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City of Palo Alto (CA) Long Range Financial Forecast (2013)

City of Palo Alto (CA) Long Range Financial Forecast (2013)

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Executive Summary

The City’s General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on a variety of assumptions (See pages 6-19 of Attachment A). It is a portrait of the City’s financial condition painted at one point in time.

The LRFF was presented to the Finance Committee on December 18, 2012. Staff was directed to return with a forecast based on specific, revised assumptions and comments provided by the Committee. In addition, some revenues and expenditures were changed based on additional data and information that came to light after December 2012.
Executive Summary

The City’s General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on a variety of assumptions (See pages 6-19 of Attachment A). It is a portrait of the City’s financial condition painted at one point in time.

The LRFF was presented to the Finance Committee on December 18, 2012. Staff was directed to return with a forecast based on specific, revised assumptions and comments provided by the Committee. In addition, some revenues and expenditures were changed based on additional data and information that came to light after December 2012.

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City of Palo Alto (ID # 3742

City Council Staff Report

Report Type: Action Items Meeting Date: 5/13/2013

City of Palo Alto Page 1

Summary Title: Long Range Financial Forecast for Fiscal Years 2013 to 2023
Title: Acceptance of Long Range Financial Forecast for Fiscal Years 2013 to
From: City Manager
Lead Department: Administrative Services

Staff recommends that the City Council review, comment on, and accept the attached forecast
of revenues and expenses.

I move to accept the Fiscal Year 2013 to 2023 Long Range Financial Forecast as staff’s latest
projection of the City’s revenue and expenditure picture given current and projected

Executive Summary
The City’s General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on
a variety of assumptions (See pages 6-19 of Attachment A). It is a portrait of the City’s financial
condition painted at one point in time.

The LRFF was presented to the Finance Committee on December 18, 2012. Staff was directed to
return with a forecast based on specific, revised assumptions and comments provided by the
Committee. In addition, some revenues and expenditures were changed based on additional
data and information that came to light after December 2012. The revised ten year forecast
was brought back to the Finance Committee on March 5, 2013, with discussion continuing on
March 19, 2013.

Again, after the March 19, 2013 Finance Committee meeting, new developments occurred

City of Palo Alto Page 2

which altered staff’s calculations of revenues and expenditures for 2014 and beyond. This
latest version of the Forecast shows a ten-year cumulative shortfall of $34.8 million.

Table 1 is a Summary of the Base Model of the Forecast.

On December 18, 2012, the Finance Committee directed staff to return with a revised Forecast
addressing the issues and information requests cited below. Staff updated the forecast given
these requests and incorporated other information that came to light since December.

Finance Committee Point 1: Historical Revenue Trends
Staff was asked to review 20 year and 10 year historical growth rates for economically sensitive
revenue sources and consider adjusting the forecasted growth rates to more closely match the
historical rates. Staff believes that the 20-year historical rates provide a more meaningful
reference point since that period incorporated two dramatic economic cycles (dot.com boom
and bust and the Great Recession).

Staff analyzed 20-year revenue growth rates for combined General Fund tax revenues,
combined Total General Fund revenues, and for each of the five major tax categories: property,
sales, documentary transfer, transient occupancy, and utility user taxes. Staff controlled the
calculations for extrinsic developments such as the State’s intermixing of Vehicle License Fees
with property taxes beginning 2004, and the 2 percent TOT rate increase in January 2007.

The table below shows historical growth rates over the 10-year and 20-year historical periods;
and the rates used in the Forecast versions presented December 2012, March 2013, and today.
The term “CAGR” refers to Compound Annual Growth Rate, or an average annual rate of
growth over the given period of time.

City of Palo Alto Page 3

*Documentary Transfer Tax was available beginning in 1993 so a 19 year CAGR is displayed in the 20 year category.

Comparing the 20-year CAGR for the five major tax revenue sources (4.1 percent) with the
CAGR of the current version of the forecast (4.13%) shows the forecast is fairly consistent with
historical growth rates. However, individual tax growth rates show some variations. Sales tax in
the last 20 years grew at an anemic 2.07 percent growth rate, slightly below staff’s projected
2.30% annual growth. On the other hand, the Utility Users Tax grew an average 3.79% over the
last 20 years; staff is projecting just 2.85% growth for the next ten.

Finance Committee Point 2: Overall Change in 10-Year Cumulative Budget Shortfall
The Finance Committee asked for a breakdown of what caused the change from last year’s
(May 2012) Forecasted $88 million shortfall over ten years to the current Forecast’s ten-year
shortfall, now at $35 million. It will help to look at the same ten-year period: FY 2013 to FY
2022. For that period the current Forecast shows a combined shortfall of $26.5 million. Why
the $61 million improvement?

The main reason is an improved revenue outlook. Tax revenues were projected last May at
$916 million for the ten years; now staff projects $968 million in combined tax revenues from
FY 2013-FY 2022 – an increase of $52 million over the ten years. The main sources of the
increase were Documentary Transfer Tax ($59 million more), Property Taxes ($28 million more);
and TOT ($24 million more); offset somewhat by more conservative outlooks for Sales Tax ($12
million less) and UUT ($48 million less).

20-yr CAGR
10-yr CAGR
Dec 2012 LRFF
CAGR (2013-
Feb 2013
May 2013

Property Tax
4.67% 4.88% 4.29% 4.97% 4.97%
Sales Tax
2.07% 0.98% 3.96% 3.38% 2.30%
Transient Occupancy
4.88% 1.99% 4.50% 4.58% 4.79%
Doc. Transfer Tax*
7.30%* 5.31% 4.58% 5.56% 7.42%
Utility User Tax
3.79% 5.31% 2.80% 2.85% 2.85%
Total of All 5 Major
Taxes (adjusted)
4.10% 3.12% 4.04% 4.23% 4.13%
Total Revenues (all) 4.56% 2.55% 3.14% 3.32% 3.27%

City of Palo Alto Page 4

Non-tax revenues also look better – by $38 million – in this Forecast than in last year’s. This is
partly offset by an $18 million hit to Operating Transfers-In, due to a recent change in the
Equity Transfer methodology (discussed below).

On the expense side, pension rates are higher than they looked last year. After a March 18,
2013 CalPERS Board meeting, two assumption changes will be implemented: changing the
smoothing period from 15 to 5 years, and using a closed-end amortization period. These
changes are estimated to add 8.5 percent to Miscellaneous group pension rates over five years,
and 14 percent over five years for Safety. These rate increases, along with other likely changes
in the next 2-3 years, are incorporated into the Forecast.

Note that from the March 2013 version of the Forecast to the current version, PERS assumption
changes described above as well as others projected in the near future have caused a
significant increase in projected pension rates. For Miscellaneous, the increase averages 3.5
percent per year for the ten years of the Forecast, and for Safety, the increase averages 8.7
percent per year. In dollar terms, the combined ten-year projected pension expense in this
version of the Forecast is about $23 million more than that projected in the March version.

These pension increases are a significant factor in the shortfalls shown in the Forecast
beginning in FY 2016. The City has two years in which to restructure and prepare for these

Substantive Changes To Revenue and Expense Since December 2012 Forecast
Since the December 2012 presentation of the LRFF to the Finance Committee, new data and
information have prompted staff to make adjustments to revenue and expenses both in FY
2013 and in future years. These are outlined below:

 Recent activity for tax revenues has resulted in an upward revision to FY 2013 revenues
of $1.7 million
 Because of a decrease in PG&E’s rate of return by the California Public Utilities
Commission which affects a key component of the City’s equity transfer formula, the
transfer from the City’s Electric and Gas Enterprise Funds is decreasing by $0.7 million in
FY 2014 (More information on equity transfer is provided on page 14 of Attachment A)
 Salary and benefit projections in FY 2014 were changed based on the City’s Service
Employees International Union (SEIU) contract.
 Tentative decisions that were made at the March 18, 2013 CalPERS Board meeting
impact projected pension rates from FY 2016 onwards. These changes are discussed in

City of Palo Alto Page 5

detail in the LRFF report (pages 15-16 of Attachment A).

Lastly, the Cost of Services Study is nearing completion, with results expected to Council this
summer. Following that, staff is planning a review of City non-fee services as well as of
administrative operations to further inform any upcoming structural changes.

As with all forecasts, revenues and expenses are moving targets that change with circumstance
and time. Nevertheless, the forecast serves as a critical tool in developing the FY 2014 budget
and in identifying the City’s most pressing, future challenges.
 Attachment A: Long Range Financial Forecast Fiscal Years 2013-2023, Council Version
dated May 13, 2013 (PDF)
 Attachment B: CMR ID# 3618 - Fiscal Years 2013 to 2023 Long Range Financial Forecast
(Continued) (PDF)
 Attachment C: Excerpt Minutes from Finance Committee Meeting 03-05-13 (PDF)
 Attachment D: Excerpt minutes from Finance Committee meeting 03-19-13 (PDF)

Fiscal Years 2013 to 2023
Council Version—May 13, 2013



- 2013-2023 BASE MODEL 20



This forecast summarizes the General Fund outlook for Fiscal Years (FY) 2013 through 2023. Rather than a 
predicon or commitment, a forecast is a financial snapshot based on a number of assumpons.  This Long 
Range Financial Forecast (LRFF) is a tool to allow staff and Council members to see the longer‐term results 
of choices made to date, and idenfy issues that must be addressed in the near term in order to improve 
the City’s long‐term outlook. 

