Cities on the Brink

Municipal finance chiefs are fighting to keep their troubled cities solvent. Sometimes it’s a losing battle.

Tom Thanas, Joliet’s city manager, recalls the impact. “In May 2008, I looked at a spreadsheet prepared by finance, and it showed a five-year projection of a $67 million deficit in 2013,” he says. “I was in disbelief.”

Each of these municipalities suddenly confronted their worst nightmares. Being prudent fiduciaries, they weighed the advantages and risks of declaring bankruptcy but put it on the back burner. In the meantime, they got to work.

San Jose, for instance, reformed its pension and retiree health care benefits. “Seventy percent of citizens voted ‘yes’ on new benefit levels for incoming employees that are much less expensive,” Mayor Reed says. “Skyrocketing pension benefits were the single largest factor behind our budget deficits. We’ve now saved $20 million and stand to realize another $48 million in annual savings once the rest of the measure is implemented. We’ve avoided any additional layoffs or service cuts the past two budget cycles, and are now within half a percent of having a balanced budget.”

13Oct_Cities_SanJoseSan Bernardino County took a different tack, issuing $37 million in debt to help plug its budget gap. It also reduced annual energy expenses, leveraging an energy incentive program offered by a local utility to retrofit county buildings, and successfully renegotiated labor contracts with county unions. “Employees are now picking up a larger share of the pension plan, and we’re now moving toward more cafeteria-style benefits,” McBride says.

Fixing San Fran
Rosenfield touts changes in San Francisco’s health-care obligations. “Previously, if you worked here five years and left, you were vested and could receive health benefits until the age of 60,” he says. “Since 2009, new employees now need to work for 20 years before they’re vested.”

The city also is phasing in a more rational, two-year budget. “When you have an annual budget, you focus on the next 12 months and not the challenges that lay beyond it,” says Rosenfield, the city’s former budget director. “You end up using land sales, accounting gimmicks or one-time solutions to keep revenues and expenses together for a year, postponing your problems into the future.”

Joliet, too, is climbing back up. “Anything viewed as discretionary spending was cut,” says Thanas. “For example, our neighborhood improvement program, which has been around since the 1980s, had grown to the point where each of the five council members had between $1 million and $1.5 million to spend on new parks or road improvements. We made some steep cuts there, recommended a hiring freeze and implemented an early-retirement incentive program.” The city did not replace employees who chose early retirement.

Negotiations over labor concessions with the unions proved more formidable, as the city was halfway through an eight-year deal promising compound annual raises of 4 percent, plus free health care. “We asked for authorization to lay off 16 firefighters, which allowed us to finally secure some concessions, saving about $1.2 million and preserving the 16 jobs,” Mayer notes. “We also reduced overtime expenses from $9 million to $5 million annually, and increased both the utility-tax and sales-tax rates.”

The various actions ultimately paid off: “We went from a peak of $37 million in gaming revenue to less than $20 million when the recession hit, and have since been able to make up the shortfall entirely through these measures,” Thanas says. — R.B.

3 thoughts on “Cities on the Brink

  1. I was the city manager in 2008 that recommended BK for Vallejo. We had no choice; the city ran out of money to pay for union contracts. The city labor unions were stupid and they could not comprehend the math involved in operating a city.

    Basically, the math goes something like this: The fire union charged their members $175.00 month x 12 months/year x 100 fire fighters x 2 ( election cycle every 2 years) = $410,000. Police union charged $125 per month x 12 months/year x 145 cops x 2 years (election cycle once every two years) = $435,000. Together these two unions bought their elected Council members every 2 years since they financed the local elections by the tune of $$845,000 for every election. No one could compete with the fund raising. They controlled the City Council, their own contracts and the rest of the city too. Hence, their contracts were not sustainable and bankruptcy was the result. The Fire and Police union cooked their own “petard” as the saying goes.

  2. A couple of comments related to the County of San Bernardino: the County did not borrow $37M to help solve its budget problem, it actually prepaid $37M in debt using one-time funds to generate ongoing savings to help bring the budget in line. Second, the County is moving away from cafeteria style benefit plans, which are pensionable in our system and thus cost substantially more.

    These types of actions, combined with cooperation from employee bargaining groups and an elected Board willing to make difficult financial decisions in a timely manner have allowed the County to continue to adopt structurally balanced budgets throughout the economic downturn.

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