The latest financial “snapshot in time”

Here’s a question the Merry-Go-Round suspects none of the candidates running for municipal office this November will be willing (or maybe even able) to answer:

When is the City of Alameda going to run out of money?

(Or, to put it more precisely, when is the balance in the General Fund going to go to zero?)

The short answer, based on an analysis by the City’s chief financial officer, is:  Sooner than you think.

When Council passed the latest budget in June 2013, City Finance Director Fred Marsh presented a five-year forecast showing that, in every one of the next five years, the City would be running an operating deficit – i.e., expenses would exceed revenues.  Each year, the City would need to draw down reserves from the General Fund to cover the shortfall, but there still would be $4 million left at the end of fiscal year 2017-18 (i.e., June 30, 2018).

Here’s Mr. Marsh’s chart:

This June, a year later, Mr. Marsh was back with a revised forecast.  The annual operating deficits are still there – but they now are expected to be larger than they were before.  This means the City will need to draw down more reserves from the General Fund every year to cover the shortfall.  And that means the reserve balance will run out sooner.

Here’s the updated chart:

As the chart shows, the City would begin fiscal year 2017-18 with a $8.9 million General Fund balance.  But expenses would exceed revenues by precisely that amount during the year, resulting in a zero balance as of June 30, 2018.  In other words, by that date the well would run dry!

Which raises two questions:

• What happened to make the picture gloomier?
• What do our elected leaders propose to do about it?

If you compare the two charts, you’ll get a pretty good idea of why the operating deficits are predicted to be higher now than they were projected to be a year ago:  The updated forecast shows slightly lower revenues, but significantly higher expenses, than the forecast presented in June 2013.

In his report to Council, and in response to our follow-up questions, Mr. Marsh addressed the reasons for the changes to the expense projections.

For the short run – i.e., the fiscal year beginning July 1, 2014 – he attributed $590,000 of the $1.3 million increase in forecast expenses to “revised employer contribution rates” for pensions and $307,000 to “updated personnel costs,” described as “revisions in salaries and benefits from approved Memorandums of Understanding (MOUs).”

The rest of the increase resulted from higher departmental spending.  Not surprisingly, the fire department leads the pack.

According to Mr. Marsh, the fire department’s expenses now are expected to be $115,000 more than the amount budgeted a year ago, due to “additional fuel costs” for the newly purchased fire truck and fire boat; “new costs” associated with the county-wide radio system contract, and “increased Alameda County dispatch costs.”  In addition, the net revenue generated by the fire department-run “basic life support” program – which had been pitched as an income-producing enterprise for the City – is expected to be $71,500 less than the previously budgeted amount.

For the following three years, Mr. Marsh broke down the components of the increase in forecast expenses this way:

As the table shows, increases in pension contributions and retiree health costs (the latter is the “OPEB” category in the table) – as well as in health insurance payments for current employees (“health” in the table) – account for a significant portion of the increase in forecast expenses.  Indeed, the cost of providing retirement benefits will consume a growing portion of the City’s General Fund revenue in the coming years.

When Council adopted the budget last June, Mr. Marsh estimated that the City would pay about $12.1 million out of the General Fund for pensions and OPEB in FY 2013-14.  This represented 16.22% of total General Fund expenses.

We asked Mr. Marsh to provide comparable figures for the following four years based on his updated forecast.  Here’s a table showing the information he gave us:

As the table shows, by FY 2017-18, the City will be spending $17.91 million – 20.52% of total General Fund expenses – on retirement benefits.  (By way of comparison, the General Fund budget for the recreation and parks department this fiscal year is about $2.4 million)

And, remember, this is just current spending, which is insufficient to fund the total cost of providing pensions or retiree health benefits in the future.  As a result, the “unfunded liabilities” – most recently estimated at $85.7 million for public safety employee pensions, $25.2 million for “miscellaneous” employee pensions, and $91.2 million for OPEB – continue to grow.

Now, if you were the CEO of a business enterprise (or even a governmental one), and your CFO presented you with a forecast similar to the one Mr. Marsh gave to Council, you might start to worry:  What can I do to fix the problem?  If I do nothing, will I still have a job?

If so, you wouldn’t be Mayor Marie Gilmore or, with the possible exception of Councilman Tony Daysog, any of her colleagues on the current Council.

It took Assistant City Manager Liz Warmerdam and Mr. Marsh more than an hour to present the “mid-cycle” update, which included the five-year forecast, to Council this June. When it came time for Council discussion, only Mr. Daysog wanted to talk about the forecast.  The ensuing discussion took all of 10 minutes, several of them taken up by remarks by City Manager John Russo.

In her own comments, Ms. Gilmore managed to display all of the qualities that distinguish her stewardship of the City’s finances.

She began with the obvious:  You can balance a budget by raising revenues or by cutting expenses, she said.  Okay.  But cutting expenses may require reducing services.  Okay again.

Then she pivoted, as she often does, to bestowing credit and assigning blame.  “Previous Councils always said, Manage the budget so it has very little impact on the public,” Ms. Gilmore proclaimed, “and we have been very, very good at that.”  But her administration couldn’t keep working its magic forever.  Why not?  Because the public won’t tell Council what it wants!

To quote the Mayor directly:

[W]e’ve had these conversations before in terms of trying to get feedback from residents as to what are your priorities, and what ends up happening when we have those conversations is everybody comes up here and says, Cut this and don’t cut that, because I like it.  At the end of the day there’s no clear direction from the public as to what the priorities are because everybody’s trying to protect their own little whatever it happens to be.  And I’m not saying that pejoratively, it’s just an observation.

That’s right, fellow Alamedans.  It’s all our fault.  Never mind that citizens – twice – have responded to staff-sponsored “budget challenge” surveys in which they made clear exactly “what the priorities are.”  You knew that those surveys would carry no weight at City Hall as soon as you saw (in the most recent survey) that 44% of respondents supported cutting the fire department budget by 5-to-10% and another 35% endorsed cutting it by 2.5%.  To the Mayor, these responses must have seemed like the rants of reactionary Republicans. Now she’s forgotten they ever existed.

This June Ms. Gilmore ended her lecture with a coda:

The other point I want to make about the slide is that probably since 2010 . . . we always had a slide like this and people kept saying we’re going to be running out of money and what people need to realize is that this is a snapshot in time and it assumes no corrective action being taken.  I just want to make that really clear to people who are watching this at home, and so it was 2010 or 2011 we were supposed to have been bankrupt.

Whereupon Councilwoman Lena Tam interjected: “Yup.  And we’re still here.”

Ms. Gilmore picked up the cue:  “We’re still here and we have a healthy fund balance because this Council has been very good, along with staff making great proposals and this Council listening to staff and taking corrective measures.”

So there you have it.

We don’t have a problem.  If we have a problem, it’s not our fault.  But, if we just calm down, it’ll all go away.

As those of us of a certain age listened to Ms. Gilmore, an old Beach Boys’ song began playing in the background.  But, having read the data and reviewed the analyses, we’re not so sure that everything will turn out alright.  Unless, that is, someone does something.  And that someone isn’t likely to be our once and future Mayor.

Sources:

Staff budget presentations: 2013-06-11 staff presentation re budget; 2013-06-11 Ex. 3 (responses to Council questions); 2014-06-03 presentation re mid-cycle update

“Budget challenge” surveys: 2012-05-29 budget challenge survey; 2013-05-28 budget challenge survey