City Budget Facing $1 Million Deficit

So Pas City Manager Stephanie DeWolfe explains budget challenges facing the city. Photo by Steve Whitmore

The South Pasadena City Council recently heard the city budget might be facing a deficit of more than $1 million driven, in large measure, by pension costs.

The budget presentation on March 6 did not require the council to take action but it began the discussion of potential ways to increase revenues, including raising the sales tax, as well as what services might have to be cut.

The City Council is in the beginning stages of examining the fiscal plan before it finalizes the 2019-2020 balanced budget, which has to be adopted no later than June 30.

City Manager Stephanie DeWolfe began the presentation by characterizing South Pasadena’s budget crunch as “modest.”

“The bottom line is, yes, the city does have a deficit moving forward over the next several years,” DeWolfe told the council. “I do want to clarify that it is modest compared to many other cities that are struggling with CalPERS issues right now. So that’s the first point. We do have an issue but it’s modest.”

However, later in the same discussion DeWolfe and City Councilmembers also looked at the possibility of declaring a citywide fiscal emergency to allow for additional taxes.

She went on to say the city has a variety of options to close the budget gap, “but none are easy.”

“What’s most important about the beginning of the conversation tonight is that we’re looking for community engagement on these issues,” she said. “Because they are difficult challenges in front of us, I think we all on the dais agree how important it is the community engage with us and help us frame the solution as we move forward.”

Frank Catania, principal management analyst, was hired by the city to analyze the budget issue. Catania used to be on the South Pasadena Finance Commission before being hired by the city to study the five-year general fund financial forecast. Catania presented the budget forecast to the council at the March 6 meeting.

Some of the remedies presented during the council meeting included raising revenue from parking meters on Fair Oaks Avenue and Mission Street, which could raise $245,500 next year; increasing the sales tax by 75 cents; and implementing a public safety parcel tax. The combined sales tax is now 9.5 percent. The latter two tax increases would not be effective until fiscal year (FY) 2020-2021. The city FY is from June 30 to July 1.

There was an idea floated in the Catania report to implement a retail Cannabis tax, but the city would first have to make it legal to have such a store. Cannabis is illegal in South Pasadena, according to city officials.

Officials also mentioned as potential sources of new or increased revenue encouraging investment in business districts that generate property and sales taxes; increasing city fees for services; allowing new land uses and associated taxes such as the cannabis tax or even a hotel tax; and redeveloping city properties that will generate more money over the long term.

The council also looked at potential cuts to employees and services, including eliminating some part-time employee positions; eliminating crime prevention programs, the police cadet program, and certain special events, such as Concerts in the Park; cutting library part-time hours; and reducing teens and senior programs.

The council did not take any action at its March 6 meeting.

“Tonight we are not making any decisions,” DeWolfe told the council. “We are just presenting it to you to frame the issues and to get the conversation started.” Another issue that is facing the council is that labor negotiations are about to begin and it’s unknown at this time how that will affect the budget gap.

“What that means at this point is that Frank’s slides show that our gap next year is a little under $500,000,” DeWolfe told the council. “I think the reality is the gap next year is more like a million dollars, potentially a little bit more and those increased costs flow all the way through his model. So we gave you the actual numbers of what we know but I want to manage expectations by saying we know a number of things that will increase that, so the gap next year is at least a million dollars.”

Councilmembers asked questions and made suggestions, such as including an inflation factor, the need for a sales tax or a public safety parcel tax. Those two taxes would require a ballot measure in the next general election.

However, the city could do it quicker but would need to declare a fiscal emergency, according to DeWolfe.

The budget issue is of such magnitude the council has authorized an aggressive public outreach campaign to inculcate the community at large into the process that may require cuts to popular city services and a restructuring of taxes, which includes adding a public safety parcel tax and increasing the sales tax.

City officials are going to have at least two town hall-type meetings that will encourage the public to participate. Also, they will be taking their budget deliberations to various community groups such as Rotary, Kiwanis and Women Involved in South Pasadena Political Action (WISPPA), to name just a few.

