT - SIX MONTHS ENDING DECEMBER 31, 2017
DATE: FEBRUARY 14, 2018
C:\Users\slombardo\Desktop\Council Meeting\09 Staff Report Mid-Year Budget.docx 2/16/2018 2:56 PM SLL
DISCUSSION (cont’d):
Applying the above assumptions in the preparation of the financial forecast, results in an
estimated $340,000 of additional revenues over expenditures projected at the end of the
current FY 2017/18. From FY 2018/19 to FY 2021/22, the forecast show revenue shortfalls due
to the incorporation of the increased employer pension costs due to CalPERS discount rate
change in December 2016.
CONCLUSION:
The financial results from the prior fiscal year, coupled with the FY 2017/18 second quarter data,
confirm that the second quarter financial results are stable. Staff is cautious as the five-year
financial forecast projects shortfalls beginning in FY 2018/19. The shortfalls are due to the effect
of implementing the anticipated increased employer pension costs due to CalPERS discount rate
change in December 2016. Staff is actively engaged in the 2018/19 budget process with the
primary focus of ensuring that the available Town resources are allocated to meet the priority
service needs of the community.
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
Attachment:
1. Budget Performance Report for the Six Months Ending December 31, 2018.