Editorial Bored

City of Chico – Burning Through Cash

Mark Sorensen — Fri, 17 May 2013 15:33:58 +0000

By: Mark Sorensen

In what will be of little to no surprise to people who have been closely watching City of Chico finances for the past few years, the news is out that the City has been burning through cash the past several years.

Not little bits of cash, but big piles of cash.

Chico has been burning through more than $20 million in cash in the past 5 fiscal years alone, perhaps earning a distinguished medal of dishonor for achieving a cash burn rate average of $4.1 million per year.

All while saying that everything was just Honky Dory. It wasn’t. It wasn’t even close.

It has been a long known fact, and frequently stated fact that the City of Chico has been spending more than it has been taking in for many years.

To accomplish this feat of financial non-genius the City has been driving down various reserve funds and racking up negative fund balances to maintain the financial charade rather than deal with the current economic reality.

After the November 1st, 2011 Financial update I was so nauseated with the lack of honest and complete disclosure that I spent the entire following weekend writing a 22 page letter (with more than 200 pages of attachments) to the Grand Jury in hope of bringing in some help. Yes, I got an interview, but It didn’t bring in the review that I had hoped. This stuff is just too difficult and time consuming to follow, it seemed, and there was not time in the Grand Jury schedule that year. This year’s Grand Jury seems to have spent more time looking into the situation. We’ll find out in late June when their report is published.

Meanwhile new City Manager Brian Nakamura, Assistant City Manager Mark Orme and new Finance Director Chris Constantin have evaluated the situation in a 4 page summary which chronicles the wake of deficit spending, negative fund balances and cash flow concerns.

Negative city fund balances represent dollars that were spent that the city simply did not have. The city is now nearing a point where those negative fund balances have accumulated into a cash flow problem.

Reckoning day has arrived.

Over the course of the coming weeks some of the techniques that were employed will be chronicled and explained. I dearly hope that it wakes up the voting public. But I remember back to the 2006 election when 3 Council Candidates campaigned on the alarm of the coming city fiscal time-bomb, and 3 who campaigned on the notion that the financial illusion could be sustained. The later won the election.

Even last year a few Council candidates dared to attempt to draw attention to the long time pattern of deficit spending and negative fund balances, but to no avail. Even the CNR wrote this in the edition before election day:

“…..you’d think the council and city staff had driven the city to the brink of bankruptcy in recent years …. That’s simply not true, and Evans knows it. ….”

Bombastically wrong. And I knew it then.

In a typical progressive thought process, the best that the CN&R could muster was to suggest that we the taxpayers should throw more money into the money fire. Wrong again CN&R. It is time for a reasonable level of fiscal management.

The story today is just beginning of a long and complex tale of woe. Much more will be coming. I just hope that folks will follow the details. You should be shocked and vow to follow local government in the future to a greater degree.

The following 4 page presentation deserves an award on several levels, but one is that it is the most straightforward, honest presentation on City Finances that this city has seen in many years. Please read it.

CalPERS Reports 1% Investment Return

Mark Sorensen — Mon, 16 Jul 2012 18:01:00 +0000

The CalPERS pension system reported that it made a whopping 1% return on investments in the past fiscal year. Far below its previous operating assumption of 7.75%, or its new 2012 operating assumption of 7.5%.

An example of where assumptions are clearly disconnected from reality.

See the full story in the Sacramento Business Journal

Previous NorCal Blogs Entries:
http://www.norcalblogs.com/bored/2012/03/pension-liability.php
http://www.norcalblogs.com/bored/2012/01/pension-earnings-dip-amid-gloomy-forecasts.php

This rate of return is important when you consider local pension groups such as the two City of Chico pension groups that had (as of the most recent actuarial report) $63.7 million in unfunded liabilities.

Based upon the assumptions at the time of the report from last fiscal year, the City’s pension contributions were $9.7 million. Plus the City pays the “Employee Portion” to the tune of $1.9 million per year. For a total of $11.6 million per year.

Those pension payment rates were based upon the old 7.75% earnings assumption. The drop to a $7.5% assumption in 2012 was already going to create higher annual payments from the City. If earnings persist below that assumption, then the city (the taxpayers) will absolutely be called upon to pay increased contribution rates to make up for the investment gains that did not materialize.

