Revenue Assumptions and Projections
The only way City leadership can arrive at a structural deficit is by pretending large reserves and likely tax revenue somehow don’t exist.
The facts are important.
We all know the truth of “garbage in, garbage out.” It means the accuracy of whatever conclusion you draw is entirely dependent on the accuracy of the information you input at the beginning.
This is exactly how government budgeting works. Nothing can be predicted with absolute certainty. Will labor costs go up by 3% or 3.5%? Only events like future labor negotiations and actual rate of hiring will determine the actual increase.
So too with projections on things like sales tax and property tax revenues. For Pleasanton leaders to conclude the City is facing a $13 million structural deficit, they made choices about certain inputs, called assumptions and projections, to arrive at that conclusion.
Using outside experts, internal finance staff and audited financial statements, City staff has made available to the public pages and pages of information, including financial tables, in an effort to convince residents that everyone has done their homework and nothing is being hidden.
But this doesn’t change the reality that assumptions and projections selected are what really matter. Budgeting must start with how much money is predicted to be available.
How the City ended the 2022-2023 budget year on June 30, 2023 is a perfect example. Ten months into the year, with known revenue and expenses through most of the year, the City very conservatively predicted the year would end with a $2.5 million surplus based upon assumptions and predictions made by staff. In fact, Pleasanton ended the 2022-2023 fiscal year two months later with a whopping $14 million surplus!
As it relates to predicting a $13 million deficit, staff wrote in a City Council Agenda Report (March 19, 2024), “Based upon these assumptions, the baseline scenario projects an average annual deficit of approximately $13.8 million.” The report goes on the say that if funds were used annually out of the existing Section 115 Pension Trust Fund and the already enacted annual expenditure savings of $2.5 million were included, “the baseline forecast scenario show an average annual deficit of approximately $5.7 million.”
However, the Council ended up not including either of these existing and entirely available funding sources in their assumptions and therefore the deficit is projected to be $13 million.
Similarly, the assumption used for anticipated property tax growth over the next ten years is enormously important in determining whether a deficit will exist. Property taxes grow every year by the Consumer Price Index (CPI) or 2%, whichever is greater, increased house values at the time of sale and from new construction.
To arrive at the $13 million projected deficit, City leadership assumes property tax revenues will grow over the next ten years by an annual average of 3.5%.
The Pleasanton Annual Comprehensive Financial Report (ACFR) is the City’s annual audit of its finances, done by an external audit firm. These are the real numbers, not projections, for the budgets audited.
According to the last ACFR performed for Pleasanton, for the year ended June 30, 2023, audited property tax growth for the past ten years (2014 through 2023) averaged 5.5%. Over those ten years, the lowest year over year growth was 3.2% and the highest was 7.4%. These years covered the pandemic as well as years of economic slowdown and growth. Using the actual property tax revenue from 2023 (audited) compared to the property tax collections reported by staff for 2024 (unaudited), the property tax revenue grew by 4.7% from 2023 to 2024.
Why does this matter? According to a city staff report to the City Council (March 18, 2024), each 0.5 percent increase in property tax revenue translates into an additional $2.5 million in General Fund revenues.
Move the assumed property tax growth from the used 3.5% to instead 4%, the projected $13 million deficit becomes $10.5 million. Make the assumption a more appropriate 4.5% in property tax growth over the next ten years, the projected deficit is reduced to $8 million. And this assumption is still substantially below the actual historical growth rate over the past decade of 5.5%.
Combine this additional $5 million in assumed property taxes with the deficit reductions of using the Section 115 Pension Trust Fund and the enacted expenditure savings described above, Pleasanton’s projected deficit is actually closer to $500,000. This is a far cry from $13 million.
This is why budget assumptions and projections are the real story. Not the one City leaders are trying to sell to us.