Back on June 28, the Davis City Council passed, by a narrow 3-2 vote, a budget that started to fix what had been decade-long fiscal mismanagement of the city. Over the course of the last decade, the city council has allowed total compensation, salaries, benefits, other post-retirement benefits (OPEB) and pensions to become unsustainable.
Employee compensation has grown to the point where it makes up 80 percent of our general fund expenditures. To maintain the fiction of a balanced budget, the city simply slipped unmet needs into a second category that suggested as late as 2008 that we had a balanced budget and a 15-percent reserve.
The fiction collapsed along with Lehman Brothers, the real estate market collapse, and a deep and prolonged recession.
We have seen declining revenues the last three years, and projected revenues appear to be flat, at best, for most of the next five-year period.
The problem that we face is that costs are not flat. Those unmet needs are piling up into deferred maintenance, exacerbated by the fact that other non-general fund sources of revenue have dried up.
The city discovered several years ago that it had a $50 to $60 million unfunded liability for OPEB, which for the city constituted a very generous retiree health care package. The city has decided to fully fund that benefit – the right move when you look at the long-term costs – but it will take the city 30 years to get to full funding, which will cost the city a lot more than other means.
The city presently is halfway to the level it needs to be at, in order to fully fund retiree health in thirty years.
The most uncertain part of this is pension costs. We know, based on current projections, that the costs to the city for pensions is going to increase by some amount over the next three years. That is due to loses from 2008 that were staggering.
Prior to the most recent economic uncertainty, it looked as though PERS (Public Employees’ Retirement System) had recouped a portion of those losses.
At stake is whether CalPERS will lower their earnings projection. Currently, they have maintained the standard 7.75% assumed rate of return. However, many believe that a 7.5 or 7.25%, or even lower rate of return, is more reasonable, given the current economy. It is important to understand that the ARR is set to a 30-year forecast, but higher projections for rates of return mean the creation of another unfunded liability.
Every quarter percent appears to mean another million in the all-funds budget.
Put together all of these pieces and Paul Navazio, the city’s finance director, believed back in March that we could be looking at $7 million in additional costs to the city by 2015.
The city’s general fund is around $37 million, give or take, so we are looking at a very sizable chunk. Those looking for solutions that do not involved personnel cuts should remember we are looking at 80% of that $37 million going to personnel. It is hard to imagine cutting nearly one-fifth of the general fund’s budget without it impacting city employees.
Based on that projection, the council passed back in June a proposal to take $2.5 million in current personnel costs to address these shortfalls. The most urgent is $1 million that goes to street maintenance.
I have made this point many times over the past year. The city has typically spent $800,000 on road maintenance from non-general fund sources. This year those sources were completely gone and the city had no funding. Tier 2 cuts provided a miniscule $150,000 for the street maintenance.
How much do we need? At the $800,000 level it was projected that our pavement index would decline and deferred maintenance increase. The council is looking to fund street maintenance up to $1 million total, including the Tier 2 cuts, with $850,000 coming from the $2.5 million.
They would then take $1 million and plug it into to OPEB, which will bring us closer to getting up to the level to where we can close that gap over 30 years.
$500,000 would go to PERS, the most speculative of the moves since we do not know for sure that that number is going up. The remaining $150,000 would be an unallocated contingency.
One important point that needs to be made is that, despite the 3-2 vote, everyone on council agrees we need to do this at some point. The question is only about the best timing and best way to do it.
An argument against doing this now is the timing of the MOUs. The argument is that the contracts come up next June, and so next year is the time to incorporate these cuts, not this year.
I can see that perspective, but there are three reasons I disagree: (1) $2.5 million is not the end of cuts, (2) there are ways to cut the $2.5 million that do not rely on concessions and are needed; and (3) I am not convinced we will get huge concessions from the city employees even when the MOUs come up for renewal.
Let me add a fourth reason not to wait, and that is the urgency of the road maintenance. Because of contract schedules, the soonest we could let the contracts for street maintenance would be spring of 2013, if we wait. In the meantime, the city faces deteriorating road conditions and potential liability.
That is by far the most urgent of the items. The remaining $1.5 million in cuts could be phased in, and could start taking place earlier.
