The following letter was sent to the Council and Staff on 2-18-24 by the Chair of the Finance Commission Phil Koen. I have been watching the Town Manager and her supporters, Councilmembers Ristow and Moore, try to manipulate the citizens into increasing taxes when parroting the Town Manager who stated “the persistent presence of a deficit” were based on assumptions that were then found to be unrealistic by the Finance Commission. Please read the letter below and draw your own conclusion.
The following has been sent to the Town for the 2-20-24 Council meeting by Chair Koen
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% Compounded Annual Growth Rate (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 Annual Comprehensive Financial Report (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.
Phil Koen
Finance Commission Chair
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