The city of Pleasanton remains in sound fiscal condition with general fund revenues projected to keep rising during the next two fiscal years, but more than $15 million worth of new pension costs expected to be due in the years ahead could impact that stability going forward, according to the city's latest budget report.
The City Council last week spent just under an hour reviewing the staff-recommended city budget for the 2017-18 and 2018-19 fiscal years, which estimates more than $115 million in revenues and more than $107 million in expenditures from the city's general fund each year while leaving the city with operating reserves of around 20% of expenses.
But the public conversation focused primarily on how the city is bracing for the latest financial curveball from the California Public Employees' Retirement System (CalPERS).
"It's hitting all cities. Obviously it's not just Pleasanton; everybody is struggling with how are they going to address it," Tina Olson, city's finance director, told the council members during their June 6 meeting at the Pleasanton Civic Center.
The CalPERS board late last year voted to lower its discount rate, or assumed rate of return on its investments, from 7.5% to 7% – meaning cities, schools, state agencies and other employers will have to contribute more to CalPERS to help make up the revenue difference.
These higher costs, on top of the regular employer contributions, will be spread out from 2018-19 to 2022-23, increasing steadily each year.
In Pleasanton, early estimates forecast more than $15 million in additional pension costs over the five years, starting at almost $700,000 for 2018-19 up to more than $5.6 million for 2022-23. For comparison, next year the city expects about $13.8 million in regular CalPERS-related expenditures from the general fund.
"I think we all understand the tsunami is coming, and that we must be very aggressive in early- and pre-payment," Councilwoman Karla Brown said last week, later adding, "We've got to be fiscally careful."
City officials are working to develop strategies to address the latest new pension costs, but they aren't ready to present recommendations, waiting on a CalPERS actuarial report due in the next month or so that will provide more accurate projections, City Manager Nelson Fialho said.
Options could include pre-funding the pension liabilities, like the city has done in the past, and looking toward investment options to raise additional capital. Cost-cutting moves and fewer infrastructure improvements would also be on the table.
After analyzing the new CalPERS data and potential strategies, city staff anticipates bringing forward a formal proposal to the council in the summer or fall.
"We just want to be absolutely accurate with our strategy, and that's why we need just a little bit more time before we come to you with a recommendation," Fialho said.
Brown urged her council colleagues, while weighing approval of the new two-year budget, to act as soon as possible on addressing the upcoming spike in pension costs.
"Pre-funding that debt will save us a lot of money," Brown said. "I just want to make sure we're paying everything we can. We don't have to wait for the bill due to say where in this budget am I going make some significant payment, like the $15 million … or some similar large payment against our PERS."
The council is scheduled to weigh final adoption of the two-year budget during its June 20 regular meeting, along with final approval of the associated four-year capital improvement program (CIP) outlining various city projects for 2017-18 through 2020-21.
Other budget takeaways
Overall, the budget proposal recommends $174.9 million in expenditures for 2017-18 across all city funds -- not including $28.2 million for the CIP – and down from $180.5 million recorded for 2016-17 according to the most recent results. Recommended expenditures dip slightly to $172.1 million for 2018-19.
The recommended budget estimates $115.2 million in general fund revenues for 2017-18 and $117.2 million in 2018-19, compared to expenditures of $107.9 million and $110.4 million, respectively. The general fund accounts for 62% of the city's operating budget.
About 84% of general fund revenues come from taxes, while 10% come from department revenues such as service fees and the remaining 6% from other revenue sources.
City officials estimate sales tax will grow each of the next two years, by 2.1% and 3%, respectively. They also anticipate secured property tax growth, at 3.6% next year and 1.2% in 2018-19.
Tax revenues are also expected to grow between 3.5% and 5% next year in the categories of state and county tax pools, restaurants and hotels, buildings and construction, and cars and transportation. But declines are projected in business and industry taxes (down 12.2%) and general consumer goods (down 8.1%).
City sales tax revenues, projected to reach a 20-year high of $23.7 million in 2018-19, are slowing though due to regional shopping competition and online consumer sales, according to Fialho.
General fund expenditures are broken down by 73.7% for personnel, 19.3% for materials and supplies, 5.4% for transportation and training, 1.1% for repairs and maintenance, and 0.4% for capital outlay.
The largest costs in the personnel category are salaries including overtime (59%), pensions (17%) and medical benefits and leave (12%). Personnel expenditures are expected to rise by 4.9% and 3.3%, respectively, in the next two years.
The city got some good news on health insurance premiums, with Kaiser premium costs expected to drop by 2.3% next year. Health Net costs are expected to rise 7.3% though.
The budget recommends adding two new, full-time police officers, as well as an increased allocation toward workers compensation for the Livermore-Pleasanton Fire Department next year to build up reserves there.
City officials estimate an operating surplus of just over $6 million next year, with almost $5.2 million going toward the CIP and the remaining $832,664 into operating reserves. In 2018-19, the operating surplus is estimated at $5.6 million, with $5.1 million toward CIP and the rest into reserves. Contributing $5 million to the CIP is common practice for the city, Fialho said.
In all, the city expects to end 2017-18 with almost $21.6 million in general fund reserves and 2018-19 with just over $22 million in operating reserves -- or about 20% of expenses, the minimum reserve level under city policy.
In the city's water fund, revenues are expected to go up by 6.9% next year due to rate increases while expenses also rise, by 8.8%, largely due to a 10.3% increase in costs for purchasing drinking water from the Zone 7 Water Agency.
The sewer fund should remain closer to stagnant in 2017-18, with 1.7% increase in revenues and 0.3% increase in expenses expected.
The city-owned Callippe Preserve Golf Course estimates fewer golfers will hit the links there next year so revenues are projected to dip by 3.6%. So, the city will make a lower payment, estimated at $78,780 from the golf course fund to the general fund to repay the outstanding loan between the funds.