City Budget Deficit Revealed in Detail, Pension Costs Driving Cuts & Taxes

City Council examined the budget deficit facing the city that requires cuts and added revenue. Photo by Steve Whitmore

The South Pasadena City Council on Wednesday night dug deep into the weeds of the budget deficit on the immediate horizon, driven by the increasing liability of pension costs that requires increasing local revenues as well as trimming expenses.

The issue is of such magnitude, the council has authorized an aggressive public outreach campaign to inculcate the community at large into the process that may require cuts to services and a restructuring of taxes.

“South Pasadena has a variety of options available to balance future budgets including, increasing revenue through economic, administrative, and other non-tax alternatives; increasing revenue by restructuring local taxes; and reducing costs through the reduction of personnel and the services they provide,” states a staff report presented to the council at its March 6 meeting. “Staff is recommending that the Council direct staff to engage the community in review and discussion of available alternatives to create a framework for the development of a long-range financial sustainability plan. Through this process, the City can be strategic in developing financial structures to maintain the high quality of life currently offered by the City, while also creating stability in the face of future challenges.”

The report goes on to discuss the looming liability of the CalPERs.

Moreover, the city is looking at creating a workable five-year financial sustainability plan because of the increasing variables presented by the pensions costs with CalPERS, the biggest challenge facing the city, according to the staff report presented to the council by City Manager Stephanie De Wolfe and prepared by Frank Catania, principal management analyst.

“CaIPERS’ investments suffered greatly from the economic recession that began in 2008, when the system suffered a gross impact of nearly 35% loss to its investment funds,” the report states. “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 theratioofworkinglcontributingmemberstothenumberofretiredlreceivingmembers. 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.”

The report goes on to state that the city has no control over the CalPERS situation.

“The bottom line is that CalPERS investment funds have fallen to an alarming level and must be stabilized,” the report states. “While this has potentially devastating impacts on local governments, cities have no control over the management of the CalPERS investment funds or the rates that are subsequently charged to member agencies to support the fund. Further, cities have no legal path to reduce the provision of benefits to employees contracted under the pre-PEPRA rules.”

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 , such as Stockton, have declared bankruptcy.

South Pasadena’s challenge is far less fiscally dramatic, officials say, because of “conservative fiscal management.”

“In summary, as a result of conservative fiscal management, South Pasadena’s pension burden is modest compared to many other cities,” the report states. “According (to) the California Policy Center, South Pasadena’s burden ranks 242 out of 459 cities. Cities facing the largest threats, some in the San Gabriel Valley, allocate over 12 (percent) of their total revenue toward pension contributions. In comparison, South Pasadena allocates approximately 5 (percent) of total revenue. These percentages are anticipated to increase for all cities, however, reaching crisis proportions for those hardest hit. Despite these factors, the City is still facing a financial shortfall over the next five years and must be strategic in building a sustainable long-range financial plan.”

Last year, the city adopted a five-year strategy that identified more than $100 million in critical projects for the city, known as the Capital Improvement Plan (CIP).

“This is the first time the city has had a comprehensive inventory of capital needs,” according to the report. “These projects include larger systems such as roadways and water infrastructure, which are critical to maintaining quality of life, as well as smaller projects such as upgrading electrical systems, plumbing, and drainage mitigation. Less than half of the projects in the CIP are funded.”

The report recommends the city examine cutting costs by reducing services and personnel along with a reduction in hours and even eliminating some programs.

Furthermore, the city staff report recommends increasing revenues by encouraging investment in business districts that generate property and sales taxes. Also, to establish new fees such as for parking meters; increasing city fees for services, restructuring local taxes, allowing new land uses and associated taxes such as a cannabis tax or a hotel tax, to name just a few. And to redevelop city properties that will generate more money over the long term.

One of the challenges the city faces, though, is to avoid cutting funding that was believed to be saved by the passage of the utility users tax (UUT) last November.

The proposed elimination of the UUT was on the November ballot but was soundly defeated by nearly 80 percent. It comes up again in front of the voters in 2020.

Although the city overcame the potential loss of General Fund revenues from the utility users tax (UUT), the city now faces additional financial challenges, prompting the need for a long- range financial sustainability plan,” the report states. “As with all cities in California, South Pasadena is burdened by increasing pension costs from CalPERS (the state pension fund), as well as increasing costs across the board for materials, contractors, and personnel. In addition, the city has aging infrastructure that will require significant additional investment in future years. The five-year forecast demonstrates that city revenues are not projected to keep pace with these rising costs. Further, the UUT will sunset in 2022 if not renewed by voters in 2020. The loss of this $3.4 million would dangerously escalate the severity of the city’s financial position.”

The City Council gave its unanimous approval at its Feb. 20 meeting to develop a plan to include the public in budget discussions that may require cuts to some important services.

City officials are going to have at least two town hall-type meetings that will encourage the public to participate. Also, they will be taking their budget deliberations to various community groups such as Rotary, Kiwanis and Women Involved in South Pasadena Political Action (WISPPA), to name just a few.

“Staff recommends a robust community engagement program to review all potential options, identify preferred alternatives, and inform future strategies.,” the report states. “A financial model will be presented to the community establishing the baseline gap for each year and outlining the potential budget impact of a variety of budget cuts and revenue enhancements, allowing residents to test a variety of options and scenarios. Through the community engagement process, staff anticipates gaining perspective on those options, or combination of options, that receive the greatest support from the community. That feedback will then be used to guide the development of a Long-range Financial Sustainability Plan to be presented to Council as part of the annual budget in June.”  The city’s fiscal year runs from June 30, 2019, to July 1, 2020.

Earlier, Mayor Dr. Marina Khubesrian weighed in publicly regarding the budget and the importance of including the public.

“I want to point out a couple of things,” said Mayor Dr. Marina Khubesrian. “This is a very robust budget-information-to-the- community proposal. Of note, this is a first for our City Council. It’s the first I’ve seen since I’ve been on the council to have the outreach plan laid out in such a thorough manner, so everything looks predictable and transparent and the community knows what to expect and where they can go to hear the information that staff will present about our budget, any shortfalls and opportunities for increased revenues.”

This year’s 2018-2019 General Fund (GF) revenues are at $27,049,618 while the GF expenditures are at $26,286,835, according to city officials.