The following text comes from the first part of my State of the City address last month.
The City Council established goals for fiscal year 2012-13
The City Council met earlier this year for our annual retreat with staff. Together we formulated six goals for our City. They are:
- Place the City on a firm foundation for long-term fiscal sustainability
- Work with the community and all stakeholders towards completing major projects and programs for sustainable economic development
- Provide quality public safety services and work in partnership with the community to keep San Leandro safe
- Maintain and enhance the City’s infrastructure
- Support programs, activities and communication that enhance the quality of life in San Leandro and promote a sense of community and civic pride, and
- Maintain and support a strong positive relationship between the City and schools
It is through the prism of these goals that the Council and staff will evaluate public policy decisions and develop our budget for fiscal year 2012-13.
The state of San Leandro today is stable
The ability of our City to meet these goals and serve the needs of all San Leandrans depends upon a stable financial foundation. The State of San Leandro is stable. After a period of significant financial upheaval, marked by the reduction of the City’s reserves and a 15% percent reduction of full time City employees, the City Council last June adopted a budget that, for the first time in four years, did not rely on the transfer of one-time-only funds to pay for ongoing costs.
The recovery and progress that last year we were hoping would take hold did start to occur. We are seeing an increase in the approval of new business licenses.While the recovery in jobs has been slow and too many San Leandrans remain unemployed, the unemployment rate has continued to drop, now 9.4% down from over 10% a year ago, and lower than the County rate as a whole.
This fiscal year marks our first full year of the Measure Z funding. The quarter- cent sales tax boost has been a great help to the City’s sales tax revenues. It generates about $3.5 million for us in operating revenue. As promised, those funds are being used to support public safety, libraries, parks, and other essential services.
Earlier this fiscal year, the City Council took significant actions to restore our reserves by moving $1.5 million from the General fund to the Reserve for Economic Uncertainty. This meets the City Council’s goal of maintaining reserves equal to 20% of our operating expenditures.
The City has a structural deficit that undermines our ability to meet the needs of the community
San Leandro has not yet achieved long-term fiscal stability. Our seven year budget forecast shows the City’s long-term structural deficit. The COPS grant that pays for 5 police officers will expire in 2014, and the Measure Z revenues end in 2018. By that time, we will have $85 million in spending but only $78 million in revenues.
Our spending projections, in fact, may be too low. Our forecast assumes employees will receive no salary or cost of living increases over the next seven years.
Note, I am not advocating that we freeze salaries for the next seven years. In fact, I wish for the opposite. Our employees should receive raises, but until we eliminate our structural deficit, we cannot consider any increase in wages (although their total compensation will increase due to continued increases in benefits for employees, mainly retirement benefits, paid for by the City).
A core City function is maintaining the infrastructure of the community. Our forecast includes no allocation of monies from the general fund for capital improvements and major road work. Some work will occur but only because the City receives funds from other agencies. Funding for investment in the maintenance and upkeep of City-owned buildings and facilities is set at an amount in the forecast far below what is needed.
Nor is there any funding for the restoration of programs and activities cut during the past four years that meaningfully contribute to the quality of life in San Leandro, such as the Cherry Festival and the City’s Art and History Museum.
Focusing on the immediate fiscal issue - creating a balanced budget for fiscal year 2012-13 – we expect that revenues will increase by $3.3 million. That, of course, is wonderful news. The challenge we face is that our spending is projected to go up by $4.6 million.
Keep in mind our budget is not static. These numbers will likely change as we gather further data in the coming months.
The City Council and City staff are committed to adopting a budget that is balanced without relying on the transfer of monies from one-time-only funds to pay for reoccurring costs. We will either find savings or make necessary spending cuts to close the deficit.
The City is running a deficit due largely to the rising costs of employee benefits
Despite passing Measure Z in November 2010 and no major new programs requiring new spending the City is again looking at a deficit. Why?
Here are the three largest contributors to our increase in costs:
- The bill the City pays CalPERs for employee retirement benefits is increasing by $832,000.
- The expiration of the employee furlough program adds another $666,000 in costs.
- Our contract for fire and emergency services with the Alameda County Fire Department will increase by $580,000, which reflects in part increased pension costs the Alameda County Fire Department is experiencing.
Even though our employees are not receiving any salary increases next year, their compensation is increasing due to the larger bill the City must pay for employee retirement benefits.
To restore our City to long term fiscal stability, as well as to provide retirement security for all City employees, we have to make our pension system sustainable
Last year, during my State of the City address, I stated that we must examine the cost of retirement benefits provided to City employees. Some refer to this as “pension reform.” It is a term that has no agreed-upon definition. Some use the term when they actually seek the elimination of pensions for public employees. I said last year and I say again, I do not support that. Instead, I prefer the phrase “pension sustainability.”
One of the principle challenges for all local government in the years ahead is, how can we provide quality services despite stagnant to slow growth in revenues. Achieving pension sustainability continues to be an important part of meeting this challenge.
The City Council has taken one significant step toward pension stability. We looked at these costs in depth last year. Out of this examination, we realized we could lower our pension costs by refinancing the so-called “public safety side fund.” By refinancing this debt, we expect a net saving of $300,000 annually or a total savings $3.9 million.
Yet the City’s bill for retirement costs continues to escalate. In 2000, the City spent $4.7 million on employee retirement benefits. This fiscal year, we are spending $11 million, a 134% increase in costs since 2000.
Even with the anticipated savings from refinancing of the public safety side fund, our total retirement benefit costs are expected to increase by nearly $1 million next fiscal year to $12 million, or a 9 % increase in costs.
Like every other City in the Bay Area, the rate at which our revenues are increasing, even under the most optimistic projections, is less than the rate at which retirement costs are increasing.
The path to fiscal stability – next year and beyond - requires sustainable pensions. Sustainability requires that all City employees join with the City Council and the City Manager in contributing to the cost of their pensions. Our employees have made substantial contributions to containing costs over the past several years, from taking furlough days to accepting multi-year salary freezes.
However, San Leandro can no longer afford to pay 100 percent of the cost of employee retirement benefits. Most public safety and municipal workers in Alameda County today pay for their share of pension benefits. If all of our employees were to do the same, nearly $3 million in annual savings would be achieved.
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