In 2008 during the Davis City Council elections, incumbent Councilmembers Don Saylor and Stephen Souza ran on a platform that argued the city had a balanced budget and a 15 percent reserve. In those days prior to the collapse of the US financial markets, it was difficult to counter that the city only had the illusion of a balanced budget.
At that time there were the looming unfunded liabilities of OPEB (Other Post-Employment Benefits, mostly retiree health) and the pension crisis had not hit, even though we were warning in the spring of 2008 that the city budgeting practices were unsustainable and, sure enough, when the Great Recession hit that fall, the house of cards came tumbling down.
But, while the next eight years would bring cuts and even some reforms, the unstable house of cards was never repaired. If anything, it got worse due to benign neglect. City infrastructure investment would lag. Unfunded liabilities and retirement costs would soar.
And yet our accounting methods continued to allow yet another mayor in 2014 through 2016 to credibly claim that all was well, we have a balanced budget with a 15 percent reserve and growing resiliency. Mayor Dan Wolk would dub this “the Davis Renaissance.”
The underlying reality had not changed. We simply did not have the metrics or models to demonstrate the precarious nature of our city finances.
That is what makes our new budget so extraordinary. It shows a $7.8 million average annual shortfall.
The report concludes, “The average annual shortfall in funding is $7.8 million.” To put this into perspective, “this amount is roughly equivalent to the current 1% Measure O sales tax, or to a 6.0% utility users tax on power, communications and water/sewer/sanitation services, or to a $270 parcel tax.”
And this is still a low number, as the park maintenance cost remains a work in progress.
Mayor Robb Davis writes in a comment that “it is a sobering read.” The financial forecast section of the budget, he said, “points out how in each area of City infrastructure we are, over the long run, failing to cover maintenance costs. It provides an initial estimate of the size of a potential tax to cover all unmet/underfunded needs. It is an important read and the kind of analysis this CC has pushed for.”
This kind of sober analysis is the outgrowth of some heavy lifting behind the scenes. Earlier this year, we presented the modeling of Project TOTO and the work of Matt Williams, Jeff Miller and Bob Fung to give the city a tool in which to see how decisions about funding can play out into the future.
The city then hired Bob Leland, who further refined the process to give the city real long-term forecasting tools whereby, as Matt Williams put it, “decisions that the Council and the Community face can be examined in the light of the tradeoffs associated with the decision alternatives.”
The city is to be commended for embracing this approach. No longer can the city hide the true cost of doing business or our true deficit by placing key items like unfunded liabilities or infrastructure needs into an unmet needs category which is off-budget.
The analysis, however, is sobering and we have tough decisions now to make in order to rectify the situation.
One big source of trouble, unsurprisingly, comes in the form of pension costs which the city projects to triple in the next 20 years. Think about it, back in 2000-01, the city was paying less than half a million dollars for pensions. By 2038 that number will be $18 million. To put this into perspective, $18 million is one-quarter of our current general fund budget.
Part of this problem rests with CalPERS (California Public Employees’ Retirement System) itself, which for years relied on unreasonable growth associations in the long-term combined with risky investments.
But that analysis ignores the role that city council level decisions played in this. It was the city council that voted to expand the firefighters’ benefits to 3 percent at 50. It was council that from 2004 to 2009 had double-digit pay increases across the board, including a whopping 36 percent increase for firefighters. It was the council in 2009 that dragged its heels on pension and OPEB reforms and salary concessions.
Most importantly, from 2005 to 2012, the council made the decision to prioritize compensation to employees over investment in critical infrastructure. During that time, council put almost no general fund money into road repairs, for example.
The result is that, by 2016, Nichols Consulting projected a 20-year need of $167 million – or $8.3 million annually – for road repairs.
Currently the forecast “assumes that 66% of street costs and 65% of bike path costs, or nearly two-thirds of this need will be funded through a combination of sources: General Fund ($3 million annually ramping up to $5 million in the 2030’s with 85% going to streets and 15% to bike paths), construction tax ($130,000 annually), development fees ($800,000 annually), and the new SB1 gas tax money ($441,000 in 17/18 and $1.56 million annually thereafter).”
Even with these added expenditures, roadways in Davis after a momentary uptick will regress back down to PCI (Pavement Condition Index) 60 by 2035.
These are all choices that the council made, but the advantage of this modeling is that we now get to know the consequence of our choices and we can decide what our priorities ought to be. Do we shore up our infrastructure or continue to pump the bulk of our spending toward retirement benefits for current and past employees?
These choices are now ours – but thanks to transparent models that forecast our expenditures, we get to make them consciously.
—David M. Greenwald reporting