In December of 2012, the Davis City Council voted 5-0 to impose the last, best, and final offer on the Davis firefighters. That action marked the end of the second round of new contracts since the recession hit in September of 2008.
Unfortunately, while progress was made on a whole range of fronts with this round of agreements, the city is actually moving in the wrong direction on revenue.
We estimate the city saved about $336,000 annually just with the fire contract. Add to that a savings of between $88,202 and $231,544 for the shared management agreement with UC Davis, and another $443,663 by reducing staffing from 12 firefighters to 11, the city managed to achieve perhaps three-quarters of a million last year just through savings from fire.
But, as we argued in December, those cuts do not go nearly far enough. The real savings can come if the city were able to further reduce the 25% disparity in compensation between the city of Davis firefighters and UC Davis firefighters. That would not only reduce the $175,000 total compensation by 25%, it would enable the two departments to merge.
It is this kind of thinking that we may be forced to employ, because, unfortunately, the budget situation is not getting better, it is getting worse.
In his December budget update, City Manager Steve Pinkerton presented data showing that the city was moving into a $5 million annual deficit and if the city did not act, that number would increase to nearly $7 million.
Over the next five fiscal years, the city manager projects we will go from a positive $3.68 million fund balance to a negative $28.43 million by the end of fiscal year 2017-18. That is about a $32 million budget gap.
As we have noted many times, most recently in yesterday’s article on pensions, the city made a series of decisions from 1999 until 2005 that laid the ground work for the current fiscal dilemma.
The city of Davis, like most municipalities, moved to enhanced benefits in 1999. At the time, CalPERS funding was superfunded, and cities and local and state governments were not having to pay money into the fund. The investments left over from the dot-com boom of the 1990s were funding pensions without any additional input.
At that time, the city went to 3% at 50 for public safety employees and eventually all other employees would receive 2.5% at 55. The mistake Davis made, like all other communities, was that it made the changes retroactive. Meaning a public safety employee who had worked from 1980 to 1999 making the previous pension formula, was suddenly getting 3% of their salary going to their pensions, rather than the percentage that was being paid into their pension accounts.
That created an immediate unfunded liability – as does the fact that employees receive their pensions based on their final salary, rather than an average salary over the course of their employment.
Davis also created a very generous retiree health benefit. The city did not realize until the new GASB (Government Accounting Standards Board) accounting practices, that it was failing to fully fund its retiree health care.
The round of MOUs in the middle part of the 2000s decade saw double-digit increases across the board, most notably a 36% aggregate pay increase for firefighters from 2005 ending in 2009.
The city survived these mistakes at the time by passing a half-cent sales tax in 2004 and on the wave of double-digit property tax increases.
By 2008, those paying attention were warning that the city was headed for troubled times with their pension and unfunded health insurance liabilities.
As we noted yesterday, during the period of 2008 until 2011, the city engaged in further fiscal mismanagement. City leaders dealt with only short-term budget needs, the 2009 MOU process failed to address key structural problems, and the budgets were balanced through attrition of employees and the designation of wide categories of infrastructure needs as unmet needs.
The city survived that time by adopting two policies. First, they reduced primarily by attrition. So if an employee retired or transferred to another city, the city reduced costs by simply eliminating that position.
Second, the city survived essentially by putting entire categories of needs into an unmet needs category. We have spent a great deal of time and energy discussing the roads issue, but roads are not alone in the benign neglect category.
The problem with this policy is that the recession and fiscal downturn lasted too long. Roads are crumbling and other infrastructure needs have arisen. Because we delayed maintenance, the costs for road repairs has gone up tremendously and the city is actually in far worse shape now than they were in the heart of the recession because of this fiscal mismanagement.
This is particularly important for our current fiscal problem.
Some interesting data emerged in the City Manager’s budget. From the 2008/09 fiscal year until the present 2013-14 fiscal year, the city has in aggregate reduced the general fund budget by $5.8 million and $9.7 million in all funds. To do that, it has reduced its workforce by 103.25 FTE (full-time employees).
In 2007-08 right before the recession hit, the city had 464 FTE. This year that number is 361. That is fewer employees than the city had in 1996-1997.
Those numbers are both critical because it suggests that the city will have difficulty closing the budget gap by simply laying off more employees. The city is in a bind now, in part because the 2009 MOUs failed to deal with the problem and the 2012-13 MOUs, while addressing the structural problem, could only go so far in terms of total compensation and salary reductions.
We need to do a full analysis, but it appears on the surface that $32 million in deficit may actually be a low number.
It appears that the roads funding is not included in the $32 million. The council made the decision last spring that they could no longer fully fund the roads and keep the Pavement Condition Index (PCI) at its current level. So they are prioritizing funding for major roadways and willing to reluctantly accept a lower level of maintenance for residential streets.
We are also concerned about the millions in deferred maintenance that we have for the city parks. We have not seen that report yet but that could end up adding additional money to the deficit. The city made the decision in 2012 to keep the parks tax at the current $49 level even though, at that time, they knew needs would far exceed it.
There are also concerns that there are millions in infrastructure needs for buildings and structures. We also have had to close at least one pool due to maintenance costs, and the city may need to close others if money does not come available.
Finally, while not in the general fund, we have sewer and water infrastructure maintenance that needs to be addressed.
As we have discussed, in the short term the city will put a tax revenue measure on the ballot. In the longer term, the city is looking at economic development strategies to increase the tax base. But by the time that kicks in the city may be in far more hurt than we have ever anticipated.
As we noted on Tuesday, all of this occurs at a time when we face the potential loss of the city manager, who has finally helped to put the city back on more certain fiscal footing, and at a time when there figure to be two or three councilmembers turning over in city hall.
The city of Davis has managed to avoid bankruptcy, but at a huge future cost in potential city services and unfunded maintenance.
—David M. Greenwald reporting