The City’s Structural Deficit Is Solved

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By Dan Carson

Dirk Brazil must have a great sense of timing. He is waltzing into his new job as Davis city manager just as new data suggest that the city’s once-formidable $5 million structural budget shortfall is, for all practical purposes, solved.

As I predicted in a written analysis I prepared for city officials six months ago, the city is getting closer and closer to resolving a festering structural General Fund budget shortfall. The latest evidence is a city staff report to the City Council, released Friday, stating that the city closed the 2013-14 fiscal year that ended in June almost $850,000 to the better than had been assumed in the city’s prior forecast.

In particular, the staff report indicates that property tax revenues were up $570,000 over the amount the city had been projecting for 2013-14 as recently as last April. The total property tax take in 2013-14 of about $17 million represents an increase of roughly $1.4 million or 8.7 percent over the prior year – far more than the 1 percent revenue gain that had originally been forecast when the 2013-14 budget was adopted.

These property tax gains are due largely to a strong and ongoing recovery in the real estate market in Davis from the 2008 housing recession. For example, the property tax numbers reflect a big increase in supplemental tax payments that purchasers made when they bought properties that were previously assessed well below their true cash value. Under Proposition 13, such a property sale triggers a reassessment based on the purchase price – and the collection of more property tax monies for the city as well as other jurisdictions in the county.

As city staff acknowledged in its Friday report to the City Council, it is highly likely that these property tax revenue gains will “stick” and continue into future years. In fact, property tax revenues will almost certainly grow even further in 2014-15. The county assessment roll released last June increased the taxable value of property in the city of Davis by 4.49 percent to $6.9 billion.

In my view, this points to continued gains in property tax revenues above the 2 percent rate that the city assumed for 2014-15 in its most recent budget. The city has already received $420,000 more in property taxes in 2013-14 than the city assumed it would get from property taxes in 2014-15 when it adopted the current budget last summer. Clearly, those now-outdated fiscal projections understate city property tax revenues, probably by hundreds of thousands of dollars or more over the projection period.

More good fiscal news is on the way, at least in the short term, based on my interpretation of a presentation to the city Finance and Budget Commission by the city’s actuarial consultant, John Bartel. The amount of money the city has to budget from the General Fund for pensions could be several hundreds of thousands of dollars less in 2015-16 than the city had been assuming.

The fiscal forecast released last April had assumed that the city contribution rate to CalPERS would be 33.7 percent of payroll for fire and police staff and 27.3 percent of payroll for miscellaneous city staff in 2015-16. However, Bartel’s firm has now updated the city projections to reflect the lower amount that CalPERS is actually asking the city to contribute in 2015-16 – which is 30.4 percent for fire personnel, 32.5 percent for police, and 26.6 percent for miscellaneous staff. These lower CalPERS contribution rates could result in reduced General Fund costs in the next budget. Bartel has not estimated the amount of the potential savings, but given the size of the city payroll, I believe they could amount to a few hundreds of thousands of dollars in that year.

The city will not release an updated set of its five-year fiscal projections until next spring. However, my analysis indicates that the city’s annual structural budget shortfall – defined as the difference between the revenues received and the money spent by the city in a given year — is now on a path to being completely solved.

The April forecast had put the structural shortfall at about $1.4 million in both 2013-14 and 2014-15. However, taking into account the latest improvements in city finances, the true shortfall in those two years is probably less than half of that and dropping.

The remaining shortfall will almost certainly go away altogether once the city gains a full year’s worth of Measure O sales tax increase monies in 2015-16. (Measure O will bring in only about three-fourths of a year’s revenues in 2014-15 because it took effect October 1, three months into the fiscal year.) The prior fiscal forecast released in April had assumed that the structural budget shortfall would drop to $480,000 in 2015-16, then bump back up modestly over the next few years. The latest improving revenue numbers released by the city on Friday almost certainly mean that the structural budget shortfall will be gone in 2015-16, probably to stay.

This welcome news on continued city revenue gains doesn’t solve all our fiscal problems. The city will face continued pressures to come up with more money for infrastructure and personnel costs. For example, the same Bartle projections that suggested that the city will have modestly lower CalPERS contributions than expected in 2015-16 show just the opposite – a bit more money being needed — a few years down the line.

This means that the city will have to maintain strong fiscal discipline lest the dramatic recent improvements in its fiscal condition be allowed to unravel. Moreover, the city must continue to be entrepreneurial and search out opportunities to gain additional revenues to support needed public services. This includes pursuing its aggressive efforts for economic development and conducting a rigorous review of what city assets are needed and could be leveraged through sales, leases or concessions for the benefit of the taxpayers.

Finally, the city should do a much better job of forecasting its revenues and, as it receives additional resources, setting aside some of those monies to rebuild its General Fund reserve in keeping with established city policy. These good times won’t last forever, and it will be important to have a fiscal cushion in place for that day when revenues aren’t looking as good as they are now.

Dan Carson is a member of the city Finance and Budget Commission. This article represents his views only and does not necessarily those of any other members of the commission.

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About The Author

Dan Carson worked for 17 years in the Legislative Analyst’s Office, a nonpartisan fiscal and policy adviser to the California Legislature, retiring in 2012 as deputy legislative analyst, and serves as a member of the city’s Finance and Budget Commission. This commentary reflects his views only and does not represent the position of the commission on this issue.

