HomeMy WebLinkAbout02-21-2017 Item 12 General Fund Five-Year Fiscal Forecast: 2017-22 Meeting Date: 2/21/2017
FROM: Xenia Bradford, Interim Finance Director
SUBJECT: GENERAL FUND FIVE-YEAR FISCAL FORECAST: 2017-22
RECOMMENDATION
1. Review and discuss the results of the General Fund Five-Year Fiscal Forecast for 2017-
22 (Attachment A); and
2. Concur with the Activation of the Fiscal Health Contingency Plan (Attachment B)
REPORT IN BRIEF
The City enters the 2017-19 Financial Planning period with a proven record of “exceptionally
strong” financial performance, as recently re-affirmed by Fitch Ratings (an international credit
rating agency), who praised the City’s budget-management practices and financial planning. The
City showed “robust financial planning and policy framework” according to Fitch Ratings. Past
performance shows a robust recovery from the Great Recession. The City was able to rapidly
rebuild financial flexibility after the recession and quickly restore fund balance as well as fiscal
stability.
In spite of exceptional past performance, the City is facing significant challenges ahead. The City
has gone from a situation of Steady Growth Equally Challenged by Expenditure Growth and
Uncertainties to one of Slowing Economic Growth outpaced by Expenditures. As for revenues,
our economy is going to grow but much more slowly than previously projected. Expenditures
will grow significantly, primarily due to increased costs for retirement payments. Based on
these and other assumptions and if the City continues to operate withut course corrections, the
forecast indicates a structural imbalance as early at Fiscal Year 2018-19 and escalating over the
remainder of the forecast (approximately $2.7 million in Fiscal Year 2018-19 growing to $6
million in FY 2021-22). Yet, as we know from our history, the City has a long and distinguished
history of policy-based action to counteract financial adversity. One policy that helps guide us in
situations such as this is the Fiscal Health Contingency Plan (FHCP). This policy provides a
general framework for addressing financial challenges similar to the ones we face today (triggers
include weakening revenues and significant escalation of costs). Staff recommends that strategic
short-term provisions of the Fiscal Health Contingency Plan be implemented in the current Fiscal
Year while a longer-term plan is developed. Staff intends to present an action plan consistent
with this FHCP on April 18, 2017 with the Strategic Budget Direction as part of the Fiscal
Sustainability and Responsibility Major City Goal work program.
It is important to note that our civic infrastructure (community involvement, robust policy
framework, dedicated City Council and employees, to name a few) will serve San Luis Obispo
well in successfully navigating the challenges ahead.
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BACKGROUND
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 informs the budget
process but it does not represent formally adopted revenues or expenditures. Its purpose is to
provide context with focus on long-term fiscal health for considering the City’s ability to
continue current services, maintain existing assets and/or fund new initiatives.
DISCUSSION
The City’s financial planning is focused on achieving the highest priorities for the community
within the City’s means. The City’s adopted fiscal and budget policies are focused on long-term
fiscal health. Each financial plan starts with a Council Goal Setting Process, which is informed
by community input and fiscal outlook.
Per the City’s fiscal policies, the Council also reviews financial position at mid-year of each
Fiscal Year to review fund balance financial position based on the latest trends in revenues and
expenditures. Additionally, the City’s fiscal policies, (including the Fiscal Responsibility
Philosophy, our fund reserve policy and the Fiscal Health Contingency Plan) position the City to
be flexible and focused on outcomes in good times as well as in response to adverse fiscal
conditions. While the City Council has limited ability to increase revenue without voter approval
due to California law, the Council has discretion over allocation of resources for non-mandated
services.
The General Fund Five-Year Forecast informs the Council with a long-term financial outlook.
The forecast uses inputs from subject matter experts (Beacon Economics and HDL), an in-depth
review of the latest trends regarding revenues and expenditures as well as financial outlook
through the five-year period ending Fiscal Year 2021-22. The forecast presents the financial
position of the General Fund if the City stays the course funding the current level of services, in
the same manner while also incorporating anticipated changes in revenues and expenditures.
One last note on the importance of the General Fund forecast – many of the assumptions used for
the General Fund are also applicable to the Enterprise Funds. While some of the assumptions and
impacts will have varying effect on each fund, in many cases they will apply to each fund. A
good example of this is fair share allocation of retirement payments or the assumptions about
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other assumed cost increases (fuel, energy, etc.). So while this forecast applies to the General
Fund there are important pieces that will apply to the Enterprise Funds as the program managers
craft their Fund forecasts for review.
Summary of General Fund Five-Year Fiscal Forecast for 2017-22
On December 13, 2016, Council reviewed the City’s Fiscal Outlook, which was presented with
the Budget Foundation. The theme of the forecast was Steady Growth Equally Challenged by
Expenditure Growth and Uncertainties. The economic outlook showed a slowing down in
growth of major sources of revenue such as sales tax and transient occupancy tax (TOT). There
are several uncertainties at play as we chart a course with the fiscal forecast. Further slowing
down in the economy and the potential for a recession continues to be an uncertainty. Policy
changes at the Federal level are also part of the uncertainty framework. The closure of the Diablo
Caynon Power Plant has not been analyzed as part of this forecast. Planning for this eventuality
needs to be on-going. The Council approved a Settlement Agreement with Pacific Gas and
Electric Company on December 13, 2016 related to the Diablo Canyon Power Plant Closure
Joint Proposal. The agreement includes a payment by PG&E to local jurisdictions, including
$1.82 million to the City of San Luis Obispo to ease economic impacts by creating or updating
economic development strategies. These one-time funds will be available to make a plan on how
to address these impacts and, more importantly, take action to prepare the community for the
scheduled closure.
Based on Mid-Year review, revenue growth continued to slow through the end of December
2016 and the national economy showed slower Gross Domestic Product (GDP) growth than
expected. This revenue trend combined with very significant policy changes by the California
Public Employees’ Retirement System (CalPERS), discussed below, now shows a forecast where
the theme has shifted to: Slowing Economic Growth outpaced by Expenditures.
CalPERS Changes Ensure Long-Term Sustainability of Retirement Fund:
As for the expenditure growth, CalPERS has made changes to ensure long-term sustainability of
retirement fund that will significantly influence the City expense projections. Specifically, over
the last five or so years the CalPERS Board has taken several actions to address the significant
stock market loss in 2008 and demographic study that concluded that employees were living
longer and retiring earlier. Most recent policy changes made by CalPERS were to establish a
fixed timeline of thirty years to pay down unfunded liability and, in 2015, the Board
implemented a Funding Risk Mitigation policy, which was expected to gradually lower the long-
term discount rate over 21 years. These changes are all directed towards ensuring that the
retirement fund is fiscally sound, which is overall a positive. Nonetheless, these policy changes
have driven significant increases in payments to CalPERS to support the retirement benefits for
our current and retired employees. These increased costs have been included in the City’s
budgets and fiscal forecasts in the past but these costs are rising at a faster pace than was
projected. This is in part because current actuarial estimates from CalPERS were understated and
recent financial performance in terms of returns on investment did not meet actuarial
expectations.
On December 21, 2016, the CalPERS Board voted to “lower discount rate to seven percent over
the next three years.” The discount rate is the expected rate of investment returns for CalPERs
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managed funds. This latest action taken by the CalPERS Board leads to significant impacts to
participating agencies. The lowering of the discount rate directly translates into higher required
contribution rates for normal cost and higher payments toward the unfunded liability. The
increase in payments will first affect the City’s budget in Fiscal Year 2018-19 and will grow over
the following eight years. CalPERS utilized a smoothing mechanism where required payments
are escalated over a five-year period. This applies to each of the three-step process of lower the
discount rate over three years. According to CalPERS, this action is driven by the most recent
market performance, which yielded a zero-percent return in Fiscal Year 2015-16 and growing
pension payments. As mentioned before this action strengthens long-term sustainability of the
fund but also significantly increases the City’s obligations to CalPERS.
The estimated impact to the General Fund due to the discount rate change is estimated to amount
to approximately $3.2 million dollars by Fiscal Year 2021-22 and continue to rise to
approximately $5 million by 2025 (beyond the five-year forecast but CalPERS is implementing
increases over an eight year period). These increases are in addition to the already escalated
CalPERS rates factored into the forecast due to previous actions to pay down the unfunded
liability in 30 years and demographic assumption changes. The total estimated increase in
CalPERS payments is estimated to reach $8.3 million by the outer year of this forecast in Fiscal
Year 2021-22. These increased payments are estimated based on the latest information provided
by CalPERS. The information from CalPERS provides with ranges of percent increases over
time and apply to both required normal cost and unfunded liability required contributions. The
Fiscal Year 2015-16 Annual Actuarial Valuation for the City’s CalPERS retirement plans is
expected to be released in the summer of 2017, which will further provide information on the
impacts to the City.
