In 2009, Councilmember Lamar Heystek created an alternative budget to that presented by Finance Director Paul Navazio. It called for fewer cuts from core services and greater savings from the upcoming employee bargaining session, but also a downwardly revised revenue projection.
While Mr. Heystek succeeded in gaining some modifications, it turned out that the revenue projections that he proposed were much closer to accurate than those of Paul Navazio. Moreover, the city council failed to negotiate MOUs (Memorandums of Understanding) with the bargaining groups that were sufficient to meet the needs of the council.
However, a couple of months ago it became clear that this had not happened. The city remains somewhere between $300,000 to $500,000 short in terms of restoring the 15% fund balance.
The city staff is now announcing that the General Fund is expecting that, even after all of the cuts in the last two budgets, the city will continue to have an operating deficit of roughly $700,000 to $800,000 meaning that it may need to cut an additional $1.5 million in order to balance the budget and restore the 15% reserve.
Moreover, staff reports that the budget deficits will be ongoing. “The five-year forecast for the General Fund suggests annual operating deficits in the range of $900,000 to $1.2 million, suggesting the need to implement ongoing budget-balancing measures not only for FY2011/12, but also in the out-years of the forecast.”
The city has not gotten a chance to start implementing its multi-year budgeting.
In a report from Acting City Manager Paul Navazio and Budget Manager Kelly Fletcher, they cite three factors contributing to the ongoing General Fund budget deficits.
They write, “The primary factors contributing to the recurring General Fund budget deficits, as well as funding shortfalls across several other areas of the budget include: 1) lower revenue estimates resulting from the ongoing economic recession (significantly impacting local tax revenues), 2) projected increases in costs associated with employee retirement and retiree medical benefits, and 3) reduced State and Federal funding in support of a wide array of transportation, housing and social services programs.”
While bad, the worst news has been at least temporarily postponed, as for now CalPERS has not lowered their projections for their Assumed Rate of Returns from 7.75 to 7.5, a move that would lead to a huge hole for the City of Davis. However, the city should be looking for ways to build in lower projected earnings from the pension fund that will otherwise lead to a new wave of unfunded liabilities for the city above and beyond their current ones, which are combined over $100 million.
Furthermore, the city is not accounting for the deferred maintenance of roadways into the deficit, something that will have to be paid for, even though there is currently no money for it.
The city is starting to realize that there needs to be structural changes. In their discussion they lay this out more clearly.
The staff report suggests, “The budget outlook for the City of Davis – while perhaps not as dire as some other cities – nonetheless requires that significant steps be taken to reduce expenditures in the short-run, and effectively manage long-term costs within an environment of declining revenues and continued uncertainties over potential budgetary impacts from the State’s continuing fiscal crisis.”
They continue, “Given the duration of current economic downturn, it is clear that the City can not fully address the budgetary challenges merely through cost-saving measures and budget reductions arrived at through ‘decremental’ budgeting.”
Here is a crucial point, though, about how they view structural changes.
“In order to balance budgets while minimizing impacts on direct services to the community, past budgets have sought to employ a combination of new revenue, cost-savings measures and targeted service-level reductions,” they write. “Most recently, the City achieved savings through restructuring of selected City operations, and continues to explore alternative service-delivery models, and increased co-ordination and collaboration with all public agencies at all levels.”
However, the problem is that most of this has been done through attrition and then shuffling the deck. This is not a true restructuring and it has left some departments woefully short.
The staff report continues, arguing that long-term fiscal stability will require even more fundamental change, and here is an area tin which hopefully the new council can push staff in the right direction.
“Areas of focus will necessarily include a comprehensive review of 1) the cost of city services (primarily employee compensation and benefits), and 2) the breadth and scope of services that the City can sustain,” they continue.
“The City Council is engaged in a review of the City’s current structure for employee compensation and benefits, with the goal of discussing a full range of options with employee bargaining groups, in conjunction with the next round of collective bargaining,” they continue.