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70 thoughts on “The City’s Structural Deficit Is Solved”

  1. Gunrocik

    Let’s see, all of our infrastructure is crumbling, PERS rates are guaranteed to go up well beyond the cost of inflation for the foreseeable future, pretty soon we’ll have as many retirees as employees, and all those retirees will be getting most of their health care premiums paid by the City.

    Oh, and we just gave our City Manager a $50,000 raise that will definitely come back to haunt us when we attempt to negotiate labor agreements over the next year.

    But never fear, someone who worked for one of the most fiscally irresponsible States in our Country — and worked there as the annual deficits hit the tens of billions is telling us we are okay and on the road to recovery.

     

    1. TrueBlueDevil

      What happens to his rosy scenario if real estate prices take another dip?

      Some think we have a second real estate bubble where we have repeated man of the mistakes of the previous bubble. We’ve gone from liar loans and no money down, financed by Freddie and Fanny; to 3% down, and the FHA (?) playing a major role. Meanwhile, the economy sputters along with anemic growth, and millions say off of the work rolls.

    2. hpierce

      Add UC to your list.  Unlike the City, they paid neither employer nor employee contributions to their retirement/retiree benefits for ~ 20 years, and now we and our children need to bail those employees out with higher tuition and/or higher taxes.

  2. Don Shor

    Did you have some specific critique of the actual numbers Dan Carson put forth, or did you just want to start your morning with an ad hominem instead of a cup of coffee?

    The LAO is an independent agency, highly regarded for its objectivity. Your snarky sniping makes no sense. This is the kind of comment that discourages people from contributing and participating on the Vanguard.

    1. Gunrocik

      I’ve spent a lot of time analyzing the overly rosy projections made by the state in past years — and this column just sent me over the edge as it is emblematic of how the state bureaucracy constantly remained over optimistic in its projections.  You are kidding yourself if you think the LAO’s office is truly independent — they would have a $5 budget if they didn’t play the game.   I don’t want my City budget based on the assumption that as the writer states:

      In fact, property tax revenues will almost certainly grow even further in 2014-15. The county assessment roll released last June increased the taxable value of property in the city of Davis by 4.49 percent to $6.9 billion.

      There is no guarantee that they will most certainly grow.  Trends show that values go up then flatten quite frequently.  In fact, a good budget analyst will usually adjust down the next year when projections exceeded expectations in one year — because they likely will not exceed budget expectations the following year. Those numbers are county wide — a lot of the increase may be to all the new construction in Woodland and West Sacramento where they actually have growth. No guarantee that Davis received a proportional share of the increase.  You don’t want to spend money that you don’t have yet — the best governments are always cautious when budgeting not over optimistic.  Revenues never go up in a perfect straight line.

      And he keeps talking about savings and revenues in the hundreds of thousands, and we have a multi-million dollar deficit.  And numbers these small can swing to the negative very quickly with small adjustments to the assumptions.

      He also hasn’t made any assumptions about future increases in labor costs — and is looking through rose colored glasses when it comes to future PERS and medical costs–which he or no one else has a crystal ball to predict.  We also don’t have a good number yet on all of our future maintenance costs — attempting to keep up with our maintenance backlog could cost millions of additional dollars each year.  Finally, sales tax revenues — particularly a city heavily dependent on auto sales can be very volatile from year to year — he can’t assume that those are going to go up every year.  We lose on car dealership and our revenues are sunk.  People in the LAO’s office are used to looking at statewide trends.  Local governments can’t do that — they have a finite number of revenue sources that can be quite volatile from year to year.

      Part of what the writer is doing is bragging that he claimed we would have better revenues than projected and he was right.   The reality is that when the economy is good — budget projections are exceeded, when the economy drops, you are very happy that you didn’t over estimate.  I would prefer we stick to conservative assumptions so that we don’t spend tax dollars we don’t have.

      I find it fiscally irresponsible to take the State’s approach to rose colored glass budgeting and encourage the city to take the writer’s comments with a very large grain of salt.

       

      1. Barbara King

        Auto sales tax is based on the address of the auto’s owner.

        I think that some share of auto sales tax also goes to the jurisdiction where the owner lives.

        I do not know if the jurisdiction where the owner lives gets the same share of the tax if the car is bought outside the jurisdiction as it would were the car bought inside the jurisdiction.

      2. Don Shor

        In fact, property tax revenues will almost certainly grow even further in 2014-15. The county assessment roll released last June increased the taxable value of property in the city of Davis by 4.49 percent to $6.9 billion.

        There is no guarantee that they will most certainly grow. Trends show that values go up then flatten quite frequently. In fact, a good budget analyst will usually adjust down the next year when projections exceeded expectations in one year — because they likely will not exceed budget expectations the following year. Those numbers are county wide — a lot of the increase may be to all the new construction in Woodland and West Sacramento where they actually have growth. No guarantee that Davis received a proportional share of the increase.

        Since that was the “taxable value of property in the City of Davis” I don’t see how “a lot of the increase may be to all the new construction in Woodland and West Sacramento.”
        I assume that the June-released figures form the basis for the statement that “tax revenues will almost certainly grow even further in 2014-15” since those June figures are what the tax is assessed on. If he had said that revenues will almost certainly grow in 2015-16, I would see your point. Perhaps Dan Carson would like to clarify this.
        I believe Dan is talking in this article about the near-term deficit. I doubt he disagrees that there is a longer-term deficit that Davis and all cities are facing.

