By Dan Carson
Last Thursday, I got two dental implants. After years of dithering about having the operation, I realized that putting up with the short-term pain and post-operative swelling were critical to my long-term health. (The swelling was so ugly they could cast me in the Broadway remake of “Elephant Man.”) Because the surgery took four hours, good Dr. Bennett twice had to reinject me with a local anesthetic, for which I am eternally grateful. If I have to endure the pain, I felt urgently at the time, it should at least be no more than is necessary.
That sequence of events came to mind as I analyzed the City of Davis’ financial condition in my newfound role as a member of the Finance and Budget Commission. Some additional pain, in the form of new and higher taxes, is unavoidable if our city leaders are going to balance the city’s budget, address critical infrastructure needs, and maintain deteriorating city facilities. But, since most every dollar in the government’s pocket comes from the pockets of its citizenry and businesses, the economic pain that is inflicted in behalf of the common good should be no more than necessary.
This Friday, city staff and a council subcommittee came forward with their recommendations to address persistent budget shortfalls and to shore up the city’s investment in public infrastructure and in maintaining city facilities. It involves placing a $5.4 million sales tax measure before voters in June to address city deficits and a second $4.1 million parcel tax in November to pay for city infrastructure and facility maintenance.
The council is scheduled to consider the matter this Tuesday. Given this tight timetable, on Saturday I sent my commission colleagues as well as members of the City Council my analysis of the city’s fiscal condition, which I hope will be helpful in forthcoming decisions about the tax measures. After someone forwarded my missive to the Davis Vanguard, I agreed to prepare this Reader’s Digest version for you. The full text of my analysis for you fellow diehard budget wonks can be found here. (insert link)
At this point, I haven’t been privy to a spending plan from the city that explains why $4.1 million a year in parcel tax revenues are justified or how and exactly how and when that money would be spent. But with my 17 years of experience as a nonpartisan state budget geek, I am in a position to comment on the efforts to address the city’s structural shortfall. So, here goes.
The city administration has based its case for the sales tax measure on a five-year projection of the condition of the city’s General Fund it released last month that indicates that the city’s structural shortfall could be up to $5 million in 2014-15 and could grow to $7 million by 2018-19.
Based upon my review of the budget materials available on the city website, public hearings on the budget, and other relevant data I have collected, it is clear that the city manager has it fundamentally right. The city does face a serious “structural shortfall” – a risk of spending substantially more money each year than it takes in — that must be addressed in the 2014-15 budget cycle. But the key question before the City Council remains, what size of a revenue package is really needed for this purpose?
Marked improvements in the city’s two largest existing General Fund revenue sources, the property tax and the sales tax, suggest that less new money may be needed than first thought.
The assumptions in the city administration’s five-year forecast about the revenues that the city will get from property taxes seem too low for a Davis housing market well along on the road to recovery from the recession. Economists are predicting statewide property tax revenue growth in the 7 percent range for the next five years. Among the reasons for optimism in Davis: The build-out of The Cannery will add $680,000 to the city’s property tax base within five years, accordingly to the city’s fiscal model for the project, as new homes are sold and increase the property tax base.
Yes, the city has a lower property turnover rate than some other jurisdictions, which tends to dampen growth in property tax revenues. But the Yolo County Assessor announced last June that Davis’ 2013-14 assessment roll, which takes these and other factors into account, had increased by 5.75 percent. That was a stronger performance than any other jurisdiction in Yolo County and much better than the statewide average. An initial payment received by the city on Thursday from the county tax collector for secured property tax receipts (the bulk of the money the city receives each year from property taxes) showed growth of roughly 5.7 percent, right in line with the assessment roll increase.
All of this is well above the projected overall property tax growth rate of 1 percent for 2013-14 that was built into the city’s five-year fiscal forecast and the 2 percent to 2.88 percent growth city managers had projected for later years. My analysis suggests that the city could gain roughly $700,000 in unanticipated General Fund revenue in 2013-14 that would carry over to help solve the city’s 2014-15 fiscal problems. These extra revenues would likely reoccur in 2014-15. If property tax growth were sustained at 5 percent annually, as seems likely, the property tax base would grow by an additional $1.9 million annually by the end of the forecast period.
