As we noted in yesterday’s article, the city’s projected budget forecast has good news and bad news. The good news should not be overlooked. Right now we have a very conservative budget forecast.
The forecast calls for very small, if not neutral, salary projections. The expenditures for the city remain flat until 2019-2020, and even then we see a very modest bump in expenditures. The revenue projections see a small but steady increase starting in the 2017-18 year (not sure why there is predicted to be a $2 million decline in revenue for 2016-17 from the present fiscal year).
That is good news because right now that means the city manager is forecasting that the city budget is going to largely stay the course. We are not going to see massive new spending. We are not predicting huge revenue growths that might tempt the council to entertain a massive spending project. And our greatest fear would have been that the recent good news led the council to increase total compensation to employees – and at least the city manager does not see that course, either.
The modest plan increases the general fund reserve which is right now at $7.1 million up $12.8 million by 2020-21. That increases the fund reserve from just under 15% to 24%. While we like the frugality, we wonder if at some point the council will decide to use at least some of that fund reserve either for one-time or ongoing spending.
With all of that said, I view this budget as very precarious. While we build in a healthy reserve, we know from experience that needing to dip into the reserve for more than a year or two will once again deplete it. It is enough to buffer the blow but does little else.
Moreover, it shows us in three ways how susceptible we are to the rise and fall of the economy and that we need additional revenues.
First, the sales tax is set to expire at the end of 2020. Not just Measure O’s half-cent increase, but the full one-percent. We don’t really see that reflected in the 2020-21 revenue projections, but clearly at some point the tax revenue drop off will cause the revenues to sink. What is clear, looking at least at these conservative projections, is we do not actually increase the revenue by enough to consider not asking the voters to renew either the original half-cent tax (approved in 2004) or the second half-cent (extended and increased in 2014).
That is not a small point, because the way Measure O was sold to the voters was as a six-year tax to bridge our revenue gap in a fiscal crisis. An op-ed that ran a year ago in May of 2014, co-authored by Councilmembers Lucas Frerichs and Brett Lee, Former Mayor Ken Wagstaff and commissioners Elaine Roberts Musser and Dan Carson wrote: “We recognize that increased sales taxes are only a temporary (yet necessary) solution.”
Yet at present, with no changes to spending or the revenue trajectory, the city will have to come back in 2020 and ask for another six years.
Second, some have been quick to rejoice at the new numbers, while others are more skeptical and circumspect. If these numbers hold, we cannot sustain any sort of employee compensation increase. Even a very small one percent salary increase would increase the general fund budget by nearly half-million per year.
Projected over the course of five years, that increase would eat away $2 million of the fund balance. A two percent increase would increase the budget by $1 million per year and $5 million over the course of the projection period. And a three percent increase would increase the budget by $1.5 million annually and $7.5 million completely wiping out the fund balance increase.
This is critical because it illustrates that, while the city might be able to afford a small COLA (cost of living adjustment), that COLA would serve to wipe out most of the projected revenue and fund-balance increases. Based on these projections, the city cannot afford to go beyond a one-percent total compensation increase, two at the very most.
While there will be the temptation by city employees to ask for actual raises (one to two percent is well under the rate of inflation), the revenue projections clearly demonstrate that the city does not have the bandwidth to absorb even modest cost of living adjustments.
There will undoubtedly be those that argue that we need yet another round of cuts. Clearly, the city has cut deeply over the last seven years, but a lot of that was in attrition. We got leaner and meaner in terms of the number of total employees. The actual cuts to salary and benefits were minimal, which many of the cuts actually off-set by small salary increases.
However, there are two revenue increases the city needs to look at. The first is the parcel tax or utility tax to pay for infrastructure. We continue to believe it to be a mistake to attempt to add luxury items like pools or sports complexes to the critical needs of roads, bikepaths, sidewalks, city buildings, and existing park infrastructure.
