Final Multi-Year Forecast and Status Research Report 24-27.pdf

City of Phoenix — City Council Policy Session (2024-02-27)

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RESEARCH REPORT
BUDGET AND RESEARCH DEPARTMENT
B.R. REPORT NUMBER
2024-05
DATE ISSUED
February 22, 2024
TO:
JEFF BARTON
CITY MANAGER
FROM:
AMBER WILLIAMSON
BUDGET AND RESEARCH DIRECTOR
SUBJECT
MULTI-YEAR FORECAST AND FY 2024-25 PRELIMINARY GENERAL FUND BUDGET STATUS
BACKGROUND
Development and presentation of the multi-year forecast is an important step in the City’s
budget process. Evaluating projected available resources and identifying potential ongoing
budget surpluses or funding gaps will allow City management and Council to develop strategic
plans to ensure the continuation of City operations and optimize services to the community.
The multi-year forecast estimates future revenues and expenditures of the General Fund for the
current fiscal year through fiscal year 2026-27. The purpose of this forecast is to identify key trends
in revenues and expenditures and to provide information about the financial landscape anticipated
over the next few years. The information contained in this forecast is based on data available
through January 2024.
The General Fund (GF) multi-year forecast (Attachment B) is provided to the City Council
and the community for consideration and provides City policy makers with:
• A strategic financial management best practice
• A framework for strategic decision-making to ensure a balanced budget each fiscal year
• The opportunity to make policy changes to maximize City resources and service delivery
• A roadmap to continued fiscal health and award-winning budgetary and financial reporting
The forecast is not an official policy or legal budget document and does not enact any budgetary
allocations. The forecast is also not intended to set or precisely predict future revenues or
expenditures. Rather, the forecast presents current estimates based on several economic and
financial assumptions of the future direction and ranges of growth rates for both resources and
expenditures. The economic, revenue, and expenditure assumptions are provided in Attachment
C.
The forecast is built on several assumptions outlined in Attachment C regarding:
• The national, state, and local economy
• Population and job growth
ATTACHMENT A

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• Revenue and expenditure growth
• Impacts of anticipated increasing pension liabilities
• Effects of the state’s actions on residential rental sales tax and individual income tax cuts
• Estimated additional costs for the Class and Comp study
• Cost management practices

All of these factors are subject to change and are detailed further in this report.
Projecting future available resources and expenses over multiple years is complex and involves
several assumptions concerning how revenue and expenditures will grow over time. To model
potential future budgetary scenarios under varying economic conditions, a range is provided for
resources and expenditures for the outer years of the forecast. The differences between the upper
and lower ends of the ranges increase in the later years of the forecast reflecting additional
economic uncertainty. The top of each range represents the “optimistic” forecast, while the bottom
of the range represents the “pessimistic” forecast.

It is important to note, if any of these assumptions as described were to change or modeled
differently, the ranges of amounts presented in the forecast would need to be revised. Unexpected
economic shocks, recessions, legislation, unfunded mandates, or other risks to the forecast can
also adversely affect projections.

Additionally, even slight variances in the revenue and expenditure growth rates in the initial years
of the forecast result in substantial changes to the later years due to the compounding effect of the
changes. For example, a revenue growth variance of only 1% in FY 2024-25 can result in a $19
million change to the ending balance, which would impact the ending fund balances in the
subsequent forecast years. Long term forecasts become less reliable the further they are from
development because of the many underlying assumptions subject to frequent fluctuations.

Projections are formulated in the first six months of the fiscal year and are based on current
estimates of where staff believes resources and expenditures will be for the current fiscal year and
the subsequent three years. In order to create the most reliable revenue and expenditure
projections, staff relies on several economic sources, months of actual collections and extensive
technical reviews before recommending estimates to City management and ultimately the City
Council for final consideration.

GF Summary
Revenue growth in the previous fiscal year was strong despite the onset of geopolitical conflicts, high
inflation, actions by the Federal Reserve to increase interest rates, tighter monetary policy, and
volatile markets. In FY 2022-23, GF revenues were 13.2% higher than FY 2021-22, primarily due to a
one-time increase in state shared income tax collections (based on actual collections from FY 2020-
21), and strong city and state sales tax revenues. However, significant economic uncertainty and
volatility in sales tax revenue collections in the first six months of FY 2023-24 require a cautious
approach to forecasting. The baseline revenue forecast for the remainder of FY 2023-24 and looking
ahead to FY 2024-25 is projected to expand but at a slower pace and is in line with trusted economic
sources used to develop revenue estimates. The revised estimated revenue growth for FY 2023-24
and FY 2024-25 is 12.4% and -3.1% respectively. The negative growth in FY 2024-25 is primarily due
to significantly lower state shared income tax collections caused by the state’s actions to lower the
individual income tax rate to the current “flat tax”, and the elimination of residential rental sales tax.