The naonal and state economies connue to show improvement, and for the City, FY 2011 and 2012 end‐
ed with net posive results.  FY 2011 ended with a $3.2 million General Fund surplus, and FY 2012 financial 
results included a $4.5 million surplus.  
The LRFF Base Model shows a connuing posive trend. FY 2013 is projected to end with a $3.1 million sur‐
plus. In the LRFF Base Model, the combined shorall for FY 2014 to 2023 (ten years) is $34.8 million. The 
Base Model can be found on page 20 of this report. Table 1, below, summarizes the Base Model.  
The Base Model includes increased pension rates due to impending changes in CalPERS methodologies as 
well as possible addional rate increases in the future. One impending change is a switch from a fieen‐
year smoothing period for recouping PERS porolio gains and losses down to a five‐year period.  A second is 
due to increased life expectancy among rerees, and the third is the likely lowering of the assumed dis‐
count rate on the PERS porolio from 7.5 percent to 7.25 percent.  In addion, staff has added an addional 
1 percent per year beginning in FY 2017 for unforeseen pension cost increases. 
Staff included an alternate scenario that assumes the discount rate declines by 0.5 percent rather than 0.25 
percent—adding an addional $14.5 million in costs over the eight‐year period from FY 2016‐2023.  
Staff will be hiring and working with an actuary in the coming months to help validate the cost esmates 
and assumpons discussed in this report. 

Note: The forecast does not include the savings from the new third pension er implemented as of January 
2013 as part of the California Public Employees’ Pension reform Act (see page 26). At the moment, the dollar 
impact of this legislaon is unknown, and staff will provide Council with updates as new informaon emerges. 

The Base Model also includes savings from the recent agreements with the Palo Alto Police Officers’ Associa‐
on (PAPOA), the Service Employees Internaonal Union (SEIU) and the Management/Professional group.  
The savings from these three agreements add to $2.7 million in FY 2013. 
Addional assumpons incorporated into the Base Model are detailed beginning on page 6. 
The following pages of this report provide a summary of the naonal, state, and local economic outlook; a 
detailed look at the ten‐year Forecast; the alternate scenario with higher pension rates; and a discussion of 
the challenges and conclusions derived from the Forecast. 



Economic growth – on naonal, state, and local levels ‐ has begun to look more robust in the past year.  The 
following indicators contribute to the impression that the economy is on a more stable foong: 
 The naonal unemployment rate was 7.6 percent in March, down from 7.9 percent in January 2013 and 
8.2 percent in March 2012.
 Beacon Economics is expecng the U.S. economy to grow by 3% through 2013, and the unemployment 
rate to drop to 7% by the end of the year.

According to Beacon Economics: 
 “Opmism for the rest of 2013 is being partly driven by a resurgent housing market. Home prices 
have been climbing at a significant pace and will connue to rise through this year and 2014, at a 
minimum. The reason for the jump in prices is simple—ght inventories and incredible affordabil‐
 “Overall, the US economy is on the mend. But there are many longer‐term issues the naon must 
address including working through changes to the naonal healthcare system and tackling funda‐
mental issues related to underfunded Federal entlements and state and local pesnions.”

 The state’s unemployment rate fell to 9.6 percent in February—its lowest level in over four years.  
 The median price of exisng single‐family homes sold in March was $313,000, up 8.3 percent from Febru‐
ary and 24.7 percent from March 2012. 
 The Bay Area median home price was $436,000 in March, up 7.7 percent from February and 21.8 percent 
from March 2012.

From The Weekly Update, State Treasurer’s Office, April 15, 2013

“One bright spot in the February jobs report from the Employment Development Department was 
the decline in long‐term unemployment over the past year. Californians out of work for a year or 
longer dropped both in number and as a share of the unemployed more than any other category of 
jobless duraon.  
 In February, 617,000 Californians were jobless for 52 weeks or longer, compared to 728,000 in 
February 2012. That’s a decline of 111,000, or 15.2 percent.  
 Over the same period, as a share of total unemployed, workers jobless for 52 weeks or longer 
fell from 34.7 percent to 32.8 percent.

 Chart Source:  State Treasurer’s Office staff, The Weekly Update, April 15, 2013 
 Caltrain Annual Passenger Counts show a 15.7% increase in ridership to Palo Alto between Feb‐
ruary 2011 and February 2012.
 Palo Alto is seeing a noceable increase in commercial acvity, as evidenced by the opening of 
several new retail stores, and a renewed dearth of parking capacity, with Council and staff now 
weighing a range of soluons.
 The last two years have been a period of steady growth in revenues for local hotels, and five 
hotels are in the pipeline, including: 
 Hilton Garden Inn: 175 Rooms.  Expected opening: 2014 
 Hilton Homewood Suites: 138 Rooms, Expected opening, 2014 
 Casa Olga:  86 rooms.  Approved July 23, 2012.  Renovaons are currently under con‐
strucon.  Expected opening, summer 2013. 
 Mings (1700 Embarcadero):  147 Rooms.  Council approval requires that building permits 
must be obtained and construcon commence must start by April 2014. 
 Wesn annex (711 El Camino Real) (Clement):  23 room expansion.  Preliminary architec‐
tural review occurred in May 2012.  No formal applicaon has been received. 

As a result of the factors discussed above, the Forecast includes relavely healthy growth in sales, property, 
transient occupancy and documentary tax revenues. The following chapter discusses each revenue source in 
           State & Local Unemployment Rates, January 2012‐2013
            Source: EDD Labor Market Informaon Division, April 9, 2013 
  Jan. 2012 Jan. 2013
Palo Alto Civilian Unemploy‐
ment Rate
4.8% 4.2%
Santa Clara County Unemploy‐
ment Rate
9.0 8.0%
CA Unemployment Rate
11.0% 9.8%

The following describes factors assumed in the Base Model.  
The FY 2013 revenues and expenditures include a number of one‐me expenditures and savings. The Base 
Model excludes these one‐me items from the succeeding years, beginning in FY 2014: 
 $1.3 million in salary savings due to frozen posions (increasing FY 2014 expenditures) 
 $0.2 million in one‐me, non‐salary costs, including $80,000 for a Police Service Study; $50,500 for Com‐
prehensive Plan funding; and $70,000 for an organizaonal study of the Planning and Community Envi‐
ronment department (decreasing FY 2014 expenditures) 
 The payback of a $4.9 million loan to the Technology Fund.  The last payment of $1.2 million on this loan 
was completed in FY 2013 (decreasing FY 2014 expenditures) 
In addion to these items, the FY 2014 projected budget assumes a one‐me net decrease in revenues of 
$1.4 million for the Golf Course Reconfiguraon project.  The enre ten‐year period includes $1 million in ad‐
dional annual operaonal expenses aributable to the Library renovaons. 
Recent agreements with the Palo Alto Police Officers’ Associaon (PAPOA), the Police Management Associa‐
on (PMA), Service Employees Internaonal Union (SEIU), and the Management/Professional group – re‐
sulng in a combined savings of $1.9 million in FY 2013 – are included in the Base Model. 
Total revenues are projected to grow at annual rates ranging from 1.7 to 4.7 percent over the next ten years. 
Although this is a sign of improved city resources, looming pension and reree medical obligaons and infra‐
structure needs exceed available resources. The most recent valuaon report from CalPERS increased the FY 
2014 City pension rates, resulng in $1.9 million in addional General Fund expense for FY 2014 compared to 
FY 2013.  Furthermore, the General Fund’s reree medical obligaon is $9.1 million in the coming fiscal year 
and is expected to grow 3.25 percent annually.  
Staff performed an analysis on revenue growth going back to 1992, reviewing overall General Fund revenues 
as well as growth rates in the five major tax categories (Property Tax, Sales Tax, Documentary Transfer Tax,  
Transient  Occupancy  Tax,  and  Ulity  User  Tax).    To  ensure  that  the  compound  annual  growth  rates  (CAGR) 
for  each analysis  reflected  real  changes  rather  than  re‐categorizaons,  adjustments  to  prior  year  actual  col‐
lecons were made where appropriate.   
A  historical  twenty‐year  CAGR  analysis  for  all  General  Fund  revenues  shows  average  annual  growth  of  4.56 
percent.  Within that figure, there are significant variances between the CAGRs for each of the tax categories.  
For instance, the 20 year CAGR for Property Tax (the largest tax category) is 4.67 percent, while the CAGR for 
Sales Tax (the second largest tax category) is 2.07 percent.  