        1. Gunrocik

          Got me on the property tax numbers, read that wrong, but I stand by my contention that projecting optimistic numbers into the future is fiscally irresponsible.  Take a look at property tax actuals over the last 15 years and sales tax during that period — they don’t go straight up.  One year of missed projections can send your budget into a tailspin for years — just like what happened to the State.

          The City has been slowly crawling out of this hole by remaining conservative and not prematurely declaring victory (where have I seen that before?)

          I just want to reiterate that this column was self serving  and fiscally irresponsible and will be the sort of document that a labor union will use when beating up the City Council for an increase in compensation.

          1. Don Shor

            My recollection when I did look at those numbers a year or so ago is that sales tax numbers are more volatile than property tax numbers. Davis relies more heavily on property tax revenues than sales tax revenues; if I recall Davis is about 60:40 property to sales tax, compared to Woodland at 60:40 sales to property tax.
            I agree that we certainly prefer conservative projections. But property tax assessments are tied to the real estate market. Unless you are expecting a downturn in housing sales in Davis within the five-year projection period, I don’t see how there is anything irrational or irresponsible about making the assumption that the improving home sale/resale market locally will continue to cause a steady increase in property tax revenues within that time frame.

        2. Dan Carson Post author

          Don,

          You are correct that the increased assessment roll that I cite for 2014-15 is specifically for the City of Davis. I was not citing countywide assessment roll data including Woodland and West Sac.  However, I am saying that the evidence is strong that this improvement in city finances is likely to extend beyond 2014-15 into the remaining years of the city’s five year financial forecast.

          However, as I noted in the piece, there are continued cost pressures for the city relating to infrastructure and personnel costs we as a city still need to address.  I argue that we not only need to maintain fiscal discipline, we need to find additional solutions through economic development and better asset management to help maintain critical city services.  Our work here is not done.

    2. South of Davis

      Don wrote:

      > The LAO is an independent agency, highly regarded for its objectivity. 

      The LAO just pretends to be independent and objective and I have never met anyone that “really” thinks they are “objective” (even my union negotiator friends who tell me “off the record” that they know politics helps them get the numbers they want from the LAO).

      > Did you have some specific critique of the actual numbers

      For starters you can look how the LAO has ignored the CalPERS and CalSTRS pension shortfalls.  Even if they funds hit the target numbers every year for the next couple decades we will not even be close to funding the pensions (and let’s not even get started on the health care shortfalls)…

      1. Gunrocik

        In the article Dan writes: new data suggest that the city’s once-formidable $5 million structural budget shortfall is, for all practical purposes, solved.

        At 949 am he writes:

         I argue that we not only need to maintain fiscal discipline, we need to find additional solutions through economic development and better asset management to help maintain critical city services.  Our work here is not done.

        I would argue that the most important thing that we do is not make statements that for “all practical purposes” our problems are solved.  I think I would recommend that the Finance and Budget Commission advise you to keep your thoughts limited to Commission meetings and not use your former place of employment and current seat on the FBC as a platform for self aggrandizement.

        You have just used the public forum to make it even more difficult for the City to contain its labor costs.

        1. Dan Carson Post author

          So, Gunrocik, I should sit down and shut up because you disagree with me?  Moderator, please?  I have the same rights as any citizen of Davis to comment here on the Vanguard, and have been doing so because I was invited to become a regular contributor here.  I have been very careful to state that the piece reflects my views, not those of the commission to which the City Council appointed me. As for labor costs, I stated explicitly in the piece that the city must continue to maintain fiscal discipline and warned that our good fiscal track could unravel if we don’t.  I meant what I said.

    3. Alan Miller

      “This is the kind of comment that discourages people from contributing and participating on the Vanguard.”

      Wow, and I thought the kind of comments that I made were the ones that discouraged people from contributing and participating on the Vanguard.

      Do you have some specific evidence that people don’t contribute to the Vanguard due to a particular “kind” of comment, or did you just want to start your morning with an ad hominem instead of a cup of coffee?

        1. Frankly

          Don – the VG should write a piece including a good cross-section of the types of comments you are getting… making the source anonymous of course.  I think it would be a good discussion topic and maybe a learning opportunity.   I don’t think we can and should consider each and every comment like this as actionable because, frankly, I think blogs in general are for the type of family that tends to have political and social debate at the dinner table… and there are just some families that don’t do that and are not comfortable with it.

          I see there being a need for two-way traffic enforcement… one that moderates based on the VG policy to prevent personal attacks and the unnecessarily derogatory statements… but that also protects the open flow of communication and basically establishes a standard that new posters have get familiar with.

        2. Matt Williams

          I tend to agree with Frankly on this subject.  I think a story like he suggests would be very interesting to read.

          When I was canvassing during the City Council Election in April, May and early June this year, I ran into quite a few people who said that they used to post on the Vanguard, but that they had been discouraged from contributing and participating by what they perceived was the high level vitriol of a lot of the commenters.

          A fair number of people also said that in the early days the Vanguard stood for “peace, justice, and the American Way” but that in recent times the Vanguard could not be relied upon to “fight the good fight” … with the good fight being, in their opinion, no growth and ag land preservation.

          1. Matt Williams

            Not sure what you mean Alan. You posted your comment for a reason. Do you care to expand on that reason a bit?

