Below is a public letter sent by the Town’s Finance Commission Chair as it regards the Town adding another tax, and another poor choice by the Town Manager of a consultant that cost us over $100,000, only to fail her responsibility – just as the Housing Element Consultant failed us. They cost the Town over $300,000. Did the town go ahead and pay both for failing their assignments and cost us well over $400,000?
From: Phil Koen
Sent: Sunday, February 18, 2024 5:14 PM
To: Mary Badame <MBadame@losgatosca.gov>; ‘mhudes@losgatosca.gov‘ <mhudes@losgatosca.gov>; ‘Rob Rennie’ <RRennie@losgatosca.gov>; ‘rmoore@losgatosca.gov‘ <rmoore@losgatosca.gov>; ‘Maria Ristow’ <MRistow@losgatosca.gov>
Cc: Linda Reiners; Laurel Prevetti <LPrevetti@losgatosca.gov>; Gitta Ungvari <GUngvari@losgatosca.gov>; Wendy Wood <WWood@losgatosca.gov>; ‘Gabrielle Whelan’ <GWhelan@losgatosca.gov>
Subject: Agenda item #14 – 5 year forecast
Dear Honorable Mayor and Town Council Members,
I am writing to you in my capacity as Chair of the Finance Commission. Unfortunately, because of the timing of the Council meeting, the entire Commission has not had an opportunity to review and comment on this memo. I take full responsibility for its content. I believe the major points expressed by the Finance Commission have been captured and the memo is accurate.
Summary Comments
The Finance Commission discussed for over an hour the Staff’s 5 Year Forecast, analyzing the forecast as a whole and carefully listening to the Staff’s presentation and comments. The agenda called for the Finance Commission to make a recommendation to the Town Council to either accept or reject the forecast as presented. The Finance Commission’s role was not to opine on individual assumptions but rather to review and determine whether the Council should rely on the Staff’s work product taken as a whole.
There was considerable discussion and comments provided to Staff regarding the underlying assumptions and the reasonableness of the forecast. It is important to note that based on the 5 Year Forecast, Staff concluded “the persistent presence of a deficit indicates that the Town needs to consider new revenue measures if it wants to maintain high levels of municipal services” (Executive Summary, page 1 of the Staff report). Given this conclusion the Finance Commission took extra care to probe the reasonableness of the 5 Year Forecast.
Additionally, the Finance Commission considered in FY 22 and FY 23 the Town’s General Fund had an operating surplus of $4.4 million and $5.7 million. It was difficult for the Finance Commission to bridge from a $5.7 million operating surplus in FY 23 to an operating deficit of $1.5m by FY 25. That would be a negative turnaround of $7.2m in two years, which was never adequately explained by Staff.
In a unanimous decision, the Finance Commission made a finding the 5 Year Forecast total tax revenues were too conservative compared to historic growth rates, and operating expenditures could be managed through cost containment and productivity measures to reduce the forecasted growth rates. If adjustments were made to property tax and sales tax growth rates to align with more closely, but remain below, historic growth rates and cost containment and productivity measures were reasonably applied to internal service costs to reduce the projected growth rate from 10.8% to 7.1%, the Town would realize persistent future surpluses and not deficits.
Based on the above, the Finance Commission unanimously voted not to recommend the Staff’s 5 Year Forecast to the Town Council and did not agree with Staff’s conclusion that “the persistent presence of a deficit indicates that the Town needs to consider new revenue measures if it wants to maintain high levels of municipal services”.
Additional Detail Comments
Attached are two schedules which the Finance Committee referenced in making its finding but were not included in the Town Council package.
The first schedule – General Fund Expenditure Analysis – FY 22-FY 29 – presents in a simplified format the Staff’s 5 Year Plan. As you can see the Staff has assumed a compounded annual growth rate (CAGR) of 3.7% for property taxes. During the discussion Staff confirmed the 6-year historical growth rate has been approximately 7.4%. Additionally, the Staff’s forecast has assumed a 10.8% CAGR in internal service charges which reflect the growth in operating expenses for equipment replacement, workers compensation, self-insurance, information technology and facilities maintenance. There are no salary and pension expenses included in internal service charges.
