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Home My WebLink About12-16-2014 B1 Five Year Financial ForecastCity of San Luis Obispo, Council Agenda Report, Meeting Date, Item Number FROM: Wayne Padilla, Director of Finance & IT Joe Lamers, Budget Manager SUBJECT: GENERAL FUND FIVE YEAR FISCAL FORECAST: 2015-20 RECOMMENDATION Review and discuss the results of the General Fund Five-Year Fiscal Forecast for 2015-20 DISCUSSION Forecast Purpose The purpose of the attached Five-Year Fiscal Forecast is to assess the General Fund’s ability over the next five years to accomplish five things: 1. Deliver current service levels; 2. Maintain existing infrastructure and facilities. 3. Preserve the City’s long-term fiscal health by aligning operating revenues and expenditures; 4. Maintain fund balance at policy levels; and 5. Reinvest in the General Fund supported Capital Improvement Program, particularly in areas that are underfunded such as infrastructure maintenance, fleet replacement, IT replacement, and facilities maintenance. It is important to stress that the forecast is not the budget. The forecast sets the stage for the upcoming budget process but it does not represent formally adopted revenues or expenditures. Its purpose is to provide context for considering the City’s ability to continue current services, maintain existing assets and/or fund new initiatives. Summary of Forecast Findings The theme of this forecast is “Projecting Steady Growth While Meeting our Fiscal Responsibilities.” This update of the five year fiscal forecast provides a clear indication that the City is benefiting from a continuously improving economic climate. Unaudited year-end results from 2013-14 show that revenues were $2.2 million or 3.7% over budget and that expenditure savings targets were met. This represents the fourth consecutive year of steady growth in revenues. Whereas revenue growth experienced in 2010-11 and 2011-12 brought the City’s revenue base back to and slightly above pre-recession levels, the growth levels experienced in 2012-13 and 2013-14 reflect new highs in the City’s revenue base which have not been experienced in any previous year. This forecast uses 2013-14 unaudited revenues as a new base and projects that there will continue to be steady growth in 2014-15 and throughout the five year forecast period. 12/16/14 B1 B1-1 General Fund Five-Year Forecast: 2015-20 Page 2 Key revenue sources such as Sales Tax and Transient Occupancy Tax (TOT) have experienced significant growth over the past four fiscal years. Property Tax and Utility Users Taxes (UUT) have also increased over the past two years. The largest area of growth in 2013-14 was in Development Review Fees. This is the result of applicants making increased investments in our community, another positive economic indicator. All major indicators show that these revenue sources are expected to continue to increase in future years, and this is reflected in the forecast. Although all major economic indicators are pointing in a positive direction for the City’s revenue sources, it is important to note that very significant cost increases have been identified and reflected in the forecast. As expected, the new funding formula approved by the governing board of the California Public Employees Retirement System (CalPERS) has increased the annual contributions required to fund the program. This funding formula which takes effect in 2015-16 is designed to fully amortize the remaining unfunded retirement liabilities over 30 years. This new formula utilizes a strategy that rapidly escalates costs in the 5 year period immediately following a change in actuarial and demographic assumptions. Based on information provided by CalPERS in the valuation report for the period ending June 30, 2013 the fiscal forecast includes the most recent estimates for the City’s share of costs for the retirement program. While the City has made significant progress in its efforts to contain retirement costs, such as adding 2nd and 3rd Tier benefit programs that now reflect membership by 20% of the total employees and increasing employee contributions toward the cost of retirement, the fiscal forecast still reflects a significant increase in the annual cost of retirement benefits as a result of these funding formula changes. For context the fiscal forecast projects that retirement costs will increase by an estimated annual average of 8% over the next five years. By the fifth year of this forecast, costs are projected to rise cumulatively by $3.9 million to $12.3 million in General Fund retirement costs by 2019-20. This represents a 63% increase over actual retirement cost levels in 2013-14. While this is a tremendous increase over a relatively short period of time it is important to note that this is projected to be a more sustainable financial position that will see unfunded liabilities paid off over the next 30 years. It is also important to note that the fiscal forecast does not include assumptions for making additional prepayments beyond those approved in 2013-15. The City is also seeing an increase in costs for its liability and workers compensation insurance programs. The California Joint Powers Insurance Authority (CJPIA) recently informed staff of the potential for a previously unanticipated retrospective insurance adjustment deposit requirement in the amount of $1.4 million in 2015-16 which would result in a $1.1 million charge to the General Fund. This amount is pending final results from the CJPIA but is anticipated in the forecast. This matter is discussed more fully in the 5 Year Fiscal Forecast document. As a result of the City’s continuously improving economic condition, combined with prudent and fiscally responsible actions already taken to control costs in recent years, the City is well positioned to cover these escalating insurance and retirement costs while also identifying opportunities to make new and important investments in our community. This fiscal forecast B1-2 General Fund Five-Year Forecast: 2015-20 Page 3 projects full payment of the retirement program cost increases as well as the retrospective deposit that has been identified by the CJPIA. The forecast also anticipates new funding will be dedicated towards vital community services and infrastructure. An example is the fact that the fiscal forecast reflects an additional $3.0 in capital improvement program spending over the 5 year period, compared to the fiscal forecast that was completed in June 2014. The fiscal forecast projects a fund balance which exceeds the City’s minimum 20% fund balance reserve requirement. In 2014-15 the fund balance, which is based in part on 2013-14 unaudited results, is projected to be $4.4 million above the minimum 20% reserve requirement and this amount is projected to increase slightly in future years. This amount is available for one-time expenses because once it has been committed to fund expenses it is no longer available to support on-going costs. In addition to the $4.4 million excess reserve there is an undesignated and unappropriated amount that is available for appropriation by the Council. It should be noted that the majority of this amount is only available for one-time funding. This is due to the fact that the amount available each year varies according the forecast assumptions. In other words it would be prudent to limit on-going expenditure commitments to the lowest amount in the five year period available for programming. It is staff’s intent to utilize the most current and reliable sources of information available when forming the basis for its forecast assumptions. Sources used in developing revenue projections for the forecast include long and short-term trends in City revenues; projections shared by HdL, the City’s sales tax advisor; information developed by the State Legislative Analyst and the State Department of Finance; property tax information provided by the San Luis Obispo County Auditor-Controller’s Office; and materials prepared by the League of California Cities and State Controller’s Office. To assist in improving the reliability of revenue forecasts, staff also engaged the services of Beacon Economics to provide professional forecasts (Appendix A) for a number of key revenue sources. This firm provided a forecast for the City two years ago to assist with the 2013-15 Financial Plan process. SUMMARY The City enters the 2015-17 Financial Planning period in a substantially improved economic condition both in the long and short terms than it has in previous financial plan periods. However, it still faces significant challenges, particularly in the area of increased employee retirement benefit costs, insurance programs and the legal obligation concerning retiree medical. As a result of an improved economy, combined with fiscally responsible decisions of the past, the City is positioned to address these challenges while also having an opportunity to make investments and reinvestments which will continue to improve our community. The City continues to have substantial advantages compared with many communities in California due to the following: 1. A balanced budget and reserves above minimum policy levels; B1-3 General Fund Five-Year Forecast: 2015-20 Page 4 2. Dedication to fiscal responsibility; 3. Strong financial systems, policies and procedures; 4. Commitment to transparency and principles of engagement; 5. Strong Council leadership 6. Citizens who care deeply about the City’s quality of life and services 7. Staff that is committed, dedicated and passionate about achieving the City’s mission 8. A great tradition of responsible stewardship The civic infrastructure will serve San Luis Obispo well in successfully meeting challenges ahead. All of the information shown here is described more fully in the 5 Year Fiscal Forecast document that is provided as an attachment. ATTACHMENT 1. General Fund Five-Year Forecast: 2015-20 2. Beacon Economics Revenue Forecast, November 2014 t:\council agenda reports\2014\2014-12-16\general fund 5 yr fiscal forecast (padilla-lamers)\car general fund 5 yr fiscal forecast.docx B1-4 General Fund Five Year Fiscal Forecast: 2015-20 Projecting Steady Growth While Meeting Our Fiscal Responsibilities December 2014 B1-5 Table of Contents Overview Purpose of Forecast…………………………….…………. 3 Summary of Findings……………………….…………….. 4 Where We’ve Been ……………………………….……..... 6 Revenue Forecast……………………………….…………. 7 Expenditure Forecast………………………………………11 Summary…………………………………………...……....16 Synopsis of Major Assumptions………….………………...17 Five Year Forecast Summary Forecast of Revenues, Expenditures, Fund Balance……......19 Projection Factors……………………………………….......20 Historical Trends and Supplemental Information Overview…………………………………………….……... 21 Population and Housing Trends…………………….…….... 22 Consumer Price Index …………………………….……….. 23 General Fund Revenue Sources…………………….……….24 General Fund Expenditures ………………………….…….. 30 Revenues Compared to Expenditures…………………...…...35 2 B1-6 Purpose of Forecast The purpose of the General Fund fiscal forecast is to evaluate current and future fiscal conditions to guide decisions about goals, policies, and programs. This fiscal forecast assesses the General Fund’s ability over the next five years to do the following: 1. Deliver current service levels. 2. Maintain the City’s existing infrastructure and facilities. 3. Preserve the City’s long-term fiscal health by aligning operating revenues and expenditures. 4. Maintain fund balance at policy levels. 5. Reinvest in the General Fund supported Capital Improvement Program, particularly in areas that are underfunded such as infrastructure maintenance, fleet replacement, Information Technology replacement, and facilities maintenance. The forecast does this by projecting revenues over expenditures over a five year period, using assumptions about economic conditions, future expenditure scenarios, and other salient factors. The balance remaining is available for Council decision on whether to build reserves to guard against future financial uncertainties or to fund increased investment in maintaining infrastructure, new capital improvement or operating initiatives. If this balance were to be negative, the balance would represent a “budget gap” that requires corrective action consistent with the City’s commitment to fiscal sustainability. It is important to stress that this forecast is not a budget. The forecast sets the stage for the upcoming budget process but it does not represent formally adopted revenues or expenditures. Its purpose is to provide context for considering the City’s ability to continue current services, maintain existing assets and/or fund new initiatives. The Government Finance Officers Association (GFOA) recommends that governments of all levels forecast major revenues and expenditures extending over several years into the future. The forecast should be clearly stated and made available to stakeholders in the budget process. It should also be regularly monitored and periodically updated. The City of San Luis Obispo, through its financial planning process, embraces each of these recommendations in making the forecast an integral part of the budget process. 