Detailed Fiscal Forecast Findings
Revenue
Building on the fiscal projections conducted by Beacon Economics and the City’s sales tax
advisor (HdL) that was presented to the Council in conjunction to with the Economic Outlook in
December 2016, Staff has reviewed Fiscal Year 2015-16 year-end results and the last six months
of actual receipts in revenue sources. Based on this analysis and economic outlook at the
national, state and local level, revenue trends have been evaluated and presented in the Five-Year
Forecast in Attachment A.
The main driving force on the revenue side is slowing down in Sales Tax growth. This decline
will negatively influence both the current Fiscal Year by approximately -$1 million and the five-
year outlook. The City contracts with HdL companies to review and forecast sales tax estimates.
HdL forecast assumptions are based on approximately 2% sales tax growth through the 2017-19
Financial Plan, followed by a mild and brief recession in Fiscal Year 2019-20 and a rapid
recovery and 2.8% sales tax growth in the outer years.
Property tax growth remains solid. Based on estimates from the County of San Luis Obispo
estimate, the property tax for Fiscal Year 2016-17 is projected approximately $250,000 higher
than was originally adopted with the Fiscal Year 2016-17 Supplemental Budget. The property
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tax growth is estimated to be strong due to large developments in the City limits currently under
construction. The growth rate through the Fiscal Year 2017-19 Financial Plan is estimated at 6
percent and is lowered to 5 percent in outer years. This forecast is also informed by Beacon
Economics econometric analysis that was presented in December with the Economic Outlook.
Transient Occupancy Tax (TOT) growth showed significant slowing down in this Fiscal Year
compared to previous Fiscal Year. This is primarily explained by relatively high growth in the
previous Fiscal Year and constant room inventory as well as properties holding a fairly high
average daily rate. TOT growth is projected to pick back up in Fiscal Year 2018-19 due to
expected openings of three hotel properties, which will add a total of 244 rooms, once all
properties are complete.
All other revenue sources remain in line with previous projections. The forecast does not include
any adjustments to service charges fee schedules and is based on current fee schedule annually
increased by Consumer Price Index, when applicable. Any update to fees will be incorporated
into staff’s proposals for the Council’s consideration on April 18 when Strategic Budget
Direction is sought.
Expenditure
The operating expenditures in this forecast represent anticipated expenditure levels based on the
current business model and level of service. The expenditure growth is estimated at 2.5 percent
in future years based on anticipated cost increases aligned with the increases that took place in
the current Fiscal Year 2015-17 Financial Plan. In addition, by law, minimum wage increases
will take place throughout the five-year period.
The most significant impact on the expenditures side is the impact of recent announcement of
CalPERS to lowering the discount rate (also sometimes called the rate of return) from 7.5 percent
to 7 percent over a three-year window. The first budgetary impacts will begin in Fiscal Year
2018-19. Lowering the discount rate will increase both the required contributions for both
normal cost (which is presented to the city as a percentage rate) and unfunded liability (which is
now presented as a fix dollar amount). As an example, based on the sensitivity analysis in latest
annual valuation reports (as of June 30, 2015), a decrease in the discount rate to 6.5 percent
would result in an increase to the City’s unfunded liability, for all funds, of approximately $23
million dollars. A one-half percent reduction, holding all other variables steady, could be
estimated at approximately half of this amount. The forecast includes estimated increases in
payments both toward normal cost and increased payments toward unfunded liability. The
increases in normal cost are calculated conservatively at the higher end of the percent increase
provided by CalPERS. The estimated increases in payments toward unfunded liability are
calculated at mid-range of the range provided by CalPERS. Currently the City’s payment toward
unfunded liability is approximately 6% of the total unfunded liability of the City’s plans.
Utilizing the mid-range point of the suggested range of impact is aligned consistently with a
similar proportional payment to total outstanding accrued unfunded liability. CalPERS will
implement the discount rate in a three-step process and will apply a smoothing methodology to
each impact increasing payments over a period of five-years from each change.
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In a Circular Letter issued on January 19, 2017, CalPERS provided with estimated ranges of
potential increases to both normal cost and unfunded liability over an the 8-year period. The
published rates increases are shown in in the table below.
Valuation Date Fiscal Year Impact Misc. Plans Safety Plans Misc. Plans Safety Plans
6/30/2016 2018-19 0.25% - 0.75% 0.5% -1.25% 2% - 3% 2% - 3%
6/30/2017 2019-20 0.5% - 1.5% 1.0% - 2.5% 4% - 6% 4% - 6%
6/30/2018 2020-21 1.0% - 3.0% 2.0% - 5.0% 10% - 15% 10% - 15%
6/30/2019 2021-22 1.0% - 3.0% 2.0% - 5.0% 15% - 20% 15% - 20%
6/30/2020 2022-23 1.0% - 3.0% 2.0% - 5.0% 20% - 25% 20% - 25%
6/30/2021 2023-24 1.0% - 3.0% 2.0% - 5.0% 25% - 30% 25% - 30%
6/30/2022 2024-25 1.0% - 3.0% 2.0% - 5.0% 30% - 40% 30% - 40%
UAL PaymentsNormal Cost
*Unfunded Accrued Liability (UAL)
CalPERS representatives have indicated that the 2015-16 Actuary Reports will be released to
participating agencies in the summer time. The table above provides with CalPERS estimated
ranges, showing potential impacts to payments for both normal cost and Unfunded Accrued
Liability (UAL). These ranges do not provide with exact amounts CalPERS will require the City
to contribute, but can be used to forecast potential impacts. Actual required contributions in the
future may also be impacted by further demographic changes and actual rate of return. CalPERS
issues an Annual Valuation report annually, which is based on the past experienced lagged by
one year. For example, the required contributions paid in fiscal year 2016-17 are based on 2014-
15 Annual Valuation report. Therefore, when the assumption in discount rate is changed from
7.5% to 7.375%, the lowering of the discount rate will increase both normal and unfunded
liability required contributions to CalPERS reported with the 2015-16 valuation, which will
translate into required payments within the 2018-19 fiscal year.
The ranges above inform the estimated future required contributions based on the methodology
used by CalPERS to create these estimated ranges. In accordance with the circular latter release
in January 2017, the ranges should be used as follows.
“To illustrate how this table can be used as a guide to include the change in discount rate in the
calculation of pension contributions, a Miscellaneous plan with a current normal cost of 15
percent of payroll can expect an increase of 15.25 percent to 15.75 percent of payroll in the first
year (Fiscal Year 2018-19), and 18 percent to 18 percent in the firth year (Fiscal Year 2012-23).
For the UAL payment, a plan with a projected payment of $500,000 in the Fiscal Year 2018 -19
and $600,000 in Fiscal Year 2022-23 can expect the revised payment to be $510,000-$515,000
($500,000*2.00%/$500,000*3%) for Fiscal Year 2018-19, and $720,000-$750,000
($600,000*20%/$600,000*25%) for Fiscal Year 2022-23. These estimated increases incorporate
both the impact of the discount rate change and the ramp up.”
The estimated impact to the General Fund of the discount rate change is estimated to amount to
approximately $3.2 million dollars by Fiscal Year 2021-22 and continue to rise to approximately
$6 million by 2025. This increase is in addition to already escalated CalPERS rates factored into
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the forecast due to previous actions to pay down unfunded liability in thirty years and changes to
demographic factors. The total estimated increase in CalPERS payments for normal cost and
unfunded liability combined is estimated to reach $8.3 million per year by the outer year of this
forecast in Fiscal Year 2021-22. These costs are estimated based on the latest information
provided by CalPERS. The 2015-16 Actuarial Valuation for the City’s CalPERS retirement plans
is expected to be released in the summer of 2017, which will provide detailed information
regarding the impacts on the City. The City will continue to evaluate the impact of the discount
rate (including possibly having an outside peer review of these estimates) and will return to
Council with the Strategic Budget Direction with further analysis of this issue.
It is important to recognize that the City has made proactively significant progress in its efforts to
contain retirement costs, such as adding 2nd and 3rd tier benefit programs that now reflect
membership of 34 percent of total City employees and increasing the employee portion of
retirement contributions toward the cost of retirement under those tiers. These actions will
continue to lower the future costs of retirement to the City as an employer; however, this process
will occur over time and is not expected to significantly change the immediate expenditure levels
included in this forecast. Since 2014, the City began making lump sum pre-payments toward the
unfunded liability starting in 2014 for a cumulative total in the amount of $2.74 million.
