For the third time within the last month, the Upland Finance Committee sent Upland City Manager Rod Butler, Butler’s assistant Jeannette Vagnozzi and Upland Finance Manager Scott Williams back to the drawing board to revamp the proposed 2016-17 budget the full city council is slated to consider at its last meeting this month.
The government fiscal year runs from July 1 through June 30 of the following calendar year. Traditionally, governmental entities great and small in the State of California – from school, fire and water districts, to cities to counties right up to the state government in Sacramento – have striven to arrive at a budget before July 1. Indeed, in years past most of those entities had their budgets finalized by early to mid-June. In recent years, nearly all governmental entities in California have faced moderate to severe financial challenges as costs have increased, public salaries and benefits have risen and revenues into government coffers have shrunk, exacerbated during the lingering 2007-2013 recession.
A common goal has always been to arrive at balanced budgets, that is, to have no more in expenditures than in revenue. As the recession persisted, many cities, including Upland, failed to achieve truly balanced budgets, and were unable to match outgo to income, instead plugging the gap through a reliance on depleting existing municipal reserves, that is, savings from previous years stashed in reserve accounts.
In addition, cities all across California are faced with a looming pension crisis. Over the last fifteen years, governmental entities have offered public employees increasingly generous retirement packages by agreeing to a pension calculation formula that allows those employees to draw a yearly retirement stipend that is equal to their highest yearly salary times a percentage, which varies between two percent and three percent, multiplied by the number of years those employees have worked for a public agency. Thus, a worker who reaches retirement age – between 50 and 65 – who has worked, for example, 30 years for a governmental entity and has risen to a position paying, for example $100,000 per year, would be eligible to pull an annual pension of at least $60,000 [$100,000 X 2% X 30] or as much as $90,000 [$100,000 X 3% X 30] every year for the rest of his or her life. Upon his or her death, if his or her spouse is yet living, she or he would be eligible to continue to draw half that amount for the rest of her or his life. Because government jobs offer relatively decent wages to most workers and because most workers generally advance to higher and higher paying positions over the term of their careers before retiring, this means districts, cities, counties and the state are paying out substantial amounts to cover pension costs on an annual basis. Retirement systems have been created to cover these ongoing costs, with both the governmental entities and the government employees contributing to them. The most significant of these is CalPERS, an acronym for the California Public Employees Retirement System, which manages the contributions into that retirement fund made by the governments and public employees. That money is put into the stock market and other interest bearing securities. CalPERS is the retirement/pension fund managing system for all state employees as well as most municipal employees throughout the state, including those employed by Upland. All government contributions into CalPERS are set at a certain rate each year based upon that particular governmental entity’s number of current employees and the terms of the pension benefits it offers. To stay fiscally balanced, CalPERS also has an earnings goal for the money it invests – 7.5 percent per year. When its investment do well and meet that goal, the only money contributed by the cities and state and participating agencies is the earlier referenced set amount. But if CalPERS’ investment portfolio does not meet its goals, then those governmental entities are committed to make up the difference. Last year CalPERS’ investment return was only 2.4 percent.
As years pass and more and more public employees retire, and with the average lifespan of Americans ever increasing such that many retirees are on average now living well into their seventies, eighties and beyond, the pension burden is burgeoning to a point that it is straining cities financially.
In Upland, which last year had a $43 million budget, $7.1 million went toward pension costs. Next year, that cost is anticipated to increase to $7.4 million. By 2022, that cost will zoom to $11 million, money being paid out to former employees who will no longer be working, representing money that will not be available to provide ongoing services, necessitating that city operations in the future be pared back to the bone. In Upland, the retirement age is 55. Safety employees – firemen and policemen – receive 3 percent for each year they have worked. Non-safety employees receive 2.5 percent for each year they have worked.
