Analysis: Which Way Does the Council Go with Compensation, Budget Issues?

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.

Unfunded-Liability-Mis-Safety

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

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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18 Comments

  1. Frankly

    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.”

    In November, Robb Davis was more cautious, 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.”

    Who is right?

    Robb Davis is right. IMO.

    There is not much “stickiness” to it.

    As Robb points out, the increase in tax revenue is from an uptick in property tax revenue from greater housing turn-over.  The greater housing turn-over is a function of three things:

    – General strong local real estate market
    – Extremely low mortgage interest rates
    – Overheated stock market putting many Davis home owners in a better financial position to cash out or buy-up.

    And keep in mind that #1 is really a function of #2 and #3.   Rates will go up, and the overheated stock market will undergo a big correction at some point.

    And this last point is key… because California’s current economic improvements are largely a function of the rise of the stock market.

    From the Economist…

    But more than most people realise, California’s fortunes depend on the stockmarket. The state relies heavily on individual income taxes—this year they are expected to be two-thirds of general-fund revenues—and in particular, the capital gains of the rich. (Prop 30 aggravated this problem.) This makes the state’s revenues highly volatile (see chart 1); and this is why Mr Brown resists calls to open the spending spigots.

    So since Mr. Brown resists calls to open the spending spigots, the city of Davis should do the same.

    And we have a probable continuing drought.  That is no small consideration to California’s economic situation that would impact Davis.

    Lastly, the current estimates of pension and OPEB benefits are based on a very aggressive expectation for investment returns (even though our city estimates discount the CalPERS estimates by 50 basis points).  These are based on historical performance trends.  There are many reasons to consider future returns will be lower than historical trends.   For example, GDP growth trends have flattened as averaged over the last dozen years.

    The state of the global economy is anemic at best.   The CBO puts the gap between the potential GDP and the actual GDP at 3.6 percent.   This the gap between the US economy’s production capability and demand.   And the prospects for increased economic demand in the global economy are non-existent at this time.  You would be better off to place bets on global war.

    The point I am making here is that Davis politicians should not put Davis in an economic bubble to justify spending when the economic results are tied to the state, the nation and the globe.  Davis got hit pretty hard from the Great Recession.  That is proof that we are not an isolated economy.  Instead of going on another spending spree, we should be using our good fortune to shore up reserves and to catch up all of our deferred maintenance.  Lastly, we should be much more conservative in our projections by factoring more anemic real economic growth and also factoring greater and more frequent recessions.  And with greater and more frequent recessions, the nation, the state, and the county will all be competing for limited dollars and making policy changes that impact the funding share going to cities.

    However, if Davis grows its own local economy leveraging its unique opportunity with its connection to UCD, and to correct for its current below average business tax revenue, we can get to a place where our strong economic situation is actually sticky.   Palo Alto has the same population and a general fund budget that is 3-times the size of Davis’s budget.  About 50% of that larger budget is funded by greater business tax receipts (most of the rest is property tax).   Davis’s business-related tax receipts are significantly lower than is the same for any comparable city in California and most comparable cities in the nation.

    Without a larger local economy, we should not use temporary swings in positive revenue to justify increasing any long-term liability from increased labor wages and benefits.  That is what we have done in the past and we paid the price when the Great Recession swept through.  If Davis wants to increase the pay and benefits of city employees we need to secure long-term increased revenue stability from economic expansion.  This will allow us to better handle the larger economic swings and also to recover more quickly when we get a big recession.

    1. Anon

      The point I am making here is that Davis politicians should not put Davis in an economic bubble to justify spending when the economic results are tied to the state, the nation and the globe.  Davis got hit pretty hard from the Great Recession.  That is proof that we are not an isolated economy.  Instead of going on another spending spree, we should be using our good fortune to shore up reserves and to catch up all of our deferred maintenance.  Lastly, we should be much more conservative in our projections by factoring more anemic real economic growth and also factoring greater and more frequent recessions.  And with greater and more frequent recessions, the nation, the state, and the county will all be competing for limited dollars and making policy changes that impact the funding share going to cities.

      However, if Davis grows its own local economy leveraging its unique opportunity with its connection to UCD, and to correct for its current below average business tax revenue, we can get to a place where our strong economic situation is actually sticky.”

      Very well said!

    1. Anon

      I am not following why you think three city council members would agree to pay raises for city employees.  From DG’s article, it appears the only City Council member who was “bullish” was Mayor Dan Wolk, and even he was somewhat cautious.  And I would think pay raises would kill any chances of a parcel tax succeeding.

        1. Mark West

          My prediction is that we will see a pay raise, justified as being intended to address employee morale. Some CC members who vote in favor will claim ‘reluctant’ support, but that will just be political cover. The only remaining question is how big will the raise be. The parcel tax will almost certainly be dead as a result, but I expect the election calculus assumes that the parcel tax is already dead so why worry about it.

      1. hpierce

        Zero total comp increases for city employees = real compensation cuts (take home/effective cost of living) for employees, given inflation (minor, but real), and cost increases on the medical, etc. coverages.  Just be honest about that.  Advocate any way you please, just be honest.

        Ironic, many supporters of at least zero comp increases for municipal/government employees staunchly support minimum wage increases, and/or increased compensation for teachers (but not administrators or ‘non-teaching’ DJUSD employees).  Whatever.

        1. Frankly

          I think the value of job security and early retirement with defined benefits including full Healthcare are undervalued and represent the increased compensation relative to overall inflation.

           

           

        2. Davis Progressive

          “Ironic, many supporters of at least zero comp increases for municipal/government employees staunchly support minimum wage increases, and/or increased compensation for teachers (but not administrators or ‘non-teaching’ DJUSD employees).  Whatever.”

          why is that ironic?

