Where Do We End Up?

by Rob White

Over the last few weeks I have been doing a lot of serious reflection on what will happen in Davis in the coming weeks, months and years. I know we are all thinking about this to some degree, but have you ever had that period in your life where you really dwell deeply on something? That has been my mindset.

The bad news is that I haven’t had any manifestations of wisdom from this activity, but let me share with you my thoughts and maybe we can dwell on these things together.

We have significant leadership changes happening in our community and region, especially as it relates to public policy, business, education, job creation, and technology.

Amidst all of this change, I have been asked several times by local and regional business leaders, “Where is Davis heading?” Or more importantly, where do we end up? I have to confess, this is a tricky question. I can relate how I see it from my view in City Hall, but I am very interested in hearing how the readership of the Vanguard sees our collective future playing out over the coming months and years.

On the one hand, I think that the community is starting to understand and grapple with the magnitude of the fiscal imbalance in the City budget. And though it is very clear that no one solution is preferred (and I suspect it will be a collection of many smaller solutions), this factor will drive decision-making now and in the foreseeable future. And it most certainly has direct impact on what Davis will look like and ‘become’ in the future.

Regardless of views on how to generate revenue versus cut costs, the structural imbalance continues to grow as we start to take a hard look at the deferred maintenance (and in some cases, needed replacement) of community assets. This is a tricky balancing act, as you know well.

The City of Davis has many fiscal choices ahead, and likely some will include budget cuts. As we look to close the looming annual multi-million dollar fiscal imbalance over the next decade, one way that has been suggested to get to a balanced budget is to cut the staff ranks and benefits. Or tie them to the revenue of the City.

These are interesting concepts and have some basis in a rational approach to budgeting, but they ignore the realities of our region. Davis is not in a static condition and the public sector employment conditions are changing around us. As staff take other jobs in other cities that pay better, we will be left with a local skills gap and the pressure to increase compensation to hire replacements.

Recent news has already started reporting on public sector salaries and benefits rising again regionally (and you can verify this by going to the websites of similar cities in our region). We saw this play out locally with the recent increase in the City Manager compensation as part of the recruitment efforts. This will obviously create competition for good staff, both keeping them in Davis and attracting them to fill positions.

I realize that the comment of ‘let them go, then’ will most certainly be posted below. Or my other favorite statement, ‘I would do that job for that amount.’ But let’s play that out for a moment.

To provide good services and keep from running into the same fiscal issues we have now, a community would want to retain (and likely hire more) competent people. Before there is the rush to describe all of the current models of management that can mitigate poor staff performance, take that down to a human level and think about your own work place or experience. Seriously, think about it.

Since most of what city government does is provide services, let’s use a service sector analogy. When you go to a restaurant, you expect basic service levels. You might even expect a little better than basic. And you will likely only frequent those places that provide exceptional service.

In many ways, municipal services are the same. You make the choice to live in place that provides exceptional services and you pay for them through taxes. As the service level or quality drops due to increased costs and budget cutting, we can raise the price of the meal, get more efficient in the staff, or cut back the number of offerings on the menu. But those elastic parameters are only so elastic.

Additionally, when staff morale is bad because wages are being cut, benefits are being reduced, and the community they work in complains loudly that it is these specific service providers that are causing the fiscal problem, the business model is universally affected. When the business is affected (whether it be a service, retailer, professional office, educational institution or non-profit) then ‘customers’ are disenfranchised (and possibly lost) and the business model can falter quickly.

Said another way, most employees came to Davis based on a certain wage and benefits offerings when they were hired. The community registering its dislike for that situation is normal, but choices are also a two-way street. To go back to our analogy, if a restaurant owner doesn’t want to pay service staff the going rate for restaurants in the area, they will be forced to hire mediocre employees (at best), which will create lots of turnover, and probably a lack of satisfied customers. This probably leads ultimately to the closure of the restaurant.

