First, the need to clarify something. Last week in my column I noted, “There is talk potentially about an employee compensation increase,” and in the comments I suggested that there was talk of this at the budget workshop.
I need to be clear that, in the context of the workshop discussion, the concern was with employee morale per se, and compensation was never part of it. However, the people I talked to who were there, and others, believe that compensation will enter the discussion at some point and there may well be a move during the upcoming contract negotiations to increase employee compensation.
We are not talking the kind of increases we saw a decade ago, where fire received a 36 percent pay increase and the other bargaining units 15 to 18 percent over a four-year period. We are looking at perhaps between one percent and three percent, which might not even keep pace with inflation.
Still, the sales tax increase does not sunset until 2020. The city probably still needs a parcel tax to fund infrastructure needs. The city probably is still looking at innovation parks for increased longer term revenue. How talk about a small compensation increase will work politically remains to be seen.
What is interesting is that in his monthly column yesterday, Mayor Dan Wolk was again pumping the “unexpected good budget news,” as the city ended up with nearly $850,000 in additional revenue.
He writes, “Like other communities, we were hit hard by the Great Recession, which resulted in cuts in city services, difficult concessions from our employees, and a painful 24 percent workforce reduction. But with the strength in our property and sales tax revenue — mirrored at the state and regional levels — I believe our community has begun to emerge from the downturn.”
Here is what the mayor touted as being “several significant signs that we are on the right fiscal track.”
- We are on our way to eliminating our structural deficit. Our general fund deficit — a chronic imbalance between revenues and expenditures — was estimated to be about $1.5 million this fiscal year and was forecast to drop in the coming four years. However, the improved financial picture means we have immediately taken a large bite out of the deficit and are moving toward eliminating it completely.
- Our budget rainy-day reserve stands at a healthy 13.9 percent.
- We are fully funding pensions and retiree health care. We have substantial liabilities in both retiree health care benefits ($61 million) and pensions ($89 million). However, we are fully funding what our actuary and our retirement system (CalPERS) requires us to pay for retiree health care and pensions, respectively. These are big numbers, yes. But it’s best to think of them like mortgages — and we are paying what we need annually to cover the cost.
- We are putting $4 million per year into critical infrastructure. Despite our budgetary challenges, we have managed to dedicate $3.4 million (all-funds) this year for roadway rehabilitation and another $500,000 for water conservation measures. We need to do more, but this is a solid amount.
He did stress, “We’re not out of the woods yet.”
And he was conservative on “holding the line on new expenditures until we are on more solid footing financially.” He added that we need to focus “on obtaining more revenue by continuing to process the two innovation park proposals, as well as the Downtown University Gateway District on the Nishi property.” Finally, he urged us to explore “smart ways of increasing our investment in critical infrastructure and preserving existing valuable city assets.”
Does that tamp down on concerns that we are headed toward employee compensation increases? Or does that merely mean we wait until the spring to see if the numbers continue to climb?
As we mentioned last week, the mayor was more bullish on the future than his colleagues.
Mayor Pro Tem Robb Davis expressed concern that these were more one-time numbers due to “pent-up demand during the recession.”
Will it last? Probably not. Said the mayor pro tem, “My simple interpretation – Cannery hasn’t opened yet, we haven’t built a lot of commercial buildings where we’re getting unsecured property tax or anything like that, so this is home sales.” He wanted to know the trajectory and where this would take us at the end of the year.
He also spoke about PERS (Public Employees’ Retirement System) and OPEB (Other Post-Employment Benefits). “The good news is we’re in a place where we’re addressing those long-term liabilities. The time horizons are long – 30 years – but we’re addressing them,” he said. “But we’re putting away money in a way in which our actuary thinks is a reasonable approach.”
“But,” he said, “the point is that between 2020 and 2021… between OPEB and PERS we’re going to need to be coming up with an additional $4 to $5 million. Additional on top of today. But that’s a hefty piece of money. We are in a situation where we need this money.”
“We have the road backlogs, we have Bob Clarke who is ready to put out a bid on the study of other infrastructure – especially building replacement costs,” he added. “When we begin to finally internalize those things into our normal budgeting process then we can start breathing a little bit.”
That is the real problem. Back in 2011, then-Councilmember Sue Greenwald made a motion, a motion that passed unanimously, to have truth in budgeting. That means to add the unmet needs, unfunded liabilities, and deferred maintenance into budget projects so we are not where we are now – in a situation where we have tens of millions if not hundreds of millions in obligations, but the budget appears to be balanced.
As Councilmember Brett Lee said, “I think we need to more explicitly talk about roads.” He noted that we are looking at 20 years, $6 to $8 million a year to stay current, “and that’s not in the current budget projections.” He added, “Even when you include the Measure O funds, that’s nowhere near the $6 to $8 million going forward for 20 years. We need to talk about that and really have that part built in so that it’s not an afterthought.”
He added, “We may not be able to fully fund it, but at least have it explicitly listed so that it’s not an afterthought.”
We would like to see the city complete the process of fixing the structure of our economy – that means adequately fund infrastructure needs, that means fixing our unfunded liabilities like pensions and OPEB, and that means producing a stable and ongoing revenue source.
Once we do that, we can think about starting to increase employee compensation, but it must be done in a responsible manner. From 1999 to 2004, we retroactively increased pensions, and greatly expanded both retirement and salaries. We cannot have a return to those days.
If we want to start building cost of living adjustments into the budget and into compensation, that’s a reasonable discussion to begin having – if the rest of the books are in order.
—David M. Greenwald reporting