Another cost containment measure the City pursued in 2016 is to join the Lability Excess
Insurance Program (EIP) administered by the California Joint Powers Insurance Authority. This
program creates a new pool for only the CJPIA members with the lowest claims and establishes a
self-insurance amount over which the CJPIA will insure. Given the City’s low levels of claims,
the City will benefit from this program over time. For Fiscal Year 2016-17, rather than paying a
$2 million premium under the Primary Insurance Program for first dollar coverage, the City paid
a rate of $984,500 and moved into the EIP. The City’s deductible under this program is $500,000
and requires funds be set aside to ensure adjudicated claims can be fully funded from the city’s
self-insurance fund balance; however, the fiscal forecast assumes adequate fund balance will be
reached by Fiscal Year 2019-20, resulting in annual savings to the City of approximately
$500,000. This timetable for achieving full funding of the self-insurance fund balance will be
assessed as part of the implementation of the Fiscal Health Contingency Plan.
All General Fund contributions toward Capital expenditures are forecasted based on historic
levels of contribution. Staff will review this assumption as part of the process of assessing a plan
moving forward that will be presented at the Council meeting concerning Strategic Budget
Direction.
Immediate Actions in Light of Changing Conditions - Fiscal Health Contingency Plan
Due to the increase in required contributions to the pension plans along with mild slowing down
in the economy and a potential for a mild recession within this time, staff recommends that the
Council activate the Fiscal Health Contingency Plan (Attachment B).
The purpose of the Fiscal Health Contingency Plan is to establish a framework and general
approach in responding to adverse fiscal circumstances. The four key elements of the plan are:
1. Maintaining minimum fund balance at policy levels
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2. Following other key budget and fiscal policies
3. Monitoring the City’s fiscal health on an ongoing basis
4. Assessing the challenge: short or long-term problem?
According to the plan any of the following would reasonably trigger actions in accordance with
the plan:
Adverse fiscal circumstances as determined by the city Manager, such as:
Natural or human-made disaster.
State budget takeaways.
Large, unexpected costs.
Economic downturns.
Whenever there are two consecutive quarters of adverse fiscal results in one or
more of the City’s top five General Fund revenues:
Sales Tax
Property Tax
Transient occupancy tax (TOT),
Utility user tax (UUT)
Vehicle license fee (VLF) “swap”
Adverse results include:
Actual declines in revenues.
Significant variances from projected revenues
The Fiscal Health Contingency Plan also articulates that while the plan is focused on the General
Fund the Enterprise Funds will fully participate. The two rationale for participation of all funds
are as follows:
We are one organization: all parts need to participate.
It is strategically important to limit Enterprise Fund rate increases (rate decreases
would also be nice) at a time when we may be consider General Fund revenue
increases.
Additionally, the Enterprise Funds will be impacted in a similar fashion as the General Fund as it
relates to CalPERS costs. As a result, the Enterprise Funds should be participating with as much
intention, diligence and purpose as the General Fund.
Staff will implement the Fiscal Health Contingency Plan to contain costs in the short term and to
develop and implement short and long-term measures into the Fiscal Year 2017-19 Financial
Plan. Staff intends to focus on the Council adopted highest priorities and within parameters of
the City’s fiscal policies. Staff will return to Council in April with Strategic Budget Direction
(including a work plan for the Fiscal Sustainability and Responsibility Major City Goal). All of
this effort will inform the Preliminary Budget recommendations presented by the City Manager
in May.
All of the information shown here is described more fully in the Five-Year Fiscal Forecast
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document that is provided as Attachment A.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action to receive and discuss the
Five-Year Forecast or to concur with activation of the Fiscal Health Contingency Plan. However,
if the Fiscal Health Contingency Plan is not activated, it may be more challenging for the City to
implement measures to close the budget-gap.
Attachments:
a - 2017-22 General Fund Five-Year Forecast
b - Fiscal Health Contingency Plan Openable
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General Five-Year Forecast: 201-
6lowing Down Growth outpaced by Expenditures
February 2017
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Page 1 of 4
Purpose of Five-Year Forecast
The purpose of Five-Year 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.
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. 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.
The Five-Year Forecast presents with an
overview of the General Fund over the next five
years. The forecast incorporates the Mid-Year
review of the latest trends in revenues and
expenditures. Future major revenue sources are
further analyzed by partnering with consulting
firms specializing in econometrics and specific
revenue sources such as sales tax and utility
user’s taxes.
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.
It is important to stress that this Five-Year
Forecast is not a budget.
This Five-Year forecast for the General Fund, is
based on a slowing down revenue growth and
rapid growth in expenditures due to recent
policy change by the California Public
Employee’s Retirement System to lower
discount rate, which results in significant
budgetary implication and growth in
expenditures over the five-year horizon.
The theme of this forecast is “Slowing Down
Growth outpaced by Expenditures.”
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.
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Summary of Findings
The City enters the 2017-19 Financial Planning
period with a proven record of “exceptionally
strong” financial performance, as recently re-
affirmed by Fitch Ratings (an international credit
rating agency), who praised the City’s budget-
management practices and financial planning.
The City showed “robust financial planning and
policy framework” according to Fitch Ratings.
Past performance shows a robust recovery from
the Great Recession. The City was able to rapidly
rebuild financial flexibility after the recession and
quickly restore fund balance as well as fiscal
stability.
In spite of exceptional past performance, the City
is facing significant challenges ahead. The City
has gone from a situation of Steady Growth
Equally Challenged by Expenditure Growth and
Uncertainties to one of Slowing Economic
Growth outpaced by Expenditures. As for
revenues, our economy is going to grow but much
more slowly than previously projected.
Expenditures will grow significantly, primarily
due to increased costs for retirement payments.
Based on these and other assumptions and if the
City continues to operate in the same way with no
course corrections, the forecast indicates a
structural imbalance (budget gap) as early at
Fiscal Year 2018-19 and escalating over the
remainder of the forecast (approximately $2.7
million in Fiscal Year 2018-19 growing to $6
million in FY 2021-22). Yet, as we know from
our history, the City has a long and distinguished
history of policy-based action to counteract
financial adversity. One policy that helps guide
us in situations such as this is the Fiscal Health
Contingency Plan (FHCP). This policy provides
a general framework for addressing financial
challenges similar to the ones we face today
(triggers include weakening revenues and
significant escalation of costs). Staff recommends
that strategic short-term provisions of the Fiscal
Health Contingency Plan be implemented in the
current Fiscal Year while a longer-term plan is
developed. Staff intends to present an action plan
consistent with this FHCP on April 18, 2017 with
the Strategic Budget Direction as part of the
Fiscal Sustainability and Responsibility Major
City Goal work program.
The City of San Luis Obispo contracts with
Beacon Economics to provide with Economic
Forecast for the City of San Luis Obispo.
Beacon Economics forecast is based on time-
series econometric techniques based on
historical correlations and forecasts of future
economic trends. Beacon Economics utilizes a
layered approach based on the National, State of
California and regional forecast.
The forecast reviews trends in all general fund
revenue sources and provides with higher level
of focus on review of major sources of revenue
for the City. Sales Tax represents approximately
36% of the General Fund Revenue, followed by
Property Tax at 14%, Transient Occupancy Tax
at 10%, Utility Users Tax at 8%, and
Development Review Fees at 7%. Sales Tax and
Transient Occupancy Tax revenue sources are
highly correlated with economic fluctuations.
Building on the fiscal projections conducted by
Beacon Economics and the City’s sales tax
advisor (HdL) that was presented to the Council
in conjunction to with the Economic Outlook in
December 2016, Staff has reviewed Fiscal Year
2015-16 year-end results and the last six months
of actual receipts in revenue sources. Based on
this analysis and economic outlook at the
national, state and local level, revenue trends
have been evaluated and presented in the Five-
Year Forecast in Attachment 2 to this report.
The main driving force on the revenue side is
slowing down in Sales Tax growth. This decline
will negatively influence both the current Fiscal
Year by approximately -$1 million and the five-
year outlook. The City contracts with HdL
companies to review and forecast sales tax
estimates. HdL forecast assumptions are based on
Slowing Economic Growth
outpaced by Expenditures
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Page 3 of 4
approximately 2% sales tax growth through the
2017-19 Financial Plan, followed by a mild and
brief recession in Fiscal Year 2019-20 and a rapid
recovery and 2.8% sales tax growth in the outer
years.
