Spend away!

Three weeks ago, the Merry-Go-Round reported on City Finance Director Elena Adair’s forecast that, if all of the additional spending proposed for the next two fiscal years were to take place, the “available balance” in the General Fund would drop to next to nothing – specifically, $159,047 – by June 30, 2022.  To put it colloquially, the well was expected to run dry in five years.

But that forecast was made before Council held its May 17 “budget workshop,” where it “gave direction” so that staff could finalize the budget for Fiscal Years 2017-18 and 2018-19.  Now the workshop has been held and direction has been given.  And staff has finalized the budget, which will be presented to Council for approval Tuesday.

The bottom line?  In the proposed final budget, the “available balance” on June 30, 2022, is forecast to be . . . wait for it . . . $685,208.  So the well may not be quite dry, but there won’t be much left to drink.

Today, we’ll look at where the money is going and why.  We’ll also use the preliminary results of the online “budget challenge” conducted by City staff to compare Council’s priorities with the public’s.  (Thanks to Public Information Officer Sarah Henry for giving us an advance look at the numbers.)

Let’s start by defining the size of the pot.

At the beginning of FY 2015-16, the “available balance” – i.e., the amount of money Council was free to spend – in the General Fund was $30.2 million.  During FY 2015-16 and FY 2016-17, the City racked up “profits” – i.e., revenues exceeded expenses – totaling $9.9 million, and thus, at the beginning of the current budget cycle, Council will have $40.1 million under its control.  (For the sake of simplicity, we’ve not broken down this amount into the various categories used for accounting purposes.)

If Council approves the proposed final budget, the City will spend a total of $16.8 million during the next two fiscal years on four items:

• A contribution of funds to the previously approved pension/OPEB trust ($11.1 million);
• Upgrades to the City’s information technology systems ($3.2 million);
• Purchase of equipment for the fire department ($1.5 million); and
• Repair of City-owned buildings ($1 million).

(The proposed final budget contains a handful of other “special” items, but these are the Big Four.)

After these sums are spent, the “available balance” in the General Fund will fall to approximately $23.3 million as of June 30, 2019.  (The staff-prepared budget summary comes to the more precise figure of $23,444,208.)  This is more than the so-called “20% policy” requires – but it won’t last for long.  During the following three fiscal years, the City will need to draw down the General Fund balance to cover operating losses totaling $22.7 million ($5.1 million in FY 2019‑20, $7.1 million in FY 2020-21, and $10.5 million in FY 2021‑22).  At the end of the three-year period, only $600,000 will be left in the General Fund.

Small wonder that, in its presentation to Council on May 17, staff pledged to “Focus the Next Two Years on Reducing Expenses and Evaluate Future Revenue Streams.”

Now let’s look at each of the Big Four items.

By far the largest of them is the $11.1 million contribution to the pension/OPEB trust.  For years, the City Finance Department (Ms. Adair and her predecessor, Fred Marsh), City Treasurer Kevin Kennedy, and City Auditor Kevin Kearney have been warning Council about the potential for financial disaster resulting from the City’s commitment to pay generous retirement benefits to its employees, especially firefighters and police officers.  But this year, those experts – with the assistance of an outside consultant – may have managed at last to scare the bejesus out of the elected officials (even those who care more about where the City keeps its money – emphatically not the Wells Fargo Bank – than about whether it has any money to keep).

Ms. Adair led off the effort in March when she presented staff’s recommendation to set up a “Pension Rate Stabilization Plan Trust.”  The most recent analysis showed that the City’s unfunded pension liability was $203.8 million, of which $143.7 million was attributable to the plan for public-safety workers.  Its unfunded liability for retiree health benefits (aka “OPEB”), primarily for firefighters and cops, was $113 million.  (“Unfunded” means that sufficient assets haven’t been set aside to cover the costs.)

But the most dramatic part of Ms. Adair’s presentation was the graph she displayed showing that the City’s annual required contribution to CalPERS for pensions would grow from $15.8 million in the current fiscal year to $35.6 million in FY 2022-23.  We included it in our May 14 column, but it bears re-publishing:

At the budget workshop, Ms. Adair turned the podium over to a consultant from NHA Advisors, who offered more bad news.  Poor investment returns in FY 2015-16 and a recently announced decrease in the discount rate would add $75 million to the City’s unfunded pension liability over the next two years, the consultant said.  In addition, he had projected annual pension costs beyond the period in Ms. Adair’s forecast and concluded that the City’s payment to CalPERS would hit $40 million in 2030.

Then came Mr. Kennedy and Mr. Kearney, who, for once, did not have to confront a hostile audience of uniformed firefighters.  (Like Alameda residents, firefighters’ union members tend to skip budget workshops.)  Mr. Kennedy provided the sound bite of the evening:  “Hope is not a business plan.”  And Mr. Kearney came up with the most telling observation:  the $23.2 million in public-safety pension costs projected for FY 2022-23 was more than the $22.9 million budgeted next year for all non-public-safety departments combined.

Having heard from the financial experts, no one on Council resisted staff’s recommendation to deposit General Fund money into the pension/OPEB trust.  Likewise, fewer than 100 of the respondents to the budget challenge opposed spending “surplus” funds to reduce unfunded liabilities.  (At first glance, it may seem curious that the majority of respondents picked the smallest amount of the four possible choices for that purpose, but they weren’t there for the March or May presentations.)  The final budget proposes moving $6.043 million of previously “committed” funds and $5.1 million of the “available balance” into the trust.

