Editor’s Note: The following is an editorial that represents myBurbank and has been authored by Greg Simay for us. We will be glad to publish letters to the editor from opposing opinions.
The elevator speech (if you’re in a tall building, like in Dubai)
The City budget that supports police, fire, parks, libraries and streets has been facing a $30.5 million shortfall, with catastrophic reductions in service—a nightmare for the City Council and the public they serve. That’s the bad news. The good news? There are solutions:
- Vote for Measure T by June 5, and you reduce the shortfall by 12.5 million, from $30.5 million to 18 million. It assures that a revenue source the public has supported since 1958 remains in place with up-to-date language. It doesn’t increase your electricity rates or your taxes.
- The City has created $9 million in savings, which includes having employees contribute more toward their retirement. Now we’re down to a 9 million shortfall.
The City has $14 million beyond its emergency reserves ($33 million) to buy a year’s time to find a permanent cure for the shortfall, which is:
- To pass a ¾% increase in the sales tax, hopefully next November, which would raise $20 million annually, wiping out the $9 million shortfall and providing $11 million toward roadway and other capital improvements. It does mean that when we pay for that $10 item, the sales tax on it will be 102.5 cents instead of 95 cents.
We know that Burbank is a city that works and works very well. Property values are sky high for a reason. So vote “yes” on Measure T and support an increase in the sales tax, when that ballot measure comes up later on.
Now for the details
Only the General Fund part of the City’s budget is in trouble.
Some City services (including water and electric services, and refuse) are supported by rates. Rate revenues flow into various proprietary funds, and expenses flow out of them.
Other city services are supported by taxes and certain fees. These services include those provided by police officers, fire fighters, park and recreation staff, library staff and those maintaining City streets. Tax revenues flow into the General Fund, and expenses flow out of it. Besides ongoing expenses, the General Fund also supports capital improvements, either on a pay-as-you-go basis or by servicing the debt on borrowed monies, usually from bonds. Currently, the City is debt free.
The proprietary funds are in good shape. The budget shortfall concerns the General Fund only.
The In-Lieu Transfer Fee, which provides revenues that a private utility would otherwise provide, is at legal risk, which puts $12.5 million of revenue at risk.
One source of General Fund revenue has been an in-lieu transfer fee, in which the Electric Fund (a proprietary fund) transfers some 12.5 million to the General Fund. The in-lieu transfer fee cannot exceed 7% of the revenues from electric rates paid by residents and businesses, which is what the fee currently equals.
If Burbank Water and Power were a private utility, it would be paying a franchise fee for the privilege of having stations, power lines and other facilities in Burbank. For example, the current cable provider pays the City a franchise fee based on 5% of its retail revenues.
But as just mentioned, Burbank’s in-lieu fee equals 7%, not 5%. What is the extra 2% for? It’s for street lighting, including its ongoing expenses and capital improvements. Even without their own electric utility, many cities are responsible for maintaining their own street lighting systems. By having its own BWP take care of its street lighting system, the City is able to do so very economically without giving up policy oversight.
But if BWP didn’t have to transfer the other 5%, couldn’t electric rates be lowered correspondingly; or perhaps more realistically, couldn’t any future rate increases be delayed even further than they have been? Yes they could, but BWP’s electric rates are already very competitive with those of other Southern California utilities, public and private. BWP has been achieving economies both by creating additional revenue sources (from fiber optic services, spare transmission capacity, etc.) and continually improving the efficiency of its operations and maintenance. It doesn’t need to discontinue a decades-old revenue source to the General Fund in order to do right by the ratepayer.
Put another way, the marginal benefit the electric ratepayer may receive from the elimination of the in-lieu fee would be offset by a significant reduction in one or more City services that depend upon the General Fund.
Passing Measure T guarantees that the in-lieu transfer fee would meet current legal standards, thereby safeguarding the $12.5 million per year.
So why is the in-lieu fee at risk? After all, according to the Supplemental Voter Information pamphlet, Burbank voters, way back in 1958, had amended their City Charter (specifically, Section 610) to approve “a fee in retail electric rates to fund the transfer of no more than 7% of BWP’s gross annual sales of electricity to the City’s General Fund in order to pay for essential City services.” But as a result of a legal challenge to Section 610, the court in 2017 found “voter-approval requirements for a tax were not met because Section 610 did not explicitly [our emphasis] authorize funding the transfers from retail electric rate payers.” (This was in spite of the voters having approved a Charter amendment to Section 610 back in 2007.) The court ruled that the in-lieu transfer fee is therefore a tax, subject to fresh voter approval.
That part of the decision would have been manageable, but the court had also ordered the City to stop collecting the fee. To stave off an immediate funding crisis, the City quickly appealed the decision, which suspended the court order pending the outcome of the appeal. BWP has been able to continue collecting the fee and make transfers to the General Fund, but as of September 2017, the monies are currently in limbo in a holding account. As of now the amount held is $5.1 million.
If the court rules in the City’s favor on appeal, all well and good. The $5.1 million returns to the City’s coffers and from 2018/19 onward, the in-lieu transfer continues to be a revenue souce.
But if the appeals court agrees with the lower court, disaster would loom. The City needed another bite at the apple, one that could survive any future court challenge. Hence the City Council’s decision to propose Measure T in which a new, “Section 610A” amendment to the Charter “explicitly approves the existing practice of including a fee in retail electric rates to fund transfers to the General Fund.
So if the voters approve Measure T, the in-lieu transfer is safe, regardless of how the appeals court rules.
The City has taken steps to make its FY 2018/19 expenses by $8 million less than they would otherwise be, in part by having new and current employees pay a greater share of their retirement.
