City Braces For New $5.1 Million Structural Deficit

walletCity Will Look to Revenue Measure in June – City Manager Steve Pinkerton reports in his 2014-15 Budget Preview that the city will be facing a new “a structural imbalance of up to $5.1 million in the General Fund.”

“Difficult decisions are ahead concerning how to balance funding ongoing programs vis-à-vis service-level expectations in the community,” he writes. “Davis is justly proud of the amenities it offers to residents. However, expenditures continue to grow faster than revenues, despite all the changes the City has made to date.”

He argues, “Largely these increases are outside the City’s control. This funding gap makes it difficult to continue to provide the current level of services to residents.”

“The bottom line is that, absent some new revenue or one-time funds, the City will be making reductions again and efforts to maintain critical infrastructure will result in difficult choices,” the city manager writes.  “This is a matter which needs to be addressed, since the overall trend is that the City has been drawing down on its carryover balances to make ends meet and those funds are projected to be depleted within the next several of years.”

“A subcommittee of Councilmembers Wolk and Lee have been discussing possible revenue raising strategies,” Mr. Pinkerton continues. “It may be that some combination of relatively short term revenue options in conjunction with economic development efforts is the answer. The subcommittee suggested gathering a focus group of community members to talk about the options available to the City.”

At this point, Mr. Pinkerton is suggesting scheduling “outreach meetings” with the community members identified by the subcommittee concerning strategies for funding ongoing programs and other community needs.

He argues that the funding challenge is systemic, with revenues growing at 10.33% over the next five years while expenditures increase 13.45% over the same time.  In short, “Since revenues are not keeping pace with expenditures for reasons largely outside the City’s control, there is a built-in funding gap which will need to be addressed.”

The key drivers, at least as we understood it back in June, are increases to PERS due to changes in their annual rate of return estimates, increased costs to road maintenance in order to avoid catastrophic increases, health insurance increasing at a rate faster than inflation, and increased costs due to water rate hikes associated with the water project.

The city has been spending down its reserve over the past few years.  The General Fund is running a structural imbalance of $5.1 million which will increase to $7.1 million by 2018-19.  The city manager writes, “If nothing is done, the City will have quickly used its year-end balances and not have enough money to plug the gap.”

The city has reshaped its finances over the past several years by working with employment groups to restructure labor agreements.  The concessions that were agreed to resulted in the city avoiding additional costs.

The city ultimately got all of the bargaining units except for two to agree to concessions.  The most critical concessions shifted the burden of pensions to the employees who are now picking up most of the employee share.  They also reduced the costs of retiree health and reduced the still very lucrative cafeteria cash out from $1700 per month down to $500 per month.

In November, the city of Davis imposed the last best and final offer on DCEA, and on Tuesday the council expects to do the same with fire.

However, the next step is to address unmet infrastructure and service needs.  Writes the city manager, “To accomplish this, the path is less clear. In the short term, the City’s structural imbalance leaves little or no funding for new investments.”

The city has allocated several million to go to previously unfunded and underfunded pavement maintenance programs and the water project could end up adding several million to the city’s general fund budget through increased costs for city water.

While the city felt the need to deal with these infrastructure issues – and is now paying for past neglect – these are not wholly internally driven costs.

Lastly, the city needs to find a sustainable source of ongoing revenue. Mr. Pinkerton notes, “The City has invested in economic development efforts and growing the economy. However, this is not a short term fix. It takes many years to reap the benefits of a sustained economic development program. Other means of raising revenue will be needed in the short term.”

The Davis City Council in June, and reiterated in November, turned down the possibility of a business park east of Mace.  The city has hired a Chief Innovation Officer and has started up the Innovation Parks Task Force to be better able to identify locations for a business park that can start to generate more sales and property tax revenue for the city.

But this is a long term fix.  In the short term, the city is likely to look at another half-cent sales tax measure, which could expect to produce about $3 million in future revenue, based on the success of the last such revenue measure.

Will the community be willing to step up and support an additional revenue measure when they are already being asked to pay increased water bills?  That remains a huge question as we move closer to the time to put revenue in place or face more cuts to city services, which may be necessary anyway.

—David M. Greenwald reporting

Author

  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

    View all posts

Categories:

Breaking News Budget/Fiscal City of Davis

13 comments

  1. Vanguard: “He argues that the funding challenge is systemic, with revenues growing at 10.33% over the next five years while expenditures increase 13.45% over the same time. In short, “Since revenues are not keeping pace with expenditures for reasons largely outside the City’s control.”

    Maybe out of City government’s control at this point, but the city voted for Measures J, R and O. And previous City Councils voted for the absurd high levels of pay and benefits for city workers. And, this most recent council looked the Mace 391 revenue generating gift horse in the mouth and shot it dead… choosing instead to approve yet ANOTHER permanent ag easement to appease the land preservation extremists in their quest to surround the city with a farmland moat.

    Davis is filled full of a bunch of well-educated social and environmental do-gooders that apparently skipped their econ 101 classes and live in a fantasy land where we keep running up deficits spending for amenities without having to build or maintain our structures that produce the revenue.

    1. “Davis is filled full of a bunch of well-educated social and environmental do-gooders that apparently skipped their econ 101 classes and live in a fantasy land where we keep running up deficits spending for amenities without having to build or maintain our structures that produce the revenue.”

      you act as though there is never any dispute on economic theories.

  2. “Maybe out of City government’s control at this point, but the city voted for Measures J, R and O. ”

    Sure and the city council approved the MOU compensation increases, failed to fund roads, etc. But going forward, most of this stuff is unavoidable. We can obviously debate the road and other charges.

  3. From the staff report:
    General Fund Revenue Assumptions –
    Sales Tax and TOT/Hotel Tax (flat growth)

    From the state Legislative Analyst:
    Specifically, we expect taxable sales to grow about 7 percent in 2013–14 before falling to below 5 percent later in the forecast period.

    Why is the city assuming sales tax revenues won’t grow? They already are.

    1. “Why is the city assuming sales tax revenues won’t grow? They already are.”

      The city can’t assume it in the short term, certainly not for next year.

      1. Going back to previous budget documents on the city web site, I see they are projecting 2% sales tax revenue increase after this year. Conservative compared to what state economists are predicting, but I certainly prefer conservative projections.

    1. That would likely cost us money. Right now, we offer people who do not need health insurance because they’re spouse is employed, an incentive to take the cashout rather than the health insurance. Dropping it to zero, means the city would have to pick up the full health insurance.

      1. I agree with David’s reply to Toad.

        And not that we really need to think of this for a few years, but … It’s likely going to be the case at some point in the future that the City will save money by gradually increasing (in nominal terms) the cash-out cap, as medical premium costs go up.

        If the cap holds at $6,000/year when, down the road, the cheapest plans cost $12,000 per person, almost no one will take the cash-out of $6,000/year. That is, almost no one will trade in a tax-free benefit worth $12,000 for $6,000 in cash which is taxable income.

        Perhaps someone whose spouse or parent can cover him equally well for no expense would be the exception. But in most cases, when someone is added to a plan, the insured party must pay some portion of the cost for his dependent’s coverage.

  4. David, I have no comment (for now) on the topic of your column. However, I wanted to let you know that the new format of the comments–where the first is at the bottom and later adds are above–is more difficult to follow in my opinion. It’s easier to read through a thread from top to bottom. This is especially true because of the way later commenters can insert thoughts in a “reply” to an earlier comment.

Leave a Comment