’S TOOL
for SURVIVING FISCAL CHALLENGES
S U N N Y V A L E
BY MARY J. BRADLEY AND DREW CORBETT
ost U.S. cities have been hit hard by the economic
downturn, in terms of both lower revenues and
increased operating costs. But because of its culture of long-term planning, the City of Sunnyvale, California,
has a tool that helps it identify fiscal challenges early on and
gives it time to deal strategically with major issues.
M
Every year, staff prepares a 20-year financial plan for all city
funds, covering all foreseeable elements of revenues and
expenditures. Major assumptions are included in the budget
transmittal letter and are discussed with the City Council,
which ultimately approves the plan. This approach has
allowed the city to weather economic cycles and provide stable and consistent services to its residents.
The key to developing Sunnyvale’s 20-year financial plan
each year is understanding the city’s sustainable trend line for
revenues, and then budgeting expenditures — and setting
service levels — at that point. When revenues exceed the
trend line, additional money is added to the budget stabilization fund, and that money does not go toward providing new
or increased services. Therefore, when the economy slows or
goes into a recession, there is money available for the city to
draw upon and use to maintain existing service levels. This
means there are years when the city runs a significant deficit
or a significant surplus — on a one-year basis.The long-term
plan is balanced, however, meaning there will be enough
money over the 20-year planning period to provide services at
the levels set by the council.
This does not mean Sunnyvale has been immune to reducThe ability to maintain stable service levels through ecoing service levels in response to economic downturns such as
nomic ups and downs is an enormous
the dot-com bust or the current recesadvantage in itself, but the budget stasion. The city has had to “reset” its revThe fund ensured that the city bilization fund provides other advanenue base and make permanent
would be able to take a measured tages as well. It gives the city a safety
adjustments to its levels of service. But
Sunnyvale has been able to avoid the
and reasoned response to the net when the economy takes a swift
turn for the worse, as it did during the
necessity of constantly adding or
fiscal crisis, instead of being forced
2008-2009 fiscal year.The fund ensured
reducing services through normal ecoto
take
immediate
action
before
that the city would be able to take a
nomic fluctuations.The city’s long-term
the scope of the problem was measured and reasoned response to
financial plan gives it time to deal
the fiscal crisis,instead of being forced
rationally with required cuts to ongofully understood.
to take immediate action before the
ing operations.
scope of the problem was fully understood. Sunnyvale was able to draw on
BUDGET STABILIZATION
the balance in the budget stabilization fund while city offiFUND
cials assessed the short- and long-term revenue and expendiSunnyvale has a reserve policy requiring that 20 percent of
ture implications, reset the long-term revenue baseline, and
general fund operating costs be set aside to deal with natural
then identified the expenditure reductions that would be
disasters or similar emergencies.The policy also establishes a
needed to balance the long-term budget.The city was able to
budget stabilization fund, to which the city adds or subtracts
avoid layoffs, furloughs, and other such difficult personnel
money, based on economic cycles. One of the primary funcactions. (Exhibit 1 shows the size of the budget stabilization
tions of the stabilization fund is to keep the city from adding
fund from fiscal year 1998-1999 to present.)
unsustainable services during good times and then inevitably
reducing them in bad times. When a jurisdiction receives
increased revenues, adding services or increasing the level
of existing services is a natural response. But unless the
increase in revenues is permanent (and not simply a peak
in the economic cycle), the increased services will just
need to be cut when the economy slows down again and
revenues decrease.
THE PENSION BOMB
Another benefit of long-term planning is the fact that it
forces jurisdictions to consider future issues in the current
planning cycle, eliminating “surprises” that can catch elected
officials off-guard. A recent example of this is the looming
increases in pension costs that will hit Sunnyvale beginning
April 2010 | Government Finance Review
29
Exhibit 1: Budget Stabilization Fund
70
60
Millions of Dollars
50
40
30
20
10
0
1998/
1999
2000/
2001
2002/
2003
2004/
2005
2006/
2007
2008/
2009
2010/
2011
2012/
2013
2014/
2015
2016/
2017
2018
2019
2020/
2021
Fiscal Year
in fiscal year 2011-2012. (Exhibit 2 shows the city’s historical
and projected retirement costs.)
