New City Staff Forecast Says Fiscal Year to End with Substantial Reserve

budget-stockBy Dan Carson

A city staff report released Friday says that better-than-expected growth in property tax revenues and the realization of the additional sales tax revenues from voter-approved Measure O have bolstered city finances to the point where the current fiscal year will end with a $7.1 million General Fund reserve.

The city staff’s estimates are preliminary and could well change for the better or worse as the city budget process unfolds between now and the June 30 end of the fiscal year. For example, a significant portion of property tax revenues are distributed to the city in May and could influence the final outcome.

However, if the numbers that will be presented to the City Council for discussion on Tuesday hold up, the city will have achieved an important fiscal benchmark heading into its deliberations on next year’s 2015-16 budget.

Current city policy calls for the city to have on hand in its General Fund reserve funding equivalent to 15 percent its annual revenues (after a technical adjustment to subtract out intragovernmental revenues). The newly released staff report (to which a link can be found here) says that the city will have a 14.9 percent reserve in hand at the end of the current fiscal year as things stand, and thus is essentially there

City policy may soon change to compute the reserve in a somewhat different way, but the new numbers are a clear signal that the city’s fortunes have improved since December 2013, when the city manager forecast a $5 million annual structural shortfall. Assuming continued fiscal discipline in the next and subsequent budget cycles, the trend means the city could be in a better position to address backlogged deferred maintenance and infrastructure replacement costs as well as continued personnel cost pressures.

Here are some of the key points highlighted in the city staff report:

— Property tax revenues for the current fiscal year now appear likely to be $897,000 above the level estimated when the 2014-15 budget was adopted. According to the report, an increase in the property tax monies coming to the city from the phase-out of redevelopment, and increases in citywide assessed values, account for the positive revenue trend.

— The half-cent increase in the sales tax approved by Davis voters last year as Measure O, estimated to bring in $2.7 million in 2014-15, is paying dividends. Better yet, about $578,000 more in sales tax revenues are coming in than were initially budgeted.

— A delay in completing a new contract with Davis Waste Removal means that a $500,000 a year increase in franchise fees designated for the General Fund is kicking in later than expected. That delay contributed to a $358,000 shortfall in this revenue source in 2014-15. However, the larger franchise fee payments started in March and should henceforth be received in the full amount each year.

Not mentioned in the new city staff report are the difficult past actions taken by the City Manager and City Council to help improve city finances, including another round of $1.2 million in General Fund budget reductions that were built into the 2014-15 budget package. However, the biggest single factor in improving the city’s bottom line was clearly Measure O, which is forecast to eventually bring in $3.6 million annually to city coffers.

These numbers should be seen in perspective. Sudden economic changes, such as the recession that hit the nation in 2008 and the recent plunge in oil costs, can dramatically affect city revenues and costs for the good and bad. But the likelihood that the city will have a full 15 percent General Fund reserve in its pocket means it is much better positioned than it has been in a long time to weather future budget storms.

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.

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Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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32 Comments

    1. Dan Carson

      The reserve is what’s left over after all general fund revenues and spending are accounted for. However the city staff report linked above has tables showing how different specific types of revenue sources are performing and thus how they contributed to growing the projected reserve.  The chart on page 8-5 shows this.  But it does not go to the level of detail you are seeking on this housing project.  Send me your contact info offline (Daniel.c.carson@gmail.com) and I would be happy to find out for you if these are General Fund revenues.

  1. Davis Progressive

    well this is an announcement at least by mr. carson: it is back to business as usual in the city.  we have plenty of funding, time to ramp up employee compensation.

    1. Dan Carson

      When I mentioned the need for fiscal discipline, the continuing negotiations with city employee groups are just one example of what I have in mind. I was glad to see that the official set of goals adopted last month by the City Council included a fiscal goal to “ensure labor contracts reflect long-term sustainability to support delivery of services.”  Specifically, the goal requires that cost analysis be done before labor negotiations begin and that this continue throughout the process.