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The State recently enacted Senate Bill 1131, which prohibits municipalities from taxing residential
rental property starting Jan. 1, 2025. The estimated 5-month impact to the GF for FY 2024-25 is
approximately $(18) million and the ongoing annual impact beginning in FY 2025-26 is over $(43)
million. Additionally, Senate Bill 1828 reduces individual income tax rates beginning in tax year 2022
to the current flat tax rate of 2.5%. On June 9, 2023, the State's Joint Legislative Budget Committee
(JLBC) notified the legislative membership of a significant decline in GF revenue collections, which is
primarily due to underestimating the negative impact of the state's decision in 2021 to enact Senate
Bill 1828. The City receives state-shared income taxes based on actual collections from two years
prior. Budget and Research (B&R) staff rely on projections from the JLBC to estimate this revenue
stream for budget development. The estimated negative impact to FY 2024-25, FY 2025-26, and FY
2026-27 of the less than estimated income tax revenues by the JLBC is approximately $(36) million,
$(43) million and $(41) million respectively compared to projections in the GF Multi-year Forecast
presented to City Council on Feb. 21, 2023.

The FY 2024-25 GF ending fund balance is estimated to be $80 million and is considered one-time
funds representing a carryforward of prior year fund balance and savings in capital expenditures. The
outer years of the forecast project a range of ending balances with deficits in FY 2025-26 of $(103)
million to $(66) million and for FY 2026-27 of $(53) million to a potential surplus of $19 million. The
baseline forecast in FY 2025-26 and FY 2026-27 includes deficits estimated at $(92) million and $(31)
million, respectively. The forecast assumes the one-time surplus in FY 2024-25 is allocated for one-
time purposes rather than spent on ongoing initiatives. The FY 2025-26 deficit is balanced by
reducing ongoing expenditures and is not carried over to FY 2026-27. The projected deficits are due
to the state’s actions to diminish the ongoing tax base by prohibiting cities and towns from collecting
residential rental sales tax and lowering individual income tax rates. It is important to note the FY
2024-25 GF ending balance if adjusted for the loss of residential rental sales tax and the impact of the
less than projected state shared income tax collections would have been estimated at $134 million
(versus $80 million). The outer years of the forecast would also be significantly improved absent the
loss in revenue with a range in FY 2025-26 of $(17) million to $20 million and projected surpluses of
$33 million to $105 million in FY 2026-27 (Attachment B).

Additionally, to better prepare for future challenges, this report also includes stress testing for
moderate and severe recessions, which is an essential fiscal tool to evaluate how revenues might
respond to different levels of economic crisis (Attachment D, E and F).

OTHER INFORMATION

Staff is underway with the annual 7+5 expenditure and revenue technical review process and may
update estimates if necessary. The final estimates and recommendations to the City Council on how
best to allocate the one-time GF surplus in FY 2024-25 to achieve a required balanced budget will be
presented in the proposed Trial Budget on March 19.
It is also worth noting the preliminary FY 2024-25 budget and forecast is based on existing state-
shared revenue models and statutory obligations. Any changes to state-shared revenue formulas,
or other revenue sources proposed in the Governor’s budget or in legislative bills that would
impact the GF forecast, are not reflected, and would need to be addressed if adopted by the
State.

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General Fund FY 2024-25 Preliminary Budget Status

FY 2024-25 Resources - The chart below shows the preliminary resources projection:

GF Resource Category
2024-25
Preliminary
Estimate
(in millions)
2024-25
Preliminary
Projected Annual
Growth Rate %
Local Sales & Excise Taxes 1
$737
0.9%
State-Shared Revenue 2
$699
-8.9%
Primary Property Tax 3
$215
3.9%
User Fees and Other
$192
-2.9%
Beginning Balance 4
$242
N/A
Transfers/Recoveries 4
$11
N/A
Total GF Resources
$ 2,096
-1.6%

1 Reflects the negative impact to Local Sales & Excise taxes because of Senate
Bill 1131, which prohibits municipalities from taxing residential rental property
starting January 1, 2025.
2 Reflects the negative impact to State-Shared Income Tax Revenue because of
Senate Bill 1828, which reduces the individual income tax rates to flat tax of 2.5%
beginning in tax year 2022. However, it does not reflect any impact to State-Shared
Revenue resulting from the FY 2024-25 State budget, nor legislative changes that
have recently been proposed or discussed during the current legislative session.
3 Assumes the continuation of the City Council adopted policy to maximize the
primary levy in order to preserve GF services. Any deviation from this policy would
require an ongoing reduction to GF programs.
4 Estimates for beginning balance and transfers/recoveries are not derived from
annual growth rate projections or broader economic factors.

