Monday Morning Thoughts: Where is the Budget Process Headed?

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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

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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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24 thoughts on “Monday Morning Thoughts: Where is the Budget Process Headed?”

  1. Michelle Millet

    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.”

    So the cost associated with fixing the roads is not included the city’s budget?

    1. David Greenwald Post author

      Correct. The $4 million that they have allocated – I think all but $1 million from the general fund – is, but not the deferred maintenance.

      1. Michelle Millet

        To clarify, and sorry if I am being redundant here, when Dan states, “We are on our way to eliminating our structural deficit” he is not including the total costs of road repair as part of the “structural” deficit.

  2. Michelle Millet

    “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.”

    I want to make sure I’m understanding this correctly. Currently we have enough money in the city budget to fully fund pensions and health care cost. But in 5-6 years the cost to do so is going to rise by $4 to $5 million dollars annually?

     

    1. David Greenwald Post author

      Pretty sure the correct answer on retiree health is that we’re moving on a trajectory to be fully funded by 2030, I don’t believe we are fully funded now.

      1. Robb Davis

        I will attempt a clarification here.  PERS and OPEB are payed out over time as staff retires and needs medical care.  Thus the unfunded liability refers to a long time horizon and whether or not we are on track to pay for it when the time comes.  We will not be required to pay the “lump sum” (ballon payment) for unfunded liabilities but must be prepared to pay for them by putting money away over a 25-30 year period (PERS and OPEB respectively).  The city’s actuary has calculated what it would take (with greater uncertainty in the out years) to deal with the liabilities in each fund and we are CURRENTLY funding these costs out of general fund and future costs are built into each five-year projection staff carries out.

        My comment about $4-5 million extra needed merely points out that to KEEP up with the actuarial estimates in the coming five years we will need to add this amount to general fund.  Actually, as someone pointed out to me, not all of the additional $4-5 million comes out of the GF because some staff are paid, and OPEB/PERS contributions made, from enterprise funds.  I am not sure of the amount but there is not doubt that additional revenue is needed to cover ramped up PERS/OPEB costs (please consult the actuarial studies to see how these increase in the coming five years).

        So, we are currently dealing with these costs within the GF but must continue to do so so that we do not fall behind.

        Hope this helps.

      2. Sam

        Is this statement being made prior to GASB 67/68 being implemented? If Davis’s unfunded liability on pensions is $89,000,000 prior to implementation, what you are you projecting it to be after implementation? Have you adjusted those projections after seeing that New Jersey pension funding went from 54.2% to 32.6% after implementation?

        1. Sam

          Ok, so Davis has funded 68% of their pension cost and is short $89,000,000 prior to GASB 68. So, if GASB 68 causes a funding adjustment equal to what it did in New Jersey where is was only actually 60% of what they had been reporting, then Davis would only have funded 40.8% of their pensions and have an unfunded liability of $168,450,000. How would this affect the $4-$5 million extra that would need to be contributed by the City starting in the next few years?

        2. Robb Davis

          Sorry, I see that the quote I used did not work.  Not sure why.  In any case, the report says that the GASB 68 analysis will not be out until the spring and, Sam, I think you have answered your own question with your response.

        3. Sam

          Sorry, I know that the $4-$5 million goes up. What I don’t know is if it would increase in ratio with the funding adjustment (in this case increase 40%) to about $6-$7 million more per year, or if the increase would be amplified because you would have to not only make up for the larger unfunded liability, but increase what you are paying to also fully fund the liability you are creating in the current year. My guess is that it would have to be amplified, but I don’t know if that means it could be $8 million per year or $20 million. Does the City know?

  3. Doby Fleeman

    Michelle and David,

    May we please give the Mayor a break……and take a deep breath.  It’s also the Mayor’s job to be an unabashed  cheerleader for the community and I commend him for the sincerity of his efforts and his heartfelt concern for his hometown.  Whether its the rain we’ve received over the past few days or the positive economic news – it never hurts to recognize that we’ve got it pretty good here in Davis.

    That said, the issues you both pose are clearly the stuff of legitimate debate and will be critically important in shaping the dialogue regarding spending priorities and discretionary, available budgets.

    From what I have seen and read, Robb Davis has a good command of the underlying financial pressures created by the twin budgeting nemesis created by public sector accounting practices which can be easily manipulated to disguise a community’s true financial burn rate.   We see them both at play in your comments:  1) the ability to defer crucial infrastructure maintenance and reinvestment – letting it pile up for future taxpayers, and 2) the effects associated with the ability to shift current period total compensation expenditures into future budgets through the mechanism of underfunding current period contributions – again, letting them pile up for future taxpayers.   Now, we are the generation of future taxpayers and we are seeing the results.

