Long-Term Financial Forecast and Local Sales Tax Analysis July 21, - PowerPoint PPT Presentation

Long-Term Financial Forecast and Local Sales Tax Analysis July 21, 2020 1

Presentation Overview • UFI Overview & Experience Overview – Long-Term • Why Do Cities Need a Long-Term Forecast Financial Forecast • Developing a Baseline Forecast Model • Key Baseline Assumptions 10-Year Baseline • Revenues & Expenses – Significant Gap Forecast & Analysis • Operating Deficit Grows to $5 million • Fund Balance – Potential Insolvency by FY 2024 • Assumption Changes Local Sales Tax Scenario • Revenues & Expenses - Better Aligned Forecast & Analysis • Operating Deficit Reduced • Fund Balance Improves • Fiscal Strengths Forecast Take-a-Ways • Fiscal Challenges 2

UFI – Financial Advisors & Consultants Public Finance Group Public Management Group - Municipal Advisory Services - Financial & Forecast Modeling - Fiscal Sustainability Strategies - Capital Improvement Planning - Pension/OPEB Liabilities Solutions - Alternative Financing Analysis - Local Revenue Measure Analytics - Post Issuance Compliance Staffed with former city managers, chief financial officers, legal counsel and public finance investment bankers, UFI combines the practical aspects of public financial management with the technical fiscal expertise. 3

Why Do Cities Need a Long-Term Forecast? Annual Budget Forecast & “What If” Analysis Outlook Current FY and two years prior 10 to 20 years; long-term trends Bottom-up development; budgets by Income statement approach; all revenues Design dept. and service (siloed) with roll-up and expenses aggregated into summary economically uniform categories Proactively align city’s goals & service Allocate available funding by Purpose objectives with long-term revenue dept/service; adjust to known conditions capacity Pros Available funds = Current FY expenses Fiscal stability & solvency Difficult to understand long-term impact Cons Discipline & fiscally constrained decisions of decisions & fiscal structure 4

Developing a Baseline Forecast Model  Ensure general level of reconciliation between the financial data in budget categories and CAFR What is a “Baseline”  Isolate and remove one-time revenues & Forecast? expenses that obfuscate annual ongoing operational costs Neutral, fiscal assessment and decision-making tool that  Disaggregate revenue & expense categories to establishes a common ensure data driven by appropriate indexes understanding of the status quo:  Develop average, moderate and conservative “If the City makes no changes to trends and apply appropriate index to drive each its organization or operations, budget revenue and expense category (utilize and there are no significant econometric/forecast data from multiple sources, external economic impacts to historical trend/regression analysis of city’s the City (other than what’s financial data, and other financial metrics) known today), what is the predicted financial condition of  Create graphical outputs of measurements and the General Fund over the next metrics that facilitate understanding and insight ten years?” about General Fund’s projected financial condition over the forecast period 5

1O-YEAR BASELINE FORECAST & ANALYSIS 6

Baseline Forecast – General Assumptions • Forecast Fallacy: new residential development can solve an existing city operating deficit Forecasts – Indexing the Drivers o Expands city’s tax base (prop tax from new homes, sales Indexes primarily derived from local, tax from new commercial development, etc.) regional and state economic indicators, o HOWEVER, brings demand for expanded city services adjusted where appropriate for: o Difference between new revenue and new expenses • City revenue and expense history (if from new development is rarely a significant net strong correlation between data and positive for cities over the long-run; and in fact, it may trendline); exacerbate an existing operating deficit • Local economic or city operational • City’s baseline forecast built around FY 2020-21 particularities (e.g., sales tax base budget adopted by the City Council in June 2020 composition, development cycles, service delivery model (contract vs. • COVID-19 Recession Assumptions in-house). o FY 2020-21 impact contained in adopted budget Under/over performance of regional, o FY 2021-22 assumes return to year-over-year historic state or national economy affects these growth norms indexes and underlying assumptions. o Impact understated if recession elongates/deepens 7