Revenue Forecasting Model - In the fall of 2014, Budget and Research consulted with the University
of Arizona’s Eller College of Management, Economic and Business Research Center (EBRC) to
enhance the City’s sales tax revenue forecasting process. Dr. George Hammond, EBRC Director,
and Dr. Alberta Charney, Senior Research Economist, spent several months working with City staff to
develop an enhanced econometric sales tax forecasting model for all categories of city and state
sales tax. In the summer of 2017, staff worked with EBRC to update the tax forecasting model. In
March 2021, the EBRC revised the City’s model again by including online sales tax. The City began
collecting sales tax from online marketplace retailers effective October 2019 just prior to the
pandemic, which helped to offset losses experienced in the leisure and hospitality sales tax
categories during the pandemic. The EBRC leads the State of Arizona Forecasting Project, which
provides in-depth economic forecast analysis and databases on a subscription basis to businesses,
organizations, and government via membership. The additional consulting with Dr. Hammond has
provided the City with solid, independent economic and statistical expertise used to develop a
statistically valid forecasting model specifically for the City of Phoenix. The projected growth rates in
each category of sales tax for the FY 2024-25 estimate and the outer years of the forecast are based
on projections developed with the enhanced econometric forecasting model. Revenue estimates may
change as more data becomes available and will be finalized in the coming weeks.

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GF Expenditures - The preliminary expenditure estimates may change as cost estimates are further
refined in the coming weeks. Currently, FY 2023-24 and FY 2024-25 General Fund expenditure
estimates excluding contingency are projected to be $1.890 billion and $1.927 billion, respectively. The
increase includes the additional costs for the Class and Comp study, and increased costs for pension,
contractual services, and commodities. The outer years of the forecast assume expenditures excluding
pension grow by five percent and account for increased costs from the Class & Comp study and
estimated operating cost impacts for the voter approved 2023 General Obligation Bond Program.
Further detail on expenditure assumptions can be found in Attachment C.

Pension Costs – Expected changes in COPERS and PSPRS pension costs are as follows:

• COPERS: GF pension costs in FY 2024-25 for civilian employees are estimated at $113
million and are expected to increase to $122 million in FY 2026-27. The overall trend in
COPERS pension cost has been driven by recent actuarial changes, plan earnings,
payroll growth and pension reform (Attachments B and G).

• PSPRS: GF pension costs in FY 2024-25 for sworn Police and Fire are estimated at $330
million and are expected to increase to $352 million in FY 2026-27. The primary factors
contributing to the growth are recent actuarial changes, plan earnings, and changes to the
payroll base. As the multi-year forecast shows, GF public safety pension costs are estimated
to increase by $31 million from the FY 2023-24 budget through FY 2026-27 (Attachments B
and G), which adds pressure to the GF budget going forward and limits the City’s ability to
either expand programs and services to residents or increase employee compensation.

Contingency Fund (Rainy Day Fund) – The Contingency Fund is assumed to increase from $81
million to $89 million in FY 2024-25 to reflect 4.75% of operating expenditures. The contingency
rate remains at 4.75% for the entire forecast period due to the anticipated deficits in FY 2025-26
and FY 2026-27. In March 2010, the City Council agreed to gradually increase the contingency
with a goal of achieving five percent of GF operating expenses to withstand potential economic
declines. Contingency/rainy day funds provide one-time resources for possible emergencies and
unanticipated costs that may occur after the budget is adopted. The possibility of natural
disasters, public or employee safety emergencies, public health issues, economic shocks or
declines, and geopolitical events that can impact the broader economy necessitates maintaining
adequate contingency funds. The Government Finance Officers Association (GFOA)
recommends cities maintain reserve levels as a financial best practice and according to the Pew
Charitable Trust, research also shows that contingency/rainy day funds can affect a
government’s credit rating, which in turn has an impact on borrowing costs and operating
expenses. The role of the contingency/rainy day funds is to improve a city or town’s monetary
stability by building up a safety net for cities and towns so that it could be used to protect itself
against adversities. They offer the capability to meet a monetary crisis without hindering public
services. Without a contingency fund, unforeseen emergencies or economic declines may create
budget deficits requiring reductions to programs and services.
The GF preliminary FY 2024-25 budget status and multi-year forecast are provided for
information purposes only.

