CC 2021-02-23_11a General Fund Five-Year Financial Outlook
MEMORANDUM
TO: CITY COUNCIL
FROM: MICHAEL STEVENS, ADMINISTRATIVE SERVICES DIRECTOR
SUBJECT: CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL
OUTLOOK
DATE: FEBRUARY 23, 2021
SUMMARY OF ACTION:
Receive and discuss General Fund revenue and expenditure assumptions included within
the Five-Year Financial Outlook Report (Outlook).
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
There is no direct impact of the Outlook other than the staff time required to prepare it.
However, the Outlook provides a forecast of the financial impact of revenues and
expenditures for the current fiscal year and over the next five years.
RECOMMENDATION:
It is recommended the City Council receive, consider, and file the updated Five-Year
Financial Outlook Report.
BACKGROUND:
The General Fund is the City’s largest financial fund and is used to collect revenues and
track expenditures that support the majority of services commonly associated with local
government including police, fire, public works, community development, parks and
recreation. One of the first steps in the City’s budget process is the preparation of the
Five-Year Outlook, which forecasts anticipated revenue and expenditures specifically for
the General Fund. The Outlook gives a long-term perspective of the likely financial future
of the General Fund based upon known and estimated economic variables. The Outlook
is intended to be used as a planning tool to facilitate a discussion and help the community,
City Council, and staff prioritize public services during the creation of the City’s upcoming
FY 2021-23 Biennial Budget. The Five-Year Outlook Report also provides a projection for
the current fiscal year which can be used as a baseline for future estimates.
ANALYSIS OF ISSUES:
Caveats
The Outlook presents the City staff’s best estimate for the current and next five fiscal
years based on facts and factors currently known to the City. These estimates may differ
materially from the actual results. The accuracy of the revenue and expenditure
Item 11.a. - Page 1
CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 2
predictions will ultimately impact the decisions made about the types and level of services
provided by the City. For this reason, the Outlook is updated annually using information
supplied by experts in various economic and financial areas and then accepted or
modified through a robust public discussion. It is important to know that the forecast is
based on many assumptions and requires a certain amount of speculation. Some
assumptions are easier to estimate due to previous actions taken by the City such as
multi-year contracts or labor agreements which specify cost of living adjustments for a set
period of time. Other assumptions are more difficult or impossible to predict such as when,
how intense, and how long lasting the next economic downturn will be. An example of this
unpredictability is the current COVID-19 pandemic and its financial impact on the City.
It should be noted that there are factors that could impact the financial condition of the
City in the coming five years that are not addressed or are underestimated in the Outlook
because there are too many unknown conditions surrounding them at this time. Some of
these include: financial rebound from the COVID-19 pandemic, impacts to retirement
costs if CalPERS makes further changes to actuarial assumptions such as reducing the
discount rate, extent of rising health insurance costs, increasing Workers’ Compensation
insurance costs, and impacts on the community from the closure of the Diablo power
plant.
Key Points
Key points of the Outlook include:
Outlook only focuses on the General Fund.
No enhancements to current service levels or increases in staffing (Status Quo).
General economic recovery from the COVID-19 pandemic by Summer of 2021.
Does not anticipate any additional State and Federal Relief in response to the
COVID-19 pandemic.
Current year Projection favorable due to favorable revenue estimates.
General Fund surplus forecasted over next three years and a deficit in the final two
Outlook fiscal years.
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CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 3
Notable Revenue Increases
The current year Projection:
The current FY 2020-21 Projection reflects a $904,000 or 5% increase in revenue over
the Adopted Budget. The majority of that increase is a favorable increase in property tax
and sales tax. Property tax estimates for the current 2020-21 fiscal year were provided
by the County Auditor-Controller’s Office and the sales tax estimate was provided by the
City’s sales tax consultant. Most of the current year’s projected revenue growth is based
on a sooner than anticipated economic recovery from the COVID-19 pandemic. Due to
the pandemic, the City reduced General Fund revenues within the FY 2020-21 Adopted
Budget by $1.1 million, or 6% versus the prior year’s budget. The reduced revenue in the
Adopted Budget was attributed to decreases in budgeted sales tax, transient occupancy
tax (TOT), and recreation services’ revenue.
The Five-Year Outlook:
In first two years of the Outlook period (FY 2021-22 & FY 2022-23), revenue is projected
to increase $627,000 and $445,000 which equates to a 3.4% and 2.3% increase
respectively. The Outlook forecasts the continuation of revenue growth and economic
recovery from the pandemic by FY 2021-22. The recovery is based on the vaccine being
distributed to a significant number of people by summer/fall of 2021. Revenue growth in
the remaining three years of the Outlook is projected at a modest 1.7% increase per year.
The attached Five-Year Financial Outlook Report provides more detail on significant
FY 19‐20
Act
FY 20‐21
Proj
FY 21‐22
Otlk
FY 22‐23
Otlk
FY 23‐24
Otlk
FY 24‐25
Otlk
FY 25‐26
Otlk
Property Tax 7,408 7,662 7,939 8,098 8,260 8,425 8,593
Sales Tax 4,171 4,205 4,373 4,543 4,657 4,773 4,892
TOT 927 850 927 1,001 1,021 1,041 1,062
Franchise Fees 728 690 697 704 711 718 725
Licenses & Permits 690 561 573 584 596 608 620
Service Revenue 1,484 1,111 1,133 1,156 1,179 1,203 1,227
‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
REVENUE (IN THOUSANDS)Key Revenue
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CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 4
revenue accounts including economic trends and a scenario analysis to help in evaluating
potential variability to the revenue projections.
Notable Expenditure Increases
Personnel costs represent 63% of the General Fund expenditures based on the FY 2020-
21 Adopted Budget. Included in total personnel costs are base salaries and associated
payroll taxes, employee benefits, workers’ compensation, and the California Public
Employees’ Retirement System (CalPERS) unfunded accrued liability (UAL) cost. The
City’s on-going retirement cost, not including the UAL portion, is built into the salary and
taxes category.
Contracts for outside services and professional services are considered non-personnel
costs and make up roughly 10% of General Fund expenditures. Also, the portion of the
City’s fire and emergency services provided by the Five City Fire Authority (FCFA) and
paid using General Funds represents 11% of total expenditures. All other expenditures
not specifically discussed are combined and equate to approximately 16% of General
Fund expenditures.
FY 19‐20
Act
FY 20‐21
Proj
FY 21‐22
Otlk
FY 22‐23
Otlk
FY 23‐24
Otlk
FY 24‐25
Otlk
FY 25‐26
Otlk
Salaries & Taxes 6,754 7,912 8,274 8,439 8,608 8,780 8,956
Employee Benefits 1,025 1,248 1,304 1,364 1,426 1,492 1,560
Workers' Compensation 475 514 555 599 647 699 755
CalPERS UAL 3,234 1,394 1,461 1,274 1,358 1,447 1,489
Fire Services (FCFA)2,052 2,052 2,052 2,175 2,284 2,352 2,423
Contractual Services 1,494 1,794 1,830 1,866 1,904 1,942 1,981
‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
EXPENDITURES (IN THOUSANDS)Key Expenditures
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CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 5
The current year Projection:
The current year FY 2020-21 Projection is expected to be on target with the FY 2020-21
Adopted Budget.