In the Base Model, the CAGR for projected overall General Fund revenues is 3.27 percent, well below the ad‐
justed 20‐year historical CAGR of 4.56 percent.  One of the primary reasons for the decrease is a $0.7million 
reducon in the equity transfer.  
As recommended by the Infrastructure Blue Ribbon Commission (IBRC) report (December, 2011), and ap‐
proved by Council beginning in FY 2013, the Base Model incorporates an addional $2.2 million in annual 
capital operang and maintenance funding (“keep‐up”). The IBRC report recommended that an addional 
$4.2 million be contributed annually towards the City’s infrastructure “catch‐up” needs and that funding be 
found for other project and construcon needs totaling approximately $210 million. These needs, including a 
new Public Safety Building and rebuilding the Municipal Service Center, and the “catch‐up” funding are not
included in the Base Model. 
Tax revenues in Palo Alto have improved markedly since the beginning of the Great Recession and are ex‐
pected to continue their upward trend in the near future.  Since the December forecast presented to the Fi‐
nance Committee, several tax revenue categories have been adjusted for FY 2013 and in out years.  These 
changes are based on data available since the December forecast and on the alignment with historical 
growth rate trends. 
Sales Tax
This economically sensive revenue source is bouncing back from its recession low of $18.0 million in FY 
2010.  Receipts rose to $20.7 million in FY 2011 and to $22.1 million in FY 2012.   Staff is currently projecng 
sales tax revenues of $23.4 million in FY 2013, nearly $0.8 million above the adopted budget.  Receipts in the 
first quarter of FY 2013, which are 6.7 percent above the prior year’s first quarter, support this change.  Ro‐
bust economic segments include electronic equipment, apparel stores, restaurants, and service stations.  
Weak performers include furniture/appliance stores and business services.  Staff’s forecast is in line with that 
of the City’s sales tax consultant, Muni‐Services, for the next two years.  As a consequence of recent data, 
estimated revenues for FY 2014 were raised $0.5 million above projected FY 2013 revenues. 
The sales tax growth rate used for the next ten years at 2.3 percent is slightly more optimistic than the 20 
year historical growth rate of 2.07 percent.  While there are many challenges to sales tax growth, such as 
growing Internet sales, the proliferation of big box stores outside City limits, and the rise of consumer ser‐
vices (not subject to tax), the City’s efforts in economic development (e.g. Tesla auto sales) and maintaining 
high profile retailers could boost the future growth rate.  Sales tax growth must be monitored carefully since 
this revenue source represents 14 percent of General Fund resources. 

Property Tax  
Unlike many California jurisdictions, Palo Alto’s property taxes did not take a material “hit” as a consequence 
of the Great Recession.  Revenues have remained relatively stable as shown below: 
For the past several years, staff has primarily relied on County estimates to develop its property tax budget.  
The County has regular meetings to inform cities and school districts on assessment roll growth and events 
that can impact revenues (e.g. appeals from commercial and residential properties).   Based on recent County 
data, it is likely that receipts will exceed the FY 2013 adopted budget of $27.3 million by some $0.6 million.   
As stated in the previous chapter, housing values in Silicon Valley are rising at a faster rate than the rest of 
California and the country.  According to a November “Intero Real Estate Services” update, “While the rest of 
the country has been recovering…the Bay Area housing market has exploded over the last 18 to 24 months. 
Most lisngs are selling with mulple offers and considerably over list price.”  This prognosis for the Palo Alto 
real estate market will likely translate into higher documentary transfer and property taxes. For FY 2014, 
property tax revenue is projected at $29.1 million, a $1.2 million or 4.3 percent increase above the current 
fiscal year esmate of $27.9 million.  
Fiscal Year Property Tax Revenues
2009 $25.4 million
2010 $26.0 million
2011 $25.7 million
2012 $26.5 million
2007 2008 2009 2010 2011 2012 2013
Sales Tax (Thousands, FY 2013 Projected)
Fiscal Year

Transient Occupancy Tax (TOT)
Since declining to $6.9 million in FY 2010 due to the Great Recession, TOT revenues have steadily risen.   In FY 
2011 receipts totaled $8.1 million and in FY 2012 they moved to $9.7 million.  Staff now estimates they will 
increase to $10.4 million in FY 2013 and to $11.5 million in FY 2014.  Average occupancy and daily rates, re‐
spectively, have surged from 66 percent and $139 per day in FY 2010 to 85 percent and $174 in the first quar‐
ter of FY 2013.  With increased business activity and visitors to Palo Alto, staff will adjust the FY 2013 budget 
upward by approximately $0.8 million.  The out years of the Forecast include a CAGR of 4.79 percent.    
Note that the forecast includes future revenues from the Casa Olga hotel, expected to open this winter.  Rev‐
enues from other hotels in the planning stages are not included.  
Documentary Transfer Tax (DTT)
This revenue source is based on the number and value of commercial and residential property sales. In the 
last decade, revenues have averaged $4.8 million per year.   During the recession period, DTT revenues fell to 
$3.1 million in FY 2009 and to $3.7 million in FY 2010.  Results for FY 2011 and 2012 were $5.2 million and 
$4.8 million, respectively.  With revenue stabilizing in the last two fiscal years, the rising value of commercial 
and residential transactions in the first quarter of FY 2013, and several extraordinary remittances, staff is pro‐
jecting receipts in FY 2013 of $6.8 million, or $1.7 million higher than Adopted Budget. Due to the unusual 
stream of transactions this fiscal year, a more realistic $5.7 million for FY 2014 is projected.   
Unlity Users Tax (UUT)
FY 2013 UUT revenues are expected to be the same as actual FY 2012 revenues, or around $10.8 million.  The 
ulity‐generated UUT projecons are based on the most recent rate and projected revenue informaon from 
the Ulies department.  These numbers could change as the department discusses its proposed rate plan 
with the Ulies Advisory Commission and the Council.  Telephone‐generated revenues connue their down‐
ward decline, due to decreased landline usage.  
Other Taxes & Fines
The large part of this category is comprised of Parking Violaon revenue, which staff is esmang to be $1.6 
million in FY 2014. Other revenue items such as traffic violaons, administrave citaons, and library fines  
and fees have connued to grow over the past five years. Another component of this revenue category is the 
Vehicle‐in‐Lieu Fee (VLF).  In FY 2012, the state legislature suspended its allocaons to local agencies in order 
balance the State budget.  Unl the legislature takes acon to restore it, staff is not projecng any VLF re‐
ceipts in this forecast. Staff expects that FY 2014 revenue will end at the same level as FY 2013, which is $2.1 
Charges for Services
Total revenues in this category are projected to be $0.5 million higher in FY 2014 than in Adopted FY 2013.  
This is due to two factors: first the Golf Course Reconfiguraon project will begin later than originally anci‐
pated, resulng in less of a hit to Golf Course fee revenue in FY 2014 but more of a hit on FY 2015.  Second, 
plan check revenues are expected to increase by $2.2 million in FY 2014, more than compensang for the 
Golf Course‐related loss.  Aer the Golf Course project is completed and that revenue normalizes, the Fore‐
cast assumes an annual increase in the Charges for Services category of between 2.6 and 3.7 percent be‐
tween FY 2017 and FY 2023.   


Stanford Fire and Dispatch Services
The City currently is under agreement with Stanford University to provide Fire Response and Dispatch ser‐
vices. Stanford is charged 30.3 percent of the Fire Department’s net cost and 16 percent of the Police Depart‐
ment’s Communicaon and Dispatch Division. With the excepon of pension, healthcare, and reree medical 
obligaon cost increases, the FY 2014 base does not assume any significant changes for the Fire Department 
and Police Communicaon and Dispatch Services budgets. Stanford fire and dispatch revenue is esmated to 
increase by $0.2 million in FY 2014 due to pension, healthcare, and reree medical cost increases. The Base 
Model assumes that revenue from this agreement will increase 3.5 percent annually.  
Currently, the City is in negoaons with Stanford for the Fire Services component of the contract. The FY 
2013 budget includes a total of $8.2 million of revenue from Stanford for Fire and Dispatch Services. In the 
best case scenario, the final determinaon of a new reimbursement agreement could result in $1.4 million in 
addional revenue; in the worst case scenario the agreement could be terminated enrely. The agreement 
requires the University to give 12 months’ noce of terminaon. Assuming that negoaons are concluded in 
FY 2014, a modest increase of 3.5% has been built into the outer years to account for staffing and other de‐
partment cost increases. 

Permits and Licenses
Revenue from permits and licenses rose significantly in FY 2011 and 2012 due primarily to increased acvity 
at the Development Center.  Budgeted revenue in FY 2013 decreased because the City implemented a 
citywide Technology Enhancement Fee and these revenues, which had previously been charged only to some 
development permits, were moved from the General Fund to the Technology Fund. This revenue category is 
projected to decrease slightly due to two factors: (a) internal street cut fees, which are based on Ulies ac‐
vies, are reduced by $0.11 million to reflect planned project acvies; and (b) permit acvity is assumed to 
slow by 2 percent per year through FY 2018 based on historic acvity, followed by 3.5 percent annual growth 
in subsequent years.  
Return on Investment
General Fund interest earnings have declined 71 percent from FY 2009 to projected FY 2013 levels as higher‐
yielding maturing investments are re‐invested in a historically low interest rate environment. The Federal 
Open Market Commiee remains commied to keeping interest rates at exceponally low levels through 
mid‐2015 to smulate the economy and boost job growth.  This acon will keep downward pressure on the 
City’s porolio yield in FY 2014.    Interest earnings are projected to gradually increase by 1.3 percent  in FY 
2015 growing to 3.0 percent  in FY 2023. It is expected that FY 2013 revenue will be below the adopted budg‐
et by $0.2 million, totaling $0.8 million. In FY 2014, return on investment revenue is esmated to remain level 
at $0.8 million.  
Rental Income
The largest source of rental income is the City’s Enterprise Funds and the Cubberley Community Center.  The 
rent from the Enterprise Funds declined $2.5 million with the closure of landfill, the Middlefield Well site, and 
the former Los Altos Treatment Plant (LATP) site in FY 2013. FY 2014 rental income also reflects the paral 
closure of restaurant and pro‐shop facilies during the Golf Course Re‐Configuraon Project.   For this fore‐
cast period, a 2.5 percent growth rate was assumed for all rental properes, except for the Refuse Fund rent, 
which remains fixed unl FY 2021.The City is conducng an assessment of all General Fund properes which 
might impact the rental income from Enterprise Funds during FY 2014 and beyond.  
From Other Agencies
Revenue from Other Agencies includes income from Community Services Outreach theatre programs, Palo 
Alto Unified School District (PAUSD) reimbursements, State of California grants for Police, Libraries and Com‐
munity Services, and donaons from Friends groups. Many of these are difficult to predict. For example, state 
grants are reduced when the state experiences budget difficules. Revenues over the past 4 years have 
ranged from $0.08 million to $0.3 million. The Forecast assumes a zero growth rate from FY 2014 onwards.  
Charges to Other Funds
Eighty‐six percent of this category is General Fund administrave cost plan allocaon charges to the Enter‐
prise Funds.  For FY 2013, the projected amount is $10.9 million. In FY 2014 onward, forecasted increases are 
around 2 percent.  