Property Tax estimated revenue continues to
show positive strong growth. 2015-16 actual
property tax revenue growth was 5% over the
previous year. Beacon Economics forecast based
on assessed valuation trend over time and
building permits, shows an expected growth rate
above 6% through fiscal year 2017-18 and above
5% in the outer years. In addition, three
significant projects are underway in San Luis
Obispo incorporated area that are expected to
significantly contribute to the property tax
revenue growth for the City. The projects are
Monterey Hotel, Garden Street Terraces and
China Town. The Economic outlook is based on
a 6% growth projection through the 2017-19
Financial Plan, 5.5% percent growth in 2019-20
and 5% growth thereafter due to higher degree
of uncertainty in the outer years.
Transient Occupancy Tax (TOT) growth showed
significant slowing down in this Fiscal Year
compared to previous Fiscal Year. This is
primarily explained by relatively high growth in
the previous Fiscal Year and constant room
inventory as well as properties holding a fairly
high average daily rate. TOT growth is projected
to pick back up in Fiscal Year 2018-19 due to
expected openings of three hotel properties,
which will add a total of 244 rooms, once all
properties are complete.
All other revenue sources remain in line with
previous projections. The forecast does not
include any adjustments to service charges fee
schedules and is based on current fee schedule
annually increased by Consumer Price Index,
when applicable. Any update to fees will be
incorporated into staff’s proposals for the
Council’s consideration on April 18 where
Strategic Budget Direction is sought.
The operating expenditures in this forecast
represent anticipated expenditure levels based on
the current business model and level of service.
The expenditure growth is estimated at 2.5
percent in future years based on anticipated cost
increases aligned with the increases that took
place in the current Fiscal Year 2015-17
Financial Plan. In addition, by law, minimum
wage increases will take place throughout the
five-year period.
The most significant impact on the expenditures
side is the impact of recent announcement of
CalPERS to lowering the discount rate (also
sometimes called the rate of return) from 7.5
percent to 7 percent over a three-year window.
The first budgetary impacts will begin in Fiscal
Year 2018-19. Lowering the discount rate will
increase both the required contributions for both
normal cost (which is presented to the city as a
percentage rate) and unfunded liability (which is
now presented as a fix dollar amount). As an
example, based on the sensitivity analysis in
latest annual valuation reports (as of June 30,
2015), a decrease in the discount rate to 6.5
percent would result in an increase to the City’s
unfunded liability, for all funds, of approximately
$23 million dollars. A one-half percent reduction,
holding all other variables steady, could be
estimated at approximately half of this amount.
Based on preliminary information released by
CalPERS, providing with ranges of potential
increases over time, the forecast includes
estimated increases in payments both toward
normal cost and increased payments toward
unfunded liability. The increases in normal cost
are calculated conservatively at the higher end of
Packet Pg. 499
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Page 4 of 4
the percent increase provided by CalPERS. The
estimated increases in payments toward unfunded
liability are calculated at mid-range of the range
provided by CalPERS. Currently the City’s
payment toward unfunded liability is
approximately 6% of the total unfunded liability
of the City’s plans. Utilizing the mid-range point
of the suggested range of impact is aligned
consistently with a similar proportional payment
to total outstanding accrued unfunded liability.
CalPERS will implement the discount rate in a
three-step process and will apply a smoothing
methodology to each impact increasing payments
over a period of five-years from each change.
On December 21, 2016, the CalPERS Board
voted to “lower discount rate to seven percent
over the next three years.” This latest action taken
by the CalPERS Board leads to significant
impacts to participating agencies. The lowering
of the discount rate, or expected rate of return,
directly translates into higher required
contribution rates for normal cost and higher
payments toward the unfunded liability. The
increase in payments will first affect the City’s
budget in Fiscal Year 2018-19 and will grow over
the following 8 years. CalPERS utilized a
smoothing mechanism where required payments
are escalated over a five-year period. This applies
to each of the three-step process of lower the
discount rate over three years. According to
CalPERS, this action is driven by the most recent
market performance, which yielded a zero-
percent return in Fiscal Year 2015-16 and
growing pension payments. As mentioned before
this action strengthens long-term sustainability of
the fund but also significantly increases the City’s
obligations to CalPERS.
The estimated impact to the General Fund due to
the discount rate change is estimated to amount to
approximately $3.2 million dollars by Fiscal Year
2021-22 and continue to rise to approximately $5
million by 2025 (beyond the five-year forecast
but CalPERS is implementing increases over an
eight year period). These increases are in addition
to the already escalated CalPERS rates factored
into the forecast due to previous actions to pay
down the unfunded liability in 30 years and
demographic assumption changes. The total
estimated increase in CalPERS payments is
estimated to reach $8.3 million by the outer year
of this forecast in Fiscal Year 2021-22. These
increased payments are estimated based on the
latest information provided by CalPERS. The
information from CalPERS provides with ranges
of percent increases over time and apply to both
required normal cost and unfunded liability
required contributions. The Fiscal Year 2015-16
Annual Actuarial Valuation for the City’s
CalPERS retirement plans is expected to be
released in the summer of 2017, which will
further provide information on the impacts to the
City.
Conclusion:
If the City continues to operate in the same way
with no course corrections, the forecast indicates
a structural imbalance (budget gap) as early at
Fiscal Year 2018-19 and escalating over the
remainder of the forecast (approximately $2.7
million in Fiscal Year 2018-19 growing to $6
million in FY 2021-22). The revenues over
expenditure graph (Attachment 1) shows the blue
line (sources) under the red line (uses). The
difference between these lines represents the
budget gap or structural imbalance. Attachment 2
to this report provides with the five-year outlook
showing sources over uses for the General fund
based on the assumptions discussed in this report.
Packet Pg. 500
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Attachment 1Packet Pg. 50112
City of San Luis Obispo - General Fund Five Year Fiscal Forecast
2017-19 Financial Plan #REF!
$ in 000's Actual Actual1 Revised
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22
1 Sales Tax 15,273 17,498 16,584 16,932 17,277 17,186 17,659 18,170
2 Measure Y/G Sales Tax 7,136 7,178 7,391 7,607 7,679 7,636 7,790 7,959
3 Sales Tax Prop 172 410 405 428 405 405 405 405 405
4 Property Taxes 9,632 10,187 10,767 11,172 11,843 12,494 13,119 13,775
5 Property Tax in Lieu of VLF 3,849 4,113 4,365 4,593 4,846 5,088 5,343 5,610
6 Transient Occupancy Tax 6,806 7,113 7,186 7,328 7,695 8,079 8,483 8,908
7 Utility Users Tax 5,211 5,414 5,506 5,562 5,729 5,901 6,078 6,078
8 Franchise Fees 2,790 1,538 1,540 1,527 1,527 1,527 1,527 1,527
9 Business Tax 2,203 2,492 2,500 2,747 2,884 3,028 3,180 3,339
10 Real Property Transfer Tax 298 366 373 381 388 396 404 412
11 Subtotal Taxes 53,608 56,304 56,640 58,255 60,273 61,742 63,988 66,182
12 Transfers In (Gas, TDA, CoS, Other)1,505 2,924 2,353 3,190 3,239 2,560 2,590 2,307
13 Other Subventions & Grants 1,278 1,539 316 316 316 316 316 316
14 Development Review Fees 5,274 5,624 5,373 5,400 5,562 5,729 5,901 6,078
15 Recreation Fees 1,881 1,759 1,640 1,800 1,836 1,873 1,910 1,948
16 Other Service Charges 1,875 1,952 1,750 1,803 1,821 1,839 1,858 1,876
17 Other Revenues 697 891 543 543 543 543 543 543
18 Subtotal Non-Tax Revenues 12,510 14,689 11,975 13,052 13,317 12,860 13,118 13,069
19 Total Resources 66,118 70,993 68,615 71,307 73,591 74,602 77,106 79,251
20 Operating Expenses (excl PERS)2 44,576 46,223 49,548 50,518 53,130 53,791 55,099 56,698
21 PERS Normal Costs 4,322 3,612 3,866 4,101 4,210 4,316 4,424 4,531
22 PERS Unfunded Liability 3,536 5,629 6,871 7,212 8,767 9,861 10,584 11,341
23 PERS Discount Rate Adjustment 606 1258 2197 3271
24 Subtotal: Operating Expenses 52,434 55,464 60,285 61,831 66,713 69,226 72,304 75,841
25 Debt Service 5,312 3,025 3,246 3,212 3,202 2,912 2,520 2,520
26 Transfer to CDBG 73 147 154 154 154 154 154 154
27 Transfer to Insurance Benefit Fund 280 2,124 1,740 - - - - -
28 Transfer to Parkland Development Fund 900
29 CIP - Fleet Replacement 533 384 - 604 471 485 500 500
30 CIP - IT Replacement 991 617 2,621 726 1,261 525 551 579
31 CIP - Major Facility Replacement 551 146 505 770 790 1,190 917 962
32 CIP - All Other & Local Measure Funded
projects)2,197 3,329 6,507 3,497 3,652 3,502 3,550 3,728
33 Subtotal: Operating Transfers 9,937 9,773 15,673 8,963 9,529 8,768 8,192 8,443
#REF!