We have already made the first argument that the $2.5 million is not the end of cuts, and the idea is to space them out so that when 2015 comes we are not having to cut $7 million in a single budget.
That allows us to plan more carefully and attempt to mitigate impacts on employees and the public alike.
The second point is critical. We have to understand that the sum total of reforms does not involve employee concessions. We need to streamline government.
As the city put it, we need to look for: “1) potential savings being identified through a series of reorganization and restructuring proposals across all City departments, 2) program areas where potential savings could be achieved through alternative service delivery methods (including, contracting, shared-services, and public-private partnerships),and, 3) specific program reductions.”
One way a lot of people were counting on to get at least part way there were fire staffing changes, where the City of Davis would join most of the rest of the state and put three on a fire engine.
Beyond that, we need to address middle management and other positions which do not directly involve the provision of services and interaction with the public, to streamline government. Finally, there may be program areas where we can find savings through alternative service delivery methods.
Not one of those areas requires changes to MOUs, except fire staffing levels.
Finally, we need to recognize that the ability to gain much from employee concessions is constrained by the collective bargaining process.
The DCEA (Davis City Employees’ Association) contract situation is a good sign that it is going to be tough to get concessions from employee groups, and they are balking at most reforms proposed in the last round of MOUs. The impasse process is far from straightforward.
And, while I generally agree that the city blundered in how they went about the impasse, I also believe that any strategy that requires the imposition of contracts on employee groups is going to lead to delays and lawsuits
Moreover, impasse does not solve the problems longterm. It is a contract-to-contract situation.
Employees are angry right now, believing that they are being unfairly targeted. I would argue that the primary culprits in this are, ironically, the same people responsible for the compensation problems we now face.
Contrary to popular belief, we are not under the belief that employees have not agreed to any concessions thus far. Rather, our concern is that they have not agreed to sufficient concessions to fix the problem – a problem rooted in policy changes regarding pension formulas, salary increases, and retirement health and cafeteria cash-out policies.
As Mayor Krovoza put it last week, given the hiring of Steve Pinkerton, it seems reasonable to hold back and let the new city manager – a man with experience cutting spending – take a full look at the city’s budget situation.
“The theme that I’m most sympathetic to in all of this really is the observation that [Councilmember] Sue [Greenwald] made when we were at the end of June which was that we were going to potentially bring on a new city manager in the interim between the stated goal the council passed in late June and the end of September,” the Mayor said last week.
“I couldn’t agree more that this is a very complex issue of both finding the cuts and managing through them – so the idea that those things are developed in concert makes sense to me,” he said.
“I don’t think it’s fair to ask our new city manager, who arrived on September 2, to figure this out in a month,” he said.
Nevertheless, we expected more than we got last week. And so, too, did the Mayor.
The Mayor said, “While we don’t have $2.5 million in cuts here, we don’t have two, we don’t have 1.5, we don’t have one, we don’t have 500.”
“We have spent three months,” he said, pointing out, as well, that even the Finance and Budget Commission had the better part of two months to look into recommendations for cutting $2.5 million from the budget “to at least start to bring us some movement on this issue.”
More should have been at least put on the table for discussion, thought and consideration.
The Vanguard continues to believe there is an urgency to get these cuts this year, and have them done and off the table in time for the next round of employee negotiations, which will be heating up sooner rather than later.
—David M. Greenwald reporting
David ,
“”””The fiction collapsed along with Lehman Brothers, the real estate market collapse, and a deep and prolonged recession.””””
So you now understand that state , city , and county workers didn’t cause budgets to go bad ! Wow I was wondering if you could understand that .
[quote]Employee compensation has grown to the point where it makes up 80 percent of our general fund expenditures. To maintain the fiction of a balanced budget, the city simply slipped unmet needs into a second category that suggested as late as 2008 that we had a balanced budget and a 15 percent reserve.[/quote]
This was creative bookkeeping at its worst, and a legacy of the failed leadership of former City Manager Bill Emlen, IMHO.