The city has also collected more sales taxes revenues than projected. The city manager’s five-year forecast assumes the city will receive sales tax revenues of $9.4 million in 2013-14. However, the city is already surpassing these assumptions. Sales tax receipts reached almost $10.3 million in 2012-13 and collections for the first five months of this fiscal year so far have remained on track to provide the city comparable revenues in 2013-14.
Things are looking up. My former employers at the non-partisan Legislative Analyst’s Office foresee statewide increases in taxable sales of about 7 percent in 2013-14, falling gradually to below 5 percent over five years. The state Department of Finance expects 6.7 percent growth in taxable sales in 2014-15. Again, there are good reasons to believe that Davis will be part of the more robust sales tax receipt trend. Our biggest employer, UC Davis, is already receiving budget increases and its student body and staff are expanding. The addition of T.J. Maxx and the other new Target center stores will add $100,000 to the city’s sales tax base. The build-out of The Cannery is estimated to bring in another $239,000 annually within five years.
The surge in sales tax revenues that has already been realized above budgeted levels means that the size of the city’s 2014-15 fiscal problem could be reduced by about $1.8 million. More aggressive sales tax growth rates in the ensuring years would lessen the structural budget shortfall by another $1 million annually by 2018-19, the end of the forecast period.
Enough about revenues. Projected growth in spending is also driving the city toward budget deficits. However, expenditures could be somewhat less than the amounts assumed in the five-year forecast presented last month by the city administration. If the forecast were adjusted to correct for a modest overstatement of future CalPERS rates, to build in a 1 percent factor for salary savings, and to include some relatively minor and mostly technical budget cuts, the fiscal gap could be narrowed by $800.000 per year.
I incorporated my revised revenue and expenditure assumptions into the alternative five-year forecast shown below. It shows that the magnitude of the structural shortfall would be reduced to roughly $2.4 million in 2014-15. The funding gap would peak at $2.8 million in 2015-16, then gradually decrease to about $1.7 million by 2018-19, the end of the forecast period. That is still a serious fiscal challenge, but a more manageable one, most certainly, than the city manager’s prediction of a structural deficit that starts at $5 million and escalates to $7 million a year.
If my assumptions proved correct, the City Council could consider tailoring the new $5.4 million sales tax revenue measure to about $2.5 million annually to fill this funding gap. It could then proceed later with a separate November parcel tax measure for infrastructure and maintenance of city facilities in whatever amount that city staff could demonstrate was justified in future budget hearings.
In the alternative, the City Council could stay the course with the proposed sales tax revenue measure in June of $5.4 million. After using roughly $2.5 million a year in tax proceeds to balance the budget, the Council could earmark the remaining $2.9 million in annual revenues for infrastructure and maintenance of city facilities. While that would not quite match the $4.1 million in new revenues that might be gained from the proposed parcel tax, it might be enough for now to do without a second ballot proposal in November that could be a hard sell for voters
And if you think about it, having one less big ballot measure for voters and city leaders to worry about is its own form of pain relief.
Dan Carson is a 25-year resident of Davis. His personal views expressed here do not represent those of the Budget and Policy Commission. He worked for 17 years in the Legislative Analyst’s Office, a nonpartisan fiscal and policy advisor to the California Legislature, retiring in 2012 as deputy legislative analyst.
Click here to read full letter sent to council
Well as Gomer used to say “Suuprise, surprise, surprise.”
Just as i predicted to much ridicule by Matt and others.
Which prediction are you referring to?
Toad, let’s draw an analogy to reading a book. What Dan Carson has laid out in his analysis is Chapter Three of a book that has the City Manager’s December 17th report to Council as Chapter Two. The original Budget presentation is Chapter One.
The challenge everyone who cares about this community faces is to read all the Chapters of the book. Here are some highlights of those chapters.
Chapter Four: $213 million in expenditures plus a $129 million backlog just to keep the pavements of our streets at their current compromised level.