Right now the city is spending $4 million annually from its general fund on roads. That number, the city manager acknowledges, will likely not be sufficient to improve the city’s pavement condition index (PCI). By passing a parcel tax or another revenue measure that the city can bond against, we not only gain a sufficient revenue stream to bond against, but we might be able to free up that $4 million chunk for other purposes.
Finally, in the long term, the current projections scream for economic development. The city’s very modest revenue projections even in good times are a huge warning that we need a broader base.
As the op-ed from last year noted, the half-cent sales tax was designed as a bridge. Right now, it is a bridge that will have to stand the test of time, because revenues are insufficient to do away with that bridge. “The City Council and the city are focused on generating new revenue from new sources. As a longer-term solution to the city’s current challenges, Davis is aggressively moving forward with economic development to generate additional revenue,” they wrote.
For those concerned that creating an innovation park is likely to increase compensation to employees, consider that at some point the sales tax, at least the second ½ cent sales tax increase, is likely to fall off the revenue. That’s somewhere around $4 million. The build-out time, over 20 years, means that the revenue will not come in a huge chunk.
The bottom line is that a 200-acre innovation park is most likely sufficient to allow at least one of the sales tax measures to expire, and to provide us with additional revenue. Some of that will likely go toward a COLA, but the revenue projections of the city right now suggest we will not have enough to give employees a real raise any time in the near future.
Again, the modest projections here may well be conservative in their revenue forecasts, but if we plan accordingly, the city will be all right in case the economy once again turns south.
—David M. Greenwald reporting
Regarding budgets, compensation and cuts. If memory serves Robb Davis has stated that he felt a thorough assessment of employee placement (org chart eval if you will) was in order since as you say many of the cuts were from attrition, necessarily from efficiency. Perhaps Robb could comment; has that been done? Does the CM’s organization provide that? I again remember Don Saylor’s description of the then org chart with supervisor’s supervising maybe one or two employees, layers of supervisors.
I am not in favor of wholesale cuts or indiscriminate cuts, but thought the assessment was a good idea not only for the city but also for some of us who continue to raise the ‘cut’ flag!
Thanks for remembering this SODA. It comes back to me know… the point about a need for redesigning the city organization chart to be flatter.
How about this? http://www.holacracy.org/how-it-works/
Actually, Frankly, some of that has been happening in Davis for ~ 35 years. Definitely not “across the board”, but in pockets, depending on the individuals in charge. In Davis, there were/area bunch of ‘working supervisors’, who perform the same work as those they supervise, but when a judgement call needs to be made, they make it. That has actually extended to some individuals in management, some even higher than mid-level management. Usually, it came about where people loved the work, were highly competent, but had to be ‘promoted’ in order to compensate them for their abilities and for their willingness and efforts to train/mentor others. [Lest they moved on, and be lost to the organization] This has been particularly true in some of the full “professional” classes.
Your cite is insightful, (pun intended) but the city’s org chart has never really reflected the dynamics of the workplace.
I think the examination is long overdue, but one should not assume it should be simplistic.
Thanks hpierce. Yes, there has been some “flattening” going on in the city org chart. I think there is still room for more.
I am not really too keen on holocracy… I see it as one of the new management fads that will eventually prove lacking and will cycle back to more traditional command and control hierarchies.
There is no denying that there is tremendous untapped productivity value in the empowered line-level employee. However, innate decision-making risk aversion is a big reason why many employees stay at the line-level and never advance to supervisory or management roles. In my experience, the best-practice method is the Hersey/Blanchard Situational Leadership model (http://en.wikipedia.org/wiki/Situational_leadership_theory ). That is one where supervision provides “just-in-time” leadership tailored to the situation… but with an overarching goal of increasing line worker confidence and competence toward ultimate empowered self-sufficiency. What this model allows for is a larger span of control. I have 16 direct reports and no supervisors. That has been typical for me in my management career since I learned about the Blanchard Situational Leadership model and adopted it. Some of my employees may complain that I do not give them enough management attention, but then they would also agree that I give them a lot of autonomy and authority to make the decision in their domain of responsibility.