Like most California cities, Sunnyvale provides pension
benefits for its employees through the California Public
Employees Retirement System (CalPERS). In fiscal year 20082009, CalPERS suffered major market losses that reduced the
value of its investment portfolio by nearly 30 percent. These
losses will result in a significant increase in employer contribution rates from member agencies. (Due to the timing of the
actuarial valuations that determine contribution rates, the
market losses of fiscal 2008-2009 will not affect contribution
rates until fiscal 2011-2012.)
As part of preparing the fiscal 2009-2010 operating budget,
Sunnyvale began working with its actuarial consultant and
CalPERS to get information about what the market losses
would mean for the city.That information was used to create
models that would project the cost increases for the duration
of the city’s financial 20-year plan.The results were staggering.
Initial estimates indicated that the general fund pension costs
would increase by approximately $5 million a year beginning
in fiscal 2011-2012.
With all the other financial issues facing Sunnyvale during
the recession, it would have been easy to leave the pension
30 Government Finance Review | April 2010
Exhibit 2: Historical and Projected Retirement Costs
35
30
Millions of Dollars
25
20
Safety personnel
3 percent
at 55
15
10
5
Non-safety personnel
2.7 percent
at 55
0
2000/
2001
2002/
2003
2004/
2005
2006/
2007
2008/
2009
2010/
2011
2012/
2013
2014/
2015
2016/
2017
2018/
2019
2020/
2021
2022/
2023
2024/
2025
2026/
2027
2028/
2029
Fiscal Year
■■ Miscellaneous (non-safety) Personnel, 2.7 percent at 50*
■■ Miscellaneous (non-safety) Personnel, 2 percent at 55*
■■ Safety Personnel, 3 percent at 50*
■■ Safety Personnel, 3 percent at 55*
* The pension benefit multiplier formula indicates the percentage of final (or highest) salary an employee earns for
each year of service, retiring at age 50 or 55.
issue alone and worry about it later. Dramatic reductions in a
number of major revenue sources and a disturbing trend of
rapidly increasing operational costs indicated that if no
action were taken, the city’s general fund would be facing a
structural deficit of approximately $8 million. The increased
pension costs ballooned that number to $13 million in the
next two years.
Sunnyvale’s long-term planning policy forced city officials
to face the impact of the pension problem and develop strategies to address it.With a diminished revenue base,the city had
to figure out how to manage pension costs in two ways: The
base had to be reduced, and the rate of future increases had
to be slowed down. Knowing that pension costs were becoming a more and more significant portion of general fund operating expenditures, Sunnyvale looked at less expensive ways
to provide adequate pensions to its employees and concluded that a two-tiered pension system was a viable approach.
All existing employees would retain their current CalPERS
retirement plan, but new employees would move to a less
generous plan.
When Sunnyvale modeled the proposed pension changes
in the long-term financial plan, the results were encouraging.
April 2010 | Government Finance Review
31
Being able to maintain stable service levels
through economic ups and downs is an enormous
advantage in itself, but the budget stabilization
fund provides other advantages as well.
City officials estimated that making this move would save the
general fund approximately $44 million over 20 years. The
reality of moving to a two-tiered system is that the cost savings
are not immediate,so this fix would not help in the short term.
Looking at the bigger picture, however, the long-term savings
are significant and will go a long way toward creating a more
sustainable retirement model for the city and its employees.
As difficult as it was to address the pension issue at the
same time that the city was dealing with other financial
issues, there were positive effects to doing so. One example is
the momentum created for studying pension reform in
Sunnyvale.Although the city has not yet implemented this significant change, it continues to work toward it. Another substantial effect has been the credibility city officials have generated with the City Council and the community by being at
the forefront of identifying this major issue and developing
long-term solutions. Significant progress has been made on
this issue, and it would not have occurred if long-term planning had not been at the foundation of the organization.
CONCLUSIONS
Sunnyvale’s budget stabilization fund helps it avoid a constant fluctuation in service levels as the economy ebbs and
flows. The city’s long-term planning efforts have also allowed
it to avoid the layoffs, furloughs, and other actions many other
jurisdictions have been faced with. Sunnyvale’s 20-year plan
also forced it to take a good look at its pension situation and
address the problem sooner rather than later. This approach
has allowed the city to take a long-term approach through
economic ups and downs, providing stability to residents and
city employees. ❙
MARY J. BRADLEY has been finance director for the City of
Sunnyvale, California, since 1995. DREW CORBETT is Sunnyvale’s
budget officer.
32 Government Finance Review | April 2010