Other Revenues
Major revenue sources in this category are Animal Services charges to Los Altos and Los Altos Hills, dona‐
ons from non‐profits for City libraries, and revenues which do not belong to other categories.  In FY 2013, 
Other Revenues are projected at $1.2 million – the same level as in the Adopted Budget.  Projected FY 2014 
revenues of $2.0 million include a $0.7 million donaon from various non‐profits to libraries; a 2 percent an‐
nual increase is assumed throughout the Forecast period.   
Operanng Transfers In
Operang Transfers include the equity transfer from the Electric and Gas Funds, as well as transfers from the 
University Ave Parking Permit Fund and the California Ave Parking Permit Fund. In accordance with a meth‐
odology approved by Council in June 2009, the equity transfer is calculated by applying a rate of return to 
the capital asset base of the Electric and Gas Funds.  This rate of return is based on PG&E's rate of return on 
equity as approved by the California Public Ulies Commission (CPUC).  On December 26, 2012, the CPUC 
issued its decision to lower PG&E's rate of return on equity.  As a result, the equity transfer from the Electric 
and Gas Funds is projected to decrease from $17.7 million in FY 2013 to $17.0 million in FY 2014.  The City 
Aorney's Office will be providing Council with addional informaon regarding the equity transfer in light 
of the provisions of Proposion 218, which prohibits cies from raising fees without voter approval, and 
Proposion 26, which prohibits cies from raising taxes without voter approval. 

 A 2 percent annual salary increase for SEIU and Management/Professional is assumed beginning in FY 
2014. For all other labor groups, 2 percent annual increases are assumed beginning FY 2015. These as‐
sumpons are for forecasng purposes only and do not represent a commitment or recommendaon 
from staff. 
 Unfreezing posions frozen in FY 2013 added $1.3 million in salary costs to the FY 2014 base.  
 In addion, the net FTE change from FY 2013 Adopted Budget to FY 2014 Proposed Budget is a 1.26 FTE 

The chart below shows how staffing has decreased in the GF since FY 2004, but Salary & Benefit cost has not. 
The chart below indicates the degree to which General Fund FTE reductions are tempered by real‐
locations to other funds.  While overall GF staff has decreased by 180.1 over the last ten years, 72 
of those FTE have been transferred to other funds, leaving a net decrease of 108.2 FTE in the GF. 



 The Forecast uses CalPERS’ esmated pension rates for FYs 2014, 2015, and 2016. The most recent rates 
were received in November 2012.  However, FY 2014 rates will increase slightly since the City opted not 
to phase‐in an assumpon change, in order to reduce its costs over the long term.
 The CalPERS Board met on March 18, 2013 and tentavely approved a set of assumpon changes pro‐
posed by their Chief Actuary.  Specifically, the changes include transioning from a 15‐year smoothing 
method to a 5‐year smoothing method, and moving from an open to a closed amorzaon period. This 
would add approximately 1.7% per year from FY 2016‐2020 for the Miscellaneous group, and 2.8% per 
year for the Safety group. 
 In spring of 2012, Council directed that the forecast assume 3 percent annual increases in pension rates 
beyond the 3 years projected in the annual CalPERS Actuarial report.  In the December 2012 and March 
2013 versions of the Forecast, staff had included those 3 percent increases.  However, in this version of 
the Forecast, staff has incorporated into the forecast a number of specific potenal rate increases and 
substuted 1 percent addional annual increases rather than 3 percent. Staff believes that the intenon 
of the 3 percent increases was to reserve against future changes in CalPERS assumpons and rate‐seng. 
Given the certainty of smoothing and amorzaon changes, and the likelihood of the mortality increase 
and a discount rate change, staff has instead incorporated these specific changes to CalPERS rates.  These 
changes offset most of the need for the 3 percent annual placeholder.   (See page 16 for details.) 
 Staff has modified the alternate scenario to reflect a discount rate change of 0.5% rather than the 0.25% 
change reflected in the Base Model.  The CalPERS Board is expected to consider the discount rate change 
in February 2014, so this change would not impact rates unl FY 2016. 
 Starng in January 2013, pension reform requires new members of CalPERS be enrolled into a new pen‐
sion plan that offers lower pension benefits.  CalPERS is calculang the actual cost for Palo Alto, so an es‐
mate is not available at this me.  The Base Model does not include the potenal savings from a 3rd 
pension er for new employees. 
As a point of reference, the June 30, 2011 CalPERS Ac‐
tuarial Valuaon indicated that the City’s Miscellane‐
ous group’s Pension Funded rao (using Market Value 
of Assets) was 69.5% ‐ up from 62.2% in the prior year.  
The City’s Safety group’s Funded rao was 71.8% 
(again using Market Value of Assets).  The prior year’s 
rao had been 64.8%. 
Pension seems to be one of the largest variable among the 
expense categories , with evolving rate changes over which 
the City has lile control. Staff is staying in close contact 
with PERS actuarial staff to stay up to date on all pending 

The chart below details the components of the CalPERS rate projecons used in the Base Model Forecast. 
Health Care 
 Reree Annual Required Contribuons (ARC) are based on the January 1, 2011 actuarial study for FY 
2012, 2013, and 2014, as amended by the Council Direcon of April 16, 2012. In seng the ARC, the actu‐
ary assumes it will increase each year by 3.25 percent, the presumed annual increase in payroll.   
 The forecast assumes a 10 percent annual increase in medical costs and a 4 percent annual increase in 
dental and vision costs. This assumpon results in a $0.76 million increase between projected FY 2013 
and  2014 costs. Over the next ten fiscal years (2014 through 2023), these healthcare cost will increase 
from $9.5 million to $20.8 million, or 218 percent. 
 The Affordable Care Act (“Obamacare”) has provisions which must be implemented in calendar year 2013 
in preparaon for effecve dates in 2014.  Staff is in the process of examining these requirements and 
planning for their implementaon.  The costs of this implementaon are not included in the forecast. 
Contract Services
FY 2013 Projected Contract Services includes $80 thousand of one‐me contracts, such as the Police Organi‐
zaon study, and a placeholder of $0.5 million for assumed savings from the re‐organizaon of Palo Alto Ani‐
mal Services.  The FY 2014 base removes these one‐me FY 2013 expenses and projected savings.  The Ani‐
mal Services savings are allocated across various categories in the FY 2014 Budget.  
Total expense for this category totals $10.7 million, a $0.4 million increase over the FY 2013 adopted budget. 
In FY 2015 and beyond, contract expenses are projected to remain relavely stable, with a 3.0 percent annual 
growth rate throughout the forecast period.  

Supplies & Materials 
The base model assumes an increase in this category from $3.2 million in FY 2013 and $3.9 million in FY 2014, 
mainly due to the purchase of books and other materials for the Mitchell Park Library.  In FY 2015, Communi‐
ty Services will see a small increase of approximately $31,000 for Supplies & Materials at the Palo Alto Golf 
Course. This is based on the Naonal Golf Foundaon esmates to maintain the newly redesigned golf 
course. Costs will remain relavely constant looking forward to outer years, with a consistent yearly increase 
of 3.0 percent. 
General Expense
The majority of General Expense includes categories like travel and meengs, telephone and non‐city uli‐
es, conngency accounts, and debt service payments for the newly signed Golf Course Lease Agreement.  
Projected FY 2013 expenses of $4.6 million reflect annual debt service which was originally budgeted as a 
transfer to Debt Service Fund. In FY 2014, General Expense remains mostly flat, and from FY 2014 onwards, 
annual increases of 2.5 to 3.0 percent are assumed.  

Cubberley Lease
This category represents lease payments to PAUSD for the Cubberley facility. The Forecast assumes the lease 
contract with PAUSD will connue beyond 2014.  Payments from FY 2014 onward are based on projected 3 
percent annual CPI increases. The Cubberley lease expense in FY 2014 is esmated at $7.3 million. 
Rents and Leases
Expansion of the Development Center increased this expense category by $0.2 million in FY 2013. Rent and 
Lease expense for FY 2014 is esmated to remain at $1.2 million. From FY 2015 onwards, this expense is ex‐
pected to increase by 3 percent per year.  
Facilines and Equipment
An addional $0.2 million was added to Facilies and Equipment during FY 2013 due to one‐me increases 
for the Development Center upgrade. Facilies and Equipment expense for FY 2014 is $0.5 million, increasing 
by 5 percent in 2015, then 4 percent in 2016, and 3 percent per year for the remaining years of the Forecast. 

