Santa Paula: Five-Year Fiscal Forecast

By Sheryl Hamlin

Dr. Thomas Gardner, DPA, presented a Five-Year Fiscal Forecast at the Santa Paula Council on June 20, 2016. Read this article about a previous appearance and his recommendations in December of 2014.

Dr. Gardner explained his financial management tool, an elaborate spread sheet with “10,000 moving parts” in the model. He stated that it is not a predictive model because there are “many things we don’t know”, but it can show what the future MIGHT be financially. He reiterated that the model was neither an accounting tool nor a budgeting tool, but a management tool which can be modified dynamically in the event economic conditions change.

Discussing national economics, he said that recession cycles are seven years apart; now we are in the seventh year since the last recession, so there are concerns at the national level about when the next recession will hit. Economists have concerns too about the increase in national debt. An uncertain political environment brings congress to a halt, he said, particularly with grant applications. Note a previous article about Santa Paula’s reliance on grants.

The Job growth in California is in these areas: healthcare, technology and service sector. How much healthcare and/or technology is in Santa Paula, he asked rhetorically. How many service sector jobs are at risk with increase in minimum wage? Employment growth is downward … 1.9%, 1.6%, 1.0% … all of which produces uncertainty. Weak business spending is offset with a healthy statewide housing market, although there is not enough housing on the low end for sale.

He cited local retail sales increasing over the last two years. Note previous article about unsubstantiated forecasts by HDL, Santa Paula’s sales tax consultant.

He cited that Santa Paula’s expenses exceed revenue in every year, thus causing the city to draw on reserves, although in the next few years, there may be revenue from East Area I and II as the chart below shows taken from his five year model. The two important points from the chart are as follows:

East Area (EA) Adds a Few Years of Positive Cash Flow Then Red

Note that expenses exceed revenue (shown in red), but in FY 17/18 there are revenues from East Area One, providing $619,282 profit which is carried over to the next year, providing $956,759 profit, which is carried over to the next year providing $530,218 profit. But this breaks down when the expenses exceed the revenues in FY 20/21, when even with the carryover profit of $530,218, the city is once more in the red in the amount of $92,322. He stressed that the profits from EA must be saved and carried over for the model to work.

East Area Contribution Depends on Sales Tax from EA II

Note too, that the row marked EA Revenue includes $740,000 of East Area II retail sales tax. This entire model must be recast, if the EA II retail situation changes. This situation must be monitored regularly. Dr. Gardner cited a report by Hoffman Associates as the source for the EA data. Vice Mayor Crosswhite asked about the timing since it was understood that the infrastructure for EA II would not be ready for two years. Dr. Gardner responded that Hoffman’s report is on calendar year, whereas this model is fiscal year based.

five_year_model

Is Santa Paula ready for next recession? He is concerned about the low level of reserves considering the risk of downturn and the fact that eventually expenses keep outpacing revenues.

Trends are important as this graph shows. General tax revenues (sales and property) are essentially flat for the last three years in the chart. He made a curious statement about general property tax revenues being overestimated in current year “for reasons” without explaining the “reasons”. Program revenues are back up to the FY06/07 level (fees, departmental activities, grant money) which are shown in blue.

trends

State of CA determines sales tax rate and property tax revenue …. only thing the city can control are business people making business transactions or the community making decisions such as sales tax measure, neither of which the council controls.

Personnel Increases Unsustainable

From the written report, this statement must be reiterated:

“On the expense side salaries, benefits and other operating expenses have seen average annual increases of 5.6%, 9.0% and 13.2% respectively over the last 4 years. These levels of continuing increases cannot be sustained.”

Santa Paula has gone from 98 to 120 employees since 2012. Every time a new employee is hired, one year from date of hire, the employee receives a 5 % raise and each year thereafter, so in four years a position costs 20% more, he said. (Actually, this is compounded so it would be 21.5%.) The city has no control over PERS expenses. Benefits contribute to the single most expense growth. He also showed a table of large equipment costs and contract expenses, like the city attorney.

There were many details in the report, which he did not cover in the presentation. Another notable statement was:

“Until revenues are more stabilized, new programs or expansions in programs should be approached with caution…”

To download the report and watch the video, click here on June 20, 2016. Dr. Gartner starts talking at 03:47:07 on the video.

The rest of this council meeting will be covered in subsequent reports.

For more information about the author, visit sheryhamlin.com

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