Urgency: Why Council Must Act Sooner Rather than Later on the Budget

Back on June 28, the Davis City Council passed, by a narrow 3-2 vote, a budget that started to fix what had been decade-long fiscal mismanagement of the city.  Over the course of the last decade, the city council has allowed total compensation, salaries, benefits, other post-retirement benefits (OPEB) and pensions to become unsustainable.

Employee compensation has grown to the point where it makes up 80 percent of our general fund expenditures.  To maintain the fiction of a balanced budget, the city simply slipped unmet needs into a second category that suggested as late as 2008 that we had a balanced budget and a 15-percent reserve.

The fiction collapsed along with Lehman Brothers, the real estate market collapse, and a deep and prolonged recession.

We have seen declining revenues the last three years, and projected revenues appear to be flat, at best, for most of the next five-year period.

The problem that we face is that costs are not flat.  Those unmet needs are piling up into deferred maintenance, exacerbated by the fact that other non-general fund sources of revenue have dried up.

The city discovered several years ago that it had a $50 to $60 million unfunded liability for OPEB, which for the city constituted a very generous retiree health care package.  The city has decided to fully fund that benefit – the right move when you look at the long-term costs – but it will take the city 30 years to get to full funding, which will cost the city a lot more than other means.

The city presently is halfway to the level it needs to be at, in order to fully fund retiree health in thirty years.

The most uncertain part of this is pension costs.  We know, based on current projections, that the costs to the city for pensions is going to increase by some amount over the next three years.  That is due to loses from 2008 that were staggering.

Prior to the most recent economic uncertainty, it looked as though PERS (Public Employees’ Retirement System) had recouped a portion of those losses.

At stake is whether CalPERS will lower their earnings projection.   Currently, they have maintained the standard 7.75% assumed rate of return. However, many believe that a 7.5 or 7.25%, or even lower rate of return, is more reasonable, given the current economy.  It is important to understand that the ARR is set to a 30-year forecast, but higher projections for rates of return mean the creation of another unfunded liability.

Every quarter percent appears to mean another million in the all-funds budget.

Put together all of these pieces and Paul Navazio, the city’s finance director, believed back in March that we could be looking at $7 million in additional costs to the city by 2015.

The city’s general fund is around $37 million, give or take, so we are looking at a very sizable chunk.  Those looking for solutions that do not involved personnel cuts should remember we are looking at 80% of that $37 million going to personnel.  It is hard to imagine cutting nearly one-fifth of the general fund’s budget without it impacting city employees.

Based on that projection, the council passed back in June a proposal to take $2.5 million in current personnel costs to address these shortfalls.  The most urgent is $1 million that goes to street maintenance.

I have made this point many times over the past year.  The city has typically spent $800,000 on road maintenance from non-general fund sources.  This year those sources were completely gone and the city had no funding.  Tier 2 cuts provided a miniscule $150,000 for the street maintenance.

How much do we need?  At the $800,000 level it was projected that our pavement index would decline and deferred maintenance increase.  The council is looking to fund street maintenance up to $1 million total, including the Tier 2 cuts, with $850,000 coming from the $2.5 million.

They would then take $1 million and plug it into to OPEB, which will bring us closer to getting up to the level to where we can close that gap over 30 years.

$500,000 would go to PERS, the most speculative of the moves since we do not know for sure that that number is going up.  The remaining $150,000 would be an unallocated contingency.

One important point that needs to be made is that, despite the 3-2 vote, everyone on council agrees we need to do this at some point. The question is only about the best timing and best way to do it.

An argument against doing this now is the timing of the MOUs.  The argument is that the contracts come up next June, and so next year is the time to incorporate these cuts, not this year.

I can see that perspective, but there are three reasons I disagree: (1) $2.5 million is not the end of cuts, (2) there are ways to cut the $2.5 million that do not rely on concessions and are needed; and (3) I am not convinced we will get huge concessions from the city employees even when the MOUs come up for renewal.

Let me add a fourth reason not to wait, and that is the urgency of the road maintenance.  Because of contract schedules, the soonest we could let the contracts for street maintenance would be spring of 2013, if we wait.  In the meantime, the city faces deteriorating road conditions and potential liability.

That is by far the most urgent of the items.  The remaining $1.5 million in cuts could be phased in, and could start taking place earlier.

We have already made the first argument that the $2.5 million is not the end of cuts, and the idea is to space them out so that when 2015 comes we are not having to cut $7 million in a single budget.

That allows us to plan more carefully and attempt to mitigate impacts on employees and the public alike.

The second point is critical.  We have to understand that the sum total of reforms does not involve employee concessions.  We need to streamline government.

As the city put it, we need to look for: “1) potential savings being identified through a series of reorganization and restructuring proposals across all City departments, 2) program areas where potential savings could be achieved through alternative service delivery methods (including, contracting, shared-services, and public-private partnerships),and, 3) specific program reductions.”

One way a lot of people were counting on to get at least part way there were fire staffing changes, where the City of Davis would join most of the rest of the state and put three on a fire engine.

Beyond that, we need to address middle management and other positions which do not directly involve the provision of services and interaction with the public, to streamline government.  Finally, there may be program areas where we can find savings through alternative service delivery methods.

Not one of those areas requires changes to MOUs, except fire staffing levels.

Finally, we need to recognize that the ability to gain much from employee concessions is constrained by the collective bargaining process.

The DCEA (Davis City Employees’ Association) contract situation is a good sign that it is going to be tough to get concessions from employee groups, and they are balking at most reforms proposed in the last round of MOUs.  The impasse process is far from straightforward.

And, while I generally agree that the city blundered in how they went about the impasse, I also believe that any strategy that requires the imposition of contracts on employee groups is going to lead to delays and lawsuits

Moreover, impasse does not solve the problems longterm. It is a contract-to-contract situation.

Employees are angry right now, believing that they are being unfairly targeted.  I would argue that the primary culprits in this are, ironically, the same people responsible for the compensation problems we now face.

Contrary to popular belief, we are not under the belief that employees have not agreed to any concessions thus far.  Rather, our concern is that they have not agreed to sufficient concessions to fix the problem – a problem rooted in policy changes regarding pension formulas, salary increases, and retirement health and cafeteria cash-out policies.

As Mayor Krovoza put it last week, given the hiring of Steve Pinkerton, it seems reasonable to hold back and let the new city manager – a man with experience cutting spending – take a full look at the city’s budget situation.

“The theme that I’m most sympathetic to in all of this really is the observation that [Councilmember] Sue [Greenwald] made when we were at the end of June which was that we were going to potentially bring on a new city manager in the interim between the stated goal the council passed in late June and the end of September,” the Mayor said last week.

“I couldn’t agree more that this is a very complex issue of both finding the cuts and managing through them – so the idea that those things are developed in concert makes sense to me,” he said.

“I don’t think it’s fair to ask our new city manager, who arrived on September 2, to figure this out in a month,” he said.

Nevertheless, we expected more than we got last week.  And so, too, did the Mayor.

The Mayor said, “While we don’t have $2.5 million in cuts here, we don’t have two, we don’t have 1.5, we don’t have one, we don’t have 500.”

“We have spent three months,” he said, pointing out, as well, that even the Finance and Budget Commission had the better part of two months to look into recommendations for cutting $2.5 million from the budget “to at least start to bring us some movement on this issue.”

More should have been at least put on the table for discussion, thought and consideration.

The Vanguard continues to believe there is an urgency to get these cuts this year, and have them done and off the table in time for the next round of employee negotiations, which will be heating up sooner rather than later.

—David M. Greenwald reporting