Making the sustainable transparent (or is it vice versa)?

Vice Mayor Frank Matarrese didn’t get much praise from his colleagues for his referral Wednesday night about “giving direction” to the City Manager before staff begins preparing the next two-year General Fund budget.

Indeed, Mayor Trish Spencer described the proposal as “redundant,” even though she (and the rest of Council) ended up voting for it after Assistant City Manager Liz Warmerdam massaged the language.

So let the Merry-Go-Round be the first to commend Mr. Matarrese.  In so doing, we’ll explain why the Vice Mayor’s idea is a good one and suggest how to take it a step further.

As drafted, Mr. Matarrese’s referral stated that three items “shall not be included” as revenues in the next General Fund budget: “one-time revenues”; “advances, loans or other transfers from funds outside the General Fund,” and “reserves.”  As re-written, staff is directed to “define and evaluate” those items.   Whatever that means, the exclusion is intended to preclude reliance on any but the usual, recurring sources of revenue (like property taxes) to fund the City’s operations.

To use the politicians’ lingo, the extent to which the budget is “sustainable” will be “transparent.”

That’s a good thing.  Mr. Matarrese’s proposal will force the new Council to confront whether the revenue customarily flowing into the General Fund will cover all of the City’s budgeted expenses, from the parks used by hundreds of Alamedans to an emergency operations center staffed by one fire captain.  If not, they’ll need to decide just how far they’re willing to dip into savings to pay for what the citizenry needs and what various interest groups demand.

You may recall that, during the last election campaign, ex-Mayor Marie Gilmore’s supporters claimed that her administration had presented “balanced budgets” for three consecutive fiscal years.  In the standard usage of the term “balanced budget,” this claim was demonstrably false, since in each of those three years budgeted expenses exceeded anticipated revenues.  In fact, the Fiscal Year 2012-13 budget presented to Council projected a $1,064,984 deficit.  Likewise, the FY 2013-14 and FY 2014-15 budgets projected deficits for those years of $645,000 and $1,793,000, respectively.

These figures were right there on page one of the budget summary for all to see.  So how could the Mayor’s supporters get away with claiming that she had put together “balanced” budgets?

The answer lies in a bit of – perfectly legal – sleight of hand.  For both FY 2011-12 and FY 2012-13, staff originally predicted a decrease in the General Fund balance.  As it happened, that balance actually increased in both years, in part (but only a small part) because the City ended up with an operating profit ($321,774 in FY 2011-12 and $474,246 in FY 2012-13).  So the idea was hatched to “carry over” the difference between the actual increase and the projected loss to cover deficits in future years.

If you play this game, you can make deficits appear to disappear.  Take a look at the following chart from the May 28, 2013 Council meeting:

If you look at the top two lines, you’ll see that expenses are projected to exceed revenues in both FY 2013-14 and FY 2014-15.   And yet, according to the chart, there’s no deficit in either year.

The magic, of course, lies in the “budget carryover” from the prior year, which just happens (as it did in the FY 2012-13 budget) to make up the difference between revenues and expenses.  But a “carryover” isn’t an independent source of revenue; it’s just money added to, and then taken out of, the General Fund.  So using the “carryover” really just means drawing down reserves.  (If you don’t believe us, look at the annual “ending available reserve balance” lines in the chart).

There’s nothing wrong with using last year’s surplus to cover this year’s shortfall, any more than there’s something wrong with a householder using the savings she accumulated during the good years to pay her bills in a year in which her earnings don’t do the job.  But the householder shouldn’t kid herself that, by using savings to meet expenses, she’s “balanced” her budget.  And she should let her family know that the time may come when they’ll find the cookie jar empty.

Mr. Matarrese’s proposal will make sure that the new Council knows full well when a draw from reserves is needed to cover deficits.  It can then decide whether to follow the same course as its predecessor – or to declare that it’s time to start tightening our belts.

This issue pertains even to the budget for the current fiscal year.  At the second to last meeting of the former Council, staff reported that the City had taken in more than it spent in FY 2013-14, thanks primarily to what staff identified as “one time sources of revenue”– unanticipated redevelopment pass-through payments and transfer taxes on the sale of two large apartment complexes – and salary savings – largely from not filling vacancies in the police department.  The subsequently issued CAFR showed that the City had made an operating profit of $7,840,687 last year.

So what did the former Council decide to do with the money?  Voted to spend it (or most of it) this year:  a total of $5.8 million for “work force changes, including increased staffing and negotiated wage increases”; “emergency training and supplies”; transfers to the equipment and vehicle replacement and other “internal service” funds; previously unfunded capital improvement projects, and “materials, equipment, and training” at the library.

Presumably, when the “amended” FY 2014-15 budget is published, it will show a $5.8 million increase in the gap between revenues and expenses this year – with a “carryover” from FY 2013-14 used to “bridge the gap.”  Under Mr. Matarrese’s proposal, the new Council should understand what really went on:  Having experienced a fortuitous increase in the General Fund balance, the former Council turned around and sent most of it out the door again.  It’s not too late for the new Council to decide that’s not the way they want to manage the City’s business.

There is another aspect of Mr. Matarrese’s proposal that should improve future decision-making.  In addition to taxes paid by people who live, work, and shop in Alameda, General Fund “revenue” includes “advances, loans or other transfers from funds outside the General Fund.”  And these items aren’t insignificant.

For example, did you know that, in every year since FY 2007-8 (as far back as we could find data), the City has been receiving, and counting as General Fund revenue, a flat annual payment of $2.8 million from Alameda Municipal Power?  Or that, in addition, every year the City gets a “Payment in Lieu of Taxes” from AMP of around $1.3 million, and, in each of the last two fiscal years, it took an “advance” from AMP ($1 million for FY 12-13, $1.2 million for FY 13-14) toward future PILOT?

