03. Fiscal Strategic Plan
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10300 Torre A venue
Cupertino, CA 95014-3255
Telephone: (408) 777-3220
Fax: (408) 777-3366
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CUPEIQ1NO
January 25, 2006
To the Honorable Mayor and
Members of the City Council
Subject: Fiscal Strategic Plan Issues Paper
The 2000-2005 recession forced the city to implement severe program cuts, expend limited
reserve funds and one-time revenues/expenditure savings to balance the annual budget. As
recently as fiscal year 04/05, seventeen full-time positions were frozen to provide salary savings
to contribute to the bottom line. As Cupertino plans for the future we need to address not only
what the community wants, but also how you, as community leaders, achieve that future. To that
end, we see fiscal strategic planning as the appropriate tool to address these challenges.
During the 05/06 budget process, we indicated that staff would form a Fiscal Strategic Plan
Committee to assess the fiscal condition of the City. The goal of the fiscal strategic plan is to
identify a desired level of community services that is commensurate with a steady stream of
reliable revenue sources. The Fiscal Strategic Plan will need to identify strategies to ensure that
city services can be fully supported by revenues collected.
The Committee met bi-weekly for four months and organized its efforts in the following areas:
Þ> Defining the Problem: the Current Funding Gap
Þ> Promoting Organizational Efficiency
Þ> Decreasing Expenses and Areas of Risk Exposure
Þ> Stabilizing our Revenue Sources
Þ> Drafting the Issues Paper
This project was undertaken in time to allow discussion of the report during the Council's annual
goal setting session in January 2006. All of the ideas discussed within this report will require
additional analysis. Staff requests that the Council consider the strategies presented here and
include the pursuit of the most appropriate alternatives with the 06/07 work program.
Respectfully submitted,
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Sandy Abe
Human Resources Director
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,- Rob RizQ .
Assistant Public Works Director
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Therese Ambrosi Smith
Director of Parks and Recreation
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Printed on Recycled Paper
City of Cupertino
Fiscal Strategic Plan
Issues Paper
January 25, 2006
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City of Cupertino
Fiscal Strategic Plan Issues Paper
Table of Contents
I. Defining the Problem: The Current Funding Gap.
II. Promoting Organizational Efficiency
III. Decreasing Expenses and Areas of Risk Exposure
IV. Stabilizing our Revenue Sources
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
I. Defining the Problem - The Current Funding Gap
The 2000-2005 recession coupled with significant increases in retirement and medical costs,
energy costs, new infrastructure service needs and the State of California take-always severely
undermined the ability of the City of Cupertino to continue delivering high quality municipal
services. The City weathered the economic storm by cutting service levels, fteezing up to 17
staff positions, refinancing debt service, turning to a full cost recovery fee structure for certain
services, realizing one-time revenues through sale of surplus property and reducing employee
compensation through direct salary cutbacks and work furloughs. Service levels clearly suffered
and sacrifices were necessary across the board.
The City learned that our fiscal structure left us vulnerable to the whims of economic
fluctuations and the ability of the State to raid our revenue sources. Two major revenue sources,
sales tax and property tax, were principal weak points in the above scenario. Cupertino is
heavily dependent on business-to-business sales taxes and its retail sales tax is significantly
under performing due to the condition of older strip shopping centers in the community and the
recent loss of several significant revenue producers such as Anderson Chevrolet and Drexel
Heritage Furniture. Also, Cupertino is one of four no-low property tax cities ftozen by pre-
proposition 13 to abnormally low tax rates.
The City must evaluate its revenue structure to ensure more reliable, less volatile revenue
sources and evaluate its cost structure to ensure we are operating in a cost effective manner. The
following fiscal strategic plan defines strategies to reposition the revenue and cost structure of
the city to ensure it is not as severely impacted by future changing economic conditions and that
we are able to continue funding of existing and new service levels.
The City's latest audit report for the year ended June 30, 2005 shows the General Fund in a
strong net income position after operating expenditures, debt service and transfer obligations.
Based on this, and the fact that the federal government is estimating inflation next year in the
3.6% plus levels, one might say that the goal to achieve financial viability is already won.
However, the 2004/05 financials are not representative of our true level of service. Vacancies
were upwards to II % of our authorized workforce, maintenance of infrastructure was cut to an
all-time low and because of the shortages in staffing, many budgeted projects were carried over
to the current fiscal year. In addition, one-time revenues such as sale of property inflated this
bottom line.
To analyze our current funding gap and present for you a more accurate financial picture, we
took the actual results of 2004/05 and added back the salary and benefits, deferred maintenance
and deferred projects approved but not yet executed. In addition, we deducted the non-
reoccurring State payback and sale of property. This provides you a snapshot of what our
financial results would have been at fully approved levels of operation.