The Five-Year Outlook:
Total expenditures over the five-year Outlook period are expected to grow between 3%
to 4% annually. The attached Five-Year Financial Outlook Report provides more detail
on significant expenditure accounts. The report also includes a scenario analysis for
salaries and payroll taxes and the CalPERS UAL to help in evaluating potential variability
to these significant expenditures. Key points of the Outlook are:
Salaries and payroll taxes are the City’s largest expenditure and are forecasted to
grow at a modest 2% per fiscal year or $823,000 over the five-year Outlook
compared to the baseline (FY 2020-21 Projection). The 2% increase is based on
the current Consumer Price Index (CPI) using July 2020, the beginning of the fiscal
year, as the basis year.
The City’s CalPERS UAL cost represents 8% of total expenditures and is based
on estimates provided by CalPERS actuarial staff. The CalPERS UAL cost is
expected to rise between 5% to 7% over the Outlook period, however, the UAL
cost decrease in FY 2022-23 is due to CalPERS actuarial estimates and
adjustment of the various amortization bases making up the total UAL liability.
Health insurance costs is the primary component, accounting for 90%, of overall
employee benefit costs. Health insurance costs are expected to continue to rise
on an annual basis. The Outlook, which was based on the previous four-year
average of employee benefit cost increases, assumes that employee benefits will
increase year-over-year on average by 4.5% or $313,000 over the five-year
Outlook.
Like employee benefits, workers’ compensation costs are also based on the prior
four-year average increase. Workers’ compensation costs are projected to
increase 8% per year or $241,000 over the five-year Outlook.
Fire and emergency service costs provided by the Five Cities Fire Authority will not
increase through the 2021-22 fiscal year based on the recent third amendment to
the Joint Powers Agreement approved in July 2020. However, costs are expected
to increase the following two fiscal years (FY 2022-23 & FY 2023-24) by 6% and
5% respectively and then by 3% for the remaining two years of the Outlook. The
estimated increase in FCFA costs over the Outlook period is $371,000.
Contractual and professional services are expected to increase based on the 2%
CPI and will increase by $187,000 of the five-year Outlook.
Item 11.a. - Page 5
CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 6
The chart above reflects the revenue and expense lines and their impact on fund balance
available. Even though the final two years of the Outlook period (FY 2024-25 & FY 2025-
26) reflect a deficit, available fund balance remains favorable and exceeds the minimum
fund balance target of 20%, set by fiscal policy. This is based on the definition of status
quo which assumes no enhancements to current service levels or increases in staffing
levels. The table below illustrates ending fund balance by fiscal year.
As the table above reflects, fund balance exceeds the 20% target fund balance set in
fiscal policy over the next couple of years and will generate further discussion by Council
on how to prioritize public services during the development of the City’s upcoming FY
2021-23 Biennial Budget.
ALTERNATIVES:
The following alternatives are provided for the Council’s consideration:
1. Receive, consider, and file the updated General Fund 5-Year Fiscal Outlook; or
2. Provide other direction to staff.
ADVANTAGES:
Receiving the Five-Year Financial Outlook Report will assist in informed discussions
between the community, City Council, and staff about budgetary priorities as the City
develops the upcoming FY 2021-23 Biennial Budget.
‐
5,000
10,000
15,000
20,000
25,000
FY 16‐17 FY 17‐18 FY 18‐19 FY 19‐20 FY 20‐21 FY 21‐22 FY 22‐23 FY 23‐24 FY 24‐25 FY 25‐26
General Fund Revenue vs Expense and Fund Balance
Revenues Expenditures Available Fund Balance Minimum Fund Balance
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Beginning of Year 4,591 4,591 5,183 5,501 5,898 5,990 5,800
End of Year 4,279 5,183 5,501 5,898 5,990 5,800 5,358
Fund Balance % 23.8% 28.8% 29.1% 30.6% 30.1% 28.2% 25.3%
Available Fund Balance (In Thousands)
Item 11.a. - Page 6
CITY COUNCIL
CONSIDERATION OF GENERAL FUND FIVE-YEAR FINANCIAL OUTLOOK
FEBRUARY 23, 2021
PAGE 7
DISADVANTAGES:
There are no disadvantages in relation to the recommended action.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
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) Five-Year Financial Outlook Report
Item 11.a. - Page 7
CITY OF ARROYO GRANDE
Mayor Caren Ray Russom
Mayor Pro Tem Jimmy Paulding
Council Member Kristen Barneich
Council Member Keith Storton
Council Member Lan George
Five‐Year Financial Outlook Report
Prepared and Submitted by
Department of Administrative Services
ATTACHMENT 1
Item 11.a. - Page 8
Five‐Year Financial Outlook Report
2 | Page The City of Arroyo Grande
Executive Summary
The City of Arroyo Grande’s Fiscal Year (FY) 2021‐22 through FY 2025‐26 Five‐Year Financial Outlook Report
(Outlook) is a long range fiscal planning tool and will serve as the framework for the development of the upcoming
FY 2021‐22 and FY 2022‐23 General Fund Biennial Budget. In addition to the Outlook is the current fiscal year
2020‐21 Projection. The Projection, will be used as the baseline for estimating the five years represented in the
Outlook.
The purpose of the Outlook is to provide a conservative, yet realistic, point‐in‐time estimate for the fiscal capacity
of the General Fund for the next five years. This Outlook is only focused on the General Fund and does not include
non‐general funds like water and sewer. The Outlook is based on the “Status Quo.” The Status Quo is defined as
a forecast that takes current year staffing and program levels and costs them out in the future with no material
changes. A Status Quo budget would factor in inflationary increases, but assumes no increases or decreases to
staffing levels. Any adjustments that either reduce or enhance current service levels are not assumed within this
report, however, those decisions will be considered during the upcoming FY 2021‐23 Biennial Budget
Development process and will be dependent upon available resources and operational priorities.
The Outlook is a planning tool to assist in budget decisions related to General Fund resources and should not be
considered a budget. The Outlook provides the City Council, key stakeholders, and the public with information at
the start of the budget process to facilitate discussion regarding the upcoming General Fund budget. To the extent
projected expenditures exceeds estimated revenues in any given year of the Outlook, the City will address these
shortfalls through budget balancing strategies.