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ATTACHMENTS

Attachment B- Multi-Year General Fund Forecast
Attachment C- Forecast Assumptions
Attachment D- Background, Methodology and Assumptions for Stress Testing
Attachment E- Stress Testing for Moderate Recession Scenario
Attachment F- Stress Testing for Severe Recession Scenario
Attachment G- Pension Cost Increases

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ATTACHMENT B
Multi-Year General Fund Forecast ($ Millions)
2023-24
Adopted
Budget
2024-25
Preliminary
Budget Estimate
For Planning Purposes Only
2025-26 2026-27
Forecast
Forecast
Resources
Local Taxes
$699
$737
$741 - $752
$769 - $792
State Shared Revenues
770
699
674 - 685
700 - 722
Primary Property Tax
207
215
222 - 225
228 - 235
User Fees and Other
155
192
194 - 197
196 - 202
Other (Carryover Balance, Transfers, Recoveries)
130
172
16
7
Unused Contingency from Prior Year
68
81
89
91 - 90
Total Resources
$2,029
$2,096
$1,936 - $1,964
$1,991 - $2,048
Expenditures
Operating Expenditures
$1,360
$1,408
$1,434 - $1,426
$1,406 - $1,392
Civilian Pension
112
113
115
122
Sworn Public Safety Pension
321
330
340
352
Contingency
81
89
91 - 90
91 - 90
Pay-As-You-Go Capital
122
60
38
38
Minimum Vehicles
33
16
21
35
Total Expenditures
$2,029
$2,016
$2,039 - $2,030
$2,044 - $2,029
PROJECTED (DEFICIT)/SURPLUS:
$ -
$80
$(103) - $(66)
$(53) - $19
State’s Actions to Reduce Revenue:

AZ Individual Income Tax Cut, Effective Tax Year 2022
$36
$43
$41
Residential Rental Property Tax Cut, Effective 1/1/2025
$18
$43
$45

ADJUSTED PROJECTED (DEFICIT)/SURPLUS:

$134

$(17) - $20

$33 - $105
Key Resource Forecast Assumptions:
* The forecast assumes modest revenue growth with no recession from 2024-25 to 2026-27, no fee increases or decreases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two brackets in TY 2022. Starting
from TY 2023, the individual income tax has been reduced to 2.5%.

* Relative population share used in calculating state shared revenues in 2024-25 was based on the 2022 Census Bureau Population Estimate. It was projected to remain flat throughout the forecast period.
The actual share will change annually based on Census Bureau Population Estimates. In addition, Laws 2021, Chapter 412 (Tax Omnibus) increased the Urban Revenue Sharing distribution from 15% to
18% starting in 2023-24.
* The forecast includes residential rental property tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.

Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.75% of the total General Fund operating expenditures from 2024-25 through 2026-27.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2024-25 employee costs are based on projections under the current Council-adopted pay plan ordinance and employee contracts. No assumptions have been made concerning future labor contract
negotiations. Estimated costs of the Class and Comp study are included in the forecast. Pension costs are based on required and projected contribution rates provided by the respective pension system
actuaries.
* Non-personnel related expenditures for 2024-25 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.

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Other Forecast Notes:
* Ranges provided for revenues and expenditures. Upper & lower ends of ranges increase slightly in the outer years of the forecast reflecting additional economic uncertainty in the later years.
* Ranges include pessimistic and optimistic scenarios within assumptions provided by the primary sources of economic information mentioned in this report.
* When a baseline deficit or ongoing surplus is projected, the next year’s operating expenses are assumed to be decreased or increased by the baseline deficit/surplus amount prior to applying the assumed
annual projected growth rate, as the City is required by Charter to balance the budget each year.

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ATTACHMENT C

Forecast Assumptions

Economic Sources - Budget and Research staff relies on several different sources for economic
data and forecasts to assist with developing revenue and expenditure projections.

The list below includes the primary sources of information:
• State of Arizona Finance Advisory Committee (FAC) which includes several economists and
finance professionals from the private and public sectors
• State of Arizona Joint Legislative Budget Committee (JLBC)
• University of Arizona (UofA), Economic Business Research Center (EBRC)
• Global Insight, IHS
• Arizona State University (ASU) – WP Carey School of Business, and Western Blue Chip
• Arizona Department of Administration (ADOA) - Employment and Population Statistics Office
• JP Morgan Chase Economic Outlook Center
• Blue Chip Economic Indicators (BCEI) – National Level
• U.S. Bureau of Labor Statistics
• U.S. Census Bureau
• U.S. Bureau of Economic Analysis (BEA)
• The Conference Board
• University of Arizona (UofA) Forecasting Project – A community-sponsored research program
within the Economic and Business Research Center providing project members with economic
forecasts for Arizona, the Phoenix-Mesa metro area, and the Tucson metro area. City staff
attends the Forecasting Project quarterly meetings and receives quarterly reports and
data/projections used to assist in developing our forecasts. Forecasting Project data relies on
Global Insight, IHS which is a well-known economics organization that provides
comprehensive economic and financial information. The data from this project is incorporated
into an econometric software program used to forecast sales tax.

