Berkeley’s fiscal condition is analogous to the global climate condition — not at all good, moving in the wrong direction, and portending eventual disaster. The City however, has somehow managed to develop a comprehensive and intricate Climate Action Plan (!) but not a Fiscal Action Plan.
For the last ten years at least, there have been numerous fiscal warnings and analyses from a wide variety of sources — City Managers Kamlarz and Daniel, the City Auditor, concerned citizens including myself, Zelda Bronstein and Isabelle Gaston, outside consultants and auditors, the Committee for FACTS and Berkeley Budget SOS, and the NEBA Newsletter, among others. Yet nothing has substantively improved and many aspects have worsened.
The City has about $1 billion in unfunded liabilities (half for employees and half for infrastructure), no meaningful way to pay these down, and, in the most recent labor negotiations (discussed below) has worsened the situation dramatically by awarding very large employee compensation increases. As former City Manager Phil Kamlarz stated, way back when, in the City’s 2008-2009 Budget Book cover letter “…the only method to effectively eliminate the City’s structural deficit is through cost reductions— primarily through controlling labor costs, since employee salary and benefits make up 77% of the City’s operating budget”.
How has our worsening fiscal situation impacted the community? There are far fewer amenities and services available in our town. We have lost swimming pools, the pier, much of the Rose Garden, Iceland, swathes of John Hinkel Park, use of the landmarked Old City Hall, and the West Berkeley Senior Center. Most other public structures are in seriously deteriorated condition and too dangerous to use in an earthquake. At the rate we are going it will take many many years and dollars to upgrade our street infrastructure, by which point we’ll have to start all over again as the “new” streets age. Since there are fewer City employees (with the cost per remaining employee having grown astronomically), less service is necessarily being provided in each service category, such as police, fire, social services, public works, etc., despite some purported marginal increases in so-called service efficiency and customer care. The worsening fiscal situation, while not being addressed in a meaningful way through controlling labor costs, has nevertheless incentivized our officials to nickel and dime residents with annoyingly higher costs to park a car, pay off a parking ticket, get a permit, and get rid of trash, and to justify this constant money-grabbing with climate change and spurious fiscal rhetoric. Many non-profit agencies serving needy community members have to literally beg for tiny $ amounts just to keep afloat, while the City gives incredible perks to its own employees.
Berkeley’s fiscal condition encompasses many diverse but inter-related causes, summarized below.
The Demographics of Unlimited Demand
The City has limited space and money, but, unlike most other local cities, is subject to unlimited and vociferous demands. There is a large and growing population of “dependents”, i.e. those who need, want, and/or demand goods and services, but do not or cannot pay toward their provision. In this category are about 45,000 college level students, close to 1,000 regular homeless persons, low-income residents, and housing-poor renters. One might also add the University of California itself which receives about $20 million in free services, the hundreds of local non-profit organizations and NGO’s which pay no property taxes and often receive City money to operate and to build (where are all the philanthropists who used to fund such groups?), and for-profit property developers who sometimes receive dubious subsidies.
Excessive and Irresponsible Labor Contracts
This subject is hard to discuss rationally without being labeled anti-union. For the record I would like to see reasonable achievable universal benefits for all Americans a la Bernie Sanders and Scandinavia–but the City’s compensation levels, especially regarding benefits, are so high that they dwarf those of most other Berkeley residents and middle-class Americans, starve out other public goods and services, and make unachievable a workable long-term fiscal remedy that is fair to all stakeholders. City unions and their enablers spout their own version of “trickle down” economics—just give us everything and somehow the benefits will eventually trickle down to the rest of us.
For an enlightening list of compensation for each City employee in 2014 (now much higher!), I refer readers to http://www.mercurynews.com/salaries/bay-area/2014 To give a few examples: a Building Maintenance Mechanic then had a base salary of $70,117, City-paid benefits of $64, 347, for a total compensation of $134, 464. A Psychiatrist Supervisor had a base salary of $198,082, City-paid benefits of $95,461, for a total compensation of $293,543. For a real shocker, check out the total compensation of Fire Department employees and remember that these employees work one 48 hour shift and then get 96 hours off (four 24 hour days off) for a total working month of ten days on and twenty days off.+
Note that these City employee benefits are not taxable, so each City employee is effectively shorting the State of California and the IRS of substantial tax revenue. Not Donald Trump perhaps, but a pretty special deal unavailable to the rest of us, and one that has been extended in the most recent contract deals. It should also be noted that City employees have deluxe “cradle to grave” benefits—free or just about free health care for life (e.g. $5 co-pay on prescriptions), guaranteed inflation-adjusted retirement, employer paid life insurance, almost 100% job security, health club membership, disability insurance, plenty of leave and vacation time, counselling.
