One of the more interesting questions for 2015 is what direction we should go on employee compensation and budget issues. This is particularly important because, by the end of this year, the city will, at least theoretically, have had to renew each of the employee MOUs.
In 2009, the city, much to criticism of the Vanguard, went in-house with labor negotiations. The Vanguard was quite critical of the lack of progress on structural reform and the overall result was a worsening of the city’s fiscal crisis.
In 2012, the city, with a new council and city manager, opted for a labor negotiator. That approached gained agreements with five of the seven city bargaining units and, by the end of December 2013, the city imposed contracts on the firefighters and DCEA.
In 2015, much has changed. First the fiscal climate has improved. The city unexpectedly ended the last fiscal year with $850,000 in unanticipated revenue – largely property tax, but also some sales tax. The city has a new city manager, Dirk Brazil, and a new mayor, Dan Wolk. But largely the same city council.
In November, the city manager was being “cautiously optimistic” on the budget and told the council, despite the unanticipated revenue even before Measure O’s sales tax increase took effect in October, that he wanted to “reassure (the council) and to reassure the public that we’re not going to go out and spend this immediately.”
What is clear is that there are differing viewpoints on what the revenue increase means and we have not even begun to discuss how that will impact labor negotiations.
In November, for the most part, cautious optimism ruled.
Councilmember Rochelle Swanson noted that we have a lot of unfunded liabilities and maintenance, and “those are things that are still at the top of the priority list.” She added, “This isn’t yay, yay, now we get back to programs.” She said, “I just want to make sure the public knows that we’re still very cautiously optimistic.”
Councilmember Lucas Frerichs said, “This is a welcome amount of news, but I think that there’s no disagreement among the five of us and the city manager and staff, at sort of keeping our eye on the prize. It’s a good welcome bit of news, certainly, (but) one quarter or two quarters does not necessarily a trend make.”
On the other hand, Mayor Wolk was more bullish, stating at the meeting, “My impression of this is that this is not just a one-time aberration… My impression is this has some stickiness to it. That is before Measure O kicks in.”
The mayor will be delivering the State of the City address today at the Chamber, but on November 30 he wrote, “I am more confident than ever regarding the current and future state of our city’s finances. Local government finance is a very complicated world, with a number of items to balance in the short and long term, including a very real ‘structural deficit’ in our day-to-day budget and paying for our retirees’ health care, future employee pension costs, and deferred and future city infrastructure needs. Revenue accrued in one fiscal year is but one piece of a larger pie.”
He added, “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.”
At the same time, he writes, “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.”
That’s a bit of a tricky maneuver because we are not fully funding pensions or retiree health care. We are moving toward a fully funded retiree health care system, but we are not there yet. Pensions are even more of a moving target and the city may get hit with more increases in costs.
In November, Robb Davis was more cautious as he noted that we have had increased home sales. “It’s clear that this is a trend that’s continuing. Of course that’s a cyclical trend, there was a pent-up demand during the recession.”
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 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.”
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.”
Where does that put us for 2015? We have improved immediate revenue coming in and word is that this is actually increasing. However, we have unbudgeted liabilities both in terms of OPEB (retiree health) and pensions, as well as road repair future costs.
Even with new revenue from sales tax, these are going to strain the budget.
Going forward this year is also the concerns that we have with the direction of the next MOUs. One big question will be whether the city utilizes outside negotiators or brings it back in-house. The outside negotiator was effective in getting the city’s goals achieved in the last MOU cycle, but there is renewed concern about employee morale that the city council will have to grapple with.
There are some that see the opening for 1 to 2 percent pay increases, while others believe we need still another round of cuts.
Somehow this will all play out within the next few months, as council seeks to adopt a new strategy.
—David M. Greenwald reporting