In short, if significant action is not taken, the city will burn through all of its reserves, including eventually reserves for natural disasters and other emergencies. By 2015, San Leandro could join the City of Vallejo in declaring bankruptcy.
Summary of Finance Committee Presentation
Perry Carter, the Interim Finance Director, gave an update on the budget. In analyzing a budget, you need to examine at least three years of data - the previous, current and next fiscal years. Carter first reported on the "preliminary actual" numbers for the fiscal year which just ended on June 30, 2009.
Illustrating how quickly the city finances collapsed last year, the original city budget for fiscal year 2008-09 assumed $76.2 million (hereafter simply "M") in revenues and $81.6 M in expenditures. The city began fiscal year 2008-09 with $19.2 M in reserves. Thus, it planned to use $5 M of its reserves to cover the deficit.
In April 2009, the city revised its budget - lowering revenues to $70.1 M and expenditures to $79.0 M.
As it turned out, based on the "preliminary actual" numbers, the city took in $71.0 M in revenue last fiscal year, and spent $77.6 M, a deficit of $6.5 M. The city loss for 2008-09 was less than what was projected in April 2009, but still higher than the deficit projected in the budget adopted in June 2008.
The city received an unexpected loan repayment of $1.5 M from Alameda County Industries in June 2009. This was a one time payment.
The ending balance for fiscal year 2008-09 is $15.1 M, of which $5 M has been locked away in a fund for natural disasters and other emergencies. That leaves a net ending fund balance of $10.1 M, which is $3.8 M higher than what Carter projected this amount would be in April 2009.
That is the good news. As I noted in June 2009,
The budget planned for next fiscal year 2009-10 is seriously flawed. It continues to draw on reserves and relies on unrealistic projections that tax receipts will increase. In the midst of the worse recession post World War II, the city is planning on a 4% gain in sales taxes and 3% growth in property taxes.
My criticism of the overly optimistic revenue increases in the city budget quickly proved accurate. The city is now projecting a 3% decrease in the sales tax revenue and a 2.5% decrease in the property tax revenue for the current fiscal year. Revenues are projected to come in at $74.0 M and expenditures will be $78.1 M, resulting in a $4.1 M deficit.
Carter provided a multi-year budget projection through 2014-15. The projections showed the city running a $4 M to $6 M deficit each year, with a $5.9 M deficit in 2014-15. The projected revenues in 2014-15 are $80.9 M and the expenditures are $86.9 M.
From July 1, 2009 to June 30, 2015, the cumulative total deficit is $35.6 M. Taking into account the city's ending fund balance of $10.1 M on June 30, 2009, the net deficit over the six years is $21.5 M.
The city council has taken limited steps to correct the imbalance, including the "golden handshake" to city employees to encourage their retirement. In July, staff reported that 14-16 eligible employees have accepted the "golden handshake." There will need to be more employees to retire for the program to have a significant impact on the budget. Plus, there are long term costs to providing retirement incentives to employees today.
The two primary sources of revenue for the city are the sales and property taxes. The multi-year budget projections assume the economy will turnaround in 2010-11 and start to grow strongly thereafter. From July 1, 2010 through June 30, 2015, the city is projecting the sales tax will grow by 18.5% and the property tax by 8%. If this strong rebound does not occur, the city structural deficit will expand.
The projections also assume salaries and employee benefits will grow from $39.8 M in 2009-10 to $45.7 M in 2014-15. The overall increase is $5.9 M or 14.8%.
The $5.9 M increase reflects a further escalation in the costs of employee benefits, including for health care and the pension plan (CalPERS). The projections also assume, starting in fiscal year 2013-14 and continuing in 2014-15, that employees will receive 3% annual increases in salaries. This fiscal year the police officers received a 4% raise (on top of a 4% pay raise last year). All other city employees received no salary increase in 2008-09.
