Long-Term Financial Forecast

In 2019, staff identified the need for a longer-term forecast of the City's finances to better understand the risks associated with pension obligations, trends in operating deficits/surpluses, and the impact of these trends and potential recession scenarios on the City’s reserves, and/or fund balance. In 2020, the City engaged Urban Futures, Inc. (UFI) to complete a financial forecasting model.

The 10-year financial forecast model that includes the General Fund and 11 special revenue funds identified as higher risk for requiring General Fund support due to factors such as: potentially volatile revenues, labor obligations, transfers in/out, and allocated costs. The 10-year model includes a baseline forecast with revenue and expense trends, projections for annual operating deficit/surplus, projected fund balance, and the capacity to create and analyze “what-if” scenarios (i.e., what happens to the City’s forecast if certain decisions are made, and/or economic conditions change).

Across the General Fund and 11 special revenue funds, the City has a projected annual operating deficit of approximately $3 million when evaluating the 11 special funds in conjunction with the General Fund. The City has sufficient reserves to cover the projected operating deficits. However, depletion of reserves would leave the City financially vulnerable to small changes in economic conditions, revenue shifts or other likely scenarios that modestly adjust the forecast.

As shown below, under baseline (non-recession) conditions, revenues are expected to grow at a faster rate than expenses over the forecast period, which is projected to reduce the annual operating deficits.

Of the special revenue funds studied, one of the main drivers of the projected operating deficit is the Parking Fees/Civic Center Garage Funds. Parking revenues have declined by approximately 52% since FY 2018-19, and in FY 2020-21, staff reduced parking revenue projections by 75% due to the impacts of the COVID-19 pandemic on street parking and garage usage. In December 2020, City Council approved cost reductions for these funds including a $550,000 reduction to contractual services, canceling the $327,000 transfer to the Parking capital project, and canceling the $380,000 transfer to the General Fund. With these adjustments, the Parking Fees/Civic Center Garage Funds are largely stabilized and areno longer a main driver of the operating deficit in the forecast. This stability, however, is largely reliant on the recovery and continued health of parking revenues (fees, fines, and permits).

The other special revenue funds that are main drivers of the current operating deficit are the Fleet Industrial Service Center and Tidelands funds. Options for stabilizing these funds include reducing contractual services expenses and generating additional lease revenue, if supported by the market.

The forecast model also identifies significant risk over the forecast period in two additional special revenue funds. The Fire Grants fund is at-risk because approximately $2 million in labor costs for firefighting positions are tied to continuing receipt of federal and state grants. The risk is that if these grants are discontinued or modified the fund would immediately generate a potentially significant operating deficit unless staffing was immediately cut. The FY 2021-23 Budget includes the shift of personnel from Fire grant-funded positions to the General Fund. The Alameda Point fund is at-risk because almost 100% of its revenue ($13 million annually) is from rents. While rents of unique government property are often stable sources of income, these properties and rents are tied to the commercial/office market and present market-based risks associated with this economic sector.

The forecast notes that the Library fund has increasing structural operating deficits because about half of the revenue is from an annual transfer-in from the General Fund and the other half of revenue comes from Property Taxes, which cannot be increased, so new revenue sources would have to be considered in order to boost revenues. The forecast does not assume any growth rate for the transfers between funds. To address the structural deficits, the City could either cut back operating expenses, which could result in decreased service levels, or acknowledge that provision of library services necessitates the commitment of additional General Fund tax revenues (similar to other municipal services such as police and fire) and potentially adopt a policy for proportionate funding for these services.

The remaining $1-2 million projected operating deficit in the General Fund is sensitive to likely continuing volatility in Property Transfer Tax revenues. In the past three fiscal years, revenue from this tax source averaged $16 million per year.

The challenge in budgeting and forecasting Property Transfer Tax revenues is the unpredictability of one-time receipts due to periodic sales of large commercial properties. The City expects ongoing baseline activity of about $11 million annually from the sale of residential property and small commercial property, but one-time sales of large private properties (>$10 million) which generate substantial receipts are not possible to predict. Since there is risk to balancing the budget on uncertain revenue, the City could adopt a policy governing the use of the one-time receipts from large properties and budget based on the ongoing baseline revenue expectation of approximately $11 million. Currently, the forecast model is using the assumption of $11 million annually as a baseline for Property Transfer Tax revenues.