Budget Process Begins, Department Heads Present Proposals

South Pasadena’s Finance Director Craig Koehler presents the budget overview for the City Council during the council’s last meeting at City Hall. Photo by Steve Whitmore

The South Pasadena City Council at its last meeting listened as each department head presented their individual proposed financial plan comprising the overall $28.6 million Fiscal Year (FY) 2019-2020 budget.

The council was not expecting to take any action on the budget proposal, which presents a balanced fiscal plan on paper, at its May 15 meeting.

The proposed budget still has variables, however, such as labor negotiations and pension liabilities that are expected to cause a significant budget gap, which some officials have estimated at more than $1 million. Those issues were not addressed at the May 15 meeting beyond a city issued statement announcing they will be addressed at a later time.

“The proposed FY19-20 budget is balanced on paper, but we are still expecting a budget gap due to the labor negotiations now underway with our three employee unions,” said City Manager Stephanie DeWolfe in an email to The Review after the City Council meeting on May 15. “The City pays on average 10-30 percent below other small, comparable cities in our area, which is leading to vacancies in police, fire and other departments. However, we are also examining several revenue options that could balance the budget in the near-term and continue to provide our residents with the quality of service they expect and deserve. Our goal is not just to balance the budget this year. Our goal, and challenge, is to create a financially sustainable infrastructure that anticipates future costs and necessary investments in infrastructure and human resources.”

However, the city is also facing impending payments to CalPERS that may be higher than anticipated, officials said. This issue was not directly addressed during the May 15 meeting.

One resident, Chris Bray, who is researching the pension liability issue, explained the challenge.

“While CalPERS is two years behind in their reporting, and the current figures may be far worse, the numbers you’ll see there are beyond alarming,” Bray said in an email to The Review. “South Pasadena’s unfunded accrued liability payments go from $592,637 for fiscal year 17-18 to a projected $2,539,000 for fiscal year 24-25 – they more than quadruple in less than a decade. That’s a path to insolvency.” (See Letter to the Editor, Pg. 8)

Meanwhile, the proposed general fund budget of $28,601,050 in revenue is a two-percent increase over last year’s fiscal plan because of “sustained increases in property taxes, the city’s largest revenue source,” according to city officials.
“Over the past five years, total revenue has increased at a rate of one to three percent per year on average,” a staff report presented to the City Council on May 15 reads.

“General fund revenues for Fiscal Year (FY) 2019-20 are estimated at $28.6 million. General fund expenditures for city operations in FY 2019-20 are projected to be $28.6 million. The total operating budget including enterprise funds, local return, special funds and grant funds is approximately $54 million.”

The city’s top revenue sources include property taxes, $15,414,035, 54 percent; utility user tax (UUT), $3,485,000, 12 percent; sales tax $2,430,802, eight percent; and user fees, $1,048,900, four percent.

The approximate $28.6 million general fund budget for the city is balanced on paper. Photo by Steve Whitmore

The general fund expenditures are largely attributed to personnel costs, city officials said, which amass to $19,998,122. Labor negotiations are currently underway with the three unions which represent police, fire and city workers.

“South Pasadena employees have not received salary increases over the last two years and received only marginal increases in prior years,” according to the staff report. “A current survey of compensation among comparable small cities in the San Gabriel Valley revealed that most South Pasadena employees are currently paid 10 percent – 30 percent below average. The impact of poor compensation has been reflected in high turnover rates and positions going unfilled due to lack of applicants. Staffing has had to be adjusted to reduce services in many areas, including the Police Department, as a result. The high costs of turnover include loss of institutional knowledge, work stoppage, reduced quality of customer service, and larger investments in recruitment, background checks and training of new employees. Further, in some cases the city has had to use contract employees at a much higher rate than an adequately compensated regular employee. The city must negotiate new contracts with all labor groups for the period beginning July I, 2019, and compensation has been raised as a significant issue that must be addressed.”