    How to keep it real – once you have lost confidence in the system –  that should be our goal.   This coming year, it should be the task of the Finance & Budget Commission to do just that.  As you two have commented, however, there should be no misunderstanding or confusion about our sustainable annual burn rate for road repairs and reinvestment – if it’s $6-$8MM per year that should be our budget expense amount with any underfunding going directly to a liability account so we don’t lose track and we can literally see and feel the true budget impact for that level of our true spending or burn rate.   And, yes, based on the latest actuarial report to the city, the incremental, additional new contributions towards pensions and OPEB will be building towards an additional $4-5MM annually.

    The real task should be working to insure that these levels of expenditures are captured somehow within the formal budgeting process.  How that can be made to happen should be a priority task for the Finance & Budget Commission – financial watchdogs for the community.

    Where our Mayor and the Council can be of most help in the discussion is to keep our focus on the opportunities available in this community to be a regional economic leader while carefully guiding that process to help insure the continuing improvement for our quality of life in Davis and the region.

     

    1. Michelle Millet

      My questions were not intended to give our mayor a hard time. I would never think of doing such a thing:-). They actually are my attempt to better understand the budget. I appreciate Dan breaking down our fiscal situation into 4 different categories as it aids in my understanding of how we are addressing our city finances, and appreciate you and Robb taking the time to further clarify our fiscal situation.

      1. Doby Fleeman

        I understand your frustration.

        Presumably, this is why we enlist outside experts to help us understand – in terms familiar and accessible to everyday citizens – how we have gotten into this predicament in the first place.   Valid not, my conclusion is based upon the notion that sometimes we may be able to learn something from the past.

        You will appreciate my frustration, then, when graphs like number 14 (found in the attached link
        http://city-council.cityofdavis.org/Media/Default/Documents/PDF/Finance/Commission%20Agenda%20-%20November%202014/11.3.14/Item_5b%20BA%20DavisCi%2014-11-03%20CalPERS%20Misc%20Safety%2013%20Short.pdf
          ) are presented as part of a budget briefing but without any accompanying explanation of what happened to make something as presumably stable as a pension program look more like the path of a North Korean rocket launch.

        Perhaps I was snoozing during this part of the presentation, but it can’t simply be explained by fluctuations in the stock and housing markets.  There must be some clear, underlying drivers (even if a smoothing effect has been applied) which could explain these dramatic changes in the period jarring movements.  It represents a 550% change since 1999.  It apparently stabilized from 2002-2007, but then what happened?

        Is there anything here to be learned.  That is my question.

    2. Davis Progressive

      i don’t see david giving the mayor that hard a time other than stating the position that wolk laid out, noting that he was urging caution, and correctly stating that he is more bullish than his colleagues. what am i missing?

  4. hpierce

    As to looking for ‘clarifications’, and ‘understanding’…

    David, what is YOUR definition of “increased compensation”?  Other posters have shared theirs, mainly as “not one more dime” of employee cost.

    David, assuming salary remains at zero increase, and assuming the nature (coverage) of Medical, Dental, Workers Comp, Pension, etc., remains the same, would COSTS to the City, to maintain a static level of benefits constitute an increase of employee compensation in YOUR view?  To keep compensation level static/unchanged, would you have every cent of increased City costs absorbed by current employees?  Same for ‘merit increases’ currently provided for?  Costs for employing new employees?

    David, I believe you should clarify your term “increased employee compensation”.

    1. Don Shor

      I think it should also be clarified (or repeated) what has occurred to total payroll costs as the number of employees has been reduced. Last time this was reviewed here, we learned that a 24% reduction (if I recall correctly) in number of employees had yielded no net decrease in employment costs.

    2. David Greenwald Post author

      Good question – but I think that’s where the discussion needs to head – what is acceptable? There will be increased costs for benefits and pensions, does that mean we hold cost increases to zero or do we hold benefit levels constant. Do we allow inflation to erode salaries or do we have cost of living increases. That’s where the discussion needs to be.

      1. hpierce

        Ok, again for discussion and clarification… your response , David, indicates you do not currently have a definition of what “compensation increase” is (or, are not yet willing to share it), and believe that the upcoming ‘discussion’ needs to define what “CI” is.  And, how that might be applied to benefit ‘costs’ vs. compensation costs.  Am pretty sure that all the benefits I enumerated are “on/off” switches.  No flexibility for the City to opt for reduced benefit levels in exchange for reduced costs.  Medical for example… don’t believe the City could increase deductibles to lower premium rates.  The City could elect to eliminate Dental coverage (via M/C), perhaps eliminate Medical coverage.  But pretty sure, under PERS, it is either “on”, or “off”.

        1. Anon

          I think you make some really good points here.  To me personally, a cost of living increase does not represent “compensation increase”.  I also would prefer the city to have lots of flexibility so it can opt to reduce benefit levels in exchange for reduced costs, etc.

        2. hpierce

          Anon… reducing the level of medical/other benefits to reduce costs is practically non-existent.  The two choices are to eliminate the benefit, or to have the employees pick up some share of the current costs and/or future increases to premiums.

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