Sunday Commentary: Council Needs To Be Ready to Make More Tough Choices on Budget

budget-stock

In June of 2014, the city was still facing an economic crisis and the voters stepped up delivered what was billed to be a temporary half-cent tax increase. By the fall the city’s financial budget prospects had shown improvement. Revenues not only increased due to the new sales tax, but city revenues came in around $800,000 higher than projected.

The new budget projections came in this spring showing the city projected to remain in the black and increase its fund balance for the next five years. A Davis Enterprise reporter went so far as to declare this year’s budget “boring.” Mission accomplished? Are we out of the woods?

A more careful analysis says – no. In fact, an emphatic no.

While the city has tried to portray its budget as “conservative,” it has actually forged out a middle path, projecting a small annual revenue increase over the next five and then ten years, while city manager Dirk Brazil last week proclaimed that there would be no more “take backs” from city employees.

Dan Carson continues to argue that the city’s projects for the coming fiscal year are, in the words of city staff, “very conservative and understated by as much as $750,000, based on state wide growth trends.”

Others including the Vanguard note that the city actually ends up in the red as soon as 2021-22 when the sales tax measure expires and the city is unrealistically projecting sustained economic growth for another decade, whereas it seems more likely than not that we will face another economic downturn.

Moreover, there is evidence that the rosy economic forecast by Dan Carson might be misplaced. City staff responded to Mr. Carson’s upgraded projections that “increases in assessed values are not correlated to increases in property tax and that over the past five years of actuals we are only seeing revenue equivalent to 81% of the increase in assessed values, the City feels comfortable that using only a portion of the projected increases in assessed values for the increase in Property tax over the course of the forecast.”

While the city admits that its assumptions are “more conservative,” the staff report notes, “by more than $200,000. There are current communications with Yolo County to understand if this revenue shortfall will be reconciled in our August payment or if our projections need to be downgraded. Either way would be an indicator that Davis Property Tax revenues are not necessarily growing at a pace consistent with Statewide trends.”

On the other hand, there are reasons to believe that the city is actually presenting a fairly rosy picture of the budget. It recently had to include models that showed the impact of the expiration of Measure O and the impact of a modest one percent annual COLA – both of which quickly drive the budget into the red.

The first caveat is that the budget projections have not assumed any sort of increase to employee compensation over the next ten years. Dan Carson warns, “The budget projections show that, after excluding one-time monies, ongoing city revenue sources would grow faster than the increasing costs of pensions and other benefits provided to city employees over the five-year projection period.”

While adjusted revenues would grow about 2.6 percent annually, total budgeted compensation costs would go up about 2.2 percent annually. However, staff notes, “those projections implicitly assume, for the time being at least, no further increases in pay for city employee beyond those approved in prior collective bargaining agreements with staff.”

Previously, city projections had assumed 1 percent annual increases in employee pay.

Mr. Carson continues, “Negotiations with employee groups are pending and thus were not concluded at the time the draft budget plan was prepared by the city manager. Agreements do not appear to be close. The eventual outcome of these negotiations, however, could have a significant impact on city finances.”

“If all city employees received annual 1 percent increases in pay during the five year projection period, the annual increase in pay and pension costs could amount to $1.7 million annually to the General Fund by 2020 21.”

About the impact of the expiration of Measure O, Dan Carson writes, “Under the terms of Measure O, approved by the voters last year, the city’s sales tax was increased by one half cent effective last October. Under the terms of the measure, however, the full 1-cent city sales tax expires December 30, 2020, unless extended in the interim by action of the City Council and voters.”

He continues, “My estimate is that the loss of these revenues would eventually amount to $8 million annually. 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.”

Staff responds, “The forecast has been extended out beyond the expiration of Measure O so that the effect of its sunset can be seen in relation to anticipated expenses in FY20/21. It is evident from this projection that, absent new revenue sources or expenditure reductions, the City will have expenses far in excess of revenues.”