While this is important, there needs to be a full discussion that puts on the table what services need to be supplied, how much they will cost, and a prioritization of those programs and services. We need a true re-organization based on need, not opportunity presented by retirements and transfers.
This is addressed in this point, where they tell the council, “staff will provide an update on an internal inventory and prioritization of programs and services, across all City departments. This process is being undertaken by the City Manager’s Office in order to assess the impacts of reallocating existing resources to higher priority needs, consistent with the City Council’s expressed goal of addressing unfunded liabilities and long-term infrastructure funding requirements.”
This is, along with getting a handle on pensions and unfunded liabilities, the most important thing the city will work on in terms of the budget in the next 16 months. We need to move the employee groups in the right direction and to prioritize spending, and finally we need a multiyear budget with real assumptions about future revenues.
For too long, city staff has had an overly-rosy projection of revenues, and each time they have proven too optimistic.
—David M. Greenwald reporting
“For too long, city staff has had an overly rosy projection of revenues and each time they have proven too optimistic.”
Almost like a business trying to ply a loan from the bank, no ?
[i]. . . beyond their current ones which are [b]combined over $100 million[/b].[/i]
How many employees, active vs. retired, over what period of time, in what specific job classifications? If you *must* use scary-big numbers, at least give us a link to the data.
The “scary number” refers the combination of unfunded liability to the retirement health plan and the unfunded liability to current employee pensions. If you want more details, you can look up past articles on unfunded liabilities.
[quote]The “scary number” refers the combination of unfunded liability to the retirement health plan and the unfunded liability to current employee pensions. If you want more details, you can look up past articles on unfunded liabilities. [/quote]Ah, yes… this applies to Social Security and Medicare as well… perhaps we need to deal with all of these…
Thank you for keeping the public updated and aware of the city’s long term fiscal difficulties. Ultimately tough and unpleasant decisions will have to be made by the city council. Could you from time to time post direct contact information for council members so the readers of this blog can offer them support when they make the decisions that are necessary? Thanks.
Haystack , was a puppet for this blog .
http://seekingalpha.com/article/260469-the-washington-post-gets-pension-funds-wrong?source=yahoo
See the link by Dean Baker who among other things predicted the housing bubble bust.
dmg: “While this is important, there needs to be a full discussion that puts on the table what services need to be supplied, how much they will cost, and a prioritization of those programs and services. We need a true re-organization based on need, not opportunity presented by retirements and transfers.”
Nicely said, but I would add two words: “…not opportunity presented ONLY BY retirements and transfers.”
Come on, David. You are slanting history.
You know that for years (well before Lamar was on the council to lend another voice) I presented alternative budget projections and an alternative budget.
I pointed out through the years how the assumptions were manipulated to predict a balanced budget.
I voted and vociferously argued against permanent, unsustainable pension formula changes and against excessive firefighter compensation increases.
I was frequently the ONLY voice against unnecessary studies and “master plans”, $100 million excessive wastewater treatment plant proposals, etc.
You and Lamar were relative late-comers to this issue. Please be more accurate.
Vanguard: [i]”… beyond their current ones which are combined over $100 million.”[/i]
Neutral: [i]”How many employees, active vs. retired, over what period of time, in what specific job classifications? If you *must* use scary-big numbers, at least give us a link to the data.”[/i]
Neutral, you can find the unfunded liability numbers on the city’s website. Look for the budget workshop staff report. The numbers come directly from CalPERS.
According to PERS, Davis has $85,150,185 in accrued liability for its public safety pensions. We have $135,328,725 in accrued liability of for our non-safety pensions. Combined the total is $220,478,910.
The breakdown for the accrued liability of $220,478,910 is this:
a) Active Members $101,326,716
b) Transferred Members $15,388,364
c) Terminated Members $3,848,493
d) Retirees $99,915,337
e) Total $220,478,910
CalPERS then reports that the market value of the money Davis has paid in to fund our pensions (including the amounts contributed by employees and retirees) is $126,792,185.
That means that we have a market value pension deficit of $93,686,725. This number can also be reported as an actuarial value deficit which makes a lot more assumptions about the growth of the PERS funds.
