Another Sobering Budget Picture for City of Davis

You would think at some point things would turn the corner for the city of Davis in terms of its budget picture, but the cold reality once again rained home on the council.  Much of this is occurring after the city has made a series of tough choices – reining in spending, overhauling pensions and retiree health, cutting staffing, and restructuring existing staffing to give the city more bang for its buck and flexibility.

At the same time – like the water project or hate it – there is no doubt that the impact of the decision to go forward with the surface water project is, at least in the short term, going to make things more difficult.  First, there are serious general fund costs to budget and, second, the accompanying rate hikes will make it more difficult for the city to gain additional revenue.

The fact that fire and DCEA have refused to come to terms on their new contracts continues to burden the city’s coffers.  The numbers seem to keep fluctuating, and the city now projects another four months before a resolution occurs, at the cost of about $456,124.  Project that cost over a year’s time – which we have had occur in the last year – and you get more than $1.2 million, a sizable blow with a budget finally creeping over the $40 million mark.

The city ends this year with a negative cash flow of $1.62 million, but the real problems start next year when the city’s deficit balloons to $3.77 million.  From 2012-13 to 2017-18, revenues grow from $41.55 million out to $45.19 million.  The problem is that costs increases from $41.7 million this year out to $50.14 million by 2017-18.

By the end of this five-year period, the yearly deficit is expected to hit $5 million, with the overall deficit over the entire period at $15 million.

“We have an uphill battle in the future if we want to balance our budget and address our unmet needs,” City Manager Steve Pinkerton told the council on Tuesday.  “It’s frankly not incredibly difficult to balance the budget if you’re putting off costs into the future.”

In fact, this is how the community would balance the budget from 2008 up until the last year.

However, the chickens are coming home to roost on this and, as Mr. Pinkerton said, “As we all know the future is now.”

If the city thought it had gotten its pension costs under better control, there are more blows coming.  Changes to the PERS (Public Employees’ Retirement System) methodology will result in a 54 percent increase for safety pensions over the next six years, and 59 percent increase for the rest of employees.

For this year, despite the holdouts by fire and DCEA, the city is actually decreasing its PERS costs by $260,000 down to $6.5 million, $4 million of which is a general fund expense.

So, even though the rates are going up, the city is saving money because the employees are now all paying their full employee share.  That is the good news.

“The sobering news is the fact that PERS [has] reduced their rate of return,” Mr. Pinkerton said, noting that their actuarial believes, in addition to the quarter percent reduction, there will be an additional quarter percent reduction.  “They’re likely finally going to acknowledge that people live longer and that certainly impacts the PERS liability as well.”

Based on these projections, they are anticipating that rates will go, in the miscellaneous category, from just under 23% of payroll up to over 31% of payroll in the next five years.

“You’re going to start to see an 8 to 10 percent increase on an annual basis,” he said.  Previously, when PERS said everything would be okay after the recessions, the projected rate was about 23 percent.

“Compared to other cities this isn’t bad, but on a percentage basis you’re looking at far more than the three percent we were projecting for revenues,” he said.  In total it will be a 60% increase from this year to 2018-19 on miscellaneous employees; it’s slightly less of an increase, 54%, for public safety.

For public safety it goes from 29% of payroll up to 39% by 2018-19.

What these numbers mean is that, combined with the costs for OPEB (Other Post-Employment Benefits – retiree medical), more than half of the payroll will be going to pensions and retiree health care by the end of this period.

On retiree medical, they are projecting a 4% increase from year to year.  It goes from $3.79 million this year to $4.43 million in 2017-18.

“Though PERS did give us an unpleasant surprise this year, where it’s probably going to exceed… it looks like double-digit rates on CalPERS next year,” he said.

The good news, he said – if you can call it that – is that much of the revenue increases are due not to labor costs but to funding our unmet needs – although the blow from the state on PERS and to a lesser extent OPEB is rather substantial.

The city is assuming about $3.8 million a year toward roads out of the general fund, with another $1 million from grants or other funds.  Mr. Pinkerton noted while that is a big portion of the negative figures, we would still be in the red without addressing roads.

By 2016-17, the city is looking at about a $2 million impact from increased water rates.

In summary, most expenses will continue to grow at double or more the rate of revenue growth.  The city can no longer defer unfunded liabilities without severe consequences in the future.

Worse yet is that the current five-year projection does not assume full funding for future infrastructure costs.

At the current rate, the city will likely deplete its fund balance by the end of Fiscal Year 2014-15 and by the end of the period it will have about a negative $15 million fund balance.

The city notes that every function in the city will undergo an internal review, similar to what the fire department underwent in the past year.

“I think what we did in fire this year is a good example of what we will have to do in a lot of the departments where we look at service levels, we address where the service levels [are] compared to community expectations, compared to other communities, and then what’s the most cost effective way to address those service levels,” the city manager said.

The goal is “to have baseline cost and corresponding levels of service for all city functions in time for next year’s budget sessions.”

In order to keep our service levels up while keeping costs down, “We have to make some changes over this calendar year,” Mr. Pinkerton said.

There also has to be a discussion at to whether the city increases fees and taxes to offset this, as well.

“For a city of this size, with the amenities that we have, I don’t think we have as much a spending problem here as we do a revenue challenge in the future,” he said.  “It’s going to be a tough budget cycle coming up.  This year we don’t think is the year we ask you to make tradeoffs.”

—David M. Greenwald reporting

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