On Wednesday, I attended a brown bag lunch sponsored by the Davis Downtown, in which they invited a presentation by Jeff Miller and Matt Williams of the Finance and Budget Commission with technical support from Bob Fung.
Here they presented what they are calling their “City of Davis Toto Model.” Early next week, the Vanguard is going to present a video recording of their presentation and broadcast, so right now I’m just going to briefly describe the project to make some broader points.
The idea of the model has built into it the ability to forecast and plan into the future, by allowing us to set a number of policy-based parameters and then be able to project 20 years into the future the impact of each decision.
At the outset of their presentation, they quote Mayor Robb Davis who said at the January 3 State of the City address, “We are not paying for the things that we’ve already purchased, and we are not paying for those things in adequate amounts to make sure they remain for the future.”
The need for the Toto Model is very clear. For years, the Vanguard and other critics have complained that we do not have a true picture of the budget. As the presenters pointed out on Wednesday, the city has significant annual unfunded liabilities that have been caused by pension and retiree health insurance obligations, as well as a backlog of needed repair or replacement for the city’s deteriorating infrastructure.
These are not accounted for in the actual budget and, as the presentation pointed out, “We still have no proposed long term solution to pay for these unfunded liabilities.”
The lack of budgeting these deficiencies has long had serious consequences. I still recall in the 2008 City Council elections the incumbents pointing out that the city had a balanced budget and a 15 percent reserve. Critics pointed to the unsustainable nature of pensions and OPEB (Other Post-Employment Benefits) along with what we called at that time “unmet needs,” or infrastructure deferred maintenance.
It took the Great Recession later that year and several years of delay for the council to get serious about addressing the problems in the city – but those problems underlie our systemic problems even today.
The advantage of this model is it allows for a 20-year time horizon to forecast the impacts of policy decisions. It includes other outcomes like road pavement conditions, bike path conditions, parks and greenbelts conditions, etc. It improves forecasting, they argue, by allowing the city to model alternatives.
The bottom line is this – the sales tax is expected to end in 2021. The current city budget projects a fairly flat revenue model for the next twenty years. But once increased costs for pensions and OPEB are added in, the model shows that the city plunges into a hole that will continue to grow throughout the period.
Giving a COLA (Cost-of-Living Adjustment) of just 1.5 percent per year takes the figure to negative $80 million by 2035. That number gets worse if you add a COLA with pension and retiree medical changes. The number grows to negative $180 million by 2035.
As they pointed out during their presentation, the numbers are actually worse than that, because they don’t account for roughly $200 million needed for parks in the next twenty years. Also, they have not accounted for the various options on the roads.
The city can maintain current levels of road spending, right now at $4 million from the general fund, which would take the PCI (Pavement Condition Index) downward to about 30. They can maintain the current condition, which would take us about $100 million into the hole in 20 years. Or they can achieve the targeted 70 PCI which would take the city closer to $120 million in the hole. Again, this is without adding other factors.
There are three takeaways I had from the discussion on Wednesday.
First, there is no way to avoid the fact that in the next twenty years the city is going to have to make a series of difficult and often painful decisions. Once you account for things like road repair, pensions, OPEB, the probability of pay increases, and parks, the numbers you are dealing with are in the hundreds of millions and right now we have a general fund that is only about $60 million.
Matt Williams quipped that he will continue to use the $655 million figure until someone gives him a better one, but the reality is whatever the precise number is, we are talking hundreds of millions, not tens of millions.
Second, the public is largely unaware of this problem. During the discussion the audience was asked whether they felt the roads were problematic in Davis. Most said no.
But when I met with Mr. Miller, Mr. Williams, and Mr. Fung over on G Street, I pointed to the roadway condition there. There were many seams and deep cracks in the roadway. Each time it rains, water will seep in and continue to undermine the roadbed. At some point, the roadway will give way, creating potholes and grooves.
We estimated that the condition of G St. was probably around a 50 – a failing grade. My guess is that for, most people, they see G St. as okay – there aren’t potholes and their cars are not bouncing like on Olive Drive.
The problem is twofold. First, as the roadway conditions continue to deteriorate – costs go up exponentially. Second, once cracks start to form, water can cause roadways to fail.
Then there is a third problem. The general attitude is that these problems are structural and not specific to Davis. Certainly with respect to things like pensions, earning forecasts and health care costs, that may be the case.
But, as I pointed out, Davis made a series of decisions that, coupled with things like economic collapse and reduced pension earnings, have magnified the problem.
The Davis City Council made the choice to increase pension formulas. They made the decision to give out huge pay increases in 2004 and 2005. They made the decision to attempt to balance the budget with furloughs and attrition. They made the decision not to address the structural problems of the budget in 2009 labor negotiations.
Bob Clarke was warning the city about road conditions as early as 2009 (and perhaps earlier). The city made the choice not to fund road repair in 2008, 2009, 2010. I had to meet with then-Mayor Joe Krovoza and Mayor Pro Tem Rochelle Swanson in 2011 to get them to add $1 million to the budget for roads – even then, the money was not actually included.
We didn’t start actually doing road repairs until 2015. We finally tackled structural issues in the budget starting in 2011, but we still had to get through the 2012 labor negotiations to implement many of these things.
In 2011, council passed a motion requiring the city to account for unfunded liabilities and unmet needs in the budget – that still has never been implemented.
The bottom line is that in 2008 the great recession happened, it would take three years to get serious about the budget and another several to start addressing these problems.
Those are conscious decisions by council, not Davis being the victim of circumstance.
We will have more on this next week.
—David M. Greenwald reporting