I would approach the city org chart this way… training the supervisors to adopt this new leadership model so that they can perform well with a larger span of control. This then would allow the city to shed more supervisor/management positions… which happen to be the most expensive, and give the line workers more authority and autonomy to do their jobs… something that also tends to increase job satisfaction.
I think, Frankly, you hear but don’t listen (or, perhaps, listen selectively)… the org chart should reflect best operating principles, methods, procedures. The org chart should NOT be the DRIVER of those things. The analysis is critical. But the most stupid/deleterious thing of all would be to work on a “model” org chart, and fit everything else to that “model”.
hpierce, I agree with that 100%. The org chart needs to be re-engineered ultimately in consideration of what the customer needs and wants.
In his piece, David inquires as to the reason for the $2 million drop in revenues between 2015-16 and 2016-17 shown in the summary of the five-year projections contained in the budget proposal. It is mainly the result of the completion of some one-time projects budgeted as being completed in 2015-16 (such as the street light retrofit) that do not, as scheduled now, carry into the subsequent fiscal years. Expenditures drop for the same reason. None of this is really relevant one way or the other to David’ points about the city’s fiscal condition, but since he raised the question I thought I would try to address it.
Dan, I expect this explanation makes sense in a public finance context, but from my business finance perspective you are conflating expenses with revenues. How can a one time city expense for retrofitting street lights cause a reduction in revenue?
Second question, was the street light retrofit previously budgeted? And if not, what other future one-time expenses are also not budgeted?
Not sure, but in some cases, in the past, funds from a PG&E rebate were ‘front-ended’, which could explain that, but am truly unsure of what is going on here. But, we’ve seen those kind of things before.
Oh, and revenues/expense that occur real close to the end of the fiscal year, may appear in different fiscal years.
The projections include both the $2.9 million in revenue to fund the street light retrofit project in 2015-16 and the expenditure of those monies the same year. A small amount of money ($20,000) was budgeted to start the project in 2014-15.
The other items budgeted in 2015-16 but not in 2016-17 or later are mostly grant-supported items, such as $100,000 for local green house gas reduction studies (see page 10-17 of the Planning Division budget proposal online), and one-time purchases, such as for firefighting equipment, credit card readers, or downtown signage. Brief discussions of some of the one-time items are sprinkled through the budget proposal document.
Got it. So the funding for the street lights came from some state or federal source, and was not part of our normal revenue inflow. That makes sense now. Thanks!
Thanks Dan – saves me a call
*make that 2015-16 in the second sentence
“The bottom line is that a 200 acre innovation park is most likely sufficient to allow at least one of the sales tax measures to expire”
What a great articulation of the way the Boomer generation has classically chosen to do business. We do not want to tax ourselves ( aka “pay our own bills”), therefore we are going to use the resources ( in this case land and its potential for other uses) that belong not only to ourselves, but to future generations to pay for what we have used in the past and what we want today.
What a great articulation of the way the Boomer generation has classically chosen to do business. We don’t want to “tax” ourselves by accepting change that may or may not result in unknown impacts to our treasured lifestyle even though the change clearly and undeniably benefits the economic circumstances of others.
As a Gen Xer, and a council filled with Gen Xers and Millennials, I take exception to that comment.
Tia attacked “boomers”… why would a genx or millenial take exception, unless you are guilty of the same “crime”?
Because she was quoting my line…
A great topic for another article:
GenX vs Boomers: Entitlement Mentality at the expense of your children?
Miwok… agree, that would be an interesting topic, but know of a lot of GenX/Millenials who believe they are entitled to all the wealth accumulated by the boomers, and are wondering why they aren’t entitled to it NOW. It’s a mixed bag… good reason why it isn’t too helpful to define folk by labels.
I did not define the labels, hpierce. thank you for your comment though.