[quote]The Vanguard continues to believe there is an urgency to get these cuts in this year and have them done and off the table in time for the next round of employee negotiations which will be heating up sooner rather than later.[/quote]
Agreed, these issues need to be addressed sooner than later. I just don’t think under the circumstances that it will hurt anything to:
1) Allow City Mgr Steve Pinkerton to have a bit of time to be brought up to speed on the complicated budget issue;
2) Push for the Citygate report to finally be issued, as seems should have happened by now.
[i]”The most uncertain part of this is pension costs. We know, based on current projections, that the costs to the city for pensions is going to increase by some amount over the next three years.[/i]
This is the topic I discuss in my Davis Enterprise column ([url]http://www.davisenterprise.com/opinion/opinion-columns/follow-this-plan-to-solvency/[/url]), this week. It is now available on-line and it will be published in Wednesday’s print edition.
You tell us in your headline that you are going to explain “Why Council Must Act Sooner Rather than Later on the Budget.” But then you don’t explain it. You simply state it as if it were fact.
The truth is that our problems are long-term problems. Avatar is incorrect to think that the difficulties the city faces stem from exogenous events like the poor economy. The poor economy has simply made a bad situation even worse.
The source of our problems is mostly in our labor contracts. It is in those where we have unsustainably high pension plans which not only cost too much — this year, for example, the taxpayers are spending $6.8 million on pension funding; that is 17 percent of the $40 million general fund expenditures — but those pension plans encourage employees to retire far too young. Those early retirements are costly, because the labor contracts (for all retirees up to now*) require the taxpayers to pay for very expensive medical benefits for the retiree, a spouse and one child, all before the person is eligible for Medicare.
There are other terribly expensive provisions in the contracts: the extremely large amount of paid time off for vacations, holidays and other amounts of leave; the fact that for some unions we are paying for more than 1,100 hours of time so the workers can attend union functions; the fact that firefighters are guaranteed overtime for every duty cycle; and the extremely generous medical plans which allow most current workers to get around $18,000 a year extra in cash by not using the plan, or others to get a cheaper plan for around $6,000 and pocket the extra $12,000.
The only way to solve these cost issues is in the labor contracts. These problems have nothting to do with the short-run. They were not created by the economic downturn. They will only be solved by re-writing the labor contracts.
The biggest problem we can solve–not in the next month, but before the end of this fiscal year–is with excess staffing in some departments.
The most salient staffing issue is in the fire department. We can save roughly $1.4 million a year (this year and every year going forward) by going back to the normal model of 3 men on a truck. That savings will be more than enough to maintain our roads and sidewalks. (As an aside, have any of you seen the sidewalk in front of the DPNS on W. 8th Street? It must be the worst in all of Davis.)
There are other staffing issues involving upper management. I think the city manager needs to take the lead in this area, by identifying which jobs in which departments we can live without, and which people (if any) in those jobs are not up to snuff. It might be a problem getting rid of some positions due to the city’s “bumping” policy, where an experienced person whose job is eliminated can “bump” a less senior person and take the other’s job. However, I imagine there are creative ways to make our management team more efficient. We have far more people in senior management today than we had 10 and 15 years ago. (Part of this problem was caused by Bill Emlen, who had a tendency to create new, higher paying positions for his junior subordinates, rather than just giving them a raise when they were doing the same job.)
*It will change a bit in the future for workers who started after June 30, 1996 and choose to retire before they are 60 years old.
[i]”That savings will be more than enough to maintain our roads and sidewalks.”[/i]
I should note that I was surprised to find that the City of Davis pays for sidewalk repairs. I don’t know if most cities in our region take on that expense for their sidewalks, also. A friend of mine who lives in Sacramento told me that he had to pay to repair the sidewalk in front of a rental house he owns. (The roots from the street tree in the planting strip had pushed up a couple of sections of the sidewalk.)
I don’t think it is that unreasonable to expect property owners to pay for the costs to repair the sidewalks which face their parcels. It seems to me that the City ought to identify any sections of sidewalk around town which are hazardous, and once identified, make the property owner pay to have them repaired, except in cases where the City or some third party caused the damage. (Most sidewalk damage, I think, is the result of tree roots pushing them up. But those trees bring value to the property, and so the repairs they require perhaps should be the burden of the property owner.)
