Editor’s Note: Greg Simay worked for the City of Burbank for over 40 years and retired in 2009. He has written for myBurbank for a number of years as our Entertainment Reporter. He has a vast knowledge of the City of Burbank and its workings. We asked him to break down both the Measure P and Measure QS ballot measures on the November 6 ballot. – cs
In the November 6 election next Tuesday, the Burbank City Council hopes voters will approve Measure P (City Ordinance No. 18-3,904.) It would add 0.75% (¾%) to the local sales tax rate. Measure P can pass with a simple majority of the votes cast.
The current total local sales tax rate in Burbank is 9.50%, divvied up as follows: 5.00% goes to the State of California, 3.5% goes to various Los Angeles County agencies, and 1.00% currently goes to the City of Burbank’s General Fund. For California, the maximum sales tax, with the local sales tax rate included, is 10.25%.
Measure P would increase the General Fund’s sales tax percentage share from 1.00% to 1.75%, which would use up the remaining sales tax potential of 0.75% and boost the local sales tax rate from 9.50% to the maximum 10.25%.
The General Fund’s sales tax revenues would increase by an estimated $20 million, from an estimated $34 million to $54 million. The City would use this additional $20 million to meet increased pension liability payments and to fund needed capital improvements within Burbank, including more street repaving.
The extra 0.75% in sales tax would take effect beginning April 1, 2019, and it would continue until ended by the voters. There’s no automatic sunset provision.
Impacts of Measure P on the taxpayer and the City’s General Fund.
The impacts of the sales tax include those on the taxpayers and the City’s General Fund.
Impacts on the taxpayer.
For a hundred dollar purchase of household goods, the proposed ¾% would increase the sales tax by 75 cents, from $9.50 to $10.25. In contrast, many of the food items on a $100 purchase at the local supermarket would be exempt from the sales tax.
On the other hand, the impact on big-ticket items would be noticeable. For a $40,000 car purchase, for example, the proposed ¾% would increase the sales tax amount by $300, from $2,850 to $3,150.
Neighboring Glendale and Pasadena are also asking their voters to up the local sales tax rate on November 6. Sales tax shopping looks to be a bit harder.
Impacts on the City’s General Fund.
The extra $20 million would start flowing into City coffers by June 2019, in time to be available for the City’s 2019-20 fiscal year. Measure P revenues would be used to eliminate the General Fund’s operating deficit and substantially reduce the General Fund’s capital improvement funding shortfalls.
Eliminating the operating deficit. Absent cost cutting or additional revenues, the City’s General Fund will face a long-term operating deficit of $9.5 million, driven by increased pension liability payments, within four years.
- The General Fund’s required annual payment for the City’s unfunded pension liability will be increasing by $14.6 million, from the current $12.9 million to a forecasted $27.5 million by FY 2022-23, less than four years from now. These higher-level payments are forecasted to continue for over 20 years before dropping back to the $12.9 million.
- Earlier this year, the potential operating deficit in FY 2022-23 was expected to be $30.5 million per year, but Burbank voters passed Measure T and preserved the In-Lieu Transfer, which provides $12.5 million annually. So now the potential operating deficit is down to $18.0 million.
- However, the City is actively working to reduce General Fund labor-based operating expenses so that by FY 2022-23, the deficit will have shrunk to $9.5 million. A major reform will be to require all existing employees, including Police and Fire, to pay one-half of their pension costs going forward; this requirement already applies to new hires.
Addressing capital improvement shortfalls. To meet 75% of currently unfunded capital improvement needs over the next 25 years, the General Fund would need to provide $17.9 million per year in additional capital funding from a new revenue source.
- The City has identified $683.0 million worth of the infrastructure needs that would rely on the General Fund: $151.5 million for streets, $99.5 million for facilities, $94.0 million for parks, $126.2 million for storm drains and $213.1 million for new assets.
- An extensive laundry list of unfunded infrastructure needs will have projects competing to be high priority, and not every proposed project will merit the green light. However, significant annual outlays would have to occur to make any significant progress on projects that do make the cut. Funding at the 75% level would allow the City to tackle its priority infrastructure needs.