Allocated Charges  
Allocated charges represent expense allocaons by the City’s enterprise and internal services funds for ser‐
vices and products they provide to General Fund departments such as ulies usage, liability insurance, tech‐
nology costs, and vehicle replacement costs.  The last year of the General Fund loan repayment to the Tech‐
nology Fund was in FY 2013; the FY 2014 base model is reduced by this amount to total $15.1 million. Beyond 
FY 2014, the Base Model assumes a modest annual growth rate of 2 percent in Allocated Charges. 
Operanng Transfers Out
Operang Transfers Out includes transfers for Debt Service, Tech Fund, and the Airport Fund.  Transfers out 
is reduced by $0.5 million due to the refinancing of the Golf Course debt. The Golf Course debt will be paid 
down by FY 2018. Funding for the Airport Fund from the General Fund connues through FY 2014 and the FY 
2013 projected base model assumes an addional $0.2 million will be transferred to the Airport Fund. The 
Base Model assumes that the Airport Fund will be self‐sustaining in FY 2015.  
Transfer to Infrastructure
In FY 2013, adopted and projected transfers to the capital project fund remain at $13.2 million. In FY 2014, 
they are projected to remain at $13.2 million.  Beginning in FY 2013, an addional $2.2 million per year is 
added to fund the annual maintenance of exisng infrastructure or “keep‐up” needs as defined by the (IBRC) 
Infrastructure Blue Ribbon Commission Report. An addional $4.2 million per year will be required to fund 
deferred maintenance or “catch‐up” needs as defined by the IBRC Report. This addional contribuon is not 
included in the Base Model.   


 The allocated cost of various IT Department’s new iniaves such as migraon to cloud based technolo‐
gies, purchase of new equipment and related maintenance/support costs   
 The IBRC’s recommended $4.2 million per year increase in infrastructure expenditure  
 Any new revenue stream earmarked for infrastructure.  Council may consider such a revenue source in 
the future. 
 Possible TOT revenues from four of the five expected to open in the next two years  (See details on page 
4. Casa Olga revenues are included in the Forecast; the others are not.) 
 Savings from the PEPRA‐mandated 3rd pension er (2% at 62) for new employees 
 Costs of implemenng the Affordable Care Act, beyond the costs of extending coverage to dependents up 
to age 26 




FY 2013‐2






FY 2012 ended with a Budget Stabilizaon Reserve (BSR) totaling $28.1 million. Although the Base Model pro‐
jects surpluses in FYs 2013, 2014, and 2015, the next seven years of the Forecast include shoralls, with the 
reserve balance dropping below the 18.5 percent minimum reserve level—to as low as 5.8 percent of pro‐
jected Budget in FY 2023.  
The graph below illustrates the projected BSR levels as compared to the minimum reserve levels. 

Base Model: Projected BSR Compared Against
18.5% BSR Level
Budget Stabilization Reserve Actuals & Projection Mini mum Reserve ‐ 18.5%


In this Alternate Scenario, it is assumed that in addion to the smoothing, mortality, and the 1% assumed 
addional increases beginning in FY 2017, PERS will reduce the discount rate by 0.5 percent rather than 0.2 
percent, resulng in a 7 percent discount rate. 
The addional 0.25% cut would cost the General Fund an extra $14.4 million over the period of the Forecast.  

Alternate Scenario 1



The California Public Employees’ Pension Reform Act of 2013 (PEPRA) was enacted fall 2012 and has generat‐
ed increased aenon and quesons from CalPERS rerement system members and employers. The new law 
includes a suite of changes to current rerement formulas, new members, employer/member contribuons, 
and working aer rerement. PEPRA also establishes a cap on the amount of compensaon that can be used 
to calculate the rerement benefit for all new CalPERS members. At this me, the dollar impact to the City of 
this  new  legislaon  is  unknown.  Staff  will  provide  Council  with  updates  as  more  informaon  and  data 

The LRFF shows beer “boom line” results than in last year’s presentaon.  This is due to employee benefit 
concessions, budget reducons, and higher revenues in evidence since last year’s (May 2012) forecast.  Since 
FY  2010,  the  City  has  realized  $16.7  million  in  savings  from  structural  changes,  the  fruit  of  Council’s  and 
staff’s “thinking different.” With benefit costs connuing to increase at a faster pace than revenues, the City 
must connue to find addional structural savings.  
In addion to employee benefit obligaons, the City’s infrastructure needs – capital operaon and mainte‐
nance, project “catch‐up”, and other projects idenfied in the IBRC report – should be addressed and 
planned for via this forecast.   
The Cost of Service study is nearly complete and will allow the Council to thoroughly review the price of do‐
ing business and make decisions on what services can be provided and/or how they can be provided. The re‐
view will also idenfy services and back‐room operaons provided with no fees. 
Although successful efforts have been made, the City must connue to explore its benefit structure, alterna‐
ve forms  of service delivery, and more efficient operaons to realize a sustainable, long‐term, financial fu‐



Since 2009, Council and staff completed the negoaon of agreements with labor groups to eliminate more 
than $8.5 million in salary and benefit expense. The City is working with the Police Management Associaon 
(PMA) to negoate cost savings.  
The following is a list of current labor contracts and agreements: 
SEIU (current contract) 
Esmated Savings: $0.55 million per year, or 0.76 percent of total compensaon 
 Created a second er to our rerement structure (2 percent at 60) for new employees hired or aer July 
17, 2010. 
 Shied full cost of employee PERS contribuon to employee. 
 Implemented the 90/10 medical cost sharing plan. 
 Decrease alternave medical cash‐out benefit to a flat $284 per month, effecve October 1, 2012. 
 1.65 percent cost of living increase effecve first day of pay period including July 1, 2012 
 Reduced floang holidays by three days. An addional floang holiday will be eliminated aer June 30, 
Management and Professional (current agreement) 
Esmated Savings: $0.51 million per year, or 1.5 percent of total compensaon 
 Eliminated the Variable Management Compensaon plan as of FY 2009. 
 Shied full cost of employee PERS contribuon to employee. 
 Implemented the 90/10 medical cost sharing plan. 
 Decrease alternave medical cash‐out benefit to a flat $284 per month, effecve October 1, 2012. 
 Three percent salary increase to parally offset pension contribuon costs 
 Changes to the group’s professional development plan, including eliminang use of professional develop‐
ment funds to purchase electronic technology and gym memberships and reducing the annual amount 
per employee from $1,500 to $500. Gym members can be reimbursed through management excess bene‐
 Eliminated car allowances for newly hired Department Directors. 
Internaonal Associaon of Fire Fighters (current contract) 
Esmated Savings: $1.6 million per year, or 6.8 percent of total compensaon 
 Created a second er to our rerement structure (3 percent at 55) for new employees. 
 Shied full cost of employee PERS contribuon to employee. 
 Eliminated minimum staffing requirements. 

 Implemented the 90/10 medical cost sharing plan. 
 Cost‐of‐living freeze for FYs 2012‐2014. 
 Eliminated tuion reimbursement program.  
Fire Chiefs’ Associaon (current agreement) 
Esmated Savings: $91 thousand per year, or 9.8 percent of total compensaon 
 Created a second er to our rerement structure (3 percent at 55) for new employees. 
 Shied full cost of employee PERS contribuon to employee. In March 2013, the city paid employee 
rerement contribuon “resets” to 5.1 percent. 
 Eliminated the Variable Management Compensaon plan. 
 1.33 percent salary reducon. 
 Eliminated three holidays. 
 Implemented the 90/10 medical cost sharing plan. 
Palo Alto Police Officers’ Associaon (current contract): 
Esmated Savings: $1.4 million per year, or 7.7 percent of total compensaon 
 Created a second er to our rerement structure (3 percent at 55) for new employees. 
 Shied full cost of employee PERS contribuon to employee. 
 Eliminated tuion and training benefit. 
 1.33 percent salary reducon. 
 Eliminated three holidays. 
 Implemented the 90/10 medical cost sharing plan. 
Prior to 2009, between 2004 and 2006, the City implemented for all bargaining units: 
 20‐year vesng period to qualify for lifelong City‐paid health coverage 
 Highest cost health care plan opon eliminated, saving almost $10,000 per year for each employee 
moved away from this opon. 
The aforemenoned concessions and staffing reducons have been tough decisions that were not taken 
lightly. Like the City, our employees face rising household costs and diminished asset values. Further‐
more, the impact of the posion eliminaons is that our employees are stretched thin, and our ability to 
take on new projects is reduced.

