Budget Checkup … City Hits List of 20 Most Financially Distressed U.S. Cities

By Craig Powell

After devoting my last two columns to Sacramento’s homeless crisis, I figure we’re due for a review of the city’s financial situation since Darrell Steinberg became mayor.

Among the more than 3,300 issue files that Eye on Sacramento (the civic watchdog group that I head) maintains on municipal issues is one that is often whimsical: our city rankings file. We track every time a study or publication ranks Sacramento against other cities on everything from its appeal to millennials to the quality of our coffeehouses. (There’s considerable crossover there.) But the latest ranking, published by JPMorgan Chase, is anything but whimsical. It’s disturbing.

Since JPMorgan Chase manages about $90 billion in municipal bonds, it’s pretty concerned about whether cities will be able to pay back their bond debt. So it created what one financial analyst calls a comprehensive guide of “which municipalities haven’t the slightest hope of surviving their multi-decade debt binge and lavish public pension awards”—i.e., Chicago, Pittsburgh, Atlanta, Cleveland.

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Billion-Dollar Budget … City spending to increase 25 percent over five years

By Craig Powell

First, there’s the headline number: The city is poised, for the first time in its history, to spend more than $1 billion in the fiscal year that begins on June 30. Total general-fund spending (which pays for police, fire, etc.) is set to hit $450 million next year, while “enterprise” spending (primarily, the utilities department) consumes $584.2 million.

The city expects to employ 4,552 people next year, a slight increase over the current year, but an increase of 720 positions from five years ago. The city expects to employ 130 fewer people than it did in 2008.

City officials are forecasting that the budget will sink into major deficit beginning in just two years, when a general-fund operating deficit of $11 million is expected to grow to $26 million by 2022. You would expect that a city manager, facing the prospect of such red ink, would propose a city budget for next year that calls for major cuts in spending to head off the coming fiscal ditch. But you would be wrong. Fiscal discipline is a very foreign, even suspect concept at City Hall these days. In fact, city manager Howard Chan’s recently released budget forecast anticipates sharp increases in general-fund spending on city operations over each of the next several years, rising from $412.9 million this year to $515.9 million in 2023, a 25 percent increase in operations spending over five years—a spending pace that’s more than twice the inflation anticipated during that period.

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RT on the Rocks … Fight over fare hikes splits transit board

By Craig Powell

 

To get a sense of how broke Regional Transit is, consider this analogy. Let’s say you’re part of a Sacramento family. You have a fairly well-off, middle-class lifestyle, but in the last couple of years you’ve really splurged, buying yourself a big, new Mercedes and a big, pricey cabin up at Lake Tahoe, all financed to the hilt. Meanwhile, the small business you run, RT Clothing, has never regained the boatload of customers you lost when you decided to jack up your prices by 20 percent in the middle of the last recession (oops), leaving you with a flat income for years. Fortunately, your wife, a retiree who collects both a military pension from the federal government and a healthy state government pension, has been collecting cost-of-living increases for years. She brings home close to 80 percent of the family income these days, bless her. Together, you have a family income of close to $150,000 per year.

The charming new home you bought 30 years ago in Light Rail Estates is showing serious signs of age and, let’s be honest, neglect. Your roof is shot, the paint’s badly peeling, you may need a new furnace and your backyard pool has algae stains and a rather unpleasant odor. Lately, some of the sketchier kids in your neighborhood have been jumping over the fence when you’re not home, swimming in your pool, hanging around for hours on end and leaving their trash everywhere. It’s gotten so bad that many of your longtime friends no longer accept invitations to your summer pool parties. You’ve spotted some of them going into Bob and Nancy Uber’s backyard down the street. The Ubers put in a nice, new pool last year and they let their friends drop in to swim whenever they want.

Things are going so-so until one day you decide to open up your bank and credit card statements for the first time in six months. You’re stunned (stunned!) to see all of the savings you thought you were socking away each month have somehow evaporated. Not only that, you owe a whopping $18,000 on your Visa bill. (How did that happen?) In a panic, you check the balance in your checking account and your heart sinks further. You have just $3,000 in cash and, at the rate your family burns money, it will be long gone in three months’ time.

