The news this week that the city of San Bernardino declared bankruptcy ought to have a stunning impact on the rest of the state. The basic problem that San Bernardino faces, as one analyst suggested, is that they ignored their economic hole for the last fifteen years and it ultimately resulted in municipal insolvency.
Over the last few years, people have attempted to ignore the specter of bankruptcy facing the city of Davis because the other communities’ problems were sufficiently different so as to have their impact minimized.
The city of Mammoth Lakes, for example, a resort-town, declared bankruptcy due to a $42 million legal settlement in a town whose general fund budget is only $19 million.
Stockton, on the other hand, depleted their coffers through ambitious development that saddled the city with mortgages that ultimately it would be unable to pay, while at the same time offering pension benefits that would come due in time and threaten their sustainability as CalPERS contributions increased.
San Bernardino was different. The city’s deficit represented 38 percent of its general fund budget. As PublicCEO.com, the news site focusing on local government, reported on Thursday, “If the city cancelled all of its municipal functions other than public safety, they would still be left with a deficit and have to cut public safety funding.”
Instead of dealing with the structural deficit head on, the city employed one-time budgetary gimmicks that would include the sale of assets, internal borrowing and depleted reserve accounts. Moreover, the city misrepresented the state of the city’s fiscal condition.
In 2009, the city staff had underreported the fund balance by a modest $150,000 but two years later there was a disparity of more than $3 million. The staff told their council that their General Fund would start with a $2 million surplus while the city actually was over one million in debt.
Writes the PublicCEO: “The city’s unwillingness to reconsider city services on an ongoing basis, instead opting for one-time ‘fixes,’ left a city that continued digging itself deeper into the hole. While many didn’t predict that the current economic recession would be so long, most cities in California didn’t gamble their futures on a quick recovery.”
San Bernardino was left with just $150,000 in the bank – barely enough to cover their upcoming payroll.
The amazing thing is that city employees gave huge concessions of about $10 million per year and suffered reductions in staff of nearly 20 percent.
San Bernardino is an extreme example. The city faces $45 million per year deficits until at least 2016 which would put them in a debt of more than $200 million.
Moreover, pensions and retirement benefits are contributing factors. To cover those obligations the city issued pension obligation bonds at the costs of $3.5 million, a number that figures to double over the next ten years. In 2006, the city spent 9 percent of its budget on retirement costs. By 2016, that number is forecasted to reach 15 percent .
The PublicCEO reports that San Jose, “where pension reform was linked to avoiding insolvency – spends about 20 percent of its general fund on pension related costs” and Stockton “anticipated paying as much as 19 percent towards their pensions.”
San Bernardino did a lot of bad things that Davis never did. But there are some alarming similarities that, had the current council not stepped in, it is difficult to know which path we were taking.
While the city of Davis, to our knowledge, was not underreporting end-of-the-year debt, we did cut into the reserves due in part to the overly-rosy budgeting. Had council not stepped in two years ago, our reserve may be have been completely depleted.
While the city never sold off its assets, it did rely rather heavily on one-time funds in order to fund things like infrastructure and routine road maintenance. As that funding disappeared, the city’s ability to fund road repair disappeared with it. The city managed to balance the budget on appearances by putting such work into unfunded needs categories.
But it meant that the city was actually creating a debt that would have to be paid back. At this point we have perhaps $20 million in deferred maintenance costs, not counting the needed upgrades and repair to water lines that are funded on the Enterprise fund.
The concerns are substantial enough that the city is now proposing diverting $3 million a year in general fund money to shore it up. However, previous councils prior to 2010 completely ignored the problem when it came to budgeting time. They were content to underfund road repairs by allocating $800,000 in one-time monies to do so. Last year, that one-time money dried up and the city only spent $300,000.
The biggest problem the city faces is on retirement. The city has two huge retirement obligations – pensions and Other Post Employment Benefits. OPEB is primarily a retiree health plan that within two years will represent about 24% of the city’s payroll. Add to that the amount the city is paying for pensions, and the city may be paying as much as 40% of their general fund payroll for retirement.
This is actually starting to be an area of improvement because the city’s unfunded liabilities for OPEB are around $60 to $65 million and there is another chunk unfunded for pensions as well.
The city really did very little to shore up the long-term structural problems prior to 2010. Budget cutting processes were primarily achieved through temporary fixes such as attrition and reduction in service hours. The meat of the retirement obligations were not dealt with until the current budget.
To fix these problems, the city has undertaken a massive shock therapy through roughly $8 million in cuts this year. And it may need additional cuts to fully shore things up.