      1. Davis Progressive

        that’s of little comfort.  i’m sure in 2000 they had some sort of analysis that argued that 3% at 50 was sustainable as well.

        1. hpierce

          Fine.  Dwell on what was done.  Looks like Dan and I am more interested in “moving on” with eyes wide open.  Fact:  2.5 @ 55, 3 @ 50 doesn’t exist for new hires, and haven’t for some time.

        2. hpierce

          They not only had analysis, but experience… there were years prior, where CALPERS had reduced the employer’s share for pensions to near/at zero.

          Same for UCD’s pension system.

        3. hpierce

          Not dismissive, watchful toward future, educated by the past.

          In the past, judgements may not have been considered as well as they might have been. We should remember that moving forward (and perhaps, ‘moving on’).

    2. hpierce

      BP & DP:

      BS.  The 15% goal is a good one, and except for true emergencies, it should not be spent, for roads or employee compensation, or any other purpose, save, perhaps for a small portion to pay down debt/unfunded liabilities for which the City is already obligated for.  We have not seen projections for next year.  That is when and where it would be appropriate to opine/whine/rant.

  2. Frankly

    First – thanks to Dan Carson for writing this in a way that is easy for the average reader to understand.

    But a few points:

    1. Increased property tax revenue is a function of higher real estate turn over and higher home prices.  Davis is not unique in this as the same is happening throughout California.  However, there are plenty of signs that real estate is bubbling again as it did up to the great financial collapse of 2008.  If you remember the staff reports in early 2000, they sounded about like this one.  Higher interest rates will impact home sales.  And when the next real estate bubble pops, any reliance we have hitched to property tax revenue will cause us great fiscal pain again.

    2. Increased sales tax is only partially a result of Measure O because the general economy has improved and sales tax revenue in general has improves as more people are spending more money.  Again, this revenue increase is volatile and tied to the overall economy.

    But I think the most glaring omission here is the lack of discussion about the city’s TRUE long term liabilities.  In fact, I think it demonstrates recklessness and irresponsibility to report on the fiscal health of the city without including this assessment.  Unfortunately, I think it tends to implicate the report as having too much of a political agenda.

    As are many streets in Davis, Lake blvd is about 5 years past repaving.  Last year work was done.  It was a crappy job of minimal patching on only part of the street and only on one side.  You see the same being done in other areas of town where the roads are falling apart.

    The point here is that it appears the city is putting a facade on road repair to deflect from the true liability of unmet need.

    From my perspective we have too much fox guarding the hen-house with respect to city finances.  Many of the people on the Finance and Budget commission are existing or retired public sector employees certain to have a bias for the pay and benefits of their professional peers… many that are probably close friends.  Likewise, the City Council is also primarily public sector employees.  While I appreciate a city council that treats city staff well, there is a demonstration of what I would consider excess defense and protection.

    And when you add the unions funding candidate campaigns… well there is a very big conflict of interest.

    From my perspective what we need is for all cities to start having to comply with GAAP and FASB rules.  Conflict of interest between governance, management and operations in private corporations has been effectively eliminated by the reporting requirements.  It is time to demand the same for government accounting.

    1. Davis Progressive

      “And when you add the unions funding candidate campaigns… well there is a very big conflict of interest.”

      other than a few stray $100 contributions, unions have stayed out of council elections in the recent years.

      1. Frankly

        There is a tremendous value in the organization that exists.  Unions are primarily political campaign machines waiting to jump in at the next election.  Candidates and causes that union oppose have to pay for their campaign labor and have to create the organization from scratch.  Unions are all “ready, set go.”

        1. Davis Progressive

          i wonder about that.  i think people overrated the impact of unions based on yamada 2008.  if you really look at the history of this area – lois wolk and helen thomson were not heavily supported by unions.  bill dodd beat wolk despite some union backage there.  what happened in 2008 was unusual – the unions came all in and cabaldon played into their hand.  the result is that there is an inflated sense of union power in davis.

