CITY COUNCIL: Receive & File Five-Year Financial Forecast

Prepared by: Jason Stilwell
Meeting Date: March 20, 2012

City Council
Agenda Item Summary

Name: Receive and file the City of Carmel-by-the-Sea five-year financial forecast.

Description: The Council will receive a report of the City’s five-year financial forecast highlighting the projected financial context. The five-year forecast of discretionary General Fund revenues and their uses is intended to provide a context that may be helpful in weighing the financial consequences of current year decisions. The five-year forecast shows an increasing gap between revenues and expenditures as anticipated expenditures outpace projected revenue. This gap is $500,000 in FY 2012-13 growing to $1.4 million
in Fiscal Year 2016-17. The City Council has taken action to reduce the future gap by adopting a second tier retirement system for new employees and by reducing service levels. Additional measures to bridge the gap will be presented to the City Council as part of the recommended FY 2012-13 budget.

Overall Cost:
City funds: N/A

Staff Recommendation: Review and provide direction.

Important Considerations: The City Council is anticipated to adopt the budget prior to the start of the fiscal year with budget hearings scheduled for May 17, 2012, May 24, 2012, June 12, 2012, and June 19, 2012.

Decision Record: This is part of City Council’s annual budget process.

Reviewed by:

____________________________________ _________________

Jason Stilwell, City Administrator Date

Fiscal Year 2012-2013
City Council Budget Workshop
Five Year Financial Forecast

City of Carmel-by-the-Sea
City Council Budget Workshop
Five Year Financial Forecast


Presented Tuesday, March 20, 2012 to the Carmel City Council

Sue McCloud, Mayor
Paula Hazdovac, Mayor Pro-Tem
Jason Burnett, Councilmember
Karen Sharp, Councilmember
Ken Talmage, Councilmember
Office of the City Administrator

Carmel-by-the-Sea Five Year Financial Forecast

FINANCIAL FORECAST OVERVIEW

This report highlights the financial context the City of Carmel-by-the-Sea is projected to face in the next
five years. In general, the five-year forecast demonstrates that continued concerted effort to manage
expenditures will be required to meet available revenues.

The General Fund is the focus of the forecast because it is the largest of the City’s funds and also is
positioned and at risk to have significant exposure for future liabilities including those unanticipated.
The General Fund is the City’s primary fund and the backstop for required unfunded expenditures.
Revenues are projected to rise slightly during the forecast period and the City faces increased
expenditure demands including those necessary to maintain levels of service and meet the
requirements of maintaining existing community assets and infrastructure.

The five-year forecast shows an increasing gap between revenues and expenditures as anticipated
expenditures outpace projected revenue. This gap is $500,000 in FY 2012-13 growing to $1.4 million in
Fiscal Year 2016-17. The City Council has taken action to reduce the future gap by adopting a second
tier retirement system for new employees and by reducing service levels.

FIVE-YEAR FINANCIAL FORECAST

Introduction and Summary
The five-year forecast of discretionary General Fund revenues and their uses is intended to provide a
context that may be helpful in weighing the financial consequences of current year decisions. The
revenue projections focus on discretionary General Fund revenues. Discretionary revenue is derived
from local taxes, especially property, transient occupancy, and sales taxes. On the expenditure side, the
forecast projects the use of discretionary revenue for department operations, including salaries and
benefits; capital improvements; and debt payment requirements.
Carmel-by-the-Sea Five Year Financial Forecast

This chart demonstrates a gap and potential ongoing structural deficit for the City. The forecast revenueexpenditure
gap is driven by:

• The use of one-time sources to maintain levels of service for FY 2010-11 and FY 2011-12 which,
with flat revenue projections, exacerbate the structural imbalance in future years;
• Continued growth in salary and benefit costs;
• Increasing deferred maintenance and capital investment costs;
• No increases in staffing and annual average wage increases of 2.16%;
• An average 7.0% increase in the actuarial cost of funding existing retirement obligations with
the adopted second tiers;
• Modest revenue growth slowly rebounding as the economy improves.
Closing the gap will require services to continue to shrink, employees to be compensated less, and/or
new revenue sources to be created, from economic development, annexation, natural growth of the
economy (if any), fee increases, and/or voter approved tax increases.
Carmel-by-the-Sea Five Year Financial Forecast