You won’t find me disagreeing that the whole public pension model is out of fiscal balance (and realistically needs to be addressed at the State level), but no single Davis employee created this situation and we are going to need city staff onboard to find our solutions. It occurs to me that alienating staff as a part of the solution is non-productive, won’t lead to a satisfying outcome, certainly supports mediocrity and likely leads to reduced service levels in Davis. The antithesis of what we are all debating about as we try to keep ‘the Davis we love.’

My point (which is hard to relate in brevity as it is a difficult situation) is that cutting staffing and employee compensation might have short term gains (years), but history shows us it will not fix the structural deficit in the long run (decades).

Another solution to fiscal stability is to increase taxes. Though unpopular with some, it is a valid response to closing the fiscal gap. If the community determines that they enjoy the current level of services (which is a question only vaguely answered to date), then constraints on the size of staffing come in to play and we are left with primarily raising revenue. And taxes (both sales and parcel) are the quickest and most certain way to do that. But they are difficult to maintain over time as each must be renewed regularly and voting thresholds change over time.

Just to illustrate the current situation, the community now has in place an additional 1% (or 1 cent per 100, if you prefer) sales tax above the State norm, which extends through the end of this decade. That sounds like a long time, both to the payer and the payee. But we know it’s not because it takes many years to increase economic activity to a point that it generates the same amount of revenue. And that is in a community that is completely pro-growth, pro-retail, pro-economic development of any kind. And we are not that community, and I am not suggesting we become that community.

But let’s think about what taxes need to be raised to truly address the fiscal gap. We now have a 1% sales tax that generates about $5 to $6 million annually (depending on how the economy is doing) but we were still left with more than $1 million in additional cuts for the FY 2014-15 budget year. And the current budget does not address the increased annual costs for successive years for known infrastructure repairs (like roads) or employee costs (benefits already in place, like retiree health care costs).

The current budget also doesn’t significantly address the maintenance or replacement of public facilities like sidewalks, pools, parks, playground equipment or meeting spaces (like City Hall or the Vets Hall). And we now know that our years of not funding these items has created a severe backlog of upgrades and replacements. Don’t agree? Take a ride through town on your bike and look at the cracking and lifting sidewalks, the poor condition of the playground equipment at many parks (like that of Rainbow City) and the disrepair of some of our public buildings. The lack of maintenance due to previous funding shortfalls is obvious, if you look around.

So let’s conservatively say there is a need for an additional $10 million annually for repairs and replacement of roads, etc. I am sure we can all figure out that this is a very conservative number and that the likely need is as much as 50 to 100% greater, but it works for our discussion.

That $10 million could be raised by an additional 1.5% sales tax (bringing our local rate to 10.5%, or 1.5% higher than anyone else in the region). Davis could also do a parcel tax (and Council is discussing one). If that was spread across every parcel equally, to raise $10 million annually means that each of the 15,000 parcels (both residential and commercial combined) would pay about $650 annually. And if levied only on the residential parcels (of which there are about 13,800), it would be about $725 annually.

The above discussion is a “pay as you go model.” There are also bonding strategies that would generate a large amount of funds in today’s dollars, and then payments would be spread out over a longer period of time. This bonding strategy can be sliced and diced many ways (over time and dollar amounts) and staff have already prepared this information for discussion by Council (found at this link):

http://city-council.cityofdavis.org/Media/Default/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20140701/10-Potential-Tax-Measure.pdf

There are other taxes that could be levied (like hotel transient occupancy tax) but these generate only a fraction of the amount needed to close the budget gap. And the largest problem with most taxes is that they are for a short duration and then have to be reapproved. This means that every time the tax increase is up for renewal, there is the potential for creating a significant budget gap that would lead to draconian cuts if not passed. I am sure that you would agree that an impending 10 to 15% budget reduction would have to be viewed as draconian in any fiscal situation, and that’s what taking $5 to $6 million out of a current $45 million annual budget does if just the current sales tax sunsets in 2020.

So, though a reasonable short-term fix, taxes don’t seem to be the long-term fix as they are typically cyclical and require popular approval.

This leaves us with basically two long-term choices: 1) reduce the amount of overall costs by closing public facilities, etc. or 2) increase the traditional revenues of property and sales taxes (which make up almost 65% of our annual general fund budget).

