Memo to the City Manager (Part I)

Years ago, there was a sports writer named Jimmy Cannon who penned a syndicated column called, “Nobody asked me, but . . .”

Today, the Merry-Go-Round begins a series of posts about the major challenges we think new City Manager Eric Levitt and his staff will face in the coming years.

To paraphrase Mr. Cannon, Nobody asked us, but . . .

As we see it, the most difficult tasks for the new City administration will be to:

  • Balance the General Fund budget;
  • Guide development at Alameda Point, and
  • Grapple with local housing needs.

We’ll devote a column to each of these areas.  Our goal is not to offer advice but to provide context.  It will be up to Mr. Levitt, of course, to set his own priorities.  But once he does, we’ll be interested in seeing how he approaches his job:  Will he be the sort of city manager who waits for the elected officials to suggest solutions and then tries to implement them?  Or will he be the sort of city manager who originates ideas himself and then pushes the politicians to go along?

Either way, given the composition of our current Council, Mr. Levitt will have his work cut out for him.

Let’s start with the budget.

According to the mid-cycle budget update presented to Council in June 2018, the General Fund was projected to incur an $8,000 operating loss – i.e., expenditures will exceed revenues by that amount – in fiscal year 2018-19, which ends on June 30.  A month ago, staff revised the projected shortfall downward; it’s now $174,235.

And thereafter the situation will only get worse.

Here are the numbers from the mid-cycle budget update:2018-06-19 GF 5-year forecast {data)

Or, if you prefer your bad news graphically:2018-06-19 GF 5-year forecast {graph)

When an operating deficit arises, the City is forced to draw down the balance in the General Fund to pay its bills.  (Former City Manager John Russo euphemistically described this practice as “carrying over” a surplus from prior years into the current year.)  As the chart shows, the City will need to start tapping the General Fund balance to cover the operating deficit in FY 2020-21 (a projected drawdown of $2,394,067).  The next fiscal year, the drawdown will be even greater:  $5,434,250.

What can Mr. Levitt and his staff do – and ask Council to do – about this problem?  The potential solutions are plentiful; the political will to put them into effect is problematic.

There are two ways to eliminate an operating deficit:  increase revenues and reduce expenses.  For a municipality, the primary source of revenue is taxes.  But much of the tax revenue flowing into the General Fund, like property taxes and property-transfer taxes, depends on factors beyond the City’s control.  As the standard mutual-fund prospectus puts it, past performance is no guarantee of future results.

For example, the City has benefited in recent years from greater-than-projected property transfer tax revenue as the result of a few large real-estate transactions:  in FY 2017-18, the sales of three apartment complexes  – Summer House, Vue Alameda, and Panomar – generated property-tax revenue that enabled the City to beat its targets in that category by $4 million; in FY 2018-19, two deals  – the sales of the South Shore Beach Club and the Alameda Center office complex – produced property tax revenue that led to a $2.1 million increase over the forecast.

But it is unreasonable to expect that such windfalls will recur annually.  Staff rightly refers to them as “one-time events” and does not include them in its projections of future operating results.  Indeed, it routinely warns that “this portion of the budget is particularly susceptible to recession or other fluctuations in real estate activity.”

There are a handful of taxes over which the City does have a measure of control:  sales taxes, utility users’ taxes, transfer occupancy taxes, franchise fees, and business license fees.  But City management and Council already have taken actions intended to increase the tax revenue produced by the first two, obtaining voter approval in November 2018 to raise the sales tax rate by ½ % and in November 2016 to expand the reach of the UUT.

Theoretically, the other three taxes also could be earmarked for increases, but they may not yield much additional revenue.  For example, in September 2015, Councilman Tony Daysog proposed raising the TOT rate by 1%.  But by his calculation, this increase would generate only $161,230 – not even enough to pay the cost of hiring one new firefighter.  So not much help there.

In addition to taxes, the City also gets revenue from fees charged for specific municipal services.  For FY 2018-19, “program revenues” for the General Fund are projected to amount to $6,744,500, but this figure does not include the entire universe of user fees, which may be accounted for in separate funds (but can be, and often are, transferred to the General Fund).

Recently, City management engaged a consulting firm to perform “cost-recovery” studies of activities conducted by the fire department; the planning, building, and transportation department; and the public-works department, and to recommend changes to the City’s fee schedule that would produce additional revenue.  The plan bore fruit:  fee revenue for “fire prevention services” will go up by a total of $1,876,194 over a four-year period, and fee revenue for “permit services” will rise by $921,065 annually.

As we recently pointed out, other City departments – like recreation and parks and the library – also provide services for which user fees could be instituted or increased.  By our ballpark estimate, adopting a “100% cost recovery” policy would produce an additional $1,905,000 in fee revenue from rec-park programs and $2,234,000 in fee revenue from library services.

The risk of such strategy is that there may come a point when Alameda residents balk at paying fees for services they once received for free.  And they might express their displeasure at the polls with any Council member who voted to impose such a burden.  For that reason, City management is likely to shy away from asking Council for yet another round of user-fee increases, helpful as it might be in reducing the operating deficit.