3 B1-7 Summary of Findings This update of the five year fiscal forecast provides a clear indication that the City is benefiting from a continuously improving economic climate. Unaudited year-end results from 2013-14 show that revenues were $2.2 million or 3.7% over budget. This represents the fourth consecutive year of steady growth in revenues. Whereas revenue growth experienced in 2010-11 and 2011-12 brought the City’s revenue base back to and slightly above pre- recession levels, the growth levels experienced in 2012-13 and 2013-14 reflect new highs in the City’s revenue base which have not been experienced in any previous year. This forecast uses 2013-14 revenues as a new base and projects that there will continue to be steady growth in 2014-15 and throughout the five year forecast period. Although all major economic indicators are pointing in a positive direction for the City’s revenue sources, it is important to note that very significant fiscal challenges are expected in the upcoming years as it relates to the City’s expenses. This is particularly true in regards to the rapidly escalating cost of retirement and insurance programs. The California Public Employees Retirement System (CalPERS) (the City’s provider of retirement benefits) is implementing a new retirement funding plan beginning in 2015-16 which includes a strategy to have unfunded liabilities fully amortized in 30 years. While this is consistent with creating a fiscally sustainable system, the plan includes steep increases in rates over the next five years. This is true in spite of the important efforts achieved locally to implement pension reform measures including a second tier and third tier pension benefits. For reference, about 20% of our work force is now covered by the second or third tier benefit program. For context the fiscal forecast projects that CalPERS costs will increase by an estimated annual average of 8% over the next five years. By the fifth year of this forecast, costs are projected to rise cumulatively by $3.9 million to $12.3 million in General Fund retirement costs by 2019-20. This represents a 63% increase over actual retirement cost levels in 2013-14. While this is a tremendous increase over a relatively short period of time it is important to note that these costs represent a fundamental shift in funding philosophy and some significant changes in demographic assumptions. All this should be leading to a more sustainable model that will pay off unfunded liabilities over the next 30 years. An additional cost burden will come in the form of increased costs for liability and workers compensation insurance. The city’s provider of liability and workers compensation coverage, the California Joint Powers Insurance Authority (CJPIA), recently informed staff of the potential for a previously unanticipated retrospective insurance adjustment cost of $1.4 million in 2015-16 which would result in a $1.1 million charge to the General Fund. This amount is pending final results from the CJPIA but is anticipated in the forecast. It is worth noting that it is proposed that this funding come from one- time resources since this amount has varied widely and should not be built into the City’s base budget. As a result of the City’s continuously improving economic condition, combined with prudent and fiscally responsible actions taken to control costs in recent years, the City is well positioned to cover these escalating insurance and employee benefit costs while also identifying opportunities to make new and important investments in our community. This fiscal forecast projects full payment of cost increases identified in CalPERS’ actuarial retirement valuation reports. It projects full payment of the potential CJPIA insurance cost increase plus additional funds to help guard against cost increases of this nature in the future. The forecast also anticipates new Projecting Steady Growth While Meeting Our Fiscal Responsibilities 4 B1-8 funding will be dedicated towards vital community services and infrastructure. After factoring in each of these required and important investments, the fiscal forecast projects a fund balance which exceeds the City’s 20% fund balance policy reserve requirement. These reserves are an essential first line of defense against unexpected economic emergencies or natural disaster. In 2014-15 the fund balance is projected to be $4.4 million in excess of the reserve requirement, and this amount is projected to increase slightly in future years. In addition to the $4.4 million in excess of the 20% reserve, there is an undesignated and unappropriated amount that is available for appropriation by the Council. It should be noted that the majority of this amount is available for one-time funding only. This is the case because the amount ebbs and flows such that added on- going operating costs cannot be maintained. In other words it would be prudent to limit on- going expenditure commitments to the lowest amount in the five year period available for programming. Additionally, once the excess balance above the 20% reserve is used it is no longer available. Additional details regarding major revenue and expenditure assumptions are described in detail within this report. The report narrative is followed by 15 years of revenue and expenditure history which helps form a basis and context for projections made in the forecast. 5 B1-9 Where We’ve Been While we are planning for the future it is helpful to review where we have been in the recent past, and the steps that have been taken in response to the constant changes in our financial condition. Following is a brief summary of the fiscal condition that the City has been faced over the past three financial plans, dating back to 2009. In the 2009-11 Financial Plan Council responded to declining revenues caused by the severe recession and unanticipated staffing cost increases with actions to reduce the budget by $11.3 million. While the use of reserves and a declining amount needed for the 20% reserve played an important role, about 80% of the budget-balancing strategy relied heavily upon expenditure reductions with the bulk provided by CIP reductions. Reductions from 3-11% by department were imposed with the deepest reductions occurring in support departments. These reductions included 17.2 regular positions and 6.4 temporary full time equivalent positions in the General Fund. This also included salary deferrals by employees totaling nearly $1 million. The City continued to be negatively impacted by the impacts of the recession during the 2011-13 Financial Plan. In order to address the budget gap at this time the City focused on permanent, on-going changes as much as possible. Whereas 2009-11 reductions focused primarily on CIP, the departmental operating budgets and employee concessions were the two largest elements of the budget balancing strategy in 2011-13. This included ongoing employee concessions totaling $2.6 million in the General Fund. This financial objective set the stage for Council labor relations objectives that included pension reform and a 6.8% reduction in employee total compensation. The 2013-15 Financial Plan represented the first time in five years that a budget was passed which did not require reductions. This was made possible by on-going cost containment strategies that were implemented in previous budgets, combined with slow but steady revenue growth that the City was experiencing after coming out of the recession. The Capital Improvement Plan included major new investments and important reinvestments in critical infrastructure. Limited and strategic operating program enhancements that help to achieve the City Council’s Major City Goals and Other Important Objectives were also implemented. Reserve Levels Have Been Maintained Reserves have been maintained at or above policy levels of 20% throughout each of these years, including the most difficult years of the Great Recession. As indicated above, these reserves are a first line of defense against unexpected economic emergencies or a natural disaster. Unaudited results for 2013-14 and revised projections for 2014-15 indicate that the City has higher than previously expected revenues and expenditure savings, resulting in higher than previously projected fund balances. 6 B1-10 Revenue Forecast This forecast presents a positive revenue outlook for the General Fund which is consistent with what the City has experienced in recent years. Key revenue sources such as Sales Tax and Transient Occupancy Tax (TOT) have experienced significant growth over the past four fiscal years. Property Tax and Utility Users Taxes (UUT) have both increased over the past two years. The largest area of growth in 2013-14 was in Development Review Fees. This is the result of developers making increased investments in our community, another positive economic indicator. All major indicators show that these revenue sources are expected to continue to increase in future years, and this is reflected in the forecast. Sources used in developing revenue projections for the forecast include long and short-term trends in City revenues; projections shared by HdL, the City’s sales tax advisor; information developed by the State Legislative Analyst and the State Department of Finance; property tax information provided by the San Luis Obispo County Auditor-Controller’s Office; and materials prepared by the League of California Cities and State Controller’s Office. To assist in improving the reliability of revenue forecasts, staff has also engaged the services of Beacon Economics to provide professional forecasts (Appendix A) for a number of key revenue sources. Beacon’s projections will be discussed in the applicable narrative discussions below. This firm provided a forecast for the City two years ago to assist with the 2013-15 Financial Plan process. Ultimately, the revenue projections in this forecast reflect staff's best judgment about the performance of the local economy during the next five years and how it will affect the City's General Fund revenues. Analysis of Key Revenue Sources Sales Tax revenues totaled $15.4 million in 2013-14. This represents an 8.2% or $1.16 million increase over 2012-13. This level of increase is consistent with what the City has experienced over each of the past four fiscal years. Since 2010-11 sales taxes have increased by an average of 9% or $1.17 million per year. While 2011 and 2012 sales tax collections brought the City back to and above pre-recession levels, 2013 and 2014 have represented sales tax increases above what has been experienced in any prior year. In 2014-15 the forecast projects $15.7 million in sales tax collections. This reflects a 2.2% increase over 2013-14 and a $462,000 increase over the current budget which is expected to be revised at the Mid-Year budget update in February. The forecast is higher than the original budget due to multiple factors. Sales tax from auto sales, which were previously projected to decline, have continued to increase through the second quarter of 2014. Sales tax from building & construction, as well as restaurants & hotels are expected to experience steady growth. While the growth rate is high in these sectors, the forecast is tempered by projected declining growth rates in the Food and Drug, Business and Industry and Fuel and Service Station business sectors. Going forward, sales tax is projected to increase by 1.1% in 2015-16, 5.6% in 2016-17, 3.3% in 2017-18, 3.2% in 2018-19 and 3.1% in 2019-20. The 2015-16 projection is heavily impacted by the elimination of the “triple flip” sales tax for property tax exchange which will be coming to an end and is expected to include a one-time deduction of approximately $320,000. Excluding this deduction and normalizing the growth rate, sales taxes are projected to increase by 3.8% in 2015-16 and 3.5% in 2016-17. As part of the fiscal forecast, staff conducted a review of future development projects which are expected to generate significant revenue in future years. This forecast projects additional sales tax revenues of $95,000 in 2016-17 and $190,000 in 2017-18 and thereafter based on anticipated development related to the Chinatown development project. 7 B1-11 The following table includes sales tax growth projections that are factored into the projection by the City, along with projections prepared by Beacon Economics and HdL, the City’s sales tax advisor. The data indicates varying degrees of confidence in taxable sales growth over the forecast period. Staff recommends using HdL’s growth assumptions in the current forecast calculation. In addition to taking a more conservative approach it is important to note that sales tax projections provided by HdL have been reliable in previous fiscal years and are based on the actual sales tax permit activity of each local business. For example, 2012-13 sales tax projections provided by HdL, including regular sales tax and Measure Y, represented 99% of the actual results for the Fiscal Year. Sales Tax Growth Projections Fiscal Year Beacon HdL Fiscal Forecast 2015-16 4.9% 3.8% 3.8% 2016-17 4.7% 3.5% 3.5% 2017-18 4.5% 3.3% 3.8% 2018-19 4.3% 3.2% 3.2% 2019-20 4.2% 3.1% 3.1% Measure Y / Measure G. The Measure Y half- percent local sales tax revenue stream will come to an end on March 31, 2015 and is being replaced by Measure G. Measure G was approved by voters in November 2014 and provides an eight year extension of the local general sales tax measure, meaning that this revenue stream will continue beyond the life of this forecast. The growth projections for Measure Y/G are the same as identified in the previous table for general sales tax revenue. Combined, Measure Y/G is projected to generate $6.9 million in 2014-15 and is anticipated to increase to $8.1 million by 2019-20. Transient Occupancy Tax (TOT). Revenues from transient occupancy tax (TOT) ended 2013-14 up by 8.8% from the prior year, reaching $6.06 million. TOT revenues have consistently grown at an average rate of 8% over the past four years and are now at historic high levels. Localities throughout the region are benefiting from a vibrant tourism industry, and this is reflected in the TOT. TOT has also benefitted from the extensive marketing efforts of the Tourism Business Improvement District and investments in the City’s community promotions program. As of September 2014, TOT revenues in 2014- 15 are 9.4% higher than the first quarter of 2013-14. Based on this level of continued growth, the forecast projects that TOT revenues will increase by 7.5% in 2014-15. Growth of 5% down to 