        3. South of Davis

          DP wrote:

          > why is that ironic?

          Not ironic at all since few people are consistent and most want pay raises for the people they “like” and pay cuts for the people they “don’t like”.  Most that want to increase taxes want to make “other” people pay and rarely send in extra taxes “themselves”.  I’ve never met a person with a “Pro-Choice” bumper sticker that thinks I should have a “Choice” of offering paper or plastic bags to my customers…

          1. David Greenwald

            Could that be because pro-choice specifically refers to the issue of abortion rather than pro-choice with regards to robbing old ladies at gunpoint?

        4. Matt Williams

          hpierce, since past compensation increases exceeded inflation and cost increases on the medical, etc. coverages, then using extended, multi-year evaluation periods to compare real compensation increases to real inflation is a reasonable approach. For example, if over a ten-year period the real increases are +10 +10 +10 +10 +10 +0 +0 +0 +0 +0 , the total compensation increase is +50 and if the inflation over the same ten-year period is +5 +5 +5 +5 =5 +5 +5 +5 +5 +5 then the total inflation increase is also +50. That would mean that over the 10-year period the employees’ real purchasing power has not been eroded. However, if you look only at the final five-year portion of the ten-year period, it appears that the employees’ purchasing power has been cut, when in fact it hasn’t been because of the effect of the first five-year period.

        5. hpierce

          Matt… use your same analysis over a 25-30 year period… you appear to be “cherry-picking” your data…

          And you should also use CPI over the same period to adjust for ‘inflation’.

          1. Matt Williams

            hpierce, I have no problem using a 25-30 year period at all. I used 10 numbers to create a visual example that made the concept crystal clear. Two strings of 25-30 numbers would have been visually distracting.

            The key is that during the period of the Saylor-Souza-Asmunsen Council, the increases in total compensation for substantial portions of City employees significantly exceeded CPI (which I consider to be synonymous with and the measurement of “inflation”), so the employees had “pocketed” money that was ahead of the curve. Dropping down to zero for a period of time simply returns some of that windfall excess reimbursement from the employees’ pockets.

            With the above said, do you think that there were periods of time prior to the Saylor-Souza-Asmundsen Council during which City of Davis employees saw total compensation increases that were less than the CPI? If your answer is “yes” when were those periods of time.

        6. hpierce

          OK, Matt, your math is still wrong…  10% compounded for 5 years yields 61% increase.  5% compounded for 10 years yields 63%.  Not equal.  Not by 3.2%, relatively.

          Your numbers, I now realize, were “what ifs”.  They are not what has been.  For non-safety city personnel, wages have come nowhere near 10% per year in a five year period, nor anywhere near 61% over 10 years. [particularly when employee contribution towards benefits are considered]

          You can look up CPI/inflation #’s, but for the last 5 years, not near 5% per year. Much less. Anyone getting SS would know that.

          Your input on this is bogus and misleading.  You imply that the bulk of city employees have had 10 % raises for five years, or 61% over 10 years.  Not true.  Mental m******ation?

          1. Matt Williams

            My examples were not “what ifs” they were easy to remember numbers used to illustrate a concept. Using highly variable and fractional actual CPI numbers would have made the simple illustrative calculations of 10 numbers hard to complete. For example what value do you get when you add 3 numbers all of which are equal to pi? How many significant digits will you include in your answer?

            10 and 0 and 5 are very easy to remember example numbers because they are easy to remember for the purposes of the hypothetical example. I could have used 100 and 0 and 50 just as easily. The numbers were like those in a word problem or a polynomial multiplication in high school Math class … illustrative. You have introduced compounding. I made no reference to compounding. If you feel the necessity to include compounding then you will have fractional numbers that are hard to remember.

            With all the above said, I encourage you to engage the reality of the situation … and to further simplify it for the purposes of discussion let’s restrict the group of City employees to only the Firefighters. So, here’s the key question for you, “Did the Davis Firefighters get raises that out paced the CPI for a substantial period of time?” If your answer to that question is “yes” then here’s a second question for you. “Is it unreasonable to expect them to give those windfall excessive increases back in later years in order to ‘balance the ledger'”?

            I make no implications. You have inferred meaning that was never intended and never said. I sense a considerable amount of defensiveness on your part on this issue regarding “the bulk of City employees,” which is why I have restricted the illustrative example to the firefighters, because in all your posting here in the Vanguard, nothing would lead anyone to think you were a Davis firefighter in a previous life.

        7. Rich RifkinWDE 73

          10% compounded for 5 years yields 61% increase.  5% compounded for 10 years yields 63%.  Not equal.  Not by 3.2%, relatively.

          HPierce’s math looks right to me.

          1. If you start with 100 as your base index, and you grow by 10% per year compounded for 5 years, you finish with 161.051. That is a nominal gain of 61%.

          2. If you start with 100 as your base index, and you grow by 5% per year compounded for 10 years, you finish with 162.889. That is a nominal gain of 63%.

          Ironic, many supporters of at least zero comp increases for municipal/government employees … 

          I support a sustainable compensation package. And, unless employees are becoming much more productive, or we are cutting back on services, the only sustainable formula is to grow total compensation per hour at the same rate that revenues into the City are growing.

          Unfortunately, for the last 20 years or so, total hourly employee compensation has grown much faster than revenues have grown, and as a consequences Davis has built up huge debts (including roads, pensions, medical, etc.) and we have been forced to cut back on services (largely by not replacing employees as they quit or retired). Taxes are going to have to be raised to pay for our road repairs. But if we want services to be restored to what we used to have, employee compensation has to grow at a rate a bit slower than revenues into the city, in order to pay down our debts, mostly to retired employees.

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