Item 5 - General Fund Financial Results, COVID-19 Economic Impacts Update and Long Range ForecastMarch 2, 2021, Item #5'\ion~ c> ------·1J--r . DATE: TO: FROM: ,-\ ..... -·~ CONTACT: SUBJECT: Summary: AGENDA REPORT CityofPoway March 2, 2021 Honorable Mayor and Members of the City Council Aaron Beanan, Director of Financ~ Aaron Beanan, Director of Finance 858-668-4411 or abeanan@poway.org CITY COUNCIL General Fund Financial Results, COVID-19 Economic Impacts Update and Long-Range Forecast This report will discuss the General Fund financial results for Fiscal Year 2019-20 (ended June 30, 2020), provide a COVID-19 economic update, and present the first draft of the City's long-range financial forecast. Recommended Action: It is recommended that the City Council note and file the report on General Fund financial results, economic impacts, and long-range forecast. Discussion: Consistent with staff's commitment during the Fiscal Year 2020-21 (taking place from July 1, 2020 to June 30, 2021) budget process to update Council as often as applicable to the changing economic environment resulting from the COVID-19 pandemic, staff will discuss the General Fund financial results for Fiscal Year ended June 30, 2020, provide a COVID-19 economic update, and present the first draft of the City's long-range financial forecast. General Fund Financial Results for Fiscal Year 2019-20 The Fiscal Year 2019-20 General Fund's results are presented in the table on the following page and will be discussed in more detail following the table on the next page. [Remainder of page intentionally left blank] 1 of 19
March 2, 2021, Item #5FY 2019-20 Projected FY 2019-20 Prelim. FY 2019-20 Final (as of April __ ~020) (as of August 2020) _ (Audited) Property Tax $22,750,001 $22,362,155 $22,362,155 Sales Tax 13,135,648 14,185,047 14,185,047 Franchise Fees, TOT 2,883,083 2,525,262 2,890,708 Other 9,195,596 9,680,108 10,379,110 ---------------------------Tot a I Operating Revenues 47,964,328 48,752,572 49,817,020 Legislative/Admin. Services 1,062,431 842,814 1,260,284 Finance 1,818,463 1,791,033 1,793,891 Human Resources 1,111,268 , 1,107,004 1,119,226 Community Services 6,083,434 · 5,708,872 · 5,719,232 Development Services 4,861,669 · 4,990,711 7,868,513 Public Works 6,083,876 5,708,872 5,667,791 Fire 13,026,391 13,013,153 13,175,003 Law Enforcement 13,504,284 13,492,256 13,511,871 ---------------------------Tot a I Operating Expenditures 47,551,816 46,654,715 50,115,811 Net Operating Change (298,791) Capital Expenditures (4,951,196) Proceeds from Sale 3,364,021 Transfers In 2,827,727 Transfers Out ________________________ (_2,_51_5_,0_4_2)_ Net Fund Balance Change (1,573,281) The final operating results for the General Fund were mostly consistent with staffs previous projections. Operating revenues came in about $1 million, or 2 percent, higher than expected. This was due to items such as successor agency administrative revenue ($380 thousand) and unclaimed funds ($244 thousand) that were higher than anticipated. However, operating expenses deviated much more than anticipated, $3.5 million or 7.4 percent, predominantly due to one-time accounting entries. The one-time accounting entries to reflect the land held for resale that was sold to the Poway Commons project developer created an increase in Development Services expenses of approximately $2.4 million. Without the one-time accounting entries, operating expenses would have been approximately 2 percent more than anticipated. Capital expenditures and transfers out totaled approximately $7.5 million while the proceeds from the Commons project land sale and transfers in totaled approximately $6.2 million. Overall, the General Fund balance decreased by $1.5 million for Fiscal Year 2019-20. Of this decrease in total fund balance, approximately $900 thousand was related to changes in items such as reserve levels and capital project spending. Unassigned fund balance decreased by approximately $600 thousand. COVID-19 Impacts for Fiscal Year 2019-20 and 2020-21 Economic Aid: The City has received federal aid as a result of the COVID-19 pandemic. During Fiscal Year 2019-20 the City was awarded approximately $886 thousand in Coronavirus Aid, Relief, and Economic Security (CARES) Act funding through the County of San Diego. The award will help defray the City's costs in responding to the COVID-19 pandemic. These funds have not yet been accrued and reflected in the table above. Based on preliminary estimates, approximately 75 percent of this award amount will directly benefit the General Fund. The City also received over $54 thousand when staff applied to the Department of Health and Human Services to help defray the lost ambulance revenue discussed above. 2 of 19
March 2, 2021, Item #5The City has also provided its local businesses with economic aid during Fiscal Year 2019-20. For example, on April 16, 2020 the City Council approved $2,000,000 from the City's Extreme Events/Public Safety reserve to fund the Poway Emergency Assistance Recovery Loan (PEARL) program for small businesses. The PEARL program's goal is to offer financial assistance to small businesses located in Poway by complementing existing state and federal loan programs and to provide a financial bridge to businesses to survive the current emergency. As of August 31, 2020, staff had received 78 applications requesting over $2.8 million in loans. Based on staffs review, almost $1.4 million has been loaned under the program. During Fiscal year 2020-21 the City was awarded approximately $609 thousand in CARES Act funding through the State of California. This award will also help defray the City's costs in responding to the COVI D-19 pandemic. Between the County of San Diego and State of California CARES Act awards, the City