Sunday Commentary II: Fiscal Crisis Yes, But Some Light Perhaps

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On the statewide front, Judge Christopher Klein approved the plan that Stockton put together to repay its creditors and solve its bankruptcy without the reduction of pensions. Writes the Sac Bee this morning, “That undercut, at least for now, his own groundbreaking decision on Oct. 1 that Stockton could reduce its payments to the California Public Employees’ Retirement System if it wanted to do so.”

However, the editorial board adds, “The victory may be fleeting. There can be no denying that CalPERS and cities across California still face a huge pension problem.

“Pension payments by local governments in California have almost tripled in the last decade – from $6.4 billion in 2003 to $17.5 billion in 2013, according to the state Controller’s Office. Scarier still for taxpayers, the unfunded liabilities of cities and counties mushroomed from $6 billion to $198 billion,” they write.

They add, “When those bills eventually come due, some combination of higher taxes, reduced services and lower benefits will almost certainly be unavoidable. While Stockton may be an extreme case, it is certainly not alone in paying the burden of too-generous pension promises.”

On the local front, that news combined with new information makes the situation, going forward, murky.

Davis voters in June passed a sales tax that in part will cover increases in employee compensation costs (I say costs because the costs are going up, even as the benefits themselves actually go down), including adjustments by CalPERS to reduce their expected annual rate of return.

Going forward, the city was able to negotiate with five of the seven bargaining units to create a second tier for new employees. This follows the guidelines established by the state in a law signed by Governor Jerry Brown last year.

However, one of the most critical bargaining units, the firefighters, went to impasse and the city was not able to impose a second tier on new employees. That didn’t seem like a huge problem at the time, except that the city has now suddenly hired five new firefighters who will come in under the old rules – rather than the reduced pension formula of 2.7 percent at 55 in place of the 3 percent at 50 that current employees receive.  CORRECTION: Based on the law passed last year, all employees new to PERS are subject to the new PERS benefits.   However, because of impasse, the new hires are not subject to the new retiree medical benefits.

The city’s fiscal position is improving, but the next six to eighteen months will be critical as the city makes key decisions on employee compensation, a parcel tax and eventually economic development in the form of innovation parks.

The city deserves credit for its ability to carve out about $3.9 million in ongoing money for roads. City staff has since verified that $3,930,000 of the $4,700,000 initially budgeted for 2014-15 is ongoing.  This includes the $3 million in General Fund resources, $130,000 in monies from the Construction Tax Fund, and $800,000 from development impact fees that the city council has added to the base budget for transportation infrastructure rehabilitation purposes over the course of 2013-14 and 2014-15.

There is a $3 million ongoing augmentation that has been added to the General Fund base and would continue through the five-year period.

The city previously determined that it would create a plan that would pay about $25 million up front ($15 million in year one and $10 million in year two, and obtained through a parcel tax) and then $2 to $4 million per year after that for pavement maintenance.

While the city has not put forth a parcel tax yet, in September, Michael Mitchell, the Principal Civil Engineer noted, “City Staff have allocated $4.7 million to a paving program (Capital Improvement Project 8250). While this amount is less than the $15 million mentioned above for the first year, it is better than the $1 million previously allocated.”

There are questions already as to how much money per year is even useful as there are practical limits to the amount of construction that can occur in the city at the same time.

The council is planning a retreat for November, where it will work on its priorities. It is conceivable that some of that discussion will focus on the amount and timing of the parcel tax.

Back in June, Councilmember Brett Lee was alone in pushing for a $50 a year parcel tax on roads only.

He said, “I think a parcel tax in the neighborhood of $50 a year over 30 years, would generate about $20 million according to Mark Northcross, $20 million allows us to frontload the road repairs and make a very significant investment.”

He argued that, at $50, it is small enough to leave room for further community discussion about a future comprehensive package of “nice to haves” to come before the council in the spring.

Polling shows that the parcel tax would likely fail at $150 per year and is currently failing at $100 per year, but did not test $50 per year.

The swimming community and Mayor Dan Wolk have put forward the idea of going beyond just roads. Said Dan Wolk in June, “I brought up this idea last time of this Renew Davis concept that we need to think beyond simply our roads into other critical infrastructure that really form the lifeblood of this community.”

One thing that might be helpful would be to get a real sense – and sooner rather than later – of what the city’s needs and obligations are. We know we have park maintenance, pool upgrades, and city buildings badly in need of investment. The question is whether the city has the resources to address all issues, and when and how they should attempt to do that.

