Unanimous Committee Wants Immediate Change – Before Parcel Tax Vote

At its August 17 penultimate meeting, the Municipal Tax Review Committee (MTRC) expressed its “grave concerns” that unless the Council implements recommended steps, “not only will the parcel tax not cover planned expenditures, but also renewal itself is at risk, if the public lacks confidence in the City’s fiscal management.” 

The Committee agreed unanimously (Hollis and Weiner absent) on a final set of strong fiscal reforms to recommend to the City Council.  (A few minor changes will be made in the Committee’s final report for adoption on August 31.)  Four Committee members (Ryan Gilbert, Tam Hege, Eric Lindquist and Steve Weiner) intend to submit a “supplementary statement” (at p. 9) that requires the Council to take specific actions on fiscal reforms before they will recommend voter support of the parcel tax.  Both the unanimous report and supplementary statement propose postponing the parcel tax election from February until June or November 2012 to give the Council time to enact the recommended fiscal reforms.

Below is a summary of highlights of the MTRC’s unanimous report and the supplementary statement, presented at the August 17th meeting.  The full text of both reports has not been released.

Highlights of the MRTC Unanimous Report

The Problem: 

“The current and long-term financial problem facing the City is not a revenue problem, but primarily an expenditure problem.”

Spending commitments (and the difficulty in predicting and controlling them) that Piedmont has taken on with no multi-year planning or reference to future impacts have exceeded available funding, resulting in serious decline in fund balances.  The greater challenge to the City is in the near future when projected expenditures threaten to so far exceed revenues that essential City priorities will be at risk.   The City is on a path that is not sustainable.   The General Fund balance has dropped by more than 50% since FY 2006 and is now at an imprudent level versus annual expenditures.  Piedmont relies on a single source — residential property taxes — for most of its revenues.  Real property tax revenue has grown by little more than 1% annually for the past three years.  Property transfer taxes declined by almost 50% between FY 2006 and 2009 and are still about 25% below the peak.

Three quarters of City expenditures are devoted to City employee salaries and benefits.  Due to decisions made by the City in the past 10 years, these costs have increased faster than revenues. Since 2006, the General Fund salary budget has grown by over $2 million, about 4% per year. During that same period, the benefits budget has grown by about $1.8 million, over 7.5% per year (approximate total of 55% from a prior level of 24-33%). 

The primary cause of the growth in benefit costs occurred in early 2000’s, when the City agreed to pay the highest employee pension levels offered by the state’s retirement system (CalPERS).

Unmet Needs

The City faces unbudgeted needs for replacement of critical equipment, maintenance of facilities and other essential capital needs for which it has set aside very little money.

Budget Shortfall

Based on MTRC projections, even with an extension of the parcel tax at its current level, it is unlikely the City will be able to meet its current commitments and maintain essential services. The MTRC estimates the City faces a shortfall of about $6 million over the four year life of the next parcel tax.   Beyond the issue of employee benefits,

• the City has committed $380,000 [annually] to provide a 50% subsidy to year-round swim pool operation;

• there are no procedures in place to prevent a repeat of the Piedmont Hills undergrounding cost overrun on other undergrounding projects or other large City projects;

• the proposed Blair Park sports facility has both large capital costs as well as yet unknown operating and maintenance costs;

• other potential commitments of unknown magnitude include a possible increase in payment to the Oakland Library
  

MTRC General Recommendations

The City Council should institute a five-year annual planning process and establish a new, volunteer Municipal Financing Planning Committee (MFPC) to annually review the five-year plan and provide guidance to the Council.  The MFPC would not replace the MTRC convened every four years to advise the Council on parcel tax renewal.  The MFPC would meet a limited number of times per year to review the five-year plan and review any new program commitments exceeding $250,000 annually.

The City should prioritize City services and designate them as “essential” and “non-essential” to create a priority of funding.

In the wake of the mismanaged Piedmont Hills undergrounding project, the City Council must establish procedures for executing large capital projects (over $250,000) to the highest standards of professional project management, consistent with recommendations by the League of Women Voters in its undergrounding report.

MTRC Specific Recommendations

The Committee recommends significant immediate action with regard to employee pension and other benefits to freeze these costs and ultimately make changes that reduce the costs as a percent of salaries.   The City Council should undertake a thorough review of these long-term employee costs, with the goal of capping total employee benefit costs at the current level of $5.18 million per year.