34 Total Expenditures 62,371 65,237 75,958 70,794 76,242 77,994 80,496 84,283
35 Resources Over/(Under) Expenses 3,747 5,757 (7,343) 513 (2,651) (3,392) (3,390) (5,032)
36 Fund Balance, Beginning of Year 20,317 24,566 21,539 14,196 14,196 14,709 11,545 11,317
37 Nondispensable/Restricted/ Committed - (8,074) (489) (489) (489) (489) (489) (489)
38 Funding Adjustment 502 (709) - - - - -
39 Ending Fund Balance 24,566 21,539 14,196 14,709 11,545 11,317 8,155 6,285
40 Reserve @ 20% Operating Costs (10,487) (11,476) (10,683) (10,924) (11,468) (11,621) (11,905) (12,246)
41 Designated Reserve (8,108) (519) (519) (519) (519) (519) (519)
42 Reserve Over/(Under) Policy Level 5,971 10,063 2,994 3,266 (442) (823) (4,269) (6,480)
Five Year Forecast
17-19 Financial Plan
Attachment - 2
Packet Pg. 502
12
Fiscal Health Contingency Plan
Originally Prepared in October 2001
Plan Purpose
The purpose of this plan is to establish a framework
and general approach in responding to adverse fiscal
circumstances.
What It’s Not: This plan is not intended to be a
specific “recipe” for expenditure cuts or revenue
increases: this needs to be determined on a case-by-
case basis. Preparing detailed reduction options
before they are truly needed is not recommended for
three reasons:
If not taken seriously, quality thought will not be
given to them.
If taken seriously, this is likely to result in
needless anxiety, and sends a conflicting
message if “times are good.”
And even if these were not constraints, they
would have a short shelf-life: needs and
priorities change over time.
However, this plan does set forth the foundation of
principles and values upon which specific responses
will be based.
Triggers
This plan will be “triggered” by any of the
following:
Any adverse fiscal circumstances as determined
by the City Manager, such as:
z Natural or human-made disasters.
z State budget takeaways.
z Large, unexpected costs.
z Economic downturns.
Whenever there are two consecutive quarters of
adverse fiscal results in one or more the City’s
top five General Fund revenues:
z Sales tax
z Property tax
z Transient occupancy tax (TOT),
z Utility users tax
z Vehicle license fee (VLF) “swap”
Adverse results include:
z Actual declines in revenues.
z Significant variances from projected
revenues.
General Fund Focus
This plan is focused on the General Fund, but
Enterprise Funds (water, sewer, parking, transit and
golf) will also fully participate for two key reasons:
We are one organization: all parts need to
participate.
It is strategically important to limit Enterprise
Fund rate increases (rate decreases would also
be nice) at a time when we may be considering
General Fund revenue increases.
Key Plan Elements
There are six key elements to this plan:
Maintaining minimum fund balance at policy
levels.
Following other key budget and fiscal policies.
Monitoring the City’s fiscal health on an
ongoing basis.
Assessing the challenge: short or long-term
problem?
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Fiscal Health Contingency Plan Page 2
Identifying options.
Preparing and implementing the action plan.
n Minimum Fund Balance
First Line of Defense in Adverse Circumstances
Maintaining minimum fund balances at policy
levels:
Allows continued operations and projects in
responding to short-term problems.
Provides a bridge—“breathing room”—in
addressing longer-term problems while
comprehensive response plans are developed.
This is especially important under Proposition
218, since there are limited opportunities to
implement new revenues.
o Other Key Budget and Fiscal Policies
Following our other key budget and fiscal policies
will prevent problems to begin with, and keep them
from getting bigger when they do happen. These are
set forth in Section B of the Financial Plan, and
include:
Balanced budget
Conservative investment practices
Diversified revenues
User fee cost recovery
Enterprise funds
New development pays its own way
Limited use of debt financing
Fleet replacement
Contracting for services
Productivity improvements
Z Fiscal Health Monitoring
In accordance with our budget and fiscal policies,
the City will develop and implement effective
ongoing systems for reporting and monitoring our
fiscal condition. These include:
Interim Reporting
Reliable automated financial management
system
On-line access organization-wide via the
network
Monthly financial reports
Quarterly “Newsletter” (provided electronically
to all employees)
Capital Improvement Plan (CIP) project-to-date
expenditure report
Mid-Year Budget Review
Special Reports: Sales Tax, TOT, Investments
Annual Reporting
Preparing audited financial statements in accordance
with generally accepted accounting principles and
highest standards.
q Assess: Short or Long-Term Problem?
Different Strategies for Different Problems
Short-Term: One-time event or downturn that
is not likely to continue indefinitely.
“One-time” fixes are an appropriate response for
“one-time” problems.
Long-Term: Ongoing downturn in revenues or
increases in costs that are systemic.
In this case, “one-time” fixes won’t work: this
requires new ongoing revenues or ongoing
expenditure reductions.
Assessment: Short-Term Problem
Hiring Chill. City Manager approval will be
required to fill vacant regular positions. To fill a
vacant position, department heads must
demonstrate that it is necessary in meeting
public health, safety or other high-priority
service needs that cannot be met on an interim
basis through contract, overtime or temporary
staffing. In implementing the “chill,” the goal is
not just short-term savings, but preserving future
options if the problem turns-out to be ongoing.
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Fiscal Health Contingency Plan Page 3
Travel Chill. We will limit travel and training:
City Manager approval will be required for all
Travel Authorizations.
CIP Project Deferrals. The CIP Review
Committee will identify candidate projects for
possible deferral or deletion.
“One-Time” Operating Cost Review. The
Budget Review Team will identify special
projects in the operating budget for possible
deferral or deletion.
Fund Balance. The City will consider use of
fund balance below policy levels.
Other. The City will consider other short-term
expenditure curtailments as appropriate.
Assessment: Long-Term Problem
Implement “short-term” actions. (This follows
the first rule of holes: when you find yourself in
one, stop digging.)
Prepare long-term forecast to define the
problem.
Prepare revenue increase and expenditures
reduction options tailored to problem definition
via the forecast.
z It is likely to take 3-6 months to prepare
plans; and another 3-6 months to implement
them.
z This underscores the importance of strong
fund balance and short-term expenditure
reductions to create the time needed to
prepare and implement reasonable long-term
plans.
r Identify Options
In the long-term, there are only two basic budget-
balancing options:
Increase revenues.
Reduce expenditures (and related service levels).
In the short-term, use of fund balance is an option,
but not it is not a viable long-term solution: we can
only spend reserves once. An exception is the
strategic use of fund balance that reduces future year
operating costs or increases ongoing revenues.
Expenditure Reduction Options
Tough But Simple Fact: Meaningful ongoing
expenditure reductions require reductions in regular
staff costs, including public safety personnel:
.
85% of General Fund costs are operating.
80% of General Fund operating costs are for
staffing.
90% of General Fund staffing costs are for
regular staffing.
Over 50% of General Fund staffing costs are for
public safety.
General Strategy
Department Heads are responsible for crafting
operating expenditure reduction options that:
Are real and “doable.”
Reflect the least service impacts to the
community—no game-playing in proposing
least-likely reductions and non-starters.
Are ongoing.
Describe service impacts.
Are within the City’s ability to do
independently—no speculative reductions
contingent upon actions by others.
Can be implemented within three months after
adoption.
Are net of any related revenues from fees or
grants.
Maintain essential facilities, infrastructure and
equipment at reasonable levels—no deferred
maintenance posing as genuine cost reductions.
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Fiscal Health Contingency Plan Page 4
Reflect participation from throughout their
organization.
Option “Targets”
Targets for surfacing operating expenditure
reduction options will generally be:
Based on percentage reductions from current
operating budgets, less significant one-time
costs.
The same for all departments.
Targets are likely to exceed the “gap” identified in
forecast in order to surface an array of reasonable
policy choices based on priority considerations, and
not driven by arbitrary across-the-board decreases.
Stated simply, like making choices at a restaurant,
making priority-based decisions depends on having
more options on the menu than we plan on ordering.
Operating expenditure reductions are not likely to be
sole “budget-balancers,” but identifying their service
impact is critical to attracting support for new
revenues and other mitigation strategies.
