Commentary: Council Must Address and Commit to Cost Containment

The Vanguard readers have been focused on the issue of fairness of the proposed tax, now that council has outlined that they are going to go to a parcel tax – or three – this spring.  But a far more pressing issue is one of cost containment.

The councilmembers often get defensive when I bring up the 2004 sales tax increase where council put a measure on the ballot for a half-cent sales tax increase, warning the voters that without it they would lay off public safety workers and would have to consider closing down parks – and then they turned around the next year and gave the biggest series, at least in recent history, of city employee compensation increases.

While times have changed since those days, we are concerned that the last two employee agreements in 2015 and a few weeks ago contained compensation increases.  More important than that is the fact that, without cost containment, any revenue increase is quickly going to be overwhelmed by increasing costs for employees and city services.

The first problem is, even if the council commits to not using parcel tax money on employee compensation increases, there is enough fluidity in funding systems that it is easy enough to simply shift money that is going for services and infrastructure to parcel tax money, thus freeing up general fund money for salary and compensation increases.

The second problem is actually quite a bit more substantial, and that is the need to hold the line on costs.

In February 2016, Robb Davis put forward a seven-point plan for cost containment.  Take a look at the seven points he makes – there has been some progress on some of this stuff.  But I think many would argue not enough.

The one clear area of progress was the report by Bob Leland, which showed the city was in reality facing about an $8 million deficit.

In December 2016, Mayor Robb Davis told the Vanguard: “The most updated analysis by the City-contracted actuary indicates that even if employee salaries do not grow at all over the next five years, our required pension contributions across all employee groups (police, fire and miscellaneous) will grow by over $4.8 million per year compared to today.”

He added that “while it is true that we are ‘keeping up’ as things stand currently, the cost of ‘keeping up’ continues to grow and that crowds out funding for other projects our community needs to maintain the level of service citizens expect.

“Something must give,” he said.

He expressed similar concerns on Tuesday, particularly with unfunded liabilities for pensions, which are going up again.

He said that pensions are going to go perhaps as much as $7 to $10 million higher. “Can we cut our way out of that?” he asked. “We can if we downsize.” He said, “I am not optimistic that we are going to be able to fill that gap. I am optimistic that we can continue to hold the line on salary increases and the Leland model does assume COLAs of two percent per year.”

He said, “The gap is going to increase whether we add staff or not and it’s going increase significantly.”

The challenge is that without a robust cost containment policy any additional revenue could be swallowed whole in a number of ways – some of which are outside of the control of council.  For example, next year Davis will have an increase of $1.4 million for pensions.  That means even if the city is successful in passing revenue measures for, say, $7 million a year, in one year almost a quarter of that could get eaten up by an unexpected hit for things like pensions.

The question is where do we go.  One idea that I think we should consider is an idea that Rich Rifkin has been proposing for a number of years – limiting total compensation increases in labor contracts.

As Mr. Rifkin pointed out in a column from last year: “The answer to our cost problem is not that complicated. In the labor contracts, we simply need to cap how much more we are paying our employees per hour year after year, based on the growth of revenues.”

He noted that “currently there are no caps on costs.”  As a result, “When the city’s income goes up a bit, we give all workers a raise. When pension expenses then go up more, the city eats that.”

Mr. Rifkin added, “Our labor contracts would be sustainable, however, if they just included this proviso: ‘Next year, total hourly compensation costs will go up by no more than 2 percent.’”

That is something we noted when we examined the fiscal analysis for new development.  What we found when we looked at the Sterling Apartments fiscal analysis is that revenue was projected to increase about 1.9 percent per year, but costs were projected to increase at a rate of 4.1 percent, more than twice the rate of revenue increase.

It doesn’t take a genius to see that that is not a sustainable scenario.  The analysis illustrated that the problem was not development not penciling out, but rather the failure of the city to contain costs over a long term.

Bob Leland’s analysis suggests those costs could rise on average around 2.76 percent annually, which is better than the four percent, but if we implemented Rich Rifkin’s cost-containment plan and limited total compensation growth to two percent, we keep up with the current rate of inflation and the current rate of revenue increase.

His idea is then that additional increases to the cost of benefits would have to be shared by both the employee and the city, and the amount that the city’s compensation to that employee increases would be capped.