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The Pot Tax … Helping kids at the expense of the general fund

By Craig Powell

Jay Schenirer means well, he really does. But programs launched with the best of intentions are no guarantee of sound policy or effectiveness, as Schenirer’s recent proposal confirms.

His basic idea is to dramatically increase city funding of programs for children and young adults by getting voters in June to approve a “new” 5 percent tax on marijuana cultivation, with the proceeds directed exclusively to youth services, bypassing the city’s general fund. Schenirer and his hardworking staff have spent the past year compiling research studies that show the benefits such programs can have on outcomes for kids.

Schenirer is certainly not new to youth issues: He’s spent most of his adult life working on them—in state service, on the city school board, as an education consultant and as the founder of youth-focused nonprofits since his 2010 election to the city council. (He’s raised more private funds for these nonprofits from corporations and foundations than any other councilmember with the exception of our city’s star private fundraiser, Mayor Kevin Johnson.) Schenirer is almost certainly the council’s foremost authority on youth issues, with Rick Jennings—the long-term CEO of the Center for Fathers and Families who served on the city school board alongside Schenirer—a close second.

Schenirer and his staff have prepared a thoughtful 22-page blueprint for how to create a new city department of youth services, an idea that city manager John Shirey threw cold water on by calling it a wasteful increase in city overhead. Shirey prefers to have the parks department, which administers the city’s current youth services programs, handle any expansion of such programs.

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Fire Alarm … Ambulance Reform Would Challenge Firefighters Union

By Craig Powell

In some sense, the city’s fire department is a 20th century relic operating in a 21st century world. And with its entrenched practices staunchly protected against change by what’s acknowledged to be the city’s most powerful union, Fire Fighters Local 522, the fire department has been essentially immune to efforts by city officials to drag it into modernity. Few have even tried to reform it; none has come anywhere close to succeeding.

To his credit, freshman Councilmember Jeff Harris has stepped up to the plate and is making cost-saving reform of the city’s ambulance service, operated by the fire department, a major priority. What’s more, he may very well succeed where most haven’t even bothered to try.

Why is the fire department so resistant to change? Fire chief Walt White is only the 21st chief in the department’s 165-year history. And he’s the first chief in city history to be appointed from outside of the ranks of the fire department. Organizational change is not exactly a prevailing value in the fire department. White didn’t have to travel far to take the job. Before joining the fire department last year, White spent his career with the Sacramento Metropolitan Fire District, a nearby district with a long history of paying firefighter salaries that are among the highest in California and a district board dominated by members elected with the financial support of Local 522.

Apart from history and tradition, the status quo in the fire department is vociferously defended by Local 522, whose political action committee typically brings in $150,000 annually and whose cash balance stood at $330,000 at the end of last year. It showers money on candidates for city council. When Angelique Ashby ran for the council in 2010, Local 522 not only gave her campaign $6,500; it spent another $26,826 in an independent expenditure campaign on her behalf. Such outsized political “investments” buy influence and power.

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Expansive Plans … The mayor’s budget message proposes wide-ranging ideas

Published on Wednesday, 01 April 2015

Expansive Plans

The mayor’s budget message proposes wide-ranging ideas

By Craig Powell

As I wrote last month, the mayor and city council have taken aggressive steps in the past few months to assert much greater front-end control over both the city budget and the city manager (hiring an independent budget analyst, forming a new council budget committee, public outreach on budget matters). But the process changes were just the beginning. On March 10, the mayor took the unprecedented step of releasing a “Mayor’s Message on Budget Priorities” that lays out what is likely the most expansive plan ever proposed for the role of city government in Sacramento. It proposes a cautious approach to city spending and debt management in the near future while proposing more than a dozen new and unprecedented programs and initiatives.

