CC 2018-01-23_12a 10 Year Fiscal Forecast
MEMORANDUM
TO: CITY COUNCIL
FROM: JIM BERGMAN, CITY MANAGER
DEBBIE MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES
SUBJECT: CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
DATE: JANUARY 23, 2018
SUMMARY OF ACTION:
Review and discuss a 10-Year forecast of revenue and expenditures for the General
Fund.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
There is no direct financial impact of the fiscal forecast other than the staff time required
to prepare it, however based on the forecast, significant financial impacts are projected
in future years.
RECOMMENDATION:
It is recommended the City Council receive and file the updated General Fund 10-Year
Fiscal Forecast.
BACKGROUND:
The General Fund is the City’s largest financial account and is used to collect revenues
that support the majority of services commonly associated with local government
including police, fire, public works, and parks and recreation. One of the first steps in the
City’s budget process is the preparation of a 10-year forecast of anticipated revenues
and expenditures for this fund. The forecast gives a long-term perspective of a likely
financial future of the General Fund based upon known and estimated economic
variables. The forecast is intended to provide an indication of capacity to increase or
decrease services and a robust discussion will help the community, the City Council,
and staff prioritize public services during the creation of the upcoming City budget.
Item 12.a. - Page 1
CITY COUNCIL
CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
JANUARY 23, 2018
PAGE 2
ANALYSIS OF ISSUES:
Caveats
How accurately we are able to predict revenue and expenditures will ultimately impact
the quality of decisions made about the types and levels of services provided by the
City. For this reason, the forecast is frequently updated and is informed by experts in
various economic and financial areas and then ultimately accepted or modified through
a robust public discussion. It is important to understand that the forecast is based on
many assumptions and necessarily requires a certain amount of speculation. Some
assumptions are easier to estimate due to previous actions by the City such as labor
negotiations agreeing to specified cost of living adjustments for a set period of time.
Other assumptions are more difficult or impossible to accurately predict such as when,
how intense, and how long lasting the next economic downturn will be.
It should be noted that there are factors that could impact the financial condition of the
City in the coming decade which are not addressed or are possibly underestimated in
the forecast because there are too many unknown conditions surrounding them at this
time. Some of these include: impacts to retirement costs if CalPERS makes additional
changes to their actuarial assumptions such as discount rate or length of amortization,
rising health insurance costs, increasing Workers’ Compensation insurance costs,
participation and ultimate cost of the County animal services facility, impacts from the
closure of the Diablo power plant and any potential funding from PG&E to offset
economic losses, and increases in liability insurance costs.
Key Points
This year’s forecast indicates:
A continuing trend of expenditures being greater than revenues with the deficit
increasing over time.
The gap between expenditures and revenues is $912,000 in the first year of the
forecast, growing to $3.43 million in year 10.
If status quo spending continues, reserves on hand will decrease to the minimum
“15% of expenditures” policy level in 3 years.
If status quo spending continues, the City’s reserves will reach zero in 5 years.
Item 12.a. - Page 2
CITY COUNCIL
CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
JANUARY 23, 2018
PAGE 3
Forecast General Fund Revenue vs Expenditure Gap and Fund Balance
Figure 1: Note - Parentheses indicate projected revenue/expenditure gap.
Notable Expenditure Increases
Overall, total expenditures are forecast to increase annually at an average rate of 2.83
percent. The two expenditures highlighted below have average annual increases
greater than 4 percent and also result in increases greater than $1 million:
Requested Increase in Five Cities Fire Authority Allocation (62% Increase
over adopted FY 2017-18 Budget) - As discussed with the City Council on
January 9, 2018, the Five Cities Fire Authority (FCFA) believes that the current
Reserve Firefighter model is unsustainable and additional funds will be needed
from the partner agencies in order to provide stable emergency services to our
community. These costs are expected to increase over the next five years as a
phased transition is implemented to replace Reserve Firefighters with full-time
Firefighters. The forecast assumes that over the 10-year period, the City’s cost
for FCFA will increase from the current $2.2 million to $3.3 million. A thorough
review of the request based on the benchmark cost of operating an in house fire
service as well as an analysis of other service alternatives will be included in the
future budget process.