4.2% is projected from 2015-16 through 2019-20. This compares to the Tourism Board Improvement District (TBID) strategic plan which targets a total increase of 25% over five year period (an average of 5% per year). The following chart is provided to demonstrate how significant TOT revenue increases have been since 2010 and the trend for the future. The forecast does not reflect the addition of TOT that will be generated by any new hotels that are slated for future construction, due to the uncertainty of their completion dates and the need to assess whether they will increase the occupancy rate in the community. Property Taxes. Property tax revenues in 2013- 14 totaled $12.6 million. This amount includes 3,000 4,000 5,000 6,000 7,000 8,000 9,000 20 0 1 20 0 3 20 0 5 20 0 7 20 0 9 20 1 1 20 1 3 20 1 5 20 1 7 20 1 9 TOT Revenues ($ in 000's) Projected Actual 8 B1-12 Property Taxes In Lieu of Vehicle License Fees. While this represents a 2.4% reduction compared to the 2012-13 total, it is important to note that 2012-13 included a one-time refund in the amount of $620,000 from the County for previously paid administrative fees. Taking the one-time payment out of the total, 2013-14 property taxes increased by 4.3% over the prior year. Based on data from the County Auditor- Controller’s Office, staff projects property tax growth of 3.9% in 2014-15 and 5.8% in 2015- 16. In years 2-5 of the forecast, property tax growth rates of 3.9% to 4.3% are projected. This reflects an increase from the June 2014 forecast which projected growth rates of approximately 3% per year. The forecast revenue was increased to reflect anticipated growth in assessed valuation during this period, which differed from that used by Beacon Economics because their forecast was based on county-wide growth trend assumptions and were not limited to the growth within the City. The following chart is shown to display historical results, the impact of the one-time administrative fee reimbursement in 2012-13, and the forecasted property tax revenue projection through Fiscal Year 2019-20. Grants. The forecast does not reflect the receipt of any new competitive grant revenues over the next five years. The City’s past experiences indicates that while new grants will be awarded over the 5 year period, the timing and amount of these awards cannot be accurately predicted. Also, because grants cannot supplant existing funding sources and have restrictions on their use for specified purposes, incorporating an estimate for them into the forecast is not practical. The forecast does include $319,000 annually for grants and subvention amounts which have been on-going and can reasonably be anticipated to continue into the future. This amount includes funding from the housing in-lieu fee, Zone 9 reimbursements and Homeowner Property Tax Relief (both from the County), and the state Supplemental Law Enforcement Allocation. Development Review Fees. There continues to be a high volume of development applications and calls for inspection services in the community. This has resulted in $4.2 million in development review fees in 2013-14, a 62% increase over the prior year. These fees support the added resources needed by the Community Development Department to maintain its performance obligations during this period of increased development activity. Based on results from the first five months of the current fiscal year, the Community Development Department is projecting that development fees will grow to $5.2 million in 2014-15, an increase of 23.7% over 2013-14. Based on trends in development applications and building permit activity, the fiscal forecast estimates that development review activity will continue to increase in future years. The revenue forecast uses growth projections that are tied to the level of growth in building permit valuation as predicted by Beacon Economics, with one notable adjustment. The fiscal forecast projects that development review fee growth rates will lag by one year compared to changes in building permit valuation rates projected by Beacon. This adjustment was made because Beacon is projecting a decline in 2014- 15 whereas staff is not seeing this trend since current permit activity remains at a high level. 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 20 1 5 20 1 6 20 1 7 20 1 8 20 1 9 20 2 0 Property Taxes ($ in 000's) One Time Projected Actual 9 B1-13 This one-time decline is instead reflected in the fiscal forecast for 2015-16. The one-time decline in the permit valuation growth rate is due to an expectation that some of the growth experienced in recent years is caused by pent up demand for development after coming out of a recession. In spite of this, an average annual growth rate of 6.9% in development fees is projected over the next five years. The following table compares Beacon’s permit valuation forecast to the City’s forecast for Development Review Fees to show how the revenue projection was applied. Essentially, the table shows the City’s projection lagging one fiscal year. Fiscal Year Building Permit Valuations (Beacon) Development Review Fee Forecast FY 14-15 -20.5% 23.7% FY 15-16 11.9% -20.5% FY 16-17 16.2% 11.9% FY 17-18 14.9% 16.2% FY 18-19 12.1% 14.9% FY 19-20 8.4% 12.1% It is important to note that development review fees paid at the time of an application represent a prepayment for work in conjunction with the development review process. Not all of these should be allocated for expenditures in the period they are received because some of the work can only occur when the project is under construction, which may be many months or years after an application is processed and payment is received. In order to address rapidly increasing development fees and their impact on development review operations, in June of 2014 the City Council approved a policy whereby 75% of projected revenues in excess of the current development review fee budget forecast may be dedicated for the purpose of accomplishing the timely processing of development permit applications and to ensure that there is adequate resources to process applications following the payment of fees. The forecast reflects this policy going forward with the assumption that 75% of increased revenues will be allocated to development services operating activities. The table below compares development review fees projected in the last update of the fiscal forecast (June 2014) to the current update. Also shown is how the 75% allocation impacts expenditure projections. Development Review Fee Forecast ($ in 000s) Fiscal Year June Forecast Current Forecast Variance 75% Allocation FY 14-15 3,396 5,206 1,810 1,357 FY 15-16 2,578 4,115 1,537 1,153 FY 16-17 2,581 4,527 1,946 1,460 FY 17-18 2,584 5,260 2,676 2,007 FY 18-19* 2,584 6,044 3,460 2,595 FY 19-20* 2,584 6,775 4,191 3,143 *2018-19 and 19-20 were not included in the June forecast. The same amount forecasted in 2017-18 is shown for these years. 10 B1-14 Expenditure Forecast Operating Costs. In preparing this update of the fiscal forecast, a detailed review of all operating expenditures was conducted using the 2014-15 adopted budget as the base, net of one-time expenditures. The forecast projects operating costs to increase by 4.2% in 2015-16, followed by incremental increases of 2.5% in the following years. These factors do not include potential cost increases related to PERS retirement programs, which have been reviewed on their own due to the magnitude of increases in this area. The forecast projects higher growth in operating costs in the first year because the City is faced with a number of challenges going into 2015-16 which may require additional funding. These factors include, but are not limited to: increases in standard operating costs such as utilities which have gone up in recent years; increases in contract services based on the negotiated terms of the agreements; changes in non-staffing budgets which were reduced during the recession have not been fully restored; and potential changes in staffing costs including overtime factors, contractual obligations, and insurance costs. As discussed later, there is the potential for future retrospective adjustments for both worker’s compensation and liability insurance programs administered through the CJPIA. With respect to staffing costs, these expenditures have remained relatively flat with slight declines over recent years. Average staffing costs have reduced by (0.7%) since 2010. This is the result of efforts made by the City to control costs. For example, all employees now pay the full member contribution for CalPERS retirement (8% or 9%). Beginning in January 2014, members of the Police Officers Association are now making 3% contributions towards the employee normal cost. Second and third tier retirement benefits are now in effect so that benefits received by every new employee results in less costs to the City. Ongoing savings have resulted from positions eliminated during the budget balancing efforts of the “Great Recession.” Going back to 2011, staffing as a percentage of operating costs was at 80%. As a result of the cost-sharing strategies identified above, this percentage has been reduced down to 74%. The following chart shows a ten year history of total staffing costs and staffing as a percent of operating expenditures in the General Fund. One-Time Expenses. As indicated above, one- time expenditures were excluded from the base budget for purposes of forecasting costs into the future. The 2014-15 budget includes $6.7 million in one-time or limited term expenditures. These one-time expenses include:  $1.6 million in one-time or limited term Significant Operating Program Changes (SOPC’s) that are part of the 2014-15 budget but not assumed going forward. These one-time SOPC’s were approved at the Financial Plan, 2013-14 Mid-Year Budget, and 2014-15 Supplement.  $2.065 million payment to CJPIA for retrospective insurance expenditures  $1.8 million in carryover of encumbered and unexpended operating funds from 2012-13  $468,300 of excess Development Services revenues from 2013-14 have been appropriated to fiscal year 2014-15 (75% of excess revenues)  $40,000 of one-time Zone 9 grant appropriations 68% 70% 72% 74% 76% 78% 80% 82% $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Total Staffing and % of Operating Cost ($ in 000's) Total Staffing % Operating 11 B1-15  $154,000 in one-time funds approved by Council since June budget adoption, including $75,000 for Pismo Preserve and $79,000 for the Downtown Renewal project California Public Employees Retirement System (CalPERS). Fiscal Year 2015-16 represents the starting point of CalPERS’ new funding formula designed to have all member agencies pay down their unfunded liabilities within 30 years. The new funding formula includes a “ramp up” phase in which payments to the unfunded liability are planned to escalate over a 5 year period. The City Council will be discussing the issue of whether to consider a policy that will increase the payments against the unfunded liabilities in order to pay them off sooner than the current 30- year period. This forecast does not reflect payments to the unfunded liability above the amounts that are projected based on valuation reports. Each year CalPERS provides member agencies with actuarial valuation reports that provide the basis for the PERS cost estimates included in the fiscal forecast. The latest valuation report was received in October and reflects information for the fiscal year ending June 30, 2013. The valuation report for the Safety Tier I retirement plan now includes a fixed amount to be paid towards the unfunded liability in place of a charge shown as a percentage of payroll that would be applied against the safety plan’s actual payroll during the year. The amounts to be paid towards the unfunded retirement liability are subject to change each year based on the latest actuarial valuation. 