He wrote, “For example, the employee whose total compensation this year is $200,000 will cost us $204,000 next year, even if the price of his benefits goes up by $10,000.  That employee then would have choices to make: how much of total comp to take in wages, how much in benefits, in paid time off and so on.  Some workers might prefer to keep more in wages and less in benefits; others might decide to take a pay cut in order to afford the increased cost of their pensions.”

He concluded: “If we continue on our current course, workers will have no choice at all. Most will be out of a job, and the sorry state of city services will get even worse.”

I tend to agree with that.  The problem I see is, without some form of cost containment, we can pass a tax this year – and in a few years, the increased revenue will be effectively gone even without the 2004 bait and switch problems.

It is going to be a tough sell to the voters to get them to pass three taxes in June.  Part of that sell has to be to explain the math – because many do not understand how and why the city is in fiscal peril.  But the other part will be on cost containment and, right now, I don’t see anything tangible on the table for demonstrating that, if we pass $300 in parcel taxes in June, we will still reap the benefits of that money in five years.

—David M. Greenwald reporting



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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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38 thoughts on “Commentary: Council Must Address and Commit to Cost Containment”

  1. Keith O

    It is going to be a tough sell to the voters to get them to pass three taxes in June.

    I hope so, especially when the council is trying to add a tax for a new social services program.  I think it’s also going to be tough if homeowners end up seeing that once again the burden of the new parcel taxes will fall squarely on their backs.  Hopefully our council will structure the tax so that it fairly encompasses everyone.

    1. David Greenwald Post author

      The social service program would fund for example the homeless plan which I think most people believe is near the top of the list of pressing issues.

      My point here is without cost containment, we can’t fund programs like that because the revenues disappears.

      1. Keith O

        The social service program would fund for example the homeless plan which I think most people believe is near the top of the list of pressing issues.

        How do you know that?  It’s not like we’re going to poll to find out either.  I think people who are now opening up their tax assessments might have a much different opinion about that.  In my opinion part of the reason the council decided to not do a poll is they were afraid the social services tax would get shot down.

         

         

         

        1. David Greenwald Post author

          How do I know what? That’s what they were referring to in the conversation, Robb’s social service tax which he put forward as a way to fund the Housing First program.

        2. Keith O

          No, how do you know that’s near the top of most people’s pressing issues?  I don’t believe that to be the case at all, but we have some people that would like it to seem that way.

        3. Matt Williams

          Keith, based on the Coffee With a Cop meetings I have attended, as well as Chamber of Commerce and Davis Downtown and Yolo County Visitors Bureau meetings I’ve attended and discussions I’ve had, I would definitely say the impact of homelessness on our community is very, very high on the list of priorities.

          Further, the same pattern of concern about the impact of homelessness on the functioning of our community was evident in the Council campaign coffees I have attended and Farmers Market tabling sessions I have participated in.

          Who are you talking to who believes the impact of homelessness on our community is low?

  2. John D

    David, it’s sounding like you could be the leading spokesperson for the Yolo County Taxpayers Association.

    The parallels between your comments and those of the taxpayer associations is startling.

    Neither of you seems at all capable of, nor interested in, even discussing the fundamental problems associated with our underperforming revenue models upon which a balanced and sustainable municipal services budget is constructed.

    Don’t you ever notice or tire of the fact that this is a totally one-sided conversation?

    1. Howard P

      Ironic… guess some folk don’t realize public employees are taxpayers, too… know a number of DJUSD employees who believe they should be paid more, support DJUSD levies, and oppose ANY additional compensation for City employees, and oppose City levies, as that might affect DJUSD levies.  Whatever.

  3. Jim Hoch

    “the fundamental problems associated with our underperforming revenue models upon which a balanced and sustainable municipal services budget is constructed.”

    What does that mean?

    1. John D

      David,

      Your response only serves to minimizes the issue and isn’t really helpful.  You are well aware, and have taken extra efforts to share the data on our shortfalls in “per capita” retail sales and associated tax revenue within the city.   So, your readers tend to simply take that as a “given” – with no discussion as to why – beyond the notion that we are a mall free zone.    No discussion at all about what happens when we daily send our highest earners “out of town” for ten hours a day, 5 days a week.  You have written about this, but only in the context of “outbound versus inbound commuters” – without drawing any implications about this pattern.   As you may know, Palo Alto hosts an “in town” daytime workforce population of 100,000 or more on a daily basis.  By itself, the resulting increase in daily purchasing and sales tax – just from that demographic influx – is profound in terms of generating revenues to the municipal enterprise.   The same is also true for the “per capita” commercial property taxes generated by those “resident, in-town” employers (where all these people are employed).   We never talk about that either.   According to our latest state of the city report, outside of “university employment”, the City of Davis hosts a daytime workforce of 21,000.    Do you think that might anything to do with the level of “per capita” retails sales, or “per capita commercial property tax” generated within the city.