The following are key assumptions included in the current year Projection and Five‐Year Outlook:
Outlook only focuses on the General Fund
No enhancements to current service levels or increases in staffing (Status Quo)
General economic recovery from the COVID‐19 pandemic by Summer of 2021
Does not anticipate any additional State and Federal Relief in response to the COVID‐19 pandemic
Consumer Price Index (CPI) is based on Los Angeles area using July 2020 as the base year
The City’s overall projection for the current year FY 2020‐21 and outlook for the next five years has been
complicated by the uncertainty of the economic effects of the COVID‐19 virus. Prior to COVID‐19, the growth in
revenue had been slowly increasing year‐to‐year. The Outlook forecasts the continuation of revenue growth and
economic recovery from the pandemic by FY 2021‐22. The recovery is based on the vaccine being distributed to a
significant number of the public by summer/fall of 2021. Most General Fund revenues are anticipated to increase
during the Outlook; however, the rate of growth increases during the recovery period and flattens out in the later
years of the Outlook. The Outlook forecasts moderate increases in expenditures with some key expenditures
forecasted based on a four‐year average of prior spending or if applicable applying a Consumer Price Index (CPI)
increase.
As depicted in Table 1.1, revenues exceed expenditures starting the FY 2020‐21 Projection and continuing through
FY 2023‐24. Revenue growth is projected to level off and anticipated expenditures are increasing contributing to
an overall General Fund shortfall in the last two years of the outlook. Please note that the tables and charts
included within this report may not tie due to rounding differences.
Item 11.a. - Page 9
Five‐Year Financial Outlook Report
3 | Page The City of Arroyo Grande
In thousands
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
REVENUE & OTHER SOURCES
Taxes
Property Tax 7,240$ 7,662$ 7,939$ 8,098$ 8,260$ 8,425$ 8,593$
Sales Tax 3,750 4,205 4,373 4,543 4,657 4,773 4,892
Transient Occupancy Tax 680 850 927 1,001 1,021 1,041 1,062
Franchise Fees 690 690 697 704 711 718 725
Licenses & Permits 561 561 573 584 596 608 620
Service Charges
Community Development Services 501 501 511 521 531 542 553
Other Charges for Services 754 611 623 635 648 661 674
Other Revenue
Fines & Forfeitures 45 45 46 47 48 49 50
Use of Mo ney 479 479 479 479 479 479 479
Other Revenues 264 264 264 264 264 264 264
Transfers 2,736 2,736 2,800 2,800 2,800 2,800 2,800
Total Revenues 17,700$ 18,603$ 19,230$ 19,676$ 20,014$ 20,359$ 20,712$
5.1% 3.4% 2.3% 1.7% 1.7% 1.7%
EXPENDITURES & OTHER USES
Salary & Benefits
Salary & Wages 7,912$ 7,912$ 8,274$ 8,439$ 8,608$ 8,780$ 8,956$
Flexible benefits 1,248 1,248 1,304 1,364 1,426 1,492 1,560
Workers' Compensation 514 514 555 599 647 699 755
CalPERS Unfunded Liab 1,394 1,394 1,461 1,274 1,358 1,447 1,489
OPEB 235 235 246 257 269 281 294
Total Salary & Benefits 11,303 11,303 11,840 11,934 12,309 12,699 13,055
Services & Supplies
Contractual Services 1,794 1,794 1,830 1,866 1,904 1,942 1,981
FCFA Services 2,052 2,052 2,052 2,175 2,284 2,352 2,423
Liability Insurance 651 651 716 787 866 953 1,048
Utility Charges 526 526 536 547 558 569 581
Other Operating Expense 1,222 1,222 1,246 1,271 1,296 1,322 1,349
Total Service & Supplies 6,244 6,244 6,380 6,647 6,908 7,138 7,381
Debt Service 55 55 200 200 200 200 200
Transfers 324 324 331 337 344 351 358
Capital Purchases 86 86 161 161 161 161 161
Total Expenditures 18,012 18,012 18,912 19,279 19,922 20,549 21,154
‐
General Fund (Shortfall)/Surplus (311.97) 591.53 318.36 396.68 92.21 (190.07) (442.04)
Table 1.1 Fiscal Year 2022‐2026 Financial Outlook
Summary of Major Line Items
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Five‐Year Financial Outlook Report
4 | Page The City of Arroyo Grande
General Fund Revenues
Since the start of the pandemic in March, it was apparent that the pandemic would have a significant impact on
revenue generation. In addition, the current pandemic has resulted in historic increases in unemployment claims,
declines in consumer confidence, travel restrictions and decreases in consumer spending resulting from
temporary business closures. As a direct result of the pandemic, the City reduced its FY 2020‐21 Adopted Budget
General Fund revenue assumptions by $1.4 million or 7.7 percent versus the prior year’s budget. The current year
Projection is that revenue will continue to increase during the pandemic and outperform the assumptions built
into the Adopted Budget. This is based on the assumption that a vaccine will be effective and broadly available to
the public by the Summer/Fall of 2021. The Outlook also reflects revenue growth in the next two fiscal years of 2
– 4 percent and a leveling out of revenue growth in the final three years of 1.7 percent.
To assist in evaluating the potential variability to revenue projections, a “High” and “Low” projection has been
included for property tax, sales tax, and transient occupancy tax. It is important to note that the “High” and “Low”
projections provide a range of possibilities within the current economic parameters, and are included to provide
some context should the baseline estimate not be met.
Property Tax
Property tax is the City’s largest revenue source representing 41 percent of General Fund revenues based on the
FY 2020‐21 Adopted Budget. The primary component of property tax is derived from levying an ad valorem tax
imposed on real property (land and permanently attached improvements) and tangible personal property
(movable property). Proposition 13 (1978) limits the real property tax rate to one dollar ($1) per hundred dollars
($100) of taxable value of all real property within the city limits. The amount of this tax is based on an annually
determined assessed valuation calculated by the County Assessor’s Office. Property tax is then paid to the County
Auditor‐Controller’s Office who then allocates property tax to the City based on a statutory allocation formula
applicable to the tax rate area the underlying parcel is located within.
Also included in property tax revenue is Property Tax in Lieu of Vehicle License Fees, which is the result of the
state reducing Vehicle License Fees for cities from 2.0 percent to 0.65 percent and offsetting this loss with property
tax. A third type of property tax revenue, although relatively small compared to the other property tax discussed,
is a property transfer tax that is levied on the sale of real property. This too is included in the total amount of
property tax forecasted.
Economic Trends
The major economic drivers of property tax are home sales, home prices, and foreclosures. Property tax
assessment increases on all properties are limited to no more than 2.0 percent per year as long as the property
does not have a change in ownership or any new construction. When ownership changes or new construction is
completed, the property is reassessed at the market value, or the value of the new construction is added to the
existing assessment value. The City has experienced growth in property sales and an increase in home prices
recently. Home prices continue to show growth as reflected in the City’s median home list price of $699,000
(December 2020) which increased by 6.0 percent over the prior year according to the website Realtor.com.
Contributing to the increase in housing prices is that mortgage interest rates remained at record lows fueling the
overall housing market. According to information provided by the County Assessor’s Office, the City saw an
increase in the assessed value of both secured and unsecured properties of 4.7 percent over the prior year.