2015-16 CalPERS costs are projected to increase by 8% or by $666,000 over the 2014-15 budgeted amount. By 2019-20 these costs are projected to grow by $3.9 million or 46% over the current budget. Approximately 80% of the increase in cost is estimated due to changes in PERS retirement formulas. The majority of the cost increase represents payments to be made towards the unfunded liability. Normal costs, which represent the value of the benefits earned by current employees, are projected to remain flat. The table below estimates the portion of annual required retirement contributions that have been and will be directed towards normal costs compared to the unfunded accrued liability (UAL). This table provides a clear indication that the growth in cost is attributable to the unfunded liability. Note that this chart does not include $1.2 million in total payments that the City made towards the unfunded liability in 2013-14 and 2014-15. These payments were in addition to the required annual contribution. Other Post Employment Benefit (OPEB) costs. The City maintains a retiree health benefit program in accordance with the requirements of the CalPERS Health Benefit Program. The City is legally obligated to pay the same amount for each current employee and retirees to allow future retirees to purchase health coverage through the City’s program with CalPERS Health Benefit Program. This program provides retirees who qualify with a $119.00 monthly benefit toward the cost of their health insurance premiums. (There is a group of 6 retirees for whom the City contributes more to the cost of their health insurance premiums until they reach age 65 or pass away.) The City also pays CalPERS $119 for each current employee to give them the right to purchase health insurance after they retire. The City has been a 45% 50% 55% 60% 65% 70% - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 20 1 2 20 1 3 20 1 4 20 1 5 20 1 6 20 1 7 20 1 8 20 1 9 20 2 0 Ratio of Normal Costs to UAL Payments UAL Normal Cost % UAL 12 B1-16 me mber of this program since 1993 and entered into an agreement with the California Employers’ Benefit Trust (CERBT) to pre-fund the City’s OPEB liability during the 2008-2009 fiscal year. Under the current funding plan, the City is on track to retire the unfunded liability in 23 years. An actuarial valuation of the City’s OPEB system was completed on April 15, 2014 for the year ending June 30, 2013 which reported that the unfunded liability as of June 30, 2013 was $4.4 million based on the actuarial value of assets. The annual city-wide contribution toward the cost of this benefit program is currently $588,000 of which the General Fund pays approximately 79% based on the distribution of employees among the various programs operated by the City. This amount is made up of the City’s share of cost to prefund the unfunded liability ($297,000) and premium contributions made by retirees who purchase their health insurance under the City’s health insurance program. A recent change has been made to the Actuarial Standards of Practice rules that will require the calculation of an “implied subsidy” starting in two years. An implied subsidy is an actuarially determined liability that results from allowing retirees to both purchase their insurance and obtain the post-retirement benefit at the same rates as active employees. Because the cost of health care increases with age, and because retirees are older than the population of active employees, the true cost of providing health care benefits to retirees is generally higher than the amount reflected in the health insurance premium cost. This reporting change will result in an increase in the amount of the Annual Required Contribution (ARC) to reflect the cost associated with the higher liability starting in 2016-17. The estimated increase in cost for that year is $383,000 and the General Fund portion ($304,000) has been reflected in the 5 Year Fiscal Forecast starting in that year. Following are the estimated amounts of the additional cost to fund the implied subsidy starting in 2016-17 according to the latest OPEB valuation report.  2016-17 $304,000  2017-18 $303,200  2018-19 $309,100  2019-20 $298,900 In the valuation report that was completed for the year ending June 30, 2013, the actuary calculated the implied subsidy using the actuarial value of assets to be $5.0 million. As a result, the combined total of the OPEB unfunded liability is $9.4 million as of June 30, 2013. Retrospective Insurance Liabilities. Based on preliminary information provided by the California Joint Powers Insurance Authority (CJPIA), the fiscal forecast projects that a $1.1 million General Fund deposit ($1.4 million all funds) is required to fund the most recent retrospective adjustment for the worker’s compensation and general liability programs. These insurance programs are reviewed annually and require retrospective adjustments (increases or decreases) until all claims are closed in their respective years up to 2012-13. At this time, the CJPIA is unable to provide the City with an estimate for the cost of any future retrospective adjustments. For that reason, staff recommends creating a reserve of excess general fund balance to include the $1.1 million retrospective payment that must be made in 2015-16. In addition, staff recommends increasing the reserve by $1.32 million which represents the cumulative five year total of the original estimate that was shown in the last five year forecast prepared as part of the supplemental budget process. This reserve amount will be reviewed annually as new information is received from the CJPIA to determine if it is adequate to cover future retrospective deposits. While the CJPIA has developed a new funding model that is designed to eliminate retrospective adjustments in the future, this only applies to plan years after 2012-13. The most recent retrospective adjustment applies to plan years ending with 2012-13. Insurance / Benefit Fund (IBF). The Insurance Benefit Fund was established in 2013-14 to accumulate resources needed to pay for 13 B1-17 anticipated increases in employee benefit costs, most notably PERS retirement costs as they were expected to increase significantly. As a result, the fiscal forecast reflects a General Fund transfer in 2014-15 in the amount of $280,000 to the IBF, which represents 1% of staff salaries. When the fund was established there was a plan to increase this funding level to 2% of salaries in the future and this was reflected in the previous fiscal forecast. Now that CalPERS has provided more detailed information about the 5 year trend in retirement costs which are now included in the fiscal forecast, staff recommends discontinuing the future transfers into the Insurance Benefit Fund to set aside monies to fund future retirement costs to avoid double counting the change in retirement costs. However, this does not mean that the use of the Insurance Benefit Fund would be discontinued. Based on auditor recommendations, staff will program any future retrospective payments made to the CJPIA in the Insurance Benefit Fund and as well as a transfer from the General Fund to cover that expense, as shown in the fiscal forecast. Capital Improvement Plan (CIP) Support Costs One of the Council’s continuing Other Important Objectives is to “Enhance maintenance of City infrastructure including attention to streets, sidewalks, pedestrian walkways, lighting, bicycle paths, creek and flood protection, parks, open space, urban forest, public buildings, and other City-owned property.” This is accomplished in part through the Capital Improvement Plan. The purpose of the CIP is to systematically plan, schedule, and finance capital projects to ensure cost-effectiveness as well as conformance with established policies. The CIP is a five-year plan organized into the same functional groupings used for the operating programs. The CIP will reflect a balance between capital replacement projects that repair, replace or enhance existing facilities, equipment or infrastructure; and capital facility projects that significantly expand or add to the City's existing fixed assets. Funding for the general government projects that are included in the CIP is mostly from transfers made out of the General Fund and into the General Capital Outlay, Fleet Equipment Replacement, Information Technology Replacement, Debt Service and Facility Maintenance Funds. Previously, contributions made to the debt service fund have not been counted as part of this total however staff has recognized that the debt service cost for CIP projects paid by the General Fund is another measure of support for the City’s CIP program. A review of General Fund contributions for the CIP including debt service dating back to 1995- 96 reveals that the annual average contributions made by the General Fund up through 2006- 2007 were $5.4 million. Since that time, the annual average has been $8.0 million. The 5 Year Fiscal Forecast reflects the following CIP contributions, including debt service payments for on debt issued for equipment and facility construction. The following chart indicates the City’s ability to better that investment in CIP for the next five years. It also shows how CIP funding in the current fiscal forecast reflects an increase over what was estimated in the last update of the fiscal forecast as of June 2014. Since 2018-19 and 2019-20 were not part of the June forecast, the chart reflects growth above 2017-18 levels. 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Fiscal Forecast: Transfers to CIP CIP Debt Svc CIP (June Forecast) 14 B1-18 *The 2014-15 debt service budget includes amounts for retrospective insurance and unfunded liability payments; these amounts are excluded from the chart above which only reflects CIP related expenses. The estimated contributions to debt service are based on the actual debt service requirements while the contributions to the capital outlay funds reflect modest growth intended to continue the General Fund’s ongoing support for infrastructure, facilities and equipment maintenance and replacement needs. 15 B1-19 Summary The City enters the 2015-17 Financial Planning period in a substantially improved economic condition both in the long and short terms than it has in previous financial plan periods. However, it still faces significant challenges, particularly in the area of increased employee retirement benefit costs, insurance programs and the legal obligation concerning retiree medical. As a result of an improved economy, combined with fiscally responsible decisions of the past, the City is positioned to address these challenges while also having an opportunity to make investments and reinvestments which will continue to improve our community. The City continues to have substantial advantages compared with many communities in California due to the following: 1. A balanced budget and reserves above minimum policy levels; 2. Dedication to fiscal responsibility; 3. Strong financial systems, policies and procedures; 4. Commitment to transparency and principles of engagement; 5. Strong Council leadership 6. Citizens who care deeply about the City’s quality of life and services 7. Staff that is committed, dedicated and passionate about achieving the City’s mission 8. A Great tradition of responsible stewardship The civic infrastructure will serve San Luis Obispo well in successfully meeting challenges ahead. 16 B1-20 Synopsis of Major Assumptions Demographic Trends Inflation. Grows by 2.5% in each year of the forecast Population and Housing. Over the last five years population has grown by an average of 0.2% and housing units by an average of 0.5%. The forecast does not include revenue or expenditure assumptions specifically related to these modest growth factors. Expenditures Operating Expenditures Compared to the adopted budget for 2014-15 net of one-time cost factors, operating costs are projected to increase by 4.2% in 2015-16 followed by 2.5% for inflation. Operating Expenditures – PERS Retirement Costs. Retirement costs are based on the employer rates identified in the October 2014 CalPERS’ actuarial valuation, adjusted for employee contributions. CalPERS has provided the actual employer rates applicable to 2015-16 and estimates for the remaining years shown in the forecast. CIP Expenditures – The amount of support for CIP spending reported in the five year forecast reflects a balance between the investment in CIP that is needed and the amount of available excess revenues that are identified in each fiscal year. Council has the discretion to amend the amount of funding available to CIP activities through the 2015-17 Financial Plan process. Debt Service. The forecast includes the support needed to fund the current debt service payments through 2019-20. A $612,000 reduction is projected in 2019-20 due to a reduction in 2009 Lease Revenue Bonds and completion of 2013 Fire Engine Lease Financing. Key Revenues The “top dozen” revenue sources described below account for about 95% of the total General Fund revenues. 1. Sales Tax. Sales taxes include multiple components. General Sales Tax growth is based on the information provided by HdL as part of their sales tax permit monitoring service. Staff also incorporated specific factors for the Chinatown development project. The forecast estimates $95,000 in additional revenues in 2016-17 and $190,000 in the following years for this project. Measure Y revenues are projected to grow at the same rates as those shown for the general sales tax. Proposition 172 sales tax revenues, which are a component of the state sales tax rate, were projected using growth rates provided by Beacon Economics. These revenues are projected to grow by 5.3% in 2015-16, 7.4% in 2016-17, 7.6% in 2017-18, 6.8% in 2018- 19, and 6.3% in 2019-20. 2. Property Tax. Growth in assessed valuation, which drives the property tax revenue trend, is estimated to be 5.8% in 2015-16 based on information provided by the County Auditor-Controller’s Office. This trend varies from 3.9% to 4.3% in the following years. 3. Transient Occupancy Tax. TOT is projected to grow by 5% in 2015-16, 4.8% in 2016-17, 4.5% in 2017-18, 4.3% in 2018- 19, and 4.2% in 2019-20. These rates are in line with the Tourism Improvement Board’s strategic plan revenue forecast for this timeframe. 4. Utility Users Tax. Grows by 4% in all years which is comparable to the average growth rate projected by Beacon Economics (4.1%) 5. Property Tax in Lieu of Vehicle License Fees. Grows by the same rate as projected 17 B1-21 property tax revenues throughout the forecast period. 6. Business Tax. Grows by 2.5% or the projected rate of inflation over all five years which is comparable to the growth rate experienced in the past five years. 7. Franchise Fees. Grows by 1.5% for all years of the forecast which is comparable to historical trends over five years (1.6%) 8. Gas Tax Subventions. Remains flat throughout the forecast based on information from California City Finance which monitors the State’s payments of gas tax and expected trends in fuel sales volumes 9. Development Review Fees. Growth is based on the projected growth rate in building permit valuations forecast by Beacon Economics. Staff adjusted the timing of the growth rates provided by Beacon so they more closely align with the current growth in revenue. Over the 5 year period, the following rates are reflected: -20.5% in 2015-16 followed by increases of 10% in 2016-17, 16.2% in 2017-18, 14.9% in 2018-19, and 12.1% in 2019-20. It should be noted that the one-time reduction projected in 2015-16 is following two years of significant growth (62% actual growth in 2013-14 and 23.7% projected in 2014-15). 10. Recreation Fees. Grows by 2% throughout the forecast period 11. Other Fees. Projected to remain flat over the forecast period. However, a review of the City’s fee schedule is currently being conducted which could lead to changes in this estimate as part of the financial plan adoption process. 