The most recent round of labor contracts covers various one to three year periods between fiscal years 2015 and 2018. Frankly, they are presented in such a confusing way (another issue, Fiscal Non-Transparency!) that I am hard-pressed to describe them. Suffice it to say that these contracts include: no contributions to health care premiums and no new co-pays, substantial salary increases, some payment increases by employees toward their PERS benefits (previously paid in full or in part by City) that are, however, set up to start only at the last year of the contract term and also to avoid state and federal taxation. Some examples: over three fiscal years ending June 2018, SEIU manual, clerical and paraprofessional workers, excluding refuse workers, will receive a compounding salary increase of about 14% plus a one-time $723 bonus; refuse workers will get about an 18% salary increase plus a $723 bonus; in year 3, all these employees will start to contribute 8% to the Employer Share of City’s CALPERS cost; by having employees contribute to the Employer rather than the Employee portion, I believe this enables qualification of the contribution as a further tax-free benefit. Berkeley firefighters will receive over the two fiscal years ending June 2017, a compounding 4.5% salary increase with larger increases (about 7%) to those trained in water rescue and to long-term employees with over 24 years of service; starting in the last year only, firefighters to contribute 2% toward the Employer PERS cost.
Here is a shocking and revealing tidbit. With respect to SEIU employees, the City was able to re-negotiate its health insurance contract to provide the same level of insurance at a $3 million saving. Great! However, instead of putting that saving in our General Fund to pay for vital municipal needs, in a special “side-letter” agreement between City and SEIU Local 1021, $1,672, 000 was paid out as immediate $4000 bonuses to over 400 SEIU members and $1,359, 587 was put toward unfunded SEIU retirement health plan liabilities.
The net budget effect of the most recent round of labor contracts (excluding however two as-yet unfinalized contracts, which will unquestionably make matters worse) is a General Fund projected deficit of $4.6 million plus in 2018 rising to $7.6 million plus in 2020. There will also be similar negative effects on the $200 million “special fund” budgets (explained below).
Other Fiscal Irregularities
Aside from our $1 billion in unfunded liabilities, excessive labor costs, and shrinking provision of City goods and services, there are other related fiscal problems.
Inadequate $ Reserve and No Reserve Policy
The total City all-funds annual budget (General Fund plus so-called Special Funds) approaches $362 million annually. The General Fund encompasses about $162 million annually and the Special Funds encompass the remaining $200 million. Although the General and Special Funds are often identified and treated separately, together they are needed and integral to funding ongoing City services, employees, and functions. The main difference is that police and fire services are paid via the General Fund while most other services operate via special “accounts” with caches of funds “reserved” for various functions, such as streetlights, refuse, park maintenance, etc. Basically, the distinction between the General and Special Funds is spurious when it comes to understanding the City’s finances, and many other local governments have no such distinction and fund most everything through their General Fund.
A municipal “Reserve Fund” , or “rainy day fund” is money set aside to ensure government’s ability to maintain vital community services during times of economic uncertainty or decline, emergencies, catastrophes (such as earthquake, flooding, or fire), or an extreme special pressing need that may unexpectedly arise. When Reserve funds are spent down, the expectation is that they will be replaced as soon as possible. The Reserve Fund is supposed to be distinctly separate from moneys set-aside for unfunded liabilities (pensions, infrastructure).
By professional municipal finance standards (Government Association of Finance Officers, GFOA), a minimum reserve level of 16.7% of the General Fund budget is recommended even when there are no special risks, such as earthquakes. (When the total municipal budget vastly exceeds the General Fund budget, as in Berkeley, one must assume that the reserve level should apply to the total budget). Right now, Berkeley’s target reserve level is only 8% of the General Fund, or $13 million. At the minimum recommended 16.7% level, it would be $27 million; to cover the entire $362 million City budget, we would need to set aside $60.5 million for minimum coverage.
According to the City Auditor, “Berkeley’s general fund reserve policy lacks all of the core elements recommended by the GFOA”. Further, our City officials have barely begun the necessary discussion of the Reserve situation, and at Council meetings of February 23, 2016 and March 15, 2016 effectively cut short the excellent report of the City Auditor and referred the matter for further study. I have long noticed that the City Auditor is not a particularly welcome presence at Council meetings, since she is usually a bearer of (truthful) bad news.
City Credit Rating Not at the Top
Berkeley’s bond rating at AA+ is Good, but could be better (Strong, AAA). The rating will affect the City’s cost to finance new bonds (and hence the cost to taxpayers), especially important this year as the City is likely to float a $100M infrastructure bond in November. Per the City Auditor, to get the top AAA rating, the City would absolutely have to have a formal policy and plan to address our unfunded pension liabilities, which of course is needed anyway to plan our fiscal future. Needless to say, there is no formal policy or plan in the works.
