Long-Range Financial Plan - City of Stockton

Long-Range Financial Plan

The City maintains a comprehensive and detailed long-term forecast for the City’s General Fund, referred to as the Long-Range Financial Plan (L-RFP). The L-RFP provides a 20-year forecast used for planning and budgeting purposes. 

 

Background

The L-RFP is an important tool that reflects the City's commitment to fiscal health and sustainability. This financial model is used to evaluate the immediate impact of budgetary decisions and costs of decisions over multiple years. During the bankruptcy process, the L-RFP was reviewed by the judge and creditors as the foundation for the Plan of Adjustment. The Plan of Adjustment is the City's plan, filed with the court, for emerging from bankruptcy. The L-RFP withstood challenges by the City's creditors and was approved by the bankruptcy court.

 

Since its development, the L-RFP has become a dynamic tool that is updated based on current revenue and expenditure trends. Though individual variables and assumptions may change over time, the L-RFP provides a consistent model to realistically forecast the City's fiscal performance. The L-RFP includes all aspects of the General Fund. It models and forecasts all General Fund revenues (property tax, sales tax, utility users tax, etc.) and expenditures in detail. 

 

The City updates the L-RFP as part of regular quarterly budget updates and presents it to the City Council and the public. These updates are part of developing the budget for the upcoming fiscal year. 

 

The chart below is the L-RFP included in the FY 2018-19 Adopted Budget:

 Long Range Financial Plan Chart 2018-19

 

Reading L-RFP Chart

The impact of financial decisions or assumption changes is presented using a chart showing the ending available General Fund balance by fiscal year for a range of 20 years.

  • Top Red Line - Working capital reserve goal, equal to 2 months of operating expenses and outlined in the City’s reserve policy.
  • Blue Bars - Available funds and the working capital reserve used to manage cash flow.
  • Green Bars - Remainder of funds not available for ongoing operating expenses, which are part of the reserves outlined in the City’s reserve policy. These funds are set aside for:
    • protection against economic uncertainties and downturns,
    • catastrophic events,
    • future costs such as infrastructure repair and maintenance, replacement of the City's enterprise-wide financial system, and pensions.
  • Bottom Red Line - Warning level indicates operating reductions may be required to maintain services. The warning level is when available fund balance falls below 5% of operating expenses.

  

General Fund Revenue vs. Expenses

Illustrated in the chart below, General Fund expenditures are projected to exceed General Fund revenues for eight years, beginning in FY 2019-20 and continuing until FY 2026-27. For the remaining years of the forecast, revenues are projected to meet or exceed estimated expenses. The largest gap between revenues and expenditures is expected in FY 2024-25 when the L-RFP anticipates an imbalance of approximately $12 million. This imbalance refers to anticipated increases in retirement benefit costs as CalPERS implements its multi-year strategy to close the current unfunded liability gap and establish a set of actuarial assumptions designed to keep the pension system in a long-term stable and sustainable position. 

 General Fund Budget Chrt

 

L-RFP Assumptions 

The following are major assumptions included in the L-RFP:

 

Revenues

General revenue assumptions included in the model are:

  • Property tax growth rates of 4.2% plus some new construction
  • Sales tax growth rates of 2.3%
  • Utility users tax growth rates of -1.0% to 2.0%
  • Other revenue growth rates of 1.5% to 2.0%
  • Investment earnings of 1.5%
  • Continuation of the Measure A sales tax
  • Expiration of the Strong Communities sales tax in FY 2032-33
  • A revenue decline due to recession every five years

 To view full revenue assumptions, see pages C-14 to C-15 of FY 2018-19 Annual Budget.

 

Expenses

General expenditure assumptions included in the model are:

  • No service increases
  • No part-time or new position growth
  • No growth in capital improvement funding
  • Employee compensation increases (includes health contribution) based on current employee agreements and 2% after that
  • CalPERS discount rate of 7.375% in 2018-19, 7.25% in 2019-20, and 7% thereafter
  • Other expenditure growth at 2%
  • Resources available above reserve levels are spent on one-time needs

To view full expenditures assumptions, see pages C-16 to C-18 of FY 2018-19 Annual Budget.

Pension Costs

Some of the City’s largest General Fund cost increases over the next several years will come from actions implemented by the state retirement system (CalPERS) as it attempts to improve its finances and establish actuarial assumptions that better reflect current conditions. Some changes, such as a phased-in lowering of the assumed discount rate (what CalPERS thinks it will earn on its investments) and changes to actuarial life expectancy assumptions, are already underway.

 

One significant risk all CalPERS agencies will need to assess is CalPERS Board could reduce the discount rate below the planned 7%. There are more than a few advocates and actuarial experts who believe CalPERS needs to reduce the rate to 6%. A reduction of this size would significantly impact the costs assessed to the City and other member agencies. 

 

To view full pension update, see pages C-17 to C-18 of FY 2018-19 Annual Budget.

 

Recession Cycles

A unique feature of the L-RFP is the ability to factor in recessions of varying lengths and severity.  Economic downturns in the United States and world economies are simply a fact of life the City considers in a long-term forecast.

 

The chart below illustrates the history of economic slowdowns going back to the 1927 depression. From this data, the City can make some reasonable assumptions about the intervals between slowdowns.  What is not as predictable is the severity and length of time of any given economic downturn.

 

Using the history of economic downturn data in the chart, recessions have occurred in the U.S. an average of every 5.7 years since 1933 and every 6.6 years since 1961. The L-RFP assumes recessions every five years starting in FY 2019-20, with an associated 5% reduction in most revenue categories.  The model then assumes the City recovers 90% of the reduction within three years.

 

To read more about recession cycles, visit pages C-11 t0 C-12 of FY 2018-19 Annual Budget.

 

History of Economic Downturns Graph

 

General Fund Reserves

In 2016, the City Council revised the Reserve and Fund Balance Policy - General Fund to assist planning for future years. The reserve policy establishes a recommended level of at least 17% (or 2 months of expenditures) and requires an evaluation of known contingencies and potential risks to the City.

 

At the end of each fiscal year, the City contributes available General Fund dollars to the three reserve categories: Working Capital, Known Contingencies, and Risk-Based Reserves based on a formula defined in the policy. 

 

The L-RFP incorporates the reserve policy, includes the working capital reserve, and establishes reserve goals for known contingencies and risk-based reserves. 

 

Historical Long-Range Financial Plan Updates

Council Meeting of May 1, 2018 – L-RFP Update and General City Financial Update

 

Council Meeting of November 7, 2017 – Accept Fiscal Year 2016-17 Fourth Quarter Budget Status Update, Authorize Budget Amendments, and Fund Reserves

 

Council Meeting of April 18, 2017 – L-RFP and Analysis of CALPERS Discount Rate Changes

 

Council Meeting of June 21, 2016 – L-RFP

 

Council Meeting of May 26, 2015 – Budget Study Session

 

Council Meeting of October 3, 2013 – Proposed Plan of Adjustment

 

  

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This City of Stockton web page last reviewed on --- 7/11/2018