Among the lowest forecasts for future City pension premiums comes from the League of California Cities, which says “…pension costs for most California municipalities are likely to increase 25 percent or more in the next three years.” Unless the plans are changed, I fear that the League’s estimate is low. But just a 25% increase would be another $3 million annual hit to a City that has already depleted its reserves to critically low levels.

Chico Building Tax for Art?

Mark Sorensen — Mon, 16 Jul 2012 18:00:00 +0000

It is difficult to believe that even in the current economic downturn where our economy is starving for investments into buildings and infrastructure that there is a currently active effort to tax that kind of investment to fund local art projects. This “building tax” effort has existed at various levels for many years.

In effect, the idea is that if you dare to want to invest in building something in Chico that you must pay a tax, say 1% of the building costs, to support whatever the Arts Commission decides that you should support.

ax.pdf

Keep in mind that all of this is in addition to the City’s existing robust building and design guidelines, as well as an approval process that frequently adds additional attributes to projects. Many of which are good, positive attributes. But it is also vitally important to recognize that those sometimes also add significant costs to projects.

In the case of commercial property, those costs reverberate through the financing arrangements and become long-term costs that can be measurable additions to the resulting overhead structure and therefore become additions to rental fees, lease fees, common area fees, etc, etc, etc.

But we will hear “It’s only 1%”. Gee, isn’t it always “only” some amount when someone wants to take money from one person’s wallet to support their interests?

And before we get side tracked, this is where some people jump to the conclusion that this kind of blasphemous anti-tax talk is an argument in favor of no building standards, no design standards, no aesthetic standards and/or for no art components in projects, when it is not any of those things.

As for standards, yes we need to have good, solid, reasonable development standards. Those standards need to be clearly articulated so that anyone wishing to build can easily interpret the standards. And so that the approval process avoids any sort of an arbitrary and capricious decision making process.

The memo talks about a $1 million minimum project size, fee cap at $50 million, etcetera, etcetera, etcetera. But the 1% tax rate and any limitations are merely placeholders to be changed at your peril at a later date.

Here’s one classic example of changing tax rates and tax rate brackets:
http://www.norcalblogs.com/bored/2010/04/tax-day.php

Chico’s Plastic Bag Ban

Mark Sorensen — Thu, 07 Jun 2012 16:30:00 +0000

In a year where the City of Chico has financially struggled, taken gas-tax money from road maintenance and improvements, eaten half ($1 Million) of its general liability reserve, paid for early retirements, reduced police staffing levels*, reduced fire-rescue staffing levels*, closed a fire station*, proposes to cut library funding by $30,000, struggles with uncomfortably low cash reserves, among many many other things, it is good to know that the City is laser focused on the big picture items such as a city ban on plastic bags.

Link to the Report

Be sure to read the 39 page report. And wonder, just how many 10′s of thousands of dollars of staff time will be spent on the effort before its done, and wonder how many better uses there would have been for those dollars.

* More on those items later. Much More.

Another Manufacturer – Not coming to California

Mark Sorensen — Tue, 13 Mar 2012 17:00:00 +0000

Sport Jet had been seriously looking at possibly locating their manufacture of VLJ (Very Light Jet) aircraft to Chico. With the unfortunate departure of Aero Union from Chico Municipal Airport, Chico has some underutilized, fairly modern, medium sized hanger and office space on the flight line of a decent sized airport, along with an underutilized skilled aviation work force.

Today, I received an email (below) from Sport Jet indicating that they decided to locate their manufacturing in Texas rather than California.

From: Joel Dacus

To: undisclosed-recipients:;

Date: Tue, 13 Mar 2012 17:23:27 -0500

Subject: Sport Jet Relocation

Senator Doug LaMalfa

Assemblyman Dan Logue

Congressman Wally Herger

Mayor Ann Schwab

City of Chico

City of Oroville

County of Butte

Re: Relocation Sport Jet, Ltd

Sport Jet, Ltd. wishes to thank all of you for assisting us in our interest in relocating our jet manufacturing company to California.

