By Dan Carson
Your staff has done a good job providing you with the analyses I personally undertook as well as the conclusions of the Finance and Budget Commission (FBC) in regard to the potential fiscal benefits of the proposed new extended stay hotels you will be considering on Nov. 1.
I intend to testify in behalf of the commission on this subject on Tuesday and of course am available to answer any questions you may have about our collective work. The commission, as your staff reports indicate, found that both projects would provide a net fiscal benefit to the City of Davis in the hundreds of thousands of dollars, plus one-time benefits on the order of $1.9 million per project.
I would note one technical change in my analysis of the Hyatt Hotel which I shared with our commission in September. After receiving additional information from the applicant about its business operations, I modified my analysis to conclude that the Hyatt House project would have a net fiscal benefit to the City of Davis of $650,000 annually, rather than the $700,000 ongoing fiscal benefit I originally estimated, from a reduced level of sales tax receipts.
My estimate of the net fiscal benefit from Marriott of $600,000 annually was unchanged. I also note that because of the sensitivity of the estimates to assumptions about hotel room and occupancy rates, the net fiscal impact of each hotel could be a couple hundred thousands of dollars higher or lower than these estimates.
As you deliberate about these projects, you will have to weigh the potential fiscal benefits to the city against other considerations, such as your land-use policies and the additional set of criteria you have adopted for such projects. The purpose of this memo is to alert you to recent information the commission has received, and my analysis of that data, which indicates why economic development projects such as the hotels are so important to the city. These comments are my personal views and do not necessarily reflect the views of any other commissioner.
The City’s Pension Rates and Costs Will Be Greater Than Projected
At our October 10, 2016, meeting, the commission heard a presentation by Bartel Associates, LLC, assessing, among other matters, how the cost of city contributions to CalPERS in behalf of its active and retired workforce will change in the future.
The presentation by the president of the firm, John Bartel, included 10-year projections of rates and costs of each of the city’s CalPERS plans for miscellaneous, police and fire service employees. His estimates reflect CalPERS actions to address unfunded liabilities in retirement plans that, in his view, are likely to eventually place the plans on a sound financial basis, albeit over a long period of time — perhaps several decades. It should be noted that the consultant’s projections of out-year pension costs are estimates – not actual decisions by CalPERS about what the City of Davis must pay to the retirement system in the future. However, the city has long relied on their work for its budget planning.
Notably, the Bartel firm’s projections of CalPERS contribution rates for the City of Davis are significantly higher than the assumptions that the City of Davis incorporated into its ten-year General Fund forecast it adopted last summer as part of the 2016-17 budget process.
As just one example, the most recent ten-year projections adopted by the city (based on the most recently available actuarial projections the city had from Bartel at the time) had assumed that employer contribution rates to CalPERS for fire and police employees would gradually increase from 35.55% in 2016-17 to 43.25% in 2021-22 and remain level thereafter.
However, Bartel’s updated numbers assume instead that police contribution rates would start at 34.9% in 2016-17 but reach 52.1% by 2025-26, the end of the city’s ten-year projection period.
Contribution rates for fire employees would be 37% in 2016-17 but reach 62.8% by 2025-26. Bartel’s estimates of pension costs also take into account how the city’s payroll of PERS-eligible employees would grow in the future. Specifically, Bartel assumed that these payroll costs would grow each year by 3%. (This growth rate is in line with payroll cost increases budgeted in recent years.)
This increase in payroll costs mainly result from increases in employee pay rates, changes in staffing positions, and merit raises received by employees as they move up the ranks.
Notably, Bartel’s estimates of increases in city payroll costs depart from the most recently adopted set of city fiscal projections, which assumed instead that city payroll would remain flat after recently approved memoranda of understanding with some employee groups were implemented in 2015-16 and 2016-17.
These estimated increases in employer pension contribution rates, combined with the assumption of increased payroll for PERS-eligible employees, mean the cost of putting the city’s CalPERS plans on a path to sustainability would be significant. Bartel estimated the pension cost impact as it relates to all city funding sources – the General Fund plus various enterprise and special funds. In 2017-18, pension costs would increase $845,000 annually.
Over the course of the city’s projection period, from 2016-17 to 2025-26, city pension costs would grow from a total of $9.1 million to almost $16.5 million, or an increase over the period of $7.4 million. I estimate this to be an average annual growth rate of 6.8%. I have attached to this memo a spreadsheet I prepared summarizing the Bartel pension cost estimates.
My Further Analysis of the Bartel Numbers
The Bartel analysis did not break out the specific fiscal impacts of the projected pension cost increases on the General Fund. I have prepared my own estimates of the General Fund cost impacts. I used two different approaches to prepare these estimates.
Under the first approach, I disregarded Bartel’s assumption of 3% annual payroll growth and considered only the impact of changing contribution rates in line with the higher Bartel estimates. I estimated that the higher pension contribution rates would add $425,000 in General Fund costs in 2017-18. By the end of the city’s ten-year projection period, the higher employer contribution rates projected by Bartel would result in about $2 million annually in additional costs to the General Fund.
Under the second approach, I also factored in Bartel’s estimate of 3% annual increases in payroll for the city for PERS-eligible employees. This projection approach suggests the city will face much more significant increases in General Fund costs. Using this second approach, I estimated that the 2017-18 General Fund cost of pensions would be about $635,000 higher than was reflected in the city’s ten-year fiscal forecast that was adopted last summer.
By 2025-26, the end of the projection period, the added costs to the General Fund for higher pension contribution rates would be almost $5 million higher than the city’s original ten-year projection had assumed.
The General Fund impact is higher when the direct added cost of the estimated 3% increase in payroll costs is included. The total cost of payroll and pension contribution rates together could increase General Fund costs by $1.2 million annually in 2017-18. By 2025-26, the end of the city’s projection period, the total cost of payroll and pension contribution rates together could increase General Fund costs by as much as $10.7 million annually, by my estimate.
At the time this analysis was prepared, city staff had not prepared their own updated estimates of the potential fiscal impacts of the information provided by Bartel. Given their past practice, city staff is likely to incorporate the new Bartel numbers into the updated forecast prepared in conjunction with the 2017-18 budget plan you will consider next year.
However, as the City Council is well aware from its past deliberations on the budget, the city clearly faces formidable fiscal challenges both for personnel and infrastructure costs, such as maintaining city roads and bike paths. The new Bartel projections suggest that the increased bill for city pension costs will hit the city in the near-term, and is not just a longer-term problem.
It is unlikely that the current city revenue stream can keep up with these pension and payroll cost increases and other costs the city will face to maintain high quality city services. While it should not be the sole approach the city takes to addressing these fiscal problems, city support for economic development projects, such as the two pending hotel proposals, could generate additional revenue that could help the city meet its future obligations.
I hope you will carefully consider this new information about pension costs as you consider the opportunity to increase city revenues from hotel taxes, sales taxes, and property taxes from the development of two additional hotels.
(This was originally submitted to the Finance and Budget Commission as a memo).