will receive approximately $1.495 million. The City also has an application open with FEMA to help defray other costs incurred because of the COVID-19 pandemic such as personnel and equipment costs. FEMA reimburses 75 percent of eligible expenditures. Typically, the California Disaster Assistance Act (CDAA) would pick up another 18.75 percent of the FEMA eligible expenditures. However, on February 2, 2021 the White House issued a "Memorandum on Maximizing Assistance from the Federal Emergency Management Agency" that directed FEMA to reimburse 100 percent of eligible COVI D-19 expenditures. The City has also provided its local businesses with economic aid during Fiscal Year 2020-21. For example, on July 7, 2020 Council approved the purchase of picnic tables to assist Poway restaurants with the expansion of outdoor dining areas to help restaurants survive the economic hardships from COVI D-19. Additionally, Council approved the Sharing Outdoor Spaces (SOS) initiative at a special meeting on July 15, 2020. This program's goal is to help groups impacted by the State's July 13, 2020 order requiring the cessation of indoor activities by opening the City's open spaces, such as parks, to churches and fitness-oriented organizations, so they can continue to operate. COVID-19 Expenditure Impacts: Since the start of the COVID-19 emergency in March 2019, the City has spent resources to comply with State and County health mandates and support Poway's local economy. In Fiscal Year 2019-20 for example, from March through June the City spent over $21 O thousand in supplies. This includes purchases of personal protective equipment, materials for employee health screening stations, equipment to allow staff teleworking capabilities, etc. It also included the purchase of barricades and delineators to limit access to our public spaces like parks and trails. The City also spent approximately $830 thousand on staffing costs related to complying with the State and County health mandates, supporting the PEARL program, Farmers Market, and acquisition and distribution of personal protective equipment. These costs do not include other safety services support costs, such as the Sheriffs support or firefighter COVID-19 response calls and do differ from the Continuation of Emergency COVID-19 staff report as that report does not include staffing costs in the total. Staff anticipates that many of these costs will be reimbursed from the CARES Act or through the Federal Emergency Management Agency (FEMA). From July 1, 2020, the start of Fiscal Year 2020-21, to the writing of this report the City has continued to spend resources to comply with State and County health mandates and support Poway's local economy. Fiscal year to date expenditures total approximately $1 million. For example, the City has spent over $657 thousand on contractual services, much of which relates to purchase of a new civic services software package. This software will allow the City to provide services such as the submission, management, review, and tracking of permits, plan review, code compliance, and business/regulatory licensing completely online. The City has also spent over $21 O thousand in supplies. This includes 3 of 19
March 2, 2021, Item #5purchases of picnic tables for the picnic table program, personal protective equipment, materials for employee health screening stations, equipment to allow staff teleworking capabilities, etc. The City also spent approximately $11 O thousand on staffing costs complying with the State and County health mandates, supporting the picnic table program and SOS program, and acquisition and distribution of personal protective equipment. These costs do not include other safety services support costs, such as the Sheriffs support or firefighter COVID-19 response calls. Staff anticipates that many of these costs will be reimbursed from the CARES Act or through the Federal Emergency Management Agency (FEMA). Economic Trends Staff will spend less time in this staff report explaining background information since the September 15, 2020 staff report contained a high level of detail. Based on initial estimates from the Bureau of Economic Analysis (BEA) in January, the United States GDP grew at an annualized rate of 4.0 percent. This is consistent with many economist's expectations. For example, in December 2020 the UCLA Anderson Forecast anticipated a slowdown in fourth quarter growth as a result of "additional stay-at-home orders and the looming expiration of emergency benefits" which leads to weak labor markets and food/housing insecurity. The UCLA Anderson Forecast also anticipates strong growth in the second quarter of 2021 as a result of mass vaccinations and government spending which will help release and fuel pent up demand. The chart below reflects the most recent seven quarters of information. 19,500.0 19,000.0 7 C: ~ 18,500.0 1i -<Jl. ~ 18,000.0 Q. 0 <., ni 17,500.0 QI ex: 17,000.0 16,500 0 Q2 2019 United States-Gross Domestic Product Q3 2019 Q4 2019 Ql 2020 -31.4% 0.2 2020 33.4% Q3r 2020 40.00% 30.00% 20.00% -=o-QI -~ 10.00% ni ::s C: C: 0.00% 5. QI tlO -10.00% C: n, .s::. u 0 -20.00% 0 -30.00% -40 00% Q4a 2020 The stock market continues to have an overall optimistic view about where the economy is heading. As shown in the chart on the following page, in February 2020, the Dow Jones Industrial Average (DJIA) reached an all-time high of 29,551.42 prior to the COVID-19 pandemic. Subsequently, it slid to 18,591.93, a 37.1 percent decrease, in March 2020. As of the market close on January 20, 2021, it was 31,188.38, a 67.8 percent increase. The red line represents the pre-pandemic peak for reference. [Remainder of page intentionally left blank] 4of 19