      Is it even worth talking about?

      1. David Greenwald Post author

        “Your response only serves to minimizes the issue and isn’t really helpful.”

        I can’t think of a more serious problem than the city failing to generate enough revenue to fund basic levels of service.  And no I don’t agree with those who seem to believe we can simply cut our level of service and avoid dealing with the revenue side.

         

        There are many things worth talking about, I wish more people would be willing to submit articles on some of these issues to generate more conversation.

        1. John D

          Fair enough.

          Maybe we could start with City Staff and some of our Commissions taking some time (precious as it may be) to delve into the numbers reported in their annual State of the City Report and attempt to provide some conclusions and context as the result of their comparison study.

        2. Matt Williams

          Thanks to your help. I have begun reading the State of the City Report, and at your suggestion have begun by reading Appendix D.  The population and jobs numbers in Table D-1 tell a very interesting story.  I plugged them into a spreadsheet and calculated a jobs per person ratio for each of the listed “peer” cities. 

          http://www.davisvanguard.org/wp-content/uploads/2017/10/Screen-Shot-2017-10-20-at-9.16.33-AM.png
          .
          The Davis jobs to population ratio of 50.1% is another important reason “why” the local Davis retail economy is as barren as it is.  Compared to the other “peer” cities there simply aren’t many local workers … and for the most part local workers spend their earnings in their local community.

          That is another of the discussion items about “why.”  What can we do about that “why” factor?  What do you want to do about that “why” factor?
           

      2. Matt Williams

        John D said . . . “You are well aware, and have taken extra efforts to share the data on our shortfalls in “per capita” retail sales and associated tax revenue within the city.   So, your readers tend to simply take that as a “given” – with no discussion as to why – beyond the notion that we are a mall free zone.”

        John, as you know, I am inclined to look at trends over time.  My look at the UCD enrollment vs. City of Davis population compared five 10-year Census increments from 1970 to 2010. My look at the UCD student portion of the City of Davis population also compared five 10-year Census increments from 1970 to 2010.

        So, with that 40-year perspective in mind, has Davis ever had a “normal” retail economy?  By “normal” I mean approximately equal to the Sacramento Region average (or better)?

        I’ve only been here for 19 years, but when I got here in 1998, the retail offerings in Davis were  below average at best.  With the exception of occasional trips to Davis Ace and The Artery and Redwood Barn, if I or my wife were in the mood to buy “things” it was very clear that there were not sources for those “things” in Davis.

        Part of the problem was that I was 51 years old and my wife was 56 years old.  Our days of buying “things” for our personal enjoyment were over.  We already owned all the “things” we wanted.  In fact we were fast approaching the time of life where we would prefer to simplify our lives and get rid of “things” (downsize) rather than add more clutter.

        The 2000 Census came along and confirmed that one out of every eight Davis residents (12%) was 55 years old or older.  When the 2010 Census came along, for every two old fogies like me in 2000 there were three in 2010.  That is a lot of people who are contributing almost nothing to the volume of retail purchases.

        That isn’t going to change.  In fact, it almost surely will get worse when the 2020 Census comes out.

        That is one of the discussion items about “why.”  What can we do about that “why” factor?  What do you want to do about that “why” factor?

        1. John D

          Matt,

          Thanks for the additional perspective and background.

          Clearly there a lot of why’s that we might address.  But thus far, and other than your current posts, I haven’t heard anybody ask Why?   It just seems to be accepted reality that we shouldn’t be a jobs-producing community (outside of the university that is).

          I don’t know why the community feels that way.   I certainly wouldn’t expect the current and future generations of new graduates to be neutral on the issue, but similarly, we never seem to hear from them – on the subject of jobs to match their chosen fields of endeavor.   Personally, I’m fortunate to hear from them regularly, and even more fortune to work with many of them as they explore their pathways to a future career.

          As to your other point about senior spending, there is clearly a silver cloud dimension to the local Davis senior community – where we have an above average percentage of retirees with the financial where-with-all, vitality and continuing interest and support for their local shopping resources.

          Together, these are all important aspects to how we imagine the future trajectory of the community, our local economy, and our available options to foster a truly healthy, balanced and sustainable future.

