Five-Year Financial Forecast

An important aspect of the budget development process is taking a multi-year approach to understand revenue and expenditure trends over time.  Serving as the foundation of the budget planning process, the Town develops a Five-Year Financial Forecast (“Forecast”) beginning in the late fall of each year.  The Forecast enables the Town to evaluate the Town’s fiscal condition and to help guide policy, programmatic planning, and budget decisions. Development of a financial forecast as part of the budget development process has been identified as a best practice by the Government Financial Officers Association (GFOA).

The Forecast takes a forward look at the Town’s General Fund revenues and expenditures and is updated regularly.  Its purpose is to identify financial trends, potential shortfalls, and other issues so the Town can proactively address them and budget accordingly.  It does so by projecting out into the future the fiscal results of continuing the Town’s current service levels and policies.  This process helps to provide a snapshot of what the future will look like as a result of the decisions made to date.

This Five-Year Financial Forecast is not a budget, nor a proposed plan.  The Five-Year Financial Forecast sets the stage for the upcoming budget process and is a tool in facilitating both the Town Council and Town Manager in establishing priorities and allocating resources appropriately.

Forecast Development During COVID-19

On January 21, 2020, the Town Council received the following Five-Year Forecast which became the basis of Strategic Priority planning and budgetary considerations.  As stated in January, a modest base case revenue growth forecast best reflected the economic environment at the time.  As discussed with the Town Council in January, sensitivity analyses with respect to revenues and expenditures demonstrate that the Town organization is vulnerable to changes in forecasted economic conditions.

Original 5 Year Forecast

Since the development of that original forecast, the unprecedented economic impacts associated with the local, national, and global mitigation of COVID-19 have necessitated significant revisions to growth projections for the Town’s primary revenues of Property Tax, Sales Tax, and Transient Occupancy Tax (TOT).  In close consultation with the Santa Clara County Assessor, Town Sales Tax consultant MuniServices, and a review of national and regional hospitality research. 

In addition to reassessing revenue growth, the Proposed Budget also forecasts anticipated increases in the Town’s pension obligations.  Given recent volatility in financial markets, it is anticipated that CalPERS will not achieve its assumed investment rate of return of 7% in FY 2019/20.  With two months left in the 2019/20 fiscal year, the 0% return scenario most closely approximates CalPERS current return and is used for this Forecast.  The combined effects of changing these budget assumptions in conjunction with others is illustrated in the following updated FY 2020/21 Proposed Operating Budget and Five-year Forecast.

COVID-19 Budget Scenario

The Town is affected economically by the COVID-19 pandemic and due to the Council’s proactive efforts over the years, the Town is expected to be in a position to maintain the Town’s high quality services in the short and medium terms.  The updated forecast indicates that for the Proposed FY 2020/21 Operating Budget and the following FY 2021/22 budget projected revenues and expenditures are in balance. 

The Town does face projected moderate deficits in the range of $100K to a maximum of $1.1M per year in the remaining years of the forecast.  The forecasted deficits represent approximately 0.2% to 2.7% of the Town’s proposed General Fund operating budget for FY 2020/21 out of a total of $43,420,8255, (net of capital transfers out, one-time expenses, and pass through expenditures of $6,358,150).  Given that the deficits are currently projected to be relatively modest they are within the Town’s demonstrated ability to be absorbed without affecting services.  However, the ultimate impact to the organization is not expected to be known until the depth and breadth of the pending recession is fully understood.  Given the unknown nature of the transitioning economy, staff anticipates that more definitive information regarding revenue trends and any subsequent necessity to address service levels will be better known at mid-year FY 2020/21.

For more information regarding the Five-year Financial Forecast, budget assumptions, and budget sensitivity please see the staff report and attachments for Item #6: Operating and Capital Budgets of the May 19, 2020 Town Council meeting.