The city has undertaken, in the last six months, massive reorganization. But the heaviest lifting will be in the MOUs that seek to cut $4 million from a budget, after the city failed in 2009 to act more strongly to cut less than $1 million and after it again failed to act in 2011 when council approved $2.5 million in cuts.
These cuts represent more than 20% and less than 25% of the general fund budget. That means that, of the money remaining, probably 40% will end up going for people who are no longer working or when the current employees are retired.
Because of the strong actions of the current council, bankruptcy is probably not a realistic fear anymore, but we need to worry about the long-term ability of an organization to function and provide services when huge percentages are going for retirement.
At least in the short term, the city is going to move toward outsourcing and more private contracts. The community really needs to have a discussion on this issue and determine if that is the way to go.
—David M. Greenwald reporting
Correct me please if wrong, but approved budget included spending our reserves by decreasing them from 15to 9%?
[i]the city is going to move toward outsourcing and more private contracts. [/i]
If the City wants to keep going down that rocky path, Council should be willing to produce the applicable contracts in full, including wage and benefit schedules for the workers.
Perhaps the city should become a charter city and thereby avoid the burden of paying prevailing wage (or more) for the work to be performed by contract. This would help the Jeff Boone vision of paying not one cent more than the least cost to perform minimally acceptable services.
“…the city may be paying as much as 40% of their general fund payroll for retirement.”
Are you sure about this? We need to see this on a 25-year graph with 2012 in the middle. What are the trends?
If this is true, and recent actions haven’t started us in a downward cycle for this percentage, such a chart will get people’s attention. No taxpayer intended the Davis general fund to turn into a massive, ultra-prosperous social security/medicare program for a few thousand former city workers.
And how does our percentage compare with surrounding communities? With financially troubled communities?
What impact will the Affordable Health Obama-care program have on city employees and retirees? Dump everyone into the exchanges!?
Neutral, your comment isn’t clear to me. Are you saying that private contractors providing services to the city should be required to make their payroll details available for public review? If so, why should they be required to do so?
-Michael Bisch
[quote]Are you saying that private contractors providing services to the city should be required to make their payroll details available for public review? If so, why should they be required to do so?
[/quote]If nothing else, to provide the same ‘transparency’ demanded of public agencies to disclose employees’ compensation, retirement benefits, and to disclose the profit margin of the contracting firm, so taxpayers can be assured that their money is ‘well-spent’. The private sector should not have it “both ways”. Demanding full disclosure of public services costs, unless provided by private entities.
“Are you saying that private contractors providing services to the city should be required to make their payroll details available for public review? If so, why should they be required to do so? “
I am not attempting to answer for Neutral, but I can think of at least one reason. Much is made, especially by those who oppose increasing taxes
About the need for transparency in government, especially government spending. If a service is being provided by city employees, it is relatively straight forward to determine how much is being paid to whom for what service. If a private contractor is providing the service and there is no need for disclosure, that is one more layer of “lack of transparency” and inability to asses where our money is actually going.
If these contractors are required to pay “prevailing wages,” there must be some transparent method for agencies and municipalities to confirm that this is happening. Does this law include any benefits, or just basic “wages”?
[quote]Perhaps the city should become a charter city and thereby avoid the burden of paying prevailing wage[/quote]
How would changing to charter city status render the city exempt from Davis-Bacon and Little Davis-Bacon requirements? Every public agency — including charter cities — with which I’ve contracted has had to observe the same regulations in this regard.
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Major spell checker failure!
Please, please do not call me out for the typo in the last line of my last post. I see it and want to assure all that it was not a sneaky attempt to malign anyone.
[quote]there must be some transparent method for agencies and municipalities to confirm that this is happening.[/quote]Good… we’ll have to employ city workers to investigate compliance. Not to do work, but just to monitor. Nice ‘savings’.
[quote]How would changing to charter city status render the city exempt from Davis-Bacon and Little Davis-Bacon requirements? Every public agency — including charter cities — with which I’ve contracted has had to observe the same regulations in this regard. [/quote]See the recent California Supreme Court decision in this regard.
Does not affect Federally funded projects in this regard.
That’s an interesting decision, thanks for pointing it out.
My recollection is that charter status was looked at by the Davis council a few years back, and that there wasn’t much interest in making the change.
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Charter status was a factor in the choice voting referendum. Davis would have to go to charter city status if choice voting is to be implemented. There are advantages and disadvantages to charter status; at the time I thought the disadvantages outweighed the advantages.
[quote]at the time I thought the disadvantages outweighed the advantages. [/quote]With the opportunity of paying less for city services, are you re-evaluating your opinion?
Bisch: [i]Neutral, your comment isn’t clear to me.[/i]
See above by hpierce and medwoman. Both nailed it.
Make the cuts we have been talking about. Avoid new expenses (ie. the surface water project) and we will be fine .
