Despite projections from last June showing the precarious nature of the city budget and despite sales tax figures coming in nearly three percent below the budgeted estimate for 2015-16, the city council is being asked to approve four MOUs from employee groups that will add half a million to the current fiscal year budget and $1.12 million to the 2016-17 fiscal year budget.
The MOU agreements between the city and four bargaining units – Davis Police Officers’ Association (DPOA), Program Administrative and Support Employees Association (PASEA), Individual Management Employees, and Individual Police Management Employees – each come with a 2 percent COLA (Cost-of-living Adjustment) on January 1 and an additional 1 percent on July 1.
The only “good” news in these budgets is that the city is not locked into them long term. Each expires at the end of June 2017. Even that silver lining represents a mixed bag, as it is possible that the city will be able to course-correct at that time, but it is also possible that a more labor-friendly council will open vaults to the bargaining units.
The writing has been on the wall for some time, as Dirk Brazil last spring told the Finance and Budget Commission that there would not be additional concessions sought in this bargaining process – this despite the very precarious nature of the current budget.
These announcements come just six months before the voters will likely be asked to approve some form of tax – likely the Utility User Tax – to support the city’s upgrade of infrastructure such as roads.
In June 2014, the voters approved a half cent sales tax. The sales tax was billed as a temporary tax measure to deal with the current structural deficits.
The chart above shows the impact of the tax as it pushed the city’s fund balance into the positive. However, last June’s projections show that, as soon as that tax expires, the city’s fund balance heads right back into the negative.
The city goes from being in the black in 2020-21 by nearly $2 million to being in the red in 2021-22 by about $3.4 million. And while revenues continue to increase modestly throughout the period, expenditures increase as well.
Most ominous is that this chart doesn’t show what happens with employee compensation increases.
The chart shows what happens with a one percent COLA and projects it out past when the tax increase will drop off the tax rolls.
The first thing we see is that a one percent COLA will basically track with expected revenue increases across the board. So the city’s projection of being in the black will no longer hold. The city will fluctuate between slight deficits and slight surpluses. By 2020-21, the city will be in the black by $300,000 under this scenario.
When 2021-22 hits, and the tax increase disappears, the city will immediately find itself right back in the $5 million deficit it was in previously. By 2024-25, the city would be back in a $7 million deficit.
While the second chart shows what happens with a one percent annual increase, the impact of even a one-time three percent increase is monumental. We assume that the rest of bargaining units such as Fire and DCEA will have similar pay increases should council approve this one, so we are likely looking at a $2 million plus hit on the city expenditures, which was not included in the first projection.
That being the case, we may not have any single-year budget surpluses if you look at the model. And that is only assuming that we implement the 3 percent as a one-time expenditure and go back to a flat line budget.
As we argued back in June, the zero-increase budget over a decade was unrealistic. However, there is a lot of bad news here.
First, the city’s model assumes no economic downturns in the next decade. Second, CalPERS (California Public Employees’ Retirement System) is already threatening to raise the rates for the city, which could take another million out of the budget, and Governor Brown is telling CalPERS that their planned cuts do not go far enough.
Perhaps the city is hoping to further cut non-employee costs, perhaps they are planning on the voters approving the renewal of the sales tax, and approving the Utility User Tax that they can use to bolster the General Fund – particularly on roads where the city is currently pulling $4.1 million.
However, that is a lot on which to risk the sustainability of the city’s budget. The voters have not approved the Utility User Tax – and we have yet to see the plan for how that would work.
The voters have also not approved Nishi or the Innovation Parks. Right now, even if they do, they are modest revenue sources and potentially only in the long term.
The only good news is that the city could move back toward a zero-growth budget after the current MOUs expire in mid-2017, but, as we warned back in June, the city’s budget is not nearly as strong as some have suggested and simply adding a few million to the budget is going to put tremendous strain on it.
Is the council willing to buck the city manager on this budget-related item? That seems unlikely without considerable push-back from the community. As it stands now, the city is in precarious shape and a lot of the hard work from the last five years is in jeopardy.
—David M. Greenwald reporting