City Council Starts Budget Digest with $1 Million Gap

The South Pasadena City Council began the arduous task this week of tackling the 2019-2020 budget with a looming deficit of more than $1 million.

The general fund budget of $28.601,050 in revenues is a two-percent increase over last year’s  plan because of the “sustained increases in property taxes, the city’s largest revenue source,” according to city officials.

“Over the past five years, total revenue has increased at a rate of one to three percent per year on average,” according to a staff report presented to the City Council Wednesday night.

“General fund revenues for Fiscal Year (FY) 2019-20 are estimated at $28.6 million. General fund expenditures for city operations in FY 2019-20 are projected to be $28.6 million. The total operating budget including enterprise funds, local return, special funds and grant funds is approximately $54 million. Consistent with the Finance Commission’s recommendation of April 26, 2018, special funds will continue to be expended before using general fund monies whenever appropriate.”

The City Council this week opened the beginning salvos of examining the fiscal plan before it finalizes the 2019-2020 balanced budget, which has to be officially adopted no later than June 30. The examination includes a public process where residents have the opportunity to express their thoughts about the plan. The city FY is from June 30 to July 1.

The city’s top revenue sources include property taxes, $15,414,035, 54 percent; the utility user tax (UUT), $3,485,000, 12 percent; a sales tax, $2,430,802, 8 percent; and user fees, $1,048,900, 4 percent.

The general fund expenditures largely are attributed to personnel costs, city officials said, which total about $19,998,122. Labor negotiations are currently underway with the three unions representing police, fire and city workers.

“South Pasadena employees have not received salary increases over the last two years and received only marginal increases in prior years,” according to the staff report. “A current survey of compensation among comparable small cities in the San Gabriel Valley revealed that most South Pasadena employees are currently paid 10 percent – 30 percent below average. The impact of poor compensation has been reflected in high turnover rates and positions going unfilled due to lack of applicants. Staffing has had to be adjusted to reduce services in many areas, including the Police Department, as a result. The high costs of turnover include loss of institutional knowledge, work stoppage, reduced quality of customer service, and larger investments in recruitment, background checks and training of new employees. Further, in some cases the city has had to use contract employees at a much higher rate than an adequately compensated regular employee. The city must negotiate new contracts with all labor groups for the period beginning July I, 2019, and compensation has been raised as a significant issue that must be addressed.”

The city staff report also paints a generally difficult fiscal picture without substantial increases in revenues and severe cuts in services.

“The city faces significant challenges in both short- and long-term financial sustainability,” according to the staff report. “With expenses increasing every year, but flat or declining revenues, the current structure of services is not sustainable. The costs of staffing rise every year along with the costs of materials and professional services. However, revenue sources are not rising at an equal rate, creating a structural deficit in the future. Property tax increases are minimal, UUT revenues are declining, and sales tax revenue is flat or declining. Without new revenue sources, the city will be forced to function with significantly less staff, requiring the downsizing or elimination of programs and services. Expense reduction strategies alone would require additional cuts every year, creating a compounding impact. Several revenue enhancement alternatives scored high in popularity in a recent community survey, including redevelopment of city properties, the facilitation of a small hotel and implementation of a hotel tax, and the consideration of a local sales tax measure. Staff is requesting concept approval from City Council before finalizing a financial sustainability strategy.”

City Manager Stephanie DeWolfe has characterized the city’s budget crunch, however, only as “modest.”

“The bottom line is, yes, the city does have a deficit moving forward over the next several years,” DeWolfe has 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. … We do have an issue but it’s modest.”

DeWolfe has issued and received the preliminary results from a poll costing just under $25,000 that gauged the interest in a South Pasadena sales tax increase of ¾ of a cent to offset the deficit, which she anticipated could be as high as $2 million in just five years. The tax hike could generate upwards to $1.5 million annually in revenues. The poll results have not been released.

“During this process, a deficit was identified beginning in FY 2019-20 of approximately $500,000, increasing to almost $IM over the five-year projection,” the staff report states. “However, when undetermined variances are included, such as rising pension costs, capital improvements, and other organizational sustainability and Strategic Plan goals, the deficit is just over $1 million in year one and almost $2 million in year five. City staff presented a number of revenue enhancement scenarios and potential expense reductions.”

Frank Catania, principal management analyst, was hired by the city to analyze the budget and make such recommendations. Catania used to be on the South Pasadena Finance Commission before being hired by the city to study the budget along with the five-year general fund financial forecast.

Some of the remedies recommended along with the sales tax hike are raising revenue from parking meters on Fair Oaks Avenue and Mission Street, which could raise $245,500 next year; 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.

Voters have to approve a sales tax increase by way of a ballot measure, but in order to get the issue on the ballot, the city has to first declare a fiscal emergency. (See related story Pg. 1)

Also, Catania has suggested to implement a retail Cannabis tax, but the city would first have to make it legal to have such a store. Cannabis is currently illegal in South Pasadena, according to city officials.

Officials also looked at ways to encourage investment in business districts that generate property and sales taxes; increasing city fees for services; allowing new land uses; and redeveloping city properties that will generate more money over the long term. There’s talk of bringing a boutique hotel to South Pasadena that could add revenue through an occupancy tax. That’s years in the making, however, officials say.

The council also are looking 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 biggest fiscal challenge facing the city, however, is the increasing liabilities presented by the pensions costs with CalPERS, officials say.

“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,” according to a Catania-authored report. “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 the city also 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.”

Another challenge the city faces, though, is to avoid cutting funding 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. The UUT is back in front of the voters next year.

The City Council’s next meeting is scheduled for June 5 when the budget process will again be the main focus.

Forecast 03-06-19