It appears, however, that we have found a new home in Texas and we will be preparing our move from Colorado within the next 6 months. As a native Californian, I am disappointed that I could not find a solution that would have brought the company to North Central California. Chico had a perfect hanger location for us as well as a skilled labor set; but we could not find local financial support to assist us in our move. The City of Oroville initially offered to provided us with financial incentives that would have worked but in the end its redevelopment funds were removed by the State leaving them in a non competitive position. And, finally I was unsuccessful in mounting private sector interest that would have allowed for us to move to the region. Sport Jet, Ltd. being privately held and privately funded, desired to relocate to a friendly city with a good airport. However, it lacked the funds to make the jump needing to focus all its resources towards building jets, not moving an entire factory to another state.

Our pending move to Texas is bundled with a combination of city, county and private support all driven by an aggressive airport manager with vision.

All the efforts by everyone in Chico and Oroville were well taken and I thank you personally. As marketing and sales director for Sport Jet, Ltd., I am still interested in locating a regional sales office in the area with one of our demo jets. If there is any interest in this please feel free to contact me.

Look for us above the California skies soon!

Until then here’s an interesting read about the State of California that is affecting all businesses who are here or wish to relocate to the Golden State!

Exodus: California Tax Revenue Plunges by 22%

Regards

Dr Joel Dacus

Sport Jet, Ltd.

Pension Liability

Mark Sorensen — Sun, 11 Mar 2012 14:00:00 +0000

In their March 1 Letter to the Editor, Abe Baily and Jim Gregg take issue with describing CalPERS pensions by the title of a Feb 16 Chico ER Editorial “Public pensions a taxpayer liability,” and make interesting generalizations about past CalPERS premiums, earnings and contribution rates.

CalPERS pension administrators, among other pension administrators, were grossly inaccurate in recent decades about what they forecasted they would be able to deliver in benefits with given levels of employer and employee contributions. City, County and State agencies bought the sales pitch, and, as is now obvious, CalPERS grossly understated the true ultimate costs of their pensions. Managers, elected officials, unions, and employees should have questioned the math. State and Local governments have been hit hard by rising pension costs, made worse by rising health care benefits costs, and the falling tax revenues of a weaker economy.

According to one Stanford study, CalPERS pensions alone are underfunded by $290.6 billion, or about $24,000 per California household. Many want to argue about how to calculate the exact number (San Jose Example here), when the exact number cannot be known because it depends upon assumptions (AKA: scientific wild guesses) about future investment earnings of the retirement funds. We humans have always been notoriously imperfect at foretelling the future. Unforecasted economic downturns, such as our current situation, can wreak havoc on the actuarial math. This is exactly why Defined Benefit Retirement plans (such as the common CalPERS plans) have been widely replaced by Defined Contribution plans, except in the public sector. Neither CalPERS nor the public labor unions are enamored with the idea of increased disclosure of underfunded plans such as this GASB plan.

In the City of Chico, where the vast majority of employees contribute 4% to 0% to their pension, the majority of retirement contributions are made by the City (The Taxpayers). The annual cost to the City for pensions has ballooned to over $11.6 million per year, or more than $29,000 per employee.

Among the lowest forecasts for future City pension premiums comes from the League of California Cities, which says “…pension costs for most California municipalities are likely to increase 25 percent or more in the next three years.” Unless the plans are changed, I fear that the League’s estimate is low. But just a 25% increase would be another $3 million annual hit to a City that has already depleted its reserves to critically low levels.

The next wave of CalPERS pension premium escalations may begin next week, as CalPERS contemplates dropping their current 7.75% average earnings assumption down to a number more reflective of today’s economic realities.

As a State, as pension costs rise, we must continue to divert money from actual services to taxpayers, not only to pay the massive debts racked up at the state level, but also for the growing annual cost of benefits. Either that, or the tax base must immediately grow by huge amounts to feed the cost structure. Another option, some would argue, is that we should just tax our citizens and economy more.

If none of the above, then alterations must be made to the benefits, or how the costs are distributed. Alterations such as:
- Multi-tier benefits. Where new hires are placed on lower cost benefits packages.
- Employees pay a larger portion of the premium costs.
- Benefits are changed. Such as higher retirement ages, lower payout formulas.

The most likely solution will include some combination of the elements above.

While I agree with Messrs Baily and Gregg that community discussions would be a constructive step, I believe that the Feb 16 Chico Enterprise-Record Editorial “Public pensions a taxpayer liability” was very appropriately titled.

