That, at least, is the projection in the city's Long-Range Financial Forecast, a document that aims to achieve an admittedly impossible goal: predicting the city's budget picture for the next decade. And if the document is to be believed, the picture is mostly rosy, thanks in large part to healthy gains in property- and sales-tax revenues.
But in approving the document by a 6-0 vote on Monday night, with Councilman Greg Tanaka absent, the City Council cautiously endorsed the report's conclusions even as it questioned some of its assumptions. The council will revisit some of these assumptions in the coming months, as it begins to put together the budget for fiscal year 2020, which begins on July 1.
The new forecast is intended to be the first step in the budget-setting process, Interim Chief Financial Officer Kylie Nose told the council during the Monday discussion. The document, she told the council, provides the city "with a very high-level overview of where we're at and where we're going" to help inform the council's future policy decisions.
Yet the document also reflects the decisions that the council has already made. For the first time, the forecast assumes a lower rate of return (or "discount rate") for pension investments than the rate used by CalPERS, the giant statewide fund that administers Palo Alto's pensions. The forecast assumes a 6.2 percent discount rate for CalPERS, a rate that was recommended by a CalPERS consultant in 2016 but that is lower than the 7 percent used by CalPERS.
The lower discount rate in the forecast is part of a broader effort by the council to brace for growing pension obligations. The council has also been contributing money to an irrevocable pension trust and directing staff to cut $4 million from the budget, changes that will likely spark difficult decisions before the council's budget adoption in June.
Mayor Eric Filseth, who has long championed the more conservative assumptions on pensions, argued on Monday that while the council's new position creates some tricky short-term budget challenges, it is necessary to ensure long-term stability for employees.
"People shouldn't lose sight of the fact of what we're buying by doing this," Filseth said. "What this means is that going forward, our future employee pensions in the city will be fully funded. ... If you're not at 6.2 percent, you're not fully funding future pensions and you're still piling on big debt. But our pensions will be fully funded, and that's why we're doing this."
The council's task of budgeting for a smaller discount rate is made somewhat easier by strong revenue figures. The new forecast shows property taxes rising every year between now and 2029, generally by 5 to 6 percent. This revenue source has nearly doubled in the past decade, increasing from $18.7 million in 2010 to a projected $36.1 million in 2019.
Sales-tax revenues are also coming in at levels greater than anticipated. Staff from the Administrative Services Department projects that sales-tax revenues will reach $32.4 million this year, about $1.2 million more than the city had budgeted, and that they will grow to $34.3 million in fiscal year 2020.
Thanks in large part to these factors, staff is projecting tax growth of 7.2 percent in 2020, $9.1 million above the current year. City officials are also buoyed by the fact that Bay Area unemployment remains low (2.5 percent) and its job growth remains high (2.1 percent in the last quarter).
And even though the city's expenditures are expected to increase by about 9.1 percent, from $210.7 million in the current fiscal year to $229.9 million in fiscal year 2020, some of this increase is attributable as much to the council's conservative assumptions as to the city's economy or the council's spending priorities.
Several council members noted that the budget picture is somewhat counter-intuitive: By trying to be more responsible and realistic in its pension assumptions, the council is creating a budget gap that is making the city's financial picture look worse than it is.
"We are taking on some new assumptions, which in a funny way increase costs going forward," Vice Mayor Adrian Fine said. "That's because we're being more realistic about it."
For Councilman Tom DuBois, the new document in some ways isn't realistic enough, particularly when it comes to labor costs. He pointed to the forecast's assumption that the city's expenditures will go up only slightly (between 1 percent and 2.5 percent) every year between 2022 and 2029. That, he noted, clashes with the city's recent history and near future, which is based on recently adopted employee contracts (the projected 9.1 percent growth in expenses in 2020 is largely thanks to growing labor costs).
DuBois recommended basing growth in the future years on recent trends (which show significant increases to employee compensations), rather than an expectation of slow and steady growth. Others, however, argued that the forecast is inherently imprecise, particularly when it comes to the distant years, and that its predictions don't need to be as specific as DuBois had hoped they would be.
Councilwoman Liz Kniss recalled the global recession that began in September 2008 and that surprised just about every elected leader (she was a Santa Clara County supervisor at the time). An event like that, she said, can quickly upend all city, county and state assumptions about the economy.
"It's really hard to predict," Kniss said. "We've been in a very long bull market and one has to wonder how long will this go on and have we become sort of comfortable with what we're currently dealing with? Are we going to be ready when something hits?"
This story contains 973 words.
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