Item 11.a. - Page 11
Five‐Year Financial Outlook Report
5 | Page The City of Arroyo Grande
Foreclosures have a negative effect on property values. An increase in housing foreclosures leads to an increased
supply of homes on the market and typically reduced home values for properties nearby a foreclosed property.
Local foreclosures have remained relatively low as a result of State Executive Orders regulating evictions and post‐
foreclosures evictions across the State in response to the COVID‐19 pandemic. The current federal moratorium
on foreclosures has been extended through March 31, 2021. There may be a small spike in foreclosures after the
moratorium is lifted, however, unlike the foreclosure problem during 2008 to 2010, home values have remained
high which means that troubled borrowers can escape foreclosure by selling.
Outlook
The following Table 2.1 shows the FY 2020‐21 Adopted Budget, FY 2020‐21 Projection for property tax revenue
and a five‐year Outlook for FY 2021‐22 through FY 2025‐26. The FY 2020‐21 Projection for property tax is $422,000
higher than the FY 2020‐21 Adopted Budget and will be the basis for the five‐year Outlook. The FY 2020‐21
Projection is based on recent estimates of property tax revenues provided by the County Auditor‐Controller’s
Office. Actual property tax received in FY 2019‐20, last fiscal year, was at $7.4 million which was higher than the
$7.2 million budgeted in the current FY 2020‐21 Adopted Budget, which explains the negative growth rate of 2.27
percent in the FY 2020‐21 Adopted column in Table 2.1.
The County Auditor‐Controller’s Office also provided a preliminary estimate of FY 2021‐22 property tax. This
estimate was based on an overall 4.0 percent growth in secured property tax and overall property tax increase of
3.62 percent. Using the County’s property tax estimate in FY 2021‐22 as the baseline, a 2.0 percent increase year‐
over‐year was forecasted for the remaining four years of the Outlook. Chart 2.1 graphically reflects the dollar and
percentage growth rate for estimated property tax revenue.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (2.27%)3.43% 3.62% 2.00% 2.00% 2.00% 2.00%
Projection 7,240,200 7,662,000 7,939,000 8,097,800 8,259,800 8,424,900 8,593,400
Table 2.1 Property Tax Five‐Year Outlook
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Projection 7,662,000 7,939,000 8,097,800 8,259,800 8,424,900 8,593,400
Growth Rate 3.43% 3.62% 2.00% 2.00% 2.00% 2.00%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
7,000,000
7,200,000
7,400,000
7,600,000
7,800,000
8,000,000
8,200,000
8,400,000
8,600,000
8,800,000
Chart 2.1 Property Tax Revenue Projections: Fiscal Years 2021‐2026
Projection Growth Rate
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Five‐Year Financial Outlook Report
6 | Page The City of Arroyo Grande
Scenario Analysis
In the short‐term, mortgage interest rates are expected to remain low but increase gradually over the years. In
addition, housing inventories are expected to remain low, keeping home values high. Should either of these
factors change, leading to a slowing of the housing market, property tax revenues would decrease from the
current projection. To provide some sensitivity analysis on the baseline property tax revenue estimate, both
“High” and “Low” projections were included based on a 1.0 percent increase/decrease to the property tax
baseline. Table 2.2 details the assumed growth rates for each scenario for FY 2021‐22 through FY 2025‐26.
A “High” scenario would increase property tax projections by $76,600 over the baseline in FY 2021‐22 and a
cumulative total of $1.3 million throughout the Outlook. The “Low” scenario would reduce property tax
projections by $76,600 over the baseline in FY 2021‐22 and $1.2 million over the next five years.
Sales Tax
The City’s second largest revenue source is sales tax which represents 21 percent of General Fund revenues based
on the FY 2020‐21 Adopted Budget. Sales tax is collected at the point of sale and remitted to the California
Department of Tax and Fee Administration, which allocates the tax revenue owed to the City in monthly payments.
Sales tax revenue also includes online sales from out‐of‐state businesses that meet a threshold in cumulative sales
and deliveries of goods within California. The City receives the basic local Bradley‐Burns rate of 1.0 percent of the
total City’s sales tax rate of 7.75 percent based on point of sale transactions within the City. Additionally, a half
percent (0.50%) of the total sales tax is also paid to the City and is attributed to the Local Sales Tax measure
approved in 2006. The majority of the Local Sales Tax is utilized for Capital Improvement Projects, however; a
portion of the Local Sales Tax collected is used to support public safety programs. The Local Sales Tax activity is
accounted for in a separate fund and is not included in the General Fund for forecasting purposes.
Economic Trends
Economic drivers of the City’s sales tax revenue are unemployment rates, consumer confidence, and consumer
spending. The unemployment rate within Arroyo Grande as of November 2020 was 5.5 percent, as published by
the U.S. Bureau of Labor Statistics. This is almost double the unemployment rate of 3.0 percent in February 2020,
just prior to the COVID‐19 pandemic. The sharp decline in consumer spending at the beginning of the pandemic
is attributed to state and local restrictions, including stay‐at‐home orders impacting consumer spending,
limitations on public gatherings and closures of non‐essential businesses in response to the COVID‐19 pandemic.
The national index of consumer confidence, which measures consumers’ willingness to spend, rose to 89.3 in
January 2021 from 87.1 in December 2020. However, consumer confidence is still far below pre‐pandemic levels
of 132.6 last February 2020.
FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Baseline Growth Rate 3.62% 2.00% 2.00% 2.00% 2.00%
High Growth Rate 4.62% 3.00% 3.00% 3.00% 3.00%
Low Growth Rate 2.62% 1.00% 1.00% 1.00% 1.00%
Baseline Projection 7,939,000$ 8,097,800$ 8,259,800$ 8,424,900$ 8,593,400$
High Growth Rate 8,015,600$ 8,256,100$ 8,503,800$ 8,758,800$ 9,021,600$
Low Growth Rate 7,862,400$ 7,941,000$ 8,020,500$ 8,100,600$ 8,181,600$
Table 2.2 Property Tax Five‐Year Outl ook Growth Rate Scenarios
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Five‐Year Financial Outlook Report
7 | Page The City of Arroyo Grande
Locally, certain business segments have fared better during the COVID‐19 pandemic than others while other
segments have struggled to adjust to restrictions put in place to address the COVID‐19 pandemic. For example,
retail brick and mortar stores, restaurants, hotels have seen a sharp decline in sales and subsequent sales tax
revenue during the pandemic. In particular, fuel and service stations have seen the sharpest decline in sales as gas
consumption has been significantly reduced during the pandemic due to the stay‐at‐home directive. Conversely,
online sales have seen a significant increase, which reflects the shift from brick and mortar stores to online sales.