Chapter Five: $xx million (or $xxx million) to maintain the City’s buildings and structures
Chapter Six: $xx million to maintain the City’s parks and greenbelts (including moisture sensing irrigation controllers to reduce unecessary water consumption)
Chapter Seven: $x million (or $xx million) to maintain the City’s pools
Chapter Eight: $x million (or $xx million) to maintain/replace the City’s fleet of vehicles
Chapter Nine: $x million (or $xx million) for the City’s portion of the maintenance/replacement of Unitrans’ fleet of busses (particularly important if we are going to achieve the City’s stated GHG goals by increasing public transportation usage)
Chapter Ten: $x million (or $xx million) for the City Property like the proposed Community Farm on the Mace 391 parcel
Chapter Eleven: $xx million for the non-pavement parts of Streets (sidewalks, signals, street lighting and striping)
Those are just the Gerneral Fund chapters of the book. There are additional chapters that deal with the fiscal requirements of the various Enterprise Funds that are also paid for by the taxpayers/ratepayers.
• Storm Water / Storm Sewer
• Waste Water
• Potable Water
• Irrigation Water
• Solid Waste
So I haven’t ridiculed you. I have only said that you are drawing conclusions about a whole book after only reading the first three chapters. Anyone who has an interest in the fiscal health and fiscal sustainability of this community needs to keep on “reading.”
That an improving economy would reduce the size of the structural deficit. Although I must admit I’m a little surprised by the magnitude of this revision. If you remember David was saying a 1/2 % increase in the sales tax would take care of 68% of the operating deficit and I pointed out that an improving economy would likely take care of much of the rest so I guess I predicted between 0 and 32% improvement or somewhere under $1.9 million. If this guy’s study holds at around a $3 million adjustment we will be in much better shape than any of the regular naysayers predicted.
My recollection is that the city is counting on a 2% increase in sales tax revenues, while the state is projecting (as noted in the article above) 7% gradually dropping to less than 5%. In any case, the city staff is being conservative — which is good. But I think that range of possible economic growth argues for a shorter duration of sales tax increase, with renewal in 3 – 5 years if necessary, rather than a 10 year increase.
We are a community mostly funded by six governments. As those entities pull out from the recession and their budgets stabilize and expand, so will our community’s fiscal challanges reduce. The Dan Carson Report bears out what I have suspected: the public finances are improving at a rapid clip, much faster than what staff would tell us. I dont think we need any sort of new sprawl-inducing business park, sugar-coated with the word innovative. The parcel tax is DOA. The sales tax: too big, and too long. Staff and CC will spend the extra on themselves, like Saylor did in 2005 with his friends the FF.
I would recommend we not count our chickens before they are hatched.
Just looking at the embedded table, it appears that this new approach relies upon a continuing deterioration of the City’s General Fund ending account balance. Is it being suggested that we modify our existing policy regarding the General Fund and associated reserve balance?
Even with the economy improving, our City’s finances will still be in trouble. The lack of housing turn-over means that property taxes remain stagnant. People who do move turn their houses into student rentals with sky-high rents, rather than sell. Without allowing space for businesses to build or expand, people will still commute out of town to jobs. The status quo, wait and see, don’t change anything, conservative thinking got us here and continue to do the same thing is insanity.
There is some question about the overall analysis, but the city I think needs to do the full sales tax revenue. $5.1 million surplus is a low figure (despite the conservative growth assumptions). The parcel tax is problematic politically and may be less necessary fiscally.
Dan, thank you for sharing your analysis. Your contributon to the City by your service on the F&BC and the sharing of information like this clearly helps create a more informed community dialogue. Hopefully you can join the discussion here on the Vanguard about Budget, Revenue and Expense issues.
I do have a question for you. You have supplemented the City Manager’s report with “the rest of the story” information above, but do you agree that there is even more to the “rest of the story” that needs to be factored into the dialogue
There are a lot more “magnitude” issues in Davis finances, and each of those issues needs some level of (1) quantification, (2) verification and (3) formulation of a “deal with” plan.
Here is a partial list of issues that each have their own inventory of impending Maintenance expense (some of it deferred, some pay as you go).
• Buildings and Structures
• Parks
• Pools
• Fleet
• Transit
• Property
• The non-pavement parts of Streets (sidewalks, signals, street lighting and striping)
• The pavement parts of Streets ($213 million in expenditures plus a $129 million backlog) just to keep the streets at their current compromised level.
Those are just the Gerneral Fund issues. There are additional issues that are accounted for under the various Enterprise Funds that are also paid for by the taxpayers/ratepayers.