Key Principles in Preparing Operating Expenditure
Reduction Options
Any service reductions will be balanced, and
ensure that highest priority services are retained.
Reductions will be based on service priorities,
not vacant positions: attrition is a helpful tactic,
but will not be the driving strategy in reducing
costs. On the other hand, one of the key
purposes of the “hiring chill” is to create
flexibility in making reductions based on
priorities while mitigating the need for lay-offs.
Our focus will be on retaining “front-line” core
services, and reducing services with the least
impact on the community at-large.
On the other hand, we need to preserve
“organizational” infrastructure, and ensure that
appropriate and necessary internal review
functions remain.
CIP Projects
The CIP Review Committee will be responsible
for identifying ongoing reduction opportunities.
Projects intended to maintain existing
infrastructure and facilities will generally have
higher priority over “new” facilities. Likely
exceptions include:
z Direct adverse impacts to public health and
safety.
z Outstanding contractual commitments.
z Significant outside resources or related one-
time revenues.
Revenues: Limited Options
The Budget Review Team, working with
representatives from the operating departments, will
have the lead responsibility for identifying revenue
options. However, it is likely that any new
significant revenues will require voter approval
under Proposition 218; and most likely, this election
cannot be held until the next regular municipal
election (November of even-numbered years).
There are two exceptions when revenue elections
can be held at any time:
Emergency declared by unanimous vote of the
Council.
Two-thirds voter approval for “earmarked”
revenues.
Nonetheless, there may be options for increased user
fees, fines or use of property. (On the other hand, if
these were easy to do, we would probably have
already done them!) Employees throughout the
organization will be encouraged to surface revenue-
raising options, with the recognition that expenditure
reductions are likely to play the play the leading role
in balancing the budget.
Significant New Revenues: Voter Support Required
Voter approval will require time for effective
preparation before a measure is placed on the
ballot.
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Fiscal Health Contingency Plan Page 5
Critical Success Factor: An effective,
community-based group that will work hard to
pass measure.
Legislative Advocacy
Depending on the reason for the adverse
circumstances (and especially if they are driven by
state or federal budget actions), the City will work
closely with its elected representatives and others
(such as the League of California Cities) in
mitigating service (and related cost) reductions.
Unlikely Long-Term Budget Balancers
Fund balance below policy levels. Using fund
is balance is a one-time course of action; it
cannot fix a structural imbalance.
Significant reductions in training. With fewer
employees, it will be even more important to
ensure that we have a highly-skilled, well-
trained work force.
Involvement and Participation
The City will actively solicit and encourage
participation by key stakeholders in the budget-
balancing process including:
Organization as a whole.
Employee associations.
Community groups.
This will require effective and ongoing
communication with them.
The Budget-Balancing Paradox. Balancing the
budget and closing the “forecast gap” from a strictly
numbers perspective is easy. However, after cutting
CIP projects, reducing staff, and negotiating and
implementing employee concessions, emerging from
the process with a vibrant, high-morale, high-
productivity organization is hard. Which leads to
the budget-balancing paradox: at a time when the
organization is at its nadir with downsizing, the
resulting smaller organization needs its employees to
be even more energized, fired-up and motivated to
perform.
In our experience, there is only one way to beat this
paradox: believing that the process used in
communicating with employees and meaningfully
engaging them in finding solutions matters. To use
Steven Coven’s metaphor, how we go about this
process is an opportunity to make deposits in our
credibility bank, not just withdrawals. It’s an
opportunity to both show our organizational
character and values, and to build them.
Employee Involvement
Department heads will encourage employee
participation and involvement in preparing
expenditure reduction options.
The City will strive to identify likely position
reductions resulting from this plan six months
before implementation in order to:
z Be straight forward with affected employees
about their employment outlook.
z Provide transfer opportunities.
z Allow affected employees a reasonable
amount of time to make other plans.
Key Value: Respect. There are downsides to this
approach, and many organizations consciously keep
force-reduction actions under wraps as long as
possible because of them. However, treating
employees with respect means informing them about
City plans that affect them as soon as possible.
It also means sharing the hard facts (and
consequences) in a straightforward and timely way,
even if this is painful at times for the organization.
Because ultimately, respect means believing
(contrary to Jack Nicholson's Marine Colonel Jessup
in A Few Good Men) that employees can handle the
truth.
Communication Strategies
The following identifies possible communication
strategies with employees and the community.
Employees
Ongoing employee briefings with City Manager,
Finance & IT Director and Department Heads.
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Fiscal Health Contingency Plan Page 6
Ongoing updates via voice mail or email.
Periodic “newsletters” and “rumor control
corner” on the Intranet
Ongoing briefings with employee association
representatives.
Special organization-wide briefings as
appropriate.
Community
Viewpoint articles in The Tribune and editorial
board briefings.
New releases.
Presentations to interested community groups.
Periodic “newsletters” via direct mail or utility
billing inserts.
Web site updates.
Community forums and workshops.
Possible Formation of Community Advisory Group
We may form an “ad hoc” advisory group depending
on the circumstances, with careful consideration of:
When should they become involved in the
process?
Who should be on it?
What’s their role?
s Finalize and Implement Action Plan
With advice from Department Heads and the
Budget Review Team, the City Manager is
responsible for preparing the recommended
action plan.
Council approval is required for implementation.
Finance will closely monitor results of the action
plan in achieving its goal, and will quickly
report any significant deviations to the City
Manager and Council.
SUMMARY
While the specifics of both the process will change
based on the circumstances, having a clear strategy
in place as the foundation for decision-making in
tough fiscal times that reflects our organizational
values has been a key factor in the City’s success in
preserving our long-term fiscal and our
organizational vitality.
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12
Five -Year General Fund Forecast
y
2017-22
2017-19 Financial Plan
February 21, 2017
Recommendation
1. Review and discuss the result of the General Fund Five -
Year Fiscal Forecast for 2017-22
2. Concur with the Activation of the Fiscal Health
Contingency Plan
�J:u7UI-
2/22/2017
Presentation Overview
GOAL -SETTING
INPUT
CURRENT LONG-TERM
2 -YEAR } PLANS, GOALS
GOALS' & POLICIES'
ti
24mui7
2/22/2017
2
COMMUNITY
LETTERS FROM
0
FORUM
COMMUNITY
JAN. 10, 2017
GROUPS
COMMUNITY
SURVEYS
�J
LETTERS
FRDM
INDIVIDUALS
JV�ADVSORY
�V
FISCAL
DES
BOI
FORECAST'
CURRENT LONG-TERM
2 -YEAR } PLANS, GOALS
GOALS' & POLICIES'
ti
24mui7
2/22/2017
2
General Fund Revenues vs Expenditures:
Actual Last 15 Years & Five Year Forecast
$75,000,000 -- -
$65,000,000
$55,000,000 —
$45,000,000 — -
OF I
$35,000,000 — —
$25,000,000
t J
$15,000,000
y�� •y°4 ryy4 y�
�1 L `1 R 4 '4 'L 1 `L 'Y 'l 'L ,yd '1 'l ► R tip 4 ,gyp ,y� Lp ��
Revenues �Expenditures
CITY OF Sfin LUIS 16 •1
General Fund
Five -Year Fiscal Forecast 2017-22
•• •. Slowing Economic Growth Outpaced by Expenditures
I
I
ILI
:milli
2/22/2017
3
Purpose
1. Lang -Term Financial Planning:
Fiscal Health
2. Structural Alignment: Balanced
Budget
3. A Projection/Not a Budget
Slowing Down Growth Outpaced by
Expenditures
Major Revenue Sources Share
■ Sales Tax 36%
■ Property Tax 14%
• Transient Occupancy Tax (TOT)
10%
■ Utility Users Tax (UUT) 8%
■ Development Review Fees 7%
raznwo
2/22/2017
4
Revenue Assumptions
■ Continuous modest growth in all
sources of revenue
■ Forecast based on slow -economic
expansion with a modest recession
in 2019-20 for one fiscal — year
■ Conservatively includes
assumptions for revenue growth
due to 3 large hotel properties in
construction
28,000
26,000
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
General Sales Tax ($ in 000's)
ux11fxorr
0g g g g g g g g g o 0 0 o 0 0 0 000 0 0
N N N N N N N N N N N N N N N N N N N N N N N
*Includes Local Revenue Measure
Projected Actual
2/22/2017
15,000
13,000
11,000
9,000
7,000
5,000
3,000
Property Tax (s in 000's)
O `4N M dd N9 w rw m O r4 N M S LM W N W m �0
8 8 8 8 8 8 8 8 8
N N N N N N N N N N N N N N N N N N N N N N N
Projected Actual
Expenditure
Operating Expenditures
Pension required contribution
nnpacted by lowered ROI to 7%
Long-term unfunded liabilities
Investment in Infrastructure
2/22/2017
Expenditures Trends: Status Quote
• Based on Current Service Level
■ Operating expenditures forecasted rate of
growth at 2.5% for ongoing expenditures (net
of one-time allocations)
■ Takes into account all recently approved
changes to labor rates
■ Includes known minimum wage increases
■ The forecast is based on 2015-17 Five Year
Capital Improvement Program plan
Retirement Costs and the __
Unfunded Liability
The California Public Employees Retirement System
(CaIPERS) implemented a new retirement funding
plan in 2015-16 which includes a strategy to have
unfunded liabilities fully amortized in 30 years
■ Actual rate of return in 2014-15 (last Actuarial
Valuation) was 2.4%, which is below long term
discount rate of 7.5%
■ December 21, 2017: CaIPERS released Board vote
to lower discount rate to 7% over a three year
period
2/22/2017
7
2/22/2017
CaIPERS Discount Rate Change t .