The city’s budget picture from our perspective really does not look that good. Here are our five takeaways from the budget picture that should be fully considered:

First, the sales tax measures were sold to the public as “temporary” and “emergency,” however it is clear that the city goes immediately back into the red as soon as the taxes expire after the 2020-21 fiscal year. The city undoubtedly will have to attempt to get the voters to renew them – but the city cannot operate under the assumption that the voters will do so.

Second, as Commission Chair Jeff Miller pointed out, the budget assumptions assume economic growth – modest growth, granted, but positive growth throughout the period. That assumes ten additional years of economic growth after this year – which does not seem reasonable or likely. It seems probable that we will see another recession sometime in the next decade.

Third, right now we are at a historic low in terms of number of full-time equivalent (FTE) employees. At 352, we are down a full 100 from the peak. Those cuts were largely done by attrition and without much regard as to services provided and workload. The question is whether we can assume that, over the next decade, we can continue to operate at 352 FTE. Again, it seems likely that we will need to grow the number of employees to a more workable level.

Fourth, the city staff showed us the projection of what happens even at one percent annual COLA. The small margin that the city had in the black completely evaporates and, as soon as the taxes fall off the books, the city’s fund balance drops precariously.

Fifth, these numbers do not factor in the need for infrastructure repair. Right now, the city is pumping in more than $4 million for roads, and the city manager has acknowledged that that figure is insufficient to improve the city’s roadway conditions. That doesn’t include the needed money for parks, greenbelts, and city buildings. The city has a discussion for a parcel or other tax revenue scheduled for July, but any revenue will have to get past city voters – and a two-thirds margin was elusive in previous polling.

We believe it foolish for the city manager to be removing employee concessions from considerations.

As we noted earlier this week, what is interesting is that, for most employee groups, while they believe they have had severe cutbacks, most actually received a small COLA in the last round of negotiations. This was in exchange for cuts in other areas. For example, many took a huge hit on the cafeteria cash out, which was reduced in many cases from $1500 to 1800 per month, down to $500 per month.

They have picked up a greater contribution to employee pensions; in the case of non-safety employees, they went from paying none of their pensions to paying eight percent. And there were also changes to medical plans.

On the other hand, the firefighters went to impasse, and so some of these changes could not be imposed upon them. They make more than any other bargaining group and are likely the only group in town near the top of the region in compensation.

There has been some talk, therefore, about trying to equalize the discrepancy between fire and police in compensation, but it’s not completely clear that there is the political will to do so.

We need to ask tough questions still – are we staffed sufficiently to deliver the services that we want to deliver? Are there gaps in that service delivery due to attrition? And the larger question still is whether we can continue to provide all of the services that we currently provide.

The biggest question of all is how do we go forward from here? We have clear needs in terms of infrastructure and we have no margin for error on the budget for the foreseeable future.

Finally, we need to continue to look at ways to increase revenue. Our fear is that the public has sensed incorrectly from statements from the mayor and city manager that the economic crisis may be over. The budget numbers argued against that. We need to look at economic development as a long-term solution to help with our margins.

But if we end up closing off the possibilities of concessions from employee groups, we limit ourselves, and right now the budget doesn’t look strong enough to do that.

—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.

Related posts

13 Comments

  1. SODA

    Naive questions:

    1. The budget will be passed before MOU negotiations are completed, correct? If MOUs cannot be kept level and not increased, what happens to the budget?

    2. Why is the budget timing and the MOU negotiations not flipped so that the budget can be moe accurate and realistic?

    1. David Greenwald

      The answer to question one is that if the expenditures increase after the MOUs are completed, then it will eat into the city’s fund balance. That’s one reason to have a 15 percent reserve. But naturally it is best to incorporate into the budget your best guess.

      To the second, one problem is that the budget is required around the end of the fiscal year or the start of the next fiscal year. Most of the city’s MOUs don’t expire until December. Moreover, most of the MOUs won’t be signed until well after they have expired.