• Storm Water / Storm Sewer
• Waste Water
• Potable Water
• Irrigation Water
• Solid Waste
Do you think it would be wise to get the current quantification of those expenses?
my concern is that mr. carson didn’t read the fine print in the cannery model which puts the impact at anywhere between $77,000 in the red to $849,000 in the black – but those are not ongoing revenues, they are one-time revenues to begin with and they are basically dependent on two factors, the city’s long term ability to hold personnel costs down and the need for the city to deal with water costs for the greenbelt. and that’s net revenue here. we’re not talking about a lot.
“The surge in sales tax revenues that has already been realized above budgeted levels means that the size of the city’s 2014-15 fiscal problem could be reduced by about $1.8 million. “
how do you get to $1.8 million which appears to be nearly a 20% increase in sales tax revenue in one year? that’s far-fetched to say the least.
tj maxx is going to produce $100,000 while target which is far larger was only projected back in 2006 to produce $600,000
i have to question assumptions here
There is a lot of conflicting data out there related to the state of the State’s economy.
I make loans to small business. Our market is significantly down the last two quarters compared to the same for the past two years.
Holiday sales failed to meet expectations.
CA unemployment is still at record highs when adding back all the discouraged workers.
Tax increases and healthcare cost increases are taking a big bite out of the middle class’s discretionary income.
Wealthy people are fleeing CA’s high cost of living and high tax rates.
Business is also fleeing the state.
The population of CA is increasingly low income and uneducated.
It appears that in some CA markets real estate is becoming a new bubble (e.g., Bay Area), and the stock market is also over-priced by any reasonable comparison to economic indicators.
My belief is that we are in for decades of anemic economic growth, and our sales and property tax revenue will not increase by much for any sustainable stretch.
And also, when more people like B. Nice are advocating reduced consumption for environmental reasons, it also does not bode well for retail.
Relevant data have to do with sales tax and property tax. The Legislative Analyst’s Office’s projected growth in taxable sales is 5.4% for 2014-5.
http://www.lao.ca.gov/reports/2013/bud/fiscal-outlook/fiscal-outlook-112013.pdf
CA real unemployment (From the federal BLS data):
U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force;
U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force;
U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate);
U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers;
U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and
U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.
2008
U1-2.8, U2-4.0 U3-7.1 U4-7.4 U5-8.3 U6-13.4
2010
U1-7.6 U2-7.9 U3-12.2 U4-13.0 U5-14.0 U6-22.1
2013
U1-5.2 U2-5.0 U3-9.2 U4-9.8 U5-10.8 U6-17.8
CA ranked the worst state to do business in in 2011: http://chiefexecutive.net/best-worst-states-for-business
There were 1.3 million businesses in California at the end of 2012, 5.2 percent fewer than in the previous year (that’s about 73,000 fewer). To put that in perspective, Massachusetts lost 5,200 businesses, the second-highest amount, and Kansas had 3.1 percent fewer businesses in 2012 than in 2011, the second-highest loss rate. Nebraska added businesses at 11.9 percent, the fastest rate. Because BLS releases the data on a lag, the end of 2012 is the latest date for which numbers are available.
Interesting statistics, but irrelevant to the sources of revenue in this discussion. Sales tax revenues and property tax revenues are projected to increase. The LAO has a good track record, I believe, on this kind of thing.
Don, forgive my ignorance, but does the LAO make its projections on a jurisdiction by jurisdiction basis? Said another way, is their projected percentage rate of growth applicable to Woodland and West Sacramento and Davis at the same rate or at differential rates?
Here is one rich Californian I would encourage to leave…
http://www.washingtontimes.com/news/2013/mar/18/bill-maher-threatens-leave-california-due-high-tax/
Certainly true of the porn industry – they’ve moved to Vegas. But in general: http://www.bizjournals.com/sacramento/print-edition/2013/02/08/the-california-job-exodus-myth.html?page=all
Understand… your business is hurting, and you want to make sure public employees suffer AT LEAST as much. I am sorry for your loss.
As a heads up, the city is disputing Mr. Carson’s analysis and will be providing a response. Depending on its length, we will either post it here or run it as a separate article.
Doing both would be good David. Post the immediate information here, and then a more detailed article thereafter.