[quote]So you now understand that state , city , and county workers didn’t cause budgets to go bad ! Wow I was wondering if you could understand that . [/quote]
You are misreading me if you honestly believe that’s the claim. You are simply mistaking the trigger for the cause. The problem that you fail to acknowledge is that the past practices were only sustainable during a time of double-digit property tax increases on an annual basis, and even then it took additional tax raises to balance the budget with a huge and growing unmet needs list.
Rich:
“The truth is that our problems are long-term problems.”
I don’t disagree at all and I agree that Avatar misses the boat in failing to understand that the poor economy was simply the trigger, much as the assassination of Arch Duke Ferdinand was a trigger for WWI that would not have precipitated war without pre-existing conditions.
The labor contracts are in fact the source of a lot of our problems, but I also think we are overextended both in terms of personnel and service provisions.
Fire is one huge example.
But let me talk about another one, Lamar Heystek once showed me the chain of command in parks and rec that went from then Department Head Jerilyn Cochrane to the head of the teen program. There were 14 layers of bureaucracy, one directly overseeing another. We have a huge staff of planners in a city not growing. It just seems like we made a lot of cuts that directly impacted service provision and failed to cut out some of the middle managers.
Your point about sidewalks is well taken, this is simply another example where we should be looking at alternative service delivery methods. We can save a lot there.
I agree that the labor contracts are problem. I don’t think the last round of MOUs went far enough and I am skeptical that we can get to where we want through imposition of last best offer on a yearly basis.
[quote]I don’t think it is that unreasonable to expect property owners to pay for the costs to repair the sidewalks which face their parcels.[/quote]
I don’t think it’d be practical — if it’s even legally possible — for the city to make the adjacent owner pay for sidewalk repairs. The walk is part of the roadway improvements, which were accepted by the city — not by the adjacent homeowner — in response to the developer’s dedication. The walk is in the public right-of-way, which is why the city gets sued every time there’s a trip injury due to a damaged sidewalk. If the city tries to hand the sidewalk over to the homeowners, it’ll face all kinds of problems with unmaintained sidewalks, and it’ll still get sued when someone trips.
I suspect the Sacramento case cited above happened because of the rental situation. A rental house is a business, and if Sacramento requires a business license it might have been able to require sidewalk repairs as part of the licensing approval.
Jim… with all due respect, the ‘default’ responsibility for sidewalk construction, maintenance, replacement, etc. resides with the abutting property owner. It is spelled out in the State’s Streets and Highway code, and shows up in the Davis municipal code as well. I don’t have the citation(s) immediately at hand. The same is NOT true of curb & gutter. Many local agencies give the property owner “choices” if the sidewalk condition is ‘substandard’/hazardous: the property owner can obtain an encroachment permit, and hire a contractor to do the repairs to City Standards; the City can hire a contractor to do the work, and bill the property owner; if the property owner refuses to pay, the City can lien the property. Many cities have exemptions for ‘third party’ damages (ex., a corner lot where a moving van misjudges and destroys the sidewalk), and/or city owned/required street trees (but not if the property owner “just wanted the tree’). Some cities ‘split the costs’ 50/50. Making the property owner responsible is not ONLY legal, under applicable laws, it is ‘the starting point’.
[i]”I suspect the Sacramento case cited above happened because of the rental situation.”[/i]
I just called up my friend–he used to be a Davis resident–and he tells me it is the same whether for a rental or an owner-occupied home or for a commercial business in the City of Sacramento.
You might know that Los Angeles, last year, was considering following the same policy as they have in Sacto. Here is the story ([url]http://www.dailybulletin.com/news/ci_15018886[/url]). I don’t know the outcome.
[b]Don[/b], any suggestions for different “city tree” selections (those that are planted in subdivision front yards)? Why would we choose to plant stuff that buckles and tears up sidewalks in less than a decade, anyway?
The city has a street tree commission that maintains a list of approved trees. It changes over time, as the problems with some species and varieties become apparent. Some trees are always a problem; Modesto ash turned out to be a poor choice, for example. Others almost never develop surface roots, such as Valley oak and Ginkgo (male only!). There is no perfect tree, but I’ve written several articles on the topic.
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