Forecast Revenue Detail
The revenue forecast projects FY 2012-13 will see continued modest growth in the City’s discretionary
revenues. Property taxes show slight increases for the upcoming fiscal year. Transient Occupancy Taxes
and Sales Taxes have larger, but still modest, increases projected for FY 2010-11.
The nation fell into a recession in the second half of 2008, following the real estate market crash and
precipitated by the turmoil in the financial markets. California’s economy showed an even more
troubled trend. Carmel’s revenue dropped by seven percent, or nearly $1 million, in FY 2008-09
compared to the year prior. Revenue has slowly rebounded but still does not match pre-recession
levels.

Given historical revenue patterns and available forecasts for local and state economic data, an increase
of 2.25% in discretionary revenues is estimated in FY 2012-13, compared to FY 2011-12 but when
adjusted for use of one-time reserves and the loss of the vehicle license fee revenue, FY 2012-13
revenue is anticipated to shrink by 4%. Annual revenue growth rates continue to be projected under
3.00% annually through FY 2015-16. It is estimated that the economic recovery will continue.

REVENUE PROJECTION ASSUMPTIONS
Property Taxes
Over the past five years, annual increases in the property tax revenues have averaged about 2.5%. The
budgeted FY 2011-12 increase is 1.01% compared to the previous year’s actual revenue. That prior year
Carmel-by-the-Sea Five Year Financial Forecast revenue experienced negative growth reflecting a sharp increase in foreclosures and downward valuations based on the market price. Proposition 13 allows an annual maximum increase of 2% on properties that have not declined below their assessed value. As a result of a number of properties, values in the City declined below their assessed valuation, a slow recovery in this revenue source is anticipated in FY 2012-13. The growth rate shows a continuing weak growth rate of 1.50% in FY 2013-14, followed by a 2% rise in FY 2014-15, FY 2015-16, and FY 2016-17.
Transient Occupancy Tax

This source of revenue is highly dependent on tourism and the availability of lodging in the City. The
revenue is based on a 10% tax rate and is projected to increase by 5% in FY 2012-13 compared to the FY
2011-12 budget and show moderate growth in years thereafter. The projected FY 2013-14 growth rate is
4.0% with a sustainable growth rate of 3.0% thereafter.

Retail Sales Tax
The sales tax began to rebound in late 2010 and early 2011. The FY 2011-12 budget is 3.54% higher than
the prior year. Subsequent fiscal years show continued modest growth of sales tax as the economy
continues to recover. The projected FY 2012-13 growth rate is 2.50% with 3.0% growth thereafter.

