Long-Term Financial Planning Keeps Sunnyvale on Solid Ground
By Sunnyvale Mayor Tony Spitaleri
September 17, 2012
“You can’t budget for 20 years!”
That’s often the first thing I hear when Sunnyvale’s 20-year long-term financial plans are the topic of discussion, and our city council and staff would all agree with that statement. You definitely can’t budget for 20 years; however, the city does wholeheartedly believe in its 20-year financial planning approach and I’d like to share a few examples where this methodology has served the city very well.
First, let me clarify what the long-term plan is and how the city uses it. The 20-year long-term plan is not a budget; it is a plan that is constantly monitored and updated to account for changes in the economic environment. This plan serves a number of functions. Most importantly, it is a tool to guide the decision-making of the city’s leadership by forcing the examination of the long-term fiscal impact of current decisions. This examination of the long-term impact ensures disciplined spending decisions and helps the city stay within its means in both the short- and long-term, as evidenced by the examples below.
Toward the end of 2008 as the global economy entered a deep recession, Sunnyvale, like many other cities within the United States, was faced with a significant revenue shortfall. Unlike many other cities, however, the city’s 20-year planning methodology allowed its leaders to take a thoughtful, measured response to the financial crisis instead of having to take immediate and drastic cost saving actions. There were two reasons for this. First, prior to the recession when revenues were exceeding the projected baseline, the city added additional funds to one of its reserves – the Budget Stabilization Fund – as opposed to adding new or increasing levels of existing services. So when the recession hit, Sunnyvale was spending at a more sustainable level than many of its counterparts that had added services over the previous few years. Second, because the city had added funds to the Budget Stabilization Fund, a reserve within the General Fund intended to allow for stable service delivery through fluctuations in the economy, monies were available to maintain services during the short term. This allowed time for the city to evaluate the severity of the recession and make incremental course corrections that realigned its expenditure baseline with a reduced revenue baseline. As a result, Sunnyvale was able to maintain a quality level of service to the community through a severe recession without taking any drastic personnel actions such as layoffs or furloughs. Furthermore, the stability of the city’s overall financial position throughout this period was such that its AAA credit rating was affirmed in 2012, additional confirmation of the impact of long-term financial planning.
Another great example of how the 20-year plan serves the city well is demonstrated in the actions the city is currently taking to fund its pension liabilities. Because the long-term plan forces the city to evaluate both its immediate and future expenditures, the city is able to identify future issues – such as rising pension costs – and take current actions to address them. Due to unprecedented market losses sustained by the California Public Employees’ Retirement System (CalPERS) in 2008 and 2009, the cost to the city for the employees’ pension benefit has increased significantly, and is expected to continue to increase in the future. Additionally, based on the CalPERS methodology for incrementally incorporating these market losses into the city’s pension contribution rates, the city also faced significant rate volatility going forward. To mitigate this, the city worked with a consulting actuary to develop pension contribution rates that are higher than the CalPERS required contribution rates in the short term but reduce rate volatility, pay down the unfunded liability more aggressively, and are expected to reduce contribution rates in the long term. While it would have been much easier to pay the lower contribution rates required by CalPERS, the long-term planning model helped ensure that the city took a broader perspective on how to address the issue by opting to pay more than required now to generate significant benefits over the long term, thus putting the city in a better financial position going forward.
Both of these examples demonstrate how Sunnyvale’s long-term planning methodology works and how the city has used it to guide decision-making during both good and bad economic times. This long-term planning approach has been and continues to be a cornerstone of the city’s overall budgeting and planning process, benefitting both the present and future Sunnyvale community.