“Staff recommends a robust community engagement program to review all potential options, identify preferred alternatives, and inform future strategies.,” the Catania report states. “A financial model will be presented to the community establishing the baseline gap for each year and outlining the potential budget impact of a variety of budget cuts and revenue enhancements, allowing residents to test a variety of options and scenarios. Through the community engagement process, staff anticipates gaining perspective on those options, or combination of options, that receive the greatest support from the community. That feedback will then be used to guide the development of a Long-range Financial Sustainability Plan to be presented to Council as part of the annual budget in June.” 

The five-year financial sustainability plan deals directly with the increasing liabilities presented by the pensions costs with CalPERS, the biggest challenge facing the city.

“CaIPERS’ investments suffered greatly from the economic recession that began in 2008, when the system suffered a gross impact of nearly 35 percent loss to its investment funds,” the Catania report states. “As a result, CalPERS has become much more conservative in its estimates of return. Further, CalPERS has shifted policies to account for longer lifespans among retirees and made a significant change in the ratio of working contributing members to the number of retired receiving members. While there were two working members for every retired member in 1990, there are now two retired members for less than one working member today. These are just a few of the factors that impact the financial position of CaIPERS.”

The Catania report goes on to state that the city has no control over the CalPERS situation.

“The bottom line,” the report states, “is that CalPERS investment funds have fallen to an alarming level and must be stabilized. While this has potentially devastating impacts on local governments, cities have no control over the management of the CalPERS investment funds or the rates that are subsequently charged to member agencies to support the fund. Further, cities have no legal path to reduce the provision of benefits to employees contracted under the pre-PEPRA rules.”

It’s important to note, city officials say, that South Pasadena is not alone in this fight. The CalPERS issue has affected many cities in devasting ways. Some cities in the not-too distant past, such as Stockton, have declared bankruptcy.

South Pasadena’s challenge is far less fiscally dramatic, officials say, because of “conservative fiscal management.”

“In summary, as a result of conservative fiscal management, South Pasadena’s pension burden is modest compared to many other cities,” the report states. “According (to) the California Policy Center, South Pasadena’s burden ranks 242 out of 459 cities. Cities facing the largest threats, some in the San Gabriel Valley, allocate over 12 (percent) of their total revenue toward pension contributions. In comparison, South Pasadena allocates approximately 5 (percent) of total revenue. These percentages are anticipated to increase for all cities, however, reaching crisis proportions for those hardest hit. Despite these factors, the City is still facing a financial shortfall over the next five years and must be strategic in building a sustainable long-range financial plan.”

Last year, as part of the five-year strategy, the city identified more than $100 million in critical projects, known as the Capital Improvement Plan (CIP).

“This is the first time the city has had a comprehensive inventory of capital needs,” the report states. “These projects include larger systems such as roadways and water infrastructure, which are critical to maintaining quality of life, as well as smaller projects such as upgrading electrical systems, plumbing, and drainage mitigation. Less than half of the projects in the CIP are funded.”

One of the challenges the city faces, though, is to avoid cutting funding that was believed to be saved by the passage of the utility users tax (UUT) last November.

The proposed elimination of the UUT was on the November ballot but was soundly defeated by nearly 80 percent. It comes up again in front of the voters in 2020.

Although the city overcame the potential loss of General Fund revenues from the utility users tax (UUT), the city now faces additional financial challenges, prompting the need for a long- range financial sustainability plan,” the report states. “As with all cities in California, South Pasadena is burdened by increasing pension costs from CalPERS (the state pension fund), as well as increasing costs across the board for materials, contractors, and personnel. In addition, the city has aging infrastructure that will require significant additional investment in future years. The five-year forecast demonstrates that city revenues are not projected to keep pace with these rising costs. Further, the UUT will sunset in 2022 if not renewed by voters in 2020. The loss of this $3.4 million would dangerously escalate the severity of the city’s financial position.”

This year’s 2018-2019 General Fund (GF) revenues are at $27,049,618 while the GF expenditures are at $26,286,835, according to city officials.