Notably, the mayor’s plan was not the product of deliberation and consensus by the council’s new budget and audit committee. Instead, it is the mayor’s own vision and was slated for initial council review late last month. If it ends up being approved by the council, it will represent marching orders to city manager John Shirey on how to draw up the city budget for the next fiscal year that begins July 1.

The central premise of Johnson’s plan is that the city must exercise spending caution in the short term as the city nears a fiscal cliff in 2019 (due to escalating pension contributions and expiration of the Measure U half-percent sales tax hike), but that the city must ultimately fix its fiscal problems by taking aggressive steps to grow the local economy, resulting in higher city tax revenues. His ideas for growing the local economic pie are bold: He proposes a slew of new investments, plans and programs that, if approved, would inject the city more assertively into local economic development than ever before.

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Police and Pension Reform … Burden of new contributions erased by pay hikes

Published on Friday, 01 August 2014

Police and Pension Reform

Burden of new contributions erased by pay hikes

By Craig Powell

After three long years of informal and formal bargaining, mediation, more formal bargaining and, finally, a binding determination by an arbitrator, the city has a new labor contract with the Sacramento Police Officers Association. City police will finally join all other major city bargaining unions and be required to contribute the full employee’s share into the California Public Employees’ Retirement System (9 percent of their salaries)—and then some. In addition, city cops will be required to pony up another 3 percent of their salary to pension contributions—replacing a portion of the city’s existing contribution to cop pensions—for a total contribution by cops of 12 percent of their salary. In contrast, members of the next highest contributing city union, the firefighters, contribute 9.2 percent of their salaries to pensions.

To ease the pain of such a major reduction in take-home pay, the arbitrator awarded the police salary hikes, starting next year, of 3 percent in each of the next 3 years, totaling 9.3 percent once fully implemented. (Sergeants will get 7 percent raises.) The new contract’s near-term impact on the city’s general fund budget: a savings of $1.25 million in the current fiscal year and $2.24 million in 2014-2015, shifting to a net cost of $300,000 in 2016-2017 and $1.59 million in 2017-2018.

The arbitrator’s decision caps off a three-year effort by city manager John Shirey to require all city employees to contribute 100 percent of the employee’s share of their pensions. Until Shirey’s initiative, most nonpublic-safety city employees paid between 3 and 4 percent of their salaries to their pensions, while police, firefighters and city managers paid zip toward pensions. Shirey kicked off his campaign to require full contributions by setting a good personal example: He insisted that his own employment agreement require him to make a full 7 percent pension contribution. (Of course, that’s a little easier when you are making $258,000 per year.) Next, he required all nonrepresented city employees, including all city managers, to pony up. Then, as each city union contract expired, he insisted that each contract require workers to make full contributions.

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Balanced in Name Only … Small budget surplus is no cause to break out the champagne

Published on Sunday, 01 June 2014

Balanced in Name Only

Small budget surplus is no cause to break out the champagne

By Craig Powell

There is only a tiny handful of policy wonks who actually look forward to the release each year of the city manager’s proposed city budget for the fiscal year that starts on July 1. I’m one of them. City budget manager Leyne Milstein drove that point home in my interview of her last month, joking that I was one of only three people who have actually read the document that only a wonk could endure, much less enjoy.

But endure it I did and, knowing that most of you don’t spend your nights curled up with the city budget, I’m offering you the CliffsNotes version of it this month.

The good news is that after five years of battling chronic budget deficits, city manager John Shirey is proposing a $383 million general-fund budget that actually ekes out a small $2 million budget surplus. (The total city budget, which includes fee-collecting “enterprise funds” like city utilities, the convention center and marina, is actually $872 million, but most attention is paid to the city’s general-fund budget, which funds basic city services such as police, fire, parks, etc.) That means no cuts next year in services or city employees.