League of California Cities
http://www.westerncity.com/Western-City/November-2011/The-League-Steps-Up-on-Pension-Reform/

WSJ article on returns… lack of young people paying into the systems.
http://online.wsj.com/article/SB10001424052970204795304577223632111866416.html?mod=Androidphone

CBS News Story
http://www.cbsnews.com/8301-18563_162-57392812/calif-city-seeks-to-escape-soaring-pension-costs/

Click on Images Below to See a Larger Version

Local Tax Proposals

Mark Sorensen — Fri, 02 Mar 2012 13:00:00 +0000

In addition to last year’s Chico Sewer Users tax increase of $1.9 million, and this year’s increase of another $1 million per year (sewer fees also support City Hall payroll and benefits), we have 3 other local tax increases being considered for the November 2012 ballot.

The City of Chico is already formulating a change to its existing Utility Users Tax to expand it to apply to your cell phone bill, with the hope of bringing in around $900,000 per year.

The Lando/Stevens sales tax is currently being polled to gauge public support, and help decide whether or not to ask the City Council to put the tax measure on the ballot.

Finally, Chico Police Department is considering a local tax upon alcohol sellers. It appears that the goal is to raise $150,000-$180,000 per year to fund one officer.

Of course there are no efforts to obtain voter signatures in an initiative process. All three local tax proposals would need to be placed on the ballot by the City Council, and would need to pass muster with the voters. All three appear to be Special Taxes that would require a 2/3 voter approval.

I suspect that some in City Management would rather concentrate on the Utility Users Tax expansion this year, not risk having too many local tax items on the November 2012 ballot and risk loosing them all.

Now is simply not the time to pluck millions of dollars more per year out of the wallets of the businesses, men, women and children of Chico.

From 02/09/2012, others seem to beleive that all taxes are good taxes:

Pension Earnings Dip Amid Gloomy Forecasts

Mark Sorensen — Tue, 31 Jan 2012 09:00:00 +0000

From PublicCEO.com

Pension
Earnings Dip Amid Gloomy Forecasts

Local Governments – Exclusive — 31
January 2012

The nation’s two largest public pension funds last week reported slim annual
investment earnings, CalPERS 1.1 percent and CalSTRS 2.3 percent, as experts
continue to say hitting their long-term earnings target, 7.75 percent, will be
difficult.

While CalPERS reported weak earnings in 2011, a prominent private-sector
investment manager, Robert Arnott of Research Affiliates, told
the board last week he thinks the most they can expect from stocks and
bonds next decade is 4 percent.

Another major investor, Laurence Fink of BlackRock, told the
CalPERS board during a similar educational session in 2009 that during
the next 15 years: “You’ll be lucky to get 6 percent on your portfolios, maybe 5
percent.”….

…. The California Public Employees Retirement System board decided last March to
leave its earning assumption unchanged at 7.75 percent, despite a recommendation
by actuaries to lower the forecast to 7.5 percent.

Even a small drop in the earnings forecast could boost the annual employer
payment to the pension fund. CalPERS, which may revisit the forecast in March,
is not turning a deaf ear to the experts….

… A Stanford professor, former Assemblyman Joe Nation, D-San Rafael, issued
a report last month showing what happens if the three state pension
funds (CalPERS, CalSTRS and UC Retirement) earn the long-term historical
average, 6.2 percent a year.

Nation said in a Sacramento Bee op-ed
article the long-term “shortfall is $290.6 billion, or about $24,000
per California household. Like a mortgage accruing interest that’s not being
paid, that shortfall grows every day the problem is not addressed.”…

See the full story at PublicCEO.com

City Budgeting Math

Mark Sorensen — Fri, 23 Dec 2011 11:00:00 +0000

There is no question that the City of Chico has taken many steps to work within the revenue constraints imposed in recent years. But in the past 4 years the City has also cut its cash reserves in half, from about $11.5 million down to $6 million, and has also spent-down other smaller, specific purpose reserve accounts to back-fill the spending overruns.

Recently Council Member Bob Evans proposed budget policies that included the bold notion that it is time to consider rebuilding city reserves, or at least halt the decline of reserves.

-See related blog post here-

In a display of verbal gymnastics, Council Member Andy Holcombe plainly stated that he did not share that priority, and said “…I don’t think that we have dwindled away our reserves, we’ve made strategic expenditures of our reserves….”