1.  Bureau of Labor Stascs, Economic News Release, April 5, 2013 
2.  Beaconomics, Spring 2013 
3.  “The Weekly Briefing, State Treasurer’s Office, April 22, 2013 
4.  “The Weekly Briefing, State Treasurer’s Office, April 15, 2013 
5.  MuniServices Economic Overview 3Q2012 News, page 14 
6.    In its November 2012 actuarial reports, CalPERS presented the opon to phase in an as‐
sumpon change over two years—resulng in the 2014 rates seen here on page 16—or to 
adopt the changes right away.  Turning down the phase‐in opon would result in about $0.6 
million in addional General Fund pension costs in FY 2014, but about $1.2 million in savings 
over the subsequent 19 years.  The City opted to turn down the phase‐in.  
Since this decision was made in recent weeks, the addional cost was incorporated into the 
FY 2014 Proposed Budget, but the savings were not incorporated into the subsequent years 
of this Forecast. 


Visit our website at: www.CityofPaloAlto.org 

AmrnìcnNs wìtn Dìsnsìtìtìrs Act Stntr‐

Chrisne Paras 

Amber Cameron 

Sco Jensen 

Tarun Narayan 

Sherry Nikzat 

Lalo Perez 

Joe Saccio 

Dale Wong 


In compliance with  
Americans with Disabilies Act (ADA) of 1990,  
this document may be provided  
in other accessible formats. 
For informaon contact: 
ADA Coordinator 
City of Palo Alto 
285 Hamilton Avenue 
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Prinnng City of Palo Alto 

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The City of Palo Alto is located in northern Santa Clara County, approximately 
35 miles south of the City of San Francisco and 12 miles north of the City of San Jose.  
Spanish explorers named the area for the tall, twin‐trunked redwood tree they camped  
beneath in 1769. Palo Alto incorporated in 1894 and the State of California  
granted its first charter in 1909.

30% post‐consumer recycled 

City of Palo Alto (ID # 3618)
Finance Committee Staff Report

Report Type: Action Items Meeting Date: 3/19/2013

City of Palo Alto Page 1

Summary Title: (Continued) Long Range Financial Forecast
Title: Fiscal Years 2013 to 2023 Long Range Financial Forecast (Continued
From March 5, 2013)
From: City Manager
Lead Department: Administrative Services

Staff recommends that the Finance Committee review and comment on the attached forecast
of revenues and expenses and provide direction on assumptions used in the forecast.

I move to accept the Fiscal Year 2013 to 2023 Long Range Financial Forecast and forward it to
the full Council for review and input.

Executive Summary
The City’s General Fund Long Range Financial Forecast (LRFF) for the next ten years is based on
a variety of assumptions. It is a portrait of the City’s financial condition painted at one point in

The LRFF was presented to the Finance Committee on December 18, 2012 (staff report ID
#3248). The Committee directed staff to revise the forecast to address the Committee’s
concerns and provide additional information. An updated draft of the LRFF was presented to
the Finance Committee on March 5, 2013 (staff report ID #3531). Due to the length of the
Committee’s agenda on March 5
, staff was directed to continue discussion of the forecast at
the next Finance Committee meeting. No motion was made to provide staff with additional
direction or to accept the LRFF and forward the forecast to Council.

Attachment B

City of Palo Alto Page 2

Although the discussion of the forecast was tabled for future discussion and no motion was
made to formally provide staff with direction to update the forecast, the Finance Committee
raised a number of concerns and issues for staff to consider:
 Related tax revenue associated with hotels currently under construction and earmark
revenue streams for infrastructure expense
 Calculate the pension savings for 3
Tier employees
 Clarification of CalPERS pension rate estimates included in the base model and
alternative scenario
 Reconsider having Utility Users’ Tax (UUT) revenue increase, specifically for the Electric
UUT revenue component
 Reconsider sales and documentary transfer tax estimates

Staff is requesting a formal motion with direction on changes/additional clarification requested
by the Finance Committee so that the forecast can proceed to the Council for further

Staff would point out that the Long Range Forecast serves as a guide and is expected to be
dynamic and subject to change. Additionally, with the mid-year review each year, the City is
able to adjust revenue estimates and expenditures based on actual experience and the mid-
year allows the Council the ability to make adjustments and spending decisions based on more
current facts. In other words, some conservatism in our forecasts provides valuable flexibility in
the course of any given year.
Finally, Staff would suggest that trends concerns and assumptions can be expressed as “Trends
to Watch” in the report, for example, without necessarily changing the Forecast itself going
Page 1 of 8 
Regular Meeting
Tuesday, March 5, 2013

Review of Fiscal Years 2013 to 2023 Long Range Financial Forecast.

Christine Paras, Principal Financial Analyst provided corrections to pages
476, 498, and 504. Economic improvements and the decreasing
employment rate were reflected in the December and current Long Range
Financial Forecasts (LRFF). Positive results for Fiscal Year (FY) 2011 and FY
2012 allowed the City to transfer $7.6 million General Fund surplus funds to
the Infrastructure Reserve. The December LRFF included projected
surpluses over the next three fiscal years. The previous LRFF showed a
combined $4.2 million surplus in the base model over FY 2014-2023. That
was a turnaround from May 2012 when there was an $88 million budget gap
over ten years. When Staff presented the draft LRFF in December, the
Finance Committee (Committee) indicated a number of concerns and follow-
up items for Staff. The first one was addressing outer year projections and
how they seemed overly optimistic. The Committee asked Staff to rely on a
longer period of historical data to build projections for outer years. The
second item was the major factor that led to a ten-year budget surplus in
the last report, compared to the $88 million shortfall. In May 2012, Staff
began with a ten-year budget shortfall of $88 million. In December 2012,
Staff forecasted a $4.2 million surplus over the next ten years. Today the
LRFF showed a ten-year surplus of $500,000. The main drivers behind the
change were improved tax revenues and budget savings from miscellaneous
groups. The third item was an updated Utility User Tax (UUT) revenue. The
fourth item was the California Public Employees Retirement System
(CalPERS) smoothing methodology and mortality experience. The
Committee wanted a cumulative deficit-surplus total added to the forecast.
Finally, the Committee wanted Staff to show detail of true General Fund Full
Time Equivalent (FTE) reductions, rather than transfers between General
Fund and other funds. Staff updated the model and proposed changing a
number of items in the model. Changes resulted in a $500,000 hit to the
General Fund in FY 2014. Staff projected a $4.2 million increase in overall
revenue for FY 2013. $2.5 million of that increase was included in the LRFF
presented in December 2012. In FY 2014 Staff projected a minimal revenue
increase. Staff included in the FY 2013 numbers within the updated base
model an additional $1.7 million in tax revenue, resulting from a one-time
Documentary Transfer Tax receipt. The second item Staff changed in the
Attachment C
  Page 2 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 
base model was a $1.3 million General Fund hit due to the change in equity
transfer calculation. Staff received rate updates in January 2013 regarding
the rate of return from Pacific Gas and Electric (PG&E). The Utility Funds
were based on capital assets in those funds and tied to PG&E's rate of
return. The calculation of the equity transfer was updated for those lower
rates. The base model presented in December 2012 reflected a total $18.3
million equity transfer from Utilities. The base model now reflected a $17.4
million transfer from electric and gas. The third item included in the update
was the deferral of the Golf Course reconfiguration. The project was
deferred from July 2013 to April 2014, resulting in a savings of $700,000.

Joe Saccio, Assistant Director of Administrative Services recalled one of the
main concerns in the December 2012 Committee discussion was whether
Staff was overly optimistic in the LRFF. In addition, the Committee
suggested using historical and trends to forecast the future. Staff provided
the average ten-year and twenty-year compound annual growth rates
comparing the December 2012 LRFF and the current LRFF. The compound
annual growth rate over 20 years for the total five major taxes was 4.1
percent. The December 2012 LRFF was 4.04 percent, and the current LRFF
was approximately 4.23 percent. Property Tax was 4.97 percent; sales tax
was 2.07 percent over 20 years; Transient Occupancy Tax (TOT) was 4.9
percent over 20 years; Documentary Transfer Tax over 20 years was 7.3
percent; and UUT was 3.8 percent. All revenues were 4.6 percent over 20
years. Overall Staff used 3.32 percent for all revenue. Revenue levels for
Property Tax were stable overall. Unlike some communities, Palo Alto
property taxes remained relatively stable. Approximately 300 homes under
$500,000 turned over during the last six years. Sales tax was a concern in
that it was growing at slightly more than two percent per year, less than the
rate of inflation. Staff projected 3.38 percent, because Palo Alto was
attracting and maintaining businesses. TOT projected revenues were
roughly in line. The volatility in the Documentary Transfer Tax caused Staff
to project a conservative figure. Staff did not include Casa Olga (new hotel)
in the LRFF, nor did they include other hotels in the next two or three years
of the LRFF. He conservatively estimated Casa Olga revenue at $450,000-

Lalo Perez, Director of Administrative Services explained TOT for new hotels
was not included in the LRFF because Staff recommended using the TOT for

Vice Mayor Shepherd inquired whether Staff included Hewlett-Packard's
return to Palo Alto in sales tax projections.

Mr. Saccio reported Staff and the Utilities Department were waiting for that
  Page 3 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 
to happen. Utilities did not see the expected increase in electric demand.

Mr. Perez indicated Staff was monitoring the situation.

Vice Mayor Shepherd asked if Staff had an explanation.

Mr. Perez noted Staff attempted to discuss it with Hewlett-Packard;
however, they were protecting their privacy.

Mr. Saccio reported Staff used information from the Utilities Department as
of February 11, 2013 to calculate the five percent growth in UUT. Ordinarily
revenues were 5 percent; however, some large users had a step-down in
terms of UUT depending on usage.