Business License Tax
Business license revenue growth has been in continued decline. Continued management of business
license issuance and renewal is necessary to assure compliance. Outreach to the business community to
support and explain the rules and process for obtaining a business license is a key component of
compliance and assuring a level playing field in the business community between those that are
obtaining the license and collecting and remitting and those that are not. The forecast projects no
change in this revenue in FY 2012-13 with inflationary growth thereafter. Additional revenue growth in
this source may be possible with a successful outreach program.
Fees and Permits
This revenue category primarily includes building permit fees and planning permit fees. Parking and
other permit revenues are also included in this category. Fee and permit revenue is volatile and
dependent on economic conditions. While this revenue has experienced an average negative growth
rate of 3% during the past six years, this revenue source is projected to have the largest growth rate
during the forecast period as building permit activity is anticipated to rebound.
Interest, Rents, Parking Lots
This category broadly includes revenue from City assets including interest earnings on savings and
investment, facility use and rent, and revenue from the north Sunset Center parking lot. This category
has had an average negative growth rate of 6.5% for the six most recent years. The budget anticipates a
growth rate of nearly 12%. Future growth rates are anticipated to be steady and modest averaging
nearly 2% annually.
Carmel-by-the-Sea Five Year Financial Forecast
7 | P a g e
Franchise Fees
About 42% of these revenues come from the garbage collection franchise, 25% of these revenues come
from cable television franchises, and the other 33% are from water, gas and electric utilities. The FY
2011-12 budget includes an increase of 5.87% from the FY 2010-11 actual. Future growth rates are
dependent on cable revenues and low inflation in prices for gas and electricity. Franchise fee revenues
are projected to experience growth during the forecast period at approximately the rate of growth of
the Consumer Price Index in the subsequent years. This revenue category may exceed forecast
expectations or may be impacted by a renegotiated garbage franchise. Estimates will be revised if
growth trends demonstrate a rate higher than inflation.
Intergovernmental
Intergovernmental revenue is both dependent on economic conditions and on State budget constraints.
This category primarily includes vehicle license fee revenue. Statewide revenues from the vehicle
license fee fund city and county services, but the State Legislature controls the tax rate and the
allocation among local governments. In 2004, the Legislature permanently reduced the vehicle license
fee tax rate and eliminated State general fund backfill to cities and counties. Cities and counties
subsequently received additional transfers of property tax revenues in lieu of vehicle license fees. SB89
of 2011 eliminated, effective July 1, 2011, vehicle license fee revenue allocated under California
Revenue and Taxation Code 11005 to cities. As a part of the Legislature’s efforts to solve the State’s
chronic budget problems, the bill shifted all city vehicle license fee revenues to fund law enforcement
grants that previously had been paid by a temporary State tax and – prior to that – by the State general
fund. The League of California Cities has challenged this action in court as a Constitutional violation.
Cities should expect zero vehicle license fee revenues in 2011-12 and in subsequent years unless and
until there is a change in law.
Other Revenues
This category has four main components: 1) Grants, 2) Transfers, 3) Charges for services, and 4) various
miscellaneous revenues. Grant revenue is volatile from year to year. FY 2010-11 included $326,000 in
grant revenue. The FY 2011-12 budget anticipates $352,000 in grant revenue. Transfers were more
than $1 million in FY 2010-11 and more than $600,000 in FY 2011-12 as the City utilized reserves to
maintain service level and fund capital improvements. The Other Revenue category in the forecast
assumes base-level revenue and does not include, in the forecast, significant transfers into the General
Fund or use of fund balance. Transfers may be completed that are project specific or are necessary to
meet unanticipated expenditure requirements. Charges for service and various miscellaneous revenues