Economic Outlook
The U.S. economy has demonstrated resilience over the past three years. Real Gross Domestic
Product (GDP), a common economic measure, grew 2.5% in 2023. According to the U.S. Bureau
of Economic Analysis (January 2024), the 2023 growth was attributed to increases in consumer
spending, nonresidential fixed investment, state and local government spending, exports, and
federal government spending partly offset by decreases in residential fixed investment and
inventory investment. However, real GDP is expected to rise more slowly in 2024 than in 2023. The
Conference Board anticipates two quarters of slightly negative GDP growth during the second and
third quarters of 2024 that will be broadly felt across the economy. Estimated GDP for 2024 and
2025 is 1.2% and 1.4%, respectively. These figures represent a decline compared to the preceding
three years: 5.8% in 2021, 1.9% in 2022, and 2.5% in 2023 (The Conference Board, January 2024)
signaling a softening of the economy. Despite the anticipated normalization of inflation and interest
rates in 2024, volatility is still expected to persist throughout the year. Several contributing factors
include challenges in real disposable income growth, diminishing pandemic-related savings, rising
household debt, and the impact of “buy now, pay later” plans. At a broader level, the challenges
facing the U.S. economy arise from geopolitical conflicts and the risk of a surge in energy prices.
It’s noteworthy that the upcoming presidential election could have an impact on the economy, and
economists note concerns with the housing and commercial real estate markets as risks to the
broader economy.

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The U.S. economic growth established a platform for continued solid gains in Arizona in 2023. For
the five-year period ending in the third quarter of 2023, the Arizona economy grew 19.6%, making it
the fourth fastest-growing state during this period (Arizona Governor’s Executive Budget, January
2024). Arizona was also one of the fastest states to recover its lost jobs during the pandemic. As of
December 2023, Arizona’s job growth was at 2%, slightly higher than the national rate of 1.9%.
Overall, Arizona is well positioned to grow in 2024 but at a reduced pace. While it shares common
challenges with the broader U.S. economy, the state is currently navigating potential short-term
risks within the housing market. Housing permits are expected to decrease this year for both
single-family and multi-family activity, driven by high interest rates and significantly reduced
housing affordability. Single-family housing affordability continued to deteriorate in the third quarter
of 2023, according to data from the National Association of Home Builders and Wells Fargo. In
Phoenix, only 24.9% of homes sold were affordable, down from 64.9% in the last quarter of 2019
(Economic Outlook 4th Quarter 2023, UofA Economic Business Research Center).

Other significant economic assumptions from trusted sources include the following:
• Personal income growth for the Phoenix Metro area is projected to slightly decline from 6.4%
in 2023 to 6.3% in 2024 and range from 6.1% to 6.4% from 2025 to 2027 (UofA Economic
Business Research Center).
• Growth in population is expected to continue, but at lower rates than historical growth.
Phoenix Metro population is projected to grow by 1.5% in 2024 and slightly increase to 1.6%
for the remaining forecast period (UofA Economic Business Research Center).
• Non-farm employment in metro Phoenix is estimated to slow down from the growth of
2.4% in 2023 to 2.2% in 2024 and decrease to 2.1% for the remaining forecast period
(UofA Economic Business Research Center).
• Arizona unemployment rate is estimated to increase from the rate of 3.7% in 2023 to 4.0%
in 2024 and range from 4.4% to 4.6% for the remaining forecast horizon (UofA Economic
Business Research Center).
• Arizona housing affordability declines due to home price inflation and interest rate hikes. In
addition, housing permits are projected to decrease by 19% in 2024 and remain flat in
2025 (UofA Economic Business Research Center).
• Inflation is expected to decelerate from 2023. The Consumer Price Index-All Urban Consumers
(CPI-U) West region is estimated to decline from 4.4% in 2023 to 2.6% in 2024 and range from
2.2% to 2.3% for the remaining forecast period (UofA Economic Research Center). In the past
50 years, CPI-U has ranged from negative 0.4% in 2009, to a high of 13.5% in 1980 ( U.S.
Department of Labor Bureau of Labor Statistics).

Resource Assumptions- Revenue growth rates are determined using information from our above-
mentioned trusted sources, analyzing actual revenue trends and averages, and factoring in any
known policy or legislative changes.

Revenue assumptions beyond the broader economic considerations are described below:
• No further period of recession with modest revenue growth for the forecast horizon.
• Annual revenue growth rates range from -3.1% to 4.2% during the forecast period. The state’s
actions to diminish the tax base for both city sales tax and state-shared income taxes have
resulted in a negative growth rate in FY 2024-25 and will have a lasting impact on the
subsequent years.
• No further impact to current revenue tax base, as provided in applicable state statutes
and City ordinances.

