Introduction

Los Gatos is a town in California that is located in the level terrain of Santa Clara Valley (“Silicon Valley”). The town covers an area of 15 square miles. Its current population is 36,601. The town has undergone rapid growth and has vibrant business districts, and it is governed by five council members who are elected for a term of four years. The council appoints the town mayor and vice-mayor who serve for one year (Los Gatos Town Financial Report, 2018). The economy of the town is consistent with the economy of other Silicon Valley Communities.

The economy is strong and s financed with revenue from property tax, Business License Tax, transient economy tax, and license and permit revenues. The house-marketing is softening since homes take a significantly longer time to sell as compared to previous years. The town’s general fund revenues have increased as compared with the year-earlier (Kirshner et al., 2018). The paper is a financial report for Los Gatos for the fiscal year that ended on June 30, 2018.Los Gatos continues to make great strides in its strategic priorities. The council is working towards improving infrastructure that includes the installation of bicycle and pedestrian improvements and proceeding with the work on Almond Grove Street.

The council is embarking on the construction of accessory dwelling units.  It has approved the piloting of a few streamlined processes with the aim of enhancing community vitality and support local businesses. The town is focused on fostering its emergency preparedness capabilities during the 2017/2018 fiscal year. The economic vitality program is playing a key role in the town by connecting prospective businesses and the provision of individualized assistance to retain and attract business operations in Los Gatos.

The total budget fund activity of the town is divided into four categories based on the purpose of the fund. They include operating fund, fiduciary funds, capital funds, and RDA Successor Agency Private Purpose Trust Fund. Various operating funds finance ongoing operations, and they include the general fund departmental program operations, as well as the special revenue activities and internal service functions.

Fiduciary funds include trust and agency fund which are held in fiduciary capacity. Capital funds are used for completing capital projects and the resulting decrease in fund balances. The city council of Los Gatos approved a budget of $9.29 billion during the 2017/2018 fiscal year. The town realized a revenue growth in the general fund and budgeted special funds during the fiscal year. The town realized a 3.6% increase in total revenue in FY 2017/208 compared to the previous fiscal year (Los Gatos Town Financial Report, 2018).

The national Government finance officers association awarded the town a certificate of achievement for excellence in financial reporting in response to its comprehensive annual financial report for FY 2017/2018. The prestigious award recognizes the conformance of the report to strict standards of accounting and reporting established by the government. The town’s account has to be audited by an independent certified accountant as required by the state law (Los Gatos Town Financial Report, 2018).

Revenues

The town has realized an 8.1% increase in general fund revenues in the 2017/2018 fiscal year. One of the significant sources of general fund operations is property tax revenues. It comprises of approximately 39% of general fund revenues in FY 2017/2018. The town collected a property tax of $16 million which is $1.2 million higher as compared to the previous year (Los Gatos Town Financial Report, 2018). The trend reflects the continued desirability of the town, its culture, environment, and educational opportunities.

The town heavily depends on sales tax revenues to support general fund operations which comprise of approximately 18.7% of General Fund revenues (GFRs) in FY 2017/2018. The sales tax receipt for the FY 2017/2018 was $ 7.6 million, $1.2 million lower compared to the previous year. Several factors contribute to the decreasing collection of sales tax revenue. They include decreased gasoline prices and increased online sales versus the brick and mortar shopping (Los Gatos Town Financial Report, 2018).

Cost Drivers

A significant portion of the budget caters for the cost of salaries.  Salaries and other benefits account for 46.3% of total expenditure, and 59.5% of the General Fund expenditure in 2017/2018 fiscal year. Wage freezes unpaid furloughs are usually when monetary conditions worsen due to the recession with the aim of attaining a balanced budget. Revenue enhancement played a crucial role in balancing the 2017/2018 budget (Los Gatos Town Financial Report, 2018). Revenue enhancement was caused by the positive economy and economically sensitive source of revenues like property tax, business license, and transient occupancy tax.

Employer-paid benefits are likely to rise in the foreseeable future. Employer-paid benefits include pension contributions, premiums for retiree health coverage, and the current health plan whose current cost is on the increase. Pension accounts for a significant portion of the town’s budget since it has an obligation of contributing a necessary amount to the California Public Employees Retirement System (CalPERS). An actuarial formula is used in determining the rate.

The town is currently under pressure to deal with the increase in pensions rates. The council has been active in managing the anticipated cost escalation in its pension and other benefits associated with post-employment. The most significant long-term cost drivers for the town include pension and post-employment benefits (OPEB)(Los Gatos Town Financial Report, 2018).The general funds are playing a critical role in maintaining high service levels in the town despite the reduction of revenues and increasing cost.

