The City of Cupertino prides itself on being a financially stable organization with excellent service, high-quality programs, and healthy reserves. At the same time, the City faces financial headwinds because:

• expenditures are increasing faster than revenues,
• CalPERS pension costs are increasing,
• competitive compensation is needed to recruit and retain talent, and
• capital investment needs are increasing.

Here are the policies and practices that are helping the City maintain long-term financial health …

Budgets and Forecasts

Fiscal sustainability begins with budgeting revenues and expenditures in the context of a long-term forecast.

Financial Forecasts

While annual budgets may instill a short-term focus, long-term financial forecasts help decision-makers to consider the long-term costs of decisions. In FY 2018-19, the City incorporated 20-year forecasts into the budget process and partnered with Urban Futures, Inc. to:

• review, update, and enhance the City’s baseline financial forecast;
• evaluate fiscal strategies including potential local revenue measures; and
• develop capital financing options, structures and estimates for identified projects.

Long-term forecasts help to increase transparency, encourage fiscal discipline, identify adverse trends, and promote fiscal sustainability.

Zero-Base Budget

In FY 2019-20, the City developed a zero-base budget in which all expenses were justified. Staff analyzed the needs of every function and allocated funds accordingly, regardless of the previous year’s budget. The zero-base budget resulted in increased financial transparency, more accurate forecasts, and savings of approximately $3.6 million over the previous year’s base budget.

Fund Balance Policy

The City’s Fund Balance policy ensures sufficient reserves to prepare for economic uncertainties. The City’s reserves include:

• an Economic Uncertainty Reserve to mitigate economic downturns and revenue volatility, as well as sustain city services in an emergency;
• a Pension Reserve to fund future pension liabilities and stabilize pension cost volatility; and
• an Unassigned Reserve to absorb unanticipated operating needs or unexpected claims.

The City’s reserves help maintain fiscal health by enabling the City to allocate funds for future needs while providing stability in day-to-day operations. The City’s Fund Balance policy provides transparency and accountability around the City’s use of its reserves.

Labor Costs

Managing labor costs is important to maintaining long-term fiscal sustainability as salaries and benefits are the City’s largest General Fund expenditure.

Labor Negotiations

Given that the City’s labor agreements are typically in effect for three years, the City’s labor negotiations can create long-term financial obligations. The City aims to address the current needs of employees while minimizing long-term financial commitments.

Limited-Term Positions

In recent years, the City has added positions on a limited-term basis unless the need is permanent, ongoing revenues can fund the position, or the City cannot recruit and retain staff otherwise. Limited-term positions allow the City to provide services in the short-term while moderating staffing growth in the long-term.

Section 115 Trust

Increasing CalPERS pension costs are driving labor cost growth. CalPERS pension costs are projected to increase due to discount rate and demographic assumption changes.

In FY 2018-19, the City established and funded a Section 115 Trust to offset pension cost increases and fund future pension liabilities. When required contributions to CalPERS are lower than projected, the City will transfer the surplus to the trust. When required contributions to CalPERS are higher than projected, the City will fund the shortfall from the trust. The trust is a critical part of a long-term strategy to stabilize pension cost volatility.

Transparency, Education, and Engagement

Transparency, education, and engagement tools enable the City to quickly and efficiently communicate its financial status. The City automatically updates its financial transparency portal every night and publishes an interactive financial report every quarter. To help residents understand and interpret the City’s financials, the City highlighted the budget in a social media campaign and organized its first “Budget and Bites” community budget workshop. During the workshop, residents participated in an interactive budget exercise to experience how the City balances competing priorities such as current needs and long-term financial health.

Transparency, education, and engagement help the City to build trust with residents by providing insight into the City’s financials. In turn, informed and engaged residents can hold the City accountable for its financial performance.

Technology

Technology enables the City to develop accurate and efficient budgets, projections, and analyses, as well as communicate that information to residents. The City has recently invested in technology to improve productivity and efficiency in the following areas:

• budgeting and planning (OpenGov Budgeting & Planning),
• budget book publication (Collective Budget),
• pension and OPEB analysis (GovInvest),
• labor negotiation costing (AdastraGov),
• transparency (OpenGov Reporting & Analytics, Dashboards, and Stories), and
• engagement (Open City Hall).