Glenn Bozar, since his election to the Upland City council in 2012, has demonstrated himself as the most fiscally conservative of the city’s officials as he has constantly advocated that the city not only live within its means, but that it closely examine expenditures and look for ways of reducing staffing levels when possible. Bozar has called upon city management to maintain prudent spending discipline that will allow a modicum of money to be salted away every year to be ultimately used to extirpate the future unfunded pension liability which is presently projected at $88 million and growing. Simultaneously, Bozar considers himself on a mission to ensure that the city avoids taking recourse in imposing further taxes on its residents, reasoning that doing so will create an illusion of solvency that will compromise the level of discipline city management needs to exercise in maintaining austerity.
On May 23, city manager Butler had finance director Scott Williams preview for the city’s finance committee his proposed 2016-17 general fund budget, which envisioned revenues of $46,685,000 and operating costs of $45,727,220. Buried within that budget were increases of 20.3 percent – $1,171,145 – into the city’s pension fund; 20 percent – $549,7217 – for so-called fringe benefits; and 5.39 percent – $1,024,553 – for salary increases. Into the mix were hefty increases for both the fire department and the police department – 12.5 percent and 11 percent, respectively – as well as administrative services division increases of 14 percent.
Though the budget projected modest increases in property tax and sales tax to lift its anticipated revenue to $46.685 million from the slightly over $44 million the city brought in this year, the upsurge in spending Butler and assistant city manager Jeannette Vagnozzi were calling for entailed shifting $978,000 in gasoline tax revenue the city is anticipating receiving into the general fund and making some $400,000 worth of other adjustments. The gasoline tax in Upland has traditionally been used to pay for street and road improvements. When that was laid before them, the finance committee’s members – Bozar, councilwoman Debbie Stone and city treasurer Dan Morgan – balked. They cited the Fiscal Responsibility Act, a measure recommended by the city’s blue ribbon fiscal task force more than two years ago and passed in a 5-0 vote by the council in January.
The fiscal responsibility act states that the city “base its operating capital on demonstrable sources of revenue. The city shall maintain cash balances to adequately provide for economic uncertainties, local disasters or catastrophic events, and other financial hardships or downturns in the local or national economy or contingencies for unforeseen operational needs. The city shall retain, per policy, a minimum unassigned fund balance of at least 12.5 percent of general fund operating expenditures, with a goal of bringing the total level of reserves up to 25 percent. Once the 12.5 percent reserve goal is met, the city finance officer will provide recommendations to the council for assigning any additional reserves to reduce or eliminate deficit fund balances for funds supported by the general fund or operating needs… into an IRS Section 115 Trust for the sole purpose of funding future pension and other post employment benefit liabilities.”
And while Butler’s proposed 2016-17 budget technically met the requirement of setting aside 12.5 percent of the general fund’s operating expenditures into reserves, at the May 30 committee meeting, the committee registered displeasure at the consideration that city expenditures were to grow by $3.8 million over last year when revenues were increasing by just slightly over $2 million. Furthermore, both Bozar and Stone rebuked Butler, indicating they wanted the gasoline tax revenue utilized for fixing roads, not for plugging the gaps created as a consequence of the increases in pension fund, fringe benefits, salary increases and fire department, police department and administrative services division spending. They instructed him to revisit the budget, and find some way of keeping the gasoline tax earmarked for street and road maintenance. Morgan joined with Bozar and Stone in supplying that direction.
The upshot of those instructions appeared to be aimed at having Butler and Vagnozzi restore the gasoline tax to funding road infrastructure in full, while trimming expenditures in the city departments. Nevertheless, at the finance committee meeting this week, on June 14, what was presented was an expenditure sheet that was hardly altered at all, with almost all of the previously scheduled spending in 2016-17 left intact. What adjustments were made consisted of reducing from $978,000 to $600,000 the diversion of gasoline tax into the general fund while proposing a scheme whereby the city would market “excess water” at its disposal through its water division to other nearby water agencies.
This galvanized Bozar, who noted that city residents, the city’s water division customers, had met with the governor’s mandate that they reduce water consumption, achieving a reduction of 35 percent while being hit with water rate increases. The proposal to have the city sell water in the midst of a drought while city residents were bearing the brunt of that drought on both ends by using less and paying more was not a viable revenue producing alternative, Bozar said. Moreover, Bozar insisted, the gasoline tax needed to remain earmarked for city transportation-related infrastructure improvements and maintenance.
