Following yesterday’s column, the Vanguard received some important feedback on the fiscal state of the city. One problem that many failed to recognize is that the recession which started in late 2008 did not cause the city’s fiscal problems – rather, it exposed them.
The city’s fiscal problems were caused by a series of decisions starting in 1999 and 2000, when the council greatly increased retirement pensions and medical benefits and then, in the middle period from 2004 to 2009, greatly ramped up employee compensation.
However, the city was able to absorb those increases at the time, in part due to a booming real state market which produced annual double digit increases to property taxes and a 2004 half-cent sales tax increase.
But even before the recession, the Vanguard and others were warning the city that the situation was unsustainable. It was only when the recession hit in late 2008 that that became evident.
The problem a lot of people miss is that, even during the recession, the period when the city had declining revenues was extremely brief. For the most part, the problems were caused not by the decline in revenue, but because costs escalated faster than revenues.
As Robb Davis pointed out in August 2016, “Over the past 15 years, total general fund revenue has grown by 95 percent while general fund expenditures have grown by 92 percent. Revenue appears to have kept pace with expenditures.”
Part of the problem was that, in order to balance the budget in the lean years, the city effectively took expenditures on things like roads, parks and city-owned buildings off the books.
The other problem is retirement benefits that are owed. The unfunded liabilities we face are enormous. Earlier this year, Robb Davis wrote, “The most updated analysis by the City-contracted actuary (done before the most recent reductions) 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 $5.5 million.”
He added that “these extra millions cover ONLY pensions. They do not include medical costs and non-employee cost increases related to City services. It is no exaggeration to say that over the coming 5 years (and beyond) we need $15-29 million each year to cover all these costs combined.”
Concluded Robb Davis, “[W]e have a dire fiscal situation in our city.”
The other way that we reduced costs during the recession was by reducing staffing. But this too has been problematic. For one thing, as Robb Davis points out, “we have reduced staffing by a quarter over the past decade but that downsizing has been done in a non-strategic way—via attrition primarily.”
But it is worse than that, as we have constrained our ability to deliver city services while not impacting the bottom line and restraining employee cost growth. Thus, despite cutting our workforce by over 100 full-time employees, we are paying more in total compensation than we were in 2008.
As we pointed out yesterday, all of this was happening while the former mayor was declaring a balanced budget and fiscal resiliency.
It wasn’t the city manager who was able to identify these problems, but rather the work of the Finance and Budget Commission, through “Project Toto,” and the work of Mayor Robb Davis, who finally pushed City Manager Dirk Brazil to hire consultant Bob Leland who identified the $7.8 million annual shortfall. Again, that represents a low figure for sure, but at least we have an understanding that the paper balanced budget is not a reflection of reality.
The correspondence notes that it was not Steve Pinkerton who got the city into this mess – in fact, without his work to cut staff and streamline city services, things would undoubtedly be far worse – and it isn’t the current city manager who is going to get us out of this mess.
In fact, I would argue that very little has been done between 2014 and now to address the city’s structural problems.
It wasn’t until earlier this year when Bob Leland’s report came out that the city even acknowledged what many have been saying for several years.
While a revenue measure would be at best a short-term band-aid on the city’s problems, it is worth noting that the only revenue measure that has been placed on the ballot was done so in 2014 while Steve Pinkerton was still city manager.
Since then the council failed to act on a follow up parcel tax for the November 2014 election, and failed to present any real revenue measure (they did put a slight increase to the Transient Occupancy Tax in June 2016) in 2016. A revenue measure would not solve the city’s fiscal problems, but it would have cut into the $7.8 million shortfall.
The city has hired Bob Leland under pressure from the mayor and the Finance and Budget Commission, but has not developed a plan to deal with unfunded liabilities or infrastructure needs. The current city manager notably lacks finance experience and the city has been largely operating without a finance director for several years.
Finally, the city had created a strategy to improve economic development several years ago as a means to diversify and increase tax revenue. However, the proposed innovation centers have largely fallen off the radar. The city has failed to double-down on the dispersed innovation strategy and, as one commenter noted to the Vanguard, since the departure of CIO Rob White, has not reconstituted the Business and Economic Development Commission.
Even with a string of bad luck, the city has opportunity in this area. Nishi, with an estimated 300,000 square feet of R&D space was defeated, but MRIC (Mace Ranch Innovation Center) now at least has a pulse, and the city has seen the private development of both the Sierra Energy/Area 52 Innovation Area as well as the University Research Park.
The reality is that, while the city has challenges in this area, it also has huge opportunities but it needs leadership to push this through. The areas of economic development and finance are going to be crucial to the long-range health of the city.
That vision needs to start with the next city manager hire – someone that can help to marshal our assets and put us on a strong course for fiscal resiliency.
But my sense from the start was that the current city manager never really understood until perhaps too late the severity of the city’s fiscal plight, and never really believed in the need for large-scale economic development projects. That I think is where the city needs to focus its efforts in order to turn this ship around.
—David M. Greenwald reporting