Just got back from a followup with the oral surgeon and saw some questions posted I would be happy to respond to:
(1) As I stated in my report, improved sales tax could help the 2014-15 fiscal year by $1.8 million if an extra $900,000 likely to be received in 2013-14 is carried over to the following fiscal year, and then that $900,000 revenue gain reoccurs in 2014-15.
(2) I’m not proposing that the city stop its excellent practice of setting aside a General Fund reserve each year. The balances shown on my chart are what the situation looks like if you do no new revenues at all. That is obviously not what I am proposing. Add revenues and you have reserves.
(3) As the 9/23/13 Finance and Budget Commission staff report on The Cannery fiscal impact makes clear, sales and property tax revenue gains from the project are ongoing, not one-time.
(4) As Matt notes, there are lots of city fiscal issues that are worthy of exploration. I focused on the five-year projection of the General Fund condition because that is the focus of the tax decision the City Council is considering on Tuesday. I wasn’t in a very good position to assess the appropriateness of the magnitude of the parcel tax and the monies that would go for infrastructure and maintenance of city facilities because I have yet to see a specific spending plan that ties to the $4.1 million a year proposal.
“As I stated in my report, improved sales tax could help the 2014-15 fiscal year by $1.8 million if an extra $900,000 likely to be received in 2013-14 is carried over to the following fiscal year, and then that $900,000 revenue gain reoccurs in 2014-15.”
that doesn’t make a lot of sense, you’re talking about essentially a one-time money – carry-over – you can’t alter your tax structur based on that.
The $900,000 is not one-time money. I am simply saying that the extra $900,000 in sales tax revenue that was actually collected by the city in 2012-13 continues in 2013-14 and the ensuing five years of the fiscal forecast. These additional revenues were not accounted for in the city’s five-year projection model. My model does.
one-time money means non-recurring sums. in this case, the city is not generating that $1.8 million annually, it’s adding two years together. you can’t balance the budget on non-recurring streams of money as the imbalance is ongoing.
Dan Carson said . . .
“As Matt notes, there are lots of city fiscal issues that are worthy of exploration. I focused on the five-year projection of the General Fund condition because that is the focus of the tax decision the City Council is considering on Tuesday. I wasn’t in a very good position to assess the appropriateness of the magnitude of the parcel tax and the monies that would go for infrastructure and maintenance of city facilities because I have yet to see a specific spending plan that ties to the $4.1 million a year proposal.”
Dan, with your bolded comment you get to the heart of the matter. Isn’t a decision to solely focus on the General Fund condition delineated by the five-year projection really a “tip of the iceberg” approach. The continuing (and accelerating) deterioration of the City’s streets is an issue that has to be paid out of the General Fund, when it is paid. The maintenance/replacement of the City’s buildings and structures, parks, greenbelts, pools, fleet, transit, property, and the nn-pavement parts of Streets (sidewalks, signals, street lighting and striping) all will be paid out of the General Fund.
Why do you advocate for a discussion on Tuesday that excludes the information we currently know about those additional General Fund impacts?
We don’t need to explore those maintenance/replacement issues. Staff has varying levels of quantification of each of those categories. The streets pavement numbers that have come from those quantification efforts have not only been quantified, but also verified. Some of the other categories clearly need more verification, but shouldn’t everyone in Davis (especially the Council and the F&BC) have access to the numbers we currently know?
The information contained in your report is incredibly valuable. Why apply it to only part of the picture?
Actually, Matt, as my letter states, I didn’t call for the exclusion of additional funding for infrastructure and maintenance of city facilities. I said that, in addition to the option of passing a $5.4 million sales tax measure in June for deficit-reduction and a $4.1 million parcel tax measure in November for infrastructure/maintenance, the inclusion in city forecasts of anticipated higher revenues from existing sources allows the council these two additional options: (1) a smaller sales tax measure in the vicinity of $2.5 million for deficit reduction plus a second infrastructure/maintenance parcel tax measure in November of a size shown to be justified in budget hearings; or (2) proceeding with the full $5.4 million sales tax measure in June and earmarking the monies not needed for deficit reduction for infrastructure/maintenance needs. You will note that I have chosen my words very carefully to give the City Council more choices, and not to narrow their choices.
