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Wednesday, May 14, 2008

Commentary: View of Budget Depends on Perspective and Assumptions

Is Davis' budget balanced? Has the structural deficit been reduced or even eliminated?

Like most things it seems in Davis, the answer to that question depends on who you ask and how they factor in their budget assumptions. If you ask Paul Navazio the city's finance director and assistant city manager, he would tell you that the city has closed up its structural deficit, has a balanced budget, but also has a large amount of unmet needs. If you ask Sue Greenwald--part of the unmet needs are the budget deficit. We have merely papered over the deficit and the looming fiscal crisis with fancy work, heavily dependent on budget assumptions and elaborate models.

For Don Saylor, the city of Davis is making use of extraordinary planning to be this fiscally responsible that we do not have a budget deficit in a time of economic downturn across the state.

In his closing comments for example he said:
"This framework of budget balance for us includes a 15 percent reserve, that's really pretty uncanny."
He cites the number of jurisdictions whether it the schools, the university, the county and other cities that are making huge budget cuts. But not the city of Davis.

He does acknowledge that we have unmet needs that will exceed our revenues, but argues that this is based on the choices that we have made as a city.
"We see that the service demands of our city will exceed the revenues available and that's partly because of our own choices. Our sales tax revenue of $9 million per year is based on per capita collections of about $93... We're in the bottom third of sale tax collections. If we simply were at the state average we would bring in another $6 million. I'm not suggesting that we be at the state average, because that's not who we are. But minor changes in different pieces of our economic strategy will make a tremendous difference in the revenue picture for our city."
This seems to be an acknowledgment by Don Saylor that there is some kind of deficit. Also he argues both that we are in better fiscal shape than our neighbors and better fiscal shape than we have been in the past. Ironically, the reason we are in better fiscal shape than our neighbors is that our revenue sources so far have largely been immune to the economic downturn. The impact of the housing slump in Davis, in a market somewhat cut off from the rest of the state, has been far lower. Because we have a tight business market, we have weathered that better. And we do not heavily rely on state money as both the university and school does. The policies that Don Saylor and his council majority will explore will actually make us more vulnerable rather than less to economic downturns.

Stephen Souza likewise cites the fiscal health of the city. In 2004-05, Souza argues we had over a $2 million general fund deficit and we had to use reserves to balance the budget. This year it was $800K and we did not have to use reserves. He argued both that we need to celebrate what we have done but also that there is still work to do.
"We've been able to through a very logical process identified what are the amounts of money that would get us to a point where the people's assets are going to be taken care of and replaced and the services that we have all enjoyed will not only be at the levels of today, but they'll be better tomorrow. I think that's incumbent upon us to do that also. We've looked at economic redevelopment and we've done some of that. We've looked at cost recovery, we're going to more of that. We've looked at fee augmentation and we have to do more of that. We've talked about for a long time recovering some of the costs of the 911 service, maybe that's a path we go... We've look at some tax measures, and I think we're going to have to ask the public, do you want better... [services than you have today]. We're also going to have to ask the question beyond the $2.9 million for public works, about public safety, we want a fourth fire station, do we want more police officers on the roadways? If we want those things, it will be our choice as citizens of this community to determine after we put forward this information if want these services or we don't want these services."
The question and the point that Stephen Souza does not put forward is whether we can get to these kinds of services--if we need them--by tightening our belts, becoming more fiscally prudent in the decisions that we make.

That's really where Sue Greenwald begins.
"We're not in better shape than we've been in years. That's just not true. We are locked into a 3% at 50 retirement for the next 70 years for public safety employees and now 2.5% at 55, early retirement for all miscellaneous employees. That's got to affect our longterm budget situation. We have a $42 million post-retirement, unfunded employee retiree health liability. That's huge. That's coming due in only 15 or 20 years..."
According to the Mayor all of these will impact our budget and how much sidewalk and other maintenance we can do.
"We have postponed a number of projects and we have to remember that we have hanging over our heads first off the school fiscal crisis, if we keep taxing residents it is going to be harder for the schools to raise the funds they need... Passing the sales tax and the parcel tax, that just keeps us afloat, that does not get us anywhere... We're asking for those to be renewed at the same time we need more taxes for the schools."
Furthermore, we have not taken into account $365 million in sewer and surface water projects. These projects will add over $1000 per year to the utility fees for residents and the Mayor thinks that will be closer to $2000. Are we going to be able to renew the sales and parks taxes to stay even to the revenues we have today? This does not even touch the unfunded needs that we have today. These renewals are merely what we need in order to stay even.

Contrary to the claims by Souza and Saylor, Sue Greenwald pointed out:
"We've always had a five year budget, in fact, when Carl was around we had a seven year budget forecast."
She goes on:
"Carl was the one who about six months after we passed 3% at 50 back in 2000, he came in with his face ashen, he held up this projection and he said, we're going to be having huge deficits. I didn't realize this. He was very upset, he was looking at the seven year forecast. Well we were bailed out by the housing and real estate bubble, and the housing bubble and we've been bailed out. That's over, those days are gone."
Mayor Greenwald said we are fortunate however that we have citizens willing to shoulder the load, but will they continue to as the load gets heavier and she is concerned about the 800 pound gorilla in the room in the form of the water projects that will add another $365 million over a period of time to our costs.

I think the most interesting aspect of the budget discussion is that really Don Saylor and Stephen Souza are looking at very much the same things as Mayor Sue Greenwald, but coming to very different conclusions about our fiscal health. One of the critical questions is that of unmet needs--does their existence constitute a deficit?

The other serious problem is that of retirement benefits to employees. I think Sue Greenwald has recognized from an early period of time that the benefits that we are giving out are unsustainable. They are going to eat up a larger and larger portion of the budget and as a result we will have to struggle to find ways to meet those costs in addition to the regular costs to do business in the city. We are putting a lot of strain on the very generous taxpayers of Davis. In addition to the taxes the city will be asking residents to pay just to maintain the level of revenue we currently have, residents as the Mayor points out will be asked to pass another school parcel tax, we will ask residents to pay a higher level for water. $1000 per year at minimum means that your water bill will INCREASE by nearly $100 per month. If it is closer to $2000, you may be paying an additional $150 to $200 per month for water. That's a lot of money especially for people on fixed incomes, but really for all of us.

The cost of living in Davis is about to go up. The question about the fiscal health of the system is an open question and depends on the budget assumptions and your perspective.

---Doug Paul Davis reporting