Costa Mesa’s Incomplete Budget Picture

Tuesday, April 5, 2010 | At tonight's Costa Mesa City Council meeting, the public -- for the first time since the city drew national attention with the issuing of more than 200 layoff notices -- will have the opportunity ask council members specific questions as to why such drastic action is needed.

For months, the majority of the all-Republican City Council has been saying that the city is facing insolvency, and pushing a plan to outsource more than 40 percent of its 472-person workforce as the only way out.

Costa Mesa, like most cities in Orange County, is facing one of the toughest economies in memory and public services are being pinched. Tax receipts have plummeted in recent years, and layoffs, furloughs and service cuts are indeed part of the future.

However, interviews with city officials and an examination of budget documents do not reveal a budget crisis that is as dire as council members have told the public.

It is also apparent, based on California Public Records Act requests for emails and other forms of communication about the budget process, that very little communication took place among council members and city staff in the run-up to the decision to go forward with the outsourcing plan.

It appears that most of the deliberations regarding the outsourcing plan, as well as the budgetary rationale, was the product of a City Council budget working group made up of just Mayor Gary Monahan and Councilman Jim Righeimer.

Because the working group did not constitute a majority of council members, its deliberations were not covered by the state's open meetings laws and able to be conducted in private.

Among the issues that have not been shared with the public -- nor fleshed out among a majority of city council members in public -- are the true state of the city's fund balances, the effect of staff cuts, the extent of labor concessions and pension givebacks that have already been instituted and its revenue projections going forward.

A Depleted Cushion, But Not Insolvency

No statement in recent months has caused more alarm bells than Monahan's warning in February that the city could be insolvent by fall. To illustrate his point, he mentioned that the city's "fund balance available" (or FBA as its known as in budgetspeak) was down to $5 million last November.

What Monahan neglected to mention to residents was the fund went back up the next month, when the biannual installment of property tax revenues came in.

It's important to understand exactly what the FBA is. City budget managers look at it as a sort of internal reserve account that can be compared to the cushion that people keep in their checking account.

The FBA is needed because while a city's main expenses -- payrolls, contract payments and bills -- must be paid on an at least monthly basis, the vast majority of its revenues come in large cash infusions a couple times a year.

To be sure, Costa Mesa's FBA has taken a hit during The Great Recession. It stood at $68.3 million in fiscal 2007-08. Three years later it is down to $40 million, according to recent budget documents.

But most of the FBA draw down happened during the depth of the recession in 2008-09, when $19.4 million was taken out. In 2009-10, the draw down was $7.4 million and this year it is projected to be $1.4 million.

And before Monahan's statement, not even Costa Mesa officials were saying that it had reached the level of insolvency.

In his final budget message to the city last July, former City Manager Allan Roeder told Costa Mesa residents, "the city's cash flow position remains healthy but guarded."

The reason the FBA has been tapped so extensively in recent years is the speed of the nation's economic recession in fiscal 2007-08, said Budget Manager Bobby Young.

The dip in revenues, from $103 million in fiscal 2007-08 to $93 million the next year was immediate. It was mainly derived from dips at South Coast Plaza and the myriad car dealerships that underwent major stress that year.

Because the dip was so fast, and so stark, city officials had to scramble to cut expenses but couldn't immediately because most salary contracts were already negotiated.

Looking at the expenses in the city budget shows that city and labor officials collaborated to quickly to glide down salary costs but there was a gap, which the FBA helped cushion.

The draw down of the FBA, along with the concessions from labor groups, allowed city officials to balance the budget in fiscal 2009-10.

The Pension Issue

When Young, the budget manager, unveiled the budget working group's projections during a February council meeting showing the city's pension contributions soaring in future years, they were stark.

Righeimer has repeatedly told the public that pension payments have gone from $5 million in 2000 to $15 million in the current budget and would soar past $25 million, nearly a quarter of the city's budget, by 2015.

Those projections are also often mentioned by city officials, and cited in press reports, in defense of the mass outsourcing.

However, Young now admits those projections are his own, "subjective" and not from the California Public Employee Retirement System.

Young said his projections are higher because they assume that the city's labor groups would halt contributing toward their pensions once current contracts expire in 2013.

That makes many residents and labor activists scratch their heads.

Most pensions are funded by a combination of employee and employer contributions and investment returns.

Historically, Costa Mesa, like most cities, required no contribution from its police officers and only required a one 1 percent paycheck deduction from its firefighters. The two groups account for more than half of the city's $93 million budget.

That changed as a result of the most recent budget crisis. Police now contribute 5 percent from their paychecks, and firefighters 6 percent.

General employees, meanwhile, went from just under four percent to nearly 9 percent.

While Young said he prepared those projections for the budget working group of Monahan and Righeimer, and acknowledges having contact with both officials while preparing those projections, he stressed that neither pressured him to hike numbers.

Yet he did acknowledge that his projections have been controversial, and said the city has since asked the state retirement system to provide projections.

Young credits labor groups for helping to balance city budgets over the last four fiscal years by agreeing to open up salary contracts early on several occasions.

In September 2009, city officials offered employees early retirement options by offering two years of additional pension credits to leave. That moved about 70 employees into early retirement, out of a total workforce of about 600 that year.

That year also saw a host of furloughs, which helped to quickly reduce payroll.

That was followed in June 2010 with layoffs. Budget staff said a total of about 50 positions were eliminated with as many as 40 being individuals laid-off and 10 being vacant jobs that were deleted (a budget trick that locks in permanent savings).

This fiscal year, unions agreed to the increase in their pension contributions.

Revenues And Wish Lists

The City Council majority also seems to have underplayed the importance of hiking revenues -- such as the two percent November 2010 increase in the hotel occupancy tax -- in keeping a balanced budget.

Young noted that Costa Mesa tax revenues (mainly property, sales and hotel taxes) are actually on the uptick. He also confirmed that revenues are close to matching expenditures for the first time in recent years.

What also still needs to be fleshed out is how Costa Mesa CEO Tom Hatch came up with a $15 million deficit for the next fiscal year, which begins in July.

Young, as recently as last week, could not provide any specifics for the alleged deficit, saying the number was the result of departmental requests.

Those types of requests are typically broad, as departments include their "wish list," which is then most often significantly pared down by city officials.

Please contact Norberto Santana, Jr. directly at nsantana@voiceofoc.org and follow him on Twitter: twitter.com/norbertosantana. And add your voice with a letter to the editor.

 

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