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Five-Year Forecast Projects Budget Gap in Future
updated: Feb 23, 2017, 2:10 PM

Source: City of San Luis Obispo

CITY’S FIVE-YEAR FORECAST PROJECTS BUDGET GAP IN FUTURE YEARS

Contingency plans will address shortfalls

Responding to lower-than-anticipated tax revenues and to substantial increases in pension costs mandated by CalPERS in late December, the San Luis Obispo City Council on Tuesday unanimously supported the City Manager’s decision to activate the City’s Fiscal Health Contingency Plan (scroll to packet page 503 of the report). The City’s Fiscal Health Contingency Plan is a framework and general approach for responding to adverse budget circumstances in order to identify appropriate cost cuts and maintain a balanced budget.

City Staff recommended that the City Council support the activation of the contingency plan after presenting the Council with an update of the General Fund Five-Year Fiscal Forecast.

The updated Forecast projects a structural budget shortfall of over $5 million by 2021-22 if the city were to make no changes from current operations. The $5 million represents roughly 7% of the City’s General Fund budget.

The lower-than-expected tax revenues are already affecting the current fiscal year budget and are projected to have an ongoing adverse impact, City officials said. The California Public Employees’ Retirement System (CalPERS)-mandated cost increases will take effect July 1, 2018 and are expected to continue to increase through 2025.

Among the immediate steps the City is considering include limiting hiring to essential personnel, restricting travel and/or deferring discretionary training. In addition, the City is reviewing capital improvement projects and other one-time projects that can be deferred or dropped.

The contingency plan also outlines a process for developing and implementing longer-term budget balancing measures. It includes a framework for gathering input from residents, businesses and other stakeholders including employees. The City Council will consider more specific work plans to develop this action plan at its April 18, 2017 meeting where it will consider Strategic Budget Direction for the upcoming two-year Financial Plan.

“Activating the contingency plan is prudent fiscal stewardship, which has long been a hallmark of City operations,” said City Manager Katie Lichtig. “It’s worth noting that Fitch Ratings just last month praised the City for what it described as our ‘robust financial planning and policy framework.’ The contingency plan is just one of the tools we have available to be prepared for the unexpected.”

The two main drivers of the budget gap are lower-than-anticipated tax revenues and steep increases in pension costs.

Sales tax revenues during the past six months, while still growing, have slowed markedly, and are lower than projected. They are already having a negative effect on the City’s current fiscal year budget, which ends June 30. The recent trend also caused the City to lower its revenue forecast over the next five years. The same trend (slowing growth) is true for Transient Occupancy Tax (hotel tax).

The mandated increases in payments to CalPERS are due to CalPERS’ decision, announced in late-December, that it will be lowering its expected average rate of return on pension investments from 7.5% to 7.0% over a three period. This rate is also known as the discount rate.

In mid-January, CalPERS provided an estimate to members of how much they could expect their contributions to increase in order to make up the gap in the pension funds resulting from the lower rate of return. As a result, the Five-Year Forecast projects the City’s pension expenses to increase from $10.7 million in the current fiscal year (July 2016 to June 2017) to $19.1 million over the next five years. The pension cost projections are preliminary and based on ranges provided by CalPERS to date for all municipalities. An independent actuary will perform further analysis of the impacts of the discount rate reduction based on the City’s pension plan demographics. CalPERS will release an Annual Actuary Valuation using the lowered discount rate, hopefully in the summer timeframe. These additional efforts will result in more precise estimates of the resulting increases in payments.

Lichtig noted that the City has made significant progress in its efforts to contain retirement costs, such as adding 2nd- and 3rd-tier reduced benefit lower-cost programs that now cover one-third of the City’s employees. Additionally, since 2014, the City has made lump-sum pre-payments toward the unfunded pension liability totaling $2.74 million. These actions reduce the city’s costs or avoid higher cost increases.

“The Five-Year Forecast shows that we have both near-term impacts and a long-term structural problem. That requires us to look at all options to achieve a structurally balanced budget, which will happen over the next year,’’ Lichtig said. “All measures will need to be carefully weighed against service impacts to make sure we continue our commitment of high quality service to the community.”

 

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