By Dan Carson
The city’s Finance and Budget Commission will be vetting the 2015-16 budget proposal at our next scheduled meeting on June 8. Speaking for myself only and not in behalf of our commission, my take is that the so-called “transition” budget presented by City Manager Dirk Brazil is a good starting point for City Council deliberations but that some technical issues with the numbers deserve a closer look.
Accordingly, last week I sent my fellow commissioners and city staff my comments on a series of mainly technical budget issues related to the budget as well as to the five-year fiscal projections that are summarized in the budget plan. I am sure my commission colleagues will be raising and addressing other questions for our discussion then, and I look forward to hearing their observations. A link to the full text of my memo can be found here.
Here are the issues that concern me:
- Last year’s budget understated the money coming from two key General Fund revenue sources, the property tax and sales tax by $1.4 million. This new budget ratchets up the money budgeted from these sources to fix this disparity but the future rate of growth from property and sales taxes assumed in the budget is still somewhat understated. The actual revenues the city is likely to receive would probably be about $750,000 more from both sources combined in 2015-16 than budgeted and $4 million more by 2020-21. My research shows that the revenue projections built into the budget plan are out of line with the city’s past revenue success, other statewide economic projections, and data from various sources about local economic activity. (For example, the city has experienced a 38 percent increase in resale permits, suggesting more turnover in housing is occurring that will boost property tax assessments and revenues.) With a 15 percent budget reserve safely in place, there’s no reason I can see to budget revenues too low again.
- The budget projections assume the city receives $128,000 more in hotel tax monies from the new hotel and convention center starting in 2017-18, but a city staff report to City Council a few months back cited the applicant’s estimate that the revenue gain would be $450,000. We need to understand the reason the numbers are so different.
- The city’s annual financial report shows that the balance in one of the city’s special funds, the Cable TV Fund, continues to grow and now amounts to about $1.6 million. As much a $1 million in idle cash has been sitting there out of public view for years for which there is no active program commitment. City leaders may want to think about using some of that cash surplus for important one-time purposes, such as deferred maintenance or high-priority capital improvements. (The balances in certain other special funds deserve a look, too.)
- The budget assumes $1.2 million will be spent from a “litigation reserve” by end of the current fiscal year, June 30. That date is only a few weeks away, though, and only a few weeks ago I was advised that none of that money had been spent. Between now and the adoption of the 2015-16 budget plan, we should seek an update from city staff on what if any money in the litigation reserve will be used. Whatever money goes unspent in 2013-14 would build the size of the city’s emergency reserve well above 15 percent, and thus is suitable for use for one-time purposes such as capital expenditures.
- If the city imposes a “drought surcharge” on water bills, the city will also pay those higher rates. We may need to explore how these additional costs would compare with the savings the city will also be enjoying from using less water, and budget General Fund costs accordingly. (This may be less of a concern now with the announcement at the May 26 City Council meeting by Public Works Director Bob Clarke of the city’s tentative determination that a drought surcharge may not be necessary.)
- I hope our commission will discuss the fact that the upbeat five-year fiscal projections don’t reflect any additional savings or costs from pending negotiations on collective bargaining agreements. Just a 1 percent increase in pay every year over the forecast period by my estimate could add $1.7 million in annual General Fund costs to the budget by 2020-21. Last year’s projections built in a 1 percent growth rate in pay as a sort of placeholder. The new ones don’t.
- I also want to call the commission’s attention to the fact that the impact of Measure O will begin to hit just about as soon as this five-year projection period is over. Under the terms of the ballot measure, the collection of a full 1 cent of sales tax will cease in the middle of the last year of the projections, 2020-21. Because of a lag in the collection and distribution of sales taxes, the loss of about $8 million in annual tax revenue will be felt in 2021-22 and 2022-23 unless the tax is extended. This potential revenue loss underscores the need for the city to execute a long-term fiscal strategy that includes fiscal constraint, economic development, and efforts to lease or sell surplus city properties. All of these strategies will need to be considered in the 2015-16 and subsequent budgets, because there is no way to know for certain whether future City Council members and voters will extend the tax measure, or whether it would be continued at the current level.
My observations are based on my experience as a non-partisan state budget analyst regularly involved in budget forecasting; contacts with city, county, and state officials; and my review of budget details and relevant data. One official mission of our commission is to seek transparency in city finances. My goal in this memo is to encourage our city leaders to make financial decisions based on the most accurate and complete set of numbers and assumptions.
Dan Carson worked for 17 years in the Legislative Analyst’s Office, a nonpartisan fiscal and policy adviser to the California Legislature, retiring in 2012 as deputy legislative analyst. He now serves as vice chair of the city’s Finance and Budget Commission. This commentary reflects his views only and does not represent the position of the commission on this issue.
Thank you Dan for your thoughtful post and your service to the city. It is wonderful to have someone with your expertise willing not only to serve but to also communicate with the citizens in simple to understand language!
I especially concur with your comment on the apparent zero allotment for MOU/negotiations.
While I agree with the expense side of your analysis — we always need to lean towards “worst case” on expenses, I continue to strongly disagree with your stance on future revenue projections.
I think if you look more closely at previous revenue numbers you will see that both property tax and sales tax can be volatile at times and that large increases are not sustainable.
Your continuing public pronouncements regarding revenue will only serve to embolden our labor unions to ask for large increases in pay and further deteriorate the labor/management relationship and potentially cost all of us a lot of tax dollars.
