Santa Paula: Unsolvable Structural Deficit

By Sheryl Hamlin

The City Council of Santa Paula should not have been surprised when former Simi Valley City Manager Mike Sedell stated at the June 17, 2017 special Saturday meeting that there was a structural deficit. The previous consultant Dr. Gardner had told the council on two occasions there was a structural deficit: December 15, 2014 and June 20, 2016.

Structural Deficit

What is a structural deficit? Simply stated, a structural deficit occurs when regularly occurring expenses are growing faster than revenues, making the possibility of balancing expenses and revenues impossible. For details, click here.

Warnings and Deeper Deficits

Evidently Mr. Sedell gave specific recommendations to city management when he consulted on the budget process two years ago, but unfortunately these recommendations were not translated into actionable items for the city council.

Now, there is “rapid degradation” of the General Fund, said Mr. Sedell, with only two weeks of cash available for emergencies.

In the month that Mr. Sedell and Mr. Castania have been combing through the city’s finances, the deficit has climbed from $1.4 million to $2.2 million.

Causes of Escalating Budget

During the past week, two serious items have unfolded: lower property tax receipts than budgeted (not explained) and a lawsuit regarding overtime. Mike LaPlant of the SPFD explained that the suit involved the calculation of overtime and base pay. The suit was settled in May 2017 and is described here and here. Because this suit was heard and decided in a Federal court, the results are now considered legal precedent and affect all municipalities.

Financial Reporting

Vice Mayor Gherardi has been asking for more frequent financial reporting. Each effort has been met with resistance due to the time involved in preparing reports. Mr. Sedell said there should not be a systems issue and that the city management should be monitoring all funds monthly for changes. Finance Director Easley reported that the conversion to the new accounting system has been impossible due to other time constraints.

Annexation by the Ventura County Fire Protection District (VCFPD)

No one in the room expressed any doubts that service levels would improve with county fire, as well as improved equipment, emergency response and salaries. The question remains is the cost. Can the city afford the cost of annexation? Can the city afford its fire department in any configuration? Even after spending $50,000 on a study with the Matrix Group (reported here), this question is not resolved.

Financial Model

The team of Sedell/Castania has created a detailed financial model looking at all areas of cost savings and lost revenues due to annexation. They have also been working with the County Assessor because the payment made to the VCFPD is a function of property taxes. The county publishes a report, which is required by California Statute SB 8, annually; however, with all things financials, there are always exceptions.

Based on a strict usage of the allocation formulas, the cost to VCFPD should be over $3.1 million the initial year, but according to Mr. Sedell, his research at the county indicates that there will be less property tax revenue and thus a smaller payment to VCFPD. In fact, they have calculated only $2,762,800 for FY 17/18. Conversely, this yields a much lower property tax.

Drastically Reduced Estimates Favor Annexation

When questioned about this, Mr. Sedell said they are looking at the property tax numbers cautiously rather than over budgeting. However, when questioned why the FY18/19 Santa Paula tax allocation would be over $3 million less than in the FY15/16, the county, who reportedly provided the estimates, would not respond. Correction: report received 6/21/2017. Note: by lowering the city’s tax allocation, the payment to VCFPD is lowered, thus dramatically affecting the Sedell/Castania model to favor annexation.

Focusing only on the FY 2017/2018 budget, the model shows that retaining the SPFD will lead to a deficit of $2,286,727 and without the SPFD there would be a deficit of $2,240,477. So for the immediate first year, the cost is a wash. Mayor Crosswhite pointed out that although the deficits would be similar, there would be less flexibility in moving things around without the full property tax allocation.

Cost Comparison Graph

The most discussed summary of the report showed three lines. The “pink” or highest line represents what the city would pay for fire services if it attempted to achieve 90% of what the county could pay in salaries. The lowest number in grey is the cost to retain the SPFD at its current staffing levels. The blue, or the middle, is the cost to join the VCFPD, which does not include EA1 or EA2, but does include the increase from the recombination of the former Redevelopment Agency in 2025, which is shown by a sizable step function of $521,442. Note too that for three years, using current staffing costs (grey), the VCFPD is more expensive than retaining the SPPD, but after that it is considerably less to retain at current pay scales. The pink line represents a level of staffing which would be impossible for Santa Paula to attain given the current fiscal model and economic forecast.

Source: VCFPD/Sedell Team

Public Comments

Richard Rudman said that if he faced such a structural deficit in his own finances, he would be facing bankruptcy and asked about the city’s solvency, particularly given the likelihood of another toxic spill or major fire.