Baseline Forecast – Revenue Assumptions Top 5 Revenue Categories = 90% of total @ 3.16% Property Tax + VLF Sales Tax Admin. Allocation Franchise Fees Development Services Fees 3.47% 2.75% 2.60% 3.66% 3.12% $7.2 million Stable Revenues $3.5 million $3.2 million Net neutral $2.2 million Volatile Revenues Utility-based, $1.3 million consistent Variable Slower Steady projected growth Rebound Indexed to growth Cyclical projected & then flatten salary growth 8

Baseline Forecast – Expense Assumptions Top 5 Expense Categories = 80% of total @ 3.84% Salaries & Wages Pension & Health Public Safety Contract Services Cost Recovery 2.74% 5.16% -2.49% 3.05% 3.87% $11.0 million Cost inputs set by County $3.5 million $3.1 million $2.4 million Controllable Controllable expenses ($554,000) Long-term expenses managed Offsets costs admin. costs Faster Consistent Linked to projected Growth keeps Economy with historic growth salary growth pace with CPI driven growth rate 9

Baseline Forecast – Historical Comparison 10-Year Avg. Annual Growth Key Categories & Totals Historical Forecast Revenues 4.84% 2.78% Property Tax + VLF In-Lieu 5.44% 3.47% Adminstrative Allocation 5.59% 2.75% Franchise Fees 4.92% 2.60% Expenses 6.19% 2.96% Salaries & Wages 9.61% 2.74% Professional & Contractual Services 8.34% 5.16% Public Safety Contracts 3.84% 3.87% 10

Baseline Forecast – Revenues & Expenses • City has a significant Structural Operating Deficit in General Fund o City has not been living City’s Structural Operating Deficit within its fiscal capacity and revenue limits for most of the last decade o $1+ million operating deficits in 5 of last 10 yrs. o One-time revenues and increasing cost-recovery from other City funds have kept budgets balanced o General Fund has been transferring $1 million annually to CFD-2003 to cover operating deficits – forecast assumes this does not continue 11

Baseline Forecast – Operating Deficit • Currently, Structural Operating Deficit is $1.8 million (11% of budget) o FY 2020 – COVID-19 impacts exacerbated City’s existing structural operating deficit o FY 2021 – adopted budget continues spending at current growth rate despite net decline in revenues • Annual Operating Deficit grows from $1.8 million to $4.7 million during the forecast period o Expenses increasing faster than revenues 12

Baseline Forecast – Fund Balance • Fiscal Position of the General Fund is Very Concerning & Precarious o Currently, 37% of General Fund balance not Estimated Fund Balance as of June 30, 2020 available because of $3.4 Reserve Policies • $2.1 million in Contingency Reserve million loan to CFD-2003 Assigned (planned use) • $3.6 million for capital projects • If City continues current Restricted (not available for use) course with no changes • $3.4 million loaned to CFD-2003 to General Fund finances: o FY 2022 – General Fund must use assigned capital project funds to balance o FY 2025 – General Fund is insolvent unless major service cuts/reductions 13

LOCAL SALES TAX SCENARIO FORECAST & ANALYSIS 14

TUT Scenario Forecast – Changed Assumptions 1. Add Local Sales Tax (TUT) Scenario Forecasts – Answering “What if…” • 1% addition to current A baseline forecast examines what happens if nothing countywide sales tax rate changes. Yet the only thing we know for certain is that • Approval by voters in Nov. 2020 nothing remains the same – change is constant. • City receives first receipts in Q4 The true power of a forecasting model is to be able to of FY 2020 answer the “what if” questions in terms of the impact to city finances: 2. All other revenue and expense • What if… voters adopt 1% increase in sales tax? assumptions remain the same • What if… there’s another recession in next 5 years? as Baseline Forecast • What if… we increased salaries or benefits by __% • Structural Operating Deficit still in the next MOU? in forecast • Assume no further loans from The financial impact of these “what if” scenarios are developed as an alternative forecast (scenarios can be General Fund to CFD-2003 after current FY stacked together) and then compared against the City’s Baseline Forecast to compare/analyze alternate • Extent of COVID-19 impacts still futures. uncertain 15