A week ago Mayor Robb Davis presented his cost containment plan. This is one I fully support.
The mayor writes, “It should be clear from the foregoing that we are taking a comprehensive approach to increasing revenue. What we have not yet done is critically analyze the role of cost containment in meeting our fiscal challenges. I believe that in addition to seeking revenue growth, we must engage in a more strategic and comprehensive analysis of cost containment approaches if we are to move the city towards fiscal resilience. This analysis must include restraining employee cost growth, but must look widely for all manner of cost control measures.”
From my perspective this is easier said than done, and part of the real problem is that our general fund is only about $60 million while our unfunded liabilities and deferred infrastructure needs are into the hundreds of millions.
I think the best point that Robb Davis makes is “there is no silver bullet.”
This is a critical point, the critical point.
This week we had a piece submitted anonymously that I think illustrates the problem that we face. Right now, payroll costs for 2015 represented about $41.7 million of the general fund (give or take). We have seen in the past that the combination of pensions and OPEB (Other Post-Employment Benefits, as retiree medical) eats up nearly one-quarter of the city’s general fund.
In other words, one dollar out of every four goes to people who are not currently working.
There are a number of different possible solutions that people as recently as yesterday suggested.
Ideas that were thrown out:
- Limitation of general fund growth
- Aggressive Outsourcing
- Moving from Defined Benefit Pensions to Defined Contribution
As recently as November, Rich Rifkin in the Davis Enterprise argued with respect to the challenges faced due to unfunded liabilities: “The only sensible approach to this situation is to restrict the annual growth of total employee compensation — that is, salaries plus benefits plus other employer costs — to 2 percent per year. That growth rate in employee costs tracks with sustainable revenue growth.”
While it sounds good, the problem is, as Mr. Rifkin acknowledges, “It has to be in the labor contracts. The City cannot just impose that without going through the complete negotiation process with its unions and associations.”
This is the problem. The city might be able to limit general fund growth, but that takes the approval of the employee groups who have little incentive to agree to such a contract (and, even if they did, it would be limited to the employee group and the length of the contract). The city could transition new employees away from PERS (Public Employees’ Retirement System), but the city has to get agreements on that issue, they cannot impose it.
Indeed, the city in the 2012-13 contracts did start to transition new employees to a lower PERS rate, but that only applied to the five groups that signed bargaining contracts – the city could not impose it on either DCEA (Davis City Employees Association) or fire – neither of whom signed a contract.
DCEA has had their terms and conditions imposed on them in both 2010 and 2013. The firefighters had their terms and conditions imposed on them in 2013. That means that, for DCEA, they have not approved a new contract since 2005, while for fire it has been since 2009.
There is not much the city council can do to limit general fund growth and move toward a defined contribution retirement system without buy-in from the employee groups and, right now, at least two of the seven have shown no interest in agreeing even to the rather modest terms that the city set forth in 2009 and 2013.
Last year, the five other bargaining groups agreed to new contracts with a small COLA (Cost-of-living allowance) – which further illustrates the trouble the city will have taking a harder line approach.
That leaves us with the second idea, bankruptcy. Some see bankruptcy as an answer, but the problem is that, while bankruptcy may protect an organization from its debts, it doesn’t really absolve a city of its obligation.
As Phil Batchelor, former interim city manager for Vallejo, California, told NPR back in 2012, “When you declare bankruptcy, you don’t suddenly get a free pass that allows you to abdicate responsibilities for providing municipal services.”
He added, “Once you’ve declared bankruptcy, you still have the obligation to get your fiscal house in order. You still have to balance the budget. You still have to settle with the claimants. You still have to pay your legal bills, and you still have to deal with your unfunded liabilities.”
You may get to renegotiate terms with labor and maybe, according to a 2014 decision, change your pension system – but as I pointed out in a 2014 column, the city of Stockton was able to get a ruling from U.S. Bankruptcy Judge Christopher Klein that was “groundbreaking.” As the Sac Bee wrote, “It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred.”
And yet, Stockton decided not to go that route. The problem facing the city of Davis – yes, it’s partly related to pensions, benefits and unfunded liabilities – but the bigger problem is deferred maintenance on roads, parks, city buildings and other infrastructure. And it has a further problem of sluggish growth in sales tax revenue, resulting from one of the lower per capita tax bases in the region.
None of this would be solved by bankruptcy.
As Matt Williams put it in a comment, “As serious as those fiscal realities are, the realities imposed by Mother Nature are a much more serious challenge. A bankruptcy judge can not wave a judicial hand and eliminate the effects of Mother Nature on our streets and buildings and parks. Unless we abandon those capital infrastructure assets, the cost of maintaining/repairing/replacing them is unaffected by bankruptcy.”
And likewise, as the anonymous report notes, the city has actually done quite a bit in the way of temporary employees. In 2015, the city of Davis had 827 total employees, and only 306 were full-time, year-round – can we cut that further? Probably. But, just like bankruptcy isn’t going to solve our fiscal problems, neither is outsourcing.
I am all for taking on Robb Davis’ approach – undertaking a full staffing analysis that matches service delivery needs to staffing. In fact, this is long overdue because, while the city was able to greatly reduce its full-time workforce because it did so by attrition, it paid little attention to the intricacies of service delivery.
Like some of our readers, Robb Davis recommends “outsourcing of services where most appropriate, and analyzing alternative service delivery mechanisms such as using non-profits to provide programs.” The key question is how much more can we gain and whether such a model will come with the cost of service delivery.
We can look again toward reducing city programs and sharing services. Then again, the problem of sharing fire services between the city and university underlies that difficulty.
There is a cost-cutting component and then an elimination component.
The mayor argues that we should examine all means “to further reduce growth in compensation costs including analysis of retiree medical insurance options.” He also talks about selling city infrastructure, which not only would generate one-time money but also ongoing maintenance savings, and examining green spaces and parks for ways to reduce maintenance costs as well.
At the end of the day, these are all good suggestions, but they are trimming costs on the margins and we are going to have to look at a more aggressive approach: (1) freezing compensation increases, (2) tax revenues, (3) economic and retail growth.
One point that gets missed here is that we don’t need to necessarily cut costs in absolute terms. If we freeze costs to current levels, we are in effect cutting costs as inflation rates vary from 1 to 3 percent annually – which means that just freezing costs could lead to a 20 to 60 percent reduction in real terms over the course of a 20-year period. But, even with our most aggressive measures, we have not managed to freeze costs.
The biggest hurdle we have right now is that the public is not aware of the challenges we face. Without public understanding and support, the heavy lifts will not be possible.
—David M. Greenwald reporting