Editor’s note: the following was released by the city manager’s office in response to Dan Carson’s op-ed, Improved Revenue News Means the City Has Options to Downsize Its Tax Measures
by Davis City Manager’s Office
The City of Davis has made direct attempts to forecast the state of the City budget as frankly and reliably as possible. In the past, the City has relied on the anticipation of optimistic forthcoming conditions and the deferral of costs related to infrastructure improvements and future personnel costs that have, in part, added to the deficit that is shown in the current forecast. The assumptions included in the forecast were derived through analysis of historical and current conditions related to the City of Davis and expert outside opinion, resulting in what the City believes to be a reasonable expectation of future economic conditions.
In deriving the forecast, staff took in to account that property tax collections in the City of Davis vary depending on the area of the City where the parcel is located. Of the 1% tax assessment on property that is levied by the County, only a portion is allocated to the City. This amount ranges from just below 7% to 27%. Many areas of the City are around 11% to 16%. A significant number of the housing inventory that tends to undergo resale lies in the lower property tax share areas. This variance means that property tax receipts to the City do not necessarily tie directly to an equal increase in overall assessed value. The City of Davis also has one of the lowest turnover rates in the State which can also reduce the long term increase in overall assessed value in comparison to the State as a whole, especially since many areas of the State have seen much more dramatic drops in their historic assessed value as compared to Davis.
Mr. Carson notes that our first payment of property taxes this year from the County indicated an increase in revenue consistent with the projected increase in assessed values. Since our first payment is typically higher than our second payment, the dollar amount received actually reinforces our experience that our overall receipts usually are lower than the overall increase in assessed value.
Additionally, we don’t find statewide forecasts to be very useful for projecting our local sales tax revenues. For example, for our most recent quarter, we experienced a -1.3% reduction in sales compared to the same quarter the previous year. Conversely, statewide receipts increased by 3.4% and Northern California as a whole increased by 4.0%. Therefore, State and regional correlations are not good indicators for projecting future sales tax revenues for Davis.
The City of Davis relies heavily on a single category, Auto Sales, for the bulk of its sales tax revenue. And though we have seen decent growth in this sector after years of flat sales, this spike has been driven by three major factors – pent up demand, low interest rates, and deep sales incentives.
The City recognizes that this growth will not continue indefinitely. IHS Automotive, a leading economic forecaster, states that this trend is expected to end in 2014 as the industry returns to a standard growth rate of 2% per year.
We’ve also had some one time spikes in sales tax revenue from large manufacturing companies expanding their facilities. Due to our lack of developable land for manufacturing and the constraints on additional growth opportunities in this sector, this revenue is not likely to be sustained in future years until additional commercial and research land is made available.
Additional retail at the 2nd Street Crossing shopping area will provide some new sales tax revenue estimated at around 1% of current receipts. However, the population of Davis is growing most rapidly in the segments of the population that are older residents and transient students. According the Bureau of Labor Statistics these two demographics spend considerably less on taxable goods than do those in the 25-54 age segments.
We also have not factored in any additional revenue or expenditures from the Cannery project. Our fiscal analysis (requested by the citizenry as part of the entitlement approval process) indicated that the net increase in annual revenues would be nominal and not a significant contributor to the budget. In addition, it is unlikely that we would start seeing any surplus revenue above expenditures from the project until late in the five year projection. And the majority of the residents will likely not start arriving until at least the 2016-17 Fiscal Year.
Regarding pensions, the City hired a statewide expert to examine the state of the PERS system and the potential changes that might occur to reflect real conditions facing the pension system. The analysis takes into account all the currently known information that could affect the long term costs to the City and these projections have been relatively consistent with the actual PERS rates. Looking historically, PERS has consistently understated their projected future rates. Since FY 09/10, the miscellaneous rate has been understated on average at 1.49% per year, and 0.45% for safety. If anything, we are concerned that our rate projections are too conservative, given the huge spike in pension costs experienced by many non-PERS retirement systems in the State.
The City continues to make cuts and reductions and the number of available vacant positions has also been reduced. Due to these workforce reductions, the City is unable to keep positions vacant for long and often is required to back fill empty positions with temporary part time staff or contract services until those positions are filled, thereby reducing overall salary savings. In addition, longer term vacancies in the Public Safety departments are being eliminated with the recent hiring of vacant police officers and the fire department shared services agreement with UC Davis.
