Now that the budget process is over, the Merry-Go-Round has good news and bad news.
The good news is that Council passed a “balanced” budget for Fiscal Year 2015-16 – i.e., one in which revenues (including “one-time” revenues) cover, and, indeed, exceed expenses.
The bad news is . . . well, just about everything else.
According to the five-year forecast prepared by staff, the red ink will start flowing as soon as the next fiscal year ends: the City will run operating deficits of $1.2 million in FY 2016-17, $3.0 million in FY 2017-18, $4.2 million in FY 2018-19, and $5.3 million in FY 2019-20 – a total of $13.7 million.
What’s even more troubling than the projected results is what Council chose to do – or not do – about them.
In the two months since April 16, when staff presented its original forecast predicting operating deficits, Council took a series of actions that will make the situation worse. It voted – twice – to take on additional public safety expenses. (In fact, all of the projected increase in operating expenses over the next five years is attributable to increases in police and fire costs). It then spurned staff’s suggestions for reducing departmental spending, even in the short run.
Then, after it had approved the two-year budget, Council turned to what it should do next. But the discussion wasn’t about how to eliminate or reduce the projected four consecutive years of increasing operating deficits. Instead, in an empty gesture, Council voted to revise the official “reserve policy.” It then directed staff to prepare a list of ways in which it could spend the “excess” (or “surplus”) in the General Fund.
All we can say to Alameda taxpayers is this: Just be glad these guys aren’t managing your retirement account. If they were, you wouldn’t be able to afford even one of the bargain apartments we’re told Joe Ernst is building at Alameda Point.
We’ll start with the run-up to the final meeting.
On April 29, two weeks after staff presented its original five-year forecast projecting operating deficits from FY 2016-17 through FY 2019-20, Council approved six-year contracts with the public safety unions that will cost a minimum of $6.25 million in increased salary and benefits through FY 2019-20.
Two weeks after that, on May 6, Council rejected all but one of staff’s suggestions for departmental spending cuts that would have saved a total of $1.2 million over the next two years (and reduced the “base” level of expenses for future budgets).
Two weeks after that, on May 19, Council approved construction contracts for a new Emergency Operations Center and fire station no. 3 that will add about $350,000 annually to General Fund expenses for the next 20 years to pay off a $3 million loan from the state Infrastructure Bank. (This is in addition to the $132,480 in additional annual debt service for the EOC/fire station project that the former Council already tacked on when it refinanced outstanding bonds).
After all of these actions, staff painstakingly revised its five-year forecast. This was the chart the Council members had in front of them Tuesday night:
What was Council’s response to the forecast? No one – except Mayor Trish Spencer – voiced any anxiety. Instead, two of the elected officials went so far as to challenge the numbers and the message they conveyed.
One was Vice Mayor Frank Matarrese. Although staff already had admitted that its revenue assumptions were conservative, that wasn’t good enough for Mr. Mattarese.
“I see all the buildings that are coming out of the ground right now that are going to add to the property tax rolls, where they’re not now, and they’re going to add to the transfer tax,” the Vice Mayor told his colleagues and the public. “So we’re going to see a big, big bump, and our projections are much more conservative than what I think is actually going to happen based on the number of housing units that are actually being built, right now.”
His conclusion? “I think we have a margin of error that we can work with there.”
For his part, Councilman Jim Oddie sought to undermine staff’s expense projections. But when he tried to get Finance Director Elena Adair to go along, she wouldn’t play ball.
According to Mr. Oddie, the “main root of our annual operating result deficits” was the increases in employer contribution rates resulting from CalPERS’ adoption of a new “smoothing” policy. Since the change in the smoothing policy affects employer contribution rates only through FY 2019-20, he suggested, the City’s expenses – and deficits – would go down thereafter.
Well, no and no.
As it happened, Ms. Adair told Mr. Oddie, she had just attended a conference at which the CalPERS chief actuary spoke. The employer contribution rates won’t decline after FY 2019-20. At best, they will stay the same.
Ms. Adair also politely pointed out that the premise underlying Mr. Oddie’s argument was false. The increase in the City’s annual contribution to CalPERS was only “one component” of the increases in projected operating expenses, she explained. “It’s quite a combination of items to look at and not just one thing. I don’t think it’s prudent to focus on one.”
Not surprisingly, the numbers back her up. Between FY 2016‑17 and FY 2019‑20 – i.e., the years for which operating deficits are predicted — public safety expenses are projected to rise by $8.1 million. During the same period, the City’s contribution to CalPERS for public safety pensions will go up by $3.1 million. The CalPERS increase thus accounts for all of 38% of the total public safety expense increase.
There can be no question that the future operating deficits are tied directly to increases in public safety expenses: Between FY 2015‑16 and FY 2019‑20, total expenses for the entire General Fund are projected to rise by $11.2 million; during the same period, public safety expenses are predicted to go up by $11.4 million. But, despite what Mr. Oddie would have the public believe, the responsibility for the increases in public safety costs lies not with CalPERS but with Council, which guaranteed minimum annual raises for the cops and firefighters in five out of the next six years regardless of how well or poorly the City performs financially.
(Mr. Oddie made clear during his peroration that he was just doing what he was elected to do: sticking up for his firefighters’ union friends. “I want to point out,” he said, “nobody’s making out, or getting huge sources of money; this is something the state is forcing us to do and we really don’t have much of a choice in it, so when we talk about the growth in public safety let’s keep that in mind.” This was classic Russo-Gilmore administration rhetoric: Don’t blame the unions for the City’s expenses going up; it’s somebody else’s fault – and Council has no control over it. The rhetoric just doesn’t happen to be true).