The cost of funding medical plans increased during the FY/2017/2018. A decrease was realized in the previous fiscal year. The unstable rates may create unpredictability for budget projection. Employees contribute a share of dependent premiums to assist in the containment of cost. The cost of energy is also a significant cost driver in the town. Energy costs include fuel for safety and maintenance of vehicles, electricity used for heating and cooling buildings, water for landscaping and parks, natural gas, and lighting for street lights, parking lots and town facilities (Los Gatos Town Financial Report, 2018).

Steps have been taken with the aim of ensuring water conservation and energy efficiency in town facilities. It looks forward to reducing the cost of fuel through the use of electric vehicles and the installation of electric vehicles charging stations through the town. The town council is exploring ways of introducing alternative energy with the aim of reducing cost.

Total Expenditure

Source: Los Gatos Town Financial Report (2018).

The total budget expenditure can significantly vary from year to year. The total spending decreased by 12.5% in 2017/2018 Fiscal year. The expenditure on salaries and benefits increased by 7.7% due to negotiated salary increases and increased costs of benefits. The expenses of budgeted fixed assets mainly stem from scheduled vehicle and equipment replacements. Although expenditures tend to vary from year to year, the variation does not impact the current year departmental charges. The changes in operating costs, salaries, equipment replacement schedules, and cost allocation have primarily contributed to a 9.1% increase in internal service charges (Los Gatos Town Financial Report, 2018).

Assets and Liabilities

The town has taken significant initiatives with the aim of addressing the crucial capital asset and infrastructural needs that were considered a priority in the FY 2017/2018. In the 2017/20818 fiscal year, approximately $ 10million worth of infrastructure and other capital assets improvements were made. About $5.1 million was invested in various projects that are currently in progress. The town has approved a capital improvement plan that caters for additional infrastructure improvements. These improvements are funded by grants, or accumulated revenues savings or excess of the previous year budget as per the policy of the town council (Los Gatos Town Financial Report, 2018).

In FY 2017/2018, the assets of the town exceeded its liability by $10.9 million (net position). The net position of the town decreased by $7.8 million during the fiscal year due to the latest GASB pronouncement concerning pension and OPEB obligations. $49.35 million of total fund balances for government funds was realized at the end of the fiscal year representing a decrease of $3.797 million (7%), as compared to the previous years.The fund balance decreased because the expenditure was above the general fund revenues. The general fund balance was $30.428 million at the end of FY 2017/2018 which represent approximately 83% of the general fund expenditures. An increase of $ 5.883 million of the total capital asset to $10.21 million net of depreciation was realized (Los Gatos Town Financial Report, 2018).

The town uses fund accounting with the aim of ensuring and demonstrating compliance with finance-related legal requirements. The finances are categorized into fiduciary, government, and proprietary funds. Essential services are reported in the governmental funds, and the internal service finances are a type of proprietary funds maintained by the town. Fiduciary funds are used for accounting for resources held that benefits parties outside the town (Leuz & Wysocki, 2016).

The town provides cost-effective services since its budget focuses on outcomes for the community and allow for long-term financial planning decisions. It focuses on priority issues involving maintain public safety and infrastructure. The town is proactively engaged in the reduction of operating expenditures, identification revenue enhancements, and implementation of operating efficiencies (Chandra, 2018).The financial report aims to provide the stakeholders and shareholders with the general overview of the town’s finances thereby demonstrating its accountability for the money it receives. The investment portfolio of the town slightly increased in its overall weighed mean yearly yield. It rose from 1.255 in 2017 to 1.73% in 2018 (Los Gatos Town Financial Report, 2018).

Conclusion

The town should focus on building up reserve funds during the years of steady growth with the aim of preparing for future downturns. The combined reserve of the city has increased in the last ten fiscal years due to a combination of strong revenue growth and budgetary restraints. It rose from 3.4% to reach a peak of 9.4% in 2015/2016 financial year. It has currently declined to 7.2%. Reserve fund was established with the aim of ensuring the availability of funds for unanticipated expenditures and shortfalls in general fund revenue. The reserve fund should be at least 5% of the annual general fund budget. Budget stabilization fund (BSF) was established in 2011 for setting aside funds to be used when revenue projections are exceeded thereby assisting when there is revenue decline or stagnation. In FY 2017/2018, BSF slightly increased to $96.4 million. The debts of Los Gatos have been decreasing since 2012.

References

Chandra, P. (2018). Financial management. Tata McGraw-Hill Education.

Kirshner, J., Winkler, F., Fellmeth, R. C., & Gramme, B. F. (2018). Public Utilities Commission. California Regulatory Law Reporter, 23(2), 141-190. https://digital.sandiego.edu/cgi/viewcontent.cgi?article=1087&context=crlr

Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), 525-622.https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.12115

Los Gatos Town Financial Report. (2018). Comprehensive Annual Financial Report Fiscal Year ending June 30, 2018

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