As a follow up to my comment, I would ask the author to read the following column:
http://www.contracostatimes.com/daniel-borenstein/ci_25331895/daniel-borenstein-biased-fact-finders-skew-local-government
Here’s a quote from the column:
These fact finders, who already come up with tortured logic to justify pay increases, don’t need city commissions further overstating a rosy financial picture.
Gunrocik
“Your continuing public pronouncements regarding revenue will only serve to embolden our labor unions to ask for large increases in pay and further deteriorate the labor/management relationship and potentially cost all of us a lot of tax dollars.”
I think that it is completely reasonable to disagree on revenue issues and what they mean for the community. I do not think that it is reasonable to imply that someone whose view differs from yours should not make “public pronouncements emboldening our labor unions” by stating their views in a public venue. With regard to public policy, I favor a full and open discussion of all aspects of an issue.
Thanks for the informative article on the budget. I am curious about your statement saying that the future sales and property tax growth rates are understated.
Is the original budget pricing in some sort of economic slow down in the next five years and are you assuming that we will no go into a period of contraction during that time? Since technically the last recession ended six years ago and the period of time between the last few has been 8-10 years, wouldn’t you want to lower growth expectations during the next five years to account for a possible economic slow down?
Both the city’s projections and mine assume stable, average growth rates through the five-year forecast after 2015-16. My numbers are higher than theirs based on my research about how we have fared historically as well as current information. My confidence as a forecaster, however, is much stronger in the short-term than for the long-term for just the reason you cite — no-one can tell you for certain when the next economic cycle might slow things down. For this reason, I have suggested to city staff that they could build their projections providing more variation year by year to recognize potential future economic trends. For example, a projection model could assume a more robust 5 percent growth in property taxes in 2015-16 because of strong current performance in a recovering housing market, but assume that growth rates slow gradually year by year to more like the 3.5 percent the city staff has assumed by the end of the forecast period in 2020-21 because of the risk of things cooling off eventually. I look forward to the city’s intended efforts to adopt a more data-driven revenue forecasting model. Unfortunately, we aren’t there yet.
This is a problem with financial accounting-based forcasts is that they often don’t incorporate enough consideration of larger market and economic forces. The Fed has said it will increase rates this year. Also, the increase in housing turnover in Davis has been somewhat inflated by the pent up pressure from lower than average turnover during the early months of the recession… combined with another time of overheated value.
Now, something that has killed a number of communities in California but left Davis reasonably unscathed has been the writedown of taxable assessed property value. But the tax revenue-improving benefit of turnover relies on appreciation… epecially if Davis has been depleting its inventory of properties that have not changed hands for many years. That is another “market” metric we would need to look at before we should hang our hats on projected trends for property tax increase.
The bottom line from my perspective is that after leveling the trends for property tax based on all these market and economic factors, on a projected basis we should expect only a modest average increase unless we are building more properties.
I think it is reasonable for analysts to provide the range of projected outcomes and explain the factors. It is not reasonable for policy-makers (i.e., council members) to adopt budgets based on the rosiest scenarios.
“The bottom line from my perspective is that after leveling the trends for property tax based on all these market and economic factors, on a projected basis we should expect only a modest average increase unless we are building more properties.”
i think this is the key point. we climbed 10% or more per years last decade in property tax revenues driven by a ridiculous market. we used those increases to finance healthy increases to total compensation and once the engine cut out, we had nothing more to sustain us.
don: a point that rochelle made on tuesday was that the council just four years ago had to fight the notion that we had three percent annual revenue increases annually. that wasn’t realistic then and really we should not be budgeting for it now. keep the model as it is, and then bank the money if it comes in over.
Thanks for the clarification. Since the City’s main revenue sources are variable I agree they need to be more flexible in year to year growth and price in the changing economy. I am surprised to hear they don’t do that already.
the problem i have with mr. carson’s analysis is this. he acts like there is one right answer. in actuality we are asking our city to make a projection based on an unknown though perhaps somewhat predictable range of possible outcomes. mr. carson takes the position – he’s the analyst, his job is to get the best numbers possible. get that, but it’s still an educated guess.
the problem is that the city is in a very different position as he is. for them, numbers have meaning and consequences. show the labor groups these numbers and you’ll never get them to agree to concessions or even holding the line.
the reason people called foul even on the modest cm’s budget forecast is that those are not real numbers either – we are in the black because we passed on a new tax and go back into the red if we remove that new tax.
someone has to convey that to the bargaining groups – we are not really operating in the black and cannot really share that black with them.
I don’t know, his analysis seemed pretty balanced to me. There seems to be a theme that if you even hint that revenues are improving, you are somehow being unrealistic and encouraging labor unions to seek increases. I am quite certain that the employee unions will seek increases no matter what. It is up to the council to direct the negotiators otherwise.
“There seems to be a theme that if you even hint that revenues are improving, you are somehow being unrealistic”
revenues have improved – there is no doubt. but the only reason we are in the black is a sales tax that expires in 2020. that means we don’t have the money to give a lot in pay increases. the unions are going to see whatever they seek, but if they believe the city has an extra million they are more likely to prevail.
I don’t think the analysis is unrealistic. I’m more scared that news of improving revenues will encourage labor unions (and the Council) to seek an even greater wage increase and they will get it creating an unsustainable expenditure in all future years requiring even higher taxes and fees in the future.