Former Mayor Mary Ann Krause said there may be new opportunities to deliver services in the future, particularly emergency medical, which will change the financial picture, but those savings will be made by the county and not the city. She said that joining VCFPD now reduces future flexibility during extremely tenuous financial situations when the city needs a say over its resources. She proposed renegotiating the .165 rate or waiting.

Sheryl Hamlin questioned why the Sedell/Castania model produced results much lower than the TRA (Tax Rate Allocation) report, how the city would pay a partial year, why should the city pay more for the RDA properties when there is no new service involved in the tax recombination, and who was at the table negotiating for the taxpayers when the .165 rate was established?

Council Deliberations

Vice Mayor Gherardi felt strongly during the discussion that joining the VCFPD was an insurance policy against future disasters, particularly she said, because Santa Paula’s boundaries now include the riverbed which is prone to fire. Council Member Hernandez stressed the pay increases for the fire fighters. Council Member Procter noted that any gain from recombining the former RDA tax base with the city’s tax base is mostly lost, but suggested that the proposed “split roll” where commercial properties are excluded from Proposition 13 protections may help the city.

Mr. Sedell responded to the comments about the proposed rate saying it is not negotiable and the county feels it is giving the city a great deal. And during the break, Vern Alstott stated that VCFPD had been providing services gratis to Santa Paula for years and now can recoup their efforts.

As to the Redevelopment step increase, the team did not appear to understand that there were no new services to be provided and in fact the SPFD had been servicing this area continually.

Mayor Crosswhite asked about “spillover” to the rest of the departments when they see the fire fighters getting huge raises? She also noted that Measure T sunsets in 20 years, but it will be necessary to reauthorize it based on the structural issues in the budget. Mike Sedell said that the city needs to “wean itself off” Measure T without providing guidance for such.

Sales Tax to the Rescue?

Connie Tushla spoke about sales tax not being the driver it once was for cities due to on-line sales and the financial problems of many big retailers. In fact, this was one of the State of California’s announcements which Dr. Gardner showed in one of his presentations. See graph here. The sales tax decline is a function of an aging population spending less and on-line sales where taxes not all collected.

Chris Mahon, union representative, said the SPFD is in a “state of decline” and is “worse off” than five years ago with old trucks and breathing apparatus out of compliance. Was this a veiled notice of a potential lawsuit?

Motion to Proceed

Council Member Hernandez felt that the city needed to plan for its growth and that philosophically joining VCFPD would put the city in a better position to grow safely. Vice Mayor Gherardi said she realized the budget issues were a “wash”, but that there is a financial risk factor in retaining the SPFD because the city does not have the financial cushion to respond to a disaster. One fire, she said, could “do us in” given the overtime costs. Mayor Crosswhite said it will cost more to increase the other departments than the cost of the VCFPD, although Council Member Hernandez insisted that sales taxes would increase as well as property tax increases, so the other departments could see relief. Council Member Hernandez felt that using Measure T for the police department would enhance services as the measure stated. Council Member Procter said that without the property taxes, the city was dependent on future sales taxes to which Mike Sedell said the new city manager should focus on economic development

Mayor Crosswhite said that East Area II (retail component) was not in the forecast. Sandra Easley said that East Area II (Gateway) is to start “after 500 homes”. Council Member Garman said that he hoped East Area I would happen but had confidence in the future.

Vice Mayor Gherardi moved: “I would like to make a motion that this council move towards annexing to the county, recognizing there are still a lot of things that will come back that we will have to vote on and we have ways of getting out of it. But I think we need to give direction to the staff to do that and to prepare the budget with the assumption that the fire department will be out of the budget.” In a roll call vote, the result was 4-1 with Mayor Crosswhite opposed.

Comparisons with and without Annexation, Source:VCFPD/Sedell

To watch the entire video and download the documents, click here.

For more information about the author visit Sheryl Hamlin dot com.

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Richard Main
Richard Main
3 years ago

These cities and the government in California, and most likely elsewhere like Illinois now on verge of bankruptcy, still do not “get it”. They are in denial. Look at Oxnard with all its commercial and residential growth, large deficit and huge un-met obligations to maintain the infrastructure. Main culprit? Out of control pension obligations and bloated operating costs all around. EA 1, will not save Santa Paula, sad but true. Out-sourcing fire and police will help in the mid-term, but will not solve long term problem. Sooner or later a major re-setting is going to happen. It will NOT be pretty!