  3. Aggie

    Dan.  Thanks for the analysis. If I understand your piece, the City made overly pessimistic assumptions on property taxes plus CalPERS and some of the positive effects of the Measure O revenue have not kicked in. As a consequence, the actuals are better than the projections and the near term structural deficit may be nominal if not eliminated. My recollection is that Pinkerton presented a graph showing a longer term rise in the structural deficit from $5M to a steady state of $15M. Does your analysis mean that the deficit will rise from zero to $10M; or was this projection wrong as well?

    1. Dan Carson Post author

      No, I’m saying that the annual structural deficit is actually headed to zero under the path we’re on.  I don’t know what specific graph you are referring to in your reference to $15 million, but it may have been one that, in addition to showing the annual structural deficit, also depicted the ending year balances year by year over the five year projection period.  In one such chart I have here, the ending fund balance in 2018-19 would have been $16.95 million as year after year of structural budget deficits piled up.   But that chart is no longer applicable because (1) voters approved the sales tax increase contained in Measure O, (2) the city incorporated into the budget yet another $1.164 million in annual budget reductions recommended by the city manager and the Finance and Budget Commission, and (3) the surge in additional property tax and other revenues I describe in this piece.

      I’m building my numbers off of projections that fully fund the CalPERS and Other Post-Employment Benefits (OPEB) benefits during that projection period, in keeping with city policy.   For example, the city is no longer going “pay as you go” for retiree health care, but also socking money away now to pay those obligations when they are due.  As the city’s actuarial consultant pointed out, in the long term, as we catch up on our CalPERS and retire health obligations, the pressure on the city budget will go down.

      Those same projections also reflect City Council policy to ramp up the investment of monies to fix potholes in streets and bike paths.  That amount was practically nothing a few years ago.  Now, $4 million a year in ongoing monies are built into the city budget for this purpose  Moreover, as was noted here recently, $5.9 million will be spent for this purpose in 2014-15.  We have more work to do, but the city is making a very real commitment to address that problem.

      Finally, Gunrocik, I’m proud of my 17 year career with the LAO.  Most every day in that job involved our delving into state finances and recommending the reform of state programs, and the elimination of many, that we found wasted the taxpayers’ money or were a lower priority.  The Legislature did not always take our advice, but they did take many actions my former office recommended that reduced state spending by billions of dollars in the wake of the 2008 housing recession.  We used an analytical and objective approach and worked with members on both sides of the aisle to make our case for these changes.  Example: we objected to a plan by the federal court Receiver for a series of medical prisons that would have cost billions to build and operate in part because the analytical case for them was so weak.  In the end, only one was built.  I can point to other examples in health care, welfare, transportation, and environmental programs where efficiencies were achieved because of the hard work of our staff.

    2. Gunrocik

      So, Gunrocik, I should sit down and shut up because you disagree with me?  Moderator, please?  I have the same rights as any citizen of Davis to comment here on the Vanguard, and have been doing so because I was invited to become a regular contributor here.  I have been very careful to state that the piece reflects my views, not those of the commission to which the City Council appointed me.

      Your article lists your affiliations–which is inferring that you have a higher level of knowledge than the average citizen.

      I believe you give up certain rights of expression when you serve the public.  You can state all day that these are solely your views, but you are also attempting to demonstrate why your views matter by listing your credentials. You can’t have it both ways and I believe you’ve been patently irresponsible in writing this article.

      I would recommend that the Finance and Budget Commission encourage its members to provide their opinions within the context of their deliberations but not abuse the power of the office to promote their views elsewhere. As I noted earlier, I believe this article was fully self serving (i.e. horray, I was right, revenues went up) and demonstrates an incredible lack of political acumen and a shallow amount of knowledge regarding the true depth of our budget problems.

      I can tell you with absolute certainty (based on my experience in other jurisdictions where I’ve lived an served on Boards and Commission including a Labor Board) that your comments will be hijacked by our local unions, and your credentials will be touted as they use your article to reinforce their need for budget killing wage increases.

      1. Dan Carson Post author

        Sorry, fella.  I did not give up my First Amendment rights to freedom of expression when I accepted an appointment to a city commission.  I think telling the truth about the state of city finances is exactly what will serve the public best. I think it was completely responsible of me to advocate that the city use fiscal discipline, look for entrepreneurial opportunities to provide the resources needed in the future to serve the public, and pay attention to restoring the size of the city’s financial reserves for that future day when the city’s revenues aren’t as good.  I stand by all of those statements in my piece.

        Please remember the original context in which I initially noted that city revenues were better than was reflected in official city forecasts.  The city manager had sent a $9 million a year tax package to the City Council for its consideration.  My advice to the City Council was that it could consider the option of approving a smaller sales tax increase, and holding off for now on a parcel tax increase, because city finances were actually in much better shape than they had been told.  Of course, I wasn’t the only person concerned at the time about the magnitude of the sales tax increase that was originally being proposed.  But putting that additional information on the table at the time I think helped the council make its decision to opt for a smaller tax measure that was able to pass muster with the voters of Davis.

        If I had followed your approach, I would have kept silent about information I knew that could help them in their decision-making process.  I felt my job was to speak out for the interests of the taxpayers. I won’t be silenced.

         

      2. Don Shor

        Using the Gunrocik addendum to the First Amendment (“I believe you give up certain rights of expression when you serve the public”), the following individuals who serve on local commissions should not post articles on the Vanguard:
        Cecilia Escamilla-Greenwald
        Matt Williams
        Michelle Millet
        Elaine Musser
        Alan Pryor
        Rich Rifkin
        And, most notably, David Greenwald.
        Are they allowed to comment at all?
        It’s gonna get a little slow around here….