Of course, this will make only a small dent in the $300+ million of unfunded liabilities.   But at least it’s something, and, if the money is placed in a PRSP trust, it can’t be spent for anything else.  We’d be concerned if the trust instrument, once it is finalized, allowed unlimited use of trust funds to pay current pension costs (in addition to investing them to pay future pensions).  Fortunately, the draft funding policy restricts annual withdrawals from the trust to 10 percent of the required pension or OPEB contribution.

More respondents to the budget challenge endorsed spending “surplus” funds on the second Big Four item – upgrading IT systems – than on any other item in the “general government” category.  Although the survey gave the proposed amount as $1.5 million, the request by staff to Council was for $3.2 million.  For such a big-ticket item, the proposal generated surprisingly little discussion at the budget workshop.

The presentation by IT director Carolyn Hogg hit all the right notes.  Why was she asking for $1.5 million to set up a fully automated “Enterprise Resource Planning System”?  So that City employees no longer would have to fill out time cards by hand and human resources staffers wouldn’t have to type personnel data on index cards.  Why was she asking for another $1.5 million for, among other things, “smart infrastructure” and a dedicated network?  So that Recreation and Parks Department staff would be able to turn lights and sprinklers at parks and fields on and off from a central location, and City administrators could get access to their office computers from home.  And why $200,000 for wi-fi equipment?  So that the library could take credit cards at its annual book fair.  (We don’t mean to suggest that Ms. Hogg didn’t identify other uses for the funds, but these examples were the attention-grabbers.)

Mayor Trish Spencer was the only one on the dais to balk at the multi-million-dollar price tag; the final budget includes the full amount requested by Ms. Hogg.

The Mayor also was the sole skeptic about the third Big Four item:  buying a new $922,000 fire engine and a new $386,000 ambulance, and spending $179,000 on new emergency radios, for the fire department.  Ms. Spencer’s criticism of taking fire engines on grocery runs earned her only ridicule.  (This amounted, Councilwoman Marilyn Ezzy Ashcraft sniffed, to “falling into the trap of symbolism.”)  But the Mayor also raised the issue of the actual mileage on the two vehicles being replaced, which turned out to be 56,200 miles for the fire engine and 31,800 miles for the ambulance.  According to City Manager Jill Keimach, the City’s “vehicle replacement policy” uses age, not just mileage, as a criterion.  The fire engine and ambulance were ten and four years old, respectively, which apparently constitutes obsolescence under the policy.

The respondents in the budget challenge had ranked the requests for new fire equipment in inverse order to their cost, with the fire engine getting the fewest votes.  Nevertheless, with three Council members beholden to the firefighters’ union, there really wasn’t any doubt that all three would make the final cut.

Finally, we come to the one Big Four item for which the proposed amount was reduced between the budget workshop and the final budget:  repairing buildings and sidewalks.

The public usually places a high priority on sidewalk repairs, and the preliminary budget challenge results showed far more respondents in favor of spending “surplus” funds for that purpose than on more enlightened projects such as completing the Main Street bikeway or creating bike and pedestrian lanes on Otis Drive.  Likewise, Alamedans love their historic buildings, and, in addition to restoring the historic Carnegie Library and Veteran’s Memorial Building (if funds could be found), they also supported making “urgent” repairs to other City-owned structures.  It thus didn’t seem like an overreach when Public Works director Liam Garland asked for $1 million in each of the next two fiscal years to replace the roofs at various buildings including the O’Club at Alameda Point, and for $500,000 in each year to fix up an additional one mile of sidewalks per year.

The questions from Council to Mr. Garland at the budget workshop didn’t focus on any of the proposed repairs; rather, Vice Mayor Malia Vella and Councilman Jim Oddie sought assurances that no union jobs would be lost when streetlight maintenance functions were transferred from Alameda Municipal Power to the City.  Nevertheless, the proposed final budget slashes the requested amount for both building and sidewalk repairs in half and pays for the latter from sources outside the General Fund.  The staff report contains no explanation for these decisions.

The General Fund budget for which Council approval is being sought Tuesday covers only the next two fiscal years, so there will be no need for the elected officials to discuss how the $23.3 million “available balance” on June 30, 2019, will disappear in the following three years.  Indeed, it’s in their political interest to leave the topic untouched.  After all, by the time the crisis hits home, some of them may have moved on to higher office.

Nevertheless, the admonition by Mr. Kennedy at the budget workshop still rings in our ears:

Clearly, the City is not a for-profit business.  But I would say, absolutely, we have to run the City like a business.  In that regard, the people trust you, and us, as elected officials to make sure that we deliver a good product, that we deliver it at a good price to them, and that we are very conscious about the fiscal stability of the City.

He continued:

With the one-time money we have now, it’s pretty clear the prudent thing is to set aside as much as possible to prepare us for what we know is coming, to make sure that we make decisions between now and then that don’t exacerbate the problem, that we’re very cautious about any spending, otherwise . . . we’re looking at pretty material cuts every year, which are disruptive to our work force, disruptive to our people, and to some degree can be mitigated.

Ever the diplomat, Mr. Kennedy went on to say that he believed that those on Council were “very in tune with” this attitude.  We can only hope he’s right.  If not, we note that there will be two Council seats up for grabs next November.

Sources:

Budget workshop: 2017-05-17 staff report – budget workshop; 2017-05-17 Presentation; 2017-05-17 Ex. 3 to staff report – General Fund Draft 5-Year Forecast with Additional Funding Requests

Proposed final budget: 2017-06-06 staff report; 2017-06-06 Presentation; 2017-06-06 Ex. 2 to staff report – Budget Summary General Fund and All Other Funds

Budget challenge: Preliminary budget challenge results