“GLOOM AND DOOM” IS REAL UNFORTUNATELY
Let’s not stand in the rain – Who will lead us to shelter and a brighter day?
The city faces enormous financial challenges. After CalPERS rates change, the city may face as much as $1M a year in ongoing pension expense. Trading-off these expenses against the current City Council’s costly desires for a new city hall, streetscaping, new police station, and new parking solutions, etc. will be tricky.
By Andrea Eaton –
Now living in Los Altos, a retired economist from the Washington, DC area, where she managed $50 million to $200 million infrastructure projects and diverse regional services.
CHOOSING AMONG CANDIDATES
I have been closely following the City of Los Altos’ financial issues, and here is how I will evaluate Los Altos city council candidates 2012:
- Which ones have the aptitude and intellectual assertiveness to proactively evaluate complex issues that come before them?
- Which ones will look at the big picture and the long-run rather than following the practice of our current council to just make ad hoc decisions?
- Regarding familiarity with public finances and city financial issues — as far as I know, none of them–with the exception of Jan Pepper, who is employed by the City of Santa Clara–have the direct background or knowledge. So the question is: which ones will make sure they have knowledgeable outside advisors (knowledgeable citizens or consultants as needed)?
- Which ones will closely monitor the progress of large or important City projects in terms of cost, schedule and quality, so that the problems of cost and schedule overruns do not occur again, as happened with the downtown streetscaping?
- Which ones will be more inclusive and outreaching than the current Council has been …in involving citizens and businesses in City policies and decisions?
which candidates will make sure they have knowledgeable outside advisors…knowledgeable citizens or consultants as needed…rather than trying to know it all themselves
The City’s Pension Issue
The issue is not pension reform. That must be done at CalPERS (California Public Employees Pension Fund) where the unfunded liability is due to a number of factors.
The issue for Los Altos is: the need to plan financially for the expected large increase in the cost of employee pension benefits in the next several years. The size of the increased pension costs is not yet known. For Los Altos, it could be an additional annual $500,000 to $1,000,000 and/or more.
The issue is not pension reform… but the need to plan financially for the expected large increase in the cost of employee pension benefits in the next several years…$500k to $1 million or more
Why will this happen? CalPERS has a large unfunded liability that must be made up by all public agencies who are members of CalPERS, such as Los Altos. The current Los Altos City Council does not appear to have addressed this issue at all.
The question to be answered is: should the City be establishing a reserve fund in anticipation of these pension cost increases? Definitely, yes. See my full report from 2011 here. The upshot is that the unfunded liability of the 2 pension funds (CalPERS and CalSTRS–California State Teachers Retirement System) will not only have a negative budget impact on City of Los Altos, but also on our education institutions (Los Altos School District, Foothill-DeAnza, and Los Altos High School.)
At the time I prepared the report, the CalPERS senior actuarial staff and their actuarial consultant recommended that the rate increases start in 2012. However, the Boards of CalPERS and CalSTRS did not follow the actuaries’ advice, thereby pushing the problem down the road. The CalPERS actuarial consultant continues to recommend instituting the needed rate increases to address the unfunded liability problem. The Board continues to ignore the actuaries’ advice. The problem will have to be faced.
It seems to me that the City needs to make a serious evaluation of the risk of potential large hits to the budget. It is likely that we must start to build a significant reserve fund now, to avoid a potential serious budget gap. (The City only has a very small reserve fund for this purpose. Also, the City has moved to a 2-tier retirement system for new employees – however, that change will not have a positive cost impact until 20 to 30 years from now.)
The City’s Other Financial Issues
Our City revenues will likely grow slowly. The current City Council has extensively discussed doing some new large-cost projects. Yet, the current Council does not appear to have looked at the overall City financial picture and how these projects would impact that. Can we afford them? Particularly, they do not appear to have taken into account the budget impact of upcoming new non-discretionary or unanticipated costs, such as certain near-term large infrastructure costs, like storm drains, as well as the pension cost increases.
I have not seen any report or discussion by the current Council about how the City would fund both their desired new projects as well as pay for the upcoming nondiscretionary costs. Likely, the City cannot fund all of the projects the current Council wants to do.
I have not seen any report or discussion by the current Council about how the City would fund both their desired new projects as well as pay for the upcoming nondiscretionary costs
New projects that the current Council wants to do
- Phase II Design of First Street streetscaping project: $268,000.
- Phase II Construction First Street streetscaping: $3.3 million
This is not even in the list of Capital Improvement Program (CIP) scheduled projects, so the $3.3 million would have to be added to the CIP and funds appropriated from the operating budget. The Finance Director states that there is no financial ability to add new projects to the CIP.
- New City Hall: $16 million proposed
The Council is intending to finance this without needing or getting voter approval. This would be done by financing the project with by a type of bond called a Certificate of Participation (COP-a sort of lease-back financing). Approximately $400,000 – $1M may need to come out of the General Fund for 20-30 years depending on how it is financed.
- New Police Station and Civic Center internal roads: $25 million proposed.
This requires voter approval to approve the bond which would be paid for by a parcel tax increase.
- Repairs to Hillview: $2 million proposed.
Would need to be funded by use of Reserve Funds, budget operating fund allocation, or a loan financing. A loan financing would add approximately $120,000 to the annual budget long term.
- Council discussion of new parking facility or expansion. Costs $ unknown.
Known upcoming non-discretionary costs
- Pension cost increases discussed above:
amount unknown, possibly an additional $500,000 to $1,000,000 or more per year.
- Funding of currently depleted storm drain maintenance fund ~$250,000 per year.
- Expected large expenditures for environmental requirements related to storms drains (must be done by 2014). The City has a Draft Storm Drain Master Plan, which it has had for 6 months or more, but won’t release to the public. Costs $ unknown, but may be significant.
It appears to me that it is unrealistic to think the City can do all of these things. I urge you to vote for candidates who will find trusted advisors and include public input to make the necessary trade-offs.
Vote for candidates who will find trusted advisors
and include public input to make the necessary trade-offs.