March 2, 2021, Item #535,000 Dow Jones Industrial Average, Index, Daily, Not Seasonally Adjusted Peak: Feb 12, 2020; 29,551.42 Peak: Jan 20, 2021; 31,188.38 ~~~ ~ 25,000 20,000 15,000 10,000 5,000 Trough: Mar 23, 2020: 18,591.93 ~" ~ ~" <;) ~<;) -..: ,,: <.: ,~ ~.: ->,., -:s:,e ':S)Q, ':()Q; ~q; v¢c ~ "--o ~---(l,,~ ~ ~q; oc., ~Q, c.,e~ ~o e<-· <;) ':\,",, \, 7,<::'---x'\, 1>' ~'0-":Q'v -..,-?> <-<.Q; As previously discussed, labor statistics are a very strong economic indicator for the COVID-19 pandemic. Initial unemployment claims summarized by the Federal Reserve Bank of St. Louis' Economic Data (FRED) are reflected in the chart below. Initial unemployment claims are still behaving as anticipated. The pause in declining claims is consistent with economist expectations that the fourth quarter of 2020 would be more challenging. Initial unemployment claims should continue to decrease in the first and second quarters of 2021 as the vaccine rollout continues to expand and labor demand in the sectors most heavily impacted by health orders continues to increase. Unites States -Initial Unemployment Claims (Weekly, SA) 7,000,000 6,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 5 of 19
March 2, 2021, Item #5The trends in the unemployment rate and job openings rate shown in the table below are also following expectations and consistent with the other data trends presented. This information was summarized from FRED. The national unemployment rate peaked in April 2020 at 14.7 percent and has dropped to 6.7 percent as of December 2020, a sharp 54.4 percent decrease. The job openings rate dropped to 3.7 percent in April 2020 and has increased to 4.4 percent as of November 2020, an 18.9 percent increase. 16 14 12 10 ~ Q> 8 +-' (V 0::: 6 4 2 0 United States -Unemployment Rate & Job Openings Rate -·~ 0 0 0 rl rl rl N N N M ~ M ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 00 00 00 m m m O O 0 rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl N N N 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NNNNNNNNNNNNNNNNNNNNN NNNNNNNNN 1N ---------------------------------rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl rl ---------------------------------rl ~ m rl ~ ~ rl ~ m rl ~ m rl ~ m rl ~ m rl ~ m rl ~ m M ~ rl ~ m rl ~ m As the chart on the following page shows, consumer confidence is still increasing, but at a decreasing rate. This data trend is also consistent with the UCLA Anderson Forecast and supports issues of food and housing insecurity resulting from the anticipated expiration of emergency benefits at the end of calendar year 2020. Consistent with the other data, consumer confidence is expected to increase as vaccine rollouts increase and consumers begin to face less food, housing, and job insecurity. [Remainder of page intentionally left blank] 6 of 19
March 2, 2021, Item #5Ill) C: 103 ,3 102.5 "'O QI .... Ill ::J 102 j "' 101.5 (1j Ill ] o 101 .~ 0 -.-I Q. II E e11 100.s <t ~ cf ai 100 u ;: ~ E Ill aj :s .... .. n, "'O C: n, .... ~ 0 u w 0 99.5 99 98.5 98 United States -Consumer Confidence 2.0Ct¾ 1.000/c, 0.0090 C1I b.O C n, .c u -1.00% ?I?. -2.00% -.3.00% The fourth quarter of 2020 was projected to be bumpy as a result of renewed stay at home orders and the anticipated expiration to emergency benefits. As shown in the previous graphics, most of the economic data has been consistent with that projection. The consensus forecast is for stronger growth in the second quarter of 2021 as vaccine rollouts become ubiquitous and pent up demand is released as stay at home orders are relaxed and consumers feel more confident to go out in public. While national and state economic statistics are useful in understanding the overall economic trends from the COVID-19 pandemic, there are several key revenue sources for the City that will indicate how Poway is trending. The two largest revenue sources for the City, accounting for 64.1 percent of revenue, are property tax and sales tax. Property tax represented 40.4 percent of General Fund revenues at June 30, 2020 while sales tax represented 25.8 percent. Property tax is less volatile to economic events than sales tax. As such, how sales tax is impacted by the COVID-19 pandemic is a good indicator about how the City will be impacted. Nationally, households have cut back on eating out and increased their spending on food purchases to prepare meals at home. The red dotted line in the chart on the following page represents instances when retails sales at restaurants match retail sales at grocery stores (i.e. people are eating out with the same frequency they are eating at home). The blue line represents retails sales at restaurants as a percentage of retails sales at grocery stores. [Remainder of page intentionally left blank] 7 of 19
March 2, 2021, Item #51.10000 1.00000 0.90000 0.80000 0.70000 0.60000 O.SOOCXJ 0.40000 C) M 0 N .0 Cl.) ,._ Advance Retail Sales: Food Services and Drinking Places/Food and Beverage Stores en C) en Cf) O"l 0, C) °' 0, en 0 0 0 0 0 0 0 0 0 .-l M M n n M .