Other sectors showing growth during the pandemic include home improvement retailers and the food market
category. Food products, in particular food markets, have seen an increase in spending as consumers are preparing
more meals at home. Also, as consumers work from home they are more inclined to perform home projects,
increasing home improvement retail sales.
Outlook
The following Table 2.3 shows the FY 2020‐21 Adopted Budget, current year Projection for General Fund sales tax
revenue and a five‐year Outlook for FY 2021‐22 through FY 2025‐26. The FY 2020‐21 Projection for sales tax is an
increase over the FY 2020‐21 Adopted Budget and will be the baseline for the Outlook projections. The FY 2020‐
21 Projection represents a $455,000 or 12 percent increase over the Adopted Budget due to revised assumptions
provided by the City’s sales tax consultant. The FY 2020‐21 Adopted Budget was based on an overall decrease of
10.5 percent versus the prior year. The latest sales tax projection for FY 2020‐21 reflects growth in categories like
autos and transportation, food and drugs, which were all estimated to decline in the Adopted Budget. In addition,
the state and county pools sales tax category, which captures on‐line sales, is projected to grow this year 14
percent or $92,000 over the original Adopted Budget.
The economic outlook for sales tax revenue reflects a recovery from the COVID‐19 pandemic beginning in the
Summer of 2021. Some of this recovery has already started as the City’s sales tax revenue in the first quarter of
FY 2020‐21 increased 2.6 percent versus the prior year’s first quarter. The Outlook assumes that the COVID‐19
vaccine, which began distribution earnestly in January 2021 to certain population groups, will ultimately be
distributed to all population groups and as a result will reduce the impact of the virus and lead to fewer health
restrictions and thus be the impetus for an economic recovery and return in consumer confidence.
The City’s sales tax consultant is forecasting around a 4.0 percent sales tax growth in FY 2021‐22 and FY 2022‐23.
The Outlook anticipates a leveling out of growth over the subsequent three years at 2.5 percent per year as
reflected in Table 2.3 and the following Chart 2.2.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (10.11%)0.80% 4.00% 3.90% 2.50% 2.50% 2.50%
Projection 3,749,600$ 4,204,600$ 4,372,600$ 4,543,000$ 4,656,575$ 4,772,989$ 4,892,314$
Table 2.3 Sales Tax Five‐Year Outlook
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Scenario Analysis
A number of the economic drivers previously discussed can impact sales tax growth, however, should one or
several of these factors not perform as projected, sales tax revenues would vary from the current estimates. To
account for unanticipated variances, “High” and “Low” scenarios are provided. Table 2.4 details the assumed
growth rates for each scenario for FY 2021‐22 through FY 2025‐26.
The “High” scenario reflects sustained growth in consumer confidence, lowering of unemployment rate, and a
growing economy. A high scenario based on a 1.0 percent increase would increase sales tax projections by $42,000
over the baseline in FY 2021‐22 and a cumulative total of $695,800 throughout the Outlook period.
The “Low” scenario reflects higher unemployment and longer recovery from the current economic downturn. The
low scenario, or 1.0 percent decrease, would reduce sales tax projections by $42,000 in FY 2021‐22 and $677,600
over the five‐year Outlook.
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Projection $4,204,600 $4,372,600 $4,543,000 $4,656,575 $4,772,989 $4,892,314
Growth Rate 0.80% 4.00% 3.90% 2.50% 2.50% 2.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
$3,800,000
$4,000,000
$4,200,000
$4,400,000
$4,600,000
$4,800,000
$5,000,000
Chart 2.2 Sales Tax Revenue Outlook ‐Fiscal Years 2022‐2026
Projection Growth Rate
FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Baseline Growth Rate 4.00% 3.90% 2.50% 2.50% 2.50%
High Growth Rate 5.00% 4.90% 3.50% 3.50% 3.50%
Low Growth Rate 3.00% 2.90% 1.50% 1.50% 1.50%
Baseline Projection 4,372,600$ 4,543,000$ 4,656,575$ 4,772,989$ 4,892,314$
High Growth Rate 4,414,600$ 4,630,800$ 4,792,900$ 4,960,700$ 5,134,300$
Low Growth Rate 4,330,600$ 4,456,100$ 4,522,900$ 4,590,700$ 4,659,600$
Table 2.4 Sales Tax Five‐Year Outl ook Growth Rate Scenarios
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Transient Occupancy Tax (TOT)
TOT represents 4.0 percent of the General Fund revenues based on the FY 2020‐21 Adopted Budget. All lodging
businesses (including private home vacation rentals, vacation rental properties, hotels, motels, bed and
breakfasts, inns, etc.) must register for a City Business License and collect Transient Occupancy Tax (also called
"bed tax" or "hotel tax") and other required assessments from their guests. A TOT tax is levied at 10 cents per
dollar of taxable rent.
Economic Trends
The primary economic drivers of TOT revenues are lodging capacity, room rates, and occupancy. According to the
latest Visit California Research Update, published in December 2020, substantial progress against COVID‐19 is
projected to be made with the availability of an effective vaccine contributing meaningfully to disease suppression
by the middle of 2021. According to Visit California, the number of leisure trips and hotel demand is expected to
rebound to FY 2018‐19 levels by FY 2022‐23.
Outlook
The following Table 2.5 shows the FY 2020‐21 Adopted Budget for TOT revenue, FY 2020‐21 Projection and the
Outlook for the five‐year period from FY 2021‐22 through FY 2025‐26. The FY 2020‐21 Projection for TOT revenue
is a $170,000 increase over the FY 2020‐21 Adopted Budget and will be the basis for the five‐year Outlook
projection. TOT revenue through the first five months of the fiscal year (Jul – Nov) was 56 percent or $152,000
higher than the Adopted Budget through November. The FY 2020‐21 Projection for TOT revenue is $850,000. This
amount is based on actual TOT revenues through the first five months and the remaining seven months were
based on the current budget for those months.
The Outlook assumes that TOT revenues will gradually grow back to pre‐pandemic levels over the next two years.
The Outlook assumes that TOT revenue in FY 2021‐22 will increase 9.0 percent from the current year’s Projection.
The forecasted increase in FY 2021‐22 is similar to actual TOT revenue received in FY 2019‐20. Additionally, FY
2022‐23 TOT revenue is projected to rebound and approximate revenue received in FY 2018‐19, which was prior
to the COVID‐19 pandemic. The remaining three years (FY 2023‐24 through FY 2025‐26) are forecasted to level
out at a 2.0 percent increase year‐over‐year.
The Outlook does not factor in any increase in the City’s current room capacity or the addition of new hotels within
the City limits over the next five years. The Outlook also does not factor in any efforts the City may make to
increase TOT compliance with short‐term rentals like Airbnb or other on‐line travel services. Chart 2.3 highlights
the various assumptions.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (26.65%) (8.31%)9.00% 8.00% 2.00% 2.00% 2.00%
Projection 680,000$ 850,000$ 926,500$ 1,000,600$ 1,020,600$ 1,041,000$ 1,061,800$
Table 2.5 Transient Occupancy Tax Five‐Year Outlook
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Scenario Analysis
As mentioned, Visit California is predicting a rebound in lodging engagements by the summer months of 2021. As
the economy improves, we would expect travel and tourism to increase as well, however, if current predictions
for a rebound by the Summer months do not materialize, the TOT revenue would fall below the baseline estimate.