I understand that Dan, but can’t help but wonder about the choice of timing. The December 10th Pavement report very clearly lays out that the annual amount needed just to keep the pavement at its current PCI in the low 60’s is $10 million per year ($213 over 20 years). $2 million of that is in the current Budget, but the remaining $8 million is not. The pavement consultant also provided documentation that the inflation rate for streets repairs is between 8% and 9.5% per year.
Taking those numbers, what is the cost of deferring the beginning of the streets maintenance by six months? 6 months @ 8% of $8 million is $320,000 inflation impact. Further, the pavement consultant provided documentation of the escalation of cost magnitude as you go down the PCI scale. Repairs that now cost between $14/square yard and $21/square yard quickly escalate to between $26/square yard and $27/square yard. That 25% to 80% escalation in cost can be avoided by starting sooner rather than later. 25% of $8 million is $2 million per year. 80% of $8 million is $6.4 per year. So it is not unreasonable to say that delaying six months has a reasonable probability of increasing our repair costs as much as $1 million to $3 million. Add the $320,000 inflation factor to the $1 million to $3 million and you have a good sense of what the cost of delay is likely to be.
In laying out all of the above, I too have chosen my words very carefully to give the City Council more choices, and not to narrow their choices.
Matt… at the risk of offending…. what greenbelts, parks, city streets does El Macero, “old” Willowbank” use, and how much do they contribute to those facilities? Can’t think of any adjoining County areas that provide amenities to the City residents. Might be wrong.
OFFICAL RESPONSE FROM CITY OF 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.
C’est la vie for Mr.Carson’s numbers.
“Far cry from: “Well as Gomer used to say “Suuprise, surprise, surprise.” Just as i predicted to much ridicule by Matt and others.”
My initial response was let’s wait and see if the numbers are right. I think there are a lot of problems with Dan’s analysis, but it was good to have the discussion and get the response from the City. They’re clearly taking the Vanguard extremely seriously.
Thank you Rob for that thorough analysis.
Hi Rob,
It would be helpful to have a trend line rather than a single data point. For example, here is what you reported last year:
From the January 2013 update —
“Sales Tax receipts through the first half of FY 2012/13 indicate an increase from FY2011/12 results. In the current year-to-date categories of Automotive and Building Materials, which together account for approximately 45% of direct Sales Tax collections, reflect an increase of 22.8% compared to the same period last year. Overall, direct collections are up 18.1% over the same period in FY 2011/12.”
What has been the trend in sales tax over the last couple of years, as a percentage increase year to year?
Note also that the auto sales, together with building materials, are 45% of sales tax. So while auto is significant, it is not a majority of sales tax revenues.
Too bad we don’t have a Home Depot or a Lowe’s then.
The retail categories we need are those that wouldn’t cannibalize existing sales. Obviously either of those stores would be very harmful to Davis Ace and Hibbert Lumber.
“The retail categories we need are those that wouldn’t cannibalize existing sales.”
I think this sentiment is understandable, but only partially correct. If you take a hypothetical business that sells housewares and compare its sales with the total of all housewares purchased by Davis residents, the hypothetical store would account for some percentage of that total, with the balance coming from stores outside of town or on-line.
If you then add a second store in town selling primarily different brands of housewares, then it would not be out of the question that the two stores combined would capture a greater share of the total market. The first store might see some of it’s business ‘cannibalized’ by the second store, but the City would see an increase in sales tax revenues due to the increased percentage of total sales. The owner of the original store might see this as being ‘harmful,’ but it would be hard to argue that it was ‘harmful’ to the City in general as there would be an increase in selection options, potentially lower prices due to the competition, new jobs and higher tax revenues.
Sure, and this varies across retail sectors and by degree in different markets. If Borders opens, and every bookstore in town loses 30% of their business, and then all except one of them close, and Borders sells at a lower retail price, it’s a good question whether the city has actually gained tax revenues from the increased competition. Most cases aren’t that extreme — books are a ‘category-killer’ industry where one new big store can make a very big difference.
If a big store that sells toys opens, and the little toy store in town closes, I don’t know if we’ve gained tax revenues. Toys are another ‘category-killer’ retail segment.
More to the point, we have sales tax leakage in some categories, and sales tax injections in others. If the goal is to maximize city revenues, the focus would be more efficient if directed at categories with greatest leakage. It’s been a decade or so since a tax leakage study was done. But I think it’s still true that home furnishings and appliances, and consumer electronics, are leakage categories.