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Uncertain Future … Before upgrading the community center theater, homework’s Needed

Published on Saturday, 03 May 2014 20:05

Uncertain Future

Before upgrading the community center theater, homework’s Needed

by Craig Powell

One thing my experience with city government in Sacramento has taught me is that city policy is too often driven by an often unhealthy deference to conventional wisdom. The great pitfall of herd mentality governance is that key assumptions go both unquestioned and unexamined. A proposal to renovate the Sacramento Community Center Theater at a cost of as much as $53 million is chockablock with unexamined questions.

For example, why is the city council poised to spend tens of millions of dollars renovating a civic asset like the theater when it has received no briefings on the asset’s current financial performance? Is the theater a moneymaker or a money loser? If it’s losing money, how bad are the losses? Since the council hasn’t been briefed on its performance, it hasn’t a clue.

Eye on Sacramento (the watchdog group that I head) issued a report in September on the combined financial performance of the three city assets that make up the “convention center fund” assets: the Convention Center, Memorial Auditorium and the theater. EOS reported that the three assets have been losing a whopping $12 million annually for years, but EOS did not break out the operating losses of the theater. City staff should.

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Elimination and Reform of Retiree Health Care Benefit

Russell Fehr, City of Sacramento treasurer, reported that the City is close to $2 billion in debt, comprised of almost equal parts bond debt ($823 million) and unfunded liabilities for employee benefits ($950 million), comprised of unfunded pensions and unfunded retiree health care costs.

The real worry concerns the city’s pension and retiree health care liabilities, which have been soaring with scant council attention or public notice over the past five years.  The city has $469 million in unfunded pension liabilities, up a whopping 290% since 2005.  Its unfunded liability for retiree health care costs now stands at $440 million, a liability that has grown by $60 million since 2008.

Retiree health care costs are the sleeper liability!  While the city council has paid nominal attention to its pension liabilities, it has paid no attention whatsoever to an even larger unfunded liability: its obligation to pay retiree health care benefits.  The typical Sacramento family’s share of this $440 million liability amounts to over $7,000.

The city is now paying out about $11 million each year (on a purely pay-as-you-go basis) to cover the current costs of its retiree health care benefits.  To put the size of this outlay in perspective, $11 million/year is enough to hire 100 new city police officers, restoring almost all of the police officer positions eliminated during the past few years.  It’s a very big deal.

But that’s only the beginning of this monster liability.  The true annual actuarial cost of this sleeper liability is $43 million per year ($32 million more than the $11 million paid out in current benefits), a sum substantially more than the $27 million per year the city expects to bring in from Measure U, the half-percent city sales tax hike approved by voters in November.  Not only is the benefit a huge cost burden to city taxpayers, it’s a benefit that almost non one working in the private sector enjoys.

One of the most compelling points raised by Russ Fehr in his presentation to the council on city liabilities was the issue of inter-generational equity.  Is it fair to saddle future generations with liabilities for compensating the city’s current employees?  I would amplify the city treasurer’s message: it’s bad public policy, it’s financially dangerous, and, frankly, it’s morally indefensible.

So, what can the city do to rein in its escalating employee benefit liabilities and avoid a fiscal meltdown in future years?  For retiree healthcare benefits it ought to follow Sacramento County’s example and phase out its retiree health care benefit as rapidly as possible, relying upon the Affordable Care Act (Obama care) to provide subsidized health coverage for low and middle income city retirees before they become Medicare-eligible.  Eliminating the benefit would likely improve the city’s bond rating; lower future interest costs, and make borrowing for future major projects easier.

If the retiree health benefit is not ended outright, it should be retooled to require employees to fund it entirely or partially themselves through payroll deductions paid into a benefit trust account.

The city should increase the number of years of city employment it takes for the retiree health care benefit to vest, and it should eliminate the benefit for new employees.

Finally, it should cut off the benefit once a city retiree becomes eligible for Medicare or is covered under a spouse’s health plan.  Under the current plan, a 52-year old retired firefighter, collecting a pension equal to 90% of his final salary after working 30 years, pockets a $750/month cash medical benefit in retirement, even if he’s covered under his wife’s health insurance plan or is covered by Medicare.