A recent article about budget problems in the city of Oakland noted that Oakland city council members “resented” the fact that they were being asked to make decisions regarding which programs to cut, and which to save. Let’s hope the Berkeley city council doesn’t feel that way about making tough decisions, since substantial budget cuts are on the horizon
— and in an election year, yet.
The city Manager’s report to council on budget results for the first six months of the fiscal year included bad news about unexpected revenue shortfalls of $1.8 million dollars, and an explanation of what was being done about it. Some of the decreases are related to general economic conditions, while others can be reversed with increased effort on the part of city staff and council.
Starting next year, the situation gets worse. Due to unexpected increases in expenditures, mostly tied to the statewide Public Employee Retirement System, the city’s General Fund deficit could be over $2 million by June 2004, about $6 million the following year, and $8 million in the year ending June 30, 2006.
General Fund dollars, which are somewhat less than half of the total city budget, are those not designated by law for specific purposes. Nearly half of the General Fund dollars are budgeted for police and fire services.
Revenue Reductions: Current ($1.8 million) and Future
Of the $1.8 projected revenue shortfall for the current year, the components most closely related to regional economic conditions are also those most likely to continue over the next five years. More than a third of the $1.8 million is due to a decline in Utility Users’ tax revenue. Berkeley residents paid lower utility bills this year than last year, resulting in lower taxes, and the city expects this trend to continue. Transit Occupancy Tax revenues, based on hotel receipts, are down about $700,000. The city assumes that the sharp decline in travel since Sept. 11 will not be reversed soon.
About $600,000 in lost income is due to a lack of traffic enforcement (ticketing). The report ties this to delays in hiring traffic enforcement staff, and expects this revenue to rebound next year or sooner. However, projected losses from broken parking meters have increased since the six-months’ review was published, and this may also affect ticket revenue.
Expenditures: Annual estimates increased by $5.9 million for 2006
The financial status report to council disclosed three components to the steep increase in expenditures. Health insurance accounts for estimated annual increase of half a million to a million, reflecting industry cost increases of up to 20 percent. There does not appear to be much the city can do about that.
Costs for Workers’ Compensation benefits, now $5.6 million annually, excluding the payroll, temp agency, and overtime cost of replacing “lost time,” “continue to increase at an alarming rate,” according to the report. This could cost the General Fund an additional $850,000 to $950,000 annually over the next five years.
Having worked on a labor/management committee, which partnered with Human Resources to produce a series of training sessions for city supervisors on workers’ compensation this year, I’m aware that the city is attempting to control these costs. Nevertheless, it’s clear that a great deal more can and should be done to reduce avoidable claims.
The big ticket item on the expenditure side, though, was the abrupt reversal of fortunes (and of estimates of future costs and earnings) of the California Public Employees Retirement System.
City employees, as members of PERS, enjoy a defined benefit plan. Cost to California cities for funding this plan is determined on a statewide basis, year to year. The estimates provided by PERS for what Berkeley’s share would be over the next twenty years recently skyrocketed.
Unfortunately, PERS did not reveal this information until after the city had completed negotiations with Fire and Police employees for their contracts, benefits, and retirement packages for the next few years.
PERS’ projected costs for Police and Fire benefits alone are now escalating for each year. By the year ending June 2006, the increase beyond their previous estimates will be $3.9 million annually.
While the reductions in revenue are expected to remain steady, the increases in expenditures due to revised PERS rates and the increasing workers’ comp costs will be accelerate each year over the next four years. With a little luck, some chewing gum and baling wire, the city could approve a budget for next year that manages to put off the inevitable for a year or two.
But that way lies disaster. This really is the time for some careful scrutiny and some tough decisions. It’s painful for council, for staff, and for the residents who depend on city services, when popular programs have to be cut. But other cities have found that budget cuts can be effected with fewer service reductions if they are carefully planned for and implemented before getting to a crisis point. Investing now to prepare for reductions, and deciding now which programs to eliminate or reduce may be politically unpopular, but is the only way to avoid more drastic changes two and three years from now.
Questions? Comments? Ideas for the Audit Plan? Please e-mail the city Auditor at email@example.com, mail to 12180 Milvia Street, 3rd floor, 94704. Audit reports available on line at ci.berkeley.ca.us/Auditor