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 Clearly, those now-outdated fiscal projections understate city property tax revenues, probably by hundreds of thousands of dollars or more over the projection period.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.