-, rl n r-1 N N N N N N N N N 0 0 0 0 0 0 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 I.. 0. > C: Ql) 0. u > u C .0 ro 0.. > C '=i.D 0. r,:i ro ~ ~ ::::l (lJ 0 w ~ (lJ ro ~ ~ ::::l Cl.) 2 <i 2 <i V'l 0 z Cl u.. 2 <i 2 <i (./"j 0 0 0 N N N 0 0 0 N N N u > u 0 Cl.) 0 z Cl This trend is important to Poway because these categories typically make up just under 10 percent of Poway's annual sales tax revenue. Over the course of the pandemic we have generally seen a shift in Poway's related sales tax categories consistent with the national trend. For the third quarter of 2020 the Food and Drugs category was up 13.4% while the Restaurants and Hotels category was down 13.1 percent compared to the prior year quarter. Some of Poway's other sales tax categories have been heavily impacted by the pandemic. For example, the Fuel and Service Stations category is down 40.5 percent third quarter of 2020 compared to the previous year quarter. As discussed in previous reports, the Wayfair decision has helped Poway's sales taxes as sales taxes from many online purchases (e.g. Amazon) are now being added to the County sales tax pools and allocated to the City. The State and County Pools category is up 70 percent in the third quarter of 2020 compared to the prior year quarter. The strong performance related to online sales has helped Poway's sales taxes in total. The volatility in the sales tax categories can also be seen in how Poway's sales tax forecasts have adjusted over the course of the pandemic as more information on how the pandemic is impacting Poway becomes available. The chart on the following page shows the pre-pandemic estimates for sales tax (i.e. the baseline) and the forecast revisions over the course of the pandemic. As HDL, the City's sales tax consultant, saw how the pandemic impacting certain categories more than others (e.g. Fuel and Service Stations vs. State and County Pools) the forecast was strengthened over time. [Remainder of page intentionally left blank] 8 of 19
March 2, 2021, Item #5HDL Sales Tax COVID Forecasts for Poway 15,000,000 14.S0M 14.59M 14.56M 14,500,000 14.35M 14.20M 14.20M 14,0J0,000 13,500,000 13,000,000 12,500,000 12,000,000 FY 2019-20 FY 2020-21 ■ Baseline ■ Revision 1 ■ Revision 2 ■ Revision 3 Revision 4 ■ Revision 5 The chart below shows how Poway's sales tax reacted to the Great Recession and how it's projected to react to the COVID-19 pandemic. The chart clearly shows the different economic impacts between the two types of recessions and supports the idea that this is a recession resulting from health mandates and not structural issues within the economy. During the Great Recession it took seven fiscal years until sales tax revenues exceeded previous highs and another four fiscal years to the recent peak, which was approximately $2.7 million more than the prior peak. At this time, sales tax revenues are projected to exceed pre-pandemic levels in Fiscal Year 2021-22, or three fiscal years. 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 HDL Sales Tax COVID 5-Year Forecast for Poway -Sales Tax Actuals/Forecast -Baseline (Great Recession) -Baseline (COVID Pandemic) 9 of 19
March 2, 2021, Item #5In summary, the economic data still supports a moderate recession scenario and there is now less concern about a worsening economic environment. As stated previously in the staff report, the consensus forecast is for stronger growth in the second quarter of 2021 as vaccine rollouts become ubiquitous and pent up demand is released as stay at home orders are relaxed and consumers feel more confident to go out in public. This will help Poway move back towards its normal economic experience. Staff will continue to monitor the economic environment, economists' projections, and Poway's revenue experiences compared to current projections to understand if the City should adapt its response to help further mitigate the economic impacts from the COVID-19 pandemic. Staff will return to Council with updated information as appropriate. As staff is monitoring the direct effects of the COVI D-19 pandemic on the City, they are also compiling data for the City's long-range forecast. This forecast will provide insights into the City's structural financial condition, which is separate from how the City is being economically impacted by the COVID-19 pandemic. The following sections will discuss the current version of the long-range forecast. Long-Range Forecast The City Council, City Manager, and Budget Review Committee were all in agreement that a long-range financial forecast should be developed. Finance is in the process of developing a long-range forecast. A long-range forecast does not predict the future; actuals results will differ from the forecast. Forecasts are inherently uncertain and the degree of uncertainty increases the longer the time horizon of the forecast is. However, a long-range forecast does help identify future challenges and opportunities, causes offiscal imbalances, and strategies to secure financial sustainability. Long-range forecasts typically have the following characteristics: • A time horizon that extends between five and ten years from the current period; five years being the most common while ten years is the most ideal according to research by David Osborne and Peter Hutchinson (authors of ''The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis"); • Accounts for the interrelationships between all funds of the government; • Is periodically updated, generally no less frequently than every one to two years; • Presents long-term revenue and expenditure projections, discusses financial policies, and identifies financial strategies to address potential financial imbalances or other long-term issues; and • Is transparent and integrated within the government's planning framework. Long-range forecasts help examine the long-range financial implications of current decision making, take a broader look at the financial position and requirements, and highlight potential issues ahead of time to provide opportunities for proactive versus reactive solutions. They also reinforce the need to follow sounds financial management practices and help communicate to people in a format other than the annual budget. A long-range forecast also helps demonstrate a dedication to sound financial management to credit rating agencies. A long-range forecast for the City of Poway will help continue the City's tradition of proactive financial management to help ensure the City can provide a consistent and sustainable level of essential services into the future. An important component of a long-range forecast is the assumptions underlying the model. Current assumptions used in the model are detailed in the sections below and provided for transparency. 10 of 19
