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October 16, 2017

Money talks–thoughts on the City’s Budget

Madera City Hall Building

For those who are interested in learning more, this blog entry is an extension of an article recently published by The Madera Tribune.

I’ve been in the City Management profession a little over 40 years. One of the things that has not changed during that time is the difficult choices cities make between paying for employees and investing in streets, parks, storm drainage, and other similar facilities. This article will explore those choices just a bit.

A City’s budget is a complex document. In many respects the underlying principles are similar to those that a family may use to balance their own finances. Money is earned, bills get paid. There are short-term expenses, and long-term commitments. Money is put away for long-term needs and unexpected events. Though the fundamentals are similar in nature, the factors that must be considered significantly increase in the City’s budget.

One of the largest financial challenges the City is currently faced with can be found in employee pensions. Just this year the City learned that the cost of employee compensation is going to increase significantly due to the increasing costs associated with providing retirement benefits through the Public Employees Retirement System (PERS). Retirement costs have been a major factor in forcing some cities into bankruptcy, like Vallejo, Stockton, Mammoth Lakes, and San Bernardino.

The City Council was recently provided projections demonstrating that retirement costs will increase by 68% between now and the year 2022. The City’s revenue, much like a regular household income, is unlikely to grow fast enough to cover this increased expense. An annual growth rate of almost 14% would be necessary to keep pace and that isn’t going to happen. Every city, county, and special district in the PERS retirement system is faced with this challenge. While Madera’s immediate financial position today is sound due to prudent planning – we’ve maintained a “rainy day fund” of over $13 million — the next five years will present significant challenges. Each dollar we need to spend on increasing retirement costs is a dollar less we have available to spend on the services the community wants. Simply put we’ll be able to afford fewer people and fewer facilities over time and every service currently provided by the City will be impacted in one way or another.

Some relief may come in the form of pension reform. New laws and court decisions at the State level may change the way that public employee retirement benefits are provided in California. It’s important to understand that our employees didn’t create the challenges we’re facing; they were hired into jobs with a retirement system they didn’t select or design. Nevertheless if pension reform occurs retirement benefits could very well decrease and public employees will may pay more out-of-pocket for the fringe benefits they receive. If it occurs, relief from the State may be several years away. Until that relief is received, the City of Madera, and many if not all of those enrolled in the Public Employees Retirement System will be seeking to reduce their operating budgets.

How will these changes impact people in Madera? People tend to notice if they see a change in a service they use regularly — longer lines at customer service counters or cuts in recreation programs. Less noticeable but just important are reductions in the amount of resources available to properly maintain City infrastructure and facilities. Streets, parks, highways, sewer and water systems… like taking care of your house, your car, or anything else that breaks down, the longer you wait, the more expensive getting those assets back on track becomes. History has shown that cities, counties, states, and even the Federal Government have not performed well in finding ways to allocate the funding necessary to properly maintain this kind of costly public infrastructure.

By way of example in 2017 the American Society of Civil Engineers gave the United States a “D” grade for its roads. The US Department of Transportation estimates it may cost as much as $1 trillion to bring the current highway and interstate system up to date. When you begin taking into account additional State and local government infrastructure needs – estimates exceed $3.6 trillion. That’s a frightening figure.

Lack of funding for infrastructure has been an issue for over 40 years. As I entered the city management profession in the late 70’s I remember seeing a presentation by Indianapolis Mayor Richard Lugar (now retired US Senator Lugar) that has never left me. He joked that he directed the City of Indianapolis to resurface every street in the city every 50 years, “whether they needed it or not”. The joke, of course, was that like every city in the United States, there wasn’t enough money to pay for needed street repairs, even in the 1970’s. At that time, it was a big problem. Fast-forward to today, the problem has grown exponentially. And gets worse every day.

Because there will never be enough money for all the things we want or need, our elected decision makers are going to face tough choices. Does Madera replace aging infrastructure, or do we fund immediate service needs like public safety or parks programs? Madera is going to have to carefully prioritize how it spends. Near or at the top of any municipal priority list is public safety.

Last year, Maderans provided an 80% positive vote for Measure K, a sales tax measure in support of public safety. In the first incomplete quarter of collection last fiscal year, the City collected approximately $700,000 and anticipates collecting $3.5 million this fiscal year. Funds have been used entirely to hire 15 additional civilian and uniformed police professionals and in funding a new fire station (currently in design) to be constructed towards the northern end of the City. A new 109 foot ladder truck for the Fire Department has already been ordered using a separate funding source. Once the new fire station is operational, our fire services will see dramatically reduced response times, four minutes or less, for a vast majority of the City.

Measure K is both a game changer and an important financial safety net for public safety. At the same time it does not limit our need to make difficult choices in other areas of city services and infrastructure.

My next blog, which I’ll post this week, will provide some additional information about public employee pensions in California.

David Tooley
Madera City Administrator