Not enough to go around

So do you want the good news or the bad news first?

That’s what we thought.

The good news is that, thanks primarily to the sale of three apartment buildings, the General Fund will receive about $4.7 million more in tax revenue this year than it did last year.  Thereafter, revenue coming into the General Fund is projected to go up by about $1 million annually every year through Fiscal Year 2021-22.

The bad news is that these projected revenue increases will not be enough to cover the City’s higher payment obligations to CalPERS and to pay for the raises guaranteed to public-safety employees during the same period.

Not even close.

These are the conclusions that emerged from the “mid-cycle budget update” given to Council on March 20 by Susan Mayer, a retired finance director for Stockton and Vallejo who is working with the City while Finance Director Elena Adair is on maternity leave.  Ms. Mayer didn’t state these conclusions in so blunt a fashion.  But the data she presented compels them.

Not only are Ms. Mayer, and the rest of City staff led temporarily by Acting City Manager Liz Warmerdam, well aware of the issue, they’re hard at work trying to come up with remedies.  And our City Council?

Based on their comments at the March 20 meeting, it would appear that only Mayor Trish Spencer (and perhaps Councilman Frank Matarrese) either understands or cares that the fiscal outlook is so worrisome.  Indeed, Councilwoman Marilyn Ezzy Ashcraft, one member of the Triumvirate now running the show at City Hall – Council members Malia Vella and Jim Oddie are the others – saw the forecast as an invitation to solicit politically appealing ideas for spending money the City won’t have.  Staff should come back to Council, Ms. Ashcraft suggested, with a proposal to use the “one-time” revenue received this year to “address the rent crisis and homelessness issues.”

If Ms. Ashcraft defeats Ms. Spencer in the upcoming mayoral election, and Mr. Matarrese retires from Council, we can only despair about whom Alamedans can count on to mind the store.  Dennis Popalardo?

Herewith our analysis of the update:

First, revenues.

For FY 2017-18, General Fund revenues are projected to be $99,026,000, a $4.7 million increase over FY 2016-17.  Ms. Mayer pointed out, however, that this total includes about $4 million in property transfer tax revenue from the sale of the three apartment buildings, and she cautioned against relying on non-recurring sources like this to pay the City’s future bills.  “As you plan your operations going forward,” Ms. Mayer told Council, “it’s very difficult to plan levels of service and to negotiate labor contracts based on a very volatile source.”

The table below shows the projections for the four fiscal years beginning on July 1, 2018:

N.B. The increase for FY 2018-19 is the increase over “baseline” FY 2017-18 revenue – i.e., the total projected revenue of $99,026,000 minus the $3.9 million in “one-time” property transfer tax revenue.

These projections show General Fund revenue increases of about $1 million per year in each of the next four fiscal years.  This additional revenue can be used to cover increased expenses.  But will it be enough to cover the additional amounts the City already is contractually obligated to pay for pensions and labor during that period?  Not according to the staff forecast.

We’ll start with pension costs.

During her presentation to Council, Ms. Mayer displayed a chart showing the annual payments the City will be required to make to CalPERS from FY 2018-19 through FY 2024-25.  The table below summarizes the payments and the annual increases for the next four fiscal years:

Fortunately, City staff knew that these increases were on the way, and last November they convinced Council to adopt a “policy” intended to reduce the amount of the required annual payment to CalPERS.  Under that policy, beginning this fiscal year the City will use “excess” money in the General Fund to “buy down” its unfunded pension liabilities.  (Additional funds will go into a separate City-run pension trust.)  The City sent $6.3 million directly to CalPERS for this purpose in December 2017, and, at staff’s request, Council authorized an additional $4.4 payment on March 20.

According to Ms. Mayer and the staff report, the “buy-down” will reduce the required annual payment to CalPERS by “$1 million+” per year.  The presentation did not specify the exact amount of the reduction for each year, and it appears the annual savings will grow over time.  But even assuming the buy-down has an immediate $1 million per year impact, the City still will be facing significant pension cost increases in the next four fiscal years:

Comparing this table to the revenue table reveals the bad news:  the increased General Fund revenue will fall short of covering the pension cost increases in two of the next four fiscal years, and it will barely cover them in the other two.

