The coronavirus and the City budget

More than 2,100 U.S. cities brace for budget shortfalls due to
coronavirus, survey finds, with many planning cuts and layoffs

That was the headline in the April 14 edition of the Washington Post over a story about a survey conducted by the National League of Cities and the U.S. Conference of Mayors of the economic impact of the coronavirus on local governments.  The story went on to report that more than 1,100 cities across the country were preparing to scale back public services, and almost 600 cities predicted they may have to lay off some workers.  Local leaders in 1,000 cities said the reductions probably would affect their local police departments and other public safety agencies.

So far, at least, the City of Alameda appears to have escaped a similar fate.

This Tuesday, City staff will present its revised forecast for fiscal year 2019-20, which ends on June 30, to Council.  The forecast predicts that, as a result of the coronavirus, the General Fund will take in $7.7 million less in taxes and other revenue this fiscal year than the amount staff anticipated as recently as six weeks ago.  Moreover, the forecast includes an additional $750,000 in new spending specifically related to the coronavirus:  $500,000 for “potential COVID‑19 response expenses” and $250,000 for “community economic assistance.”

Nevertheless, even with these lower revenues and additional expenses, total General Fund revenues are expected to exceed total General Fund operating expenses by $1.6 million in FY 2019-20.  To put it more colloquially, despite the coronavirus, the City still is on track to record an operating profit this fiscal year.  Here’s a chart with the data:

Even more remarkably, this result will occur without the City of Alameda having taken any of the drastic actions being contemplated, according to the Post article, by other local governments.  Instead, City Manager Eric Levitt is employing what he describes as a “stabilizing” strategy.  Pursuant to that strategy, the City has not

• Fired or laid off any workers as a result of the COVID-19 crisis, nor is it planning to do so during the rest of this fiscal year.  Instead, the City has furloughed some part-time library and recreation department employees; staggered work schedules so that public works department engineers can work from home; and “re-purposed” staff members to perform other tasks, such as traffic control at the food bank.

• Eliminated any municipal services as a result of the crisis, nor is it planning to do so during the rest of this fiscal year.  Instead, the City has complied with the state and local shelter-in-place orders by closing the library and prohibiting “active” use – e.g., tennis and basketball courts and playgrounds – at City parks; the skateboard park also has been padlocked.  In addition, the City has reduced street sweeping and park maintenance and focused code enforcement on potential violations of the state and local orders.

So how has the City of Alameda managed to avoid having to act more dramatically?

We can suggest three answers.

First, before the coronavirus hit, the City was expected to beat its budget for FY 2019-20 by a significant amount.  This created what can be considered a “cushion” that will allow the City, this fiscal year at least, to absorb much of the adverse economic impact of the coronavirus crisis.

The original FY 2019-20 budget adopted in June 2018 showed a small operating profit ($121,420).  This gain disappeared and turned into $330,897 operating loss in the revised budget adopted in June 2019 after Council approved hiring six new firefighters (bringing the total number of authorized sworn personnel to an all-time high of 117).

Then from June 2019 through February 2020 the revenue picture got much brighter.  The June 2019 budget called for total General Fund revenue in FY 2019-20 to be $101.6 million; in the report presented to Council on March 3, staff projected that the City actually would take in $107.8 million this fiscal year.  Exactly half of this increase – $3.1 million – consisted of higher property transfer tax revenue “due to increasing sales values of properties and sales of a large commercial property and two large multifamily residential properties.”  (Thank you, Tim Lewis!  We knew you’d eventually do something good for the City of Alameda.)

The March 3 staff report also projected that the City would spend $1.5 million more in
FY 2019-20 than the June 2019 budget provided.  (About a quarter of the increase would come from additional spending by the fire department for overtime compensation.)  But the higher revenues would more than offset these increased expenses, and the bottom line was that the General Fund would end the fiscal year with a $4.4 million operating profit.  And that amount would turn out to serve as a cushion when the coronavirus hit.

Second, staff’s “best estimate” is that the coronavirus will cause taxes and other revenue collected by the City during the rest of this fiscal year to decline by less than 10 percent of the total General Fund revenue projected on March 3.  The decrease amounts to $7.7 million, broken down this way:

As the staff report explains, the largest category of General Fund revenue – property taxes – “is expected to be stable under each scenario and on target with” the previously projected $44.0 million.  Both sales and use taxes and transient occupancy taxes in the last quarter of FY 2019-20 “will drop by about half of what was previously expected.”  In addition, additional transfer taxes in the last quarter of the fiscal year “will be limited.”

The staff report also contains best and worst-case scenarios.  The former is based on annualizing the actual revenue collected year-to-date; it results in total General Fund revenue in FY 2019-20 of $106.7 million, just $1.1 million less than the March 3 projection.  The latter assumes that the City will collect only “small amounts of additional revenues beyond what has already been collected to date.”  Under that scenario, total General Fund revenue in FY 2019-20 will be only $94.2 million, $13.6 million less than the March 3 projection.

Is the projected revenue loss in the “best estimate” reasonable?  We’re in no position to say that it isn’t.  It would be unreasonable to project that the coronavirus crisis will cause no loss of revenue this fiscal year.  It would be likewise unreasonable to project the crisis will shut down all further collection of taxes and other revenue for the rest of the year.  The City finance department (and senior management analyst Jennifer Tell in particular) appears to be steering a middle course.

