Sunday Commentary: Avoiding Repeating the Mistakes of Davis Budget History

I look at articles like Dan Carson’s (5/2, New City Staff Forecast Says Fiscal Year to End with Substantial Reserve) with naturally mixed emotions. On the one hand, the city is moving into a better fiscal position – a lot of that is due to the improved economy, but some of that is due to the fact that the city took sometimes drastic and strong measures to curtail spending and compounding problems of unfunded liabilities, while figuring out funding streams for infrastructure.

At the same time, there is a need for caution. The previous decade, particularly from 1999 to 2008, was too good. In 1999, we had superfunded pensions, meaning that the investments brought in by CalPERS were generating so much revenue that local governments didn’t have to pay into the pension fund at all. That made it very easy to do things like increase the rates for employees retroactively.

The real estate boom carried us through in Davis, despite warning signs along the way. Even a half-cent tax increase in 2004 led to massive double figure salary increases for not only fire (at 36 percent) but across the board (though most bargaining units got 12 to 18 percent increases over the four-year range of their MOUs).

By 2007 and 2008, we were already warning the city that this was unsustainable – but no one seemed to listen. Those few voices were drowned out by the council majority. It was not until the recession hit in late 2008, and not until a new council was seated in 2010 and 2011, that we started to take serious steps to rectify the situation.

And so, the report by Mr. Carson is good news. As Mr. Carson writes, “Assuming continued fiscal discipline in the next and subsequent budget cycles, the trend means the city could be in a better position to address backlogged deferred maintenance and infrastructure replacement costs as well as continued personnel cost pressures.”

Clearly, the key drivers are the new influx of property tax monies. Some of it has been generated by new home sales, but some of it has also come from the phase-out of redevelopment and increases in city wide assessed values. In addition, the voters passed Measure O last year and, not only are revenues coming in, but “about $578,000 more in sales tax revenues are coming in than were initially budgeted.”

However, the good economy is a mixed blessing. It relieves the pressure on the city to cut, which is a good thing. There are many things in this community we need to spend money on – most specifically shoring up aging and crumbling infrastructure. But unless we are disciplined, we risk falling into the same trap we fell into 16 years ago.

While the solutions that were laid out in the last five years were drastic, they were necessary. The recent report by former City Manager John Meyer pointed out that city staff took the brunt of some of these reforms.

Mr. Meyer pointed out, “Despite the resulting internal hardships, budget reductions were made that were essential to improving financial stability. More work is required, but such actions were necessary to avoid the need for even more draconian measures”

On the other side, he noted that, while staff fully understood the economic forces that required these budget reductions, “there is a widely held view that limited communication to staff on budget reductions aggravated an already difficult situation.”

At the same time, Mr. Meyer told the Vanguard this week that, during a crisis, there was urgency in making the cutting and it is understandable that less effort might have been spent on explaining the cuts. Now that the crisis has receded, this is the time to make sure lines of communications are open again.

Going forward from here, there are a few things that seem important.

First, we need to avoid the buildup of unfunded liabilities in the future. If we are to expand pensions or retiree health care, those benefits need to be fully funded. It is appalling that it took the accounting practices of GASB-45 (Governmental Accounting Standards Board report from 2004) for the city to figure out that they had not funded enough into the retiree health program to make it solvent. That meant that, during the heart of the recession, when we needed money to keep basic services going, we had to divert millions to build up to full funding of retiree health care, or face a fiscal cliff by 2020 and 2030.

It was remarkable that we ramped up the pension formulas for city employees, without asking them to pay the employee share – and without calculating the long-term costs of the pension increases combined with the massive salary increased from 2004 to 2009.

While I think the city has learned some of these lessons, it is less clear that we have learned a very critical one – not to get into an arms race on compensation. The runaway compensation train has continued even during the recession, as we saw the council bring in the new city manager with a sizable pay increase that will likely have downward repercussions as we move into bargaining time.

This can be resolved through planning and moderation. There is no reason to freeze employee compensation as long as we plan properly the services we need, the amount of money that needs to go into infrastructure and the amount of money that needs to go into reserve.

The other lesson of the recession is that, while Davis fared better than many communities, thanks to its slow growth policies, the city came out of the recession more slowly in part because of its limited tax base.

Community leaders have made the decision that the route to go is not peripheral retail but rather the creation of high-tech technology parks or innovation parks, which can take advantage of the community’s proximity to UC Davis and bring in startups and high-tech companies to generate property taxes, fees and some sales tax.

With good planning, the city of Davis can retain its small, compact urban features, protect farmland, and continue to supply its citizens with services.

However, there are dangers lurking. One of the things we learned was the massive and unfettered influence of the firefighters’ union from 2000 to 2010. They were able – relatively easily – to elect at one point seven of nine councilmembers supportive of their views.

This led to four on an engine, it led to 3 percent at 50, and it led to the massive 36 percent salary increase in the 2005 MOU. Much of the reform efforts – and some of the morale issues in city hall – stem from efforts to curtail that influence and roll back some of the excesses of that period.

That suggests, going forward, we need a three-prong approach. First, fiscal discipline. In good economic times, we do not need to hold employee compensation growth to zero, but holding it constant with the cost of living would be one way to prevent employee compensation to explode like it did from 1999 to 2008.

Second, continue political reforms. The firefighters’ union has been hammered on this site – and, given the Davis Fire Report and its implications, rightly so. However, the union would not have been nearly as powerful if the citizens were paying attention and the city council acted appropriately in the best interests of the community. As long as that balance is retained, there should be no further need for reform.

Third, diversify the Davis economy. City Manager Dirk Brazil told the Vanguard this week that he remains committed to economic development. In his view, however, and for good reason, there was a lot of focus on peripheral innovation parks, and he wants to see a strategy that focuses on the downtown as well as the innovation parks.

Davis is at a point in time where it needs to take advantage of its burgeoning reputation, and the city manager seemed supportive of continuing in that direction.

But vigilance is in order – the council and unions could not have wrought the damage that they did were it not for the fact that the community was not paying attention to fiscal issues. For a brief time, fiscal issues ruled the city, but now we are moving back into a more typical period of time. That makes it all the more incumbent on the community to pay attention to finances.

—David M. Greenwald reporting

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