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