March 2, 2021, Item #5Revenues are discussed as a whole category while expenditures are broken down between personnel and maintenance and operations ("M&O"). M&O also includes minor capital (i.e. not capital projects) spending in the model. In most cases the budget, not historical actuals, represents the baseline from which the inflationary factors are applied. Additionally, this is a baseline forecast which means it only models known data and does not model scenarios. For example, the City's current labor contracts expire in June 2021. And while labor negotiations are anticipated to commence in March, items subject to the bargaining process are unknown at this time and, as a result, not included in the model. Revenue Assumptions: Revenue data is taken directly from Munis as of October 2020. The data has been grouped like the revenue categories in the Fiscal Year 2020-21 Operating Budget for consistency. Table 1 below shows the inflationary factors by fiscal year for certain revenues. Table 1: Assumptions for Primary Revenue Categories 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 Property Tax 4.50% 4.00% 4.00% 3.50% 3.00% 2.50% 2.50% 2.50% 2.50% 2.50% Sales Tax 4.70% 3.80% 3.10% 2.80% 2.90% 3.00% 3.00% 3.00% 3.00% 3.00% TOT 8.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Motor Veh. Tax 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Franchise Fees (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) (0.50%) Cell Leases 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Interest 0.50% 1.00% 1.50% 2.10% 2.10% 2.30% 2.30% 2.30% 2.30% 2.30% The following is a list of the primary revenue assumptions used in Table 1: • Property Tax o Fiscal Year 2021-22 matches Fiscal Year 2020-21 estimates from the County of San Diego Assessor's Office based on UCLA's Anderson School of Business December 2020 Economic Outlook which suggested local governments should forecast property tax revenues at least as much as the current fiscal year. The increases through Fiscal Year 2024-25 remain higher as several large development projects are estimated to be completed within that time frame. Increases beyond that point move to a slower growth/lower home turnover inflationary factor consistent with Poway's growth curve and Proposition FF. • Sales Tax o Inflationary estimates are based on HDL's, the City's sales tax consultant,January 2021 five-year forecast • TOT o Fiscal Year 2021-22 represents a return towards normal. Future years inflationary increases track with historical data. • Motor Vehicle Tax o Based on historical data. • Franchise Fees o Based on historical data. Laws governing the State's calculation of franchise fees have been slow to adapt to a changing franchise environment. For example, the franchise fee for cable providers is heavily focused on "cable TV subscribers" and not "digital connections." As a result, revenue is slowly declining as more people "cut the cord" and opt for internet only services (i.e. no longer subscribe to cable TV). • Cell Leases o Based on the terms of the current lease agreements. 11 of 19
March 2, 2021, Item #5• Interest o Represents a slow increase consistent with policy indications from the Federal Reserve and mirrors the Congressional Budget Office's forecast as their model accounts for macroeconomic conditions. Macroeconomic conditions play a material role in how the City's portfolio performs. Revenues not listed in Table 1 were most commonly inflated using a confidence interval approach. In statistics, a confidence interval represents the range of plausible future values based on the historical data at a given confidence (e.g. 95 percent) that the future value will lie within the proposed range. For example, based on historical data there is a 95 percent chance property taxes in-lieu of VLF will increase between 3.72 and 5.15 percent. The exact amount within the plausible future range was selected based on what had most commonly occurred. For example, a single large deviation may have been adjusted for if it was an outlier. A few revenues, tied to lease agreements, were inflated by the 10-year CPI-U All Items SD-Carlsbad average change consistent with the terms inherent in most leases. Five development projects are also included within the forecast based on the best data staff has available to them. These development projects are The Farm, Fairfield, The Commons, The Outpost, and Creekside Plaza. The projects are expected to be fully developed between Fiscal Year 2021-22 and Fiscal Year 2023-24. Estimates for property tax and sales tax for each development are shown in the estimated fiscal year of completion and are inflated thereafter by the assumptions in Table 1. Since the projects are primarily residential, most, approximately 70 percent, of the projected increases are in property taxes. Expense Assumptions (Personnel): Personnel data is taken directly from Munis as of October 2020 and includes all vacancies as of that data extraction. The data has been grouped like the expense categories in the Fiscal Year 2020-21 Operating Budget for consistency. Table 2 shows the inflationary factors by fiscal year for personnel expenses. Table 2: Assumptions for Personnel Categories 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Salary Increases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% CalPERS-Misc.1 30.47% 32.16% 32.97% 33.70% 30.93% 31.00% 30.88% 30.75% 30.63% Cal PERS -Safety1 43.49% 45.02% 45.53% 45.95% 45.59% 45.14% 44.68% 44.23% 43.78% Health Benefits1 16.00% 16.04% 16.08% 16.12% 16.16% 16.20% 16.24% 16.28% 16.32% Other Benefits1 10.73% 11.24% 11.78% 12.35% 12.94% 13.56% 14.21% 14.89% 15.60% Overtime1 0.93% 1.09% 0.57% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 1. Are not percentage increases but a percentage of salaries. The following is a list of the primary personnel assumptions used in Table 2: • Vacancies o Assumed filled as of Fiscal Year 2021-22. o Budgeted at Step 3 consistent with annual operating budget practices. • Salary increases o No increases forecast beyond normal step movement. • Retirement Benefits o Based on CalPERS Pension Outlook tool and further discussed below. • Health Benefits (i.e. Medical, Dental, and Vision) 2030-31 0.00% 30.50% 43.33% 16.36% 16.35% 0.00% o Represented as a percentage of salaries {~16 percent) consistent with how the Bureau of Labor Statistics tracks health benefits. o Actual percentages have been adjusted to the City's experience 12 of 19