If the opposite were to occur and the rebound comes sooner, then TOT revenues would increase versus the
baseline. The following scenario analysis is provided to show how a 2.0 percent change up/down would impact
TOT revenues. Table 2.6 presents both “High” and “Low” projections in assumed growth rates for TOT revenues
for FY 2021‐22 through FY 2025‐26.
A “High” scenario would increase TOT tax projections by $17,000 over the baseline in FY 2021‐22 and a cumulative
total of $300,000 throughout the Outlook period. The “Low” scenario would reduce TOT tax projections by
$17,000 over the baseline projection in FY 2021‐22 and $284,600 over the five‐year Outlook.
Franchise Fees
Franchise Fees represents 4.0 percent of the General Fund revenues based on the FY 2020‐21 Adopted Budget.
Franchise fees are based on agreements with private utility companies or other businesses in exchange for the
use of the City’s rights‐of‐ways.
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Projection $850,000 $926,500 $1,000,600 $1,020,600 $1,041,000 $1,061,800
Growth Rate (8.31%) 9.00% 8.00% 2.00% 2.00% 2.00%
‐10.00%
‐8.00%
‐6.00%
‐4.00%
‐2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
$‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Chart 2.3 Transient Occupancy Tax Revenue Outlook ‐Fiscal Years 2022‐2026
Projection Growth Rate
FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Baseline Growth Rate 9.00% 8.00% 2.00% 2.00% 2.00%
High Growth Rate 11.00% 10.00% 4.00% 4.00% 4.00%
Low Growth Rate 7.00% 6.00%(0.00%) (0.00%) (0.00%)
Baseline Projection $926,500$ 1,000,600$ 1,020,600$ 1,041,000$ 1,061,800$
High Growth $943,500$ 1,037,800$ 1,079,300$ 1,122,500$ 1,167,400$
Low Growth $909,500$ 964,100$ 964,100$ 964,100$ 964,100$
Table 2.6 Transient Occupancy Tax Five‐Year Outlook Growth Rate Scenarios
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Economic Trends
The South County Sanitary Service (SCSS) provides solid, green and recycling waste services to residents of Arroyo
Grande. A 10 percent franchise fee is collected on behalf of the City based on gross revenue collected by SCSS.
Charter Communications, the local cable company for the City, pays a 5.0 percent franchise fee on gross revenues
to operate a cable television system within the City. These two organizations are the largest contributors to
franchise fees, generating approximately 82 percent of the City’s franchise fee revenue. The growth for Charter
Communications is expected to remain flat as cable companies struggle to retain market share and fend off digital
competitors. Growth for SCSS is expected to increase based on a Consumer Price Index of 2.0 percent per year.
Outlook
The following table shows franchise fee revenue for the FY 2020‐21 Adopted Budget, FY 2020‐21 Projection and
five‐year Outlook for FY 2021‐22 through FY 2025‐26. The FY 2020‐21 Projection for franchise fees did not change
from the FY 2020‐21 Adopted Budget and will be the basis for the Outlook projections.
The Outlook assumes franchise fees will increase at 1.0 percent per year. This growth is consistent with prior years
and does not assume any new franchise agreements will be awarded during the five‐year Outlook period.
License and Permit
License and permit includes revenue associated with regulating certain activities within the City. Revenue includes,
but is not limited to permits for buildings, encroachment, electrical, police, fire. License and permit revenue
represents 3.0 percent of the General Fund revenues based on the FY 2020‐21 Adopted Budget.
Outlook
The following Table 2.8 reflects the license and permit revenue for the FY 2020‐21 Adopted Budget, FY 2020‐21
Projection and Outlook for the five‐year period covering FY 2021‐22 through FY 2025‐26. The FY 2020‐21
Projection for licenses and permit revenue does not change from the FY 2020‐21 Adopted Budget. The remaining
five years of the Outlook includes a 2.0 percent increase each year, which is based on the assumption that fees
will increase by an inflationary factor based on the Consumer Price Index.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (0.02%) (0.02%)1.00% 1.00% 0.99% 1.00% 1.00%
Projection 690,000$ 690,000$ 696,900$ 703,900$ 710,900$ 718,000$ 725,200$
Table 2.7 Franchise Fees Five‐Year Outlook
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (18.67%) (18.67%)2.00% 2.00% 2.00% 2.00% 2.00%
Projection 561,300$ 561,300$ 572,500$ 584,000$ 595,700$ 607,600$ 619,800$
Table 2.8 License & Permit Five‐Year Outlook
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Not included in the Outlook assumptions, but a discussion many California cities are having is the commercial
cannabis industry and the business tax received from the sale, distribution, and cultivation of non‐medical
cannabis within a City limits. The City of Grover Beach has taken the lead in San Luis Obispo County in allowing
both adult (recreational) and medical commercial cannabis uses. Grover Beach has seen a significant increase in
cannabis tax received and sees the cannabis industry as an economic development opportunity. The City of Grover
Beach generated $1.9 million in cannabis revenue during their 2019‐20 fiscal year.
Community Development Fees
The State of California mandates that virtually all buildings and structures be constructed to very detailed building
codes in order to reduce death, injuries, damage from fire, earthquakes, other natural disasters, and improperly
designed and constructed buildings. To comply with this mandate, the City’s Community Development
Department (CDD) administers the City’s building regulations. The most significant CDD fee is the plan check fee.
A plan check is a process where the CDD reviews and approves various permit applications and building plans to
ensure that these plans comply with health and safety regulations.
Outlook
Table 2.9 reflects CDD fee revenue for the FY 2020‐21 Adopted Budget, FY 2020‐21 Projection and Outlook for the
five‐year period covering FY 2021‐22 through FY 2025‐26. The FY 2020‐21 Projection for CDD fee revenue is the
same as the FY 2020‐21 Adopted Budget. The 12.41 percent decrease in the growth rate reflected in the Adopted
Budget is due to higher than expected actual plan check fees in FY 2019‐20. The Adopted Budget assumed plan
check fees would parallel previous year actuals, which were less than what was received in FY 2019‐20. The
Outlook includes a 2.0 percent increase per year and is based on the assumption that fees will increase at the rate
of inflation based on a Consumer Price Index factor.
Other Charges for Services
Other charges for services combines client fee revenue for the City’s Recreation Services, Public Works and
Engineering functions. Significant fee revenue generated by Recreation Services includes the Children in Motion
child care program and various sports leagues. Included in other charges for services is engineering inspection
fees that are provided by the Engineering division.