    1. hpierce

      Historically, MOU negotiations were part of the budget cycle.  MOU effective dates and fiscal years coincided.  That eroded over the years. Part of that was due to MOU’s being given low priority by HR/CM/CC.  Part may be due to the fact that one of the key components of employee compensation, Medical insurance premiums, aren’t known to agencies until late spring/early summer.  Medical premiums are tied to calendar yeas, not fiscal years.  The open enrollment period, where employees can adjust their coverage, occur in the Sept/Oct time frame.

      SODA is correct, as I understand the questions posed… employee compensation (via MOU’s) should be part of the budget cycle.  Given the number of employees covered by MOU’s that now expire at the end of December, the CM and HR staff should be actively engaged NOW in the meet and confer process.  Given the lack of priority given in the more recent past (last 10 years or so), I suspect the assessment that all MOU’s will have expired prior to resolution of the meet and confer process.

      That situation is not conducive to good budgeting, good government, nor positive employee morale.  The morale is more dependent on the uncertainty than on the actual provisions.  We certainly have enough employees in the HR division, and CM office to make the meet and confer process a high priority.  Don’t hold your breath, tho’.

      1. SODA

        Thanks hpierce!

        I am being suspicious in thinking that given the CM has said budget for employees will be flat, that is optimistic at best, and who will remember when the ‘city fund balance’ takes the hit should that not occur.

        David has said several times in the past few days and I know Robb has expressed interest in looking carefully at employee fit in city systems now that attrition has decreased the work force:  not necessarily in the areas most needed. Did attrition allow for the reorganization of the workforce by the CM as stated a couple months ago with the promotion (I would think) of two assistant CMs, etc.?  Did that process really examine the ‘right employees’ in the necessary jobs? I am not being critical, just curious.

        1. hpierce

          Two responses… first, the choices for Asst CM’s are excellent… young, talented, high ethics.  Mike and Kelly are truly aces.

          Second, perhaps the adoption of the budget prior to negotiations is part of a “our hands are tied” strategy to deal with the meet and confer process… the earliest additional expenditures could be committed to is in the FOLLOWING FY (2016-17)[following that logic].  Perhaps not.  Time will tell, but my main point remains… the discussions should be happening now, and we are not seeing that.

           

  2. Gunrocik

    David does a good job of pointing out five key issues being glossed over by both Dans (Carson and Wolk) who only seem to see sunny skies ahead–which is an absolute impossibility in my mind.

    Municipal Budget projections should always err to the conservative.  Many cities purposely budget no more revenue than they received in the previous year.  Why?  Because it is a lot easier to deal with a budget surplus than a budget deficit both politically and logistically.  You never want to promise a service or program you can’t deliver.

    And while it is a useful exercise to conduct five- and ten-year budget pr0jections, they aren’t something you want to depend on.  On the revenue side, the real estate market can turn in a heartbeat if interest rates rise – which can slam your property tax projections.  If one car dealer goes out of business — your sales tax numbers can fall overnight.

    On the expense side, it has already been noted by David and others that employee salaries (which along with their benefits are the vast majority of the city budget) haven’t been increased in this budget projection.  Not only will a COLA severely impact the budget projections — so will unexpected increases in medical and PERS.  While I’m sure they have projected increases in medical and PERS, these are costs over which the City has NO control and can’t control what the true cost will be.

    Remember medical makes up two components of employee compensation.  It is not only the $18,000 or so per employee for current medical premiums.  It is also another $15,000 or more per employee that is being set aside for retiree medical costs as well—that is over $33,000 per employee if my review of the budget is correct.

    If medical costs start increasing again at a double digit clip (which isn’t at all impossible) the City budget is in bad shape.

    While the City has projected healthy increases in PERS premiums, a couple bad years in the stock market could send those cost skyrocketing as well.  PERS costs are over $20,000 for each non-safety employees and over $30,000 for safety employees.  A couple large increases in PERS premiums could also severely impact the budget.

    So even if there is little or no COLA, the $50,000 to $60,000 per employee in PERS and medical costs are a huge “X” factor over which the City has no control.  That is yet another reason why it is irresponsible to be overly  optimistic in the revenue projections.