are estimated to generate $200,000 annually going forward.
Carmel-by-the-Sea Five Year Financial Forecast
8 | P a g e
FORECAST EXPENDITURE DETAIL
The expenditure forecast depicts how the General Fund discretionary revenue is anticipated to be
appropriated. Discretionary revenue is primarily spent as departmental base to fund operations. The
remaining discretionary revenue is either invested in capital improvements for one-time needs or used
to fund required debt service obligations. The forecast is comprised of three categories: 1) non-salary
changes, 2) changes in debt payments, and 3) salary and benefit changes.
Total General Fund discretionary revenue is appropriated in three broad ways. First, in FY 2011-12 the
base budget for General Fund departments totals $12.2 million. Second, the budget earmarks $1.5
million for capital investment including deferred maintenance and a designation for future capital
projects. Third, the remaining $534,000 is appropriated for debt service obligations.
The Five-Year Expenditure Projections table includes both actual and projected numbers. The actual
numbers, including those in the Adopted FY 2011-12 Budget, are to the left of the vertical double line
while forecast projections are to the right of the vertical double line. The top portion of the table
includes aggregate numbers of the three uses of General Fund revenue. The details of that spending are
at the bottom portion of the table. The numbers in the grey box are presented only for historical
comparison and are part of the aggregate numbers in the top section of the table.
Carmel-by-the-Sea Five Year Financial Forecast
9 | P a g e
Non-Salary
Non-salary cost increases include shifts in the City’s use of funding to maintaining the Fire Department’s
level of service by entering into a contract agreement with the City of Monterey and to maintain the
City’s fire-ambulance service by assuming responsibility for the function following the dissolution of the
Carmel Regional Fire Ambulance Authority. The other non-salary cost increase projected in the forecast
is to allocate $100,000 on an ongoing basis to a liability reserve to provide funding for future
unanticipated legal requirements, settlements, or judgments.
Debt Service
Debt service payments are anticipated to remain flat during the forecast period. The forecast projects a
revised strategy for funding vehicle purchases moving from lease purchase of vehicles back to a vehicle
replacement fund. The forecast anticipates adding $50,000 ongoing to the vehicle replacement fund
beginning in FY 2012-13 increasing by $75,000 annually beginning FY 2014-15. The five-year capital
improvement plan anticipates a $1.6 million vehicle replacement obligation.
Salary and Benefits
The salary and benefit increases include anticipated personnel related expenditures. They are
determined based on negotiated Memoranda of Understanding (MOUs), health insurance; retirement
benefit cost projections, and mandated costs such as workers compensation and Social Security
contributions. The assumptions behind these increases include: 1) no net increase in FTE (reductions
may be required), 2) no enhancements of health or retirement benefits, and 3) all costs associated with
salaries are relatively flat projected at 3% or lower.
Employee health insurance costs have been rising at an average a rate of 4% over the past six years even
with staffing reductions. The forecast projects health insurance costs will increase on an annual average
rate of 8.40% as the City continues to implement cost avoidance and reduction strategies.
The average annual increases in CalPERS retirement rates have been 7.31% since FY 2005-06. The
investment losses during FY 2008-09 has a significant impact on what the FY 2011-12 retirement rate
paid by the City will be. Smoothing formulas enable the rates to increase more modestly in future years
(7.0% average annual increases). The ameliorative measures already taken by the City Council provide
downward pressure on the future growth rate. However, CalPERS has adopted a lower assumption rate
which will cause rates to increase in FY 2013-14.
Other salary and benefit costs include all personnel costs other than salaries, health insurance, and
retirement rates. Medicare, workers compensation, life, and unemployment insurance premiums, and
other MOU obligations are included in this category. The average annual growth rate has been 4.32%
for the past six years. The total cost of these is approximately $1.5 million annually and the assumed
growth rate is 4.5% annually.

