Though it’s the fiscal year 2013-14 budget that the City Council must adopt in two weeks, the council has more than just the next 12 months to consider when deciding how to manage city funds.
The council worked late into the night Tuesday pouring over the details of City Manager Steve Pinkerton’s budget proposal for the upcoming year, which was illustrated by presentations given by the heads of the city’s various departments on what resources each will need.
But in addition to the departmental presentations, council members also learned from Pinkerton that several unfunded liabilities, the costs of which will continue to escalate for years to come, must receive immediate attention.
Among other consequences of that reality, departments have been asked by the city manager to reduce their operating costs for next year by 5 to 8 percent.
“Even though we’ve done a lot of great things to address expenditures … we’ve still got a real uphill battle in the future if we want to balance our budget and address all of our unmet needs,” Pinkerton said.
The three expenses that will be most difficult to corral are the city’s future annual contributions to CalPERS, the agency that manages retirement plans throughout the state for public employees; retiree medical costs — despite the city making headway on those costs through labor negotiations over the past year — and road and bike path pavement maintenance.
As Pinkerton has stressed all along, the actuaries for CalPERS who project the rate of return on the investments that generate part of that entity’s cash flow have painted an unrealistically rosy picture in the past and will soon begin to ease away from previously optimistic expectations.
That means local jurisdictions will have to pick up the slack.
“The sobering news is the fact that PERS has, as you know, reduced the rate of return,” Pinkerton said. “Our actuarial believes they’re probably going to be reducing the rate of return another quarter of a percent (this year) and they’re likely finally going to acknowledge that people live longer, and that certainly impacts the PERS liability as well.”
The city manager illustrated for the council on a graph that in five years the city will be paying 30 percent of payroll into retirement, or about a 60 percent increase for miscellaneous employees and slightly less than that for public safety employees who have agreed to pay more of their share of the costs.
Though, Pinkerton added that Davis could be in better shape than other jurisdictions in the state that have projected dedicating 50 percent of payroll to employee retirement costs.
Retiree medical costs, meanwhile, will continue to consume a large chunk of the city’s general fund, despite several of the city’s labor groups agreeing to help share those costs in the future as well. Pinkerton projects a 4 percent net increase in those costs per year over the next five years.
“We made huge strides this year with the labor agreements that have been agreed to, to date,” Pinkerton said. “The good news is we’re about a half million (dollars) less this year (for retiree medical costs) than we would have been had we not reached settlement with our bargaining units.
“The challenge is that those medical costs continue to increase.”
As for road and bike path pavement maintenance costs, an unmet need that the council already has committed to spending $25 million on during the next two years, Pinkerton projects that the city will have to spend just under $4 million per year after that initial infusion from the general fund in order to keep the city’s pavement infrastructure system from failing.
A city consultant came before the council late last year to warn that if the city ignores its road and bikeways any longer, it could build up a backlog of work worth more than $440 million in the next 20 years.
Then, continuing the theme of fronting dollars in this year’s budget to save on costs down the road, Pinkerton also has dedicated about $500,000 in this year’s budget for investment in the city’s water conservation efforts.
With the city beginning to pay for its water use this year, coupled with a drastic increase in water rates driven by the debt service on the $113 million Woodland-Davis Clean Water Agency surface water project, the city could be paying between $2 million and $3 million per year on water.
“Our (hope is) that it becomes significantly less,” Pinkerton said.
If the projections hold true for CalPERS, retiree medical, roads and water costs, Pinkerton estimates that the city will build about a $5 million structural deficit by fiscal year 2017-18.
The council is expected to approve the first reading of the ordinance that would adopt the fiscal year 2013-14 budget at its meeting July 9. The council won’t officially adopt the budget, however, until it returns from recess in late August.
Instead, the council approved allocating $70 million for the city manager to be able to fund day-to-day operations over the next few months until the budget is adopted.
— Reach Tom Sakash at [email protected] or 530-747-8057. Follow him on Twitter at @TomSakash