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7.A - Page 11 Preparing for a Future Economic Downturn The economy has been in an upward, or expansion, phase of the business cycle for more than eight years. Historically, the expansion cycle lasts about five years. Some economists have indicated that there is not yet any significant evidence that the economy has hit the peak of this cycle, i.e. inflation or rising interest rates. However, the economy is definitely in a "late -stage" of expansion. Economic growth is expected to continue but at a slower pace during 2018 and 2019 and beyond. Employment continues to grow particularly in the Silicon Valley region, where the unemployment rate is so low it is considered "full employment." The area continues to be a high-income region relative to the state and the nation. However, wage growth has barely kept pace with inflation over the past year, and economic expansion also has amplified some of the region's most pressing challenges: traffic congestion and unaffordable housing. Ultimately, the recent federal tax reform will likely provide a boost to the economy in the short-term as capital investment and consumer spending is encouraged. However, due to the front -loaded nature of the tax law, nearly every analyst agrees that the economic impact will fade, although there is not agreement as to when this will occur. For these reasons, it is important for the City to take a forward -thinking, long-term approach to mitigating the City's financial liabilities and proactively prepare for future recessionary impacts that loom on the horizon. Long -Term Solutions Staff is proposing a balanced approach to meeting these challenges. The Financial Sustainability Plan seeks to reduce costs strategically through increased efficiencies and other cost reductions in order to preserve essential and high-quality City services. Reducing Operating Costs The FY 2018-19 Financial Sustainability Plan includes cost reductions of approximately $3.8 million, including 17.1 budgeted City staff positions. Because employee costs represent approximately 74% of the General Fund operating budget, it is not possible to reduce operating costs significantly without affecting budgeted positions. This includes 6.0 vacant Police Officer positions and 3.0 vacant Firefighter positions. It also includes a reduction of Library hours beginning in January 2019, shown in Attachment 3, and elimination of certain after-school and summer programs for local children. In FY 2019- 20, staff recommends additional reductions of $2.2 million. A more detailed description of