In addition, both our PERS and Retiree Medical cost burdens continue to rise even if we reduce our staffing over time. We still must pay for the liabilities of the employees who previously held positions that would be subject to budget cuts. Thus, it will be very difficult to make the budget cuts Mr. Carson is suggesting without severe reductions in service to the public.
The current budget projection also includes $2.5 million for roadways in the General Fund. The City is not costing out the full value of infrastructure repairs. This forecast includes an amount meant to shore up existing infrastructure, maintain a balanced pavement condition and ensure there is no escalation in long term replacement costs. The City still needs to address the full scale of infrastructure repairs.
Also the City’s current General Fund reserve is at 6%. The Council has set a goal of 15% in line with typical government standards and the return of fund balance to this level is not calculated in the current budget shortfall.
As you can see, even if revenues come in higher than anticipated, there are plenty of additional costs that we would need to be addressed with the added revenues. Our staff has attempted to come up with a realistic projection, based on several decades of experience reviewing our annual expenditures. We are committed to ensuring that we can present the public with the best possible information when deciding whether or not to provide additional revenues to the General Fund. We don’t want to be in a position where we have to return to the community in two or four years asking for a higher tax rate because we didn’t look realistically at the variables in the budget projections. In all of the outreach efforts to date, staff have heard almost universally that the community would rather have us ask once and ask for enough, than to be back later because we didn’t forecast well.
If I am reading the response above correctly, city management is acknowledging that the property tax and sales tax revenues that the city has actually received so far in 2013-14 are coming in higher than budgeted.
They note that the December increase of 5.7% in property tax receipts (an initial payment of the secured roll) from the county tax collector is slightly below the increase in the assessed valuation for the city of 5.75%. True, but so what? My point is that this 5.7% increase signals that the city will be receiving more significant property tax revenues than the 1% increase they had assumed in their fiscal projections for 2013-14. My estimate is that this means the city will have $700,000 more in property tax revenues in 2013-14 and again in 2014-15, as seems likely in an improving housing market. These extra revenues are not taken into account in the five-year fiscal projections presented to the City Council last month.
In regard to sales tax revenues, I reviewed the first five months of Board of Equalization data for sales tax distributions to the city of Davis, and they were slightly higher than what the city got the year before. So, the claim in this statement by city management that the additional $900,000 the city got from sales taxes in 2012-13 was a one-time phenomenon does not appear consistent with the available data. If I am right and these tax revenues hold up in 2013-14 and 2014-15, $1.4 million more would be available to help balance the budget in 2014-15, This money also is not accounted for in the five-year budget projections presented to the City Council in December.
What city management also seems to be saying though, is, if there is more money, we want to spend more than the expenditures that were presented in our projections. So, they are not refuting my alternative projections in that respect from what I can see. In effect, they are saying they want to change their projections to increase spending even further on roads if additional money materializes.
I agree with city staff that PERS costs are going up dramatically, and that these costs must be addressed. My concern is that they built into their five-year budget projections an assumption that CalPERS will increase employer rates yet again n 2015-15 to reflect the increasing lifespan of pensioners. However, CalPERS staff is recommending that this longevity rate adjustment not occur until 2016-17 because cities and other local governments are already being hit so hard by prior rate increases they approved. As a result, my rough estimate is that the five-year fiscal forecast overstates PERS costs by about $100,000 in 2015-16 through 2018-19 of the forecast period. This statement by the city administration does not refute this finding.
I continue to believe that an additional $500,000 in budget reductions could be found in 2014-15 that would not seriously impair public services. A number of items on the city manager’s illustrative $5 million “cuts-only” list were technical in nature and just a little creativity and work work by us budgeteers could surely identify a set of solutions of this magnitude. And there are salary savings every year. Surely a level of such savings that would occur on the natural, and not impinge on city operations, could be identified. My estimate was $200,000 General Fund in an annual General Fund budget of $42 million-plus.
But let me end these comments crediting the city manager’s office and his hard-working finance department stff for the valuable public service they have accomplished by quantifying the very real fiscal gap the city faces and presenting the City Council with meaningful options for solving the problem. I just believe the evidence shows that the problem is a bit more manageable than portrayed, and therefore that the City Council has additional flexibility in acting to address these issues.
At 6% emergency reserve, there is my opinion, no wiggle room, until the reserve is close to, or at, the 15% level. Stuff happens. Maybe we need Suze Orman to ask, can you afford it, and then say show me the money.