        2. Frankly

          Some districts are more fiscal conservative than others, and in some elections the union-friendly candidate is not as appealing.  But the bar is much harder for a Democrat unless he/she is a demonstrated friend of the unions.  California is not like Wisconsin in this regard and probably will never be since we are flooded with left-leaning and liberal-learning immigrants.

  3. Dan Carson

    Frankly,

    you make a number of interesting points but let me respond to your criticism of our commission. Not one of the eight  current members of the commission is a public sector employee. To the best of my knowledge, one member — me — is a former legislative budget analyst whose job focused on advocating ways to hold down state government spending. That included making and testifying publicly in behalf of very specific recommendations to avoid pay and benefit increases and to reduce personnel costs for state workers in the policy areas assigned to me.  My colleagues and I are striving to provide more effective oversight of city finances than it has done in the past. I have no doubt we need to do a better job, but we do have the interests of taxpayers as our top concern.

    1. Frankly

      Dan, I am not completely up to date with the current commissions, but how many are former public sector employees?

      I might have this wrong and appreciate the correction.

      I am not suggesting malicious bias here.  I just think those that work for or have worked for the government will likely have preferential bias to keep funding government and government employee compensation at higher levels.   And I am not suggesting that the work of the commission isn’t valued.

      Lacking reporting about real long-term liabilities certainly adds to this thought that there is a preferential bias.

    2. Frankly

      Dan – Here is what I recommend.  You and others are contributing valuable time in a pursuit that ultimately targets city fiscal sustainability.  Regardless if I am wrong about the preferential bias toward city employee compensation, I think the mission of the commission should give much greater priority to transparency of our city finances.  Because the former target would tend to motivate for faster recognition that the goal of sustainability is being attained or met.

      I would see the role of the commission as more auditors and overseers of the city finances and less staff or council-collaborative financial managers.  And as auditors and overseers you would tend to be more pessimistic and have a higher bar for ensuring that any good news is fully vetted from all angles.

      Also, there is the challenge of trust and credibility.  Judge Roberts has been the swing vote on some controversial SCOTUS cases and has been quoted saying that he also has a responsibility to protect the reputation of the court.  I bring this up because the the function of city financial management is running at a deficit in credibility these days.  There is a deficit of trust that the reports are well vetted enough.  So when we read a rosy report there is an instant reaction of suspicion and maybe full disbelief.

      I think understanding this deficit in trust and credibility, the Commission would be well advise to tread lightly on positive reports.   In fact, I would say we should side on continuing to be critical.

      Otherwise this just looks like a PR game helping to tee up the next labor negotiation for compensation increases.  Pay increases increase the long-term liability and if the revenue increases are not sustainable long-term and meeting or exceeding all current and long-term liabilities, then it is irresponsible to give them.

      Lastly, these rosy reports have a negative impact on the point that we need economic development in this city.  Revenue from business activity provides a more steady and long-term increase to city coffers.  We need to stop with the good news reports for revenue increases that are so volatile.

  4. Dan Carson

    The commission has had extensive discussion with city staff as well as the city’s actuary about both pension and other post-employment benefits because they are such a huge fiscal concern. We created a subcommittee about a year ago to examine the city’s deficits in funding for deferred maintenance and capital improvements. We have had extensive interaction with city staff and others on these latter issues.  All of this is out there and discussed in our monthly meetings which are always open to the public.  Again, to the best of my knowledge I am the only former public employee on the commission, and my role involved reducing the cost of government.

    1. Frankly

      Correct me if you think I am wrong, but a GAAP-standard accrual accounting, the unfunded pension liability increase and any increase to road and infrastructure maintenance liability would be booked as adjustment to the bottom line of the P&L every year.  In this case we would have been, and continuing to, understate our accrued expenses relative to our accrued and actual revenue.

      For example, our ~$50MM general fund budget would be short $5-$10MM every year.. in ADDITION to the previously reported $5MM shortfall.

