Davis Faces Huge Budget Impact From State Budget Deal

At this point this is preliminary information that is subject to approval by the legislature.  The intent of the item on Tuesday was to translate what has been talked about into the impact on the Davis City Finances.

The second area is the shifting of local highway user tax and gas tax funds from cities and counties to the state—that’s $1 billion on a statewide basis.  According to Mr. Navazio this would impact the city of Davis in the amount of $1.1 million in transportation funding in each of two successive years.  That would take it from 2009-10 and 2010-11.

The final part would take money from redevelopment and give it to the state.  The state tried this last year and was blocked by a court challenge, however, now they are trying it again, which would shift $1.7 billion from redevelopment agencies to the state.  This would be a $2.5 million hit to the redevelopment agency and $3.1 million over the next two fiscal years.  This is not of course general fund money.

One of the big questions is whether this is truly a loan to the state that the city would recoup down the line or whether this is simply a shift in funds that is permanent.  The highway user tax is a straight take, but the cities and counties are going to sue the state and try to block it in court.  This represents a significant portion of our transportation fund which goes to street lighting and traffic signal, signing, stripage, etc.

Also Prop 1A goes to fund in part street maintenance.  At this point in the year, we do not have the option of modifying our street maintenance contracts in response to this, which might mean having to divert other monies to cover it.  The city might have to make general fund shifts to offset these transportation cuts.

The city also believes the redevelopment agency proposal is fraught with legal difficulties for the state and subject to a court challenge.

In addition that what is being presented as one-time hits might become ongoing hits as these solutions do not really solve long-term state budget problems.

This basically amounts to a $2.4 million cuts to the city’s general fund and $2.5 million to redevelopment.

Councilmembers expressed anger in response to the state’s machinations.

“I’m just mad,” Councilmember Stephen Souza said.

“I’m mad too,” Councilmember Don Saylor said.

“I think it’s interesting to think that we spent six to eight months and found a way to balance it tenuously and painfully with a $3.4 million reduction.  We did that in this room where anybody who wanted to see it, could.  The state is dealing with their budget by four members of the legislature and the Governor meeting in private for the last several months.  Every once in a while they come out and tell us mission accomplished.  And they’ve done that again.  It’s “mission accomplished” with the big banner on the aircraft carrier.  Now they have to go and convince the rest of the legislature to go along with this package.  We can’t even tell what the package is.  Last night when they announced on television that the mission has been accomplished, they said and details will be forthcoming.  We still don’t know today what those details are.  In fact all day there has been scurrying around in Sacramento trying to figure out what the proposals are.  Nobody knows.”

And while I appreciate some of Councilmember Saylor’s words, I also think in a way they are a bit self-serving from the perspective that I do not think the council did nearly enough to address the budget problems from a longer term perspective.  Just as the legislature went to great lengths to shift monies around, the council has in many ways simply kicked the can down the road using one-time monies and short-term cuts to balance the budget without addressing the longer term issues of sustainable compensation, unfunded liabilities, and addressing the growing costs of retirement pensions.

This week PERS announced a $57 billion loss in their investments.  Their solution is to spread that loss around about 30 years.  What that means is that now there is going to be an unfunded liability for cities in terms of pensions.  PERS is hoping that some of that is made up by recouping their investment losses over 30 years, but that might mean that down the line cities will owe millions in unfunded pension liabilities just as Davis has accumulated a $41 million unfunded retiree health liability.

To make matters worse, the state is now taking money from local property taxes.  The city in part relies on holding their own on property taxes and sales taxes from next year.  But if this stands up to legal challenges—a big if at this point—that is over a million dollars diverted from Davis to the state and with next year figuring to be just as bad at a state level, we may see additional monies funneled from the city to state.

Davis’ economy has been relatively unscathed by the downturn, but that is going to change as Davis is heavily reliant on state and UC jobs.  State workers are taking around a 13.8 percent hit in their salaries for the next year.  UC employees anywhere from 4 to 10 percent.  All of this will act to take money out of the local Davis economy which means people will not be purchasing new homes and it certainly means a loss in sales tax revenue particular from big item purchases.

The bottom line is that while Davis had to close a $3.4 million deficit for this past year, it could be far worse next year and right now is the time we are about to lock in employee compensation.  I have a growing concern about that process and think that in some ways we are going to use the fact that the budget looks currently balanced to maintain the current salary demands with minor alterations and cuts.

The bottom line is that Davis may be poised to take a huge hit next year based on the confluence of several different factors much of which comes from the state government and the current budget deal.  Council acted surprised, but I am not so sure they should have been.

—David M. Greenwald reporting