I see, from growing up on another planet, called Planet Midwest, of the culture of the generations. My millennial nieces and nephews are a bit entitled, because of some guilt their mother wants to give them. Many Boomers were given things because their parents knew how bad things could be, because of WWII.
Many Boomers respected that view and gave to their children, to get them ahead, and some took it all and spent it.
Thanks David for laying out the effect of any changes in salary. It is easy to see now that the Council is already spending at levels that will not fund the required road repairs, and as a result, will require the 1.5% sales tax to be extended indefinitely and any increase in wages will eat away at the reserve.
If the Council was fiscally responsible they would offer a contract that decreased compensation by 15-20%. This would bring expenses in line with ongoing revenues and enable the City to repair its roads and let the “temporary” sales taxes expire.
(Or if we just had UC Davis run our fire department maybe that would save the same amount)
Ok, Sam … look at the transparent california website. Scroll down thru who is compensated what. And you say ALL City employees should take a 15-25% “haircut” (scalping?). Could you afford to take a 15-20% “haircut” in a one to two year period?
I am certainly not in favor of cutting the base pay of any city employee. But there is a cake and eat it too conundrum in consideration for what SHOULD be done instead.
What should be done instead is immediately convert all defined benefit pensions to defined contribution retirement accounts, and then get rid of vesting and let people retire when they think they have enough saved… just like 95% of the rest of the working US. The funding of this cash-out roll-over will take a bond to cover the difference between what CalPers will value the cash-out, and what we would need to give the city employees to make up for the missing years of social security benefits (never mind that the city employees also never had to pay any social security payroll taxes during their careers). But that bond expense would tend to be significantly less that the total cost to the city as city employees are sure to work longer on their jobs matching 95% of the rest of the working US.
But since this cannot be done, the only other viable solution is to stop giving raising until the pay and benefits of city employee hits equilibrium with the general labor market.
If I was being paid above market rates for my job and my employer had a unsustainable budget like the City’s I would be sure to be able to afford a 15-20% decrease in my income. I would also make sure to have enough cash saved away for the possible period of unemployment when the City shows (as it has been) that it is still willing to increase spending instead of cutting it.
I didn’t say cut ALL salaries, I said decrease compensation. In fact my suggestion at the bottom would only decrease the salaries of 42 people although that alone might not be enough to solve the problem.
Sorry, guess I misunderstood… thought “all” was implied, as you used no qualifiers.
If “my suggestion at the bottom…” = “Or if we just had UC Davis run our fire department…” I understand more fully. Assume that means that effective as soon as possible, in your proposal, the highest compensated Davis FF has no higher compensation than the highest current UCD FF. Not my ox. Gore away.
Good for you… in the work force for 42+ years, can’t remember a time where I could have sustained a 15-20% loss in family income and covered mortgages, taxes, food, etc., for more than about 12 months. You’re awesome, particularly only being compensated at “market rates”.
I was looking at the total compensation paid to all workers. Cutting across the board is not the best idea. Looking at what departments you can still be filled with qualified employees at a lower cost and adjusting compensation is a better method.
Sam… now I’m listening to your message, and I agree in concept… beware “total comp” figures… sometimes there is “double counting”, but often not. Sometimes the figures include total salary, which includes vacation/sick leave, etc., and then the way the compensation surveys are written, vacation/sick leave ALSO gets reported as “other compensation”. I am no expert, but skepticism can be a good trait.
We need a surgeon’s scalpel, not a chain saw. Something about unintended consequences. There are lesions that should be excised, but the approach to employee compensation in Davis should be measured, not blanket.
“If the Council was fiscally responsible they would offer a contract that decreased compensation by 15-20%.”
how are they going to get employee buy-in for that magnitude of decrease when city revenues are increasing?
off topic, but can’t resist… the tape on the calculator show in the graphic is not “american”, using a comma instead of a period as a decimal point… significance?