12. Investments. Investment income is projected to be flat and reflects the expectation that interest rates will continue to remain low throughout the forecast period. However, the Finance Director is exploring alternatives to the current investment strategy which could increase interest yields by a modest amount over time. 18 B1-22 City of San Luis Obispo - General Fund Five Year Fiscal Forecast December 2014 $ in 000's Actual Actual Actual Budget Projected 2011-12 2012-13 2013-14 2014-15 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Sales Tax 13,290 14,242 15,406 15,277 15,739 15,907 16,897 17,542 18,099 18,664 Measure Y/G Sales Tax 6,237 6,494 6,774 6,775 6,882 7,141 7,393 7,635 7,880 8,129 Sales Tax Prop 172 307 328 392 350 411 432 464 500 534 567 Property Taxes 8,367 9,177 8,960 8,934 9,263 9,801 10,183 10,600 11,046 11,520 Property Tax in Lieu of VLF 3,492 3,533 3,646 3,722 3,849 4,073 4,231 4,405 4,590 4,787 Transient Occupancy Tax 5,222 5,572 6,063 6,290 6,518 6,844 7,170 7,496 7,822 8,148 Utility Users Tax 4,584 4,916 5,345 5,500 5,506 5,720 5,949 6,187 6,434 6,692 Franchise Fees 2,462 2,552 2,637 2,540 2,676 2,716 2,757 2,798 2,840 2,883 Business Tax 1,838 2,055 2,143 2,185 2,197 2,251 2,308 2,365 2,425 2,485 Real Property Transfer Tax 144 256 288 180 180 184 187 191 195 199 Subtotal Taxes 45,944 49,126 51,653 51,752 53,221 55,069 57,540 59,719 61,864 64,074 Gas Tax / TDA / Transfers In 1,408 1,375 1,640 1,489 1,489 1,489 1,489 1,489 1,489 1,489 Other Subventions & Grants 564 1,355 1,238 327 399 319 319 319 319 319 Development Review Fees 2,454 2,595 4,207 3,396 5,206 4,115 4,527 5,260 6,044 6,775 Recreation Fees 1,742 1,748 1,733 1,548 1,635 1,667 1,701 1,735 1,769 1,805 Other Service Charges 2,090 1,851 1,952 1,743 1,763 1,764 1,764 1,764 1,764 1,764 Other Revenues 893 903 604 373 496 496 496 496 496 496 Bond Proceeds 5,386 - - - - - - - - - Subtotal Non-Tax Revenues 14,537 9,828 11,374 8,875 10,987 9,850 10,295 11,063 11,881 12,648 Total Revenues 60,481 58,953 63,027 60,627 64,209 64,919 67,835 70,781 73,745 76,721 Operating Expenses (excl PERS)38,845 40,996 42,417 43,982 46,309 45,101 46,186 47,895 48,708 50,432 PERS Normal Costs 1 4,189 3,145 2,921 4,522 4,621 3,535 3,735 3,836 3,935 4,031 PERS Unfunded Liability 4,178 4,443 4,642 3,791 3,791 5,629 6,327 6,942 7,592 8,278 Development Svcs Allocation2 - - - - 1,358 1,154 1,460 2,007 2,595 3,143 Subtotal: Operating Expenses 47,212 48,583 49,981 52,295 56,079 55,419 57,708 60,680 62,830 65,885 Bond Costs 5,779 Debt Service 2,437 2,773 3,551 5,577 5,382 3,000 2,994 2,994 2,892 2,280 Transfer to CDBG 54 45 52 75 75 126 126 126 126 126 Transfer to Insurance Benefit Fund - - - 280 280 1,124 - - - - CIP - Fleet Replacement 500 500 411 533 533 624 655 824 824 975 CIP - IT Replacement - 200 566 967 967 650 683 700 850 900 CIP - Major Facility Replacement - - 853 551 551 607 637 720 825 850 CIP - All Other 3,723 3,496 5,754 2,516 2,739 3,765 3,953 3,953 4,072 4,400 Subtotal: Operating Transfers 12,492 7,014 11,187 10,498 10,527 9,896 9,048 9,317 9,589 9,531 Total Expenditures 59,704 55,597 61,168 62,793 66,606 65,315 66,757 69,997 72,419 75,416 Revenues Over/(Under) Expenses 3 777 3,356 1,860 95 2,175 728 1,079 784 1,326 1,306 One Time Use of Reserve4 - - - (2,261) (4,572) (1,124) - - - - Fund Balance, Beginning of Year 12,908 13,684 18,938 15,189 20,797 18,400 18,004 19,083 19,867 21,193 Funding Adjustment - 1,897 - - - - - - Ending Fund Balance 13,685 18,938 20,797 13,023 18,400 18,004 19,083 19,867 21,193 22,499 Reserve @ 20% Operating Costs 9,161 10,070 10,458 10,813 11,216 11,384 11,542 12,136 12,566 13,177 Adj for Debt Svc Reserve (603) (332) (332) (332) (332) (332) (332) (332) (332) (332) Encumbrance & Designated Reserve 5 (2,279) (1,768) (6,272) (1,700) (2,444) (1,320) (1,320) (1,320) (1,320) (1,320) Reserve Over/(Under) Policy Level 1,642 6,767 3,735 179 4,409 4,969 5,890 6,079 6,975 7,670 Change In 20% Reserve Level 168 158 594 430 611 Undesignated and Available 6 4,409 560 921 190 896 695 Notes 1 PERS costs estimated based on CalPERS valuation reports and broken out by normal cost vs unfunded liability to show the impact of PERS rate changes. 2 Relfecs 75% of development services revenues in excess of prior fiscal forecast levels 3 Projected revenues over expenses excluces one-time use of designated reserves shown in the line below 4 2014-15 use of reserve includes $2 million CJPIA, $196k Dev Svcs SOPC, $1.8M carryover, $468k Dev Svcs revenue appropriation. 2015-16 reflects CJPIA. 5 2013-14 reserve includes $2.1M CJPIA, $1.7M contingency reserve, $1.8M carryover, $468k Dev Svcs, $196k SOPC. 2014-15 and beyond reflects CJPIA. 6 Undesignated reflects balance available for appropriation. If allocated to operating this amount is to be reduced by 20% for reserve requirements.12/9/2014 Five Year Forecast 15-17 Financial Plan 19 B1-23 PROJECTION FACTORS 2 Years 5 Years 10 Years 15 Years 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 DEMOGRAPHICS Population 0.2%0.2%0.2%0.3% Housing Units 0.3%0.5%0.6%0.7% Inflation 1.6%2.4%2.5%2.5%2.5%2.5%2.5%2.5%2.5%2.5% KEY REVENUES Sales Tax (excluding Triple Flip Adj)8.0%5.4%3.5%4.0%2.2%3.8%3.5%3.3%3.2%3.1% Triple Flip Adjustment (322) Chinatown 95 190 190 190 Measure Y/G Sales Tax 4.2%3.9%NA NA 1.6%3.8%3.5%3.3%3.2%3.1% Property Tax 3.7%0.5%4.1%5.2%3.4%5.8%3.9%4.1%4.2%4.3% Transient Occupancy Tax 7.8%5.4%4.6%4.0%7.5%5.0%4.8%4.5%4.3%4.2% Utility Users Tax 8.2%4.4%4.2%4.2%3.0%3.9%4.0%4.0%4.0%4.0% Franchise Fees 3.5%1.6%3.0%7.1%1.5%1.5%1.5%1.5%1.5%1.5% Business Tax 8.3%2.6%3.8%4.9%2.5%2.5%2.5%2.5%2.5%2.5% Gas Tax / TDA / Transfers In 7.5%15.2%6.7%5.1%-9.2%0.0%0.0%0.0%0.0%0.0% Development Review Fees 34%24%23.7%-21.0%10.0%16.2%14.9%12.1% Recreation Fees 0%8%-5.7%2.0%2.0%2.0%2.0%2.0% EXPENDITURES Operating Costs (excluding PERS 4.2%2.5%2.5%2.5%2.5% PERS (Estimated based on actuarial reports)-23.5%5.7%2.7%2.6%2.5% Estimated Staff savings 2.0%2.0%2.0%2.0%2.0% Estimated Non-Staff savings 2.0%2.0% Debt Service (Based on Existing Debt)-44.2%-0.2%0.0%-3.4%-21.2% CIP (including Fleet, IT, Major Facility, All Other)17.8%5.0%4.5%6.0%8.4% Forecast AssumptionsHistorical Trends (Annual Growth Rates) 20 B1-24 Historical Trends and Supplemental Information: Overview In order to establish the five-year forecast, the City looks at historical trends and other relevant information in order to make informed decisions about its projections. The following information is an important part of the fiscal forecast and highlights information that has and will continue to influence the City's past, current, and future standing. In preparing the forecast, the below information was reviewed: Population, Housing, CPI .................................................................................................. page 22 • Population and Housing growth rates over the past 15 years • Consumer Price Index (CPI) growth rates over 15 years Overview of General Fund Revenue Sources .................................................................. page 24 • General Fund Revenue Overview including 2013-14 unaudited results and trends over 15 years • Review of Major revenue sources over 15 years • Sales tax revenues by Industry Group over 5 years • Sales tax "Pool" revenues • Property Tax Supplemental Information • Development Review Fee revenues by type over 5 years General Fund Operating Program Expenditures .............................................................. page 31 • Total operating expenditures by Function over 15 years including unaudited results from 2013-14 • Staffing Expenditures over 15 years • Capital Improvement Program (CIP) Expenditures over 15 years • Debt Service Obligations over 15 years • PERS rate assumptions used in Fiscal Forecast Revenue Compared with Expenditures over 15 years........................................................ page 35 21 B1-25 Population & Housing Year Population % Change Housing Units Annual Change %Change 2000 44,032 0.6%18,871 95 0.5% 2001 44,293 0.6%19,355 484 2.6% 2002 44,406 0.3%19,461 106 0.5% 2003 44,293 -0.3%19,558 97 0.5% 2004 44,271 0.0%19,617 59 0.3% 2005 44,630 0.8%19,962 345 1.8% 2006 44,483 -0.3%20,062 100 0.5% 2007 44,438 -0.1%20,102 40 0.2% 2008 44,650 0.5%20,222 120 0.6% 2009 44,938 0.6%20,318 96 0.5% 2010 45,046 0.2%20,375 57 0.3% 2011 45,269 0.5%20,578 203 1.0% 2012 45,312 0.1%20,663 85 0.4% 2013 45,593 0.6%20,697 34 0.2% 2014 45,473 -0.3%20,779 82 0.4% 2 Year Avg 0.2%0.3% 5 Year Avg 0.2%0.5% 10 Year Avg 0.3%0.6% 15 Year Avg 0.3%0.7% Source: State of California Department of Finance - Demographic Research Unit Population. The population in San Luis Obispo has grown during most of the past 15 years at a steady pace with no major increases. As of January 1, 2014 the City's population is 45,473. Compared to 2000, this is an increase of 1,441 or an average of 96 new residents per year. Housing. Housing units have also experienced a steady increase with two more significant growth spurts in 2001 (2.6% / 484 Units) and in 2005 (1.8% / 345 Units). Over the past 15 years the City's housing inventory has grown by 1,908 units from 18,871 to 20,779. -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 20 0 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 Annual Population & Housing Change: Last 15 Years Population Housing 22 B1-26 Consumer Price Index (CPI) Avg Growth US: CPI-U So. Cal No. Cal Last 2 Years 1.6%1.4%2.4% Last 5 Years 2.4%2.0%2.6% Last 10 Years 2.5%2.6%2.5% Last 15 Years 2.5%2.7%2.7% The City uses several CPI regions depending on the application. The City's rates and fee structure is increased annually by the U.S. City Average (All Urban Consumers CPI), but many of the labor agreements use the Southern California (Los Angeles-Riverside-Orange) or Northern California (San Francisco, Oakland, San Jose) CPI. The following charts summarize changes in the CPI for those regions over the past 15 years. 150 170 190 210 230 250 20 0 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 CPI - Last 15 Years US: CPI-U So Cal No Cal -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 20 0 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 Percent Change in CPI: Last 15 Years US: CPI-U So Cal No Cal 23 B1-27 General Fund Revenue Sources Tax Revenue Column1 Tax Entity 2014-15 Budget per 6/30/14 % of Budget Sales Tax State 15,276,800 26% Sales Tax - Measure Y Local 6,775,000 11% Public Safety Tax (Prop 172)State 350,400 1% Property Tax County 8,933,600 15% Property Tax in Lieu of VLF 3,721,600 6% Transient Occupancy Tax Local 6,289,800 11% Utility User Tax Local 5,500,000 9% Franchise Fees Local 2,540,200 4% Business Tax & Licenses Local 2,184,500 4% Real Property Transfer Tax Local 180,000 0% Service Charges Development Review Fees 3,396,300 6% Recreation Fees 1,547,700 3% Other Service Charges 1,743,000 3% Subventions & Grants 327,000 1% Fines & Forfeitures 156,000 0% Historical Trends in Revenue Sources Fiscal Year Ending Major Tax Revenues % Change All General Fund Revenue %Change 2000 25,609,500 10.5%29,906,000 5.3% 2001 27,298,600 6.6%30,977,000 3.6% 2002 28,722,000 5.2%35,769,300 15.5% 2003 29,541,400 2.9%35,522,000 -0.7% 2004 31,285,600 5.9%37,777,500 6.3% 2005 32,712,500 4.6%37,953,900 0.5% 2006 35,702,900 6.2%44,376,900 16.9% 2007 40,202,800 14.8%45,165,700 1.8% 2008*45,752,800 14.2%54,152,000 19.9% 2009 44,324,500 -3.1%53,745,600 -0.8% 2010 42,631,300 -3.8%49,265,700 -8.3% 2011 44,618,800 4.5%50,382,200 2.3% 2012 46,862,300 5.2%54,976,800 9.1% 2013 49,743,300 6.6%58,953,000 7.5% 2014 52,465,500 6.6%63,027,300 7.5% 2 Year Avg 6.6%7.5% 5 Year Avg 3.8%3.6% 10 Year Avg 5.6%5.6% 15 Year Avg 5.8%5.8% * 2008 reflects first full year of Measure Y funding The City receives income from two major revenue sources, taxes and service fees. The tables below reflect a breakout of the individual revenues comprising these revenue streams. An in depth review of revenue allocations is included on the following pages. 