On the reserve issue, by the way, I ran the numbers and my assumptions and approach result in a bigger reserve than the city manager’s approach. I added in about $2.5 M a year in additional sales tax revenue (which grows over time) as well as the extra sales and property tax revenue I show is coming from existing taxes. At the end of 2014-15, the city’s General Fund reserve would be $5.5 million or roughly 12 percent of General Fund expenditures.
I took the city manager’s five-year fiscal projections and added in $5.4 million in sales tax revenues (which also grows over time). I kept their sales and property tax revenue growth assumptions. Guess what? Their plan would result in about a $4 million reserve at the end of 2014-15, or roughly 8 percent of General Fund expenditures.
So, my approach leaves you with a $5.5 million reserve at the end of 2014-15. Theirs is $4 million — $1.5 million less.
Why is my reserve better? (1) My front-end revenues are much better because I account for the increased revenues already being realized by the city. (2) City management is unwilling to make any more spending reductions in 2014-15, while I believe some modest savings are realistic and achievable.
Dan, if your assumptions are correct about increased sales tax and property tax revenues, then you need to add those revenues into the City Manager’s fiscal projections when you calculate the reserves. If your assumptions are not correct about increased sales tax and property tax revenues, then you need to remove those revenues from your fiscal projections when you calculate the reserves.
With that done, we would have a foursquare fiscal “playing field” whose four corners are defined by the two calculations that use the pessimistic tax realization scenario laid out by the City Manager (for the sake of discussion label those corners CM-P and DC-P) and two calculations that use the optimistic tax realization scenario laid out by you (for the sake of discussion label those corners CM-O and DC-O)
Show me the %.
“the City is unable to keep positions vacant for long and often is required to back fill empty positions with temporary part time staff or contract services until those positions are filled, thereby reducing overall salary savings.”
While we won’t see salary savings from using temporary and / or contract workers, we do save money on pensions and healthcare. This is why outsourcing can be so valuable going forward. We need to evaluate the entire City staff and decide exactly what jobs we need to keep as City employees, and which ones are better outsourced.
The city now outsources about half of parks/greenbelt maintenance. The outsourced employees make the same wages and have the same medical plans. But, as you note, they are affordable, because they don’t come with OPEB and pensions. If we outsourced many more functions of city government, we could avoid a tax hike on those of us who don’t have any OPEB or pensions.
City workers are notoriously unproductive, so the outsourced employees are likely performing at much higher levels. That is possibly why we have not seen a severe drop in services with fewer city employees.
I think this is generally true, but certainly with exceptions.
But more importantly, when an organization cuts, it impacts employee motivation. So, outsourcing is a useful alternative because the incoming new labor is more highly motivated.
It is a common tactic for larger private companies to outsource as a way to eliminate the problem of a bloated workforce. In many cases the company will turn back to hiring after the outsourcing contract expires. But with better management to ensure lean operations.
I know the outsourced tree trimmers did a Hell of a job on our block.
Here are two we have known since before the Davis City Council locked us into the current contracts:
1. The employer pension funding rate for most non-safety workers will go up from 21% to about 32% by 2020. The misc. employee rate holds at 8%; the employer rate for public safety will go from 35% to about 55% by 2020. The safety employee rate holds at 9%. (In Davis, safety employees are now paying 3% more, covering part of the employer rate.)
2. The other thing we have known for many years is that medical premium inflation for the Kaiser Family Plan (the only one which counts in Davis) has been running around 10.3% per year* since 1999. If that holds, the costs for OPEB and the cafeteria benefit will increase by about 80% per employee by 2020.
Other than the $2.1 million increase in water costs projected through 2020, all of our fiscal crisis is to be found in rising medical and pension costs. It’s very serious. Our latest contracts failed to solve the problem. Had they followed my advice, there would not be a problem with rising total comp costs. And therefore Davis residents who are paid less with lower benefits would not be asked to pay higher taxes so City workers can get higher salaries and more costly benefits.
*See: http://www.davisenterprise.com/forum/opinion-columns/theyre-careless-spending-our-money/
“the costs for OPEB and the cafeteria benefit will increase by about 80% per employee by 2020.”
To be clear, that is 80% more over the next 6 years. Davis’s rates just increased by 11.1% on January 1.
Your six year figure…. do you factor in to your numbers the older retiees shifting to “supplement to medicare” coverage, and subsequent reduction of City obligation?
Will taxes fix it? Council looks at shoring up budget