The second schedule – General Fund Expenditure Analysis – FY22-FY29 – adjusted case – presents an alternative to the Staff forecast which increases the property tax CAGR to 5.5%, slightly increases sales tax growth rate to 1.7% CAGR and moderates the forecasted growth rate in internal service charges to 7.1% CAGR. The result is operating surpluses for every year starting at $1.2m in FY 25 and growing to $3.2m by FY 29.
Additionally, the Staff report does not disclose that two resolutions were approved by the Finance Commission. Both resolutions are attached. The report includes the second resolution but omits the first resolution which was equally important. This resolution addressed a fundamental weakness in the Town’s reporting of financial information. The Finance Commission found that a lack of consistency in the reporting formats used to report actual results, mid-year updates, and five-year forecasts makes it very difficult for the Town Council and members of the public to understand the financial information presented. This prohibits the ability to compare results between reports, decreases transparency and inhibits the ability to draw reasonable conclusions. The Finance Commission’s recommendation is to adopt a consistent format in reporting financial results such as the format used in the ACFR.
Comments regarding ERAF not discussed by the Finance Commission during the February 12 meeting.
Staff has provided additional comments in their February 14 report about excess ERAF that were not provided to the Finance Commission at the February 12 meeting. For example, the comment that “there is no guarantee for funding in the future” is not based on any independent analysis or known facts. Excess ERAF has been around for decades. In a report by the Legislative Analyst’s Office dated March 20, 2020, it was reported that:
“In 2006-07 counties reported excess ERAF totaling about $100m – equating to about 1.5% of all property tax revenue allocate from ERAF accounts statewide. Over the next decade, excess ERAF grew steadily. Within the past three years, however, growth in excess ERAF has accelerated. Preliminary reports show excess ERAF totaling $820 million in 2018-19 equating to about 8% of all funding allocated from ERAF statewide”.
The reason excess ERAF has grown substantially over the past few years is because the acceleration in property valuations. The ERAF was created in 1992 and redirects a share of property taxes statewide from cities, counties, and special districts to K-14 schools. ERAF offsets funding K-14 schools would otherwise receive from the State General Fund. It is very difficult to see how $94.9m that is currently projected to be distributed in FY 24 excess ERAF to the cities in Santa Clara County would go to zero. How exactly this would happen was not explained in the Staff report.
For FY 24, Santa Clara County has already indicated the Town will receive $2.5m in excess ERAF which is an 8.7% increase over FY 23 ERAF of $2.3m received. Staff did not explain why it would be reasonable to assume receiving a 50% reduction in excess ERAF revenue in FY 25 of $1.25m (option b) and holding at revenue level through FY 29.
The February 14 Staff report mentions “the Governor’s most recent budget assumes the approval of legislation allocating ERAF to charter schools, potentially reversing the recent appellate decision that charter schools do not get ERAF”. It is correct the budget proposes statutory changes that would clarify that charter schools are eligible for funding from the ERAF. Charter Schools were established the same year as ERAF, and it had never been clarified if they are eligible for this funding until the ruling California School Boards Association vs Malia M Cohen dated July 31, 2023, which determined that charter schools were not intended to be included in the calculation or allocation of excess ERAF. This concluded the legal challenge brought by CSBA.
If the Governor’s proposal is adopted, it would be on a “go forward” basis and would modify the calculation of future excess ERAF so charter schools would receive an automatic allocation of property tax revenue. The Staff has reported the potential impact could be an annual reduction of approximately 8% of the excess ERAF the Town is projected to receive.
Please let me know if you have any questions. The Finance Commission takes seriously its responsibility to serve as an on-going substantive and expert advisory body to the Town Council so that the Council can make informed decisions about the Town’s financial matters.
Thank you.
