Santa Paula: Council Approves Fiscal Year 2016-2017 Budget

By Sheryl Hamlin

Santa Paula’s new fiscal year began on July 1, 2016 with a new budget in place approved at the June 20, 2016 council meeting.

Highlights of the budget were given in staff reports, which can be downloaded here, are given in this analysis.

Unsustainable Employee Costs

The City Manager made this important observation about the FY 2016-2017 budget:

budget_summary_fontes

Note his phrase “increases in health care insurance and retirement costs for employees outpacing general revenues of the City”.

 

Sacramento Bee columnist Dan Walters recently wrote, “CalPERS has been demanding hundreds of millions of dollars in additional contributions from state and local governments – hitting cities particularly hard…”  in response to weak returns by CalPERS.

At .61% overall return, there is NO OTHER OPTION except to turn to the municipalities and counties to underwrite these low investment returns, who in turn reach out to citizens in the form of new taxes and businesses in the form of new fees.

Read the CALPERS report here. Another analysis of the CalPERS problem may be read here showing the actual fund losing about 2% of the principal.

The combination of an aging, healthy population, generous life-time defined benefit plans and the zero interest rate (ZIRP) Federal Reserve Policy has been lethal to all investors, even the most sophisticated ones such as CalPERS.

This demographic “wave” could take 20 to 30 years to work off, as the Baby Boomers ‘exit’ the population. Politicians in both parties are loathe to address this because of constituency backlash.

General Fund Balance Moved to Reserves

The budget was declared as “balanced”, which must be explained in terms of the subdivisions in the General Fund. Per the most recent Audited Financial Statements (AFS), the General Fund was subdivided into the following categories: non-spendable, restricted, committed, assigned and unassigned. Examples of the categorical divisions can be found on page 36 of the most recent AFS. One example are the matching funds for the Limoneira Public Safety Grant found in the Committed subdivision of the General Fund.

As of June 30, 2015, the General Fund balance (which includes all reserved and unallocated funds) was $5,042,183 per the Audited Financial Statements for FY 14-15. Click here to download. The city’s annual audit is in process now for the fiscal year ending June 30, 2016 (FY15-16), but an estimate can be seen in the approved budget as well as a projection for the FY 2016-2017 budget. By moving the entire $285,486 to reserves as shown below, the FY 17-18 budget will start with zero carryover, a cushion previously used to balance a new budget.

gf_activity

Building up the reserves for another recession was recommended by the consultant Dr. Gardner and discussed in the City Manager’s report as follows based on lessons learned from the most previous recession:

fontes_reserves

What Could Go Wrong?

The FY 16-17 budget has two aggressive forecasts: sales tax and fees from the Limoneira East Area 1 project.

Aggressive Sales Tax Forecasting

The sales tax for FY 2015-2016 actual will be known soon for the year ending June 30, 2016 and should be in the Audited Financial Statements. The sales tax forecast for 2016-2017 was computed by a consultant HDL.

Sales taxes increase in one or more of three ways:  1) each individual buys more, 2) more people buy in the local area, and/or 3) the costs of taxable goods increase. The challenge for the local government is to influence options (1) and (2), while the Federal government is trying to induce option (3) inflation.

With an aging population spending less, the first option (each individual buys more) is a weak bet. With the city’s population growing from 30,684 as of 1-1-2015 to 30,752 as of 1-1-2016, the likelihood of option two (more people buy in the local area) is also weak until there is a full build out of East Area I.  The Federal Government is projecting inflation at 2.0%, so option 3 is also weak. See report from the State of California in the Adapted Budget for the population numbers on PDF page 18.

sales_tax

Fees from Limoneira

As noted previously, $200,000 is budgeted as fees from Limoneira. Limoneira’s finanacial plan is based on calendar years, while Santa Paula’s budget is a fiscal year, so this means that there is only a six month overlap where these expenses could occur. Furthermore, the Planning Director said the project is proceeding slowly in a recent Planning Commission meeting.

Recession?

And, as the consultant Dr. Gardner said, recessions tend to appear cyclically, so it is about time for another recession or at least a slow down. With Santa Paula recovering from the last recession in terms of staffing, each spending decision can have ramifications. The chart below shows that the city has not ramped up to pre-recession levels of hiring, so is providing its services with fewer full time resources and contractors.

staffing_history

Alternatives

The city is placing a 1% Sales Tax increase on the 2016 ballot. This will be discussed in a subsequent report. Also, the city is considering the use of County Fire. This option was discussed previously and is still under consideration.

For more information about the author, visit sheryhamlin.com

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