- To have a steady program of street pavement improvements, the City would need $8.0 million annually. Currently the City can devote $3.0 million from existing annual funding and $2.5 million from SB1 annual revenue, for a total of $5.5 million.
If Measure P passes, the City could make significant progress toward the $17.9 million funding at the 75% level. If a persistent $9.5 million per year is needed to meet what would otherwise be an operating deficit, then up to $10.5 million in annual Measure P revenues could be devoted toward the $17.9 million target on a pay-as you-go basis. For example, the City could provide an additional $2.5 million for street paving, bringing the total funding to the $8.0 million needed for a continuous paving program
Measure P revenues could also be leveraged to support a higher level of capital funding, if it were used in bond financing. The General Fund is nearly debt-free; the one outstanding bond will be paid off in June 2023. So it seems feasible for the City to keep debt servicing well within the Measure P revenues available for capital funding, and avoid overleveraging.
How the General Fund got into trouble.
Deferred pension payments caused the operating shortfall; the end of redevelopment hurt capital funding.
Deferred pension funding has long been the proverbial elephant in the room, one that, in the past several years, the City has started to seriously face.
- Typically, the California Public Employees Retirement System (CalPERS) needs annual contributions from Burbank and other member cities in order to meet its pension obligations to them. But during the go-go 90s, CalPERS had achieved very healthy rates of return, healthy enough to stand in for the California cities’ annual contributions. By 2002, the City’s retirement plans were between 130% and 140% funded. Burbank, along with most other California cities, decided to defer the pension payments.
- In fairness, the City had suffered budget blows as Lockheed, from 1989 through 1994, withdrew from Burbank as the classic Cold War ended and the political center of gravity shifted eastward. Not having to fund pensions for was a welcome break. The 90s also saw the successful retention of the major studios as well as major progress in attracting new developments, progress that continued into the 00s. Sales tax revenues were rising and property values were roaring back.
- But California cities generally—not just Burbank—should’ve realized that the fat times were getting leaner. CalPERS funding sank below 100%. Rates of return became volatile, especially during the “Great Recession.” In those turbulent times, CalPERS suffered nearly a 25% loss in a single year.
In hindsight, the city councils of yesteryear should’ve taken advantage of the good times and established rainy day funds, or at least resumed pension payments to keep retirements from becoming less than 100% funded. As well, CalPERS should’ve begun earlier to base their earnings projections on lower, more stable rates of return.
Instead, the City embraced an ambitious building program: rebuilding fire stations, adding a signature library, and building modern headquarters for police, fire and other customer services. All worthy projects benefitting the community, and leaving a legacy of quality facilities for years to come. Unfortunately, there’s now also a legacy of revenue shortfalls.
Beginning earlier this decade, the City has been shrinking the pension elephant. For new hires in all categories, including Police and Fire, the City offers significantly reduced retirement plans. New hires must also pay 50% of their retirement. As the years pass, these reforms will increasingly reduce the City’s pension liability exposure. And as will be described in greater detail later, the City has been making progress on other reforms independently of Measure P.
But meanwhile, the pension elephant is still formidable. Today, the City’s pension plans are funded between 70.2% and 76.5%. A wiser CalPERS now aims for lower-but-more-stable returns on investment, recently lowering their long term investment rate-of-return target from 7.5% to 7%, phased in over the next three years. And this, along with the need to re-achieve 100% retirement funding, means the City will be contributing more, much more, to CalPERS.
The discontinuance of redevelopment has been a blow to capital funding.
- Under redevelopment the City had been able to keep the difference between the property tax revenues from new projects, and the taxes from the old facilities they replaced. The additional revenue was used to support bond funding, which in turn often supported various capital improvement projects.
- Although these projects had to have a nexus to the City’s redevelopment efforts, they often overlapped with projects that the City would have had to undertake anyway. So in practice redevelopment became an important source of capital funding, worth tens of millions annually in the 00’s.
- For a variety of reasons, including the State’s desire to reclaim tax increment revenues for itself and its counties, redevelopment ended in February 2012, setting the stage for the underfunding of he City’s infrastructure projects.
Meanwhile, the City’s infrastructure needs to be replaced, retrofitted or otherwise overhauled.