■ December 21, 2017: CaIPERS vote to lower
discount rate to 7% over a three year period
■ 1 sc Year 7.375%
■ 2nd Year 7.25%
■ 3rd Year 7.00%
■ Fiscal impact to both Normal Pension
expenditure and Unfunded Liability required
payments
■ First Impact will be seen in the second year of
the Financial Plan 2018-19
■ Impact is phased in and projected to grow
through 2025
rs�s�
lamok7
CaIPERS
Discount Rate Change
1 J 7 SL
CaIPERS
(Pension) Required Contribution Growth ($ in 1,000s)
Discount
Normal Unfunded
Rate
Cost Liability
Adjustment
Fiscal Year
Required Required
(Unfunded
Impact
Contribution Contribution
& Normal) Total
2017-18
$4,101 $7,212
$11,313
2018-19
$4,210 $8,767
$606 $13,583
2019-20
$4,316 $9,867
$1,258 $15,441
2020-21
$4,424 $10,584
$2,197 $17,205
2021-22
$4,531 $11,341
$3,271 $19,143
lamok7
CaIPERS Contributions Through Time
$25,000
$20,000
$15,000
$10,000
$5,000
� tiAry 'd, o�,3 41 "-01ry��s� y0q
Total General Fund Staffing mid % of Operating Cost
550.000 li t13,c
S4s000
S4o,000
$35.000
530.WO
am
Tec
706
74%
72%
S2sAM 70%
Smpoo I I I I I I I I I I I I I - 6e6
2WS 3006 2M7 JIM 7009 2010 2013 2012 1013 1014 203S 2016 1017
—Total Staffing Cost (Left Ajds)—Pwc@M Of Operudne (Right axis)
2/22/2017
E
CaIPERS Discount Rate Change
`
Normal Cost
*UAL Payments
Ca1PERS (Pension) Required Contribution Growth
_
Discount Rate
Unfunded
Adjustment
-
Fiscal Year
Liability 30 -yr
(Unfunded & Total
Impact
Pay Down
Normal) Impact
Impact
2017-18
$341
$341
Safety Plans
2018-19
$1,555
$606 $2,161
2019-20
$1,094
$1,258 $2,352
6/30/2016
2020-21
$723
$2,197 $2,920
0.5% -1.25%
2021-22
$757
$3,271 $4,028
6/30/2017
Ir; 2f: ll7
2/22/2017
10
Normal Cost
*UAL Payments
20
Valuation
Fiscal Year
Date
Impact
Misc. Plans
Safety Plans
Misc. Plans
Safety Plans
6/30/2016
2018-19
0.25%
- 0.75%
0.5% -1.25%
2%-3%
2%-3%
6/30/2017
2019-20
0.5%-1.5%
1.0%-2.5%
4%-6%
4%-6%
6/30/2018
2020-21
1.0%-3.0%
2.0%-5.0%
10%-15%
10%-15%
6/30/2019
2021-22
1.0%-3.0%
2.0%-5.0%
15%-20%
15%-20%
6/30/2020
2022-23
1.0%-3.0%
2.0%-5.0%
20%-25%
20%-25%
6/30/2021
2023-24
1.0%-3.0%
2.0%-5.0%
25%-30%
25%-30%
6/30/2022
2024-25
1.0%-3.0%
2.0%-5.0%
30%-40%
30%-40%
J.Wd,dA—r d Li.bilhIMAD
2/22/2017
10
95,000,000
85,000,000
75,000,000
65,000,000
I
55,000,000
45,000,000 -
35,000,000 '
25,000,000 i
Revenues vs Expenditures:
Actual Last 15 Years & Five Year Forecast
2021-22 Fiscal Year
$ 5 Million Annual Gap
• $6 Million Reserves
Under Policy level of 20%
15,000,000 I 1.-1 I—1 L—J.-.._.I......._.l_....-... I ..... ..... _I-..... .F 1. .1.T. 1 1 1 1 1
�^ �� le O^O O,~ 01ry O^� Opp O^6) q�0 ti�4 y�4 X04 ry04 Ory~ 'Lv
'b 'V ry ry ry ry ry ry ry ry ry ry ry ry ry v0 ,LO ryp ,ti0 1, ry0
-Revenues -Expenditures
Tax Revenue % Growth vs. Pension Cost % Growth
20.1%
i
o
116%
i
I
1
i
V
i
1
i
5470
1
!
1
27%1 ' 3.596
�.
j 2.496
.....
?,3'63�a
.... - ------ �.. ��----
3.496
2017-18 2018-19
2019-20
2020-21
2021-22
Axis Title
• Tax Revenue % Growth —o—Pension Expenditure % Growth
2/22/2017
11
Fund Balance Reserve
*General Fund 20% of operating
expenditures
w Fleet Replacement fund $500,000
■ Information Technology fund $400,000
Continued Uncertainty
■Economic Fluctuations
Federal Policy Changes
■Future Changes by PERS
■Diablo Canyon Closure
■Settlement agreement with
PG&E
■Uncertainty — Economic and
Financial Impacts
2/27/2017
2/22/2017
12
Fiscal Health Contingency Pian
■ Purpose!
■ Maintain minimum fund balance at policy
level
■ Following other key budget and fiscal
policies
■ Monitoring the City's fiscal health on an
ongoing basis
■ Assessing the challenge: short or long-term
problem?
21=2017
D
Fiscal Health Contingency Plan
■ Triggers
■ Natural or human -made disaster,_ �•
■ State budget takeaways
■ Large, unexpected costs.
■ Economic Downturn
■ Two consecutive quarters of adverse fiscal
results in one or more top General Fund
revenues
is Adverse results include:
■ Decline in revenue
■ Significant variances from projected
revenues
2/22/2017
2/22/2017
13
Next Steps
r
26 Key Budget Dates
Strategic Budget Direction April 18
■ Pension Costs Update
■ Major City Goals/Other Important Objective
Programs
■ Fiscal Health Contingency Plan:
Recommendations for achieving Balanced
Budget
:r27�2di�
2/22/2017
14
Recommendation
1. Review and discuss the result of the General Fund Five -
Year Fiscal Forecast for 2017-22
2. Concur with the Activation of the Fiscal Health
Contingency Plan
✓UJ201,
2/22/2017
15
..4,,
• ) Five -Year General Fund Forecast
2017-22
2017-19 Financial Plan
February 21, 2017
Recommendation
1. Review and discuss the result of the General Fund Five -
Year Fiscal Forecast for 2017-22
2. Concur with the Activation of the Fiscal Health
Contingency Plan
MV2pl7
2/22/2017
Presentation Overview
GOAL -SETTING
INPUT
COMMUNITY � LETTERS FROM
FORUM COMMUNITY
W; 10.2017 GROUPS
w COMMUNITY INLETTERS
SURVEYS FROM •e .` NDIVIDUALS
DADVISOY FISCAL
BODIES FORECAST"
s e CURRENTLONG—TERM
2 -YEAR PI.ANS,GUALS
GOALS• 0 & POLICIES,
TM art
2/22/2017
General Fund Revenues vs Expenditures:
Actual Last 15 Years & Five Year Forecast
$75,000,000
$65,000,000 -
$55,000,000
$45,000,000 — -
$35,000,000
$25,000,000
$15,000,000 — -... .....