In fiscal year 2011-12, due to the heavy losses by CalPERS in the stock market last year, the city's contributions to CalPERS will increase. By fiscal year 2014-15 the bill from CalPERS is projected to reach $11.2 M, or close to 15% of the general fund. The multi-year budget projections assume the city will continue to pay both the city's required contribution and the employees' contribution to CalPERS.
How is the city going to avoid financial disaster?
There was talk of mandatory furloughs for all employees. However, City Manager Steve Hollister did not present any plan. Any effort to address the budget crisis through furloughs, pay reductions, or changes to benefits appears to be moving forward, if at all, in slow motion.
There was considerable discussion of new tax measures. The city commissioned a poll of residents to gauge their support of a 1/4 cent sales tax hike or a landscape and lighting improvement district for the city. Hollister stated based on a preliminary review of the polling data that both options were "achievable." He added he plans on presenting the poll results at a city council meeting at the end of the month.
Comments on the Budget Presentation
1) Regardless of actions by the state and even if the economy turns around within two years and grows strongly thereafter, the city's budget will be in red by millions of dollars. The city council has adopted a series of budgets which have set the city on the path to bankruptcy unless significant corrective action is promptly taken.
2) I'm glad that the city is now using realistic sales and property tax revenue projections for this fiscal year. However, the reversal in revenue projections for this fiscal year makes me question the likelihood of strong revenue growth planned in the coming years.
3) Why is the city planning on a 6% pay increase (over two years) to all employees in the last two fiscal years of the multi-year budget projections when the city will still be in the red? That is like planning to buy a car on credit when you are already at the maximum on your credit cards and can not afford to make the minimum monthly payments. These pay increases expand the annual deficit from $4.6 M in fiscal year to 2012-13 to nearly $6 M in each of fiscal years 2013-14 and 2014-15.
Obviously the cost of living will not decrease over the next six years. Without a pay increase employees will suffer a real loss in income. Yet that then begs the question of why the city is not now imposing furlough days, opening up contracts and seeking give backs or reducing positions.
4) The mayor and city council's solution for the budget crisis appears to be new taxes. They are placing the solvency of the city in success at the ballot box. Their track record is decidedly mixed. City-sponsored parcel taxes to pay for emergency services failed in 2004 and 2008.
I appreciate that important services come at a price. I voted for the three city tax measures last November. But I will not support any new city taxes next year. I want value for my tax dollars and first a demonstration of fiscal discipline at city hall.
Despite the recession, the number of city employees earning over $100,000 annually keeps increasing. The city is spending $13 million more on the police department than in 2000, and we passed a tax measure last November for emergency services. Yet, we have less police officers protecting San Leandro today than nine years ago. We are down to only 88 police officers for a city of 85,000.
The solutions are not complicated. The city council should take a pay cut. Free health club memberships and other perks for managers need to be eliminated. To resolve the budget deficit, all city employees will have to make sacrifices. That will not occur if those at the top fail to lead by example.
Next, the city council needs to start asking questions it has ignored. For example, this year the city is paying over $10 million to CalPERS, the employee pension plan. Of that amount, $2.8 M is for contributions owed by employees. The city payments to CalPERS will escalate in the coming years.
I appreciate that offering pensions to employees helps attract and retain quality workers. Our city employees provide vital services and deserve good pensions. But in this economy and with $36.5 M in deficit spending over the next six years, it is time for city employees to start contributing to the cost of their pensions. If they do, they would still get a great deal. The city would be picking up over 70% of the bill from CalPERS. However, ending the city's payment of the employee contribution would have a tremendous positive impact on the city deficit, cutting it by more than 50%.
Finally, the mayor and city council must recognize that their primary duty is to the best interests of all San Leandrans and the community should be brought actively into the budget decision making process. Civic engagement is a two-way street. The city council should conduct community forums on the budget where the public can ask questions, offer input and receive answers from city staff.
That is what good government is all about - providing the means and opportunity for the public to have a say in critical decisions affecting the community.