Outlook
The following Table 2.10 reflects other charges for services for the FY 2020‐21 Adopted Budget, FY 2020‐21
Projection and Outlook for the five‐year period covering FY 2021‐22 through FY 2025‐26. The FY 2020‐21
Projection for other charges for services reflects a reduction in revenue of $143,300 versus the FY 2020‐21
Adopted Budget. The lower Projection for the current year is related to an estimated reduction in engineering
inspection fee revenue, which is based on actuals through the first half of this fiscal year. The Adopted Budget
included $213,000 in engineering inspection fees, however, only a fraction of that has been collected this year. It
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (12.41%) (12.41%)2.00% 2.00% 2.00% 2.00% 2.00%
Projection 500,500$ 500,500$ 510,500$ 520,700$ 531,100$ 541,700$ 552,500$
Table 2.9 Community Development Services Five ‐Year Outlook
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is anticipated that construction projects in the second half of the current year will mitigate some of the expected
shortfall.
The Outlook years includes a 2.0 percent increase over the baseline FY 2020‐21 Projection and is based on a
Consumer Price Index factor of 2.0 percent each year.
This Section is Intentionally Left Blank
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (17.39%) (33.09%)2.00% 2.00% 2.00% 2.00% 2.00%
Projection 754,000$ 610,700$ 622,900$ 635,400$ 648,100$ 661,100$ 674,300$
Table 2.10 Other Charges for Services Five ‐Year Outlook
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General Fund Expenditures
General Fund expenditures include both personnel and non‐personnel expenditures. As with revenues, the
baseline for the five‐year Outlook will be based on the FY 2020‐21 Projection and any future year’s growth in
expenditures. Any one‐time expenditures will be identified and removed from the baseline projection.
Personnel costs represents 63 percent of General Fund expenditures based on the FY 2020‐21 Adopted Budget.
The largest of personnel costs is salaries and taxes and represents base salaries and their associated payroll taxes.
However, salary and tax expenditures do not include employee benefits, workers’ compensation costs, the portion
of the unfunded accrued liability (UAL) associated with the City’s retirement plan. These personnel costs will each
be estimated and presented separately within this report.
Non‐personnel expenditures include contracts for outside services and professional services, which makes up 10
percent of General Fund expenditures based on the FY 2020‐21 Adopted Budget. Also, included as non‐personnel
costs is the portion of fire and emergency services contracted through the Five Cities Fire Authority (FCFA) that is
paid using General Funds.
Salaries and Taxes
The salaries and taxes category includes base salaries and associated payroll taxes. Also included in this salary
calculation is the “normal” retirement contribution the City pays per employee to CalPERS based on their wages.
The FY 2020‐21 Adopted Budget did not include salary increases. The City’s Police Officers Association, SEIU, and
City Management agreed to forego any salary increase in FY 2020‐21. The salary and tax category is the largest
General Fund expenditure for the City and is comprised of regular salary and wages, overtime, step increases,
payroll taxes and vacation/sick pay‐in‐lieu. The FY 2020‐21 General Fund Adopted Budget included salary and
taxes of $7.9 million, based on staffing of 74 full‐time equivalents (FTE).
Outlook
The following Table 2.11 reflects salary and taxes for the FY 2020‐21 Adopted Budget, FY 2020‐21 Projection and
Outlook for the five‐year period covering FY 2021‐22 through FY 2025‐26. Salary and taxes for the FY 2020‐21
Projection are forecasted to remain flat compared to the FY 2020‐21 Adopted Budget. The Outlook, however, is
factoring in a 4.6 percent increase in FY 2021‐22 and a 2.0 percent salary increase for the next four fiscal years.
The 2.0 percent is based on a Consumer Price Index factor. The 4.6 percent increase in FY 2021‐22 is based on
adding a 2.0 percent cost of living increase as well as adding back approximately $200,000 in one‐time salary
savings that were included as part of the cost cutting measures to reduce expenditures in the FY 2020‐21 Adopted
Budget. The FY 2020‐21 Adopted Budget included delaying the hiring of three vacant positions through the first
quarter and a Police Officer position for the full year.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
FTE's 74 747474747474
Growth Rate 17.14% 17.14% 4.58% 2.00% 2.00% 2.00% 2.00%
Salary & Taxes 7,911,600$ 7,911,600$ 8,273,800$ 8,439,300$ 8,608,100$ 8,780,300$ 8,955,900$
Table 2.11 Salary & Payroll Taxes Five‐Year Outlook
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Scenario Analysis
Table 2.12 reflects three growth rates to help provide some context on what a salary increase may cost. A “Low”
growth rate would assume salary costs only rise by 1.0 percent per year over the five‐year Outlook period. Over
the five‐year period this would result in a decrease of $1.2 million in salary and payroll tax costs. A “High” growth
rate forecasted at three percent per year would result in a $1.3 million increase over the five‐year Outlook period.
Employee Flexible Benefits
The City offers flexible benefits to all eligible employees under a qualified benefits program. Flexible benefits
include medical, dental, vision and basic life insurance plans. These benefits vary by recognized employee
organization, working hours, years of service and other factors.
The FY 2020‐21 Adopted Budget included $1.2 million in flexible benefits, 90 percent of which is health insurance
costs. The FY 2020‐21 Projection for employee benefits does not change from the Adopted Budget. Table 2.13
displays the Outlook for flexible benefits for FY 2021‐22 through FY 2025‐26. The approximate 4.6 percent increase
year‐over‐year in the Outlook is based on an average increase of actual employee benefits over the previous four
years.
Workers’ Compensation
All California employers must provide workers’ compensation benefits to employees who sustain a work‐related
injury or illness. The City is a member of the California Joint Powers Insurance Authority (CJPIA) which manages
the City’s workers’ compensation program. The CJPIA is composed of 116 California public entities and is organized
under a Joint Powers Agreement.
As is reflected in Table 2.14, the FY 2020‐21 Adopted Budget includes workers’ compensation costs of $513,900.
The current year FY 2020‐21 Projection of 513,900 is the same as the Adopted Budget. The Outlook forecasts
roughly an 8.0 percent increase in workers’ compensation year‐over‐year and is based on the average actual
increase of workers’ compensation costs over the previous four years.
FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Low Growth Rate 3.58% 1.00% 1.00% 1.00% 1.00%
Baseline Growth Rate 4.58% 2.00% 2.00% 2.00% 2.00%
High Growth Rate 5.58% 3.00% 3.00% 3.00% 3.00%
Low Growth $8,194,700$ 8,276,600$ 8,359,400$ 8,443,000$ 8,527,400$
Baseline Growth $ 8,273,800$ 8,439,300$ 8,608,100$ 8,780,300$ 8,955,900$
High Growth $8,352,900$ 8,603,500$ 8,861,600$ 9,127,400$ 9,401,200$
Table 2.12 Salary & Taxes Five‐Year Outlook Growth Rate Scenarios
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate 21.76% 21.76% 4.55% 4.57% 4.57% 4.58% 4.60%
Projection 1,247,635$ 1,247,635$ 1,304,400$ 1,364,000$ 1,426,400$ 1,491,800$ 1,560,400$
Table 2.13 Flexible Benefits Five‐Year Outlook
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CalPERS Unfunded Liability
All qualified permanent and probationary employees are eligible to participate in the City’s Safety (Police) or
Miscellaneous Employee Pension Plans. These two defined benefit plans are administered by the California Public
Employees’ Retirement System (CalPERS). The unfunded portion of the pension liability is the gap between the
amount of future benefits a pension fund is expected to pay out and the assets presently in the pension fund.
