Bankruptcy filings by three California municipalities have drawn national notoriety, but local officials tell Noozhawk that their cities are in a much stronger financial position because of labor concessions, reserve funds bolstered by prosperous years and recovering revenues.
“California on a state level and cities live and die by the sword, and rely on revenues that are very volatile, with tourism and real estate being a big part of the tax base,” said Bob Samario, the City of Santa Barbara’s finance director.
There are 10-year revenue swings, but many cities were unprepared or didn’t react quickly enough when revenues plummeted along with the economy in 2008, he said. On the other side, many agencies increased benefits in 2000 and 2001 when revenues were good, which made them more vulnerable to such big shifts, he added.
“If they don’t put money aside in reserves for the inevitable and aren’t controlling costs in other ways, they’re going to be hit hard,” he said.
When the real estate market was booming, the City of Carpinteria stockpiled a significant amount of reserves in anticipation of future challenges, City Manager Dave Durflinger said.
“It allowed the city to take a balanced approach to addressing issues related to the recession,” he said. “We can use a small portion of reserves to offset revenue losses and also make cost adjustments to employee compensation and other areas.”
In the North County, the City of Santa Maria’s policies have left it in better shape than much of the state, City Administrator Rick Haydon says.
“Other cities increased staff exponentially during the housing boom,” he said. “We didn’t, and we did that consciously, knowing the economy and boom wouldn’t last forever — it never does.”
At the time, the Santa Maria City Council also put aside $12 million for a Local Economic Augmentation Fund to bridge the gap for bad budget years, and the city has been using about $2 million of it each year for the past five years.
“Our position is, we’re not looking at this thing with blinders, we’re realists,” said Haydon, who added that Santa Maria had cut about $2 million from its budget for three years in a row, followed by $750,000 in cuts for the current fiscal year.
“We thought we had to make the cuts and had to do our share of cutting operations expenses before going to the electorate and asking for a revenue measure,” he said of Measure U, the quarter-cent sales tax approved by voters in June to fund firefighters for a newly built station and other public safety services.
This year, officials say, the city’s sales tax has shown healthy growth and its transient-occupancy tax revenues increased 9.6 percent from the last fiscal year, with $13.6 million in revenues. It’s the highest collection in any fiscal year to date, Santa Barbara treasury manager Jill Taura said.
Carpinteria’s beachfront location and local economy have provided for relatively stable property tax revenues, as well, Durflinger said.
“Property taxes did drop in our region a couple of years ago, but they’ve been pretty flat since then and we haven’t seen a precipitous drop like other areas,” he said.
Carpinteria’s sales taxes come mostly from small local businesses and business-to-business through industrial companies in town.
“Revenues are smaller, of course, but more stable,” Durflinger said.
To help boost local revenues, Carpinteria and the cities of Buellton, Goleta and Solvang are asking voters in November to approve a bed tax increase from 10 percent to 12 percent, which is the rate Santa Barbara currently charges hotel guests and vacation rental visitors.
While struggling with lagging revenues, cities have had to make multimillion-dollar cuts every year to balance their budgets. The biggest part of the municipal budget pie is employee compensation costs, so many cities are negotiating labor concessions, leaving positions vacant, instituting hiring freezes and ordering layoffs.
Santa Maria was ahead of the curve, Haydon said.
It was the first city in Santa Barbara, San Luis Obispo and Ventura counties to move toward pension reform, “jumping in with both feet” into a two-tier system that implemented lower benefit packages for new employees hired after July 2011. Haydon believes the recession was a wake-up call, forcing other cities follow Santa Maria’s example.
“It’s kind of like going to a swim party,” he said. “Everyone is standing around the pool and putting a toe in the water and it’s kind of cold, so no one wants to jump in. We jumped in when it comes to pension reform and concessions,” Haydon said.
“Hats off to the City Council for providing that kind of direction, that kind of fortitude, to say they were going to take a stand and reduce costs, and do what they needed to do,” he added.
Since January 2009, Santa Maria hasn’t given a salary increase and has negotiated concessions for pay decreases — not deferred raises or furloughs, but less take-home pay for the same days of work. Haydon said he gathers every employee bargaining group’s leaders in one room and gives them a breakdown on the city’s finances for the next two or three years, and explains what will happen if concessions aren’t negotiated.
“I just laid everything on the table: ‘Gentlemen, this is Government 101, Santa Maria-style,’” he said.
Every group voluntarily agreed to the concessions the first year, all but police (who later had it implemented unilaterally anyway) volunteered the second year, and every bargaining unit agreed again last year, Haydon said.
In an attempt to quell increasing salary, benefit and pension costs, Santa Barbara has negotiated concessions with its employee groups to delay raises, pay a larger portion of the employee-paid pension contribution and take furlough days. Between 2001 and 2010, general fund salary and benefit costs increased by $24 million, financial records show.
With huge investment losses by the California Public Employee Retirement System (CalPERS), cities are faced with millions of dollars in unfunded liabilities and higher rates to pay into the investment pool. Agencies are supposed to have a certain amount in the bank when employees retire, which is paid in by the employer and employees over the length of their career.
Both Carpinteria and Santa Barbara were “superfunded” for years within the last decade, with investment returns so high the cities didn’t have to pay their annual contributions.
“That changed, of course,” Durflinger said. “So some cities changed benefits during that time and that’s come back to haunt them later on.”
Carpinteria has relatively low debt and its employees have agreed to concessions, including paying more into their retirement funds, he said.
“We feel we’re in a good position moving forward,” he said. “We know costs are going to go up for benefits and other services we provide, but we think we’re in a position to respond to that.
“Employees have been working with us so if we have to adjust compensation, pension or another volatile one, health insurance, we’ll be able to make necessary changes and deliver the quality and quantity of services that city residents desire.”
Santa Barbara, on the other hand, has a $300 million unfunded pension liability, with only $400 million in CalPERS of the $700 million it’s supposed to have, Samario said.
The Santa Barbara City Council hasn’t tackled the two-tier issue yet, but Samario says it’s inevitable to lower the city’s long-term costs. About 15 percent of the city’s budget pays for retirement costs, and savings could be used for deferred maintenance and other areas of need, he added.
“Within three years, it’s my guess that everyone will have one,” Samario said. “We’re already talking to labor groups about it.”
Goleta, as a 10-year-old city with just 45 full-time employees, has a much lower pension burden and recently voted not to pursue a two-tier system.
Goleta surveyed 25 tricounties cities and found that 10 had already moved to a two-tiered pension system, nine of which calculate the pension payout as a three-year average of employment instead of the single-highest year. Santa Barbara County has made employees contribute more into their own retirements and calculates pension payouts with a three-year average instead of the last year, which were changes recommended by the county’s Retirement Program Alternatives Advisory Commission.
Looking ahead, city officials have mixed feelings on how the rest of the state is doing — some predict many more bankruptcies, others believe it won’t become a trend — but feel confident they can keep balancing budgets until the day revenues recover to pre-recession levels.