Sunday Commentary: A Land of Misinformation and Denial

Back on August 5, the Vanguard published an article that argued that “City Employees Must Make Concessions or Face Layoffs by September.”  As we mentioned on Friday, concessions seem increasingly unlikely now and we are likely looking at 20 to 33 layoffs.

The responder wrote, “My question would be why should the city employees have to make concessions or face layoffs? The interim city manager Paul Navazio gave the city council 3 tier levels of cuts. In taking all of tier 1 it would’ve balanced the budget. In the end they took most of tier 1 and some from tier 2. I can’t recall if any was taken from tier 3 but the bottom line is that in the end the budget was balanced and the city was able to maintain a 15% reserve.”

While on the surface this sounds reasonable, it misses a number of factors that require that the city take action.  This is why a multi-year budget would be more helpful, because it paints a more realistic picture than one that suggests we have a balanced budget with a 15 percent reserve (which by the way, we have not really had for several years).

They continue, “Most people would’ve stopped at this point and considered it ‘mission accomplished.’ “

That is exactly what has gotten us into the predicament we are currently in, because it ignores several factors that the council in fact must address, namely infrastructure, unmet needs, PERS (Public Employees’ Retirement System) and OPEB (Other Post-Employment Benefits).

The writer continues, “But the decision was made to take it even further and seek an additional 2.5 million in General Fund savings by September 30^th.”

They add, “Why you ask? Well, the council has two primary validations for it. One of those is to fund street repair. The other is to fund what is being referred to as ‘unfunded liabilities’ with regards to PERS and OPEB. The council has determined that the only viable funding source for street repair is the General Fund. For me this just doesn’t make sense and I can’t help but wonder if the Council was to really put some thought and effort into it that they couldn’t devise of an alternative funding option.”

So, let us start with street repair, since it seems to be misconstrued.  The city has a pavement rating right now that puts it at 71.  Not great, but not horrible.  For the last several years, the city has been funding it through non-general fund sources at around $800,000.

Projections at that rate put the pavement rating as falling to 68.  But that is at the current $800,000 level of spending.  It also in five years puts the deferred maintenance at somewhere between $15 and $20 million.

That is a word that needs to scare people – deferred maintenance – because every time you defer maintenance, the costs go up, not down, to finance it in the future.

But that is not the worst part, the worst part is those projections occurred at $800,000.  What was the projected spending for road repair this year?  $0.  That’s where Tier 2 came into play. Tier 2 put about $125,000 into the road repair fund coupled with $100,000 that the city dug up.  Something, but still taking us into a place of real danger.

So about $800,000 or so of that $2.5 million goes to shore up the road maintenance in the city and ensure that we do not fall further behind where we already are.  That money could come back if the city is eventually able to find grants or other sources for road work, but it is not as though this were a decision that the council didn’t put much thought into.  In fact, they had been discussing it for a full six months prior to the eventual decision.

The response continues: “Moving on to PERS and OPEB issue which seems to be the predominant focus for most folks – the thing is that no one has any definitive information to go on.”

“The fact is that PERS recently showed a 20% gain and OPEB recently showed a 25% which not only reduces the possibility of a future increase, but if any future increase does occur it will possibly reduce the amount of that increase. Another problem is the fact that both OPEB and PERS costs are applied over not only the General Fund but various other special funds as well to the tune of approximately 60% and 40% respectively, so suddenly requiring the General Fund to shoulder 100% of the burden of any future increase is completely unfair and an unexplained departure from previous policy.”

This response really shows a fundamental misunderstanding on several points.

No one can figure out what it means to suggest that OPEB recently showed a “25% [gain].”  OPEB stands for “other post employment benefits,” and “other” distinguishes it from pensions.  In Davis, we are generally referring to retiree health care.  But retiree health is not based on some market that goes up or down like PERS is.

The issue of OPEB for the city is a problem that was revealed in GASB-45 (Governmental Accounting Standards Board statement 45) accounting, as the city did not set aside sufficient money to cover the health benefits for employment upon retirement. This is the unfunded liability.

Once the city learned of the problem, they calculated various costs with continuing the same policy, and to fund the plan as we need it versus the idea of fully funding it from the start.  In the short term it is more expensive to fully fund it from the start, but over a 30-year period, that calculation changes.

So, finance director Paul Navazio developed a way to pay into fully funding over time.  It’s a middle road approach, that builds us into about $4 million in general fund payments and $6 million in overall payments over a 30-year period, after which we will be fully funded.

Councilmember Stephen Souza made the point that we have half of it paid off.  This was not accurate.  What we have done is jack up our payments toward fully funding, halfway to where they need to get.

The point they make about using the general fund to pay off the entire OPEB unfunded liability is false.  What the council has proposed is simply moving toward the $4 million level in the general fund sooner, which will save the city money. There is still an all-funds amount that needs to be addressed as well, but not in this budget.

Moving on to PERS, there is a lot more uncertainty there.  The response is correct in stating we do not know how much we will have to pay for PERS and when.  I think the recent fall in the market dispels any notion that we can avoid rate increases.

Rate increases are going to happen.  We have known that since 2008.  The real question is whether they lower the ARR (Assumed Rate of Return), which is a 30-year projection, from 7.75 down to 7.5 or perhaps lower.  Everyone believes that too will happen.  For each .25 percent decrease, we are looking at another million from the city to compensate.

What are we looking at between PERS and OPEB?  By my figures, and Mr. Navazio confirmed this, we are likely going to have to pay around $7 million more in pensions and health benefits in 2015 than we are now.

If we act now, there are lots of ways to get there.  If we wait until those bills come due, then we have to make drastic changes in a year or two’s time.  By acting now, we can spread the pain and plan better.

And that is where the response piece really misses the point.  They see the now, a balanced budget, but you cannot budget for one year, you have to look at the five-year figures.  Unfortunately, this is where Paul Navazio is his own worst enemy, because he never factors in the full picture.

They write, “Mr. Greenwald’s subtitle of ‘City Employees Must Make Concessions or Face Layoffs’ almost sounds like a threat or some type of bullying tactic.”

Obviously, I don’t have the power to make threats.  It is strongly worded for sure, but it seems that most employees have been led to believe they can escape this mess without serious changes, and that is simply false.

“Essentially the council is seeking this 2.5 million not because the city is in danger of going bankrupt, not even because it’s in danger of going into the red for that matter (remember that the budget is balanced and there’s a 15% reserve) – no, it is seeking it because they want to fix some potholes and they want to set aside some money they’re not certain they’re going to need, when they’re going to need it, or how much they’re going to need.”

This is completely misleading.  Cutting $7 million right now is not going to put the city in danger of bankruptcy, but it is nearly 20% of the general fund.  We are not talking about fixing some potholes, we are talking about keeping up on the maintenance schedule because deferring maintenance will put a real crimp in the budget in the future.

“The columns of Rich Rifkin and David Greenwald would have people believing that city employees have never agreed to any concessions thus far.”

Frankly, that is irrelevant.  The real point is that 80% of our budget goes to employee compensation and we have to cut $7 million over the next three budgets (at least) from about a $38 million general fund.  Do the math.

It is unfortunate that the debate has been so skewed.  These talks should have happened back in 2008, but the last council kept kicking the ball down the road.  Now we are in a pretty serious jam.  We may not be facing bankruptcy at this point, but we are facing very serious cuts.

It seems that too many live in the land of denial and fail to understand the mechanisms at play here.

—David M. Greenwald reporting