Michael Bisch: how much new retail development and itsnet new revenue to the city would it take to equal the savings from running 3 member fire crews?
Or, what’s the burn rate of the city attorneys as they continue to use your tax dollars to beat down two local businessmen and avoid exposure of years if malfeasance and waste? It has to be at least $40,000 per month.
How about we give that $40k monthly to the DDBA to ramp up business development and programs?
Davis business should be marching on city hall to protest the fiscal madness that set in under Saylor
hpierce re charter status: [i]”With the opportunity of paying less for city services, are you re-evaluating your opinion?”[/i]
Probably not. Charter status gives the city council a lot more power, and most people aren’t aware of that. It would depend on how carefully drafted the charter proposal was. The one Davisites voted on in 2008 was not drafted with care, because the goal was simply to enable choice voting. So I argued strongly against it at that time. I’m very skeptical about charter status.
“How about we give that $40k monthly to the DDBA to ramp up business development and programs? “
How about we don’t. Why would one automatically assume that the DDBA would be any better stewards of our money than would be the City Council members and city staff?. At least with the council, they can be voted out if we do we feel that others will better represent us.. Not so with private business.
hpierce: [i]”Perhaps the city should become a charter city and thereby avoid the burden of paying prevailing wage (or more) for the work to be performed by contract. This would help the Jeff Boone vision of paying not one cent more than the least cost to perform minimally acceptable services.”[/i]
I don’t know enough about the pros and cons for becomming a charter city; however, if it allows us to pay market rates for city labor, I think we have to consider it.
Frame: [i]My recollection is that charter status was looked at by the Davis council a few years back, and that there wasn’t much interest in making the change.[/i]
Measure N, November, 2008, was defeated 54.3% to 45.7% ([url]http://www.yoloelections.org/sites/elections/archives/20081104/270.html[/url]), garnering support mostly in the traditional core area of Davis.
Davis City staff have a high tolerance for waste.
The first DACHA home became empty in August of 2009 three years later it is still empty.Ten DACHA homes have been empty since about June of 2010. That is a loss of monthly income to the City of about $15,000 a unit and property taxes, insurance, staff time and maintenance costs that bring the losses up to possibly $18,000 a month times 24 months = $432,000 in just the past two years.
And this waste has been allowed to occur by the same staff that the City is spending about $25,000 a month in attorney fees covering up this and their other DACHA mistakes.
Citizens cannot afford the present running of City Hall.
David Thompson, President, Twin Pines Cooperative Foundation
David T., it must surprise you, all these years later, that Sue, Rich and some others contend that it’s all your fault–that those who bought into the DACHA coop were misled by your brochure re. the meaning of coop ownership and, therefore, the coop failed. Have you and Rich met yet to discuss whether you’re in a money-grubbing, gouging business?
Why do you think the DACHA houses are not being rented out? It doesn’t seem that it should be that difficult to keep these homes occupied with reasonable, “affordable” leases.
The DACHA homes will be rented out by August.
I would place the empty home debacle costing citizens an income of over $400,000 on the shoulders of city staff.
Sometime soon the homes will be rented out. But the fact that the first home was empty in August of 2009 and at least ten homes have been empty for two years is a mismanagement of City resources.
Thankfully, Dos Pinos works well, no one got greedy, we set DACHA up the same way. However, the attraction of making $200,000 over time was too attractive for some of the DACHA leaders. And when the City provided them with over $160,000 to pay their legal fees to fight their breaking of the law and the contract why settle.
Hopefully, Rich and I can meet soon. I certainly wish to.
David Thompson
Twin Pines Cooperative Foundation
To David Thompson: We will see if your contentions about the DACHA debacle hold up in court…
Elaine:
Testifying already under oath, DACHA members and board members have admitted;
They wanted to own the homes outright
The Treasurer did not know how DACHA’s lawyers were being paid
City staff seemed to do everything with only a few board members
City staff refused to provide the funds to evict staff’s favored delinquent DACHA members
DACHA members still owe $47,000 in unpaid rent
By their own account DACHA still owes City an additional $70,000
Mismanagement is rife at City Hall and if it is allowed so blatantly in one department then it is likely to occur elsewhere.
Mismanagement in housing has cost the City at least $10,000 million in lost revenue.
There are many ways to go bankrupt. Mismanagement is one of them.
Go to www,community.coop/davis click on DACHA to see various topics surrounding waste and mismanagement.
No landlord in town would have left good homes empty for three years. And ten of them for two years, my god.
But ERM if you are okay with the city staff waste and abuse that is certainly your right.
David Thompson, Twin Pines Cooperative Foundation
To DT: As I said, we shall see if your contentions hold up in court…