Finally, as our numbers-oriented readers will have noted, the City still would end the year with an operating deficit if no changes were expected on the expense side, since the $7.7 million revenue loss would wipe out the previously projected $4.4 million operating profit, and then some.  But staff is projecting that such changes in fact will occur – and that they will bring the General Fund back into the black.

Ms. Tell told us that she projected revised total expenditures for each City department in FY 2019-20 by annualizing its actual expenses for the first nine months of the fiscal year.  (She left non-department expense the same.)  The result was a $5 million decrease in expenses compared to the March 3 projection, broken down as follows:

Analytically, we’re a little troubled by the annualization approach, since this method can produce a misleading picture when it is used to convert part-year results into year-end projections.  For example, if one had annualized the expense data in the financial report for third quarter of FY 2018-19, which showed expenses YTD of $68.4 million, one would have projected $91.2 million in expenses for FY 2018-19.  The actual expenses for the fiscal year turned out to be $104.2 million.  Nevertheless, despite our reservations, we don’t know what alternative method Ms. Tell could have used.

But the methodology isn’t our primary problem with the revised expenditure projections.  We’re more concerned by the conclusion that public-safety expenses will decline compared to the March 3 projections.  This would be understandable if the police and fire departments had decided to take steps with the purpose and effect of saving money in the last quarter of FY 2019-20.  But, as we noted earlier, that doesn’t appear to be the case.

So we have to wonder:  Is the police department really going to spend $1.7 million less in FY 2019-20 than the March 3 projections forecast it would?  Maybe so, since we often hear about the difficulty in filling vacant positions in the police force.  But the fire department???  Is the same outfit that increased General Fund expenses over the last three years by adding nine new sworn positions and a division chief as well as by causing the City to put up $1.2 million in “matching funds” to retain six firefighters hired under the SAFER program really going to spend $2.9 million less in FY 2019-20 than the March 3 projections forecast it would?  If so, it will end up spending $2.4 million less than the amount authorized by Council in the June 2019 budget!

When we sent an email asking for comment, Fire Chief Edmond Rodriguez did not respond.  But Police Chief Paul Rolleri confirmed our guess about the reason for the projected decline in police department expenses.  “We continue to struggle in our attempts to fill vacancies,” he told us, “but it has resulted in some budget savings that the city manager may be able to use to reduce the significant impacts to the city budget.”  For her part, Ms. Tell told us that she looked at actual spending by the police and fire departments during the first two weeks after the state and local shelter-in-place orders were issued, and the salary and benefit numbers tracked the revised projections.

Based on the revised forecast projecting an operating profit, albeit a smaller one, in
FY 2019-20, staff apparently saw no reason to ask Council to take any actions designed to reduce operating expenses during the rest of this fiscal year.  Staff did, however, propose foregoing the annual “discretionary” payment to the pension/OPEB liability paydown fund.  Before the coronavirus crisis, this payment was budgeted at $7.4 million, and, were the City to go ahead and make it, it would have to dip into the General Fund “reserves” since the operating profit wouldn’t cover the budgeted amount.  By foregoing the “discretionary” payment, the City will lose the benefit of the $500,000 reduction in annual pension expense the payment would have provided – but there will be an additional $7.4 million in the General Fund balance to cover any future shortfalls.

And the City may very well need it.  Back in June 2019, Mr. Levitt proposed what amounted to a break-even General Fund budget for FY 2020-21, with $103.2 million in both revenues and operating expenses.  (The proposal did not include a payment to the pension fund.)  It is unrealistic to expect that revenues will reach that level next year, but the question is how much lower they will be predicted to be – and how the City will manage the likely resulting shortfall:  Will staff recommend cutting operating expenses by, for example, freezing staffing and salaries?  If so, we can already hear the howls coming from firefighters’ union headquarters, which will be amplified by the two (or three) Council members who depend on union support for their seats.  Or will staff propose drawing down the General Fund reserves?  If so, there may be scant money left to cover the operating shortfalls that are already projected for the subsequent two fiscal years.

Mr. Levitt told us that “we are still working on” the budget for next year.  To that end, Chief Rolleri reported that he was “reviewing our expenses to see where I might be able to generate additional savings.”  Since most of the police department budget consists of personnel costs, “that will be the first place I look,” he told us. “I do have access to both state and federal grant funds that have already been awarded, but our police grant funds cannot be used for personnel-related costs.  Those funds can be used for certain equipment expenses with restrictions.”

The Merry-Go-Round doesn’t envy Mr. Levitt, Chief Rolleri, and their staffs the task of assessing and responding to the economic impact of the coronavirus crisis on the City of Alameda.  But City management can’t do it alone.  Success in this endeavor also will call for Council members willing to put aside their proclivity to cater to their core supporters and instead to make decisions based on the best interests of all Alamedans.  It’s not too early to remind our readers to bear that in mind when they vote this November.

Sources:

March 3, 2020 projections: 2020-03-03 Ex. 2 to staff report – Budget Summary; 2020-03-03 Ex. 4 to staff report – Revenue Projection; 2020-03-03 Ex. 6 to staff report – Expenditure Summary

April 21, 2020 projections: 2020-04-21 Ex. 1 to staff report – Revenue and Expenditure Update

Staff reports: 2020-03-03 staff report re mid-cycle update; 2020-04-21 staff report re budget update