Given the comments by Messrs. Matarrese and Oddie, it was hardly surprising that, after passing the budget, Council spent no time addressing how to eliminate or reduce the projected operating deficits. Instead, the politicians devoted the rest of Tuesday’s meeting to discussing what do with what Mr. Matarrese called the “inflated” current level of “reserves” in the General Fund.
Although Mr. Matarrese and his colleagues skipped over the “Annual Operating Results” line in the forecast, they riveted their attention on the next line, the “Ending [General] Fund Balance.” Staff’s chart showed that, at the end of the current fiscal year, this balance was expected to be $29.6 million. The Vice Mayor proposed that any of the $29.6 million in excess of the amount required as “reserves” should be spent on projects not already included in the operating budget.
The problem is, the City doesn’t really have “reserves,” at least in the usual sense of a “rainy day” account in which a fixed amount of money is restricted for use in covering future operating deficits. Instead, the City has a “reserve policy” providing that, in any given year, the “available” balance in the General Fund should not fall below a stated percentage of total operating expenses. Until Tuesday, this percentage was 20%; Council voted to raise it to 25%.
Under this policy, what our elected officials call the “reserves” is neither fixed nor restricted. Since the “minimum” General Fund balance is determined by a stated percentage of annual operating expenses, it will vary from year to year. And since the funds constituting the “minimum” remain “available,” they may be budgeted – or spent – for any purpose, even if the result is to drive the balance below the targeted minimum.
As a result of this structure, it makes little sense to talk about spending the “excess” over the “reserves” in the General Fund. If annual costs rise, the “minimum” balance specified by the policy – aka the “reserves” – will rise. At the same time, unless the City is able to replenish the General Fund by generating operating profits, the difference between the total balance and the “minimum” balance – aka the “excess” – will fall. The “reserves” and the “excess” are moving targets – and they move in opposite directions.
So let’s assume Council ends up deciding to bring the General Fund balance down to the “reserve” level this year by spending all of the “excess” funds. Next year, even if the City collects enough revenue to pay all of its increased operating costs, not only will there be no “excess” in the General Fund but the balance will no longer comply with the policy. And so on for every year thereafter.
To illustrate the point, consider this example: Suppose this year operating expenses are expected to be $80 million and the total General Fund balance is $30 million. Under the “reserve” policy as interpreted by Council, $20 million is treated as “reserves” and $10 million as “excess.” Now suppose Council votes to spend all of the excess, lowering the General Fund balance to $20 million. This balance still satisfies the policy. But now suppose that operating expenses are projected to rise 5% next year to $84 million. This would require $21 million in reserves. But, as a result of Council having spent the excess this year, there’s only $20 million left in the General Fund. The policy no longer is complied with.
If Council had desired to create a true “reserve,” it could have specified an amount of money that could be used only for covering operating deficits – i.e., a true “rainy day” account. As Interim City Manager Liz Warmerdam pointed out, the former Council did something similar when it restricted $3 million of the FY 2014-15 General Fund balance for “long-term obligations.” But no one on the dais Tuesday expressed any interest in putting teeth into the “reserve policy.”
Instead, Council merely made a symbolic change in the policy, raising the stated percentage from 20% to 25%. This decision has no practical impact on how the money in the General Fund will be managed. The “reserves” – i.e., the minimum balance – computed using the higher percentage still will vary from year to year. And Council still will retain discretion to use all of the unrestricted funds in the General Fund – including the “reserves” – for any purpose it chooses.
Of course, the Council members had plenty of ideas about how the “excess,” whatever it is and whatever amount it turns out to be, could be spent.
Vice Mayor Matarrese, who had started the whole discussion, took the lead. He initially proposed spending the money on “capital projects that have been deferred” – like parks, streets, sidewalks, and sewers – or to “fund other capital assets” – like salt water pumps. Later, he added “unfunded liabilities” to the list. Still later, in an apparent effort to garner votes, he broadened the description to encompass all “non-operational” items.
For her part, Mayor Spencer wanted to spend the money on the items “in the parking lot” – the term Ms. Warmerdam used to refer to projects that Council members had mentioned during prior budget meetings. (We can just imagine Ms. Spencer’s detractors who tuned in late to the meeting berating her for proposing to spend City money on a parking lot!) These included projects that didn’t fall neatly into one of Mr. Matarrese’s original categories.
To Councilman Tony Daysog, this seemed assbackwards. If you’ve got things you want to spend money on that aren’t already included in the budget, make a list, and then decide whether you should raid the General Fund balance to pay for them. After Councilman Oddie and Councilwoman Marilyn Ezzy Ashcraft expressed their own reservations about Mr. Matarrese’s proposal, the politicians threw up their hands and left it to staff to recommend how the “excess” funds should be spent.
This may have been the most favorable outcome we could expect from this crew. But there’s still the danger that Council will assume that, by raising the stated percentage in the “reserve policy,” it has protected the City against future operating deficits and now it can start siphoning money out of the General Fund without any potential adverse consequences. It hasn’t, and it can’t. Please, Ms. Warmerdam and Ms. Adair, make sure the elected officials understand that.
Of course, there is another option. Don’t argue with the five-year forecast. Accept it. And then do something to bring operating expenses into line with operating revenues.
We can always hope.
Staff report on budget: 2015-06-02 staff report
FY 2015-16 & FY 2016-17 budget summary: 2015-06-02 Ex. 2 to staff report – City of Alameda Budget Summary, General Fund and All Other Funds
Staff presentation on public safety contracts: 2015-04-29 Presentation – REVISED