The city staff report also paints a generally difficult fiscal picture without substantial increases in revenues and severe cuts in services.

“The city faces significant challenges in both short- and long-term financial sustainability,” according to the staff report. “With expenses increasing every year, but flat or declining revenues, the current structure of services is not sustainable. The costs of staffing rise every year along with the costs of materials and professional services. However, revenue sources are not rising at an equal rate, creating a structural deficit in the future. Property tax increases are minimal, UUT revenues are declining, and sales tax revenue is flat or declining. Without new revenue sources, the city will be forced to function with significantly less staff, requiring the downsizing or elimination of programs and services. Expense reduction strategies alone would require additional cuts every year, creating a compounding impact. Several revenue enhancement alternatives scored high in popularity in a recent community survey, including redevelopment of city properties, the facilitation of a small hotel and implementation of a hotel tax, and the consideration of a local sales tax measure. Staff is requesting concept approval from City Council before finalizing a financial sustainability strategy.”

DeWolfe has issued and received the preliminary results from a poll costing just under $25,000 that gauged the interest in a South Pasadena sales tax increase of ¾ of a cent to offset the deficit, which she anticipated could be as high as $2 million in just five years. The tax hike could generate upwards of $1.5 million annually in revenues, according to city officials. The poll results are expected to be released at the council’s next meeting.

Voters have to approve a sales tax increase by way of a ballot measure, but in order to get the issue on the ballot, the city has to first declare a fiscal emergency.

Officials also are examining ways to increase revenue by encouraging investment in business districts that generate property and sales taxes; increasing city fees for services; allowing new land uses; and redeveloping city properties that will generate more money over the long term. There’s talk of bringing a boutique hotel to South Pasadena that could add revenue through an occupancy tax. That’s years in the making, however, officials say.

The council also is looking at potential cuts to employees and services, including eliminating some part-time employee positions; eliminating crime prevention programs; the police cadet program; and certain special events, such as Concerts in the Park; cutting library part-time hours; and reducing teens and senior programs.

Also facing the city are the increasing liabilities presented by the pensions costs with CalPERS, officials say.

“CaIPERS’ investments suffered greatly from the economic recession that began in 2008, when the system suffered a gross impact of nearly 35 percent loss to its investment funds,” a staff report announced recently. “As a result, CalPERS has become much more conservative in its estimates of return. Further, CalPERS has shifted policies to account for longer lifespans among retirees and made a significant change in the ratio of working contributing members to the number of retired receiving members. While there were two working members for every retired member in 1990, there are now two retired members for less than one working member today. These are just a few of the factors that impact the financial position of CaIPERS.”

Although the CalPERS issue was not addressed at the May 15 council meeting, a CalPERS actuarial report dated August, 2018, indicates So Pas has at least two payments pending in the budget.  The first is $883,471 for normal payroll percentage contributions and the second is for $1,601,668 in extra payments something identified as “unfunded accrued liability,” for a total of $2,485,139.

It’s important to note, city officials say, that South Pasadena is not alone in this fight. The CalPERS issue has affected many cities in devasting ways. Some cities in the not-too distant past, such as Stockton, have had to declared bankruptcy.

The budget examination includes a public hearing process where residents have the opportunity to express their thoughts about the plan. The city has set up an email, budget@southpasadenaca.gov, where residents can share their thoughts. The budget timeframe is now until May 31. The So Pas Finance Commission will take up the budget at its May 23 meeting.

The City Council’s next meeting is scheduled for June 5 when the budget process will again be the main focus and is scheduled to be adopted.

Bray, the So Pas resident, questions the city’s fiscal future.

“The reality is that a sales tax increase on top of the city’s existing library parcel tax and utility user’s tax will only allow the city to stay ahead of the trendlines for a little while,” he said. “Even if the sales tax initiative passes, we’ll be back to have another conversation about new taxes soon. Our three special city taxes will lead to a fourth. We’ve lost control of our pension costs. Everything else is just noise.”