March 2, 2021, Item #5• Other Benefits (e.g. Medicare, Long Term Disability Insurance, Worker's Compensation, etc.) o Represented as a percentage of salaries (ranging from ~10% to 16%) consistent with how the Bureau of Labor Statistics tracks health benefits. o Actual percentages have been adjusted to the City's experience. • Overtime o As a function of base pay (i.e. OT increases as base pay increases). Assumptions for CalPERS employer rates came directly from Cal PERS Pension Outlook tool and are based on the June 30, 2019 actuarial valuation, the most recent actuarial available. The Pension Outlook tool uses data from the most recent actuarial valuation reports, economic and demographic assumptions as published in the Cal PERS Experience Study and Review of Actuarial Assumptions, and any user selected modeling assumptions. The next two charts provide a visual representation of the employer rates, as a percentage of salaries, used in the City's long-range forecast and does not include any user modeling assumptions (i.e. this is the base Pension Outlook forecast). As the charts indicate, CalPERS rates are projected to peak during Fiscal Year 2024-25 and begin to decrease thereafter. CalPERS Funded Status & Employer Rates (Miscellaneous Plan) 40.00% 105.00% 33.70% 35.00% 100.00% 30.00% 95.00% 25.00% 90.00% 20.00% 85.00% 15.00% 80.00% 10.00% 75.00% 5.00% 70.00% 0.00':J,.£ 65.00% .-; N ('() tj-U") •..o r-.. 00 er, 0 rl N m tj-U"') \D r-.. 00 O"l ~ ~ N qj) ~ ~ ~ r-.. co ~ 0 N ~ N N N N N N N ,-;; (f) ~ ('(') rr ('() (f') (f') (f') ('(') tj-tj-tj-Uj 6 .-I N «> ~ J; J> r-.'.. 00 O'i 6 .-I N ("/") tj-J; J> r-.'.. 00 O'i 6 ~ N «> ~ J; <.D r-.'.. 00 d-. N N N N N N N N N N r1") ('('_, ('(') ('() ('() (Y') r1") ("() ('() (f') tj-tj-tj-tj-tj-tj-tj-tj-tj-tj-0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 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 (",I N N N N N N N N N ("-,I N N N N N N ...,_Total Employer Rate ...,_Funded l~atio [Remainder of page intentionally left blank] 13 of 19
March 2, 2021, Item #550.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% .-l N ('() N N N 0 ~ N N N N 0 0 0 N N N Cal PERS Funded Status & Employer Rates {Safety Plan) 45.95% 105.00% 100.00% 95.00% 90.00% 85.00% 80.00% 75.00% 70.00% 65.00% tj" I.I) <.D r---00 Cl', 0 rl N M tj' I.I) <.D r---00 O'\ ~ .-; ~ ~ 1 I.I) ~ r---~ O'\ 0 N N N N N N N') ('(") t:t, ('() r,:, ('() ('() ('() ('() ('() tj' tj" tj' "1 U') m '<1" Ji J, r.'.. 00 di 0 ~ N ,..,, tj-Ji J, r.'.. 00 di 0 ~ N ,..,, tj-Ji J, r.'.. 00 d, N N N N N N N ('() ('() ('() ('() M ('(:, (() (() ('() M '<t tj" tj' '<t tj' tj" -:t' tj' tj' '<t' 0 0 0 0 0 0 0 0 0 0 0 0 0 0 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 N N N N ...,_Total Employer Rate ...,_Funded Ratio At the projected peak in Fiscal Year 2024-25, the City's anticipated contribution to Cal PERS for all funds is $7.77 million which is comprised of $2.37 million in normal cost and $5.40 million in unfunded liability. By 2049-50, the City's projected contribution for all funds is $3.64 million which is completely comprised of the normal cost as the unfunded liability has theoretically been paid off. However, it is important to note a pension is only fully funded at a point in time. The City will always incur some level of unfunded liability as adverse changes in investment earnings, actuarial assumptions, etc. create new unfunded liability. Expense Assumptions (Maintenance and Operations and Minor Capital): M&O and minor capital data is taken directly from Munis as of October 2020. The data has been grouped like the expense categories in the Fiscal Year 2020-21 Operating Budget for consistency with specific categories added as appropriate. Table 3 shows the inflationary factors by fiscal year for M&O and minor capital expenses. Table 3: Assumptions for Primary M&O Categories 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 Prof./Cont. Svcs. 3.55% 3.55% 3.55% 3.55% 3.55% 2.14% 2.14% 2.14% 2.14% 2.14% Supplies 2.85% 2.85% 2.85% 2.85% 2.85% 2.14% 2.14% 2.14% 2.14% 2.14% Utilities 7.65% 7.65% 7.65% 7.65% 7.65% 2.14% 2.14% 2.14% 2.14% 2.14% Asset Mgmt. (Maint.) 7.55% 7.55% 7.55% 7.55% 7.55% 7.50% 7.50% 7.50% 7.50% 7.50% Asset Mgmt. (Repl.) 7.05% 7.05% 7.05% 7.05% 7.05% 7.00% 7.00% 7.00% 7.00% 7.00% Misc. Oper. Exp. 0.65% 0.65% 0.65% 0.65% 0.65% 2.14% 2.14% 2.14% 2.14% 2.14% Cost Allocation 5.80% 5.80% 5.80% 5.80% 5.80% 2.14% 2.14% 2.14% 2.14% 2.14% Capital Outlay 2.14% 2.14% 2.14% 2.14% 2.14% 2.14% 2.14% 2.14% 2.14% 2.14% Capital Replacement 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Capital Imp. Program 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Law Enforcement 4.95% 4.95% 4.95% 4.95% 4.95% 4.35% 4.35% 4.35% 4.35% 4.35% [Remainder of page intentionally left blank] 14 of 19