24 B1-28 Major Tax Revenues - 15 Year Data Fiscal Year Ending Sales Tax % Change Measure Y Sales Tax % Change Property Tax % Change Property Tax in Lieu of VLF % Change Transient Occupancy Tax % Change Utility Users Tax % Change 2000 9,283,400 - 4,501,300 - 3,582,700 3,079,100 2001 9,516,400 3%- NA 4,799,800 7%- NA 3,920,200 9%3,425,200 11% 2002 10,099,200 6%- NA 5,219,000 9%- NA 3,790,300 -3%3,532,300 3% 2003 10,179,300 1%- NA 5,584,200 7%- NA 3,840,800 1%3,666,200 4% 2004 11,294,300 11%- NA 6,069,600 9%- NA 3,922,200 2%3,669,200 0% 2005 11,745,400 4%- NA 6,630,600 9%- NA 4,079,800 4%3,670,200 0% 2006 12,675,900 8%- NA 7,519,600 13%1,530,800 NA 4,539,200 11%3,947,300 8% 2007 13,993,800 10%1,000,000 NA 8,255,000 10%3,061,500 100%4,786,000 5%4,096,100 4% 2008 13,581,700 -3%5,996,600 500%8,374,200 1%3,280,100 7%5,054,700 6%4,177,700 2% 2009 12,070,700 -11%5,641,400 -6%8,788,400 5%3,504,700 7%4,679,500 -7%4,358,500 4% 2010 10,723,900 -11%5,252,500 -7%8,579,300 -2%3,565,100 2%4,496,100 -4%4,862,400 12% 2011 12,098,600 13%5,616,300 7%8,441,100 -2%3,551,100 0%4,844,200 8%4,592,300 -6% 2012 13,290,000 10%6,237,500 11%8,367,000 -1%3,492,400 -2%5,222,000 8%4,584,100 0% 2013 14,242,200 7%6,493,800 4%9,176,600 10%3,533,200 1%5,572,400 7%4,916,100 7% 2014 15,405,800 8%6,774,400 4%8,960,000 -2%3,645,700 3%6,063,200 9%5,345,300 9% 2 Year Avg 7.7%4.2%3.7%2.2%7.8%8.0% 5 Year Avg 5.4%3.9%0.5%0.8%5.4%4.4% 10 Year Avg 3.5%73.3%4.1%14.8%4.6%3.9% 15 Year Avg 4.0%73.3%5.2%14.8%4.0%4.1% Fiscal Year Ending Business Tax % Change Franchise Fees % Change Gas Tax & TDA % Change VLF in Excess % Change Sum of Major Tax Revenues % Change All Revenue Sources % Change 2000 1,107,800 1,089,600 834,700 2,130,900 25,609,500 29,906,000 2001 1,275,200 15%1,211,800 11%852,300 2%2,297,700 8%27,298,600 7%30,977,000 4% 2002 1,355,900 6%1,388,100 15%869,800 2%2,467,400 7%28,722,000 5%35,769,300 15% 2003 1,429,900 5%1,356,200 -2%863,200 -1%2,621,600 6%29,541,400 3%35,522,000 -1% 2004 1,475,100 3%1,967,800 45%874,100 1%2,013,300 -23%31,285,600 6%37,777,500 6% 2005 1,518,800 3%2,005,600 2%875,100 0%2,187,000 9%32,712,500 5%37,953,900 0% 2006 1,578,000 4%2,101,300 5%855,200 -2%955,600 -56%35,702,900 9%44,376,900 17% 2007 1,706,700 8%2,153,700 2%853,300 0%296,700 -69%40,202,800 13%45,165,700 2% 2008 1,866,400 9%2,361,700 10%869,400 2%190,300 -36%45,752,800 14%54,152,000 20% 2009 1,878,500 1%2,439,400 3%796,900 -8%166,500 -13%44,324,500 -3%53,745,600 -1% 2010 1,830,100 -3%2,396,700 -2%790,200 -1%135,000 -19%42,631,300 -4%49,265,700 -8% 2011 1,797,800 -2%2,352,100 -2%1,119,700 42%205,600 52%44,618,800 5%50,382,200 2% 2012 1,815,400 1%2,462,300 5%1,346,000 20%45,600 -78%46,862,300 5%55,094,500 9% 2013 2,038,900 12%2,552,300 4%1,198,500 -11%19,300 -58%49,743,300 6%58,953,300 7% 2014 2,124,600 4%2,637,000 3%1,509,500 26%- -100%52,465,500 5%63,027,300 7% 2 Year Avg 8.3%3.5%7.5%-78.8%5.8%7.0% 5 Year Avg 2.6%1.6%15.2%-40.4%3.5%3.4% 10 Year Avg 3.8%3.0%6.7%-36.7%5.4%5.6% 15 Year Avg 4.9%7.1%5.1%-26.3%5.4%5.7% 25 B1-29 Sales Taxes by Industry Column2 Column3 Column4 Column5 Column6 Column7 2009-10 2010-11 2011-12 2012-13 2013-14 % of Total 2013-14 Autos & Transport 1,826,041 2,025,718 2,172,351 2,604,966 2,967,061 21% Building & Construction 969,473 1,025,685 1,076,986 1,103,594 1,336,479 10% Business & Industry 724,884 722,163 823,276 959,562 1,007,181 7% Food and Drugs 708,609 704,867 734,380 725,238 717,948 5% Fuel & Service Stations 883,851 1,173,539 1,419,194 1,361,234 1,336,184 10% General Consumer Goods 4,010,555 4,076,226 4,483,070 4,554,066 4,826,021 35% Restaurants & Hotels 1,293,069 1,301,032 1,398,553 1,579,122 1,651,185 12% Transfers & Unidentified (922) - (108) (1) 2 TOTAL 10,415,560 11,029,230 12,107,702 12,887,781 13,842,061 Sales Tax Revenues by Industry The City's Sales Tax revenues come from several different business categories, each of which performs very differently in responses to economic conditions. The chart below shows the City's Sales Tax revenues by major business category for the previous five years. It also shows the percent of total revenue generated by each category in 2013-14. The line graph chart shows that the largest and most volatile business category is general consumer goods. In making Sales Tax projections, the historical performance of each of the categories and various economic factors influencing them are taken into consideration. Note that the following tables do not include sales tax "pool" revenues which are discussed in more detail on the following page. Quarterly Sales Tax by Industry Group: 2011-2014 26 B1-30 Sales Tax "Pool" Revenues As mentioned earlier, several major revenue sources have unique characteristics or have undergone changes during prior years that must be considered when making five-year projections. These include Sales Tax and Property Tax, Property Tax In Lieu of Vehicle License Fees (VLF) and Development Review Fees. While sales taxes are usually generated on a "situs" basis (city or county unincorporated area where the sale takes place), there are a variety of retail transactions that are allocated on a “pool" basis because the State Board of Equalization believes that it would be too difficult to do otherwise. These are generally known as "use taxes." A significant portion of the City's sales tax revenues come from the "pool" - between 10% and 15%. Allocations from the pool are made in proportion to a city's or county's share of situs revenues; as such, the City receives about 28% of County pool revenues. While used car sales between private parties are a large component of the pool for all cities in the State, there is a unique situation in San Luis Obispo due to the Diablo Canyon power plant: it is a large sales tax generator, and all of these revenues go into the County pool. These revenues are especially pronounced during reactor refueling, which occurs about every 14 to 16 months. However, beginning in 1997, the State Board of Equalization changed its allocation procedures. Now, any individual transaction in excess of $500,000 that would otherwise be distributed through the pool is allocated on a situs basis. Staff initially estimated that this change would result in a loss to the City of about $180,000 on an annualized basis. However, it turns out that this is more difficult to project than we originally thought because we did not lose all Diablo Canyon revenues - just those with a value greater than $500,000 per transaction. Cumulatively, it appears that sales activity at Diablo Canyon for individual transactions under $500,000 remains high. This is reflected in pool revenues from 1998-2006, when they either increased or remained relatively constant rather than decreased sharply as we would have otherwise expected. After declining between 2006 and 2010, these pool revenues are on the rise again. Increasing pool taxes are largely due to online sales which are included in the pool and have been growing significantly in recent years. As a result of this online sales factor, pool taxes are expected to continue to increase at a higher level than the rate that is projected for any industry. This anticipated increase in pool revenues is reflected in the fiscal forecast. Because the pool is such a large portion of the City’s total sales revenues and is volatile based on factors unrelated to the City's retail base, a better indicator of trends is sales tax revenue excluding pool allocations. The following chart summarizes City pool sales tax revenues for the past fifteen fiscal years. $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 $1,200,000 $1,300,000 $1,400,000 $1,500,000 $1,600,000 "Pool" Sales Tax Revenues: Last 15 Years 27 B1-31 Property Tax Property Tax In Lieu of Vehicle License Fees (VLF) Property Tax Supplemental Information Property Tax has been the revenue most affected by voter initiatives and legislative actions over the years. With approval of Proposition 13 in 1978, Property Tax revenues were reduced by two-thirds and thereafter limited to 2% annual increases or changes to the Consumer Price Index, whichever is less. When properties change hands or are improved, the base for assessing the tax (the "assessed value") is increased or decreased to reflect the current market value. Although the Property Tax is strictly a local revenue and is shared by cities, counties, school districts and special districts, it is collected and allocated in accordance with State law. In the early 1990s, the State legislature permanently shifted a larger portion of the Property Tax to schools. This shift was made to the State's Educational Revenue Augmentation Fund (ERAF) to backfill a portion of the State's obligation for school funding. This original "ERAF shift" resulted in an ongoing annual loss to the City of approximately $2 million that could be used for property-related basic services. In 2006-07 the state made one more revenue shift and then built into their budget a permanent 2/3 reduction in the Vehicle License Fee and began substituting this revenue stream with property tax in-lieu payments to cities and counties. Included in the State budget deal with local governments in 2004-05 was a permanent redistribution of two of the City's revenue sources. Under this agreement, the Vehicle License Fee (VLF) rate for cities was permanently reduced from 2% to 0.65%. In 2005-06 the City began receiving monthly payments at the lower rate while the remaining amount which is now known as VLF in-lieu revenue, was added to the property tax base and is paid to the City in semi-annual installments. The rate of increase in the VLF in-lieu monies is tied to the growth rate of the City's property tax assessed valuation base. Effective July 1, 2011, as part of the Legislature's efforts to solve the state's budget problems, the monthly payment of VLF revenue to cities was eliminated and permanently shifted to fund law enforcement grants. As a result, the City has received no VLF revenues after the 2012-13 Fiscal Year. 28 B1-32 Development Review Fees: Last Five Years Fiscal Year Planning Building Fire Engineering Total 2009-10 429,600 829,000 103,700 959,700 2,322,000 2010-11 500,400 724,800 122,900 319,900 1,668,000 2011-12 392,000 924,600 149,600 987,600 2,453,800 2012-13 587,500 1,266,100 219,300 522,311 2,595,211 2014-15 1,023,984 2,043,217 308,756 831,130 4,207,086 Development review fees are a General Fund revenue source that are particularly sensitive to economic conditions. In 2013-14 these fees increased by 62% above 2012-13 levels. All development review fee types - Planning, Building, Fire, and Engineering - experienced growth in the past year, as shown in the chart below. This trend has continued into 2014-15 and the fiscal forecast projects that there will continue to be significant growth in development review fees. - 500,000 1,000,000 1,500,000 2,000,000 2009-10 2010-11 2011-12 2012-13 2014-15 Development Review Fees: Last 5 Years Planning Building Engineering Fire 29 B1-33 General Fund Operating Program Expenses by Function Fiscal Year Ending Public Safety: Police % Change Public Safety: Fire % Change 2000 6,901,900 7.5%4,581,900 -3.1% 2001 7,340,700 6.4%4,841,200 5.7% 2002 7,990,700 8.9%5,906,500 22.0% 2003 8,822,800 10.4%6,505,200 10.1% 2004 9,758,100 10.6%7,495,900 15.2% 2005 10,121,500 3.7%7,702,700 2.8% 2006 10,948,000 8.2%8,299,000 7.7% 2007 11,240,400 2.7%9,419,200 13.5% 2008*14,901,300 32.6%10,154,600 7.8% 2009 15,194,200 2.0%10,808,200 6.4% 2010 14,525,400 -4.4%9,678,400 -10.5% 2011 14,019,900 -3.5%9,486,200 -2.0% 2012 14,029,600 0.1%9,923,600 4.6% 2013 14,276,200 1.8%9,697,200 -2.3% 2014 14,215,500 -0.4%9,648,010 -0.5% 2 Year Avg 0.7%-1.4% 5 Year Avg -1.3%-2.1% 10 Year Avg 4.3%2.8% 15 Year Avg 5.8%5.2% *reflects binding arbitration Fiscal Year Ending Transport- ation % Change Leisure, Cultural, Social Svc % Change Community Developemnt % Change General Gov't % Change Total * % Change 2000 1,501,100 0.2%3,822,100 15.5%3,102,100 -1.9%6,429,300 8.3%26,338,400 5.6% 2001 1,659,700 10.6%4,113,300 7.6%3,501,200 12.9%6,525,800 1.5%25,324,200 -3.9% 2002 1,954,100 17.7%4,540,000 10.4%3,852,000 10.0%6,811,300 4.4%28,158,700 11.2% 2003 2,015,900 3.2%4,753,800 4.7%3,925,000 1.9%7,364,600 8.1%30,404,800 8.0% 2004 1,854,200 -8.0%4,896,400 3.0%4,420,600 12.6%8,194,600 11.3%33,245,900 9.3% 2005 2,020,300 9.0%5,145,500 5.1%4,360,000 -1.4%8,263,200 0.8%34,182,800 2.8% 2006 1,967,800 -2.6%5,280,500 2.6%4,308,400 -1.2%8,557,400 3.6%35,771,100 4.6% 2007 2,173,500 10.5%5,705,000 8.0%4,897,800 13.7%9,866,100 15.3%39,515,300 10.5% 2008 2,539,800 16.9%6,398,600 12.2%5,510,900 12.5%10,381,000 5.2%45,810,900 15.9% 2009 3,224,200 26.9%6,598,900 3.1%5,576,200 1.2%11,002,000 6.0%48,192,900 5.2% 2010 3,019,700 -6.3%6,279,900 -4.8%5,394,000 -3.3%11,517,500 4.7%46,150,900 -4.2% 2011 2,901,900 -3.9%6,268,700 -0.2%5,309,000 -1.6%11,178,100 -2.9%44,713,900 -3.1% 2012 2,865,100 -1.3%6,704,200 6.9%5,514,400 3.9%11,950,100 6.9%47,212,100 5.6% 2013 2,798,200 -2.3%6,790,300 1.3%6,297,600 14.2%12,498,200 4.6%48,582,900 2.9% 2014 2,882,200 3.0%7,155,619 5.4%6,748,300 7.2%13,228,326 5.8%49,980,555 2.9% 2 Year Avg 0.3%3.3%10.7%5.2%2.9% 5 Year Avg -2.2%1.7%4.1%3.8%0.8% 10 Year Avg 5.0%4.0%4.5%5.0%4.3% 15 Year Avg 4.9%5.4%5.4%5.6%4.9% * Total amount shown is net of reimbursement transfer (Enterprise funded costs) Public Safety 44% Transportation 5% Leisure, Cultural, Social Svc 13% Community Development 13% General Gov't 25% 2013-14 Operating Expenses by Function 30 B1-34 Staffing Expenditures Fiscal Year Ending Total Staffing Costs Percent of Operating 2000 18,580,100 71% 2001 19,894,200 71% 2002 22,265,100 71% 2003 23,979,300 72% 2004 26,875,000 72% 2005 28,093,700 73% 2006 29,591,000 75% 2007 32,053,800 75% 2008 38,226,300 74% 2009 41,144,300 77% 2010 40,288,600 79% 2011 39,295,100 80% 2012 40,105,500 79% 2013 39,823,100 76% 2014 39,738,300 74% As a service organization, the City’s largest and most important asset is the people providing the services. The following charts provide an overview of the cost of staffing compared to overall operating expenditures. 