One final point about revenues:  The City – and the fire department in particular – receives grants that are used to pay the salary and benefits of municipal employees.  These grants are accounted for in separate funds, but they cover expenses that otherwise would be paid from the General Fund.  The terms of the grants can change, and eventually they expire.  In such a case, either the jobs will be eliminated – wanna bet that ever happens? – or the City will need to start picking up the tab out of the General Fund.

For example, so-called SAFER grants issued by the federal Department of Homeland Security paid 100% of the salary and benefits of six Alameda firefighters from 2010 through 2018 (two grants were for $1.76 million; the third was for $2.2 million).  But when the last grant expired, the federal government adopted a local matching policy.  As a result, the fourth grant required the City to spend $1,166,671 in General Fund money in order to keep the six firefighters on the duty roster.

Naturally, Council approved the additional expense.  The latest SAFER grant will end in February 2022.  If it is not renewed, the entire cost of the six firefighters – $3,043,494 over a three-year period – will need to come from the General Fund.

Similarly, a “Community Paramedicine Pilot Program” grant issued by the County of Alameda in 2015 enabled the fire department to create new positions for a division chief and two firefighters and to “back-fill” staff by hiring three new firefighters.  The grant was extended twice, but then the County, like DHS for the SAFER grant, adopted a local matching policy.

As a result, the fire department requested in June 2018 that Council appropriate $60,000 to keep the “community paramedicine” program going through November 2018.  Council agreed.  Then, two months ago, Fire Chief Edmond Rodriguez was back to ask for $195,604 from the General Fund in order to extend the program – and continue to pay for the division chief and one firefighter – for another 15 months.  (Chief Rodriguez stated that Alameda Health Systems would reimburse the City for half its share, but as Mayor Marilyn Ezzy Ashcraft later discovered to her regret, AHS turned down the request.)

Naturally, Council approved this request, too.  The community paramedicine program now is scheduled to end in February 2020.  When it does, the entire cost of the division chief and firefighter – estimated in the staff report to be $300,000 – will need to come from the General Fund.

Now for the expense side.

As the chart and graph at the beginning show, the June 2018 mid-cycle budget update projected that General Fund expenditures will rise by close to $10 million from FY 2018-19 to FY 2021-22.

If you listened to Councilman Jim Oddie, you’d believe this result is due almost entirely to increases in the annual pension contributions the City is required to make to CalPERS.  That is indeed part of the explanation – but by no means all of it.

Since 2014, CalPERS has both changed the actuarial assumptions and lowered the investment rate used to compute the annual pension contribution it requires from cities.  As a result, City staff reported, “Annual payments [by the City to CalPERS] are increasing $1-2 million per year and are expected to double in the next five years.”  And the potential consequences are dire: “Without mitigation,” staff warned, “pension/OPEB payment obligations are at risk of ‘crowding out’ the allocation of General Tax dollars to current services and programs.”

In an effort to avoid this outcome, staff convinced Council to “set aside” part of the General Fund balance beginning in FY 2015-16 as a “pension/OPEB reserve.”  Then, in November 2017 it got Council to adopt a policy whereby a defined portion of the “surplus” in the General Fund would be used each year to pay down the City’s unfunded pension liabilities and thereby reduce the amount of the required annual pension contribution.  Three-quarters of the designated amount would be sent directly to CalPERS for this purpose; the rest would go into a pension trust administered by the City.

During FY 2017-18, the City made two payments totaling $10.7 million to CalPERS.  According to staff, these payments cut the amount of the City’s required annual pension contribution for FY 2018-19 by $1.06 million.  Last month, staff recommended, and Council approved, using another $7.9 million from the General Fund “surplus” to pay down unfunded pension liabilities, which, it said, would result in $500,000 in “budget savings” in FY 2019-20.  Council agreed.

Staff is projecting that $3.5 million will be available for the pension-pay-down program at the end of FY 2018-19.  But, if the operating deficits begin, as projected, in FY 2019-20, any “surplus” remaining in the General Fund may be needed to cover the City’s operating costs.  If so, there will be nothing left to send to CalPERS as an extra payment or to put into the pension trust, and the cost-cutting measures staff got Council to adopt won’t be able to continue.

At least the prior Council, led by Mayor Trish Spencer, can be given credit for heeding staff’s recommendation to do something to reduce the City’s future pension expenses.  At the same time, however, those Council members – and their successors – failed to take any action to constrain the City’s future labor costs, which represent the bulk of General Fund expenditures.  If they truly wanted to rein in those expenses, there are two ways to do it:  freeze (if not cut) salaries and freeze (if not cut) staffing.  In fact, our elected officials have done the opposite.

The MOUs with public-safety employees approved by Council in April 2015 guaranteed minimum raises of 2% annually for 2015 through 2018, 3% in 2020, and 2% in 2021. They also contain a formula that can lead, and has led, to even greater annual raises for the firefighters and cops:  4.1% in 2015, 4.36% in 2016, 3.97% in 2017, and 2.94% in 2018.