Well, if we as a city continue to make “strategic expenditures of our reserves” at our current rate, then we will have no cash reserves in a few years.

See short video below, followed by a graph from the City’s November 2011 Financial Update.

*** Click on image to see a larger version ***

The discussion reminded me of these blasts from the past:

The year was 2006, when Mr. Holcombe provided the “Guest Comment” 5 days before Election Day 2006.

http://www.newsreview.com/chico/budget-monster-fact-or-fiction/content?oid=234495

Dan Herbert was given a few hours to draft a letter to the editor response below.

http://www.newsreview.com/chico/letters-for-november-2-2006/content?oid=234497

Re: “Budget monster–fact or fiction?” (Guest Comment, by Andy Holcombe, CN&R, Nov. 02):

During the past four years, the city of Chico’s budget went from having record reserves to falling 40 percent short of meeting reserves required by city budget policy.

Chico Today News, mailed by city staff to every resident last week, featured its front page story on the city’s impending budget deficit. City Manager Greg Jones writes: “If no changes are implemented, [costs] will continue to accelerate faster than revenues, causing continuing budget deficits and allowing no room for increasing levels of service which the community needs.” These are his words to the Chico community, not mine.

Roughly 85 percent of the city expenditures are fixed costs. Those costs aren’t to blame for the recent downturn in the city’s budget. Here are some examples:

While Mr. Holcombe states that creek-side parkway acquisitions have little impact on operating budgets, he fails to mention the City Manager’s warning to Council that we have no funds earmarked for maintenance for any of these parkway acquisitions.

After the Council majority ignored our City Attorney’s warning, the costs to prepare for the predicted lawsuit (the largest in our city’s history) have reached nearly $200,000. The attorney fees to defend the city have just begun to accumulate.

The city has capable staff, yet we pay hundreds of thousands of dollars each year for additional consultants and charettes. Not only do these direct expenses burden the taxpayer, they delay projects for years, adding millions to the city’s total costs.

We must get our fiscal house in order.

Dan Herbert
Chico

Bleeding Green Jobs

Mark Sorensen — Mon, 05 Dec 2011 06:00:00 +0000

From www.news10.net

http://www.news10.net/news/california/article/162422/430/Bleeding-Green-California-losing-green-businesses

“SACRAMENTO, CA – Green businesses have joined the exodus of California companies leaving the state or expanding only outside state borders.

In 2011, 172 companies have moved out or are moving out of California, Business Relocation Coach Joe Vranich said.

Vranich, who tracks the movement of companies, said the number of companies moving out of the state is five times higher than the rate of companies that moved out of California in 2009. According to Vranich’s research, the states most likely to receive fleeing California businesses are Texas, Arizona, Colorado and Nevada.

“Everything is difficult to do in California.” CEO of Green Trail Energy Dennis Wingo said. “When you try to rent property, the different requirements, the unemployment compensation. We knew if we were going to expand we either had to hire a bunch of robots who wouldn’t cost workmans’ comp or move operations out of state.”…

* * *

…Many green businesses based in California are choosing to expand outside the state.

Rocklin based SMA America just built a new solar panel manufacturing plant in Denver. It will eventually employee 700 people. General Manager Jurgen Krehnke said the company took a hard look at doing the project in Sacramento.

“Initially, the people we worked with, consultants, almost immediately dismissed this and said, ‘Oh, California, it’s too expensive. It won’t work,’” Krehnke said. “We said, ‘Wait a minute. We want to at least take a look.’ We would’ve had a preference to have the factory right here. There was some concern about the cost of the location, the availability of manufacturing labor, there was concern about the budget crisis and whether it would lead to increased taxes. This all led us to believe that California was a little bit more difficult to defend.”

What makes green businesses more vulnerable economically in California is the need for manufacturing. Of all green jobs, 26 percent are in manufacturing. Business owners said California’s complex environmental codes and the high cost of energy makes the state a risky bet for green business…”.

From 07/23/2010

http://www.norcalblogs.com/bored/2010/07/calif-sustainable-site-selection.php

“Let us hope that whatever “green jobs” are created, particularly those involving manufacturing, are not pressured to leave by California’s notably difficult and expensive operating environment. “

…
…