66% 68% 70% 72% 74% 76% 78% 80% 82% 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 20 0 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 20 0 6 20 0 7 20 0 8 20 0 9 20 1 0 20 1 1 20 1 2 20 1 3 20 1 4 Staffing Expenditures: Total Cost and % of Operating Expenses Total Staffing Costs Percent of Operating 31 B1-35 Capital Improvement Program (CIP) Fiscal Year Capital Outlay Equipment Replacement Open Space Transportation Impact Fee IT Replacement Major Facility Replacement Public Art Debt Service Total Total Excl Debt Svc 1999-2000 5,301,400 400,000 220,000 - - - - 1,209,000 7,130,400 5,921,400 2000-2001 5,728,700 436,700 402,500 - - - - 2,075,600 8,643,500 6,567,900 2001-2002 4,574,400 461,700 250,000 - - - - 1,715,200 7,001,300 5,286,100 2002-2003 2,646,500 486,700 200,000 - - - - 1,696,100 5,029,300 3,333,200 2003-2004 3,388,700 433,700 - - - - - 1,760,200 5,582,600 3,822,400 2004-2005 1,707,100 458,700 100,000 - - - - 1,672,600 3,938,400 2,265,800 2005-2006 2,381,100 483,800 25,000 - - - - 1,620,300 4,510,200 2,889,900 2006-2007 2,934,400 498,300 25,000 - - - - 2,083,500 5,541,200 3,457,700 2007-2008 9,365,600 1,109,000 323,000 701,900 - - - 2,078,000 13,577,500 11,499,500 2008-2009 3,849,100 550,000 234,000 - - - - 2,075,800 6,708,900 4,633,100 2009-2010 3,542,500 79,100 260,400 74,000 - - - 2,908,700 6,864,700 3,956,000 2010-2011 2,136,900 - - - - - - 3,023,200 5,160,100 2,136,900 2011-2012 3,417,800 500,000 305,000 - - - - 2,437,200 6,660,000 4,222,800 2012-2013 3,473,924 500,000 22,500 - 200,000 - - 2,772,600 6,969,024 4,196,424 2013-2014*5,535,900 411,400 200,000 - 565,500 852,700 18,100 2,615,900 10,199,500 7,583,600 * Debt service total shown in 2013-14 excludes $935k payment towards unfunded liability which was charged to debt service fund (non CIP cost) 2016-17 2017-18 2018-19 2019-20 General Fund Transfers for the Capital Improvement Program Every year, the City establishes a capital improvement program to maintain and improve its infrastructure. The following data provides the investment levels over the past 15 years, including the General Fund support for debt service payments on debt issued for equipment and facility construction. - 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 General Fund Transfers to CIP Debt Service Public Art Major Facility Replacement IT Replacement Transportation Impact Fee Open Space Equipment Replacement Capital Outlay * New Public Safety Communications Center in 2007-08 32 B1-36 Debt Service Obligations: General Fund Fiscal Year Ending Debt Service Transfer Operating Revenues* % Operating Revenues 2000 1,209,000 33,130,800 3.6% 2001 2,075,600 34,077,500 6.1% 2002 1,715,200 34,834,600 4.9% 2003 1,696,100 34,415,600 4.9% 2004 1,760,200 36,872,400 4.8% 2005 1,672,600 38,325,500 4.4% 2006 1,620,300 43,164,400 3.8% 2007 2,083,500 49,649,600 4.2% 2008 2,078,000 54,152,000 3.8% 2009 2,075,800 53,354,700 3.9% 2010 2,908,700 49,265,700 5.9% 2011 3,023,200 50,382,200 6.0% 2012 2,437,200 53,686,900 4.5% 2013 2,772,600 57,587,900 4.8% 2014 3,551,000 61,407,100 5.8% *excludes Transfers In from Gas Tax, TDA, and other funds Debt service obligations have remained a small part of the General Fund over the last 15 years. The City continues to exercise a conservative approach to debt financing, as well as a constant review of payments and possible term improvements whenever practical. The City's debt management policies state that: "In evaluating debt capacity, general purpose annual debt service payments should generally not exceeed 10% of General Fund revenues; in no case should they exceed 15%." The following data and chart illustrates the City's performance as to the ratio of debt service to operating revenues which is consistently below policy. 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Ratio of Debt Service to Operating Revenues 33 B1-37 Retirement Tier 2015-16 2016-17 2017-18 2018-19 2019-20 Miscellaneous 28.3%30.2%31.4%32.6%33.8% Safety Tier I 20.2%21.3%21.3%21.3%21.3% Safety Police Tier II 15.37%16.30%16.30%16.30%16.30% Safety Police Tier III 12.25%12.25%12.25%12.25%12.25% Safety Fire Tier II 17.30%18.20%18.20%18.20%18.20% Safety Fire Tier III 12.25%12.25%12.25%12.25%12.25% Unfunded Liability Employer Payment 2015-16 2016-17 2017-18 2018-19 2019-20 Safety Tier I 3,056,723 3,402,670 3,766,621 4,149,349 4,551,651 Notes • Miscellaneous rate reflects a blended rate for Tier I, II, and III • The rates shown above reflect the full cost of the employer rate. POA members in Tier I & II are now paying 3% of the employer share and this was factored into the forecast. PERS Rates Projected PERS Employer Rates Beginning in 2015-16, the Safety Tier I valuation report identifies a fixed payment amount to be made towards the unfunded liability. This information is shown below. Similar to the PERS rate information, 2015-16 represents the actual amount owed while the amounts shown for 2016-17 and beyond are based on a projection provided by PERS, which is subject to change annually based on the amounts indicated in the annual valuation reports. Payments made for the miscellaneous plan continue to be based on the PERS rate applied against the City's payroll cost. The table below shows the PERS employer rate assumptions which were factored into the fiscal forecast. 2015-16 reflects the new PERS rates for the upcoming fiscal year. 2016-17 and beyond is based on projections provided by PERS in their actuarial valuation reports. At the time that the fiscal forecast was prepared, updated rates for Safety Tier III plans have not been provided. However, CalPERS indicated that Tier III rates will not be changing and the forecast assumes 2014-15 rates will remain flat for this tier. It should also be noted that members of the Police Officers Association in Tier I & II are now paying 2% to 3% of the employer contribution rate and this was factored into the forecast. 34 B1-38 Revenue Compared to Expenditures: 15 Years Excludes bond proceeds *2012 excludes bond related revenue and expenditures The graph below compares General Fund total revenues with total expenditures over the past 15 years. When the revenue line is equal to expenditures, the budget is balanced. If revenues are above, the City has a budget surplus. If the opposite occurs, the City faces a budget gap. The data shows how the earlier years were balanced bdt in 2008 a significant budget gap developed. This necessitated drastic expenditure cuts in order to balance the budget. In 2011, City revenues slightly exceeded expenditures for the first time since 2006 and this trend has continued. It should be noted that bthe sharp increases in both revenues and expenditures in 2008 were related to the passage of Measure Y which provided approxinmately $6 million in annual revenue. 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 50,000,000 55,000,000 60,000,000 65,000,000 Revenues vs Expenditures: Last 15 Years Revenues Expenditures 35 B1-39 B1-40 B E ACO N E CO NOMI CS This publicaƟonwaspreparedby: BeaconEconomics,LLC ChristopherThornberg,Ph.D.JordanG.Levine FoundingPartner Economist&DirectorofEconomicResearch 310.571.3399 424.646.4652 Chris@BeaconEcon.com Jordan@BeaconEcon.com Andby: EricMeux SeniorResearchAssociate 424.646.4662 Eric@BeaconEcon.com ForfurtherinformaƟonaboutBeaconEconomics,pleasecontact: VictoriaPikeBond DirectorofCommunicaƟons 415.457.6030 Victoria@BeaconEcon.com Orvisitourwebsiteatwww.BeaconEcon.com. ReproducƟonofthisdocumentoranyporƟonthereinisprohibitedwithouttheexpressedwriƩenpermissionofBeaconEco- nomics.Copyright©2014byBeaconEconomicsLLC. B1-41   Contents ReportOverview&Summary 1 NaƟonalandStateEconomies 2 RealEstateDrivenRevenues 3 ConsumerandBusinessSpendingDrivenRevenues 6 Summary 9 B1-42 BÊÄEÊÄÊÃ®Ý ReportOverview&Summary BeaconEconomics,LLChasundertakenaforecastofseveralkeyrevenuestreamsintheCityofSanLuisObispooverthe nextfiveyears.WhiletheforecastusesstandardƟme-serieseconometrictechniquesbasedonhistoricalcorrelaƟons andfuturetrends,BeaconEconomics’methodofforecasƟngfollowsalayeredapproach.NaƟonalpolicychangesand externalshocksarebuiltintoaU.S.modelwithavarietyofeconomicindicators,includingGDP,producƟon,demo- graphics,interestrates,governmentspending,taxes,savings,incomegrowth,andrealestate.BeaconEconomicsthen craŌsaCaliforniamodelthatincorporatesmacrotrendsatthenaƟonallevelwithtrendsinthelocallabormarket, includingdemographics,realestate,andbusinessacƟvityindicators. TakingintoaccountthesestateandnaƟonalfactors,BeaconEconomicssetsuparegionalmodelforSanLuisObispo CountyandtheCityofSanLuisObispousingthemacrotrendsalongwithavarietyofspecificregionaldata—includ- ingfiguresonrevenuesthatwereprovidedbytheCityofSanLuisObispo—tocreatealocalforecastthatdeliversa broadoutlookfortheregiononemploymentbyindustry,theunemploymentrate,consumerspendingandincome trends,populaƟonandcomponentsofchange,residenƟalrealestateandconstrucƟon,andnonresidenƟalrealestate andconstrucƟon.TheregionalassessmenthighlightsthemajordriversonthenaƟonallevel,conƟnueswithdevel- opmentsinthestateofCalifornia,andzoomsinontheeconomyofSanLuisObispoCountyandtheCityofSanLuis ObispotoprovideaforecastoftheCity’smajorrevenuestreamsouttofiscalyear2019–20. City ofSanLuisObispoRevenueForecast RevenueStream Actual Forecast FY 2014 FY 2015FY2016FY2017FY2018FY2019FY2020 Assessed Value 6,467,600,400 6,847,248,543 7,241,510,243 7,644,391,702 8,049,702,121 8,442,288,409 8,837,300,634 Growth(%)3.3 5.9 5.8 5.6 5.3 4.9 4.7 PropertyTax 8,960,000 9,356,694 9,938,727 10,397,320 10,929,990 11,519,950 12,159,490 Growth(%)-2.4 4.4 6.2 4.6 5.1 5.4 5.6 UƟlity UsersTax 5,364,700 5,542,240 5,732,234 5,952,318 6,205,622 6,489,074 6,795,149 Growth(%)9.1 3.3 3.4 3.8 4.3 4.6 4.7 Business Tax 2,143,000 2,205,657 2,266,788 2,331,389 2,402,233 2,480,806 2,568,574 Growth(%)4.3 2.9 2.8 2.8 3.0 3.3 3.5 TransientOccupancyTax 6,063,200 6,480,205 6,821,515 7,118,654 7,413,543 7,697,127 7,980,302 Growth(%)8.8 6.9 5.3 4.4 4.1 3.8 3.7 TaxableSales 1,389,683,648 1,457,442,822 1,525,747,336 1,594,222,342 1,663,448,338 1,734,008,093 1,806,446,764 Growth(%)5.1 4.9 4.7 4.5 4.3 4.2 4.2 Sales Tax 15,405,800 16,156,967 16,914,179 17,673,282 18,440,709 19,222,923 20,025,966 Growth(%)8.2 4.9 4.7 4.5 4.3 4.2 4.2 MeasureY 6,774,400 7,104,711 7,437,680 7,771,481 8,108,942 8,452,905 8,806,028 Growth(%)4.3 4.9 4.7 4.5 4.3 4.2 4.2 Proposion172 391,567 411,247 432,956 465,129 500,609 534,419 568,344 Growth(%)19.5 5.0 5.3 7.4 7.6 6.8 6.3 Building PermitValuaƟon 56,605,000 44,995,690 50,368,913 58,540,791 67,292,245 75,416,658 81,735,784 Growth(%)41.7 -20.5 11.9 16.2 14.9 12.1 8.4 Source:CityofSanLuisObispo,ForecastbyBeaconEconomics City ofSanLuisObispoRevenueForecast 1 November2014 B1-43 BÊÄEÊÄÊÃ®Ý NationalandStateEconomies InthemostrecentediƟonofBeaconomics,whichcanbeaccessedfreeofchargeatwww.BeaconEcon.com,Beacon Economicsprovidesanin-depthanalysisofcurrentnaƟonalandstateeconomictrends.Belowisabriefsummaryof whatweseehappeningfortheU.S.andCaliforniaeconomies. UnitedStatesEconomy During thethirdquarterof2014theU.S.economygrewata3.5%annualrate,downfromthepreviousquarter’s 4.6%growthbutsƟllasolidincreasedandhigherthanthepost-recessionaveragegrowthof2.3%. The globaleconomyhasexhibitedweakgrowthasoflate.Europehasyettopulloutofitsrecession.China’sgrowth hasslowedanditsrealestatemarketshaveshowedsignsofdistress.Butunlikethepreviousglobaldownturnthe U.S.isnolongeratthecoreoftheproblemandisasourceofstrengthintheinternaƟonaleconomy. Nearly everypartoftheU.S.economyisshowingrealsignsofslowbutsteadyimprovement,fromhousingtopublic spendingtocredit.TheonlyporƟonoftheeconomythatisacƟngasadrainonthenaƟonistheexportsectordue toweaknessintheglobaleconomy. BeaconEconomicsisforecasƟngtheU.S.economywillkeepgrowingthisyear,butatslightlybelow3%,abitslower thanlastyear.Nextyear,expecttheU.S.economytogrowatapacemodestlyover3%,withthefollowingyear improvingevenmore. As formajorrisks,theyremainlargelyexternal–althoughthereisnothingontheinternaƟonalfrontthatcould seriouslyderailthenaƟon’seconomy.Theglobaleconomyremainstheswingitem.Regardless,theU.S.economy willconƟnuetoexpandfortheforeseeablefuture. CaliforniaEconomy As theGreatRecessionfadesfromCalifornia’srear-viewmirror,itisbecomingincreasinglyimperaƟvetofocuson thestructuralchallengesthatthestatefacesoverthelongrun. Among theobstaclesthestatefacesareimprovingeducaƟonalaƩainment,fundingthestate’spensionobligaƟons, infrastructureinvestments,reducingthecostofhousing,andreformingourtaxsystemtomiƟgatetheeffectsof futureeconomicdownturns. As ofSeptember2014,nonfarmemploymentintheGoldenStatejumpedaheadofitspre-recessionpeakbymore than80,000posiƟons.WhilesomesectorshaveperformedbeƩerthanothers,everymajorindustryinthestate’s economyhasshownprogresssincehiƫngboƩomin2010. Jobsarebeingcreatedacrossthespectrumofwagecategories.Californiahasenjoyedsolidjobgrowthinlow-wage categorieslikeLeisureandHospitality,AdministraƟveSupport,andRetailTrade.However,thestate’slabormarket hasalsocreatedasizeablenumberofnewHealthcare,Professional,andInformaƟonjobs—whichtendtowardthe higherendofthewagespectrum. ManyleadingindicatorsforfuturejobgrowthremaininposiƟveterritory,aswell.Businessandconsumerspend- ing,asmeasuredbytaxablesales,areupbymorethan4.5%throughthefirsthalfof2014.Businessinvestment City ofSanLuisObispoRevenueForecast 2 November2014 B1-44 BÊÄEÊÄÊÃ®Ý conƟnuestomoveforwardinCaliforniaaswellasmorethan$5.4billioninnewventurecapitaldeployedsofarthis year. BeaconEconomicsiscurrentlyforecasttheCaliforniaeconomywillconƟnuetoleadthenaƟonalrecovery,with growthpickingupin2015and2016beforeseƩlingintomore“normal”growthratesthereaŌer. RealEstateDrivenRevenues Propertytaxrevenuescameinlowerthanexpectedforthe2013—14fiscalyearandwere2.4%lowerthanpriorfiscal year.AndwhilethiscontracƟoninrevenueswasadisappointment,itcomesontopofexcepƟonallystrong2012—13 fiscalyeartotalthatwas9.7%higherthanthe2011—12fiscalyear.Importantly,whencomparedtothe2011—12 fiscalyear,weseethat2013—14propertytaxeswereupby7.1%,yieldinga3.5%averageannualrateofgrowthover thelasttwofiscalyears. The2012—13revenuesweresomuchhigherthanthepriorfiscalyearduetoa$620,000administraƟonfeereim- bursement.Giventhatthiswasaone-Ɵmeadjustmentweareconfidentthatpropertytaxrevenuesaregoingtoturn aroundbecauseAVhasalreadystartedgrowing.The2013—14declineinrevenuesislikelyduetopayment-related issuesratherthanadeclineinpropertyvalues.Forthe2014—15fiscalyearweexpectpropertytaxrevenuestogrow by4.4%over2013—14revenues. BuildingpermitvaluaƟonforthe2013—14fiscalyearwereup41.7%,muchstrongerthanoriginallyesƟmated.Over thenextfiscalyear,however,wedoexpectapullbackintotalvaluaƟonbeforereturningtoposiƟvegrowthin 2015—16.ThelatestdatafromtheConstrucƟonIndustryResearchBoard(CIRB)isalreadyshowinglowerpermit valuegrowthforthefirstthreemonthsoffiscal2014—15,butthiswillreverseasthebroadereconomyconƟnues tomoveforward.TheremainderofthissecƟonhighlightstheprimarydriversofrealestateacƟvityandassociated revenuesandhowtheyarecurrentlytrending. 2,000 3,000 4,000 5,000 6,000 7,000 8,000 As s e s s e d V a l u e ( $ M i l l i o n s ) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Actual Forecast Source: Forecast by Beacon Economics City of San Luis Obispo, FY 1999-00 to 2019-20 Assessed Valuation Forecast -5.0 0.0 5.0 10.0 15.0 As s e s s e d V a l u e G r o w t h ( % ) 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Actual Forecast Source: Forecast by Beacon Economics City of San Luis Obispo, FY 2000-01 to 2019-20 Assessed Valuation Growth Forecast City ofSanLuisObispoRevenueForecast 3 November2014 B1-45 BÊÄEÊÄÊÃ®Ý CaliforniaConsumerPricesSignalHigherPropertyAssessments GrowthintheCaliforniaConsumerPriceIndex(CPI)fortheOctober2013toOctober2014periodcameinat2.0%, whichwillAVforexisƟngproperƟesnotsubjecttoreassessmentduringthe2015–16fiscalyeartoincreasebythe samepercentage. The 2.0%growthintheCaliforniaCPIcomesontopofamuchlower0.5%growthfactorforthepriorfiscalyear. GiventhatinflaƟonhasƟckedupslightlyinthepastyearandFederalReservemonetarypolicyremainsrelaƟvely accommodaƟng,weexpecttheCaliforniaCPItogrowinthe2.0%rangeoverthenextfivefiscalyears. 