On top of that, we have an unfunded liability for our retiree healthcare benefits. It was originally reported to be somewhere around $42 million. That was later upgraded to about $61.5 million. In January, Paul Navazio announced that, due to a reduced estimate of future medical inflation, our liability was downgraded to around $54 million.
So if you add our pension debt and our retiree medical debt, the taxpayers of Davis owe approximately $147 million to our employees for pensions and retiree medical.
[b]”You know that for years (well before Lamar was on the council to lend another voice) I presented alternative budget projections and an alternative budget.”[/b]
I think Sue makes a good point here. Lamar deserves credit for his work on the Council. But long before Lamar presented an alternative budget with alternative assumptions, Sue was very clear that the city staff’s predictions for revenue growth were overly optimistic and she stated that the staff’s estimates for increased labor costs were greatly understated. In other words, when most of her colleagues were claiming we our budget was balanced and our outlook was bright, Sue was really leading the charge to doubt staff’s estimates. And time proved Sue right.
Where does Sue stand on David’s other point regarding Lamar’s proposal:
“It called for fewer cuts from core services…”
I believe Sue Greenwald casts lots of doubt on a lot of issues, but presenting solutions is where you get the real headlines and your name in the history books.
So, where does Sue stand on “fewer cuts from core services”?
Civil Discourse: Is this a comment about the budget issues or the start of a 2012 City Council campaign? Obviously, you can’t maintain core services if you spend too much on compensation packages for your highest paid employees, or on the humongous water/wastewater infrastructure costs. These are by far the largest expenditure the city makes.
Who is in favor cuts to core services? Sounds like campaign posturing to me.
This fiscal situation is quite sad, and it is exactly what I have been predicting and trying to avoid for about the last 8 years.
It is too bad that staff and the previous council majority white-washed the budget projections, thus allowing them to forestall the difficult decisions during the last round of labor negotiations. I fought hard for honest budget figures, but lost.
An example of the result of the white-washed budget projections was the refusal of the council majority to deal adequately with the extraordinary “cafeteria” cash-out benefit. I put my all into trying to convince the council to hold out for major, major reductions in this most costly and unusual benefit, whereby an employee who has a spouse that can cover medical care can take home up to $20,000 extra cash a year. I lost that battle.
If staff and the previous council majority had presented an honest budget, they would have had a harder time justifying the lack of meaningful reform in our compensation packages.
If labor were interested, we could have structured reform in a manner that would have been fair to lower-paid employees.
[quote]the refusal of the council majority to deal adequately with the extraordinary “cafeteria” cash-out benefit.[/quote][quote]If labor were interested, we could have structured reform in a manner that would have been fair to lower-paid employees. [/quote]Interesting combination of quotes… lower paid employees, benefit, percentage-wise much more than higher paid employees. Big surprise that this was not “pushed” by the top-level negotiators, as at least one of them would have a significant benefit reduced in their situation. Perhaps, to be “fair” to lower-paid employees, they should be able to “cash-out” and higher paid employees should pay all medical, dental, etc. benefits out-of pocket… oh… almost forgot… CC members have basically the same benefits for cafeteria benefits… can they cash out?
Rich: thanks for the referral to the data.
What Sue Greenwald wrote. Everything I’ve read brings me back to the same place: the City *must* hire an outside *professional* labor negotiator. No question, and this year.
Rifkin: “I think Sue makes a good point here. Lamar deserves credit for his work on the Council. But long before Lamar presented an alternative budget with alternative assumptions, Sue was very clear that the city staff’s predictions for revenue growth were overly optimistic and she stated that the staff’s estimates for increased labor costs were greatly understated. In other words, when most of her colleagues were claiming we our budget was balanced and our outlook was bright, Sue was really leading the charge to doubt staff’s estimates. And time proved Sue right.”
Absolutely. It is important to give credit where credit is due, especially when it comes to our politicians sitting up on the city dais… However it should be remembered a reminder served with sugar goes down easier than a reminder served with vinegar…