Council’s slush fund

Our topic today is the residual fund balance in excess of policy or fund balance deficits in the General Fund.

Sound boring?

We thought so.  What if we called it, “Alameda City Council’s slush fund”?

Ah, now we’ve got your attention.

Whether we use the technical or the colloquial phrase, we’re talking about the same thing:  the amount of cash in the General Fund available to be spent for whatever purpose Council decides to spend it on.  Lest “slush fund” carry an unsavory connotation, hereafter we’ll use the blander term “Piggy Bank” instead.

By whatever name, there’s real money involved.

Last Tuesday, staff sought authority from Council to move forward with a plan to build a $30 million public swimming pool (and make a few other improvements) at the Jean Sweeney Open Space Park.  The cost would be split, 50‑50, by issuing new debt and by tapping – you guessed it – the “Residual Fund Balance” (staff’s shorthand for the Piggy Bank.)

In describing this financing scheme, staff included a graph depicting the latter source of funds:

This graph certainly caught our eye:  It showed that, as of the end of fiscal year 2021‑22, the General Fund held $40.22 million Council could spend for whatever purpose a three-person majority could agree upon.  By comparison, the total tax revenue received by the City in the same year was $112.59 million, but Council’s discretion over spending that money was constrained by the need to use it to pay the ordinary and necessary costs of providing municipal services.

So we decided to look into the matter further.

Today, we’ll describe how the Piggy Bank is derived, how it got to be so big, and how Council has used it in the past and intends to use it in the future.  When Alameda voters elected a new Council last November, we doubt they knew they were handing such a hefty bag of cash to the successful candidates.  The next time around, our hope is that they will.

We’ll begin with a tutorial.

We find ourselves craving a whiteboard to carry out this exercise, but, since Congresswoman Porter isn’t here to lend us a hand, we’ll content ourselves with displaying the relevant formula in the following box:

Applying the formula to FY 2021‑22, here’s how you get the $40.22 million:

Now, let us explain each addition or subtraction:

• Profit or loss.  This number simply represents the difference between the total amount the City collected in taxes, license fees, and other revenue during the fiscal year and the amount it spent on its day‑to‑day operations.  Technically, we suppose, a local government isn’t considered a profit‑making (or loss‑incurring) enterprise, but the concept applies to it no less than to private businesses.

• Net transfers.  In addition to the General Fund, the City maintains a host of other accounts to and from which transfers are made into and out of the General Fund.  The most notable of them is the “pension stabilization fund,” where money from the General Fund is transferred, if and when authorized by Council on an annual basis, to “pre‑fund” the City’s pension and OPEB liabilities.  According to a staff memo prepared last October, these transfers – which result in advance payments to CalPERS, deposits to a “pension trust,” and deposits to an ”OPEB trust” – totaled $43.62 million over the last five fiscal years ($7.92 million in FY 2021‑22).

• Operating reserves.  Many years ago, Council adopted a “reserve policy,” directing that a portion of the General Fund balance be treated as an “operating reserve.”  Originally, the amount was set at 20 percent of annual operating expenses.  Then, in September 2015, staff recommended that an additional five percent be “set aside” to guard against “economic uncertainty.”  Council agreed, but, unfortunately for readers of the financial statements, the two amounts are categorized in different ways and displayed on different lines.  For FY 2021‑22, what we’re calling the “operating reserve” consists of $24,041,451 (shown in the financial statements as “reserve policy”) plus $4,035,000 (shown as “economic uncertainty.”)

• Designated uses.  From time to time, Council designates a portion of the General Fund balance that can be used only for a specific project or purpose (unless and until Council changes its mind).  The accountants recognize two categories of such funds, “committed” and “assigned.”  The amounts earmarked for the Emma Hood pool and the Dignity Village project (to be discussed below) are examples of “committed” funds.  The “assigned” category includes funds dedicated, for example, to streets and sidewalks and recreation and parks.  In addition, a portion of the General Fund balance sometimes is deemed “nonspendable.”  For our purposes, we’ll lump the three categories together as “designated uses.”

Theoretically, changes in any of these factors can affect the amount in the Piggy Bank.  As a practical matter, however, the explosive growth shown in the graph can be attributed to just one of them:  operating profits.  The City has gone from losing money in FY 2017‑18 ($4.15 million) to making a ton of it in the last three years ($22.17 million in FY 2019‑20, $29.09 million in FY 2020‑21, and $25.26 million in FY 2021‑22).  And the Piggy Bank has grown accordingly.  (It would have been even fatter had Council not begun designating funds for special projects in FY 2021‑22.)

