The two trends — rising revenues and spiking expenditures — are both detailed in the new Long Range Financial Forecast, which the City Council Finance Committee reviewed Tuesday night.
The document is not so much a prediction as a "snapshot" based on various current assumptions, city staff said, but it shows a picture of changing finances following the 2008 recession.
Palo Alto sales-tax revenues for fiscal year 2012 (which ends on June 30) are estimated at $21.6 million, exceeding the city's adopted budget by $1.4 million.
Hotel taxes rebounded last year after two years of declines, increasing by 17.8 percent between 2010 and 2011. This year, the numbers are expected to be even stronger. Tax revenues in the first quarter of 2012 exceeded those in 2011 by a whopping 26.2 percent and for the year are expected to be 7.3 percent higher than last year.
The forecast states that the transient occupancy and per diem rates in Palo Alto "have moved up appreciably as they have along the entire Peninsula, due to increased business activity." Sales tax, meanwhile, "has been on an upward trend with strong department store and electronic-equipment sales."
But while revenues are projected to grow, they are not expected to keep pace with expenditures, particularly the sharply rising cost of employee health care and pension benefits. The forecast pegs the total cost of benefits in fiscal year 2012 at $36.8 million. By 2017, the number could gradually balloon to $51.2 million because of the two trends.
The city's health care expenditures, according to the forecast, have grown by 126 percent over the past decade, going from $6.6 million in 2002 to $14.9 million this year. The trend is expected to continue and to swallow up a greater chunk of the city's General Fund. The pension costs are following a similar trend, having jumped from $15.6 million in 2005 to $23.9 million in 2012.
The rising expenditures carry bleak implications for the city's General Fund. While the forecast shows a balanced budget this year, it projects a $2.1 million deficit in 2013, a $3.7 million deficit in 2014 and a $4.1 million deficit in 2015. The forecast notes that while city revenues are improving, expense increases "continue to outpace the growth in revenue."
"The city-revenue projections are rosier than they have looked for a couple of years, but benefit costs continue their relentless upward climb — outpacing the rate of revenue growth," the forecast states.
The report also notes that a recent actuarial valuation of Palo Alto's unfunded retiree medical liability indicated that the city needs to set aside an additional $2.7 million in 2012 and $3.5 million in 2013 to cover the backlog.
"The city clearly still has its work cut out for it in addressing its structural deficit," the forecast states.
While the forecast is a forward-looking, big-picture document, its implications are already being felt in the city's negotiations with its labor groups. For the past three years, the city has been aggressively pressuring labor groups to cover a greater share of employees' health care and pension expenditures (both of which have been entirely paid by the city). Most labor groups have already agreed (or, in some cases, have been forced to accept) less generous benefits, including a new requirement for them to chip in for medical costs and a two-tiered pension system under which newly hired employees get fewer benefits.
The sharp rise in health care and pension costs is also one of the prime justifications for the city's decision to declare an impasse last week in its negotiations with the Palo Alto Police Officers Association after six months of meetings (see sidebar). The city's negotiator, Darrell Murray, highlighted the two trends in his declaration of the impasse. The city's medical insurance premium payments per employee have gone up by 21.1 percent since 2008, rising from $10,500 to $12,713. Furthermore, the city's pension contribution for police employees was 23.6 percent of earnable compensation in 2008, a rate that has gone up to 30.1 percent.
"Clearly, public agencies have reason for concern that pension costs will continue to consume increasing shares of their budgets," Murray wrote.