Item 12.a. - Page 3
CITY COUNCIL
CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
JANUARY 23, 2018
PAGE 4
CalPERS Full-Time Pension Costs (52% Increase over adopted FY 2017-18
Budget) - Pension costs are expected to significantly rise as recent decisions by
the CalPERS board to reduce the assumed rate of return (discount rate) on
investments is lowered to 7%. The reduction of the discount rate will be phased
by CalPERS in an attempt to lessen financial impacts to participants, with full
implementation over 5 years. In addition to the change in discount rate, the City
continues to work with CalPERS regarding the interpretation and implementation
of exclusion language in the City’s contract with CalPERS. The forecast assumes
that over the 10-year period, the City’s cost for CalPERS will increase from the
current $2.3 million to $3.5 million. It should be noted that this issue is not
isolated to the City of Arroyo Grande but all Cities will be facing increased
CalPERS costs in varying amounts. The table below presents increased
CalPERS costs to all San Luis Obispo County cities from 2018 to 2025, a slightly
shorter timeframe than the 10-year forecast period.
Revenue Trends
The forecast indicates a modest overall revenue growth averaging 1.53 percent per
year. However, the model does incorporate a downturn event in years 3 through 6. This
downturn event is best seen in its effects on sales tax revenue which initially climbs,
decreases, levels out, and then increases but never returning to beginning FY 2017-18
levels. An alternative forecast was developed that did not include a downturn event and
the outcome was very similar to this forecast in that the revenue/expenditure gap was
still present and the time to expend all reserves was extended out only one additional
year.
Conclusion
Previous and current forecasts indicate a long-term trend of deficit spending which can
only be sustained for a finite period of time. Activities that can reverse this trend and
create a situation of surplus spending are basic - either reduce expenditures, increase
revenues, or a combination of the two. A list of potential options for future consideration
during the budget process are:
Projected Increase in CalPERS Contributions 2018 to 2025
Pismo Beach 34% 700,000$
Arroyo Grande 34% 900,000$
Paso Robles 65% 2,800,000$
Morro Bay 66% 1,500,000$
San Luis Obispo 76% 9,600,000$
Atascadero 78% 4,400,000$
Grover Beach 89% 1,000,000$
Item 12.a. - Page 4
CITY COUNCIL
CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
JANUARY 23, 2018
PAGE 5
Efforts to Reduce Expenditures Efforts to Increase Revenue
Staff reductions associated with
curtailed services
Economic development activities
that seek new development on
vacant and underutilized properties
Labor concessions related to
salaries and benefits
Raise fees for services
Reduction of payroll obligations
through retirement incentives
Raise taxes such as sales and use
taxes, Transient Occupancy Tax,
Business License Tax
Prefunding efforts related to
pension or retiree health benefits
Community fund raising
Transferring maintenance
responsibilities of public rights-of-
way to adjacent property owners
Sale of City owned property
Contracting services to third parties
Increase operational efficiencies
through process improvement or
technology
ALTERNATIVES:
1. Receive and file the updated General Fund 10-Year Fiscal Forecast;
2. Direct staff to engage an independent consultant to prepare a fiscal forecast. This is
not recommended as it would be an unbudgeted expense and is unlikely to result in
a significantly different outcome.
ADVANTAGES:
Receiving the 10-Year Fiscal Forecast will assist in informed discussions between the
community, City Council and staff about budgetary priorities as the City develops the
2018-20 Biennial Budget.
DISADVANTAGES:
There are no disadvantages.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
Item 12.a. - Page 5
CITY COUNCIL
CONSIDERATION OF GENERAL FUND 10-YEAR FISCAL FORECAST
JANUARY 23, 2018
PAGE 6
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted at City Hall and on the City’s website in accordance with
Government Code Section 54954.2.