Likewise, the MOUs with the so-called “miscellaneous employees” approved by Council in February 2016 guaranteed minimum raises of 3% annually for 2016 through 2018.  They contained a formula (similar to the one in the public-safety MOUs) that resulted in raises in excess of the minimum for two of those years (3.38% in 2016 and 3.44% in 2017).  This January, Council approved a new contract that provides for raises of 3%, 2%, and 1% in 2020, 2021, and 2022, respectively, for employees represented by the Alameda City Employees Association.

And that isn’t all.  In April 2016, the State Legislature passed a law boosting the statewide minimum wage, in a series of steps, to $15 per hour by January 1, 2022, for “large businesses” and January 1, 2023, for “small businesses.”  But Council decided that workers in the City of Alameda shouldn’t have to wait that long.  So last October it enacted an ordinance raising the city-wide minimum wage to $13.50 per hour on July 1, 2019, and $15 per hour on July 1, 2020.

According to the City finance department, the total cost of implementing the ordinance will be $743,000 in the first two and a half years, not including $14,000 for AMP contractual services.  The staff report stated that the wage and cost increases would affect the recreation and parks department and the library the most.  And, indeed, Recreation and Parks director Amy Wooldridge recently attributed her latest request for higher user fees in part to the minimum-wage ordinance.

The story on staffing reflects a similar lack of fiscal restraint.  The number of City employees has increased only slightly from FY 2015-16 (520 “authorized full-time positions”) to FY 2018-19 (533 FTEs), but these numbers include new positions in the fire department that have had, and will have, a significant impact on the bottom line.

The first round of personnel increases for the fire department came when Alameda joined the “community paramedicine” program in July 2014.  As discussed earlier, the General Fund will be picking up $195,604 of the cost of a division chief and firefighter through February 2020 and, potentially, the entire $300,000 cost every year thereafter.

Then, in April 2017, Council approved creating new positions for two firefighters and a captain to supplement the existing civilian staff in the fire-prevention bureau.  According to Finance Director Elena Adair, this staffing decision increased General Fund expenses by $53,782 in salaries and benefits and $73,088 in start-up equipment costs in FY 2016-17 and $624,202 in salaries and benefits and $125,555 in startup equipment and recurring costs in FY 2017-18.  For the first six months of FY 2018-19, she reported, the increased costs amounted to $309,791 in salaries and benefits and $7,718 in operating expenses.

For some time, Mayor Ashcraft has been pressing the fire department for a written report on just exactly what it has achieved by bringing sworn personnel into the fire-prevention bureau.  She’s still waiting, but there’s little doubt that the City will continue to experience the fiscal effects of the staffing decision for the foreseeable future.

Finally, after its success with re-staffing the fire-prevention bureau, the fire department asked Council to create a new position for a division chief/fire marshal whose job consisted of, among other things, supervising the recently added fire-prevention staff.  The prior Council twice rebuffed the request, but the new Council majority was more accommodating, and Council recently voted, 3-2, to establish the new job.

Staff stated that the annual cost of the division chief/fire marshal would be $355,000.  Chief Rodriguez represented that this cost would be covered by an increase in user fees approved at the same time, but, of course, if it is not, the money will need to come from the General Fund.  In that event, the ongoing fiscal impact of the additional staffing approved for the fire department in just the last two years will exceed $1 million annually.

So there you go, Mr. Levitt:  You’ll be responsible for preparing a balanced budget in an era in which any effort to increase revenue faces a host of practical obstacles and any attempt to reduce expenses runs counter to the instincts – and interests – of the politicians now sitting on Council.

Have at it.  And good luck.


Budget updates: 2018-03-20 staff report re amending 17-18 budget; 2018-03-20 Presentation – REVISED; 2018-05-18 Presentation – REVISED; 2018-06-19 staff report re FY 18-19 budget; 2018-06-19 Presentation – REVISED; 2019-03-19 staff report re FY 2018-19 budget; 2019-03-19 Presentation

SAFER grant: 2018-10-16 staff report re SAFER grant

Community paramedicine program grant: 2019-02-05 staff report re community paramedicine program

Minimum wage: 2018-10-02 staff report re minmum wage

Fire prevention bureau: 2017-04-18 staff report re adding new positions

Fire marshal: 2019-03-05 staff report re new fee schedule & division chief

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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4 Responses to Memo to the City Manager (Part I)

  1. Mike McMahon says:

    Yes, cost recovery is starting up. Local elementary schools have a year end tradition of visiting local city parks to end the school year. In the past those celebrations were at no cost to the school district. This year the schools are receiving a bill for using the parks.

    • MP says:

      No wonder ausd is eager to share the cost of any swimming pool rehab.

      What types of bills are schools seeing (amount) and how calculated?

  2. William says:

    The new Alameda will see many things that are difficult to accept if you aren’t moving forward with the times. Parks are expensive. The maintenance costs of them would surprise many people. But, the costs are the last thing on people’s minds as they use the equipment, play on the grass and enjoy the well kept grounds. But, they also don’t think about the costs as they leave trash and junk when they leave. It is what it is. Charging for use will become common and has already been instituted in many other cities.

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