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• The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced
the number of individual income tax brackets from four in Tax Year (TY) 2021 to two
brackets in TY 2022. Starting from TY 2023, the individual income tax has been reduced to
a 2.5% flat tax rate.
• Relative population share used in calculating state shared revenues in FY 2024-25 was
based on the 2022 Census Bureau Population Estimate. It is projected to remain flat
throughout the forecast period. The actual share will change annually based on Census
Bureau Population Estimates. In addition, Laws 2021, Chapter 412 (Tax Omnibus)
increases the Urban Revenue Sharing distribution from 15% to 18% starting in FY 2023-24.
• The forecast includes residential tax rate reduction starting on January 1, 2025. The state
recently enacted Senate Bill 1131, which prohibits municipalities from taxing residential
rental property.
• No future fee increases or decreases and no new sources of revenue.
• Potential increases to revenue resulting from economic development efforts are not included in
the forecast.
• Ranges provided for revenues: upper and lower ends of ranges increase slightly in later years
of the forecast reflecting additional economic uncertainty.

Expenditure Assumptions - Assumptions regarding forecasted expenditures are described below:
• Annual operating expenditure growth rates, except for pension, are based on historical
growth rates, estimated CPIs and account for the impact of the City Council approved Class
and Comp (C&C) study throughout the forecast period.
• Pension costs are based on historical actuals and information provided by the COPERS and
PSPRS actuaries. The forecast does not attempt to predict future pension liabilities, assets or
other plan assumptions, but rather to account for the anticipated costs of both pension
systems.
• The forecast does not include the impact of additional potential reform measures for COPERS
or PSPRS or the impact of pending litigation or proposed legislation.
• The forecast includes no additional future funding for program enhancements, unfunded
mandates, expiring grants, etc.
• Pay-as-you-go capital costs are based on the preliminary estimates in the five-year Capital
Improvement Program and include costs for facility major maintenance, replacement of critical
IT infrastructure, and money earmarked for future expenses, including one-time funds for costs
of grant matching requirements for the Bipartisan Infrastructure Bill.
• The contingency fund is set at 4.75% of the total GF operating expenditures from FY
2024-25 through FY 2026-27.
• The FY 2024-25 total compensation costs are based on projections under the current
Council adopted pay plan ordinance and existing employee contracts.
• The C&C study requires significant increases to employee salaries that will have an
ongoing impact to the budget beginning in the current fiscal year. The study also provides
for higher starting salaries to attract qualified candidates to fill vacancies throughout the
City. Costs are estimated at $99 million in FY 2024-25, $143 million in FY 2025-26, and
$170 million in FY 2026-27 and have been accounted for in the forecast.
• No other financial impact from changes to labor unit contracts resulting from current or future
negotiations is assumed.

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• In forecast years with a projected baseline deficit or ongoing surplus, the next year’s
operating expenses are assumed to decrease or increase by the baseline deficit/surplus
amount prior to applying the assumed annual growth projection, as the City is required by
Charter to balance the budget each year.

• Ranges provided for operating expenditures: upper and lower ends of ranges increase slightly
in later years of the forecast reflecting additional economic uncertainty.

Other Considerations to the Multi-Year Forecast - The items below will likely require additional
funding or could adversely impact the multi-year forecast as it’s currently presented.

• The forecast incorporates the estimated annual ongoing operating costs in FY 2025-26 and
FY 2026-27 for the voter approved 2023 General Obligation Bond Program totaling $12.8
million over the two fiscal years. These costs have been factored into the forecast, but
additional resources could be needed.
• The forecast reflects the continued funding of approximately $16 million per year earmarked to
address aging City infrastructure and critical equipment. Examples of these projects include
upgrades and replacements of fire life safety, electrical, and cooling systems in City facilities.
Also, under the direction of the City Manager, staff continues to identify critical needs in all City
facilities and works with several external firms that specialize in facility assessments. Staff has
also taken active steps to enhance facility maintenance oversight by centralizing GF facility
maintenance funding and creating a review committee. This change has significantly
enhanced the prioritization of GF facility projects. However, additional resources may be
required to adequately maintain city infrastructure.
• GF vehicle funding is estimated at $16.2 million for FY 2024-25 and increases to $20.7 million
in FY 2025-26, and $35 million in FY 2026-27 to replace units in the fleet. The cost to replace
vehicles and Fire apparatus has grown significantly due to inflation over the past three fiscal
years per the Public Works Department. It should be noted the current GF backlog of vehicles
is estimated by Public Works at 1,193 units with a total backlog value of $122 million, and
more vehicle replacement funding may be needed during the forecast horizon.
• Additional costs to the GF are anticipated to further the City’s effort to help individuals
experiencing homelessness upon the expiration of American Rescue Plan Act funds.
Preliminary estimates include a funding need in FY 2024-25 of $6.5 million and in FY 2025-26
of $22 million. These costs have not been factored into the forecast.
• The current state legislative session could result in further negative revenue impacts that if
passed would require adjustments to revenue projections used in the forecast.

