By Ed Mendel.
Vallejo was the first of three cities that did not cut their largest debt, pensions, while in bankruptcy. Now eight years after emerging from bankruptcy, the old port city has a new forecast showing its continuing budget problem is bigger than expected.
After a decade of bare-bones budgets and voter approval of a permanent 3/4-cent sales tax increase, the city is still short staffed, with deteriorating streets and perhaps some lingering shadow from post-bankruptcy publicity about rising crime rates.
But Vallejo also is located in a part of the booming San Francisco Bay area ranked last year as one of the 10 hottest real estate areas in the nation. And there are promising plans for further development of the waterfront and the former Mare Island Naval Shipyard.
Since filing for bankruptcy in May 2008, a chastened city council has managed forecasts of five-year budget deficits, while preparing for the next downturn by building a $4.6 million surplus and a $21 million reserve at the end of the fiscal year last June.
“This council has seen the impact of bankruptcy, and it was not pretty for the city of Vallejo,” said Mayor Bob Sampayan. “I can speak for all of us. We have all vowed that will never happen again.”
The mayor made the remark last month after the city council received a new budget forecast from a national consulting firm with many California clients, Management Partners, which helped lead Stockton and San Bernardino out of bankruptcy.
A deep look at revenue and spending data found that Vallejo’s general fund of $107 million this fiscal year, up from $85.8 million when bankruptcy was filed, is on a path to have a deficit of $28 million in 2027 and $90 million in 2037.
“These outcomes wouldn’t happen because you would take corrective action to reverse it,” Robert Leland of Management Partners told the council. (See forecast here on video of Dec. 18 council meeting)
The mayor, a CalPERS retiree who said the soaring pension costs are “scary,” was concerned after a first glance that the new forecast assumed the city would not hire more staff, meaning the projected shortfall could be larger.
“We are so down on employees that we don’t have a choice as to whether or not we should or should not hire,” Sampayan said. “The bottom line is we need to hire.”
Increases in staff over the last eight years averaged 14 a year, said the new forecast. But from its peak, staff also is down 14 percent or 68 full-time equivalents. The high was 497 in 2001, the bottom 317 in 2010, and the current number is 429.
One of the most expensive positions, sworn police officer, is currently at 122, down from 146 in fiscal 2007-08. In the current budget, the average police salary is $118,946 with an additional $81,146 pension payment. With all costs (see chart at bottom) the total is $291,152.
Vallejo has taken two steps to reduce pension costs. An extra $6.5 million payment was made to CalPERS in fiscal 2013-14. Two years ago a $1 million payment was made to a new trust that sets aside money to help pay future pension costs.
And yet, Vallejo’s police and firefighter pension rate is among the top two dozen listed by CalPERS. It was 28.1 percent of pay in 2008, more than doubled to 68 percent of pay this fiscal year, increases to 78 percent in July, and in 2024 is an estimated 90 percent of pay.
Vallejo general fund spending on pensions was similar to the 11 percent average among California cities last fiscal year found by a Bartel actuaries study. But Vallejo spending is projected to reach 20 percent by 2024, more than the Bartel average of 16 percent.
A trust to set aside money to pay for the retiree health care promised Vallejo employees was launched in fiscal year 2013-14 with a $10 million contribution. The city has been making annual payments since then.
The new forecast suggests CalPERS is under pressure to reduce its 7 percent discount rate, an investment earnings forecast used to offset future debt projections. Lowering the discount rate would raise pension costs for Vallejo and other cities.
Since the CalPERS discount rate was 8.75 percent in 1992, it’s been on a downward trend along with investment returns. Wilshire consultants estimated two years ago that CalPERS investments are likely to average 6.2 percent during the next decade. To reduce losses, CalPERS is shifting to less risky investments with lower returns.
“So everything is kind of pushing them in the direction of under 7 percent,” Leland told the council.
The forecast lists some changes that could reduce the budget problem: higher job vacancy rate, weaker or delayed recessions, higher CalPERS investment returns, tax increases, and stronger real estate development.
Some changes that could increase the budget problem: CalPERS investment losses and a lower discount rate, weaker tax revenue, deeper recessions, added staff, cost-of-living adjustments above 2 percent of pay, higher construction costs, and earthquakes or fire.
Only two options tested improved the forecast baseline projection: a 1/2 percent increase in revenue projections over 20 years, and a 1 percent cost-of-living adjustment over 20 years.
Greg Nyhoff, Vallejo city manager since last January, told the council he has used the forecast model in other cities. It’s “interactive” and shows how a change in one part of the budget affects projections.
“I tell people, where does Vallejo stand today?” he told the council. “It’s in a very stable condition. It’s not in a fast-rising position to hire lots of new employees and huge service increases. But it’s very stable, and I credit you for that.”
Ron Millard, Vallejo finance director, told the city council he thinks the bigger budget problem can be managed. In fiscal 2013-14, the budget was balanced but deficits were forecast for the next five years.
“Well, it’s been five years and we have had surpluses each of those years,” he said.
As an example of what can be done now, Millard estimated that eliminating the city subsidy for the marina, golf course and parks could save $2.5 million to $4 million a year, a cut in costs that would continue in following years.
Millard said the worst of the projected annual deficits in the future — $11 million or $15 million if the CalPERS discount rate drops to 6 percent — are roughly 10 percent of current city revenue.
“A 10 percent budget issue is way the heck better than a 20 to 30 percent budget cut issue, which is what we were looking at during bankruptcy,” he said.
One of the needs for more spending is that Vallejo streets score 53 on the pavement condition index, well below the Bay Area average of 67. The forecast said an additional $3.2 million a year is needed to halt deterioration and much more for improvement.
After Vallejo emerged from bankruptcy in November 2011, the council was said to have considered cutting pensions but decided not to because CalPERS threatened a costly legal battle.
Stockton and San Bernardino, which filed bankruptcy in the summer of 2012, said pensions were not cut because they are needed to be competitive in the job market, particularly for police.
A pending state Supreme Court decision (Cal Fire Local 2281 v. CalPERS) might allow cost-cutting cuts in pensions outside of bankruptcy. Now previous court decisions known as the “California Rule” mainly limit pension cuts to new hires.