      In GAAP accrual accounting the revenue or expense is booked in the year that it is known to be a commitment or requirement.  If funded with debt service or a funding plan, it can be spread to subsequent years, but think how corporations could take advantage of accounting rules that allowed them to book all revenue accruals in the current year without having to book real expenses that they could push to long-term liabilities.  The corporate executives say: “Look how profitable we are… pay me a big bonus!!!”

      We need a full financial assessment of the pension, road and infrastructure maintenance unfunded liability.  And then we need a financial plan for getting to sustainability… and this plan needs to include assumptions for revenue variability.  The ongoing annual cost of that plan needs to be part of the book and part of all the reports we get from the FBC and the city staff.

      In summary, IMO, any report about revenue improvements needs to include assumptions for ongoing revenue volatility and also include the real budget deficit we are running.

  5. Doby Fleeman

    Dan,

    Thanks for your update on the current year’s budget performance.

    I’m hoping that might help me to better understand the difference between the Ending General Fund balance, which closed out last year with a $9.5MM balance, and the $7.1MM General Fund reserve account to which you refer in today’s article.

    Are they the same account, but just with different names?

     

    1. Dan Carson

      Doby, I am assuming the $9.5 million general fund balance number for June 30, 2014 is the one cited in the city’s Comprehensive Annual Financial Report.  As you can see on page 25 of that report the $9.5 million consists of both restricted and unrestricted amounts.  The figures cited in the new city staff report for a $7.1 million reserve pertain only to the unrestricted balance that is projected to exist as of June 30, 2015   Also it is my understanding from a discussion of the CAFR with city  staff last year that the accounting definition of what counts as General Fund for financial reporting purposes is a little different than the one in regular use for budgeting.  Page 84 of the CAFR explains some of these technical differences. Hope this helps

  6. Doby Fleeman

     
    Dan,
     
    Without knowing, but I can imagine this issue of using different terms to describe essentially the same item – in this case the period-ending General Fund Account Balance is part the frustration being expressed by Frankly in his comments.
     
    What is the “need”, and what is the “value”, in terms of financial management reporting, of changing terms as between year-end reports and interim budget reports?   I don’t get it.  In private sector, such reports are called quarterly reports – good enough for the SEC – and they generally conform to the same format as the final, annual report to allow for comparisons over time.
     
    Specifically, on the subject of the General Fund, I understand the significance of referring to it as a “reserve” – unless it truly is a reserve account and reported as such consistently across time.
     
    In the annual report, I see that the ending General Fund Account is divided in three sections last year – but nothing was identified as restricted.  They were divided as between “non-spendable, assigned and unassigned” with almost $8MM in unassigned.
     
    The main point of these comments is to attempt to put the $7.1MM in “reserve” funds into some kind of perspective with respect to where the City ended its previous fiscal year at June 30, 2014. 

    1. hpierce

      Doby… good questions… am not an accounting ‘wonk’, but I would hope the reserve would be in the “unspendable” category, with a caveat, ‘except in a bona-fide emergency’.  Kinda’ like a 401(k), prior to retirement.

        1. hpierce

          Oooops!  Unintentional… not my goal.  Got interrupted when dog needed to go out and chase a squirrel. Let’s stick with the current vocabulary…

  7. Topcat

    Assuming continued fiscal discipline in the next and subsequent budget cycles, the trend means the city could be in a better position to address backlogged deferred maintenance and infrastructure replacement costs as well as continued personnel cost pressures.

    I completely agree with the need to address backlogged deferred maintenance and infrastructure replacement.  I do think that the City needs to hold the line on personnel costs.  The City has been overly generous with employee salaries, and benefits, including retirement, to the detriment of City finances and the taxpaying public.

    I would like to see the City Council and City management adopt the idea that we need to “Live within our means”.  This is seen by some as an old fashioned and out of date way of thinking, but it has served many people and organizations very well.

    I know that some people believe that continued growth of the city by building a big new industrial park will be our saving grace, but I don’t think that this is the way we should go.

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