Closing public facilities hasn’t really sounded like an option for the community in our past discussions on this blog. So I am assuming those that ‘like Davis the way it is’ are also speaking about keeping these facilities. Without them, Davis becomes like ‘every other community’ that is lamented about and we certainly lose our edge in the quality of life category. Also, housing values likely deflate because the community falls rapidly into disrepair and we don’t have much to boast about.

Also, there are certain life-safety conditions that have to be met as an obligation of the city, regardless of the extras. These conditions take funding. Things like streets that are passable for bikes and cars and sidewalks that do not cause injury due to uneven surfaces. If we had to, the community could make a choice to close parks, pools, tennis courts, open space, etc., but the existing street and sidewalk network would be a difficult thing to do away with.

The discussion about closure of public facilities is not a threat, though it has sometime been characterized as that. It is a natural evolution of the possible outcomes from the situation we find ourselves in. When you don’t have enough money to pay for everything your want, a natural response is to identify the needs and take a pass on the wants.

The other choice is to grow the economy. And though we have many constraints on what that means in Davis, we know it is not an impossible task. Take the downtown as an example. In the last 20 years, there have been new buildings, new shops, new restaurants and new services. And though we have lost some businesses over time, the overall effect is a much more active and vibrant downtown today than 20 years ago. And a denser downtown, which has been one of the community goals for some time and could be more proactively implemented now to help generate economic activity that leads to revenue.

Equally, we have seen significant new investments by research and technology companies in South Davis and along 2^nd Street. And the economic indicators seem to point to an increase in this activity over the last 10 years, irrespective of the economic downturn we experienced. These companies seem to be ready to invest even more and are now attracting other similar companies and investments.

But I offer the same warning that others on this blog have made before… a growing economy most certainly means some changes to our community. Some are physical, some are fiscal, and some are social.

Thus my earlier question… Where do we end up? Because what I see from my perspective is a quickly ballooning fiscal crisis that only has a few solutions, none of which have universal support. They all come with changes to how Davis looks and feels and lots of uncertainty… and some are more effective and immediate than others.

But as I read the constant back and forth by posters about what the roots causes are for the current issues, I often think of the consensus that is needed to solve any crisis. And we seem very far from working together on a solution. Though the problem can be ignored (and we are doing a pretty good job of talking around the periphery), what won’t change through lack of attention is the magnitude. And it probably grows as we chose not to directly address it.

Outcomes seem uncertain, and from what I can observe, the focus on who to blame and how to keep the status quo are driving us to fewer and fewer solutions (if any). You don’t have to agree with my views… and I know many won’t (or don’t). But whether you choose to recognize how bad the City’s fiscal situation truly is, or debate about how large it is, it won’t change the facts on the ground. Again, you can observe them for yourself.

Bottom line, it seems to me that the very Davis that is cherished and worth protecting (and that we often discuss on this blog) isn’t most severely threatened by economic development or even an innovation park or two. It appears to me to be most threatened by the decades old lack of new revenue generation, continued static conditions of our city budget and the mounting total of deferred maintenance and replacement of public infrastructure and facilities (that are obvious hallmarks of quality of life in any city).

Regardless of your position on economic development or innovation centers as a solution to reducing the budget gap, the changes and possible degradation of the Davis quality of life that will occur over the next decade will be primarily driven by fiscal issues resulting from revenue stagnation.

We aren’t likely to fix the whole problem in the next 10 years, but I think we can agree with previous articles by the Vanguard on the fact that as we delay and debate, the situation compounds. A bit like our mounting federal deficit or the coming insolvency of social programs like Medicare and Social Security. The debate isn’t really if this will happen, but when and to what degree. Our actions now will shape the outcomes of the coming decades.

So I am curious, where do you think we will end up?

Thanks for reading and considering my ideas. Your thoughts are always welcome. My email is rwhite@cityofdavis.org if you choose to email me directly or you can follow me on Twitter @mrobertwhite.

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