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Wednesday, December 10, 2008

City of Davis Stares Down A Budget Deficit

At last night's Davis City Council Meeting, the city of Davis was presented data by Finance Director Paul Navazio that paints an increasingly bleak face on the city's fiscal situation. Once thought to be relatively immune to the rise and fall of the economy, the current economic crisis goes deep enough that Davis faces a $1.2 million budget deficit for this year and a $3 million budget deficit for next year.

The culprit is lower-than-expected property and sales tax revenues. For instance, the city expected a 6.5 percent growth in property taxes but they have only seen a 3 percent growth. Moreover, and just as devastating is what happened on the sales tax side where the city typically assumes a 2 percent annual sales tax growth but instead is looking at a 5 percent decrease in revenue from sales tax primarily coming from auto sales, gas, and restaurants.

A few weeks ago we reported that the city of Davis was looking for immediate cost containment which included a five-fold strategy of a hiring freeze, closer scrutiny of overtime, travel and training control, tighter control of contracts, and a limitation of non-essential spending.

The budget forecast for the next five years looks bleak for the city. With the $1.2 million debt for 2008-09 increasing to $3 million next year, $3.8 million in 2010-11, $4.49 million in 2011-12 and $5 million for 2012-13. Part of the problem is that the structural deficit that some have claimed the city resolved, has asserted itself.

The current year sees the need for continued cost containment measures with the balance of the gap being bridged through the use of the General Fund reserves.

Next year becomes critical with the need for expenditure reductions, service reductions, revenue enhancement, and state budget contingencies.

Navazio believes that the once time cost savings could save up to $900,000 which would require the city to eat up to $330,000 from their reserves. That seems rather optimistic on the face of it.

Unfortunately, the city did not provide PowerPoint slides (we believe that this would have been a great slide to show) but basically, police and fire make up about half of the general fund budget. The city is talking about a 5 to 7 percent reduction across the board in departmental budgets. A five percent reduction would save $2.2 million and a seven percent reduction would save $3 million. Of that between $400,000 to $600,000 would come from fire and $700,000 to $1 million would come from police.

The alternative would be for the city council, city manager's office, community development, community services, parks, and public works to take a 7 to 9 percent cut and allow police and fire to only take a three percent cut. The rationale for this is protecting public safety. That would place fire at a $263K cut and police at a $436K cut.

But again this really understates the budget hit we are facing. Last year we identified up to $13 million in unmet needs. These unmet needs were taken off the books so they were not considered part of the deficit and it appeared that the city of Davis had a balanced budget. These again include key infrastructure needs and repair work.

Because of the immediate crisis, they did not spend much time on the long-range financial plan update.

The first priority is the renewal of the half-cent sales tax which generates roughly $3 million per year in June of 2010. The second priority is to replace the parks tax, perhaps by 2011, since it sunsets in June of 2012. Finally they need to look at additional revenue options as well. One of their concerns to look at funding options prior to the sunset of the DJUSD parcel taxes.

There should also be a reminder that some proposed taxes do not include a variety of fee increases. The big ones are going to be water and sewer due to the capital improvement projects.

City Manager's Memo

On December 5, 2008, Bill Emlen sent out an updated memo to all city employees on the city's budget situation.

Here are a couple of key points the City Manager brings up.
"We have worked with individual departments on cost cutting measures including a hiring freeze, and reductions in various travel, training, overtime, and contractual service expenditures. Individually, these actions are relatively small but cumulatively they can add up to something substantive. They are important first steps, but it is clear that more work needs to be done. We are still determining how much savings were accomplished with these initial efforts. As I noted, current estimates are that revenues will likely be down about 1.5 million dollars this year."
"In terms of our budget, we are now projecting that next fiscal year’s shortfall could be in the 2.5 to 3 million dollar range. Add to that the uncertainty over the potential impacts the State budget crisis will have on local government, and you get a sense of the potential challenge we will face with the FY 09-10 budget."
One of the strategies is to retain as much budget reserve as possible.
"Our initial goal is to retain as much of our current budget reserve as we can going into the next fiscal year. To accomplish this, we will need to continue to find ways to reduce expenditures this year. If we are successful, it does not necessarily solve the problem we face in 2009-10, but it does provide some flexibility to cushion some of the budget impacts we are likely to face, particularly if State shifts of local funds become part of the equation. That said, the type of deficits projected by our current budget forecasts make it unlikely we can balance the budget without reductions, and they may be significant."
Here is the red flag:
"In our budget instructions for next year, we are asking departments to develop reduction scenarios in the 5-10 percent range. This information will then be evaluated on a City-wide context considering such factors as equitable impacts among departments, Council priorities and extent of use of budget reserve."
Most of this backs up what was said at the city council meeting, but it underscores the severity of the problem. Council wants to look at recently allocated expenditures and evaluate program priorities.

The unfortunate aspect of this crisis is that even if they cut five to ten percent of their budget, that will just get them by until 2010. The long-range problem is that the budget deficits will increase rather than decrease after 2010. Complicating things are the impracticality of revenue enhancements from new commercial ventures at this point plus a tough credit market precludes other revenue enhancement that is not related to tax increases.

The city of Davis is far better off than other cities or even the state at this point, but the severity of the current crisis compounded with the questionable past accounting practices with $13 million in what is really some sort of deficit stored as unmet needs puts the city in a quandary in terms of how to continue to provide a high level of services to the public.

---David M. Greenwald reporting