With the news that the city has allocated nearly four million per year for roads, I would be reluctant to support a new parcel tax unless there are guarantees that the current allocation of funding remains going to infrastructure rather than allowing the parcel tax to free up funding for increased employee compensation.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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16 thoughts on “Sunday Commentary II: Fiscal Crisis Yes, But Some Light Perhaps”

  1. Tia Will

    With the news that the city has allocated nearly four million per year for roads, I would be reluctant to support a new parcel tax unless there are guarantees that the current allocation of funding remains going to infrastructure rather than allowing the parcel tax to free up funding for increased employee compensation.”

    So as Alan Miller has said in other contexts ” So the sky isn’t falling after all.”

    I think that we may be on the same page with this, but am uncertain due to your choice to phrase it as a negative.

    I would say that I would strongly favor a new parcel tax if there are guarantees that the current allocation of funding remains going to infrastructure.  This to me would be a strong statement that the adults of today are willing to pay for the necessities and amenities that we want without passing the cost on to the next generation either in terms of higher taxes or in terms of predetermining the future of Davis for them.

  2. Don Shor

    except that the city has now suddenly hired five new firefighters who will come in under the old rules

     This seems like an odd use of “suddenly.” Did the city suddenly need five new firefighters? Or were these replacements?

  3. Anon

    “I would be reluctant to support a new parcel tax unless there are guarantees that the current allocation of funding remains going to infrastructure rather than allowing the parcel tax to free up funding for increased employee compensation.”

    Spot on!  I would go one step further and argue that any parcel tax is going to have to go towards road/bike path repair, period.  Include pool repair, and I suspect the parcel tax is DOA.  “Frankly” said it correctly in a post on an earlier article – repair the roads with a parcel tax now, and push for innovation parks and their tax revenue generation ability to fill the coffers of the general fund to take care of pool repairs.

  4. Miwok

    “$20 million allows us to frontload the road repairs”

    Translation: Let’s spend $40 Million for repairs that cost $4M per year, so instead of gradual and incremental maintenance and improvement, we get wild swings of construction and repair that all wears out at the same time.

    So while you are still paying off the $20M, there are years of repairs waiting for funding…. The State Debt for bonds is much the same. Everything gets paid for with borrowed money, and you pay back twice as much as you borrowed.

    Can someone do the math?

    1. hpierce

      Without doing the math you requested, I can affirm you make a good point.

      If you buy a car, and are prudent (assuming you NEED a car), you should budget some money each year for the current costs of operation and maintenance, AND an amount for a “sinking fund” to replace that vehicle at the end of its useful life-cycle.  We haven’t done that for our infrastructure, nor did we do that for contractural obligations such as pensions and retiree medical.  It has caught up with us.

      It seems like a consensus by David, the “progressives” and the conservatives participating on this forum to amend our ways as to funding infrastructure and do everything we can to shed the contractural obligations.  It seems like the sentiment is that all current and  potential revenue should be directed strictly to infrastructure and current O&M costs, and that any unfunded backlog of employee benefits should be eliminated/greatly reduced by contract negotiations, or failing that, by a judge saying that it’s OK to bait & switch, given the other needs.

      1. Miwok

        I played an old game called “Sim City”  years ago, that addressed running a city and roads. Every time you built something, there is a cost for the project, then perpetual costs for the upkeep. I do not feel the politicians know this, as you point out very well, hpierce.

        Contracts are written very poorly, from what I see, and the contractor doesn’t get clear scope of work that ends up costing the City millions. Contractors count on this, developers count on this too. that is why they are always pitching ideas. Large Ideas. “Consultants” are also draining the City of money, because what ever they come up with is not research, and the City is loathe to say it is a bad idea if they paid for it. My take is the CC needs to know figures to make good decisions, the Total Cost of Ownership, and have choices. Staff and Consultants don’t do this that I see.

        When you shift money from one thing to another, one suffers or maybe both. And as many have found out, planning on future revenue is not an exact science.

        Bait and Switch? Indeed.. My retirement fund was switched to a private company that drained all the profit, then asked us for more “contributions”.

        1. hpierce

          Two points, Miwok…

          First, years ago, City staff, particularly PW, pointed out life-cycle costs particularly related to roads… the message was softened by the then CC’s, via the CM’s at the time, because it was an “inconvenient truth”, I suppose.

          Second, I’m assuming your response on the “bait & switch” indicates that if you were shafted, it is only appropriate to shaft others, particularly if they are “on the public dole”.  Kinda a “race to the bottom” approach that seems in vogue.  Completely understandable.