        2. David Greenwald

          “It just seems to be accepted reality that we shouldn’t be a jobs-producing community”

          Or that we haven’t been and are not likely to drastically change?

        3. John D

          David,

          Same could have been said for Palo Alto, Cal, Irvine, La Jolla, Ann Arbor (and any number of other university centric communities) before their respective change agents – primarily within their respective universities – entered the conversation and began exploring the synergies that might benefit both the university and their host community – including the university’s research missions and jobs placement objectives, along with the business leadership representing commercial developers, agriculturalists and industrialists in those various districts.

        4. Matt Williams

          John D said . . . “Same could have been said for Palo Alto, Cal, Irvine, La Jolla, Ann Arbor (and any number of other university centric communities) before their respective change agents – primarily within their respective universities – entered the conversation and began exploring the synergies that might benefit both the university and their host community – including the university’s research missions and jobs placement objectives,”

          Help me understand your comment John.  Are you saying that the change needs to come from within the University?

          Is the current system not working for them (the University)?

          Has the University ever explored the synergies that might benefit itself and its host community?

           

        5. John D

          Matt,

          Thanks for your questions.  I don’t profess to have any inside track on the right answers, but I do believe there are a number of important questions that we would do well to put on the table.

          The university administration has its hands full with ministering to its needs and priorities.   Not to diminish, in any fashion, all that its faculty and staff do for the community, there are differences in the type of applied research and perceived mission of the many research universities, as well as in the attitudes and approach of their senior leadership, which over time translate into very different outcomes for the associated host community.    My familiarity, while limited, is more with the programs and relationships that emerged at Stanford and UCSD and which led in relatively short order to major policy initiatives within their regions.   A big part of those trajectories related to the pre-existing and embedded companies and industries in those locations.

          There is not doubt as to why the City first recruited the university to Davis.  The university has literally made the city.   But in the early days, virtually all of the commerce was undertaken locally.   And even though the notion of “local sales tax revenues” had never been contemplated – the resulting growth in housing and benefits to the local farming community were profound.

          As I have said before, the issue of changes in our sales and property tax laws over the decades have resulted in a very different fiscal relationship between the entities.  This issue have never become the topic of discussion which it deserves.

          As for your other questions, I can’t answer.   I do know that our “region” does sometimes present challenges in recruiting senior faculty and administrators, and their highly accomplished partners and spouses, owing to the weakness in senior level employment opportunities regionwide.   That the university would welcome the arrival of some major national technology employers to the Davis community is not a question.   What it might mean to the university, I do not have any answers.

          Synergy, and its associated potential for positive change, is largely in the eye of the beholder.

  4. Jim Frame

    The parallels between your comments and those of the taxpayer associations is startling.

    “Even a stopped clock is right twice a day.”

    I strongly believe that revenue sources need to be explored, but I just as firmly believe that a decision by the CC not to design and implement a cost-containment plan will be a statement that they’re not serious about making the hard choices necessary to resolve the budget problems.  Absent such a plan, my votes on tax measures are likely to begin coinciding with those of the YCTA members.  (I say “begin,” because don’t think I’ve ever voted “no” on a local tax measure.)

    1. Howard P

      I agree with Jim on his first statement (although only once if you are one of the rare folk who has a 24-hour clock).

      As to the latter, agree that cost containment is a prime objective… depends how draconian they may be… saying all inflation, health care increases, and PERS increases be fully absorbed by employees, is draconian.  Some want to go farther than that, and roll back all three, then freeze it there for the next 10-20 years.

      The 2%/actual inflation seems reasonable…

  5. Jim Frame

    saying all inflation, health care increases, and PERS increases be fully absorbed by employees, is draconian.

    I think we need to separate general inflation from health care and PERS increases.  I believe that modest inflation is reasonably accommodated by means of a COLA at some regular interval (every year or two or three).  But health care and retirement costs are increasing at alarming rates that far outstrip general inflation, and the private sector employers I’m familiar with have not absorbed most of those costs, choosing to reduce benefits instead.  (As has been noted many times before, defined-benefit pension plans have all but disappeared in the private sector due to costs.)

     

    1. Howard P

      Yet, Medicare and SS ‘absorb’ those increased costs…

      Perhaps it is time to rein in the benefits under SS and Medicare… have the beneficiaries put more skin in the game, or reduce benefits…

      We should definitely “race to the bottom”…

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