Attachments:
1. 10 Year General Fund Fiscal Forecast
Item 12.a. - Page 6
General Fund Ten Year Financial Forecast
(Minimum 15% Fund Balance Policy/20% Fund Balance Goal)
Budget
In Thousands 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
REVENUES & OTHER SOURCES
Sales Tax - General 3,778$ 3,854$ 3,892$ 3,775$ 3,587$ 3,407$ 3,407$ 3,441$ 3,476$ 3,528$ 3,598$
Sales Tax - Proposition 172 145 148 149 145 138 131 131 132 133 135 138
Property Tax 4,819 5,026 5,237 5,394 5,448 5,285 5,285 5,338 5,391 5,472 5,554
Property Tax in lieu of VLF 1,550 1,617 1,685 1,735 1,752 1,700 1,700 1,717 1,734 1,760 1,786
Transient Occupancy Tax 1,030 1,061 1,093 1,109 1,109 1,109 1,109 1,109 1,142 1,177 1,212
Transient Occupancy Tax - Village Hotel 100 135 175 175 175 175 175 180 186 191
Business Licenses 94 96 99 101 104 107 110 114 117 121 124
Franchise Fees 612 624 637 649 662 676 689 703 717 731 746
Real Property Transfer Tax 103 106 108 111 114 117 121 125 128 132 136
Aid From Other Governments
Other Subventions & Grants 128 131 133 136 139 141 144 147 150 153 156
Service Charges
Recreation Fees 685 702 720 738 758 780 804 828 853 879 906
Permits & Licenses 403 413 423 434 446 459 473 487 502 517 533
Community Development Charges 259 264 269 275 280 286 292 298 303 310 316
Other Service Charges 207 211 215 220 224 229 233 238 243 247 252
Other Revenues
Fines & Forfeitures 43 44 45 46 47 47 48 49 50 51 52
Use of Money & Property 369 376 384 392 399 407 416 424 432 441 450
Other Revenues 20 21 21 22 22 23 23 24 25 26 26
Transfers
Transfer from Local Sales Tax Fund 344 290 297 305 312 320 328 335 342 349 356
Personnel, Cost & Operating Transfers 2,313 2,371 2,430 2,491 2,553 2,617 2,682 2,749 2,818 2,889 2,961
Total Revenues 16,902$ 17,454$ 17,973$ 18,253$ 18,269$ 18,017$ 18,171$ 18,433$ 18,738$ 19,103$ 19,494$
TEN YEAR FINANCIAL FORECAST
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ATTACHMENT 1
Item 12.a. - Page 7
General Fund Ten Year Financial Forecast
Budget
In Thousands 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
EXPENDITURES & OTHER USES
Salary & Benefits 11,083$ 11,551$ 11,557$ 12,223$ 12,634$ 12,677$ 12,843$ 13,007$ 13,358$ 13,729$ 14,110$
PERSable compensation 5,753 5,755 5,870 6,007 6,027 6,045 6,064 6,082 6,221 6,363 6,507
PERS Costs 2,296 2,506 2,284 2,683 3,010 2,950 3,031 3,141 3,243 3,359 3,479
Part Time/non-PERSable comp 1,174 1,256 1,293 1,339 1,379 1,413 1,441 1,456 1,500 1,545 1,591
PT PERS impacts 103 124 145 122 130 134 138 142 147 151
Insurance (including Workers Comp)1,408 1,443 1,486 1,539 1,585 1,624 1,657 1,673 1,724 1,775 1,829
Medicare, FICA, other 452 489 499 511 512 514 515 517 529 541 553
Pre-fund Retiree Medical Costs 235 235 235 235 235 235 235 235 235 235 235