      2. Davis Progressive

        “It seems like a consensus by David, the “progressives” and the conservatives participating on this forum to amend our ways as to funding infrastructure and do everything we can to shed the contractural obligations.”

        in fairness that was the recommendation from city staff and bob clarke.  if you disagree, i’d like to understand your thinking?

  5. Tia Will

    Miwok

    While it is true that I certainly cannot do the math ( numerically challenged) , I believe in a concept that I believe that you are espousing which is pay for what you need and use as you go.  What Frankly and Anon appear to be supporting is a let’s pay for what we consider to be the most important expenditure ( the roads ) now and just wait the five to ten years at least hoping that the new developments will generate enough to pay for what we consider luxuries. I would much rather see a pay as you go approach which I believe is the responsible way to approach both needs and wants.

    Please correct if I have misunderstood the underlying point here instead of just the money.

    1. Miwok

      I am not challenging anyone’s math skills in this topic, hope you did not take it that way.. I am reading State Analysts who declare bond issues by the State paid back over 20 years are twice what the bond was for. I assume City and County financing cannot get better interest rates than the State.

      Pay as you go is great, but these discussions seem to be deferring, maintenance and pensions, and use the money now for other things. THEN borrow some more and use that for the Operation and Maintenance of the City, paying for that with interest. I don’t know where the overhead for pensions and benefits became a deferred cost as well, but even the State does it because they cannot stand a pile of money sitting around for the original use it was intended. I feel the Counties and Cities are trying the same trick, and like Stockton, it is biting them in the ass, and by proxy, US.

      1. Davis Progressive

        “I am not challenging anyone’s math skills in this topic, hope you did not take it that way.. I am reading State Analysts who declare bond issues by the State paid back over 20 years are twice what the bond was for. I assume City and County financing cannot get better interest rates than the State.”

        and what you are not accounting for is the 9.8% inflation rate for asphalt and the $9 to $81 increase in square footage cost as pavement deteriorates.  based on that calculation, the city calculated it would save money by front loading the contracts.

        1. Gunrocik

          Davis Progressive is absolutely correct.  With roads you have the double whammy of high annual inflation for road construction, and the even higher cost of deferring maintenance.  Once you let a road start to deteriorate, the construction cost goes up exponentially.  Thus, every year you wait is more like a 30-40% increase in cost — so it makes a lot more sense to borrow money at 4% and fix the problem now.
          The longer we wait, the greater the maintenance backlog.  Yes, you may end up paying double the cost when you finance over 30 years –maybe less with today’s interest rates — but you will pay ten times as much to fix the roads if you wait.
          It is such a no brainer that I can’t believe we are continuing to fiddle while our roads reach a point where we may never be able to catch up!

  6. Tia Will

    Miwok

    No, I certainly did not take your comment that way. I am notoriously bad at math and frequently excuse myself from people’s mathematical calculations, or request that they translate their analysis into English for me.

  7. Anon

    hpierce: “If you buy a car, and are prudent (assuming you NEED a car), you should budget some money each year for the current costs of operation and maintenance, AND an amount for a “sinking fund” to replace that vehicle at the end of its useful life-cycle.  We haven’t done that for our infrastructure, nor did we do that for contractural obligations such as pensions and retiree medical.  It has caught up with us.”

    Well said!  I could not agree more.  Putting necessary items in an “unmet need” category and declaring the budget balanced, as has been done with the Davis city budget in the past, was “creative bookkeeping” at its worst.

    Tia Will: “What Frankly and Anon appear to be supporting is a let’s pay for what we consider to be the most important expenditure ( the roads ) now and just wait the five to ten years at least hoping that the new developments will generate enough to pay for what we consider luxuries.”

    The reason I feel it is imperative to just pay for roads right now, is because it is the only way to get a parcel tax past the 2/3 majority required.  If other infrastructure repairs are put in place on a parcel tax, such a parcel tax will never be approved.  A half a loaf at this point is better than none.  Then look towards a suitable innovation park or two to pull this city out of its financial hole it got itself into over many years.  However, going forward, I would like to see the city start to take an honest look at the budget, and see how it can start socking away money for future infrastructure repairs and employee pensions/benefits, so we never end up in this pickle again.  Digging out of a fiscal nightmare is hard to do once the damage has been done.  Sometimes the only solution is to inch one’s way forward with slow, measured steps, to achieve the ultimate goal of fiscal sustainability.

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