Dom'' Dia DN q`D �1k 1�k ti��` ryak titi`` .ytik
+ Revenues ■Expenditures
CITY OF Sq P, LUIS OBISPO
General Fund
Five -Year Fiscal Forecast 2017-22
Slowing Economic Growth Outpaced by Expenditures
2/22/2017
3
Purposel. '
1. Long -Term Financial Planning:
Fiscal Health
2. Structural Alignment: Balanced
Budget
3. A Projection/Not a Budget
Slowing Down Growth Outpaced by
Expenditures
VnI291,
Major Revenue Sources Share
■ Sales Tax 36%
w Property Tax 14%
■Transient Occupancy Tax (TOT)
10%
■ Utility Users Tax (UUT) 8%
■ Development Review Fees 7%
2/22/2017
4
Revenue Assumptions N'
■ Continuous modest growth in all y
sources of revenue
■ Forecast based on slow -economic
expansion with a modest recession
in 2019-20 for one fiscal — year
■ Conservatively includes
assumptions for revenue growth
due to 3 large hotel properties in
construction
28,000
26,000
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
ITr+YWIJli!
General Sales Tax (S in 000's)
O a 4 N M Ln w r, w m O 4 N M u9 w N w m O e-1 N
8 8 8 8 8 8 8 8 8 0 0 0 0 0 0 0 0 0 0 0 0 0
N N N N N N N N N N N N N N N N N N N N N N N
*Includes Local Revenue Measure Projected Actual
2/22/2017
5
15,000 Property Tax ($ in 000's)
13,000
11,000 -
9,000
7,000
5,000
3,000
O rl N M 6n 00 01 O 'i N M 4t ul =D r� 00 m O
H S S H S S S g H 0 0 0 0 0 0 0 0 0 0 0 0
N N N N N N N N NN N N N N N N N N N N N N N N
Projected - — Actual
Expenditure �.
Operating Expenditures
Pension required contribution
impacted by lowered ROI to 7%
Long-term unfunded liabilities
Investment in Infrastructure
2/22/2017
11
Retirement Costs and the
Unfunded Liability
; I {
■ The California Public Employees Retirement System `
(CaIPERS) implemented a new retirement funding
plan in 2015-16 which includes a strategy to have
unfunded liabilities fully amortized in 30 years
■ Actual rate of return in 2014-15 (last Actuarial
Valuation) was 2.4%, which is below long term
discount rate of 7.5%
+� December 21, 2017: CaIPERS released Board vote
to lower discount rate to 7% over a three year
period
2f22124117
2/22/2017
Expenditures Trends: Status Quo
■ Based on Current Service Level
■ Operating expenditures forecasted rate of
growth at 2.5% for ongoing expenditures (net
of one-time allocations)
• Takes into account all recently approved
changes to labor rates
■ Includes known minimum wage increases
■ The forecast is based on 2015-17 Five Year
Capital Improvement Program plan
211IF�7
OF Sfln Wis OBispo
Retirement Costs and the
Unfunded Liability
; I {
■ The California Public Employees Retirement System `
(CaIPERS) implemented a new retirement funding
plan in 2015-16 which includes a strategy to have
unfunded liabilities fully amortized in 30 years
■ Actual rate of return in 2014-15 (last Actuarial
Valuation) was 2.4%, which is below long term
discount rate of 7.5%
+� December 21, 2017: CaIPERS released Board vote
to lower discount rate to 7% over a three year
period
2f22124117
2/22/2017
CaIPERS Discount Rate Change-�
■ December 21, 2017: CaIPERS vote to lower I, .
discount rate to 7% over a three year period -
1st Year 7.375%
■ 2nd Year 7.25%
3rd Year 7.00%
• Fiscal impact to both Normal Pension
expenditure and Unfunded Liability required
payments
m First Impact will be seen in the second year of
the Financial Plan 2018-19
■ Impact is phased in and projected to grow
through 2025
laviu17
CaIPERS Discount Rate Change 40
CaIPERS (Pension) Required Contribution Growth ($ in 1,000s)
V22/2017
2/22/2017
0
Discount
Normal
Unfunded
Rate
Cost
Liability
Adjustment
Fiscal Year
Required
Required
(Unfunded
Impact
Contribution
Contribution
& Normal)
Total
2017-18
$4,101
$7,212
$1'1,313
2018-19
$4,210
$8,767
$606
$13.583
2019-20
$4,316
$9.867
$1,258
$15,441
2020-21
$4,424
$10,584
$2,197
$17,205
2021-22
54,531
$11,341
$3,271
$19.143
V22/2017
2/22/2017
0
2721120 1 a
Normal Cost
CaIPERS Discount
Rate Change
Ca1PERS
(Pension) Required Contribution Growth
tl
18
Valuation
Discount Rate
°
Unfunded
Adjustment
Fiscal Year
Liability 30 -yr
(Unfunded & Total
Impact
Impact
Pay Down
Normal) Impact
Safety Plans
2017-18
$341
$341
2018-19
$1,555
$606 $2,161
2019-20
$1,094
$1,258 $2,352
- 0.75%
2020-21
$723
$2,197 $2,920
2021-22
$757
$3,271 $4,028
0.5%-1.5%
2721120 1 a
2/22/2017
9
Normal Cost
*UAL Payments
18
Valuation
Fiscal Year
Date
Impact
Misc. Plans
Safety Plans
Misc. Plans
Safety Plans
6/30/2016
2018-19
0.25%
- 0.75%
0.5%-1.25%
2%-3%
2%-3%
6/30/2017
2019-20
0.5%-1.5%
1.0%-2.5%
4%-6%
4%-6%
6/30/2018
2020-21
1.0%-3.0%
2.0%-5.0%
10%-15%
10%-15%
6/30/2019
2021-22
1.0%-3.0%
2.0%-5.0%
15%-20%
15%-20%
6/30/2020
2022-23
1.0%-3.0%
2.0%-5.0%
20%-25%
20%-25%
6/30/2021
2023-24
1.0%-3.0%
2.0%-5.0%
25%-30%
25%-30%
6/30/2022
2024-25
1.0%-3.0%
2.0%-5.0%
30%-40%
30%-40%
'Unflulded Accrued Liatuh1v(UAL)
2/22/2017
9
Revenues vs Expenditures:
Actual Last 15 Years & Five Year Forecast
95,000,000
2021-22 Fiscal Year
85,000,000 ......
• $ 5 Million Annual Gap
• $6 Million Reserves
75,000,000 Under Policy level of 20%
65,000,000 Al� -A4
55,000,000
45,000,000
35,000,000 —
25,000,000 -
15,000,000
�ry0, ti , ti ti , fb ti ti '0,
, 8�� D,yo Oti~ Ory o,�'b 01p O'y d'o tisk tisk ti°'k sok ti~ rytik
ti ti ti ti ti ti ti ti �. do ,yo ,yo ,yo ,yo do
—Revenues —Expenditures
Tax Revenue % Growth vs. Pension Cost % Growth
X0.1%
6%
11.5% °
21 .31
5.4°!
2.790
3.696. i 3 4%
3. 5% --
2.4%:
1_......_._ ,
2017-18
2018-19 2019-20
2020-21 2021-22
AxisTitle
• Tax Revenue % Growth 4—Pension Expenditure % Growth
2/22/2017
10
Fund Balance Reserve
`""
► Vis'
■ General Fund 20% of operating
expenditures
■ Fleet Replacement fund $500,000
■ Information Technology fund $400,000
■
Continued Uncertainty
■ Economic Fluctuations
■Federal Policy Changes
■Future Changes by PERS
■Diablo Canyon Closure
■Settlement agreement with
PG&E
■ Uncertainty — Economic and
Financial Impacts
2/22/2017
11
Fiscal Health Contingency Plan
y'
• PurpoSe _
■ Maintain minimum fund balance at policy
level
■ Following other key budget and fiscal
policies
■ Monitoring the City's fiscal health on an
ongoing basis
■ Assessing the challenge: short or long-term
problem?
=Wl1-
L'�
Fiscal Health Contingency Plan
� I I NI t
■ Triggers '1
A
■ Natural or human -made disaster
State budget takeaways
■ Large, unexpected costs.
■ Economic Downturn
■ Two consecutive quarters of adverse fiscal
results in one or more top General Fund
revenues
■ Adverse results include:
■ Decline in revenue
■ Significant variances from projected
revenues
2/22/2017
12
r.
Next Steps
Key Budget Dates '"'
zs F=
` _
Strategic Budget Direction April 18
Pension Costs Update
■ Major City Goals/Other Important Objective
Programs
■ 2017-19 Financial Plan Service Level
Impacts
* Fiscal Contingency Plan: Recommendations
for achieving Balanced Budget
2/22/2017
13
Recommendation
1. Review and discuss the result of the General Fund Five -
Year Fiscal Forecast for 2017-22
2. Concur with the Activation of the Fiscal Health
Contingency Plan
VM2717
2/22/2017
14