There is some good news: Several important funds are not facing operating and capital budget shortfalls. Water, power, refuse and sewer services are not in trouble. These services are supported by separate water, power, refuse and sewer rates, and rate revenues flow into various proprietary funds, which are distinct from the General Fund. Proprietary funds will continue to cover their share of employee retirement obligations, to meet their various capital needs and to keep their reserve funds strong. Moreover, the City’s rates are very competitive with those of neighboring agencies, while supporting high levels of customer service.
Evaluating Measure P against alternative solutions
From most desirable to least desirable, there are three basic ways the City can address the General Fund’s operating deficit and underfunded capital improvements:
- Reduce costs in a manner that allows high levels of customer service to continue and infrastructure investment to occur.
- Increase revenues, such as by passing Measure P.
- Reduce costs by reducing the scope and quality of customer service and infrastructure maintenance, but without endangering public health and safety.
Whichever alternative is adopted, the General Fund’s emergency reserves of about $33 million would remain untouched by policy.
These alternatives are discussed in reverse order, beginning with the least desirable alternative.
Cut costs by cutting the scope and quality of services?
Even with a very cautious approach to preserving public health and safety, there could still be a number of across-the-board service cuts that would immediately reduce the quality of services and further reduce them over the long term, as streets and other public infrastructure deteriorate. And to the extent one City service is spared the ax, all the other services would suffer deeper cuts.
It appears that a strong majority of Burbank citizens do not want service cuts. Some cities, with smaller revenue bases than Burbank’s, no longer have their own municipal police and fire departments (or never had them in the first place,) electing to rely on the County Sherriff or County Fire. These cities made the decision to accept an adequate, but less tailored, level of service for a lower cost. Other cities have scaled back recreational activities, or limited hours of operation. Their citizens hopefully have at least a lower tax burden to offset a reduced quality of municipal services.
But in Burbank’s case, strong public sentiment to preserve the City’s high standard of public services continues to be very strong. In November/December 2017, over 2,600 Burbank registered voters were surveyed on City services. (This is a large enough sampling to allow the Council to reliably take the pulse of the voting public.) Last January the City Council learned that 90% of the respondents thought it extremely important or very important to maintain high levels of police, fire and 911 response. For keeping neighborhoods safe and clean, it was 86%; for maintaining park and recreation facilities and programs, it was 73%. Overall, 82% of those polled agreed that maintaining the City’s essential services was extremely or very important.
As is often asserted, do the quality of Burbank schools and City services significantly boost property values? For each of the 86 Los Angeles County communities surveyed, today’s residential real estate prices were compared to the previous, pre-Great Recession peak prices. Results: 30 communities are still below their previous peaks; nine have peaks up to 5% greater than their previous peaks; for 12, an increase of 5+% to 10%; and for 16, an increase of 10+% to 20%.
There were 19 communities whose current property values are more than 20% above their previous peaks. With an increase of 26% over its pre-recession peak, Burbank is firmly within this last group. It shares the spotlight with wealthy enclaves like Beverly Hills, San Marino, and South Pasadena; and with beach communities like Santa Monica and Hermosa Beach.
Burbank is prosperous, but with a median income of around $66,000, it’s no Beverly Hills. Nor would Pacific waves crash over Riverside Drive, even if all the ice were to melt. That leaves the quality of schools and City services (with an assist from the housing/employment imbalance) as the likely driver of property values in Burbank. While not necessarily relieving any cash flow challenges presented by property ownership, property appreciation does confer a long-term advantage that must be weighed against tax measures seeking to preserve that advantage.
Increase revenues by passing Measure P and increasing sales tax revenues?
Even in Burbank, there are a lot of people living paycheck-to-paycheck, with household budgets in worse shape than the City’s General Fund. Nevertheless, Burbank voters by a 4-to-1 margin voted last June to retain the In-Lieu Transfer, an important source of revenue for the General Fund.
But it’s one thing to agree to retain a tax of long standing (since 1958) with no increase in the rates, only an updating of the enabling language. It’s another thing to propose a tax increase. Even so, 69% of those polled in the November/December 2017 survey stated they would vote to support a local sales tax increase of ¾%.