The Council should make sure the costs of any new commitments for facilities are fully understood and paid for out of user fees and not General Fund revenues.  Specifically,

• General Fund expenditures on the pool should be reduced to zero in actual costs and potential liabilities;

• Blair Park should be structured to have zero impact on future budgets in its actual construction, long-term operation, capital maintenance and replacement.  Before committing to build it, the City must secure a professional estimate of construction and maintenance costs and commit to a user fee schedule that will recover all operating costs;

• if there is strong community interest in subsidizing costly user-specific programs, the City Council should seek a public vote on individual parcel taxes to support them, with a two-thirds vote required for passage.

MTRC “Supplementary Statement”

“Unless and until reforms are made in the City Council’s financial management, voters should withhold approval of a continued parcel tax.  The major gaps in the Council’s current management relate to employee fringe benefits; assuring proper financial reserves to meet predictable future needs; setting and adhering to budget priorities; and managing and minimizing financial risk in the conduct of municipal construction projects.  In turn, these gaps reflect a more fundamental problem:   the failure of the Council to plan the finances of the City within the context of five-year budget projections and analysis.”

The Statement requires the Council to meet five “expectations” before its signers will support voter approval of renewing the parcel tax.

1.  Fringe Benefits

            The Council must commission an expert, independent analyst of employee benefit obligations, and publicly adopt a clear limit, including a possible dollar cap (of $5.2 million) on the costs of employee fringe benefits, and demonstrate that the limit is consistent with the long-term financial viability of the City.  In 1995-96, employee fringe benefits (health benefits for current and retired employees and contributions to employee retirement plans) amounted to 29% of the amount paid in employee salaries, a total of $1.4 million.  In 2003-04, the benefit ratio was 33%. In 2011-12, the benefit costs have escalated to 53% of the amount spent on salaries, an estimated $5.2 million.

In addition to the City’s dollar cap for benefits, additional costs for  fringe benefits in future years must be borne solely by employees.

2.  Reserves

The Council must require a transfer out of general funds to three reserve funds — equipment replacement, capital improvement and facility maintenance – of at least $1.3 million per year in the annual budget process.   The City currently has no general policy for maintaining reserves and makes contributions to various reserve funds on an annual “as needed” basis and when funds are available. There is no reserve fund for maintenance and repair of City owned buildings, including City Hall, the Police and Fire Departments.

3.  Risk Management and Spending Priorities

After public hearings, the Council will make a public statement regarding required changes in City policy and make those changes, drawing from the report recommendations of the Piedmont League of Women Voters Task Force on undergrounding and the Council’s Audit Sub-committee.

4.  Blair Park

The Council must secure and publicly release  an independent expert estimate of the construction costs for Blair Park and a forecast of ongoing maintenance costs,  including replacement of artificial turf, maintenance of sewer lines, other public infrastructure costs, as well as costs of city employee time devoted to Blair Park.

No construction can begin on Blair Park until the project sponsors have transferred funds to cover all estimated construction costs to the City; the sponsors agree that the City will impose sufficient user fees to cover all ongoing costs, including capital replacement; the sponsors agree to pay all City legal fees if legal action is initiated to challenge or stop the project; and the City adopts a policy that, under no circumstances, will the City subsidize operation of Blair Park. 

The Supplementary Statement notes, “To date, there has been no independent assessment of the initial construction costs (of Blair Park) nor is there any guarantee that the full costs of construction will be donated. This leaves open the possibility that taxpayers will, as was the case with undergrounding, be forced to pay to complete a project initially described as free of cost to the City.”

5.  Swimming Pool

The City Council must resolve that no City subsidies will be paid to operate the swimming pool after July 1, 2012, unless there are offsetting reductions elsewhere in the City budget of an amount equal to the pool subsidy.

Conclusion

The Supplementary Statement concludes that “In recent years, the Piedmont City Council has failed to maintain adequate reserves to meet essential expenses; it has failed to properly anticipate the risks of a major construction project or to adopt policies to avert cost overruns in the future; and it has undertaken new expenses, most notably for employee compensation, without adequately weighing the long-term costs. These facts contribute to a lack of confidence in the Council’s financial management and planning.”

The Statement adds that two actions are necessary: 1) continuation of the current parcel tax for 2013-17; and 2) more proactive and disciplined management of the City ‘s finances, starting with meeting the five expectations above. “To do one without the other,” it says, “would be a serious mistake.”

Members of the Municipal Tax Review Committee:

• Steve Brown
• Ryan Gilbert
• Tam Hege
• Steven Hollis
• Bill Hosler
• Eric Lindquist
• Robert McBain
• Michael Rancer, Chair
• Steve Weiner

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