Sunday Commentary: Avoiding Repeating the Mistakes of Davis Budget History

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I look at articles like Dan Carson’s (5/2, New City Staff Forecast Says Fiscal Year to End with Substantial Reserve) with naturally mixed emotions. On the one hand, the city is moving into a better fiscal position – a lot of that is due to the improved economy, but some of that is due to the fact that the city took sometimes drastic and strong measures to curtail spending and compounding problems of unfunded liabilities, while figuring out funding streams for infrastructure.

At the same time, there is a need for caution. The previous decade, particularly from 1999 to 2008, was too good. In 1999, we had superfunded pensions, meaning that the investments brought in by CalPERS were generating so much revenue that local governments didn’t have to pay into the pension fund at all. That made it very easy to do things like increase the rates for employees retroactively.

The real estate boom carried us through in Davis, despite warning signs along the way. Even a half-cent tax increase in 2004 led to massive double figure salary increases for not only fire (at 36 percent) but across the board (though most bargaining units got 12 to 18 percent increases over the four-year range of their MOUs).

By 2007 and 2008, we were already warning the city that this was unsustainable – but no one seemed to listen. Those few voices were drowned out by the council majority. It was not until the recession hit in late 2008, and not until a new council was seated in 2010 and 2011, that we started to take serious steps to rectify the situation.

And so, the report by Mr. Carson is good news. As Mr. Carson writes, “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.”

Clearly, the key drivers are the new influx of property tax monies. Some of it has been generated by new home sales, but some of it has also come from the phase-out of redevelopment and increases in city wide assessed values. In addition, the voters passed Measure O last year and, not only are revenues coming in, but “about $578,000 more in sales tax revenues are coming in than were initially budgeted.”

However, the good economy is a mixed blessing. It relieves the pressure on the city to cut, which is a good thing. There are many things in this community we need to spend money on – most specifically shoring up aging and crumbling infrastructure. But unless we are disciplined, we risk falling into the same trap we fell into 16 years ago.

While the solutions that were laid out in the last five years were drastic, they were necessary. The recent report by former City Manager John Meyer pointed out that city staff took the brunt of some of these reforms.

Mr. Meyer pointed out, “Despite the resulting internal hardships, budget reductions were made that were essential to improving financial stability. More work is required, but such actions were necessary to avoid the need for even more draconian measures”

On the other side, he noted that, while staff fully understood the economic forces that required these budget reductions, “there is a widely held view that limited communication to staff on budget reductions aggravated an already difficult situation.”

At the same time, Mr. Meyer told the Vanguard this week that, during a crisis, there was urgency in making the cutting and it is understandable that less effort might have been spent on explaining the cuts. Now that the crisis has receded, this is the time to make sure lines of communications are open again.

Going forward from here, there are a few things that seem important.

First, we need to avoid the buildup of unfunded liabilities in the future. If we are to expand pensions or retiree health care, those benefits need to be fully funded. It is appalling that it took the accounting practices of GASB-45 (Governmental Accounting Standards Board report from 2004) for the city to figure out that they had not funded enough into the retiree health program to make it solvent. That meant that, during the heart of the recession, when we needed money to keep basic services going, we had to divert millions to build up to full funding of retiree health care, or face a fiscal cliff by 2020 and 2030.

It was remarkable that we ramped up the pension formulas for city employees, without asking them to pay the employee share – and without calculating the long-term costs of the pension increases combined with the massive salary increased from 2004 to 2009.

While I think the city has learned some of these lessons, it is less clear that we have learned a very critical one – not to get into an arms race on compensation. The runaway compensation train has continued even during the recession, as we saw the council bring in the new city manager with a sizable pay increase that will likely have downward repercussions as we move into bargaining time.

This can be resolved through planning and moderation. There is no reason to freeze employee compensation as long as we plan properly the services we need, the amount of money that needs to go into infrastructure and the amount of money that needs to go into reserve.

The other lesson of the recession is that, while Davis fared better than many communities, thanks to its slow growth policies, the city came out of the recession more slowly in part because of its limited tax base.

Community leaders have made the decision that the route to go is not peripheral retail but rather the creation of high-tech technology parks or innovation parks, which can take advantage of the community’s proximity to UC Davis and bring in startups and high-tech companies to generate property taxes, fees and some sales tax.

With good planning, the city of Davis can retain its small, compact urban features, protect farmland, and continue to supply its citizens with services.

However, there are dangers lurking. One of the things we learned was the massive and unfettered influence of the firefighters’ union from 2000 to 2010. They were able – relatively easily – to elect at one point seven of nine councilmembers supportive of their views.

This led to four on an engine, it led to 3 percent at 50, and it led to the massive 36 percent salary increase in the 2005 MOU. Much of the reform efforts – and some of the morale issues in city hall – stem from efforts to curtail that influence and roll back some of the excesses of that period.