Perhaps that’s because if a tax hike is the only alternative to deep cuts in services, upping the sales tax is one of the less-painful methods. Because of its wide applicability, a modest increase in the sales tax rate can generate millions in revenue. As mentioned earlier, passing Measure P and changing the sales tax rate from 9.5% to 10.25% would generate an extra $20 million annually for the General Fund, beginning in FY 2019-20.
Past trends suggest that about one-third of the Burbank’s sales tax revenue comes from residents, one-third from local businesses and one-third from non-residents shopping in local Burbank businesses. It’s true that Transient Occupancy Taxes (the “bed taxes”) get almost all their revenue from non-residents, but increases in the TOT within the bounds of reason wouldn’t raise as much revenue. It’s also worth noting that individuals and businesses have direct control over their purchasing and, to that extent, some control over how much sales tax they’re prepared to pay. As mentioned earlier, many food items are exempt from sales taxes, making them less regressive for low-and-moderate-income purchasers.
If Burbank citizens might be taxed anyway, shouldn’t they at least keep the money within Burbank? If Burbank doesn’t capture the remaining 0.75% of sales tax potential, some other agency probably will, and sooner rather than later. Recent history fuels this concern. In March 2017, Los Angeles County persuaded voters to pass Measure H, which added 0.25% to the sales tax rate for countywide funding for services to the homeless. But here’s the kicker: Although Burbank is contributing about $8.0 million for this purpose, the County is under no obligation to dedicate any local return to Burbank or, for that matter, to any of the other cities within Los Angeles County. In fact, the County had to receive after-the-fact special state legislation that allowed them to grab the 0.25% that would have otherwise been available to cities like Burbank.
According to the survey mentioned earlier, 90% of the respondents favor a requirement that all funds from additional taxes be used in Burbank. That seems preferable to having to pay an additional ¾% anyway, but to some other agency with no special accountability to Burbank voters. And if the recently approved Measure H is any indication, there may not even be one dollar of revenue flowing back to Burbank. Think of what the City, with active citizen involvement, could have done with the $8.0 million now captured by Measure H.
Active citizen involvement is key for the success of Measure P. Burbank voters definitely want accountability: 69% of the survey respondents want to require audits, and 68% want to require citizens’ oversight over any additional revenues raised.
The City Council has heeded the calls for accountability over the use of additional revenues. Measure P explicitly calls for oversight of the use of the additional sales tax revenues. At Council direction, staff is working to create a new board and strengthen others:
- Create a new Infrastructure Oversight Board that includes City residents. Responsibilities would include, at a minimum, annual review of proposed infrastructure spending as well as the status of funded projects.
- Expand the responsibilities for the existing Retirement Plans Committee to include at least an annual review of the City’s pension funding and benefits.
- Expand the responsibilities for the Audit Committee to make sure, among other things, that all Measure P proceeds are used in the City of Burbank.
It’s worth mentioning that the City has a track record of being available to citizens and businesses. It hasn’t hurt that the City has had more than its share of watchdogs, especially during times of controversy. And while the quality of the watchdoggery has been highly variable, the overall effect has led to a City government with a healthier regard for public opinion. Having additional oversight for Measure P funds would be in keeping with the City’s culture of citizen involvement and so would be more than a rubber stamp exercise.
The City Council is committed to making Measure P revenues a genuine increase in capital funding. The Council will establish a baseline of capital funding based on the past several years. Any Measure P funds devoted to capital improvements are to be in addition to this baseline capital spending rather than a substitute for it.
The Council is also requiring that the annual normal cost of the City’s pension plans be funded, with explicit and transparent funding goals that would allow the City to absorb future pension funding charges. If this policy had been in place in the 90s and early 00s, a substantial pension “rainy day” fund could have been created.
Can enough costs be cut to avoid raising taxes or cutting services?
Measure P appears to be politically viable, and far preferable to reducing the scope or quality of customer services. Beyond the pension reforms for new hires mentioned earlier, can the City find ways to cut enough costs so that it can avoid raising taxes altogether?
The number of budgeted positions has significantly decreased. Over the past 20 years General Fund staffing had roughly fluctuated between 934 and 1,023 full time equivalent positions; but several years ago, the number of positions has continually decreased, dropping to 903 positions. When redevelopment ended in 2012, most of the 21 budgeted redevelopment positions were eliminated. Staffing was retained for the real estate section, which had traditionally been a planning function and for which there was an ongoing need.
