Commentary: New City Manager’s Straight Talk A Reason For a New Hope

Davis got its first view of its new city manager, Steve Pinkerton, on Tuesday night, and we could already see a huge change in the nature of the fiscal analysis coming out of city hall.  Gone were the days of rosy projections and papering over serious problems.

No longer is Davis having tough times but in better shape than others, now we acknowledge that, while Davis is not alone, the reality is that a whole lot of cities are in trouble.

As Mr. Pinkerton put it, the funding gap could be so large that cities could be looking at 40 to 60 percent increases in their rates.  That situation calls for reform and strong measures that PERS (Public Employees’ Retirement System) has so far not been willing to accept.

“I think, realistically, at some point PERS is going to have to find some way to impact future benefits of existing employees.  I think that’s the only way to avoid creating pure chaos at the state and local government,” the city manager warned.

“While we have defined this as a gap, it’s not really a gap because we have no choice but to pay this,” Mr. Pinkerton said.  “What this really is, these are guaranteed, built-in guaranteed increases in expenditure in a flat revenue time we’re looking at in the next two fiscal years.”

And this was not the only time the city manager actually took measured steps to paint a picture worse than the underlying numbers represent.

“We can have long debated on what’s going to happen to our PERS payments because there’s plenty of actuarials who are laying claim, with very good numbers behind them that the rates that PERS is charging right now are not legitimate,” Mr. Pinkerton told council.

In fairness, perhaps, to previous staff and Finance Director Paul Navazio, the council has changed drastically on the issue of the budget.  Back in 2008, before the collapse of Lehman Brothers and the economy with it, there was a disconnect between those who were warning of fiscal calaminity and unsustainability of the budget and those who were like the council majority, still fixated on a balanced budget with a 15% reserve.

The council has focused on the projected rate of return as a key barometer as to whether PERS increases will be merely or utterly disastrous.

The numbers there show PERS increases starting at $1 million over the next two years – that is if the ARR remains at the current 7.75 percent level.  But those numbers quickly increase to $1.8 million and then $2.6 million if the ARR is reduced.

Furthermore, as Mr. Pinkerton points out, the ARR is not the only cause for alarm.

“Rate of return is only one of about seven factors that you have to take into account when you’re looking at PERS rates,” he said.

Instead we see a whole host of errors that CalPERS has made in their assumptions, and as we know any model is only as good as its assumptions.  So when you underestimate how long people live, particularly public safety employees who were once thought to die at a younger age than miscellaneous employees, this justified their higher 3% rate and lower age of retirement (50).  But now CalPERS acknowledges that there is no statistical difference between the longevity of public safety and other employees.

Just as importantly, the rate of increase in salaries is about three times higher, at 9 percent, last decade than projected previously.  Does that trend continue?  If we look at the level of salaries for a few recent hires, there is no reason to believe otherwise.

Finally, the fact that the employee pool has shrunk rather than grown is a reason to downwardly revise growth estimates.

Said Mr. Pinkerton, “They were assuming an ongoing growth of the number of employees paying into the system.  As we know statewide between local and schools, you are down over 100,000 employees paying into our pension system as opposed to just a couple of years ago.”

The message delivered by Mr. Pinkerton, backed up by Paul Navazio and punctuated by council, is that we are not going to be all right without serious changes.

The Vanguard initially balked at delays in implementation of the $2.5 million in personnel reduction because it feared it was the council and city staff backing down from its obligations.

The message delivered on Tuesday was the opposite, as the council reiterated its goals.

“I totally get it that Davis is not unique,” said Mayor Krovoza, acknowledging that Davis is but one of many cities in this predicament.  However, he added, “My view is that we’re a sharp city that plans well and has a lot of talent in our finance department, if we start to see that all cities in California are bracing for a very hard landing… I want this city to be sure that we’re a city that’s doing the planning and putting the right amounts of money away so that we have as soft a landing as possible”

As we argued on Tuesday, we do not believe that we can wait.  The situation involving road repairs is more pressing than ever, with a shortfall, even at the $1 million funding, of between $2 and $2.5 million per year.

Mayor Pro Tem Rochelle Swanson pointed out that even if we increase spending up to one million dollars for road maintenance, we are still growing the backlog, falling further behind.  Time is of the essence on some of these, she argued.

She pointed out that deferred maintenance increases the costs of repair by as much as 5 to 10 percent per year.

Even Mr. Navazio, who has long publicly downplayed the severity of the situation, was on board on Tuesday, as he made the critical point that the city’s needs exceed the $2.5 million in savings proposed in this fiscal year, and additional savings will be needed in the out-years.

This is where I think the disconnect is between the city manager, finance director and city council, and the employee groups.

The employee groups believe that they have already given enough concessions.  They downplay the importance of road maintenance investment, mocking it as the filling of potholes.

Layoffs are probably inevitable, but one of the reasons that they are inevitable is that the city employee groups are now the ones in denial about the severity of this problem and what the city faces.

A reasonable restructuring of the employee benefits, to push more of the costs and risks on the employees rather than the city taxpayers, would produce savings while at the same time assuring the continuation of generous retirement benefits and health care.

Like Sue Greenwald, we continue to support defined benefit retirement, but that could be threatened by continued fiscally unsustainable practices.

That is not to say I believe that employee concessions is the end of the story.

As we argued last week and at various other points in time, the city needs to restructure government, we continue to hold out hope for a reduction of fire staffing, and finally we believe that the city does not have to be the sole provider of some services such as recreation and parks services.

This is a discussion worth having, and it is worth taking a few months to do it right.  For the first time, we are confident that this can happen, that the city can in fact back down off the September 30 date and still commit to making the changes this fiscal year.

Mr. Pinkerton had a good opening act, but we are under no illusion that this will be easy.  Already, city employee groups have drawn a line in the sand and we fear the next round of MOUs will result in more impasse and stalemate, with few needed concessions.

—David M. Greenwald reporting

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