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ATTACHMENT D

Stress Testing

Background – According to the National Bureau of Economic Research, the longest economic
expansion on record was ended by COVID-19 in February 2020. The COVID-19 recession is one of
the deepest but shortest in U.S. history. With federal stimulus packages and more than anticipated
revenue collections, the City was not forced to cut the budget. The City exhibited remarkable
economic resilience during the pandemic. However, several risks currently threaten national and
local economies, potentially triggering a recession or economic slowdown. Thus, stress testing is
crucial, as it helps estimate potential financial shortfalls resulting from adverse events. To help the
City plan ahead, avert or limit a fiscal emergency and keep long-term priorities on track, staff
conducted stress testing for the General Fund.

Methodology/Assumptions - "Stress test" in financial terminology, is an analysis or simulation
designed to determine the ability of a given entity to deal with an economic crisis. Instead of doing a
financial projection on a "best estimate" basis, a company or its regulators may do stress testing to
estimate how robust an entity performs in certain negative circumstances, a form of scenario
analysis. There are two scenarios for this stress testing: moderate and severe recession scenarios.

Attachment E shows a hypothetical moderate recession estimated to start in FY 2024-25. This
scenario assumes that General Fund revenue, except state-shared income tax, will decline by 1% for
two consecutive years. According to Moody’s Analytics, a recession typically affects budgets for at
least two years (except for the COVID-19 recession, which was interfered with the federal stimulus
packages). Although a moderate recession may impact revenue by more than 1%, the model is
simulated with a 1% decrease. State-shared income tax distributed to cities and towns is based on
the collections from 2 years prior, so the state-shared income tax decrease due to a moderate
recession will not affect revenues until FY 2026-27.

Attachment F shows a hypothetical severe recession that is estimated to start in FY 2024-25. This
scenario assumes that General Fund revenue, except state-shared income tax, will decline by 3% for
three consecutive years. Although a severe recession may impact revenues by more than 3%, for
simulation purposes, this stress test used a 3% decrease. Similar to the moderate scenario, the state-
shared income tax decrease caused by the economic recession will not affect revenues until FY 2026-
27.

Assumptions for recoveries, fund transfers and expenditures remain the same as the model shown in
Attachment B. However, the expenditures for the forecast period will be different due to the
methodology applied in the model. When a deficit or surplus is projected, the next year’s operating
expenses are assumed to be decreased or increased by the deficit/surplus amount prior to applying
the assumed annual projected growth rate, as the City is required by Charter to balance the budget
each year.

- 14 -

ATTACHMENT E
Multi-Year General Fund Forecast – Moderate Recession Scenario ($ Millions)
2023-24
Adopted
Budget
2024-25
Preliminary
Budget Estimate
For Planning Purposes Only
2025-26 2026-27
Forecast
Forecast
Resources
Local Taxes
$699
$696
$666 - $676
$690 - $712
State Shared Revenues
770
680
638 - 648
645 - 665
Primary Property Tax
207
205
201 - 204
207 - 214
User Fees and Other
155
187
183 - 186
185 - 191
Other (Carryover Balance, Transfers, Recoveries)
130
168
16
7
Unused Contingency from Prior Year
68
81
89
91 - 90
Total Resources
$2,029
$2,017
$1,793 - $1,819
$1,825 - $1,879
Expenditures
Operating Expenditures
$1,360
$1,408
$1,434 - $1,425
$1,255 - $1,242
Civilian Pension
112
113
115
122
Sworn Public Safety Pension
321
330
340
352
Contingency
81
89
91 - 90
84 - 83
Pay-As-You-Go Capital (Includes Technology Plan)
122
60
38
38
Minimum Vehicles
33
16
21
35
Total Expenditures
$2,029
$2,016
$2,039 - $2,029
$1,886 - $1,872
PROJECTED (DEFICIT)/SURPLUS:
$ -
$1
$(246) - $(210)
$(61) - $7
Key Resource Forecast Assumptions:
* The forecast assumes moderate recession in 2024-25 and 2025-26, no fee increases or decreases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two brackets in TY 2022. Starting
from TY 2023, the individual income tax has been reduced to 2.5%.