If Measure T passes, the $30.5 million General Fund shortfall becomes a 18 million shortfall. The City could reduce the number of employees, but only at the cost of triggering a corresponding reduction in services. (And avoiding cuts in police and fire services would make the cuts even direr for other services like parks and recreation, library and street maintenance.) The Burbank voter, and various watchdogs, have made sure that more employees has translated to more and better services.
So how can the City reduce costs without reducing services? It turns out that one way was making the workplace significantly safer, thereby reducing workers compensation costs. There have been, over the years, improvements in work efficiency, particularly as the workforce has become more computer literate.
But the budget elephant in many City Council chambers in California, and across the nation, are underfunded employee pension obligations. To void, even partially, current obligations is a serious violation of contract. But to make deep cuts in City services is a serious betrayal of the public.
At the State level some pension reforms have taken hold (such as salary caps,) but ultimately, current employees will have to fund more of their pensions. The City Council has adopted a policy that employees should pay 50% of the pension annual normal cost. Once fully implemented, this policy will result in $3.7 million in annual savings. (The City also plans to continue prepaying the annual unfunded CalPERS unfunded liability payment, so as to avoid interest costs.) Policies that require a higher percentage of employee contributions also allow CalPERS to depend more on current contributions rather than achieving higher-than-market rates of return.
CalPERS had, during the go-go 90s, achieved very healthy rates of return, and in 1994, the retirement system was 140% funded on a statewide basis. But high rates of return can be volatile as well; during the Great Recession, CalPERS had a 25% loss in one year.
Today, the statewide retirement system is 80% funded. A wiser CalPERS now aims for lower-but-more-stable returns on investment, recently lowering their overall rate-of-return target from 7.5% to 7%. These lower returns can meet pension obligations if employees are putting more in the CalPERS kitty in the meantime.
During the 90s, the City Councils could have decided to keep contributing to CalPERS for those rainy day years when surpluses shrink and turn into deficits. They could have decided to resume payments in 2004, when the surplus had shrunk to zero and CalPERS was 100% funded. But City projects—good, popular projects—beckoned. And so the elephant grew. Recent threats to the City’s revenue stream like the loss of the transfer fee has been a wake up call to tackle the elephant before it smothers everyone in the room.
A ¾% increase in the sales tax will be needed to wipe out the remaining, $9 million budget shortfall and to provide capital funding for city streets and other needs.
The net result of the City’s cost saving efforts so far has been to reduce costs by about $9.0 million beginning in FY2018/19. Along with the passage of Measure T, this reduces the shortfall to $9 million, as against a FY 2018/19 operating and maintenance budget of $167 million.
The City does have fully funded reserves of $33 million, but this money would only be used in the severest of emergencies or more likely, as a bridging loan for a short period, with the assurance that permanent funding was at hand. The City also has $14 million beyond these reserves; if this amount were used to cover an ongoing 9 million shortfall, it would be exhausted by 2020.
Which leads to the proposal of a ¾% sales tax this coming November. The current sales tax in Burbank is 9.50% so the new sales tax rate would become 10.25%. The extra ¾% would produce extra revenues of $20 million annually, covering the $9 million shortfall and providing $11 million for needed capital improvements. The tax burden’s pretty evenly spread: About one-third of the $20 million would come from Burbank residents, about one-third from Burbank businesses and about another third from non-Burbank residents.
The implicit assumption is that the ¾% would not reduce consumer buying and thereby the $20 million would be the revenue generated from the increase. For every $100 spent, the ¾% additional sales tax would mean that the sales tax amount increases by 75 cents, from $9.50 to $10.25. For 10 dollars, it’s a 7.5 cent difference. Whether the local economy heats up or goes down, it will probably be due to other factors.
A lot of Burbank roadways are in need of repaving, a capital expense, rather than patching, an O&M (operations and maintenance) expense. (On a household level it’s the difference between replacing a roof and patching it.) Most streets need repaving on shorter time frames than payment schedules for long-term bonds, so long-term financing is dicey. (It’d be like paying for a car long after it’s consigned to the junkyard.) Pay-as-you-go is a safer route and one that the extra ¾% would provide.
Redevelopment had been a way of funding many capital improvements through tax-increment financing. That is, the increases in property tax revenue from redeveloped properties would flow to the City rather than the County. These funds didn’t flow into the General Fund, but they were used for projects that would otherwise have been paid out of the General Fund. So the General Fund still benefitted. But under its own budget pressures, Sacramento discontinued redevelopment several years ago.
The Grand Bargain
The Burbank Unified School District also needs additional funding. Details are another discussion for another time. But consider this proposed bargain:
Burbank’s local government agencies will continue to make Burbank safe and offer a very high level of services for ourselves and our families The streets will be kind to our cars,, the libraries will be useful and the parks will be fun. If there’s a hillside fire, it won’t consume our houses because our fire fighters will continue to have the ability to be Johnny-on-the-spot.
Our schools will be safe and so good that many of us parents will decide we don’t have to bear the additional expense of private schools. (And even if we nevertheless decide to pay for a private school, we will sleep easier knowing the public schools are a more-than-decent Plan B, should a Plan B become necessary.)
The City Councils and School Board will continue to work together to the benefit of the Burbank community.
And so in Burbank, there will be a significantly greater chance that our children will grow up safe, graduate with skills, have great local employment opportunities, and successfully launch into adulthood earlier and with considerably less debt than their peers elsewhere. And, everything else being equal, the value of our houses will continue rising because a city that offers what Burbank offers will be a highly desirable location, location, location.
Is this what we want? If it is, then let’s heed the Spanish proverb:
Take what you want. Take what you want, and pay for it.