    It is also irresponsible for the City Manager to state “no more givebacks.”  The employees benefit mightily from the medical and pension benefits they receive.  If the costs of those benefits go up extraordinarily, the employees should be willing to share in that cost — particularly if they are also getting a COLA.

    Oh and by the way, David.  The workforce has already shrunk by 112, not 100.  This power point shows that the staffing high achieved during the Saylor years was 464:

    http://administrative-services.cityofdavis.org/Media/AdministrativeServices/Documents/PDF/Finance/2014-2015-Budget/Presentation-Revenue%20Measures-2014-02-11.pdf

    1. hpierce

      A few incorrect things in your post:

      1.  “It is not only the $18,000 or so per employee for current medical premiums.  It is also another $15,000 or more per employee that is being set aside for retiree medical costs as well.”  That assumes that all employees have two or more dependents not covered by another plan.  Two assumptions that may well be invalid. A single employee only costs ~ $7,000/year.  Plus $6,000/year if they do cafeteria cash-out, which I believe should be eliminated in any case.

      Also, the actual cost for retiree medical is only true until an annuitant (and dependent) qualifies for Supplement to Medicare. Then the costs drop.  Big time.

      2.  ” A couple large increases in PERS premiums could also severely impact the budget.”  Not if, as many agencies have, the employees pick up all or a part of the employer’s share.  Am not advocating the City pursue that, but it is, arguably, within the City’s control as part of the M&C process. Same is also currently true re: medical insurance costs, as most of the current MOU’s provide that the City picks up the first 3% increase in premiums, the employees the next 3%, and the City and employees split any additional increases 50-50.

      Discussion is good.  Facts are not the choice of those who have opinions.

       

      1. Gunrocik

        The 15,000 number is the cost per current employee.  Because the city did not set aside money in the past for retiree medical costs, the city now has to set aside approximately 20% of payroll costs per year to be able to cover both the cost of current retirees but also the cost of future retirees as well.

        The cost per employee would be even higher were it not for the lower medicare coordinated cost for over 65 retirees.

        And yes, hopefully future employee contracts will have cost sharing, but it would be irresponsible to include those in projections.

        My main point is that the City Administration has an ethical responsibility to provide a conservative near worst case scenario to honestly portray future costs.  We don’t need history to repeat itself.  We should know better after what happened last decade

  3. Robb Davis

    A few points from the previous round of MOUs (these concern all bargaining groups–including those imposed upon–except as noted):

    Health Benefits Contribution:

    Beginning December 1,2012, and each month thereafter, the CITY will contribute $1561.55 towards the monthly health care premium for EMPLOYEES. Effective December 1, each following year, when health care premium increases take effect, the CITY will contribute up to the first three percent (3%) of any increases in health premiums (set from the actual health care premium rate of Kaiser-Bay Area Employee +2 plan). EMPLOYEE will contribute up to the next additional three percent (3%) of health premium increases for the benefit year. Any increase in the premium above six percent (6%) will be shared equally (50/50 cost sharing) between CITY and EMPLOYEE. The EMPLOYEE must pay the difference between the CITY’S allotted portion and the actual premium. 

    PERS (misc–safety employees hired before Dec 31, 2012 receive 3 at 50):

    The following provision applies to EMPLOYEES hired into city service on or before December 31,2012.

    The CITY shall continue providing EMPLOYEES with the CalPERS “2.5% at 55” local retirement plan. Upon ratification of the MOU, the current 3% employee pick-up of the employer share shall be moved to the employee portion (3% total employee share). EMPLOYEES shall contribute three percent (3%) towards the employee’s portion for a total of six percent (6%) towards the employee’s CalPERS contribution.

    EffectiveJanuary l, 2013, through December 31,2013,EMPLOYEES shall contribute a total of seven percent (7%) towards the employee’s CalPERS contribution.

    Effective January 1 , 2 014, EMPLOYEES shall contribute a total of eight percent (8%) towards the employee’s CalPERS contribution. 