Actually, it would be more efficient if the City stayed out of the picture all together. We don’t need the City to choose the winners and losers, that is what the market is for.
Actually, I agree. I don’t really want staff trying to micromanage which retailers go where in general. I support store size limits, but if competing retailers want to open within the existing rules, more power to them. Example: we have four pet supply stores now.
“… it would be hard to argue that it was ‘harmful’ to the City in general as there would be an increase in selection options, potentially lower prices due to the competition, new jobs and higher tax revenues.”
If history tells us anything, it is not hard at all to argue in this town that it’s harmful to allow any competition. I think the Target development agreement is full of “protected” goods and services now provided by existing Davis businesses.
We apparently don’t want more options and jobs and lower prices here. We’d rather vote to increase our own taxes than to vote for development that might bring the things that other communities seek.
I fail to understand why you think that would help? If those items are already strong, why would you wish to bring in more competition rather than find categories that we are weak and attempt to bolster them?
For the record, in 2010 and again in 2012 I attempted to get information from the city as to the amounts of sales tax revenues by category. I was interested in the percentage from auto as well as other categories, as aggregated by the Board of Equalization. In spite of 6 – 7 emails back and forth with Paul Navazio, and his apparent willingness to put together the data and share it, that never happened. My last email on the subject included congratulations for his new job in Woodland, and that was the end of that.
Sales tax data is not forthcoming from the city web site and doesn’t appear to be easy to get from what the state provides to staff. Or they just didn’t have the time. So if you actually have this data — quarter by quarter changes, by category, of sales tax revenues — it would be really useful to know.
Agree that this information would be useful for the current discussion. One would think city staff routinely would be analyzing the sales tax data, trends, category percentages, etc. It’s surprising that you had difficulty getting it.
It would be interesting to see, but my guess is the current staff would be more forthcoming.
I just got a message indicating that staff will be putting together the detailed information that he sought previously. Apparently one reason that Don did not get previously was concerns about privacy in tax data for businesses.
Don, et al
I will ask finance staff to pull the requested info together as soon as possible. The response above was a joint effort of City Manager’s office, finance and HR.
Don… unlike City Employee salaries, and City retirees’ “costs”, sales tax revenue, as I understand it, is protected from disclosure by law. but am pretty sure Frankly would agree that ONLY public salaries/benefits should be made public, because, after all they are private…. even if public employees use their services.
Dilemma… City depends on auto sales, yet hires employees @ over $150,000 per year in total comp to avoid the auto…. mixed message?
I have responded on the other line of discussion to the comments by the city. I find it encouraging that they acknowledge in their statement that both sales and property tax revenues are coming in higher than projected.
Perhaps we can call those off sooner than later. You can always lower rates w/o a vote of the people. Seen that.
Am suspecting, Dan, that you really want to “compromise”, or, you want to ‘stir the pot’, or we can play games with how to look at the revenue side.
The spending side needs to be looked at, but I am against breaking faith with people who serve the community, particularly professionals who DO get lesser wages, but get benefits that off-set that. A choice. Thought we were a ‘pro-choice’ city.
Dan,
Perhaps you can share with us your view of “pay as you go” models for financing of employee defined benefit programs? Was there ever any pushback from staff/your office/Liz in connection with the reporting the obligations of the employer versus “representing the obligation due the employee” – relative to supporting the need to be team players in “delivering a balanced budget” to the assembly?
As you know, in our community there exists a sincere interest in fully reporting the true liability and full amortization schedule for promises made but not supported by tangible investments for their repayment. It seems noteworthy that the states reports an unfunded liability for Other Post Employment Healthcare Employment due to employees in the amount of $64BB due to state employees for Other Post Employment Benefits, plus and additional $1.37 BB for the trial courts, and an additional $15.2BB due to employees of the University of California for similar unfunded benefits.
How do you think we got into this situation where the State is saying one thing “that it is operating on a pay as you basis” and yet is has accumulated some $80Plus Billion dollars in unfunded liabilities for its retiree health care obligations?
Clearly, a major component of our current budget shortfall is represented by our need to make further, additional contribution for past underfunding. In the case of the City of Davis, and as you have watched this liability continues to grow in size, what are your suggestions to help manage the City’s existing unfunded liabilities?