If You Don’t Like The Forecast, Change The Policies, Not The Forecast Assumptions

posted in: Budget 2022-2023 | 1


A letter to the editor of the Bay Area News; Los Gatan; Los Gatos Weekly; Spotlight

CC: Los Gatos Town Council; Los Gatos Finance Commission


To give you context, please see the article in the BayAreaNews that incensed us enough to write this dire warning to all who read the article or watched the Town Council meeting on 2-15-22 :


If you don’t like the forecast, change the policies not the forecast assumptions

In listening to the Council’s discussion on February 15th of the Town’s 5-year forecast ending FY 2027, one can’t help but become extremely discouraged. When presented with a very troubling forecast, which projected cumulative deficits totaling -$10.4m over the next five-year period, no one seemed particularly concerned. Much of the discussion probed the reasonableness of certain planning assumptions coupled with the occasional hopeful statement that possibly the future could be better.

Let’s be clear, the purpose of a five-year forecast is to enable and encourage our elected leaders to critically examine the current financial glide path and to make tough decisions to deliver a different and better outcome. It is a call to action.

As an example, the 5 year forecast projected salary expense growing at a compounded growth rate of approximately 2.1% through FY 2027. That would be a truly remarkable outcome considering that over the past five years, salary expenses have grown at a compounded growth rate of 6.8%. And that is before the inflationary cycle in which we currently find ourselves.

Every experienced financial planner knows that if an “upside” scenario is presented, it also is appropriate to provide a “downside” scenario. In this case that downside scenario should include an analysis of what would happen if salaries increase at the historic rate of 6.8%. Without this balanced “context,” the Council will not be informed as to tough decisions it must make to control the upward cost pressure on the Town’s largest cost element. This is a great example of “changing an assumption” to make one feel better to avoid making decisions.

We can provide context the Staff failed to provide to the Council: if history repeats itself, and salaries increase by 6.8% annually, the cumulative deficit in 2027 will not be -$2.3m, but -$8.1m!

Let us close with this chilling point – if the Town does experience the cumulative $10.4m deficit through FY 2027 in its optimistic forecast, the General Fund balance will decrease to $13.5m from its current level of $23.9M. That’s almost a 50% reduction over the next five years. We are alarmed by that outcome.

However, it likely will be even worse. If salary expenses increase at the historic annual growth rate of 6.8%, that higher rate of increase will accumulate to an additional $16.5 M of losses.  This incremental $16.5 loss will wipe out the $13.5M balance in the General Fund. Consequently, the General Fund will be more than fully depleted by FY 2027. This is the more likely scenario, and unless hard decisions are made to change the current financial path, it may well become our reality. It’s time for our elected Town Council members and their appointed staff to get to work and make some tough decisions.


The Los Gatos Community Alliance

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