    (New employees–those hired after Dec 31, 2012 pay the 8% but are at 2 at 62 (capped at 2.5 at 67) for misc employees and 2.5 at 57 (capped at 3 at 62)

    (Note DCEA had the full 8% contribution to PERS made effective upon imposition.  Fire and Sworn Police pay 9% employee contribution and police pay an additional 3% of the employer contribution.  Fire refused to pick up the 3% employer share and had a 3% salary cut imposed)

    “Cafeteria” cash out:

    The following provision applies to EMPLOYEES hired prior to January 25,2010. CITY will make available to each covered EMPLOYEE a monthly amount for health and dental benefits, as specified in Section C of this AGREEMENT. If the EMPLOYEE has outside healtlddental coverage, such as through a spouse, domestic partner, or other acceptable alternate health coverage, the EMPLOYEE can take the unused portion of the amount allocated for the benefit as cash in lieu of receiving any or all of the actual benefit. The amount of cash in lieu available for the covered EMPLOYEE is capped at $1,483.08 per month and the amount allotted for health and dental premiums is the only CITY contribution that can be taken as cash in lieu. For example, if an EMPLOYEE elects a healtld dental benefit of $613.42 then the maximum cash out amount would be $869.66.

    Effective January 1,2013, the maximum amount of cash in lieu that an employee may receive is $1,200 per month.
    Effective January 1,2014, the maximum amount of cash in lieu that an employee may receive is $1,000 per month.
    Effective January 1 , 2 015, the maximum amount of cash in lieu that an employee may receive is $750 per month.
    Effective December 3 1 , 2 015, the maximum amount of cash in lieu that an employee may receive is $500 per month.

    The following provision applies to EMPLOYEES hired on or after January 25, 2010. A lower “cash out” cap applies. If the EMPLOYEE uses any portion of the health andlor dental insurance benefit, then the difference between the actual premium paid on behalf of the EMPLOYEE and $500 can be cashed-out each month, provided a proper election has been made. If the EMPLOYEE has outside healthJdental insurance coverage, such as through a spouse, domestic partner or alternative plan, the EMPLOYEE can cash-out a maximum of $500 per month, provided a proper election has been made. For example, if an EMPLOYEE elects a health or dental benefit of $150 then the maximum cash out amount would be $350. If an EMPLOYEE elects benefits over the $500 maximum amount, then the EMPLOYEE would receive no cash out benefit. 

    Retiree medical changes are far more complicated and people can check those for themselves.

    1. hpierce

      Clarification… you seemed to imply “misc-safety” pension rates are @ 3% @ 50.  Those misc. employees hired pre 2013 are 2.5% @ 55, NOT 3% @ 50.  Probably an inadvertent muddying of the waters.

  4. Gunrocik

    Robb Davis: retiree medical changes are far more complicated and people can check those for themselves.

    They are definitely more complicated, and as I noted above in two posts, an item over which we have very  little control.

    Those of us who spend far too much of our time analyzing actuarial tables can also tell you that the City’s current retiree medical is a primary reason why no City Manager or City Council member should be waving the “Mission Accomplished” flags that Dan Carson is handing out.

    Right now, the City is paying around $6 million per year towards retiree medical — which they are hoping over time will dig them out of a $50-$60 million hole created by previous Councils and adminstrations.  That annual payment is predicated on a number of factors, the most important of which is the cost of future medical premiums.  It is also banking on a specific mortality rate, a specific number of active employees and a specific rate of staff longevity  as well.  A change in the wrong direction for any of these factors and the annual payment could go up significantly.

    Bottom line, the city’s retiree obligation is likely a moving target, and the target is probably going up and not down.  And it is not a benefit that is easy to adjust — as you can’t likely change it for those already retired.  You are stuck with it and need to budget accordingly.

    Any revenue windfalls should be going into paying down this debt and not into Mayor Dan’s special projects or to placate bargaining groups.

     

Leave a Reply

X Close

Newsletter Sign-Up

X Close

Monthly Subscriber Sign-Up

Enter the maximum amount you want to pay each month
$ USD
Sign up for