March 2, 2021, Item #5The following lists the assumptions that were used in the development of the inflationary factors in Table 3: • Professional/Contract Services o First 5 years: Based on average historical change (excludes law enforcement costs). o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Supplies o First 5 years: Based on average historical change. o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Utilities o First 5 years: Based on average historical change. o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Asset Management (Maintenance) o First 5 years: Based on average historical change. o Second 5 years: Mirrors average historical change given maintaining aging infrastructure costs more over time. • Asset Management (Replacement) o First 5 years: Based on average historical change. o Second 5 years: Mirrors average historical change given the need to replace aging infrastructure increases and costs more over time. • Miscellaneous Operating Expenses o First 5 years: Based on average historical change. o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Cost Allocation (this is a negative expense added to approximate expense cost share impacts to the General Fund) o First 5 years: Based on average historical change. o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Capital Outlay o First 5 years: 10-year CPI-U All Items SD-Carlsbad average change. o Second 5 years: 10-year CPI-U All Items SD-Carlsbad average change. • Capital Replacement o Moderate increase in replacement set aside to account for inflation while also increasing the amount being set aside. • Capital Improvement Program o No new capital projects are projected to be funded by the General Fund at this time. • Law Enforcement (separated out given the contract has agreed upon inflationary factors that are different than other contracts) o First 5 years: Based on 5-year average historical change. o Second 5 years: Based on 10-year average historical change. [Remainder of page intentionally left blank] 15 of 19
March 2, 2021, Item #5Projection: The charts below show the baseline long-range forecast for the General Fund. The charts includes six years of actuals (fiscal year ended 2015 -2020), one year of budget (fiscal year ended 2021 }, and ten years of projections (fiscal year ended 2022 -2031 ). The line graph shows the General Fund revenues and expenses over time. The bar chart shows the related surplus or deficit in each year and is related to the right axis. 75,(X)0,000.00 70,(X)0,000.00 V) 65,000,000.00 QJ V) C ~ 60,000,000.00 X UJ O(j 55,000,000.00 I.I) QJ :::, ~ 50,000,000.00 > QJ 0:::: V) a., V) C QJ a.. X UJ O(j V) a., :::; C QJ > QJ 0:::: 40,000,000.00 35,000,000.00 4,000,000.00 3,000,000.00 2,000,000.00 1,000,000.00 (1,000,000.00) (2,000,000.00) 16 of 19 <---:\,' '\,C) General Fund Revenues and Expenses ..._Total Revenues ..._Total Expenses General Fund Surplus/(Deficit) I I I I ■ I I I I I I I I I ■ :-,.'<> ~ :-,.'b ~ ~C) C'v"',, (\,'\, . .,, ~ ~ C'v(o ~ (\,'b "OJ 2->C) \)'?"',, <:)'\, '\,<:) '\,<:) 1,<::> '\,C) '\,C) '\,C) '\,<:) '\,C) '\,C) '\,<:) '\,<:) '\,<:) C)"' '\,(j 1; '\: ~
March 2, 2021, Item #5There are a few large swings in the forecast that warrant explanation. Fiscal Year 2019-20 actuals had a steep increase in revenues and expenses as compared to prior year actuals. As detailed in the City's comprehensive annual financial report and discussed previously in this report, this was predominantly a combination of pension costs and one-time accounting entries to record the land sale to the Poway Commons project developer. The one-time accounting entries are not included in the future projections. Fiscal Year 2020-21 's budget is lower than Fiscal Year 2019-20 actuals as a result of staffs COVID-19 retrenchment techniques. It also appears to deviate significantly because of the prior year one-time accounting entries. Since budget adoption, staff has made several revenue adjustments based on updated information for Sales Tax and Property Tax in lieu of VLF, among others. As a result of those revenue adjustments, the chart above reflects an anticipated surplus of slightly more than $1.5 million. During budget adoption Council had authorized a $1.5 million transfer from the General Fund Revenue Volatility Reserve in compliance with the General Fund Reserve Policy to stabilize anticipated shortfalls in revenue categories like sales taxes and property taxes. This transfer has not yet been made but does show up in the budgeted amounts in the chart. As such, Fiscal Year 2020-21 should be viewed as "breaking even" at this point as staff would not make the reserve transfer unless necessary. It should also be noted that staff is in the process of calculating projected actuals for the fiscal year. Once those amounts have been calculated, the forecast will be adjusted to reflect projected actuals instead of budget. Fiscal Year 2021-22 does currently project a small surplus. However, the primary factor for the projected surplus is a result of the annual General Fund Reserve Policy calculation. Based on the forecast calculation, there are more funds in the General Fund reserve than are required by the policy. When this situation occurs, staff transfers the difference back to the General Fund. Without this transfer, which is estimated at ~$847 thousand, the Fiscal Year 2021-22 projections would show a deficit. Once the Fiscal Year 2021-22 operating budget has been calculated, the forecast will be adjust to reflect budgeted amounts instead of forecasted amounts. Fiscal Year 2022-23 shows a large deficit which is primarily the result of several things. Due to increasing operating expenditures, more funds need to be set aside to maintain compliance with the General Fund Reserve Policy. This accounts for ~$740 thousand of the projected deficit. Professional services are also projected to increase by ~$935 thousand. Of that projected