The Vanguard readers have been focused on the issue of fairness of the proposed tax, now that council has outlined that they are going to go to a parcel tax – or three – this spring. But a far more pressing issue is one of cost containment.
The councilmembers often get defensive when I bring up the 2004 sales tax increase where council put a measure on the ballot for a half-cent sales tax increase, warning the voters that without it they would lay off public safety workers and would have to consider closing down parks – and then they turned around the next year and gave the biggest series, at least in recent history, of city employee compensation increases.
While times have changed since those days, we are concerned that the last two employee agreements in 2015 and a few weeks ago contained compensation increases. More important than that is the fact that, without cost containment, any revenue increase is quickly going to be overwhelmed by increasing costs for employees and city services.
The first problem is, even if the council commits to not using parcel tax money on employee compensation increases, there is enough fluidity in funding systems that it is easy enough to simply shift money that is going for services and infrastructure to parcel tax money, thus freeing up general fund money for salary and compensation increases.
The second problem is actually quite a bit more substantial, and that is the need to hold the line on costs.
In February 2016, Robb Davis put forward a seven-point plan for cost containment. Take a look at the seven points he makes – there has been some progress on some of this stuff. But I think many would argue not enough.
The one clear area of progress was the report by Bob Leland, which showed the city was in reality facing about an $8 million deficit.
In December 2016, Mayor Robb Davis told the Vanguard: “The most updated analysis by the City-contracted actuary indicates that even if employee salaries do not grow at all over the next five years, our required pension contributions across all employee groups (police, fire and miscellaneous) will grow by over $4.8 million per year compared to today.”
He added that “while it is true that we are ‘keeping up’ as things stand currently, the cost of ‘keeping up’ continues to grow and that crowds out funding for other projects our community needs to maintain the level of service citizens expect.
“Something must give,” he said.
He expressed similar concerns on Tuesday, particularly with unfunded liabilities for pensions, which are going up again.
He said that pensions are going to go perhaps as much as $7 to $10 million higher. “Can we cut our way out of that?” he asked. “We can if we downsize.” He said, “I am not optimistic that we are going to be able to fill that gap. I am optimistic that we can continue to hold the line on salary increases and the Leland model does assume COLAs of two percent per year.”
He said, “The gap is going to increase whether we add staff or not and it’s going increase significantly.”
The challenge is that without a robust cost containment policy any additional revenue could be swallowed whole in a number of ways – some of which are outside of the control of council. For example, next year Davis will have an increase of $1.4 million for pensions. That means even if the city is successful in passing revenue measures for, say, $7 million a year, in one year almost a quarter of that could get eaten up by an unexpected hit for things like pensions.
The question is where do we go. One idea that I think we should consider is an idea that Rich Rifkin has been proposing for a number of years – limiting total compensation increases in labor contracts.
As Mr. Rifkin pointed out in a column from last year: “The answer to our cost problem is not that complicated. In the labor contracts, we simply need to cap how much more we are paying our employees per hour year after year, based on the growth of revenues.”
He noted that “currently there are no caps on costs.” As a result, “When the city’s income goes up a bit, we give all workers a raise. When pension expenses then go up more, the city eats that.”
Mr. Rifkin added, “Our labor contracts would be sustainable, however, if they just included this proviso: ‘Next year, total hourly compensation costs will go up by no more than 2 percent.’”
That is something we noted when we examined the fiscal analysis for new development. What we found when we looked at the Sterling Apartments fiscal analysis is that revenue was projected to increase about 1.9 percent per year, but costs were projected to increase at a rate of 4.1 percent, more than twice the rate of revenue increase.
It doesn’t take a genius to see that that is not a sustainable scenario. The analysis illustrated that the problem was not development not penciling out, but rather the failure of the city to contain costs over a long term.
Bob Leland’s analysis suggests those costs could rise on average around 2.76 percent annually, which is better than the four percent, but if we implemented Rich Rifkin’s cost-containment plan and limited total compensation growth to two percent, we keep up with the current rate of inflation and the current rate of revenue increase.
His idea is then that additional increases to the cost of benefits would have to be shared by both the employee and the city, and the amount that the city’s compensation to that employee increases would be capped.
He wrote, “For example, the employee whose total compensation this year is $200,000 will cost us $204,000 next year, even if the price of his benefits goes up by $10,000. That employee then would have choices to make: how much of total comp to take in wages, how much in benefits, in paid time off and so on. Some workers might prefer to keep more in wages and less in benefits; others might decide to take a pay cut in order to afford the increased cost of their pensions.”
He concluded: “If we continue on our current course, workers will have no choice at all. Most will be out of a job, and the sorry state of city services will get even worse.”
I tend to agree with that. The problem I see is, without some form of cost containment, we can pass a tax this year – and in a few years, the increased revenue will be effectively gone even without the 2004 bait and switch problems.
It is going to be a tough sell to the voters to get them to pass three taxes in June. Part of that sell has to be to explain the math – because many do not understand how and why the city is in fiscal peril. But the other part will be on cost containment and, right now, I don’t see anything tangible on the table for demonstrating that, if we pass $300 in parcel taxes in June, we will still reap the benefits of that money in five years.
—David M. Greenwald reporting