By Dan Carson
The city’s Finance and Budget Commission will be vetting the 2015-16 budget proposal at our next scheduled meeting on June 8. Speaking for myself only and not in behalf of our commission, my take is that the so-called “transition” budget presented by City Manager Dirk Brazil is a good starting point for City Council deliberations but that some technical issues with the numbers deserve a closer look.
Accordingly, last week I sent my fellow commissioners and city staff my comments on a series of mainly technical budget issues related to the budget as well as to the five-year fiscal projections that are summarized in the budget plan. I am sure my commission colleagues will be raising and addressing other questions for our discussion then, and I look forward to hearing their observations. A link to the full text of my memo can be found here.
Here are the issues that concern me:
- Last year’s budget understated the money coming from two key General Fund revenue sources, the property tax and sales tax by $1.4 million. This new budget ratchets up the money budgeted from these sources to fix this disparity but the future rate of growth from property and sales taxes assumed in the budget is still somewhat understated. The actual revenues the city is likely to receive would probably be about $750,000 more from both sources combined in 2015-16 than budgeted and $4 million more by 2020-21. My research shows that the revenue projections built into the budget plan are out of line with the city’s past revenue success, other statewide economic projections, and data from various sources about local economic activity. (For example, the city has experienced a 38 percent increase in resale permits, suggesting more turnover in housing is occurring that will boost property tax assessments and revenues.) With a 15 percent budget reserve safely in place, there’s no reason I can see to budget revenues too low again.
- The budget projections assume the city receives $128,000 more in hotel tax monies from the new hotel and convention center starting in 2017-18, but a city staff report to City Council a few months back cited the applicant’s estimate that the revenue gain would be $450,000. We need to understand the reason the numbers are so different.
- The city’s annual financial report shows that the balance in one of the city’s special funds, the Cable TV Fund, continues to grow and now amounts to about $1.6 million. As much a $1 million in idle cash has been sitting there out of public view for years for which there is no active program commitment. City leaders may want to think about using some of that cash surplus for important one-time purposes, such as deferred maintenance or high-priority capital improvements. (The balances in certain other special funds deserve a look, too.)
- The budget assumes $1.2 million will be spent from a “litigation reserve” by end of the current fiscal year, June 30. That date is only a few weeks away, though, and only a few weeks ago I was advised that none of that money had been spent. Between now and the adoption of the 2015-16 budget plan, we should seek an update from city staff on what if any money in the litigation reserve will be used. Whatever money goes unspent in 2013-14 would build the size of the city’s emergency reserve well above 15 percent, and thus is suitable for use for one-time purposes such as capital expenditures.
- If the city imposes a “drought surcharge” on water bills, the city will also pay those higher rates. We may need to explore how these additional costs would compare with the savings the city will also be enjoying from using less water, and budget General Fund costs accordingly. (This may be less of a concern now with the announcement at the May 26 City Council meeting by Public Works Director Bob Clarke of the city’s tentative determination that a drought surcharge may not be necessary.)
- I hope our commission will discuss the fact that the upbeat five-year fiscal projections don’t reflect any additional savings or costs from pending negotiations on collective bargaining agreements. Just a 1 percent increase in pay every year over the forecast period by my estimate could add $1.7 million in annual General Fund costs to the budget by 2020-21. Last year’s projections built in a 1 percent growth rate in pay as a sort of placeholder. The new ones don’t.
- I also want to call the commission’s attention to the fact that the impact of Measure O will begin to hit just about as soon as this five-year projection period is over. Under the terms of the ballot measure, the collection of a full 1 cent of sales tax will cease in the middle of the last year of the projections, 2020-21. Because of a lag in the collection and distribution of sales taxes, the loss of about $8 million in annual tax revenue will be felt in 2021-22 and 2022-23 unless the tax is extended. This potential revenue loss underscores the need for the city to execute a long-term fiscal strategy that includes fiscal constraint, economic development, and efforts to lease or sell surplus city properties. All of these strategies will need to be considered in the 2015-16 and subsequent budgets, because there is no way to know for certain whether future City Council members and voters will extend the tax measure, or whether it would be continued at the current level.
My observations are based on my experience as a non-partisan state budget analyst regularly involved in budget forecasting; contacts with city, county, and state officials; and my review of budget details and relevant data. One official mission of our commission is to seek transparency in city finances. My goal in this memo is to encourage our city leaders to make financial decisions based on the most accurate and complete set of numbers and assumptions.
Dan Carson worked for 17 years in the Legislative Analyst’s Office, a nonpartisan fiscal and policy adviser to the California Legislature, retiring in 2012 as deputy legislative analyst. He now serves as vice chair of the city’s Finance and Budget Commission. This commentary reflects his views only and does not represent the position of the commission on this issue.