The General Fund continues to provide various administrative services for the proprietary funds. The consolidated approach makes these services more labor efficient; and the General fund is reimbursed for the shared support through its cost allocation plan.
Significant new cost cutting is underway. The City has in fact identified several savings initiatives that, if fully realized as planned within four years, will generate $7.8 million in savings without hurting city services:
- Have all employees, not just new hires, pay 50% of their pension costs, a greater share than many employees pay presently. Serious discussions are underway. Estimated savings: $3.7 million.
- Avoid paying more in salaries that what market competitiveness demands. Estimated savings: $2.0 million.
- Improve worker safety and reduce lost hours due to injury, which will enable reduced Workers Compensation costs. Estimated savings: $1.2 million.
- Pre-pay the CalPERS Liability annually. Estimated interest rate savings: $0.9 million.
Note that $3.7 million in savings would come from General Fund employees assuming a greater share of the pension payment burden, and to that extent reducing the potential burden on taxpayers.
A fee study and fee changes have already been completed, which are expected to generate $1.2 million. These targeted fee increases are preferable to a general tax increase, especially when coupled with the introduction of the PASS program, which allows lower income residents to pay reduced fees for many City services.
In total, these measures could reduce the operating deficit to $9.5 million by FY 2022-23. But that’s still a big deficit, and capital funding needs remain unaddressed.
The freeze on hiring and compensation will generate several million in savings. Of the 903 budgeted General Fund positions, a total of 112 person years’ worth of staffing has remained vacant due to the hiring freeze. The General Fund budget is $168 million, with about 80% due to wages/salaries and benefits for the 903 budgeted positions. Doing the math reveals that each budgeted position is, on average, $150,000 per year. For 112 positions that totals to $16.8 million per year.
However, it would be a mistake to suppose that most of the $16.8 million would be available as savings. In many cases, existing staff has had to work extra overtime, at time-and-a-half or greater, to maintain service levels in spite of the vacancies. For example, 15 vacancies are sworn positions that often must be filled in with overtime to maintain minimum readiness levels. Moreover, some maintenance has been deferred and must eventually be done.
Nevertheless, there’s likely is to be several million or so in one-time net savings by the time most of these positions are filled, which would take about a year. And some vacancies may well be permanent; the hiring freeze is an opportunity to increase labor efficiencies without layoffs.
The decision to save budget surpluses has led to a $14 million spendable balance (i.e., beyond required reserves, in the General Fund. Even in a typical year, there are a certain number of vacant positions that arise from retirements, resignations, etc. The resulting net salary savings had been customarily treated as a spendable surplus. But over the last several years, the surpluses have been accumulating instead, and can now be used to defend against pension liability payments when they are higher than currently estimated.
Or, they can accelerate the reduction of the pension liability when required payments are lower than estimated. A long-term cost reduction had already occurred in the recent past, when the General Fund was receiving monies from Redevelopment as a consequence of its dissolution. Former Mayor Gary Bric, who served on the Council from 2007 to 2015, recalls successfully advocating for using these monies to pay down some of the pension deficits, which has been saving the City $750,000 per year.
Or, the spendable surplus could also be used to tackle the General Fund’s needed capital improvement projects sooner rather than later.
The City has achieved a running start on the General Fund’s looming challenges. The $14-plus million (keeping in mind additional savings from the hiring freeze) can stave off an immediate crisis but without Measure P revenues, the annual operating deficit of $9.5 million would exhaust this amount within two years.
Attempting to generate $9.5 million purely through staff cuts would require hundreds of permanent vacancies, with resulting drops in service levels that even huge overtime expenses could not overcome. Parks and fire stations alike would face closures.
But with Measure P revenues, the $18 million could remain available indefinitely. While the Council and citizenry is considering the best use of these funds, they will be earning around 5% ($900,000 per year) in a special trust fund, versus the usual rate of 1.5% ($270,000) per year.
So there’s good reason to believe that the City can mitigate General Fund operating and capital budget shortfalls through internal savings, but it would also need to have at its disposal Measure P revenues.