Enterprise Op-Ed on Measure Q Misses the Mark

We can certainly make an argument that the city budget has been encumbered by the combination of increasing employee compensation at an unsustainable rate while at the same time accruing long-term liabilities that have been unfunded and unchecked.  At the same time the city is removing $3 million from the city’s limited revenue stream, which is a move that is not going to put it on better footing.

That argument I can at least understand, even if I am not ready to endorse it.  The Davis Enterprise argument is difficult to stomach not to mention inaccurate.

Writes the Enterprise:

“OPPONENTS OF Measure Q argue that City Council members and city staff need to do a better job of handling our money, running our programs and protecting residents.  They use a “no” vote on Q as punishment for personnel or elected officials whom they want held accountable. Some critics see the tax as a burden on low-income residents.

We see it quite differently.

Recent economic conditions have forced cities to become creative in their approaches to paying the bills. It is fortunate that, despite the frequent dramas played out on the Davis City Council dais, our city is well-managed.

While other cities wrestle with multi-million dollar budget gaps, Davis’ is a relatively modest $1 million for 2010-11. Thanks to some painful cuts and lots of belt-tightening, we’ve retained a healthy general fund reserve of about $5 million.

That money is the city’s storm cellar. We hope we never have to use it, but it is reassuring knowing it’s there. If we don’t renew Measure Q, that reserve money could be gone in less than two years — or more program and employee cuts loom, which might be the case regardless.”

The first problem is that the city has not been well-managed at all.  We are fortunate that we have not been hit as hard as other communities.  That has to do with the relatively tight real estate market, the fact that this community is upper-middle class and has only recently been hit by the problems affecting other areas.  We haven’t had huge waves of foreclosure, and only with state furloughs and layoffs and now university furloughs and layoffs have we felt what much of the rest of the state has felt much harder, much sooner.

But we are not well-managed.  During the last decade, we have exploded our commitments to city employees and we have yet to feel the full brunt of those impacts.

Davis does have a modest budget gap which we have closed mainly through retirements and closing vacant positions, mixed in with a small amount of savings from new bargaining agreements and the cutback of a lot of city services.

However, we also face much larger problems in the impact of PERS cost hikes and an unfunded liability that is approaching $60 million.  These two factors alone may siphon off as much as $11 million in additional money from the general fund within five years.  Given that number is nearly one-third of our current operating budget, that is something that we should fear.  And yet, not only did we irresponsibly pass policies in the last decade to create the problem, our latest round of employee bargaining has hardly touched them.

The editorial harps on the reserve as though that were some sort of saving grace.  The reality is that the money in that reserve is little more than margin for error.  A real crisis would wipe out that money almost instantaneously. 

Think about this, that reserve is less than one-tenth of our unfunded health care liability, it is less than our pension liability, it is less than the expected PERS rate hikes, it is less than half of our unfunded needs, it is nearly half of our street repair liability.  In other words, is nothing more than a buffer on an annual basis if our revenues do not reach what is projected, as they did not last year, or if we end up with additional costs or less savings than projected, as also happened last year.

And so we have dipped into our reserve this year and will cut more from the budget next year in order to repay it.  That may be an appropriate use of the reserve, but to suggest is helps us plan for a rainy day and that we hope we never have to use it – we already did use it and it provides us with nothing more than a false assurance, because $5 million is nothing.

That is the reality that Davis faces and it is a bleak reality hidden behind rosy projections and rhetoric from the city manager and the finance director.  The truth is that while the city has begun to address  – a little – these serious problems it is really is too little and too late.  We have already started to see other cities talking about declaring bankruptcy, Davis is not all that far behind those other cities.

Reuters had an article that “Bankruptcy talks spreads among California Municipal Officials.”  Officials in our favorite town of Antioch are already talking bankruptcy.  But they are not alone.  They write, “Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm.”  Quoting Mr. Street, “There’s no such thing as entertaining bankruptcy; there’s ending denial.”

That is exactly right.  In a way, we are still in denial even though it seems that the council candidates, or at least four of them, really get it in terms of the impact of employee compensation.  It seems that at least four candidates get the impact that 71% of our general fund budget has on our overall fiscal picture.  In the next five years, we are going to need to find ways to reduce those liabilities, because otherwise we will not survive.

There is no great way to increase revenue right now, or maybe ever.  Think about it this way.  Target is projected to net the city $600,000 in tax revenue.  Many would dispute that number since a lot of those sales may come at the expense of other sales in the city, but assume for the moment that it is true.  If we need to plug a $3 million gap with sales tax revenue that is at least five Target-type additions.  And it will be more because each additional one will have a declining marginal value on the city.  To plug  an $11 million gap created by the unfunded liabilities and increased PERS costs, we would be talking perhaps 20 to 25 Target type additions. 

I think you are starting to see the problem here.  We have heard a lot about focusing on high-tech, green startups for Davis.  I am all for that and I think that is the direction we should go in terms of producing jobs in Davis that are green and sustainable, but let us not be fooled, that is not going to generate for the city sales tax revenue. 

Quite simply, we are not going to grow our way out of the problem.  We need to plan for flat-line growth and we need to hope that the economy does not double-dip back into a recession as it might given the number of furloughs and layoffs locally.

No folks, this city is not well managed, we are fortunate, very fortunate not to be in worse shape, but that is coming and we might not be able to stop it.

—David M. Greenwald reporting