None of these payments from AMP is included as a separate revenue item in the General Fund budget or in the Comprehensive Annual Financial Report.  (To find a reference to the $2.8 million annual payment you’ll need to look at paragraph K of footnote 1 in any recent CAFR; for PILOT and the advances, go to page 5 of the June 26, 2012 letter transmitting the FY 2012-13 budget to Council).  Instead, as we learned from former City Finance Director Fred Marsh back in April 2013, the payments from AMP are accounted for as “franchise tax” revenue.

These payments from AMP account for almost as much of total General Fund revenues as sales taxes do, and they’ve played a key role in covering the annual shortfall between operating revenues and expenses.  But there’s no guarantee they’ll continue forever.

Every year, the Public Utilities Board votes to authorize AMP to make the $2.8 million payment, even though the City Charter requires such a payment only if AMP has “excess earnings” – which it does not.  This transfer is a gift – or, if you’d prefer, a subsidy – by AMP to the City, pure and simple.  But there may come a time at which AMP no longer can afford to be so generous.  By the same token, if the additional $1 million and $1.2 million payments truly are “advances,” eventually they’re going to have to be repaid.  And when they are, the money’s going to come from the General Fund.

Under Mr. Matarrese’s proposal, information about advances and transfers such as those from AMP will be highlighted, not buried in footnotes or transmittal letters or discoverable only by asking Mr. Marsh (who has gone to Fairfield anyway).  The new Council thus will know the extent to which the City is depending on other entities to fund its operations.  And it may decide that self-sufficiency is a more prudent course.

We think that Mr. Matarrese’s proposal is a step in the right direction.  But there is even more basic information we’d like to see plainly presented:  How much is the City paying to provide basic services?  And where does the money come from?

Surely we jest, you might be thinking:  Isn’t that the very information already contained in the annual budget?  To which we’d respond:  Yes, if you know where to look for it.

Take, for example, recreation and parks.  The General Fund budget contains an expense item for “recreation,” but it includes only part of the City’s rec/park costs; for the rest, you’ll need to go to the budget summary for a separate fund aptly named the “Recreation Fund” (Fund 280, if you must know).  There, you’ll see that the expenses incurred by Fund 280 are paid in part from “program revenues”; for the rest, you’ll need to turn back to the General Fund budget and look for the “Recreation Fund” item under “transfers to other funds.”

Clear enough?  But remember, these are just budget numbers, not actual results.  If you want the latter, you need to pick up the CAFR and turn to . . . ah, hell, you get the point:  It would be a lot simpler if staff told Council and the public, in so many words, how much the City spent, and is proposing to spend, on recreation and parks, and where the money’s coming from, rather than expect us to hunt through the financial statements to find the information.

We’re sure that the way staff is keeping the books complies with generally accepted accounting principles.  But this is more than a bookkeeping issue.  If it ever becomes necessary for the new Council to consider cutting back on basic City services, it might be a good idea for them to know – at a glance – the total costs in each major category.  Likewise, if the alternative to reducing services is raising user fees, it might be useful to know, without assistance from a CPA, the extent to which the City already is relying on those fees to cover those costs.

Which brings us, inevitably, to fire and police.  Except for a handful of grants, the public safety departments’ expenses are paid out of General Fund revenues.  By far the majority of those expenses go for “personnel” (86% for fire and 84% for police in the FY 2013-14 budget).  But the “personnel” expense item in the fire and police budgets encompasses both wages/salaries and benefits, and the budgets do not separate the two.  Likewise, the CAFRs show the total amounts paid by the City for pensions and for retiree health benefits, but they do not differentiate between public safety and other “miscellaneous” employees.

During Mr. Marsh’s tenure as Finance Director, he was willing, at our request and with the City Manager’s permission, to provide specific numbers for wages and salaries, pension contributions, and OPEB payments for the fire and police departments.  But it would be preferable for this information to be made available to Council and the public as a routine matter.  Again, if the new Council should determine it’s necessary to reduce the public safety budgets, it seems like a good idea to know which components cost how much.

No, with all due respect, Madam Mayor, we don’t think that Mr. Matarrese’s referral was “redundant” at all.  Sure, the information already exists, and staff will dig it up if asked. But there’s something to be said for presenting it in a readily accessible format.  How about a one-page “cheat sheet” like the one below to accompany the staff report?

Unfortunately, there still will be some who, like climate-change deniers, will refuse to admit – for reasons of self-interest – that the ice is melting.  (Asked by Alameda magazine about the financial forecasts prepared by Mr. Marsh and vetted by Ms. Warmerdam, IAFF Local 689 president Jeff Del Bono replied, “Fiscally, that’s a bunch of B.S.  That’s what I call it.”)  But if the new Council truly is intent on managing the City’s finances based on facts, not fantasy, Mr. Matarrese’s proposal (and maybe our cheat sheet) would be a good way to start.

Sources:

FY 2012-13 General Fund budget & transmittal letter: FY 2012-3 Financial Summary; 2012-06-26 transmittal letter

May 28, 2013 budget presentation: 052813 PPT presentation re FY 2013-15 budget

FY 2013-14 & FY 2014-15 General Fund budget & transmittal letter: 2013-06-11 FY 2013-4 & FY 2014-15 budget summary; 2013-06-11 transmittal letter

FY 2014-15 budget “amendment”: 2014-12-02 staff report re amending 2014-15 budget

CAFRs: FY 2011-12 (2012 CAFR ); FY 2012-13 (2013 CAFR); FY 2013-14 (2014 CAFR (Part 1); 2014 CAFR (Part 2))