Mr. Perez reported the CalPERS chief actuary will be recommending that the
CalPERS Board lower the expected rate of return; the expected amount was
either 1/4 or 1/2 percent.

Council Member Schmid asked if CalPERS was currently using 7.5 percent.

Mr. Perez stated 7.5 percent was the current rate of return. The
recommendation will be presented to the CalPERS Board around February
2014, and the impact will occurr in FY 2016. The expected impact was an
approximate 2.5 percent increase for the Miscellaneous, and approximately
four percent for Safety. The three percent embedded in the base model
covered a 1/4 percent increase. If the rate of return increased 1/2 percent,
then the base model was not sufficient. The proposal in February 2014 was
to move from a 15 year smoothing period to a five year period. That
accounted for approximately $34 million of the impact in the alternative
scenario of $50.6 million in additional expenses. The mortality factor
accounted for approximately $17 million of the $50.6 million. If the CalPERS
Board acted on these three issues, the alternative scenario became part of
the base model. Staff proposed hiring an actuary to assist with the next
step. Pension reform went into effect in January 2013, and neither the base
model nor the alternative model showed the potential savings of the new
third tier of pension reform; the City was to have a $586,000 cumulative
surplus in that period for the base model. If the CalPERS Board acted on the
recommendations and impacts passed through to the City in FY 2016, the
City was to have a $50 million deficit.

Chair Burt inquired whether the $50 million deficit excluded consideration of
the third pension tier.

Mr. Keene asked where in the alternative scenario was the additional 1/4
  Page 4 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 

Mr. Perez stated it was in the base model starting in FY 2017.

Chair Burt asked if the second 1/4 percent was included in the alternative

Mr. Perez indicated it was not in the alternative model.

Mr. Keene reported that was an additional increment on top of the $50
million if that occurred.

Council Member Berman reiterated that the 1/4 percent was included in the
base and alternative models, but note the 1/2 percent.

Mr. Perez agreed. The base model contained the 1/4 percent. The potential
second 1/4 was not contained in either model.

Chair Burt asked how the alternative model was different from the base

Mr. Perez explained the alternative model included the smoothing change
from 15 years to 5 years, in addition to the mortality experience.

Council Member Berman inquired whether Staff felt the CalPERS Board
wanted to take the recommended action.

Mr. Perez believed there was enough pressure from experts for the CalPERS
board to act. The third tier for pension generated some savings to offset
some of these impacts. The City had 2,000 employees either retired or
working for other agencies, which was a large number compared to the
number of active employees. Those 2,000 employees were not going to
move into the new tier. The question was how many of the 900 active
employees moved to the third tier once they were replaced. An expert was
necessary to determine the potential savings.

Mr. Keene felt many employees preferred to retire later in order to receive a
higher pension amount.

Mr. Perez reported another reason for the CalPERS Board to take action was
the cap in the Tier 3 was tied to the Social Security number.

Council Member Berman inquired whether the increase in retirement age
was mandated by State legislature.
  Page 5 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 

Mr. Keene stated it was part of Governor Brown's plan. He inquired if there
was a sense of whether or not the CalPERS Board adopted either the 1/4 or
1/2 percent.

Mr. Perez stated the CalPERS Board was concerned about the impact on local
governments. A few agencies were in bankruptcy and had issues with
payments. He believes the CalPERS Board will adopt 1/4 percent, given the
impact to local governments.

Mr. Saccio reported Moody's and Standard &Poor’s had utilized a 5.75
percent return rate to evaluate the liabilities to cities, and that exerted
pressure on the CalPERS Board.

Vice Mayor Shepherd asked Staff to explain why they used these numbers
when Staff knew they were wrong.

Mr. Perez suggested having the discussion with an expert. The Committee
needed to discuss options and plan for the potential impact. Using the
numbers provided an indication of the need to plan for the following two

Chair Burt believed the 1/4 percent reduction was likely, and suggested
people assume another 1/4 percent reduction would occur in a few years.

Mr. Perez was comfortable including an additional 1/4 percent reduction in
the alternative scenario.

Vice Mayor Shepherd inquired whether Staff included an incremental note in
the LRFF stating the monetary impact for each 1/4 percent incremental

Mr. Perez agreed to add that if it worked mathematically.

Mr. Keene said he could provide a general number, because the specific
amount was to change, as the percentage changed.

Council Member Schmid believed CalPERS was in a position to take higher
risks to achieve higher rates of return, because any consequence fell to
cities. With benefits growing on the order of 6 1/2 to 7 percent per year,
and salaries growing at two percent, the City was in a long-term situation
where it was not be able to pay employees to keep up with the rate of

  Page 6 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 
Chair Burt asked if the Committee should continue the Agenda Item due to
the time.

Mr. Keene asked if the Committee had additional questions.

Mr. Perez noted the Agenda Items for the next meeting on March 19, 2013.

Chair Burt suggested continuing discussion of the LRFF.

Mr. Perez inquired whether Staff should prepare additional information for
the next discussion.

Chair Burt wanted the alternative scenario to become the base model.

Mr. Perez felt that would be assuming the CalPERS Board would approve the

Chair Burt considered approval of the 1/4 percent change as the base model,
and not approving it is an alternative model.

Council Member Berman stated there was no analysis of the pension third

Chair Burt agreed that would need to be analyzed in order to have a realistic

Mr. Keene noted the information was evolving.

Chair Burt believed a placeholder was more accurate than pretending
nothing would occur; projection required the best thinking.

Mr. Perez said he could include a simple calculation; however, the calculation
would most likely be very complex.

Chair Burt suggested including a rough number in order to have a more
accurate forecast.

Vice Mayor Shepherd inquired whether Staff needed to return once
information was more certain.

Chair Burt wanted Staff to return with updates based on the Committee's
feedback. Hotels under construction needed to be included in the long term
projection. He suggested the Committee earmark certain new revenue
streams for infrastructure; he said that could be done within the LRFF. He
  Page 7 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 
encouraged Staff to reconsider the UUT increase and the anticipated gas and
water increases in coming years. He was skeptical of the anticipated high
sales tax; however, the Documentary Transfer Tax was probably
underestimated. He wanted to make the numbers as realistic as possible,
with the understanding that certain numbers were the best estimates given.

Mr. Keene reported Staff could prepare a LRFF over the next month, with the
qualification that it utilized best estimates. Until June, Staff needed to be
working on the Budget.

Council Member Berman suggested including Cubberley needs, and inquired
whether the $7.5 million lease payment was included.

Mr. Perez indicated the full amount was included, and Staff anticipated it
continue for the modeling.

Chair Burt requested Staff to explain the radical impact of changing
smoothing from a 15-year period to a 5-year period.

Mr. Perez was going to provide information he received at the finance officer

Chair Burt wanted to understand if CalPERS was restating an adjustment in
long term projections and burying it within a discussion of the shorter-term

Vice Mayor Shepherd inquired whether Staff had enough direction to return
with updated information.

Mr. Keene answered yes.

Vice Mayor Shepherd noted the LRFF was utilized in Budget discussions, and
expressed concerns about changes in revenue forecasts.

Mr. Saccio suggested Staff utilize 20-year amounts into the future.

Chair Burt requested an explanation of the rationale to utilize data other
than the 20-year data.

Council Member Schmid felt the importance of the LRFF was context for the
Budget debate.

Mr. Keene stated the LRFF was used to inform Budget decisions. The
Committee did not think about this in terms of tradeoff implications.
  Page 8 of 8 
Finance Committee Regular Meeting 
Draft ExcerptMinutes 03‐05‐13 