450 500 550 600 650 700 750 Me d i a n P r i c e s ( $ 0 0 0 s ) 40 60 80 100 120 140 Sa l e s ( S A ) Q3-04 Q3-06 Q3-08 Q3-10 Q3-12 Q3-14 Sales Median Prices Source: DataQuick City of San Luis Obispo, Q3-04 to Q3-14 Existing Home Prices and Sales 0 20 40 60 80 De f a u l t s / F o r e c l o s u r e s ( S A ) Q3-04 Q3-06 Q3-08 Q3-10 Q3-12 Q3-14 Defaults Foreclosures Source: DataQuick City of San Luis Obispo, Q3-04 to Q3-14 Defaults and Foreclosures ResidenƟalRealEstateintheCountyStaysonTrack Home pricegrowthhascooledrecentlyaŌeratwoyearsofstrongappreciaƟon.Sincereboundinginthethirdquar- terof2012themedianpriceforanexisƟnghomegrewata13.0%averageannualgrowthrate.Forthefirstthree quartersof2014year-over-yeargrowthhasaveraged7.6%. ExisƟnghomesaleshavetrendedloweroverthelastfewquarters,whichhavehamperedgrowthintheshortterm fortheCity’spropertytaxrevenues.Fromthethirdquarterof2013tothethirdquarterof2014exisƟnghomesales intheCityweredown14.0%.ThisisdueinparttofewerdistressedproperƟesonthemarket,whichulƟmatelyis posiƟveforAVoverthemedium-termevenifithasheldbackreassessmentsintheshort-run. The latestdatafromtheCaliforniaAssociaƟonofRealtorsshowsthattheregion’sinventoryofhomesonthemar- ketremainsƟght.AsofSeptember2014thecurrentinventoryofhomesonthemarketwouldbeexhaustedinjust overfivemonthsatthecurrentpaceofsales.ThedwindlingnumberofdistressedproperƟesintheCityhasgreatly limitedthenumberofexisƟnghomesonthemarket,butsupplywillincreaseashigherpricesenablemoreowners toputtheirhomesupforsale. ResidenƟalConstrucƟonAddingtotheAVbase NewresidenƟalconstrucƟonhasmaintainedarelaƟvelysteadypaceandhassteadilyaddednewstructureswhich havesupportedgrowthinthelocalAVoverthelastfiscalyear. City ofSanLuisObispoRevenueForecast 4 November2014 B1-46 BÊÄEÊÄÊÃ®Ý During the2013—14fiscalyeartherewere59newsinglefamilyhomespermiƩed,accordingtotheConstrucƟon IndustryResearchBoard(CIRB),up22.9%fromthepriorfiscalyear.Inthefirstquarterfiscal2014—15therewere 16newsinglefamilyhomespermiƩed,onparwiththe17homepermiƩedinthefirstquarterof2013—14. PermiƫngacƟvityformulƟ-familyunitswasupsharplyin2013—14.Therewere37newmulƟfamilypermitsau- thorizedthislastfiscalyear,upfrom24thepriorfiscalyear.WithApartmentvacancyratesathistoriclowswe expectmulƟ-familyconstrucƟontoconƟnueintheyearstocome. 10 15 20 25 30 Nu m b e r o f U n i t s ( S m o o t h e d , S A ) Q3-04 Q3-06 Q3-08 Q3-10 Q3-12 Q3-14 Source: Construction Industry Research Board City of San Luis Obispo, Q3-04 to Q3-14 Total Residential Permitting 17.70 17.75 17.80 17.85 17.90 Re n t ( $ / S q . F t . , S A ) 11.0 12.0 13.0 14.0 Va c a n c y R a t e ( % ) Q3-11 Q3-12 Q3-13 Q3-14 Vacancy Rate Rent Source: REIS San Luis Obispo, Q1-11 to Q3-14 Ofﬁce Real Estate CommercialRealEstateHoldingSteady While notthelargestsourceofAVgrowth,commercialproperƟesintheregionshouldconƟnuetoseeproperty valuesrisesteadilyintheyearstocome.Vacancyratesaretrendinglowerasrentsareincreasingorholdingsteady, indicaƟngdemandforcommercialproperƟesisontherise. In thethirdquarterof2014thecostofrentforofficeproperƟesincreasedby0.3%overthesameƟmelastyear. RentforretailproperƟesremainedthesameoverthelastyear. Vacancyrateshavealsotrendedfavorably.Asofthethirdquarterof2014thevacancyrateforofficeproperƟes was11.2%.Andwhilethismaybehighhistorically,itisanimprovementoverthe12.1%rateinthethirdquarterof 2013.ThevacancyrateforretailproperƟesstoodat9.8%,downfrom9.9%ayearprior. NewResidenƟalConstrucƟonRemainsTepid With thecommercialrealestatemarketslowlyonthemend,buildershavebeensteadilyimprovingstockofcom- mercialstructuresinSanLuisObispo.ThiswillsupportAVgrowthasimprovementsincreasepropertyvalues. The bulkofnonresidenƟalpermitvaluesconsistofalteraƟonsandaddiƟonstoexisƟngstructuresaccordingtoCIRB. Infiscal2013—14thesepermitsmadeuproughly70%oftotalvaluaƟon.Duringthefirstquarteroffiscal2014—15 permitvaluesforaddiƟonsandalteraƟonswereup4.2%overthesameƟmeayearprior,indicaƟngconƟnued acƟvityinthissegmentofthecommercialconstrucƟonmarket. City ofSanLuisObispoRevenueForecast 5 November2014 B1-47 BÊÄEÊÄÊÃ®Ý PermitsforconstrucƟonofnewcommercialstructureshasbeenmorevolaƟle.Forfiscal2013—14newcommercial permitvaluesweremorethandoublethepreviousfiscalyearduetonewretailspaceauthorizedinJuly2013.For thefirstquarterofthenewfiscalyeartherehavebeennocommercialpermitsauthorized. ConsumerandBusinessSpendingDrivenRevenues VirtuallyalloftheCity’staxrevenuesthataredrivenbyspendingandoveralleconomicacƟvityintheCitycamein strongerthanouroriginalforecastforthe2013—14fiscalyear.WewereopƟmisƟcabouttheCity’sfuturerevenuesat theƟme,butthelocaleconomyendedupmovingforwardatanevenfasterpacethanpreviouslyanƟcipated.Forthe comingfiscalyearweareequallyopƟmisƟcandareforecasƟngconƟnuedposiƟvegrowthacrossthesales,transient occupancy,uƟlity,andbusinesstaxes.TheremainderofthissecƟonwilldetailthecurrentdriversofspendingand overalleconomicacƟvityinthelocalandbroaderregionaleconomythatimpacttheCity’srevenuestreams. 500 1,000 1,500 2,000 Ta x a b l e S a l e s ( $ M i l l i o n s ) 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Actual Forecast Source: Forecast by Beacon Economics City of San Luis Obispo, FY 1997-98 to 2019-20 Taxable Sales Forecast -10 -5 0 5 10 15 Ta x a b l e S a l e s G r o w t h ( % ) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Actual Forecast Source: Forecast by Beacon Economics City of San Luis Obispo, FY 1998-99 to 2019-20 Taxable Sales Growth Forecast EmploymentintheCountyTrendingHigher As thelocaleconomyhasconƟnuedtoimprove,theregion’slabormarkethasmovedforwardinsimilarfashion. AsofOctober2014totalnonfarmemploymentintheCountywas108,500onaseasonallyadjustedbasis,up0.8% fromOctober2013.NonfarmemploymentintheCountyisnow3.1%abovethepost-recessionhighsetinJune 2007. The bulkofthenewjobsoverthelastfiscalyearwereintheLeisureandHospitalityindustry,notsurprisinggivethe region’svibranttourismindustry.Employmentinthissectorincreasedby820employeesandrepresented41.0% ofthenetjobsgainsacrossallnonfarmindustries.GovernmentemploymentmadethesecondlargestcontribuƟon tononfarmemploymentgrowthandadded740jobstopublicsectorspayrolls,a3.4%increaseovertheprevious year. The unemploymentrateintheregionhassimilarlymovedintherightdirecƟon.AsofOctober2014theunemploy- mentrateinSanLuisObispoCountywas5.4%onaseasonallyadjustedbasis,downfrom7.5%inOctober2013. City ofSanLuisObispoRevenueForecast 6 November2014 B1-48 BÊÄEÊÄÊÃ®Ý Thisdropintheunemploymentratecameaboutasthelaborforceexpandedby2.0%overthesameƟmeperiod, indicaƟngthatnewresidentsareenteringthelaborforceandareabletofindajobasopposedtoadeclinein unemploymentduetoresidentsdroppingoutofthelaborforce. San LuisObispoCountyEmploymentGrowth Industry Aug-12Aug-13ChangeGrowth(%) TotalNonfarm 106,100 107,400 1,300 1.2 LeisureandHospitality 16,248 16,890 642 3.9 EducaƟon/Health 13,346 13,928 582 4.4 Government 21,236 21,712 476 2.2 Other Services 4,586 5,021 435 9.5 Manufacturing 6,479 6,666 188 2.9 Professional/Business 11,851 12,001 150 1.3 Wholesale Trade 2,581 2,581 0 0.0 InformaƟon 1,430 1,427 -3 -0.2 Financial AcƟviƟes 4,145 4,135 -10 -0.2 Transport,Warehouse,UƟl.4,173 3,867 -306 -7.3 RetailTrade 13,868 12,838 -1,030 -7.4 Source:CaliforniaEmploymentDevelopmentDepartment 4 6 8 10 Un e m p l o y m e n t R a t e ( % , S A ) 95 100 105 110 Em p l o y e e s ( 0 0 0 s , S A ) Sep-04Sep-05Sep-06Sep-07Sep-08Sep-09Sep-10Sep-11Sep-12Sep-13Sep-14 Nonfarm Employment Unemployment Rate Source: California Employment Development Department Sep-04 to Sep-14 San Luis Obispo County Labor Market 25,000 30,000 35,000 40,000 Av e r a g e A n n u a l W a g e ( $ ) 2001 2003 2005 2007 2009 2011 2013 Source: Bureau of Labor Statistics San Luis Obispo County, 2001 to 2013 Average Annual Wages San LuisObispoCountyWagesOutpacingInflaƟon The latestfiguresfromtheBureauofLaborStaƟsƟcsshowtheaverageannualwageintheCountywas$37,889 in2013,up2.7%from2012averagewages,thefastestrateofincreasessince2008.Notably,thisrateofgrowth wasfasterthanthe1.5%annualincreaseintheConsumerPriceIndex,indicaƟngthatwagegrowthintheCounty isoutpacinginflaƟon. City ofSanLuisObispoRevenueForecast 7 November2014 B1-49 BÊÄEÊÄÊÃ®Ý WagesinSanLuisObispoCountyarealsogrowingfasterthaninthestateoverall.TheaverageannualwageinCal- iforniagrewbyjust0.5%from2012to2013.HigherwagegrowthintheCountybodeswellforsalestaxgrowthas residentshavemorepurchasingpower. ConsumerandBusinessSpendingintheCityMovingForward Spending levelsintheCityconƟnuetomovehigheraswageshavegrownandmorelocalbusinesseshaveincreased hiring. Taxablesaleslevelsinthe2013–14fiscalyearwere5.1%higherthanthepriorfiscalyear.Thisdownfromthe 6.7%growthobservedfromthe2011–12fsicalyeartothe2012–13fiscalyearbutneverthelessrepresentedasolid uptrendinlocalspending. The latestdatafromtheHdLcompaniesshowsthatspendingoverthelastyearwasfairlybroadbased.Fromthe secondquarterof2013tothesecondquarterof2014virtuallyallspendingcategoriespostedposiƟvegrowth.The autosandtransportaƟoncategorygrewthefastest(+10.8%)followedbythefuelandservicestaƟons(+7.3%)and restaurantsandhotels(+6.6%)categories.Onlythebusinessandindustry(-12.6%)categorywasdownyear-over- year,whichisdueinlargeparttospendingassociatedwithsolarprojectsinthecountywindingdown. San LuisObispoCountySalesTaxReceiptsbyCategory Category Q2-13Q2-14Growth(%) Total 12,988,752 13,133,365 1.1 AutosandTransportaƟon 1,421,522 1,575,373 10.8 Fuel andServiceStaƟons 1,568,475 1,682,884 7.3 RestaurantsandHotels 1,509,039 1,608,589 6.6 FoodandDrugs 695,005 725,941 4.5 GeneralConsumerGoods 2,349,023 2,417,673 2.9 Building andConstrucƟon 1,046,324 1,048,273 0.2 Business andIndustry 3,183,176 2,781,246 -12.6 Source:HdLCompanies HotelRevenuesConƟnuetoGrow HotelrevenuesinSanLuisObispoCountyhavefaredfavorablyoverthelastyear.Theaveragerevenueperavailable room(RevPAR)intheCountywas$87.57asofSeptember2014,whichwas5.5%higherthanthesameƟmeperiod ayearprior. The increaseinRevPARfromSeptember2013toSeptember2014isduetoimprovementsintheaveragedailyroom rate,whichincreasedby3.9%,andoccupancyrates,whichedgedup0.5percentagepointsto67.5%overthesame Ɵmeperiod. City ofSanLuisObispoRevenueForecast 8 November2014 B1-50 BÊÄEÊÄÊÃ®Ý The increasedhotelacƟvityhasalsocoincidedwithemploymentgainsintheLosAngelesCountyLeisureandHos- pitalityindustry.Employmentlevelsforthisindustrywereupby5.0%inOctoberoverthesameƟmelastyear. Summary TheCityofSanLuisObispoeconomyhasconƟnuedonanupwardtrajectoryoverthelastfiscalyearand,asaresult, virtuallyalloftheCounty’smajorrevenuestreamshaveexhibitedposiƟvegrowth.NewconstrucƟonintheCityis expectedtobelowerthanthepreviousyear,butweexpectaturnaroundforbuildingpermitvaluesin2015—16fiscal year.OverthenextfivefiscalyearsweareopƟmisƟcabouttheCity’sdirecƟonandarepredicƟngconƟnuedposiƟve growth.Fromrealestatetolocalspending,eachsectorofthelocaleconomyisontherighttrack. RisingpropertyvaluesandnewconstrucƟonwillhelpboostgrowthforAVandsubsequentpropertytaxes.Beacon Economicsexpectsalestaxtopostamodestgaininthecomingyearaslocalretailexpands,tourismacƟvityremains steady,andthelabormarketconƟnuestogrow.ItisourviewthatoverthenextfivefiscalyearstheCitycanexpect posiƟvegrowthineachoftherespecƟvetaxbasesasthelocaleconomyconƟnuestomoveforward. City ofSanLuisObispoRevenueForecast RevenueStream Actual Forecast FY 2014 FY 2015FY2016FY2017FY2018FY2019FY2020 Assessed Value 6,467,600,400 6,847,248,543 7,241,510,243 7,644,391,702 8,049,702,121 8,442,288,409 8,837,300,634 Growth(%)3.3 5.9 5.8 5.6 5.3 4.9 4.7 PropertyTax 8,960,000 9,356,694 9,938,727 10,397,320 10,929,990 11,519,950 12,159,490 Growth(%)-2.4 4.4 6.2 4.6 5.1 5.4 5.6 UƟlity UsersTax 5,364,700 5,542,240 5,732,234 5,952,318 6,205,622 6,489,074 6,795,149 Growth(%)9.1 3.3 3.4 3.8 4.3 4.6 4.7 Business Tax 2,143,000 2,205,657 2,266,788 2,331,389 2,402,233 2,480,806 2,568,574 Growth(%)4.3 2.9 2.8 2.8 3.0 3.3 3.5 TransientOccupancyTax 6,063,200 6,480,205 6,821,515 7,118,654 7,413,543 7,697,127 7,980,302 Growth(%)8.8 6.9 5.3 4.4 4.1 3.8 3.7 TaxableSales 1,389,683,648 1,457,442,822 1,525,747,336 1,594,222,342 1,663,448,338 1,734,008,093 1,806,446,764 Growth(%)5.1 4.9 4.7 4.5 4.3 4.2 4.2 Sales Tax 15,405,800 16,156,967 16,914,179 17,673,282 18,440,709 19,222,923 20,025,966 Growth(%)8.2 4.9 4.7 4.5 4.3 4.2 4.2 MeasureY 6,774,400 7,104,711 7,437,680 7,771,481 8,108,942 8,452,905 8,806,028 Growth(%)4.3 4.9 4.7 4.5 4.3 4.2 4.2 Proposion172 391,567 411,247 432,956 465,129 500,609 534,419 568,344 Growth(%)19.5 5.0 5.3 7.4 7.6 6.8 6.3 Building PermitValuaƟon 56,605,000 44,995,690 50,368,913 58,540,791 67,292,245 75,416,658 81,735,784 Growth(%)41.7 -20.5 11.9 16.2 14.9 12.1 8.4 Source:CityofSanLuisObispo,ForecastbyBeaconEconomics City ofSanLuisObispoRevenueForecast 9 November2014 B1-51 BÊÄEÊÄÊÃ®Ý AboutBeaconEconomics AboutBeaconEconomics BeaconEconomics,LLCisaleadingproviderofeconomicresearch,forecasƟng,industryanalysis,anddataservices. Bydeliveringindependent,rigorousanalysiswegiveourclientstheknowledgetheyneedtomaketherightstrategic decisionsaboutinvestment,growth,revenue,andpolicy.Learnmoreatwww.BeaconEcon.com. Services Contacts Economic,Revenue,&OccupaƟonal ForecasƟng EconomicImpactAnalysis RegionalEconomicAnalysis EconomicPolicyAnalysis RealEstateMarketAnalysis IndustryandMarketAnalysis EB-5 EconomicAnalysis Public Speaking Expert TesƟmony Sherif Hanna ManagingPartner (424)646-4656 Sherif@BeaconEcon.com VictoriaPikeBond DirectorofCommunicaƟons (415)457-6030 Victoria@BeaconEcon.com Rick Smith DirectorofBusinessDevelopment (858)997-1834 Rick@BeaconEcon.com City ofSanLuisObispoRevenueForecast 10 November2014 B1-52