Bozar essentially said that Butler needed to bring back something that was in compliance with both the letter and spirit of the Fiscal Responsibility Act. This resulted in a rather spirited back and forth between Bozar on one end and Butler and Vagnozzi on the other, with Williams poised in between. Butler and Vagnozzi took the position that what they perceived as a frenetic wielding of the budget axe was not yet called for and that they were working on cost saving measures that will be incorporated later on and will manifest in some savings once the upcoming fiscal year is underway.
“You’re just kicking the can down the road,” Bozar intoned, embarking on a questioning of the calculations upon which the budget was based. In particular, Bozar sought to bring into focus the money earmarked to cover the city’s anticipated CalPERS responsibility. In response to Bozar’s questions, Williams acknowledged that the more than $7 million the city has set aside to fork over to CalPERS in the upcoming year is based upon its 7.5 percent earnings expectation. Williams conceded that CalPERS has already given a “heads up” that it will not meet that earnings goal and that a “mild recession” is anticipated in the relatively near future.
“Our financial projections need to be more realistic,” Bozar said, indicating the city’s CalPERS contribution will be well above $7.1 million this coming year.
Butler and Vagnozzi angled their comments to suggest the revenue drawdown and pension drain would be less severe than Bozar was projecting and they advocated that the city adopt the budget as proposed and make adjustments on the fly as needed.
Bozar did not recede, however. “Using the most optimistic projections is not feasible,” he insisted. “The scenarios you are using as the foundation of this budget are inconsistent with the CalPERS rate of return of 2.4 percent last year and the tax revenue we will receive. How can you project during a moderate recession that CalPERS will meet its 7.5 percent return goals and that we will receive adequate tax revenue?” Living up to the spirit of the Fiscal Responsibility Act dictated, Bozar said, that the city use “more realistic projections” in formulating its budget model. “These optimistic assumptions aren’t realistic,” he said of what the city was presently using.
Stone, who in previous go-rounds had supported Bozar’s call for budget austerity, appeared to be wavering. She was more tolerant of the proposal to market water than was either Bozar or Morgan. She seemed to be sympathetic as well to Vagnozzi’s displaying of a projection of a spreadsheet for the salary and deductions of an unidentified member of the city’s clerical staff, one of the city’s lowest paid employees, who had not received, Vagnozzi said, a pay increase since 2009.
Vagnozzi’s point was that raises for staff were in order. This clashed with Bozar and Morgan’s philosophy, which holds that the city has already demonstrated its appreciation of city employees by giving them free medical coverage as well as a pension that is equal to anywhere from 70 to 90 percent of their highest yearly salary while working.
With Stone vacillating and seemingly ready to sign on to staff’s budget recommendation, city treasurer Morgan stepped up, swinging his support squarely behind Bozar. Most pointedly, Morgan said, he did not think diverting gasoline tax revenue away from doing street repair to plug budget gaps was advisable or in accordance with the will of the city’s residents.
Bozar and Morgan said that if Butler and Vagnozzi truly felt that there were no further places in the city’s operations where they might find opportunities to institute economies or make reductions, they should test their conviction and see if they can get a four-fifths vote of the city council to declare a fiscal emergency so the Fiscal Responsibility Act can be suspended and reserves can be borrowed to balance the budget. From the context of the situation it was clear to Butler that he could not get a recommendation of the full finance committee for such a drastic option. At last, addressing Bozar directly, he asked what the councilman would suggest with regards to making those economies and cuts.
Bozar responded, “You’re the city manager hired to present the budget.” He told Butler he needed to use his own judgment and expertise in leading the city in a financially sound direction in accordance with the Fiscal Responsibility Act.
While signaling their willingness to have Butler facilitate increases within the police department’s budget to accommodate the hiring of four new police offers and four part-time unsworn police service technicians, the committee ultimately collectively instructed Butler to make modest cuts to other departments to bring the city’s budgeted expenditures into line with its revenues.