FIVE YEAR 2012-2017
FINANCIAL FORECAST
3/20/2012
Issued by the
City Administrator
Overview
Forecast
Introduction
 The report includes five-year projections of
City revenue and expenditures
 Designed to provide intermediate term
financial information for the City Council
 In general, the forecast demonstrates the fiscal
condition of the City will require close
management
 Service level impacts have been reduced and
further reductions are possible given projected
revenue streams
Overview
Overview
Forecast
Introduction
 The forecast is a tool to provide the City
Council a context for decision making
 Helps to inform the public about expected
service levels from the City
 Provides an overview of the City’s financial
condition and integration of its various
elements
Overview
Overview
Forecast
Summary of forecast
 Revenue are not projected to keep pace with
anticipated expenditures
 Increases in levels of service are unlikely
without additional revenue
 Further expenditure management and
cooperation with the employees will be
necessary to maintain current levels of service
Forecast
18.0
17.0
16.0
.1.f.t ,..... 15.0 14.0
fa ~ 13.0 -- =.Q 0 ·- 12.0 c 6 11.0
10.0
9.0
8.0
1.6
Five Year
General Fund
Revenue & Uses
2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016-
06 07 08 09 10 11 12 13 14 15 16 17
~ Discretionary Revenue _.. Total General f und Expenditures
Overview
Forecast
Revenues
 Revenue is projected to have modest growth
during the forecast period
 Big 3:
 Property tax average projected growth 1.74%
 TOT average projected growth 3.6%
 Sales tax average projected growth 2.9%
 Average revenue growth $400,000 annually
Forecast
Overview
Forecast
FIVE-YEAR FY 2011-12 through FY 2016-17 DI SCRETIONARY REVENUE PROJECTIONS
in thouruuis of dollars
f f
Revenue Source FYOS-06 fY{)6..()7 FY07-08 FYOS-09 FY09-10 FY10-11 FY 11-12 FY12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17
(Oollars in Millions) Actual Actual Actual Actual Actual Actual Budget Projected Projected Projected Projected Projected
Property Tax S3.340 53.726 53.867 54.066 54.189 54.158 S4.200 54.250 54.314 S4.400 54.488 54.578
Transient Occupancy Tax 3.879 4.209 4.395 3.787 3.799 4.003 4.210 4.421 4.597 4.735 4.8n 5.024
Sales Tax 2.169 2.1 43 2.340 2.181 1.620 1.806 1.870 1.917 1.974 2.033 2.094 2.1 57
Business License Tax 0.416 0.333 0.627 0.609 0.551 0.526 0.500 0.500 0.505 0.515 0.525 0.536
Fees and Permits 0.553 0.488 0.492 0.369 0.448 0.391 0.425 0.430 0.441 0.458 0.475 0.493
Interest, Rents, Parking Lots 0.502 0.694 0.633 0.386 0.250 0.235 0.263 0.267 0.271 o.2n 0.283 0.290
Franchise Fees 0.398 0.466 0.426 0.467 0.453 o.4n 0.505 0.515 0.531 0.546 0.563 0.580
Intergovernmental 0.413 0.376 0.369 0.382 0.387 0.459 0.383 0.042 0.043 0.044 0.045 0.046
~ ~
other Revenue 0.561 1.121 0.472 0.461 0.607 1.637 1.846 1.292 1.331 1.358 1.412 1.475
TOTAL 12.237 13.556 13.621 12.708 12..304 13.692 141 02 13.634 14.007 14.367 14.763 15.178
DDllar Chan.ge Per Year $1.319 $0.065 -$0.913 -$0.404 $1.388 $0.510 -$0.568 $0.373 $0.360 $0.396 $0.811
GROWTH RATES:
Property Tax 11.36 3.78 5.15 3.03 -0.74 1.01 1.20 1.50 2.00 2.00 2.00
Transient Occupancy Tax 8.51 4.42 -13.83 0.32 5.37 5.17 5.00 4.00 3.00 3.00 3.00
Sales Tax -1.20 9.19 -6.79 -25.72 11 .48 3.54 2.50 3.00 3.00 3.00 3.00
Business License Tax -19.95 88.29 -2.87 -9.52 -4.54 -4.94 0.00 1 00 2.00 2.00 2.00
Fees and Permits -11.75 0.82 -25.00 21.41 -12.72 8.70 1.25 2.50 3.75 3.75 3.75
Interest, Rents, Parking Lots 38.25 -8.79 -39.02 -35.23 -6.00 11 .91 1.50 1.50 2.25 2.25 2.25
Franchise Fees 17.09 -8.58 9.62 -3.00 5.30 5.87 2.00 3.00 3.00 3.00 3.00
Intergovernmental -8.96 -1.86 3.52 1.31 18.60 -16.56 -89.00 2.00 2.00 2.00 2.00
other Revenue 99.82 -57.89 -2.33 31.67 169.69 12.77 -30.00 3.00 2.00 4.00 4.50
TOTAL %Change from Prior Yr 10.73 0.48 -6.70 -3.18 11.18 3.72 -4.00 2.74 2.57 2.76 5.65
Overview
Forecast
Expenditures
 Salaries and benefits are expected to grow on
average $350,000 annually with no increase
in number of staff
 Health insurance costs expected to growth by
8.4% annually
 CalPERS rates expected to grow by 7% annually
 Forecast projects creating a litigation reserve
and a vehicle replacement fund