Here’s a chart covering the last five years that illustrates the relationship:

Why has the City been doing so well financially?  If our Mayor were a Washington politician, she’d surely claim the credit for herself.  (We know Donald Trump would, and even Uncle Joe Biden occasionally gives in to the same temptation.)  In reality, however, the reasons are beyond the control of any elected official.

As the “management’s discussion and analysis” sections in the City’s financial statements reveal, increasing home prices and increasing home sales have spawned increases in both property tax revenue and property transfer tax revenue every year during the last five years.  Property taxes went from $38.73 million in FY 2017‑18 to $51.49 million in FY 2021‑22; property transfer taxes went from $15.68 million to $21.93 million during the same period.  This has led to greater total revenues and substantial operating profits, which in turn has produced a bigger Piggy Bank.

But this phenomenon isn’t guaranteed to last forever.  Indeed, after pointing out the dramatic increase in the Residual Fund Balance, the staff report presented last Tuesday added a cautionary note:  “As mortgage interest rate increases impact housing prices and mortgage affordability, layoffs in the Bay Area tech industry continue, and the possibility of an impending recession, it is uncertain when the City will benefit from another booming property market.”

As the amount in the Piggy Bank continued to grow, the money began to burn a hole in our elected officials’ pockets.  From FY 2017‑18 through FY 2020‑21, Council didn’t designate any of those funds for special projects or purposes.  Since then, however, Council has voted to:

• “Encumber” $1.2 million of the Residual Fund Balance to guarantee payment of the last nine months of the cost of operating the Dignity Village “interim supportive housing” project;

• Appropriate $7.5 million from the Residual Fund Balance to pay half of the cost of renovating the Emma Hood swimming pool; and

• Commit to spend up to $15 million of the Residual Fund Balance to construct the new “aquatics center” and other facilities at the Jean Sweeney Open Space Park.

The first two actions reduced the amount in the Piggy Bank by $8.7 million in FY 2021‑22.  The last will reduce it by another $15 million in FY 2022‑23.  According to the staff report presented last Tuesday, which included projected results of operations for the current fiscal year, the Piggy Bank will be down to $18.59 million as of June 30, 2023.

It should come as no surprise that Council chose to move $1.2 million out of the Piggy Bank for the Dignity Village project.  That was consistent with its view that homelessness is the No. 1 problem facing the City.  By last October, the prior Council had approved spending $10.28 million of the $26.68 million Alameda got under the American Rescue Plan Act on projects for the homeless.  Thereafter, it authorized using another $4.97 million in ARPA funds for such projects.  The Dignity Village allocation fit the pattern.

We admit, however, that we were a little surprised that Council had moved $22.5 million out of the Piggy Bank to fix and construct . . . swimming pools.  At last Tuesday’s Council meeting, Mayor Marilyn Ezzy Ashcraft and Councilman Tony Daysog waxed nostalgic about their happy, golden, bygone days at City‑run swimming pools, and Councilwoman Malia Vella disclosed that she’d learned to swim at the Franklin Park pool.  We don’t mean to suggest that these fond memories influenced their affirmative votes, but we wonder whether the same group would have been so enthusiastic if the proposal had been to commit $15 million to building a new football field.

Which raises a more basic issue about the Piggy Bank:  By definition, it represents money Council can spend on whatever purpose a three‑person majority votes to spend it on.  There are no criteria governing the choice and no standards against which it can be evaluated.  Truly, this is a situation where anything goes.

At the same time, the existence of a Piggy Bank poses two different risks.  On the one hand, it’s easy to say yes to a special project proposed by a favored interest group.  After all, the politicians would say, we’ve covered all of our operating expenses and other commitments and there’s still plenty of dough left sitting around.  On the other hand, it’s hard to say no to a proposed new expenditure, whoever’s idea it may be.  Sure, those on the dais might think, we can’t pay the additional costs from ongoing revenue, but who cares?  We can take the money out of the Piggy Bank instead.

As far as we know, no one asked the candidates running for Council last November how the City should spend the $40.22 million in the Piggy Bank as of June 30, 2022.  (Nor, for that matter, did anyone ask the candidates how the City should spend the ARPA funds.)  But these are questions that voters ought to ask the next time around.  The answers may reveal something not only about a candidate’s priorities but about her attitude toward fiscal responsibility.

Sources:

FY 2021-22 CAFR: 2021-22 CAFR

Funding for “aquatic center”: 2023-02-21 staff report re swimming pool