Operating Programs 5,792 6,086 6,619 7,017 7,183 7,291 7,401 7,475 7,624 7,776 7,932
FCFA contribution 2,062 2,244 2,662 2,941 3,026 3,071 3,117 3,149 3,212 3,276 3,341
All other operating programs 3,730 3,842 3,957 4,076 4,157 4,220 4,283 4,326 4,412 4,501 4,591
Debt Service 246 309 255 255 126 52 52 52 52 40 40
Minor Capital Outlay 124 60 65 65 75 75 75 75 75 75 75
Capital Improvement Projects - 20 30 30 40 40 50 50 50 50 50
Vehicle Replacements - 55 55 190 270 280 290 300 310 320
Technology Replacements 100 100 110 110 120 120 130 140 150 160
Transfers Out 5 5 5 5 5 5 5 5 5 5 5
Total Expenditures 17,485$ 18,366$ 18,921$ 19,995$ 20,599$ 20,765$ 21,061$ 21,318$ 21,834$ 22,366$ 22,922$
Revenues Over (Under) Expend.(583)$ (912)$ (949)$ (1,741)$ (2,330)$ (2,748)$ (2,889)$ (2,885)$ (3,096)$ (3,262)$ (3,427)$
428 447 460 389 - - - - 424 435 446
AVAILABLE FUND BALANCE
START OF YEAR 6,933$ 6,778$ 6,313$ 5,825$ 4,473$ 2,143$ (605)$ (3,494)$ (6,379)$ (9,051)$ (11,878)$
Reserve for carryover
END OF YEAR 6,778 6,313 5,825 4,473 2,143 (605) (3,494) (6,379) (9,051) (11,878) (14,860)
Fund Balance Goal-20% Expend 3,497$ 3,673$ 3,784$ 3,999$ 4,120$ 4,153$ 4,212$ 4,264$ 4,367$ 4,473$ 4,584$
Ending Fund Balance %39%34%31%22%10%-3%-17%-30%-41%-53%-65%
Unspent appropriations (incr. fund bal)
TEN YEAR FINANCIAL FORECAST
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General Fund Ten Year Financial Forecast
PROJECTION FACTORS 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
DEMOGRAPHICS
Population 0.5%0.5%0.6%0.6%1.0%1.0%1.0%1.0%1.0%1.0%
Housing Units 1.0%1.0%1.0%1.0%1.0%1.0%1.0%1.0%1.0%1.0%
Inflation 2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%
Compound Pop & Inflation 2.5%2.5%2.6%2.6%3.0%3.0%3.0%3.0%3.0%3.0%
KEY REVENUES
Sales Tax 2.0%1.0%-3.0%-5.0%-5.0%0.0%1.0%1.0%1.5%2.0%
Property Tax 4.3%4.2%3.0%1.0%-3.0%0.0%1.0%1.0%1.5%1.5%
TOT 3.0%3.0%1.5%0.0%0.0%0.0%0.0%3.0%3.0%3.0%
Business License/Tax 2017-18 Projection Plus Compound Population and Inflation
Franchise Fees 2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%
Property Tax in lieu of VLF 4.3%4.2%3.0%1.0%-3.0%0.0%1.0%1.0%1.5%1.5%
Development Review Fees 2017-18 Projection Plus Compound Population and Inflation
Recreation Fees 2017-18 Projection Plus Compound Population and Inflation
EXPENDITURES
Salary 2.0%2.0%2.0%0.0%0.0%0.0%0.0%2.0%2.0%2.0%
PERS Benefits 9.1%-8.8%17.5%12.2%-2.0%2.8%3.6%3.2%3.6%3.6%
Non-PERS Benefits 2.5%3.0%3.5%3.0%2.5%2.0%1.0%3.0%3.0%3.0%
Operating Programs 3.0%3.0%3.0%2.0%1.5%1.5%1.0%2.0%2.0%2.0%
Debt Service Based on Lease Purchase Contracts for Vehicle Replacements
TEN YEAR FINANCIAL FORECAST
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Item 12.a. - Page 10