        1. Gunrocik

          Let me clarify what I said.  I didn’t say that Commissioners couldn’t express themselves.  I just strongly believe (and I’ve been in many conversations regarding the subject) that you have to understand that your comments will be taken in the context of your role on that Commission –even if you clarify that the opinions are your own.

          I don’t believe that any of the individuals noted in Don’s 12:32pm response have ever written anything related to their Commissioner roles as irresponsible as what Mr. Carson did with his article today.

          I also believe his 12:26 response demonstrates the level of self-importance that Mr. Carson seems to get from being a rogue Commissioner.  I closely followed the sales tax debate last spring and I don’t recall Mr. Carson’s comments having much impact on the final decision.

          His narcissistic view of his role last spring further reinforces my feeling that he wrote today’s post for self aggrandizement and not to further the City’s need to realistically close the structural budget gap.  I find that reprehensible behavior by a City Commissioner who should know better.

          And by the way, based on Nancy Price’s 1:01 pm comment — it looks like I underestimated the potential damage of this article. It won’t just be used and abused by organized labor.  The “No on Everything” crowd will also be using it to fight the Innovation Park shortly. Yes, I know that they will be taking parts of it out of context — but that is what happens when you decide to write an article more provocative than factual.

          1. Matt Williams

            It is so BP. Others will have to be the moderate voice. Kristin Burford, Steve Westhoff and Matt Holland all fit the moderate description in my opinion.

        2. Barack Palin

          I hope you’re right Matt.  I don’t want to have to walk around town with a knife and fork in my shirt pocket and a coffee cup hanging from my belt in case I want to get a bite to eat and not have to pay for a plastic utensil or a styrofoam cup.  The problem with these commissions is they have to come up with stuff whether it’s needed or not in order to look relevant.

          1. Matt Williams

            That is painting with a broad brush stroke BP … but you have never been one to abstain from a touch of hyperbole every now and then.

        3. South of Davis

          BP wrote:

          > I don’t want to have to walk around town with a knife

          > and fork in my shirt pocket and a coffee cup hanging

          > from my belt

          I’m betting that the paper napkin ban will come before the plastic knife and fork ban…

          P.S. I bet I see 100 paper napkins on the ground for every plastic bag…

        4. Barack Palin

          I’m betting that the paper napkin ban will come before the plastic knife and fork ban…

          Then I’ll need a knife and fork in my my shirt pocket, a coffee cup hanging from my belt and a long sleeved shirt to wipe my mouth.  But hey, the zealots will be happy.

      3. Tia Will

        Gunrocik

        I believe you give up certain rights of expression when you serve the public.  You can state all day that these are solely your views, but you are also attempting to demonstrate why your views matter by listing your credentials. You can’t have it both ways and I believe you’ve been patently irresponsible in writing this article.”

        I fundamentally disagree with the assertion that one gives up “certain rights of expression” when you serve the public. But I am curious about how far you would extend this belief. Since I donate time to the County MCAH, does that mean that I am not free to state my position if it differs from that of the majority of that group on a public health issue even if I state that my views are mine alone and not reflective of that body or its members ?  Since I have volunteered at UCD sponsored clinics and events, does that mean that I should not cite that work if it is relevant to say for example my opinion about health outreach to vulnerable communities since my opinions may vary from those of the UCD leadership ?  At just what point do you believe that my right to express my own opinion ends if I have provided a public service. I am curious as to how you see this as “having it both ways”. If you have an area of expertise that involves public work, how is being honest about your credentials either hypocritical or manipulative or harmful in some other way ?

        1. Gunrocik

          Public service is a privilege.  When you choose to serve, I believe you have agreed to conduct yourself in a manner commensurate with the dignity of the office.

          That doesn’t mean you can’t express yourself.  It means that you have to understand that you have to weigh your comments in a manner that doesn’t abuse the privilege you’ve been given to serve the community.

          Mr. Carson doesn’t seem to understand that his need for self-promotion puts the city’s entire financial stability at risk.  His need to thump his chest and take credit for predicting an increase in revenues this past year and his further prediction that revenues will be rosy in the future is putting his own selfish need for validation ahead of those of his Commission.

          Like it or not, his stature as a member of the Finance and Budget Commission gives his claim higher credence — and mark my words — his irresponsible actions will come back to haunt the City in the future and negatively impact all of the citizens of our community.

           

  4. Frankly

    This is well-done article by Dan.  But I would definitely recommend that we either include, or quickly follow up with, a matching article on longer-term budget projections.  It has been these more rosy announcements about the state of the budget that have led to us being faced with so many fiscal problems.  I’m not saying that we ignore good news, but lacking the bigger picture, it is in fact dangerous in its influence of the voting population that has a strong tendency to quickly embrace good news and ignore bad news.

    Lastly, by always including the long-term picture with the immediate analysis, we will eliminate more of the claim that the reporting is partisan.

    1. Gunrocik

      Agreed Frankly.  There will be permanent damage done by this article.  As I said above at 943am — you don’t want to declare victory prematurely — in fact, I would argue that all we have is an article claiming he was right about last year’s revenue projections.  I’m guessing the City also knew that their projections would be exceeded–they just didn’t think it was smart to celebrate a one year minor bump in revenue.   The writer  hasn’t provided anything of substance to prove we should change our conservative approach in any way.