That suggests, going forward, we need a three-prong approach. First, fiscal discipline. In good economic times, we do not need to hold employee compensation growth to zero, but holding it constant with the cost of living would be one way to prevent employee compensation to explode like it did from 1999 to 2008.

Second, continue political reforms. The firefighters’ union has been hammered on this site – and, given the Davis Fire Report and its implications, rightly so. However, the union would not have been nearly as powerful if the citizens were paying attention and the city council acted appropriately in the best interests of the community. As long as that balance is retained, there should be no further need for reform.

Third, diversify the Davis economy. City Manager Dirk Brazil told the Vanguard this week that he remains committed to economic development. In his view, however, and for good reason, there was a lot of focus on peripheral innovation parks, and he wants to see a strategy that focuses on the downtown as well as the innovation parks.

Davis is at a point in time where it needs to take advantage of its burgeoning reputation, and the city manager seemed supportive of continuing in that direction.

But vigilance is in order – the council and unions could not have wrought the damage that they did were it not for the fact that the community was not paying attention to fiscal issues. For a brief time, fiscal issues ruled the city, but now we are moving back into a more typical period of time. That makes it all the more incumbent on the community to pay attention to finances.

—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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15 Comments

  1. Alan Miller

    now we are moving back into a more typical period of time.

    Phew!  What a relief.  That atypical period of time just about did me in.

  2. davisite4

    Ok, I am kinda baffled here.  The two recent recessions hit the tech sector pretty hard (and, actually, almost every sector of the economy).  How are the business parks, which are aiming at the tech sector, going to help bring stability?  The tech sector has been a big factor in the boom and bust cycles of the last decades.  Are we just going to end up with lost farmland and empty buildings when the inevitable crash comes?

    1. Alan Miller

      Are we just going to end up with lost farmland and empty buildings when the inevitable crash comes?

      I, and no one, can answer that question.  But thanks for keeping it real and calling it a business park.

      –Alan C. Miller  (adding something to the discussion)

    2. Topcat

      Are we just going to end up with lost farmland and empty buildings when the inevitable crash comes?

      We’ve got some empty office space in the Westlake Shopping Center on Lake Blvd.  It’s been empty for a long time now, ever since West Yost moved out.  How come we don’t have anyone talking about moving some of those “Innovation” companies in there?  Yes, I know it’s not a lot of space, but it could certainly accommodate a few small companies.

      1. Frankly

        That is crappy and overpriced space.  But you bring up a good point… if we are in need of office space and have low vacancy why is that space not being leased?… even if it is crappy and overpriced.

        1. Topcat

          I’m beginning to think they ought to just tear down half of that shopping center and build more apartments there.

          Yes, we’ve seen several operators try to make a go of a grocery store and they just can’t make it work.  Family Dollar seems to be a complete loser.  I see very few customers there.  I expect that Family Dollar will close within a year.  Other retail operator come and go at regular intervals, but nobody seems to thrive.

          I don’t know the details about who owns the shopping center or how they price the space there, but they do seem to be terrible business people.  It also seems that this was a terrible location for a shopping center.

        2. wdf1

          Most of the ground level is occupied with retailers, maybe a couple of spaces that are vacant.  MandRo Teahouse is recently opened and seems to have a lot of business, mostly students.  Westlake Market seems to be doing well, at least when I go there.  I never go to check out the upper level, but I have assumed that most must be vacant.  I know that Delanos (Westlake) said they were keep their offices upstairs.

    3. Frankly

      Actually the last recession hit the tech sector not very hard at all compared to real estate and financial services.  Boom and bust cycles hit Davis harder because we lack diversity in our revenue.  Just about every city came out of the recession quicker than did Davis because we had to wait for consumers to purchase more, tax increases and homes to start selling again.  All of this stuff happened well after business tax receipts were filling the coffers of other cities.

      Your question is in fact quite baffling.  Where do you think tax revenue derives from?  If you are going to rule out sources that might be impacted by a downturn in the economy, then you would have to rule out everything… except that money tree growing in your water-conserving landscape.

  3. sisterhood

    “Are we just going to end up with lost farmland and empty buildings when the inevitable crash comes?”

    God, I hope not, don’t want it to be inevitable, but it kinda seems like it is. And once the precious, verdant, vibrant farmland is gone, will it ever come back? Some will say a vibrant economy will replace it. I wish I could believe that. Maybe a few optimists out there can soothe my anxiety?

    1. Alan Miller

      And once the precious, verdant, vibrant farmland is gone, will it ever come back?

      Perhaps tomatoes and corn breaking boldly through the crumbling asphalt in the year 2525.  (If man is still alive . . . )

      Some will say a vibrant economy will replace it. I wish I could believe that. Maybe a few optimists out there can soothe my anxiety?

      Perhaps you would like the same optimists who predicted before the 2008 great-recession that the economy would continue to grow at a boom rate forever, and that one could base city budgets and government employee pensions upon such optimistic forecasts?  Are those the optimists that you wish to sooth your anxiety?

      –Alan C. Miller  (adding yet more to the discussion)

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