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
Defining the Problem - The Current Funding Gap, Continued
CITY OF CUPERTINO
- GENERAL FUND
STATEMENT OF REVENUES, EXPENDITURES --'--
AND CHANGES IN FUND BALANCES
BUDGET AND ACTUAL
FOR THE YEAR ENDED JUNE 30, 2005
!
One~time ppropnatior Vacancy Deferred Revised-
Budget Actual Revenue Carryover Savings Maintenanc Actual
Revenues:
Taxes[ $20,069,000 $21,822,298 21,822,298
Use of money and property 1,200,900 959,887 959,887
Intergovernmental 2,953,255 4,321,649 -885,764 3,435,885
Licenses and pennits 2,000,000 2,896,000 2,896,000
Charges for services 495,600 1,207,893 1,207,893
Fines and forfeitures 600,000 559,791 559,791
: Other revenue 1,676,300 1,370,611 -1,200,000 170,611
Revenues available for appropriations 28,995,055 33,138,129 -2,085,764 31,052,365
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Ch J"ges for appropriation (outflows)
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Administration 1,348,707 1,162,096 1,162,096
Law enforcement 6,976,075 6,144,695 110,655 6,255,350
Public infonnation 758,314 758,314 758,314
Administrative services 4,316,741 3,671,303 366,292 62,149 4,099,744
Recreation services 2,266,819 2,121,366 5,122 43,599 2,170,087
Community development 3,396,050 2,830,633 352,539 492,314 3,675,486
Public works 9,372,795 8,076,341 18,634 467,258 185,000 8,747,233
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Total charges for appropriations 28,435,501 24,764,748 853,242 1,065,320 185,000 26,868,310
EXCESS (DEFICIENCY) OF REVENUES
lOVER EXPENDITURES 559,554 8,373,381 4,184,055
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OTHER FINANCING SOURCES (USES)
Transfers in 2,439,878 2,439,878 2,439,878
Transfers (out) -5,164,000 -5,164,000 -845,000 -6,009,000
I -3~569,ï22
Total other financing Sources (uses) -2,724,122 -2,724,122
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'ri"ÈT CHANGE IN FUND BALANCES -$2,164,568 5,649,259 614,933
~II II
BEGINNING FUND BALANCES 16,529,556 16,529,556
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ENDING FUND BALANCES $22,178,815 I $17,144,489
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
Defining the Problem - The Current Funding Gap, Continued
As you can see from the analysis, the adjustments resulted in a revised "net income" to the
General Fund of approximately $600,000. On a $32 million budget base, this equates to a
savings of one-quarter of one-percent. This net income figure does not reflect future concerns in
the following areas:
Þ> Pending legislation may put $389,000 of cable franchise fees in jeopardy;
Þ> The City is currently spending $1.53 million per year on active and retiree medical
premiums and future liability costs. There are 150 active and 81 retired employees
receiving benefits. The cost of providing this benefit has fluctuated and it is conceivable
that health premiums could increase in excess of 8% per year;
Þ> Fuel costs have risen 30% since preparation of the 05/06 budget;
Þ> Asphalt is a petroleum-based product and the cost of street work has risen dramatically
this year. A consultant is updating the pavement management plan, and has indicated
that street jobs are coming in 25% to 46% higher than a year ago;
Þ> The annexation of Monta Vista, Garden Gate and Rancho Rinconada neighborhoods has
lowered the overall pavement standard for Cupertino, and a disproportionate amount of
funding has gone into these areas to bring streets closer to city standard;
Þ> Our current annual $750,000 commitment is minimal for keeping the streets in good
order. Keeping pavement in good condition is the most economical maintenance strategy
over the long tem.
Besides balancing at the basic level of operating revenues and operating expenses/debt service
obligations with the above issues in mind, we will need to fund our reserves at appropriate and/or
mandated levels. A healthy "net income" will be required to embark on operational or capital
improvement areas that are already being discussed. Some of these projects include:
Þ> Additional parks on the east side of the city;
Þ> Reserves to accommodate major renovation requirements of our facilities such as the
Quinlan Community Center;
Þ> Funding for environmental components such as artificial turf and solar energy options for
fields, parks and facilities;
Þ> Extended library hours;
Þ> Improved street standards;
Þ> E-Services; and
Þ> Risk reduction efforts.
Based on the under-funded current and non-funded future needs, staff recommends that the City
reposition its revenue and expenditure base to fund an additional $2 million per year.
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
II. Promoting Organizational Efficiency
We currently have 157,75 full-time equivalent positions in our budget. Although lean for a city
of our size, the committee looked at the structure of our organization and areas to automate or
streamline. This task was critical since approximately 70% of the general fund operating
expenditures are associated with salary and benefit costs. In addition, long-term trends for what
we call "hidden" costs (medical insurance premiums, workers compensation and retiree medical
costs) are directly associated with the number of our employees. The more we can streamline or
contract out services, the more we can control these current and long-term costs.