Chair Burt said a reasonably accurate LRFF was an informed Budget
Page 1 of 7 

Regular Meeting
Tuesday, March 19, 2013

Fiscal Years 2013 to 2023 Long Range Financial Forecast (Continued From
March 5, 2013)
Lalo Perez, Administrative Services Director wanted to provide Staff with
feedback to the Finance Committee's (Committee) comments at the end of
the prior discussion, and to receive input for discussion with the Council.
The Mayor indicated he wanted the Long Range Financial Forecast (LRFF) to
be an Action Item on the Council Agenda. The first comment concerned tax
revenue associated with hotels currently under construction, and earmarking
those funds as revenue streams for infrastructure expense; He said Staff
could include that in the LRFF. The second comment concerned calculating
the pension savings from the third tier pension benefits. Staff suggested
hiring an actuary firm to assist in calculating those savings because the
alternative scenario contained an approximate $50 million impact between
the years of 2017 and 2023. He remarked that the $50 million impact
should be offset by savings. The third comment requested further
clarification on the CalPERS pension rate estimates included in the base
model. Staff suggested utilizing the actuary firm to validate their application
of the CalPERS estimates. With regard to the fourth comment from the
previous meeting, Staff requested clarification. With regard to the fifth
comment, Staff was comfortable with their estimates for sales and
Documentary Transfer Taxes. If the Committee had concerns, Staff would
note them in documentation to the Council and in the model.
Chair Burt indicated the Committee needed to decide whether to make the
first comment a recommendation to the Council.
MOTION: Vice Mayor Shepherd moved, seconded by Council Member
Schmid to have Staff put the related tax revenue associated with hotels
currently under construction in the Long Range Financial Forecast.
Chair Burt noted the comment also contained a provision to earmark
revenue streams for infrastructure expense.
Attachment D
  Page 2 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
Vice Mayor Shepherd did not want to earmark revenue for infrastructure
Council Member Schmid did not recommend earmarking funds at this time.
Chair Burt wanted to earmark funds for infrastructure. He asked if Staff
needed a Motion.
James Keene, City Manager suggested the Committee move the separate
MOTION RECAPPED: Vice Mayor Shepherd moved, seconded by Council
Member Schmid to include Transient Occupancy Tax for hotels currently
under construction in the Long Range Financial Forecast.
SUBSTITUTE MOTION: Council Member Burt moved to have Council
consider earmarking revenue streams for infrastructure expense.
Vice Mayor Shepherd did not object to the Committee asking the Council to
hold a policy discussion regarding earmarking funds.
Chair Burt inquired whether the City had other definable new revenue
Mr. Perez could not recall any new revenue sources. There were some
implied such as the Utility Users Tax (UUT).
Chair Burt stated a change in the Cubberley lease could be a new revenue
Vice Mayor Shepherd reported discussion from the Infrastructure Committee
meeting indicated a bond may not be needed.
Chair Burt suggested the Finance Committee recommend that full Council
consider whether discrete new revenue streams needed to be earmarked for
specific purposes such as infrastructure.
Vice Mayor Shepherd requested Chair Burt make a suggestion that was
separate from the Motion to prevent confusion.
Chair Burt agreed.
MOTION PASSED: 3-0, Berman Absent
  Page 3 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
MOTION: Council Member Burt moved, seconded by Vice Mayor Shepherd
that the Finance Committee recommend the Council hold a discussion on
whether discrete new revenue streams be identified for specific purposes,
such as infrastructure use.
Council Member Schmid felt the Motion was a policy change when the
Committee was considering amendments to the LRFF.
Chair Burt explained potential new revenues would have a multi-year impact
on the LRFF.
Council Member Schmid believed defining new revenue sources for
infrastructure was separate from review and approval of the LRFF.
Chair Burt stated budgeting one or two new revenue streams was a part of
the LRFF.
Vice Mayor Shepherd indicated a Committee could hold a broader discussion.
She wanted the Infrastructure Committee to develop new revenue streams;
however, she thought this would be a good conversation for the Council.
MOTION PASSED: 2-1, Schmid no, Berman absent
Chair Burt recalled the next topic was calculation of the pension savings for
third tier employees. Staff wished to hire an actuary. He inquired whether
Staff needed a Motion for Staff to hire an actuary.
Mr. Perez answered no and said hiring an actuary was within the City
Manager's authority.
Vice Mayor Shepherd inquired whether this work was within the scope of
work for Bartel Associates.
Mr. Perez replied no. The previous work was regarding retiree medical.
Vice Mayor Shepherd asked if this work could be added to Bartel Associates'
scope of work for the next cycle.
Mr. Perez reported the City had not engaged Bartel Associates for pension
services. Given the significant impact of Staff estimates, it was beneficial for
an actuarial firm to validate Staff's calculations.
Vice Mayor Shepherd wanted to understand the importance of the
information at the current time.
  Page 4 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
Mr. Perez felt it was important because Staff wanted to ensure they were
making sound decisions based on sound information and said data was
based on actual demographics; however, some assumptions were based on
California Public Employees' Retirement System (CalPERS) experience. He
said a pattern could develop in the next five to ten years that would shift
because the City will have savings from new employees moving into the
third tier.
Vice Mayor Shepherd wanted to ensure Staff worked efficiently.
Chair Burt clarified that the actuary would project the number of employees
in the third tier and the point in time that would impact City liabilities.
Mr. Perez reported the actuary would make assumptions regarding
employees' retirement dates and the likelihood of employees being in tier
two, versus being in tier three.
Chair Burt inquired if the impact was many millions of dollars.
Mr. Perez answered yes. The unknown factor was when the impact would
Chair Burt acknowledged that the actuary could only provide a best
estimate. At the current time Staff did not include any estimate, and it was
a significant change.
Mr. Perez indicated Bartel Associates performed the same analysis for other
Council Member Schmid stated the difference between tier two and tier three
was savings; however, CalPERS reform opened the possibility of losses for
the City.
Mr. Perez explained the two percent at age 60 could move to 2.418 percent
at age 63. In tier three, a cap on the maximum pension allowance an
employee could earn was tied to the Social Security limit. The question was
how many employees would go to in tier two.
Chair Burt stated the Committee did not need to take action on the request
to hire an actuary, and continued to the third topic.
Mr. Perez reported Staff was comfortable with their estimates. He said an
actuary could validate those estimates to ensure Staff's calculations were
  Page 5 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
Vice Mayor Shepherd said she had no confidence in CalPERS' rate of return.
She hoped the LRFF would include the effect of each 1/4 percent rate
Chair Burt did not believe this was a point of contention.
Mr. Keene indicated Staff could include a note and some calculations in the
Vice Mayor Shepherd wanted to ensure that was included.
Chair Burt indicated the third topic required no action by the Committee.
With regard to the fourth topic, he was concerned about projecting the prior
anticipated utility increases for the future. While capital expenditures
continued to increase for various utilities, the commodity costs on gas and
electric might not rise at historic rates. Experts in the industry were
reexamining those historic trends and escalations, and suggesting the
escalations may not occur at the same rate. Renewables and non-
renewables were experiencing market changes, which could be new trends.
He requested Staff discuss with Utilities Staff any anticipated trends that
should be factored in.
Mr. Perez indicated Staff would do so.
Council Member Schmid agreed that Staff should review that.
Vice Mayor Shepherd noted Utilities did not provide the majority of
Chair Burt inquired whether the Report included a breakdown of revenues
from different streams.
Joe Saccio, Assistant Director of Administrative Services reported the last
LRFF included a compound annual growth of approximately 2.9 percent for
UUT. The historical 20-year compound annual growth was 3.8 percent, and
the prior ten years was 5.3 percent.
Chair Burt suggested the adjustment was included.
Mr. Saccio noted Staff had lowered the projected annual growth. It was
incumbent on Utilities to explain their forecasts in terms of prices of
commodities and capital.
Chair Burt inquired about the percentage of the Budget.
Vice Mayor Shepherd stated the sales tax had been erratic.
  Page 6 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
Chair Burt recalled the final topic was long-term projections for sales and
Documentary Transfer Taxes. The concern was that the 20-year
compounded growth was 2.07 percent, the 10-year compounded growth was
one percent, and the forward projection was 3.38 percent for sales tax.
Mr. Saccio explained Staff reviewed the forecast and assumptions. Those
were reasonable growth rates for the next few years. Comparing the four
quarters of calendar year 2012 to the four quarters of calendar year 2011
resulted in a 12.4 percent increase.
Chair Burt felt that information was not relevant in projecting a 10-year
forecast. He requested Staff's rationale for projecting 3.4 percent growth
when the prior growth was only one or two percent.
Mr. Saccio said Staff considered the first couple of years when preparing the
Chair Burt indicated the LRFF did not appear to include a recession.
Mr. Saccio recalled the Committee's prior instructions were to review the
prior 20 years and include all the recessions in those 20 years in order to
determine a rate of growth.
Chair Burt asked how Staff moved from 2.0 percent growth to a projected
3.38 percent growth.
Mr. Perez reported Staff was comfortable with the projected growth for the
next five years. Staff reviewed the final five years, and either made
adjustments or stated the Committee was uncomfortable with Staff's long-
term projections for sales tax.
Council Member Schmid felt the general economic outlook as stated on
pages three and four was optimistic. He thought it would be good to have a
section about persisting economic problems.
Vice Mayor Shepherd inquired whether Staff relied on any new source of
sales tax.
Mr. Saccio responded no and said the Amazon tax would go to the
jurisdictions where warehouses were located.
Vice Mayor Shepherd indicated the Amazon tax would be ZIP code specific,
and was projected to provide $2.5 billion to the State of California.
  Page 7 of 7 
Finance Committee Regular Meeting 
Excerpt Minutes 3/19/2013 
Mr. Saccio stated the State of California would receive its share of the sales
tax, but the one percent of sales tax for local jurisdictions went to the local
jurisdictions where the Amazon warehouse is located.
Vice Mayor Shepherd asked if the City would receive funds from the Amazon
sales tax.
Mr. Saccio replied no. Staff relied on sales tax from Hewlett Packard;
however, that had not occurred.
Vice Mayor Shepherd inquired whether Staff could resolve the higher
projection for sales tax.
Mr. Perez stated Staff would review the second of the five years of the LRFF
and would provide more detail. If Staff did not change their opinion, they
needed to provide an explanation.
Vice Mayor Shepherd asked if Staff preferred to present the LRFF to the
Council or if they preferred returning to the Committee.
Mr. Perez suggested that was preferable in light of Budget hearings
beginning in May.
Mr. Saccio noted that the major taxes over the past five years had a
cumulative growth rate of 4.1 percent. The forecast contained 4.2 percent
growth. Every year some taxes did not meet projections and others
exceeded projections. In totality, projections were close to the trend in
historical growth.
Chair Burt stated the LRFF should be as close to correct as possible. The
Amazon issue raised the question of how much Staff considered trends of
internet sales and their impact on 10 and 20-year trend. He noted that
changes in tax law could change that.

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