The City is required to make annual payments towards the unfunded liability portion of the City’s various
retirement plans. The minimum amount the City is required to pay is calculated annually by CalPERS actuarial staff
and invoiced to the City. The amount of the City’s unfunded liability is based on a number of factors including
investment return, payroll growth, benefit eligibility, and longevity among retirees. In December of 2016, the
CalPERS Board of Administration voted to lower their investment assumption taking it from 7.5 to 7.0 percent
over a three‐year period. This change has resulted in significant increases to the City’s unfunded liabilities in recent
years.
The following Table 2.15 reflects the CalPERS unfunded liability payment the City is required to pay. The table
reflects a significant decrease (57%) in the FY 2020‐21 Adopted Budget growth rate. The decrease is the result of
a one‐time $2 million prepayment the City made in FY 2019‐20 to reduce the unfunded liability balance. The FY
2020‐21 Projection is not expected to change from the Adopted Budget.
The five‐year Outlook covers the period FY 2021‐22 through FY 2025‐26 and is based on estimates provided by
CalPERS actuarial staff. The decrease in FY 2022‐23 is due to CalPERS actuarial estimates and the reduction in the
various amortization bases making up the total UAL liability.
Scenario Analysis
As mentioned, CalPERS’ current investment return is set at 7.0 percent. If CalPERS reduces their investment return
assumption or earns less than the 7.0 percent in any one year it would result in an increase to the City’s unfunded
liability. In FY 2019‐20, CalPERS posted a 4.7 percent investment return and over the last 20 years it has averaged
a 5.5 percent investment return, both under their 7.0 investment return assumption. Both the Projection and
Outlook do not assume a lowering of the investment rate of return by CalPERS. However, the following scenario
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate 8.12% 8.12% 8.00% 8.00% 8.01% 8.00% 7.99%
Projection 513,900$ 513,900$ 555,000$ 599,400$ 647,400$ 699,200$ 755,100$
Table 2.14 Workers' Compensation Five‐Year Outlook
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate (56.87%) (56.87%)4.78%(12.81%)6.59% 6.54% 2.93%
Projection 1,394,500$ 1,394,500$ 1,461,188$ 1,274,000$ 1,358,000$ 1,446,800$ 1,489,200$
* FY 2020‐21 growth rate is impacted by prior year's $2 million prepayment.
Table 2.15 CalPERS Retirement Unfunded Liability Five‐Year Outlook
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analysis reflected in Table 2.15 factors in a 2.0 percent rate both up and down from the baseline FY 2020‐21
Projection.
The “Low” growth rate would reflect a lowering of the unfunded liability payments by 2.0 percent over the
baseline. This would result in a reduction to the City’s unfunded liability payment over the next five years of
$415,000. The “High” scenario, or 2.0 percent increase, would increase the unfunded liability paid by $438,000
over the five‐year Outlook period.
Fire Services (Five Cities Fire Authority‐FCFA)
The City’s fire services and emergency response is provided through a Joint Exercise of Powers Agreement (JPA)
combining fire department resources with the City of Grover Beach and Oceano Community Services District. The
FY 2020‐21 General Fund Adopted Budget includes $2 million for FCFA services as shown in Table 2.17. Local sales
tax dollars also contribute to pay for fire services, but are not included as part of this General Fund analysis.
In July 2020, the City approved a third amendment to the JPA agreement. Under the terms of the agreement,
costs to the City for fire services in FY 2019‐20 will remain the same through FY 2021‐22. In FY 2022‐23 and FY
2023‐24, costs are forecasted to rise by 6.0 percent and 5.0 percent respectively, after holding costs flat
throughout the latest agreement. In the final two years of the Outlook, FCFA costs are expected to increase by 3.0
percent per year.
FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Baseline Growth Rate 4.78%(12.81%)6.59% 6.54% 2.93%
High Growth Rate 6.78%(10.81%)8.59% 8.54% 4.93%
Low Growth Rate 2.78%(14.81%)4.59% 4.54% 0.93%
Baseline Growth $ 1,461,188$ 1,274,000$ 1,358,000$ 1,446,800$ 1,489,200$
High Growth $ 1,489,100$ 1,328,100$ 1,442,200$ 1,565,300$ 1,642,500$
Low Growth $ 1,433,300$ 1,221,000$ 1,277,100$ 1,335,100$ 1,347,500$
Table 2.16 CalPERS Retirement Unfunded Liability Five‐Year Outlook Growth Rate Scenarios
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate 0.00% 0.00% 0.00% 6.00% 5.00% 3.00% 3.00%
Projection 2,052,061$ 2,052,061$ 2,052,061$ 2,175,185$ 2,283,944$ 2,352,462$ 2,423,036$
Table 2.17 Fire Services (FCFA) Five ‐Year Outlook
Item 11.a. - Page 24
Five‐Year Financial Outlook Report
18 | Page The City of Arroyo Grande
Contractual Services
The City budgeted $1.8 million in contractual and professional services in FY 2020‐21. Contractual and professional
services include services rendered by independent contractors providing services such as, but not limited to,
management consulting, legal, auditing, labor negotiations, police dispatch, landscaping, professional and
technical studies, and management systems.
Outlook
Table 2.18 reflects contractual service spending for the FY 2020‐21 Adopted Budget, FY 2020‐21 Projection and
five‐year Outlook. The FY 2020‐21 Projection is not forecasted to change when compared to the Adopted Budget.
The high growth rate of 20 percent reflected in the Adopted Budget is based on actual FY 2019‐20 contractual
service costs compared to the Adopted Budget. Contractual service costs ended FY 2019‐20 lower than expected,
which when compared to the Adopted Budget resulting in the higher than normal growth rate. The five‐year
Outlook includes a 2.0 percent increase and is based on the assumption that contractual services will increase by
a Consumer Price Index factor each year.
FY 2020‐21
Adopted
FY 2020‐21
Projection FY 2021‐22 FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26
Growth Rate 20.07% 20.07% 2.00% 2.00% 2.00% 2.00% 2.00%
Projection 1,793,890$ 1,793,890$ 1,829,800$ 1,866,400$ 1,903,700$ 1,941,800$ 1,980,600$
Table 2.18 Contractual Services Five ‐Year Outlook
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