increase, ~$731 thousand is related to the law enforcement contract. Large expenditures like this, which total ~1.675 million between these two items, are eliminating gains in revenues. For example, property tax is expected to increase ~$1 million while sales tax is projected to increase ~$685 thousand. The City's two largest revenue sources are projected to increase only slightly more than the amounts needed to comply with the General Fund Reserve Policy and projected increases in professional services. In addition to the information above for each individual fiscal year, Cal PERS rates are also increasing in the early forecast years. For example, the Miscellaneous Plan's rates are projected to increase by 10.6 percent while the Fire Plans are projected to increase 5.7 percent between Fiscal Year 2020-21 and Fiscal Year 2024-25. From Fiscal Year 2023-24 to the end of the forecast period, expenses begin slowly increasing at a decreasing rate and revenues beginning increasing at an increasing rate. The two largest factors contributing to this trend are that the expected Cal PERS employer rates peak in Fiscal Year 2024-25 and that the five new development projects are expected to reach completion by the end of Fiscal Year 2023-24. 17 of 19
March 2, 2021, Item #5Broad Takeaways: Based on the current data, the next few years will be challenging to maintain the status quo for the City's General Fund, let alone fund increases in personnel, services, or capital spending. Expenses continue to increase more quickly than revenues. As Cal PERS pension reform begins to show results and the City's current development projects come online, maintaining the status quo will become more feasible with the possibility to fund increases in personnel, services, or capital spending becoming significantly more feasible towards the late 2020's. Challenges and Opportunities: Based on staffs review of the City's financial framework there are several challenges: • Ability to attract/retain high quality staff with competitive salary and benefits packages • Ability to fund core services is constrained as the costs to fund services increase • Ability to fund the rehabilitation and replacement of City's assets using a pay-go approach As indicated in the long-range forecast assumptions, the forecast does not include future salary increases beyond normal merit (step} increases as employees advance through their ranges. Ranges have five steps. Across the board salary increases are subject to the bargaining process between the City and unions. Over time not having salary increases outside of the normal merit movement can create issues with employment competitiveness compared to neighboring agencies and increase employment turnover leading to higher costs and decreased productivity. Costs to fund core services continue to increase, in many cases, at or above the pace at which revenues increase. This pattern is anticipated to continue for the near future. For example, property tax revenue is projected to increase by an average 3.80 percent over the next five fiscal years and sales tax revenue by an average of 3.46 percent while law enforcement expenditures are projected to increase by an average of 4.86 percent over the same time period. As the City's infrastructure continues to age, more will need to be invested in rehabilitation or replacement of the City's assets. Staff has been analyzing the City's assets to understand the ability to fund replacement and rehabilitation spending using a pay-go approach. The initial analysis suggests there is a gap between the funding set aside and the replacement/rehabilitation needs. While staff has not yet determined the shortfall for all assets, gaps between funding and need can delay the replacement or rehabilitation of the City's assets. Based on staff's review of the City's financial framework, there are also opportunities for enhancing the City's financial sustainability. The financial framework may be broadly improved by increasing revenues or decreasing expenses. The following list contains examples: • Revenues o Ensure fees appropriately recover costs and keep pace with inflation o Ensure shared operational costs are being appropriately allocated amongst funds o Pursue a revenue enhancement measure • Expenses 18 of 19 o Determine sustainable service levels o Pursue business process refinements and technological enhancements to help existing staff keep up with increasing regulatory mandates o Reallocate replacement funding towards operations and issue debt for replacement needs o Pursue pension obligation bonds to attempt a reduction in retirement costs
March 2, 2021, Item #5Next Steps: This long-range forecast represents a point in time based on data available to date. Staff will update the long-range forecast with Fiscal Year 2020-21 projected actuals and with the Fiscal Year 2021-22 General Fund Operating budget as the information becomes available. Additionally, staff will continue improving the long-range forecast and refining its forecasting methods. For example, staff will continue to build out a statistical approach in the model such that a range of possible futures can be presented. This will help better communicate the challenges and opportunities facing the City's financial future. Environmental Review: This action is not subject to review under the California Environmental Quality Act (CEQA). Fiscal Impact: There is no direct fiscal impact associated with the COVID-19 Economic Updates and long-range forecast as it only contains information related to the financial performance of the General Fund. Public Notification: None. Attachments: None. Reviewed/ Approved By: ~~v-----w~daserman Assistant City Manager 19 of 19 Reviewed By: Alan Fenstermacher City Attorney City Manager