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City Staff to Present Council with Recommended Approach for Closing Projected $8.9 Million Budget Gap

Post Date:12/11/2017 4:00 PM

San Luis Obispo City staff will present a report to City Council on Tuesday, December 12 recommending a balanced approach to address the City’s projected $8.9 million budget gap resulting from increased pension costs mandated by the California Public Employees’ Retirement System (CalPERS).

In alignment with the City’s current major city goal of Fiscal Responsibility and Sustainability, City leadership spent several months developing the building blocks of a Fiscal Health Response Plan (FHRP), guided by community and staff input. The plan includes implementing offsets totaling $8.9 million annually by fiscal year 2020-21 that could allow money to be set aside for increased payments to CalPERS.

Staff recommends a balanced approach that includes operating reductions and new ways of doing business, new revenues, and employee concessions, while minimizing impacts on the community. The recommendations total $7.5 million from the General Fund and $1.4 million from the City’s Enterprise Funds, including Water, Waste Water, Transit and Parking.

“We have concluded that we need to take a balanced approach that maintains our commitment to good fiscal management, quality public services and the employees who provide those services,” City Manager Derek Johnson said.

The report recommends a three-pronged approach to close the projected $7.5 million budget gap in the General Fund:

1. 30-40% through Operating Reductions and New Ways of Doing Business

Expected to total approximately $3 million over a three-year period, operating reductions and new ways of doing business could include operational efficiencies, staff reorganizations, proactive fiscal management, and improved debt and investment management.

2. 20-30% through Employee Concessions

In keeping with the City Council’s adopted Compensation and Financial Responsibility Philosophies and Labor Relations Objectives that include cost sharing of employee benefits such as health insurance and retirement, the recommendation assumes approximately $1.7 million will be achieved through employee concessions. The City is obligated to meet and confer in good faith with its represented employee groups regarding the impacts of changes to wages, hours, and/or working conditions.

3. 30-40% through New Revenue Sources

Two areas that would generate additional revenue would be:

a. Cannabis Taxation: $500,000 growing to $3 million annually by 2020-21. The estimates are preliminary and based on all the uses allowed by State regulations. Actual revenues collected would depend on the range and scale of activities allowed in the City, as directed by Council and guided by public feedback.

b. Storm Water Parcel Tax: $1.5 million. A parcel tax would generate approximately $1.5 million annually and would require two-thirds voter approval with the first revenue collection realized in fiscal year 2020-21.

The Enterprise Fund solutions totaling $1.4 M will be met through various strategies unique to each fund. The primary reliance will be on doing business differently and employee concessions. Enterprise Fund revenues are those revenue projections based on approved and historic rates and revenue growth trends.

To manage future fiscal uncertainty, another key component of the staff recommendations is for the City to establish a Section 115 Pension Trust Fund. While CalPERS’ higher risk investment strategies could yield higher returns (CalPERS estimates seven percent in long-term interest), placing the funds in a trust instead would allow the City to limit its exposure to market volatility, still achieve an estimated five percent net interest earnings rate, and allow the City to draw funds to pay down pension debt early, resulting in long-term savings.

A variety of factors, some outside the City’s control, have contributed to the increased costs, including losses from the Great Recession, retirees living longer, and past decisions around employee benefits. Most recently, CalPERS adjusted its investment strategy toward more conservative investment assumptions, and decreased the expected rate of investment return, further increasing costs for the City as well as for 3,000 other member agencies in CalPERS. 

For San Luis Obispo, annual costs for CalPERS will more than double in 10 years, from $7.8 million in 2014-15 to $19 million in 2024-25. 

The staff report notes while CalPERS is the driver for the current fiscal challenge, it is not practically feasible for the City to leave CalPERS. To exit CalPERS, the City would be required to meet its projected worst-case financial obligations within 30 days of the time of separation. That obligation is currently estimated to be between $377 million and $495 million. There are other legal barriers to reducing benefits for current employees and retirees.

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