      1. Don Shor

        There will be permanent damage done by this article.

        If three members of the council use it as a basis for undoing any of the expense cuts that have been implemented, I agree. There are three legs to the economic policy Davis needs: increase local taxes (done), retain the budget cuts, and move forward on economic development.

  5. Michelle Millet

    However, my analysis indicates that the city’s annual structural budget shortfall – defined as the difference between the revenues received and the money spent by the city in a given year — is now on a path to being completely solved.

    While this is welcome news it was my understanding that a significant amount of  road repair costs were not included in the city budget and thus are left out of this equation. Is this accurate?

      1. Gunrocik

        If you look at the reports provided by Public Works, $4 million a year doesn’t even come close to stemming the tidal wave of future liabilities.  No questions we need a bond issue and articles such as this will be used by the Grandas of the world when they oppose the bond measure.

        I’m out and about now so I don’t have access to a computer where I could find the reports detailing the amount of money we need on an annual basis — but no question that $4m is not enough.

        Found it, here’s the link:
        http://city-council.cityofdavis.org/Media/CityCouncil/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20131210/05-Transportation%20Infrastructure%20Rehabilitation%20Project.pdf

        And the power point:
        http://city-council.cityofdavis.org/Media/CityCouncil/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20131210/05-Transportation-Infrastructure-Rehabilitation-Presentations-Combined.pdf

        Even in the most expensive scenarios, our liability skyrockets.

    1. Anon

      Dan Carson: “However, as I noted in the piece, there are continued cost pressures for the city relating to infrastructure and personnel costs we as a city still need to address.  I argue that we not only need to maintain fiscal discipline, we need to find additional solutions through economic development and better asset management to help maintain critical city services.  Our work here is not done.”

      To Michelle: It would appear that Dan has not included road and other infrastructure repair into the budget equation.  What I would ask Dan is if he thinks we need a parcel tax in the immediate future to address our road repair/pool repair problems?

       

      1. Michelle Millet

        From what I understand our unfunded infrastructure needs/costs go way beyond roads and pools. Claiming that the city’s structural deficit is solved, when major costs were not included in the budget, may technically be true, paints a false picture of our real economic situation.

  6. Nancy Price

    Just wondering: Let’s see, if the picture is so rosey…then, why do we need all the innovation parks that are being proposed to “solve” the city’s budget crisis?   And with this surplus, why the talk about a Mello-Roos for The Cannery?  Why didn’t we get a better deal from the developers to pay their real share for safe bike lanes and proper and safe access to Covell?   What am I missing?

    1. Matt Williams

      Nancy, you ask a very important question. The numbers that are being discussed in this article/thread are budgeted General Fund numbers. What those numbers do not include is the approximately $100 million of deferred Capital Maintenance/Replacement expenses (Streets, Bicycle Paths, Greenbelt paths, Buildings and Structures, Parks infrastructure, Pools, Fleet, Property, Community Farm, etc.) that are not included in the budgeted General Fund numbers.

    2. DavisBurns

      Nancy, it is my understanding that the Cannery developers included all those amenities like the urban farm to make the project more attractive to the city so the project would be approved.  The way it works is someone besides the developer pays for everything eventually.  The developer pays for the land, develops the plans, provides the upfront money for the project but all those costs plus profits figure into the selling price of the houses.  The developer takes a risk that the houses won’t sell; not much of a risk here in Davis. So anyone who believes the developer is giving anything to the city or the project just does not understand capitalism.  The city is responsible for providing infrastructure.  The city pays for that with income from property taxes levied on the new homes or the home owners pay a higher price for the home and finance those property taxes over 30 years.  The project brings in more money for the city than it costs the city for ten years.  After ten years, the cost to provide services for the project is more than the revenue the city receives from the project which is why the bigger the city gets by approving new housing projects the poorer it is in the long run.  The theory is a business park, or excuse me, innovation park would have a better long term benefit to the city.  Common sense says the only way an innovation center is more profitable for the city than a business park would be it would generate more money by virtue of its innovativness.  If innovation parks result in additional housing developments, it might be a wash.

      1. Don Shor

        Common sense says the only way an innovation center is more profitable for the city than a business park would be it would generate more money by virtue of its innovativness.

        Plus they can make a special assessment district for either a business park or an innovation park, and charge extra fees and taxes.

      2. Matt Williams

        The project brings in more money for the city than it costs the city for ten years.  After ten years, the cost to provide services for the project is more than the revenue the city receives from the project which is why the bigger the city gets by approving new housing projects the poorer it is in the long run.

        In the City’s current model for assessing the revenues and expenses for any project, the default annual revenue increase (based in large part on the velocity of historic home sales in Davis) is 2% per year and the default annual cost increase (based in large part on historical result of negotiations with the City’s employees) is 4% per year.  A quick mathematical computation of those two percentages shows that each year has a net decrease of 2%.  So after 10 years the cumulative decrease is 20%.

        Many people here on the Vanguard, and throughout the City have argued that a 4% annual increase in costs is unsustainable.  If the City successfully achieves lower levels of cost growth then the 10 year projection you have cited will extend out to eleven, twelve, thirteen …  In fact, if the cost growth rate is reduced to the same 2% rate as the revenue increase, the City’s bottom-line associated with Cannery will never go into deficit.  Cost containment of City services needs to happen independent of any housing decisions.