Uncertainty as to Future PERS Contribution Requirements
The PERS system operates on the assumption of a 7.5% rate of return on investments, and bases its required City contributions on this estimate. Given the sluggish performance of the stock market over the last two years and the possibility of a downturn, it is likely that the actual returns will be much lower and a compensatory required City contribution will be instituted. Many experts have suggested that a 4.5% rate of return would be a more appropriate assumption. Further, it is unclear if the City has factored in the PERS cost of recent increases in City employee PERSable salaries.
Lack of Clarity and Transparency in Presentation of Fiscal Issues
I have been closely following City matters for almost twenty years, especially fiscal matters, and I can still barely decipher the City budget, Council reports, and labor contracts with respect to the global impact on our City’s fiscal condition. The best of these reports occur only every two years, Projections of Future Liabilities, with the next one due in early 2017. (We can thank Berkeley Budget SOS and the Committee for FACTS for spurring the production of these reports, with a ballot measure that secured almost 40% approval and incentivized Council to ask for such a report). Reports from the City Auditor and the City’s Finance Manager are also occasionally helpful. But for the most part, contracts are signed, money is spent, deals are made without any simultaneous information and projections as to how they affect the City’s overall fiscal condition.
No Citizen Oversight
The City has about fifty citizen boards and commissions. We once had a Citizens Budget Review Commission but this was summarily eliminated by Council in April 2005 after it had questioned aspects of the November 2004 City tax measures. We still need, more than ever, a panel composed of citizens and experts to receive pertinent fiscal information on an ongoing basis, work through issues, inform and advise our Council and residents, and provide community education and leadership.
Voters Apathetic and Disinterested in Fiscal Matters
In the recent voter survey conducted in conjunction with potential November tax measures, an amazing 64% of likely voters felt that things in Berkeley are going in the right direction and that City services are good to excellent. Only 4% felt that managing the City budget was an important issue. With numbers like this it is no wonder that our officials don’t feel pressed to take any serious fiscal action. I can only conclude that our residents want to believe that we are “the best” in “the best of all possible worlds”. Pessimism and doomsaying is apparently not an acceptable attitude, a la Herbert Hoover. Many newcomers and younger folks do not miss the disappeared amenities and services they never even knew and their standards for the good life in a good community with good government must simply be lower. Understanding budgets is not fun nor easy nor necessarily “progressive”, particularly if understanding will indicate the necessity for difficult actions. It is much more acceptable to Berkeley voters to generically support public education, climate action, and labor unions without thinking much about taxes, costs, reserves, unfunded liabilities, credit ratings, and running out of City money.
The Growth Bailout Fantasy
Smart-growthers, developers, and their political alter-egos believe that increased population, density, growth and development will be the magic cure for all of our social, climate and fiscal woes. Somehow developer fee and other mitigations along with new resident and visitor spending will not only pay for the new needs being created but will be adequate to bail us out of our current fiscal hole. This is clearly self-serving magical thinking, and there is not a shred of evidence that such growth will ipso facto make anything better. It is simply a value/lifestyle choice disguised as necessity that is being foisted on a gullible public. Even were Berkeley’s growth to continue on its current course, there is no direct connection to real sustained improvement in the way Berkeley addresses its fiscal issues.
No Leadership from Council or Officials
There is not one sitting Council member who approaches the City’s fiscal condition with any level of leadership, knowledge or seriousness. The only current Council candidate so far with any credibility on this issue is Isabelle Gaston (running in District 6); I am watching, but not at all optimistic, that other fiscally credible candidates will emerge. There are some rare occasions on Council of lip service to the enormity of the fiscal problem (thank you Councilmember Maio), but mostly our Councilmembers are “full of lip”. Especially in election years, our elected officials and candidates want the endorsements, contributions, and PACs from our City unions, numerous local NGO’s and interest groups; they certainly don’t want to face angry people who claim, for example, that the City Reserve Fund is really just a fund for the local rich, set up to deprive residents of all the goods and services to which they feel entitled (I have actually heard this statement from a regular Council attendee). Most of the people regularly faced by Council are perforce angry, alienated, and self-righteous supplicants for more public funds, and they are pandered to by several Council members.
Our City Council and the City Manager are supposed to be the prime stewards of our City’s money and assets and to provide leadership on important substantive issues. They have failed miserably with respect to our fiscal condition. We are spending more money than we have, what money we have is mostly being spent on a shrinking number of active City employees and a growing number of retired City employees, and there is no workable plan or path to save us from fiscal decline and disaster.
+For a discussion of firefighter political clout, see “Firefighters’ Union Owes Clout to Its Free-Spending Chief”, Noam Scheiber, New York Times, October 18, 2015.
Originally published in the NEBA News, spring 2016.
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