Our hiring rreeze this year demonstrated that we couldn't reduce our workforce and maintain all
existing programs for any length of time. Our organization is too lean and too flat to
accommodate this option without experiencing declines in customer satisfaction and service
level. If we are successful in a workforce reduction, programs impacted by staffing reductions
need to be identified and either contracted out, modified or eliminated. In addition, previously
"frozen" maintenance positions will need to be filled to support infrastructure added during the
last five years and to address mounting workload demands associated with deferred maintenance.
We also need to be cognizant of our future persoID3el needs. This year we added a full-time
Information Technology Assistant to accommodate the workload associated with our increasing
technology base. A Facility Attendant was also approved to staff the new Community Hall. At
some point, possibly as early as fiscal year 2006/07, we will be facing increased law enforcement
needs as a result of our annexations and the development of new residential and commercial
buildings. We also foresee new staffing needs for economic development and a redevelopment
agency.
The Committee identified several areas for potential short term and/or long term savings for your
consideration. These include, but are not limited to, streamlining our workforce as opportunities
arise, implementing E-Services with the goal of bringing city hall to the customer and reducing
our cost of service delivery, pursuing alternative energy sources wherever possible and pursuing
artificial turf to reduce maintenance costs and injury risks. In addition, efforts should continue to
increase the number of Block Leaders, Neighborhood Watch groups and CERT groups to
capitalize on community policing and reduce/maintain sheriff costs.
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
III. Decreasing Expenses and Areas of Risk Exposure
The Committee looked at our major programs in relation to operating costs and risk exposure
associated with general liability claims and workers compensation claims. Currently, claim costs
are paid directly by the Risk Management Division, which results in an understatement of the
true cost of service of some of our programs. For high-exposure or highly loaded "hidden cost"
programs, additional trend analysis was performed to establish what other municipalities are
implementing in an effort to decrease expenses and areas of risk.
Several suggestions for potential short term and/or long term savings have been identified for
your consideration. These could include reductions in field maintenance costs, sharing
infrastructure maintenance with the property owner, and requiring developers to maintain new
open space associated with their projects. Using the permit process to incorporate private
maintenance of sidewalks, medians and other improvements for new development will also limit
our expenditures. Finally, the City could consider the pros and cons of establishing a trust for
the retiree medical reserves to increase investment return and decrease funding obligations,
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
IV. Stabilizing our Revenue Sources
Cupertino has historically been heavily dependent on sales tax as a major general fund revenue
source, however trends over the past ten years have changed not only the percentage of revenue
received from this source (36% to 26%) but also the make-up of where the revenue is coming
from. Ten years ago, over 50% of our sales tax base came from the retail sector where today
49% is from the business-to-business or tl3e high-tech sector. Our largest sales tax producer,
Apple Computer, comprises more than a quarter of the total and given the volatility of the high
tech industry, this fact alone has put this revenue source in an "at risk" situation. To add to this
concern, the State is continuing it's efforts to change the way Internet sales are reported and, if
they are successful, will dramatically affect the amount of sales tax revenue currently received
from Apple,
Annual Sales Tax by Business Category
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In the past four budgets, we have mainly focused our efforts to reduce expenditures, No new
revenue sources per se have been implemented, and the only major change resulted from an
independent analysis of existing fees to ensure that we cover costs of service,
Good financial planning necessitates considering revenue strategies to diversify our revenue mix
and reposition the City for tuture recessionary spirals, Areas to explore could include re-
assessing park dedication fees to retain current purchasing power of parkland, pursuing the Tax
Equity Allocation (TEA) split to get our fair share, and continuing support for
redevelopment/economic development, such as Vallco, The City may also want to revisit a 9-1-
I fee if our sales tax cornposition exceeds 50% business to business, pursue a retuse vehicle
impact fee and consider annexation of the Hansen property. Finally, Council may want to
discuss a sales tax in-lieu fee where retail use is lost and the possibility of using homeowner
associations and landscape and lighting districts to fund maintenance of parks and other
amenities associated with new development projects.
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City of Cupertino
Fiscal Strategic Plan Issues Paper
January 25, 2006
Next Steps
Thank you for your consideration of a Fiscal Strategic Plan and possible suggestions towards
achieving that goal. We look forward to discussing this concept paper with you at the City
Council Study Session scheduled for Monday, January 30, 2006. In addition, we request that the
Council appoint two of its members to serve on a subcommittee for the Fiscal Strategic Plan and
work with staff towards identification of a long-term fiscal solution for Cupertino.
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