         

  7. Robb Davis

    Dan wrote:

    However, Bartel’s firm has now updated the city projections to reflect the lower amount that CalPERS is actually asking the city to contribute in 2015-16 – which is 30.4 percent for fire personnel, 32.5 percent for police, and 26.6 percent for miscellaneous staff. 

    Just to be clear, the updates to fire and police are NOT based on the latest CALPERs unfunded liability calculations though the 26.6 for miscellaneous staff is.  It is probable that the fire and police percentages will tick up a bit.  Whatever the case, I think it is important in this case to translate the percentages into dollars and consider the projections.

    For fire 30.4% represents $1.285 million in 2015-16 and projections show the percent going to 42.9 in 20-21 or $2.203 million

    For police 32.5% represents $1.926 million in 2015-16 and projections that percent going to 43.6 in 20-21 or $3.002 million

    I don’t have the absolute dollars for the miscellaneous employees but the percent goes from 26.6 to 32.2.  Taking only police and fire the increases will cost us an additional $3 million dollars over 15-16 levels in 2020.

    This is for pensions. OPEB projections indicate that by 2020 we will be paying about $1 million more than we are today. This includes all staff.

    My question (which I don’t expect Dan to answer) is whether the rate of growth of revenues will track the rates of growth implied by these numbers?  That is what I will be looking at to determine whether we are “out of the woods.”

     

    1. Robb Davis

      I should have said the rates of growth of ALL costs in our budget not just these numbers.  However, we know that these numbers are going up substantially and will contribute to overall cost increases so they are important.

      1. Gunrocik

        Thanks for the details, Robb.  The figures you are pointing out are exactly the ones which demonstrate why I objected so strongly to Mr. Carson’s article.  I look at state and local budgets from across the country on a daily basis.

        The cost side has locked in annual increases — with pensions and OPEB increases guaranteed to exceed inflation for many years to come.  Even if medical costs slow, our retirees are living longer, having kids at home longer — and we aren’t replacing our retirees at the office — meaning we have fewer employees to cover the cost of all these retirees.

        The revenue side is choppy and unpredictable — particularly at the local level.  The City’s projections show an ongoing gap between revenue inflation and expense inflation — and that is the case most places.  Even if revenue inflation keeps up 3 out of 4 years with expenses (which is optimistic) you need to have huge jumps in revenue periodically to make up for the one out of four years that revenue does not keep up.  And that just isn’t happening nowadays.  Property turnover is low–which in a built out city like us is the only time you have increases in property tax. In addition, a lot of the homes which were purchased at the peak of the market now have a little equity and are now selling — you don’t get a big bump in property value when those sell–many may sell at less than their assessed value.   Sales tax is not only volatile — but rarely keeps up with inflation.  Why?  More and more of our home expenses go into services and medical which are not subject to sales tax.  Thus, we have to pray that car sales continue upward forever and that isn’t happening.

        And we haven’t even discussed unfunded infrastructure liabilities.

        This article would be better retracted than debated — the City has a long road ahead — and unsubstantiated pieces such as this don’t help.

    2. Doby Fleeman

      Robb,

      Thanks for taking the time to attend the Finance & Budget Commission meetings and for your diligence and command of the underlying data.  It is no easy read trying to cut to the chase (which you have) in terms of looking to the future years.

      Any time we are being asked to pass muster on budget elements where the underlying accounting allows for deferred payments or deferred expense recognition, or the use of liabilities to substitute for underfunded current period payments – we run the risk of conflating budgetary moves with the actual, underlying trend in unfunded obligations and future commitments related to our current period operations.

      Based on my limited exposure, as an attendee at the recent F&B presentation, I left with more questions than answers.   IMO an hour to receive, process and digest this type of information is simply inadequate.

      Related to this entire discussion are the questions posed by those who now wonder why all the continued discussion of the need for greater technology employment as a means to enhance municipal income.   I can only suggest that apart from the obvious virtues of providing desirable employment opportunities offering above average wages and career opportunities, the additional economic benefits to the community may accrue in ways that most aren’t considering today – most notably when compared to an status quo trajectory that encompasses little jobs growth as the community continues to age in place.

      It would be interesting to see alternative, demographic and actuarial projections assuming three different population/age trajectories – together with anticipated local GDP projections and associated revenues available for delivery of municipal services under each scenario.

      Keep up the good work, but try to leave some time to enjoy the weekends.

      1. Robb Davis

        Doby wrote:

        Based on my limited exposure, as an attendee at the recent F&B presentation, I left with more questions than answers.   IMO an hour to receive, process and digest this type of information is simply inadequate.

        I have spent several hours with staff going over these documents (a bit of a slog).  I am thankful that the City is addressing these issues even if the time horizons are long.  I believe we are going in the right direction but it is going to take discipline to stay on track.  I think our Finance and Budget Commission is doing a great job and I am thankful that they are taking the time to educate themselves about a variety of City finance issues.  I am grateful that I am able to be the liaison to that Commission.

    1. sisterhood

      Dear Mr. Davis and/or Mr. Carson.

      Precisely where would one find the info re: the profits the City has made on the previous DACHA home rentals?

      Thank you.

      1. Robb Davis

        I am pretty sure rent (after paying a Management Company) go into the City’s affordable housing trust fund.  I won’t be able to check until tomorrow to confirm that with staff.