* Relative population share used in calculating state shared revenues in 2024-25 was based on the 2022 Census Bureau Population Estimate. It is projected to remain flat throughout the forecast period. The
actual share will change annually based on Census Bureau Population Estimates. In addition, Laws 2021, Chapter 412 (Tax Omnibus) increased the Urban Revenue Sharing distribution from 15% to 18%
starting in 2023-24.
* The forecast includes residential rental property tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.

Key Expenditure Forecast Assumptions:
* The contingency fund is set at 4.75% of the total General Fund operating expenditures from 2024-25 through 2026-27.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2024-25 employee costs are based on projections under the current Council-adopted pay plan ordinance and employee contracts. No assumptions have been made concerning future labor contract
negotiations. Estimated costs of the Class and Comp study are included in the forecast. Pension costs are based on required and projected contribution rates provided by the respective pension system
actuaries.
* Non-personnel related expenditures for 2024-25 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.

Other Forecast Notes:
* Ranges provided for revenues and expenditures. Upper & lower ends of ranges increase slightly in the outer years of the forecast reflecting additional economic uncertainty in the later years.
* Ranges include pessimistic and optimistic scenarios within assumptions provided by the primary sources of economic information mentioned in this report.
* When a baseline deficit or surplus is projected, the next year’s operating expenses are assumed to be decreased or increased by the baseline deficit/surplus amount prior to applying the assumed annual
projected growth rate, as the City is required by Charter to balance the budget each year.

- 15 -

ATTACHMENT F
Multi-Year General Fund Forecast – Severe Recession Scenario ($ Millions)
2023-24
Adopted
Budget
2024-25
Preliminary
Budget Estimate
For Planning Purposes Only
2025-26 2026-27
Forecast
Forecast
Resources
Local Taxes
$699
$681
$635 - $645
$615 - $635
State Shared Revenues
770
673
623 - 634
601 - 621
Primary Property Tax
207
201
193 - 196
186 - 192
User Fees and Other
155
183
176 - 179
169 - 174
Other (Carryover Balance, Transfers, Recoveries)
130
167
16
7
Unused Contingency from Prior Year
68
81
89
89
Total Resources
$2,029
$1,986
$1,732 - $1,759
$1,667 - $1,718
Expenditures
Operating Expenditures
$1,360
$1,408
$1,403 - $1,394
$1,193 - $1,180
Civilian Pension
112
113
115
122
Sworn Public Safety Pension
321
330
340
352
Contingency
81
89
89
81 - 80
Pay-As-You-Go Capital (Includes Technology Plan)
122
60
38
38
Minimum Vehicles
33
16
21
35
Total Expenditures
$2,029
$2,016
$2,006 - $1,997
$1,821 - $1,807
PROJECTED (DEFICIT)/SURPLUS:
$ -
$(30)
$(274) - $(238)
$(154) - $(89)
Key Resource Forecast Assumptions:
* The forecast assumes severe recession from 2024-25 to 2026-27, no fee increases or decreases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two brackets in TY 2022. Starting
from TY 2023, the individual income tax has been reduced to 2.5%.

Other Forecast Notes:
* Ranges provided for revenues and expenditures. Upper & lower ends of ranges increase slightly in the outer years of the forecast reflecting additional economic uncertainty in the later years.
* Ranges include pessimistic and optimistic scenarios within assumptions provided by the primary sources of economic information mentioned in this report.
* When a baseline deficit or surplus is projected, the next year’s operating expenses are assumed to be decreased or increased by the baseline deficit/surplus amount prior to applying the assumed annual
projected growth rate, as the City is required by Charter to balance the budget each year.

- 16 -

ATTACHMENT G
Pension Cost Increases

The below chart illustrates the rise in General Fund (GF) pension costs for PSPRS and
COPERS. The forecast for fiscal years 2024-25 through 2026-27 is based on information from
plan actuaries and on the valuations dated June 30, 2023. Projected amounts account for
changes made by the PSPRS Board, which updated the salary, inflation, and demographic
assumptions. The PSPRS Board also lowered the payroll growth assumption to 2.0%, resulting
in an increase to the employer contribution rate.

$266
$268
$300
$324
$338
$364
$413
$443
$455
$473
22.6%
22.0%
23.4%
24.2%
23.0%
22.4%
21.9%
23.0%
23.3%
24.2%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
27.0%
29.0%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
Actuals
FY17-18
Actuals
FY18-19
Actuals
FY19-20
Actuals
FY20-21
Actuals
FY21-22
Actuals
FY22-23
Estimate
FY23-24
Forecast
FY24-25
Forecast
FY25-26
Forecast
FY26-27
Millions
General Fund Pension Forecast
GF COPERS
GF Fire PSPRS
GF Police PSPRS
% of GF Expenditures
$109M or 30% Increase FY22-23 to FY26-27