From: Phil Koen
Sent: Monday, February 19, 2024 9:23 AM
To: Mary Badame <MBadame@losgatosca.gov>; ‘mhudes@losgatosca.gov‘ <mhudes@losgatosca.gov>; ‘Rob Rennie’ <RRennie@losgatosca.gov>; ‘rmoore@losgatosca.gov‘ <rmoore@losgatosca.gov>; ‘Maria Ristow’ <MRistow@losgatosca.gov>
Cc: Linda Reiners; Laurel Prevetti <LPrevetti@losgatosca.gov>; ‘Gabrielle Whelan’ <GWhelan@losgatosca.gov>; Wendy Wood <WWood@losgatosca.gov>
Subject: Agenda Item 15 – Ballot Measure Polling
Dear Honorable Mayor and Council Members,
There is no need to waste $30,000 of resident’s money (which has not been spent) on polling for a potential ballot measure. The Staff report has it backwards when it states: “the Town is not in a position to determine a measure should be placed on the ballot or not as polling has not been conducted”.
A ballot measure to raise taxes should only be put forth when a clearly demonstrated need exists and there are specific and committed uses for the tax revenues. The determination to place a ballot measure increasing the resident’s taxes should never be based on an opinion poll.
In 2018, the Town listed in the ballot measure a few critical uses for a proposed sales tax increase, including enhancing neighborhood police patrol and local crime prevention programs, to give the appearance the sales tax proceeds would be committed to these programs. Unfortunately, the fine print of the ballot measure swept away all the “promises” and did not commit to any particular action and imposed no restrictions on the use of the sales tax. The ballot measure passed, but unfortunately the underlying concerns of adequate policing and crime prevention still exist. This “bait and switch” should never happen again.
The Finance Commission unanimously voted last week to not recommend the Staff’s 5 Year forecast finding that it was overly conservative and furthermore the Commission did not agree with the Staff’s conclusion “of persistent future deficits and the need to consider new revenue measures”. An alternative forecast reviewed by the Finance Commission which adjusted for historical property tax growth rates and more reasonable sales tax growth among other adjustments determined the Town would have persistent future surpluses not deficits.
Additionally, in FY 22 the Town experienced a surplus of General Fund revenues over expenditures of $4.4m and in FY 23 the Town experienced a surplus of $5.7m. The Town’s most recent Mid-Year Forecast for FY 24 is projecting a $1.7m surplus and makes budget adjustments increasing General Fund FY 24 revenues by $2.2m. Based on all the financial information available, the Finance Commission expressed that, at this time, there doesn’t appear to be the need for a ballot measure to increase taxes.
Lastly, I wish to address the accuracy of draft messaging regarding “fiscally responsible budget measures enacted “ in attachment 3 which is attached to this email. Let me address each of the “claims”:
While it is true budgeted staffing levels from 2001-2005 were higher than FY 24 budgeted levels, actual staffing levels have never been historically reported. The Town has been unable to produce actual historical headcount, so it is impossible to know the historical trend in actual headcount.
Staff does not explain why selecting a period that is over 20 years ago and pre-dates even the introduction of Apple’s i-Phone is a relevant comparison to today’s budgeted headcount. The Staff fails to disclose that since FY 2013 budgeted headcount has increased approximately 13% while the Town population has increased approximately 9%.
While the Town imposed wage freezes and unpaid furloughs in 2008 – 2009, these actions were taken during the great recession. More recently since FY 2018, the Town’s total salary expense has grown at an annual compounded growth rate of 5%.
While it is true the Town adopted the PEPRA Safety Plan for new hires, the Town has not reduced any employee pension benefits for those employees in the Miscellaneous and Safety Pension Plans. The total pension contribution for these two plans has increased from $4.6M in FY 2018 to $7.1m in F& 2023, which is an annual compounded increase of 9%.
Town budgets are not “reviewed” annually by an independent auditor.
Taken collectively, the statements in the section are misleading and create a false message in an apparent attempt to garner support for a ballot measure. I hope the Town Council values the special relationship you have with the people of the Town and will promise to always engage in forthright and complete disclosures, so residents are adequately informed of the facts rather than communication which puts a “thumb on the scale” to influence public opinion.
Lastly, it might be useful for the Town Council to review the results of the last poll the Town took regarding community priorities. I have attached the results and doubt they have changed. Given all of this, why is it worth spending $30,000 to confirm what each of you already know?
Thank you,
Phil Koen
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