      2. South of Davis

        sisterhood wrote:
        > Precisely where would one find the info re: the profits the City
        > has made on the previous DACHA home rentals?
        After the city started to foreclose on the 20 DACHA homes in 2009 many sat vacant for years (In December of 2012 the Enterprise wrote: “Fourteen of the 20 houses are occupied and each tenant is up to date in rent”) while the city was paying to manage and maintain all the homes.  Today even if all the homes are full I would be surprised if there is much positive cash flow after expenses (due to the high expenses and low rent).
        As we head in to 2015 it will be TWENTY (20) YEARS that the Pacifico Student Housing Cooperative on Olive drive owned by the city has been close to (or MORE) half empty.  It is amazing that every other landlord in town can be close to 100% full but the city struggles to keep the residential real estate it owns much over half full.
        P.S. When I asked at the county assessors office I was told that they don’t get any tax revenue (or collect school parcel taxes) for any city of Davis (or University of California) owned real estate.

        1. sisterhood

          “…due to the high expenses and low rent.”

          Those homes were well built and they do not need huge, major, expensive maintenance. Property taxes are not astronomical either. (I’m not even sure the city has to pay the property tax.) Their linoleum type flooring in many units wasn’t that stylish, but it was functional, and good for pet owners.

        2. South of Davis

          sisterhood wrote:

          > Those homes were well built and they do not

          > need huge, major, expensive maintenance. 

          This is not a cut on the quality of the DACHA homes, I’m just pointing out that ALL city owned real estate costs a lot to maintain since they pay for multiple levels (expensive) of management and maintenance support and then hire (expensive) union labor to fix any problems (the cost of fixing something simple like a broken front door lock costs many times more for the city than for a homeowner that can just ride their bike over to Davis ACE and buy a new lock).

          P.S. The maintenance cost of subsidized units is also typically quite a bit higher than average (in San Francisco the Housing Authority spends MORE to maintain and manage their subsidized units than they take in in rent every month)…

        3. DavisBurns

          A couple of my kids lived at Pacifico for a while.  They are not apartments and there were problems with their intended use and the people who ended up living in them.  The rooms are quite small and not that inexpensive for the size.  The place was meant for cooperative living which means they needed people who buy into the idea and want to participate.  They ended up with too many students who liked the location and the rent but had no interest in the social aspects.  Some were foreign and a lot were perhaps not the most socially adept to begin with.  Maybe if the city wants to remodel them into apartments they will have a low vacancy rate but Americans aren’t raised communally–you take student who are busy and have their energies spent elsewhere and it doesn’t translate well.  There are other cooperative living situations here in Davis that are thriving but one for students hasn’t turned out to be successful. To be clear, the place isn’t apartments nor are they like dorms.

        4. South of Davis

          DavisBurns wrote:

          > Maybe if the city wants to remodel them into apartments they

          >will have a low vacancy rate but Americans aren’t raised communally

          I know many on the left just love the idea of a co-op, but maybe Robb can look in to converting the property in to studios (that would bring in over $500K/year for the city) since if an idea has not worked in TWENTY years (not long ago the Aggie wrote that the place was 89% empty) it might be time to try a different idea (he can talk to his bike friends to get some history of the property since those of us take the bike trail to campus pass behind the mostly empty property all the time)…

        5. Jim Frame

          As we head in to 2015 it will be TWENTY (20) YEARS that the Pacifico Student Housing Cooperative on Olive drive owned by the city has been close to (or MORE) half empty.

          The Pacifico project is on Drew Circle, not Olive Drive, and it was built around 14 years ago, not 20.  Are you thinking of another project?

        6. South of Davis

          Jim wrote:

          > The Pacifico project is on Drew Circle, not Olive Drive,

          > and it was built around 14 years ago

          Sorry I mixed my my streets that dead end in to the bike trail it is at the end of Drew Circle, and (like others who post here have admitted) I’m sometimes bad at math and somehow came up with 20 when I subtracted 2004 from 2014, so the property has “only”  been close to (or MORE) than half empty for 10 (TEN) Years (I’m also sorry if I offended any of the property managers working so hard keep the place half full in a town where even crappy managers keep their places 95% full)…

  8. sisterhood

    The “Emptyprise” compares Davis to Vallejo and I had to chuckle. I’d much rather live in Davis than Vallejo. Thanks, Don, for printing the link to the “Emptyprise” article.

    BTW, thanks for the chuckle to the poster who jokingly called it the “Emptyprise.”

  9. Gunrocik

    I would strongly recommend that all Vanguard readers go to the links provided by Robb re: the actuarial studies.   The numbers are very sobering and point out the overwhelming challenge ahead for fiscal stability–and how ludicrous it is for Mr. Carson to claim we are on track to closing our structural deficit.

     

     

  10. Anon

    “Any time we are being asked to pass muster on budget elements where the underlying accounting allows for deferred payments or deferred expense recognition, or the use of liabilities to substitute for underfunded current period payments – we run the risk of conflating budgetary moves with the actual, underlying trend in unfunded obligations and future commitments related to our current period operations.”

    This has always been my pet peeve about how Davis states its budget.  It never includes deferred maintenance or employee benefit liabilities in the budget equation, rather sweeping those inconvenient truths off to the side in the “unmet need” category, but somehow comes out with a “balanced budget” or a budget that does not reflect all the true costs of running this city.  This is creative bookkeeping at its worst.  I am no accounting expert, but at least have the decency to accompany any budget discussion with all the unmet needs that must be addressed.  Better yet, start socking away funding for unmet needs in good times, so it will be there when it is needed such as when potholes in the roads and bike paths form.

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