FY 2019 & Beyond. City of Santa Cruz. Economy. Growing. February 13, 2018 Item #22. California. FY 2018 Mid Year Status Update 2/13/2018 3:23 PM

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1 FY 2019 & Beyond Growing Economy February 13, 2018 Item #22 City of Santa Cruz California FY 2018 Mid Year Status Update

2 2 Questions to be answered 1. Why are we reducing operations during economic growth? 2. Who else is impacted? 3. Why have we added positions to the City? 4. Why can t we use reserves to get through this? 5. When does this start? 6. deficit challenges extend beyond

3 Unprecedented challenges despite years of national economic recovery Tax revenue eroding; rather than typical robust growth State Pension investment shortfalls in a growing market Lack of Federal and State support, while City capital needs grow

4 WHY? General Fund 5-Year Forecast Major General Fund Forecast Drivers Tax reforms needed to fix leaking tax bases (ex., sales, utility users & gas) State Pension investment shortfalls costing Santa Cruz $9 $11 million annually Lower revenue growth from a FY 2020 economic slowdown Staffing costs increasing while staff retention is harder Capital Investment Program with a modest $1.5 Million Core equipment maintenance & replacement is covered Our Fiscal Strategy can overcome this but it will require action now: 1) Reset Gen Fund Budget 5% 7.5% 2) Out of the box changes (grants, partnerships, etc.) 3) Ballot measures to maintain services 4) Support community investments

5 5 We re not alone FY 2018 Comparable City s Deficit Projections Davis 5.2% Ventura 5.0% Santa Maria 4.4% Berkeley Santa Cruz Monterey 2.2% 2.9% 2.7% Santa Barbara* 0.8% *After implementing $1.9 million Budget Balancing measures

6 Our fiscal challenges are their fiscal 6 challenges (Based on major topics within Budget Messages) Berkeley Davis Repay PERS for Monterey Santa Barbara Santa Maria Ventura losses City s costs increasing beyond projected available resources. Lack of Capital Investment Berkeley Davis Monterey Santa Barbara Ventura Current planned funding is below community expectation Retention or Recruitment Berkeley Davis Ventura Turnover is high, employee bargaining will be challenging, &/or need to develop next staff leaders Declining resources Davis Santa Barbara General revenues are not sufficient and considering tax or fee increases.

7 % Projections Accuracy between WHY? 95% to 103% General Fund forecasts have reliably predicted outcomes months earlier

8 Declining & Eroding Revenues Demographics & new economic models are permanently eroding our revenue 8 Online sales non taxable City s with distribution centers receive sales tax Tangible items now a download Pressure on limited consumer dollars Aging baby boomers shifting spending to nontaxable health care & services Sales Tax Gas Tax Ride sharing reduces fuel sales Fuel efficiency & electric cars reducing fuel sales Electric Franchise & Utility Online streaming replacing cable/dish services Landline phones are vanishing

9 WHY? PERS $318 BILLION Investment Shortfall Actual PERS Value needed to double to meet funding needs Impact: City is reimbursing PERS $9 $11 million annually for investment losses; on top of normal pension payments.

10 Impact of State Pension Returns and 10 Policy on City s costs FY2019 FY2023 additional payments to State Mandated surcharge payments to backfill for Pension investment shortfalls Normal pension cost growth is reasonable until FY 2023 increase

11 16 Year Position Growth= Modest (avg 1 per year) NET Budget Adds Total in Budget *Less 5 planned offsets during FY * Water 3 PW 3 PD (CSO s) 2* P&R (Ranger & 1) 1 Fire 1.25* Plng, HR & IT Add UCSC Fire Reductions & move out Facility, Fleet & Lifeguard; Added 9 Rangers Includes 5.0 Unfunded Officers

12 Act now- more options during a strong economy 12 Warnings of slowdown (national & regional) Escalating housing markets Increased personal debt & low savings rate Consumer interest rate increases State historically a threat Federal Gov. now a threat A long recovery is reasonable after the Great Recession but At 8.6 years, we ve long passed the typical ~5 year recovery period

13 Credible Fiscal Sustainability Plan Implement NOW Key Components 13 HOW? Ballot Measure(s) $7.0 $8.5 million Keep services intact Support capital investments Help from the Community What we Control FY 2024 Fiscal Bridge Results Reset General Fund (5% 7.5%) Offset PERS high interest debt Restore some CIP annual funding Utilize Pension Trust earnings Next phase of Fee analysis END RESULT: Reliable service levels Maintain talent & staff Create financial flexibility Funding to leverage CIP & equipment needs

14 Today and FY 2024 Plan 14

15 15 Questions No action required Continue to next agenda item City Council Ad Hoc Revenue Committee Recommendations

16 Examples of Leading Fiscal 16 Stewardship Awards National Budget Award recognition (GFOA) National Financial Reporting- CAFR (GFOA) Bond Rating Increased Bond Rating in 2014 to AA+ Within 9 comparable cities, only Berkeley& Palm Springs at this level Pension Reforms Fiscal success Financial Planning Voluntarily adopted lower tier (before State reforms) Reset lower salary levels & higher employee contributions See next slide for more Adopted major policies for Reserve, Surplus and Trusts Restrained position growth & streamlined operations Pro-active budget balancing including ensuring cost recovery for requested services Unique service contracts lowering tax payer costs (Library, UCSC, Lifeguards, Utilities) Developed long-range, dependable forecasts Developed fiscal sustainability plan to maintain services and limit community tax increases Inclusion and support of community stakeholders (citizen, non-profit, business, education, etc.)

17 January 2018 League of California 17 Cities: What Cities can do today (Best Practices published in January 2018 related to increased payments to State for pensions) Develop plan to pay down liability Consider local ballot measures Create pension rate stabilization Change in Service Levels Use Bargaining to increase Employee payments Issue Pension Obligation Bond City paid down significant portion of Liability (pension Bond issue; payments end FY2022) Started annual pre-payments of Pension liabilities to lower interest payments Fiscal plan includes paying down liabilities with beyond market interest rates City created Ad-Hoc committee providing first review of ballot measures Ad-Hoc committee created to continue and recommend 2018 ballot measures Created and allocated process to fund pension trusts Pension trusts funded to generate returns to pay portions of future State payment increases Restrained position growth & streamlined operations Unique service contracts lowering tax payer costs (County Library, UCSC Fire, Lifeguards, utility services beyond City limits) All employees pay 2.5% to 5.0% of their salary towards pensions (beyond State required levels) Adopted pension reforms prior to later State wide efforts Reset to lower, base levels all salaries City paid down significant portion of public safety liability