But we can’t stop there.  There is another item for which the City will need additional revenue to pay for increased costs in the next four fiscal years:  employee salaries and benefits.

As a parting gift to Alamedans when he left for Riverside, former City Manager John Russo recommended, and Council approved, new contracts between the City and the public-safety unions covering the period through December 18, 2021.  Those contracts guaranteed annual raises in every year from 2015 through 2021 except for 2019.  Similarly, in February 2016, Council approved new contracts with its “miscellaneous” employees covering the period through December 27, 2018.  These contracts likewise guaranteed annual raises in 2016, 2017, and 2018.

Pursuant to the public-safety union contracts, firefighters and cops got salary increases of 4.1 percent in 2015, 4.36 percent in 2016, 3.97 percent in 2017, and 2.94 percent in 2018.  No raises are due in 2019.  Thereafter, the public-safety employees are guaranteed a minimum 3.0 percent raise in 2020 and a minimum 2.0 percent raise in 2021 – regardless of the growth (if any) in General Fund revenue in those years.  (The 2020 raise will be even higher if the total tax revenue in five categories increases by 6.0 percent in FY 2018-19, but, according to the latest projections, it isn’t expected to.)

Moreover, as City Treasurer Kevin Kennedy repeatedly has reminded the public, every dollar of additional salary carries with it an additional required payment to CalPERS, so the actual cost to the City is not limited to the amount of the salary increase alone.  To approximate the cost of the raises, we began by multiplying the annual payroll projections from the July 2017 CalPERS actuarial report by the applicable salary increases in the MOUs.  To take account of the additional required payment to CalPERS, we then multiplied the product by the net employer contribution rate.  The result is that the raises for public-safety employees will cost the City about $1.1 million in FY 2018-19, $1.3 million in FY 2020-21, and $900,000 in FY 2021-22.

If anything, this estimate understates the amount of the increased labor costs, since the safety payroll in the CalPERS actuarial report does not include the three new positions created last year to revive the “fire prevention bureau” under the direction of Alameda firefighters’ union president Jeff DelBono.

The increased General Fund revenue would just about cover the labor cost increases for firefighters and cops – if that was the only purpose for which it was to be used.  But remember:  we’re already relying on the additional revenue to take care of the pension cost increases.  The only solution – if you can call it that – would be for the Council majority to vote to stiff CalPERS so that the City has enough funds to be able to hand out the raises.  The public-safety unions that finance local campaigns might be happy with that decision, but we don’t think the folks in Sacramento would let the City get away with it.

(In case you’re wondering, we haven’t forgotten the miscellaneous employees, who got a 3.0 percent raise in 2016, 2017, and 2018, in addition to an extra “stipend” – i.e., a one-time bonus – in 2016 and 2017.  Their contracts expire at the end of this year, and we hesitate to speculate about whether the new contracts again will provide for guaranteed annual raises.  If they do, the gap between labor cost increases and additional revenue will get even wider.)

As we noted at the outset, Ms. Mayer didn’t harp on the dire message her numbers portend.  Indeed, she went out of her way to praise our elected officials for their wisdom in adopting the pension buy-down policy.  We don’t blame her:  Donald Trump isn’t the only politician who craves flattery.  But the message needs not only to be heard but to be heeded.  We’re confident staff will do its job.  Here’s hoping that this November the voters will elect a mayor and Council members who will do the same.

The Merry-Go-Round offers special thanks to City Human Resources Director Nancy Bronstein, who responded, promptly and thoroughly, to our multiple requests for salary and pension data to supplement the staff report.

Sources:

March 20, 2017 staff report & presentation: 2018-03-20 staff report re amending 17-18 budget; 2018-03-20 Ex. 5 to staff report – Revenue Projections; 2018-03-20 Presentation – REVISED

Pensions: 2016 CalPERS annual valuation report (safety plan); 2016 CalPERS annual valuation report (miscellaneous); 2017-11-07 staff report re use of reserves

Labor contracts: 2015-04-29 Ex. 3 to staff report – MOU between the City of Alameda and the IAFF; ACEA MOU (2016)

Annual raises: BRI Calculation for 2014 and 2015; BRI calculation for 2016; BRI calculation for 2017 (CAFR)