Money Pinch Is Squeezing Out City Services

The Palo Alto Finance Committee plans to wrap up recommendations for the 2012-2013 budget this week with continuing cuts to services while freezing openings and laying off staff.

All this comes despite the fact that the economy is improving and tax revenue from property and sales taxes are increasing. Higher costs of pensions and medical insurance will more than consume any revenue increases.  Future budgets look even grimmer with projected deficits over $15 million in FY 2022 unless major changes are made.

Closing the budget gaps requires more revenue plus cuts to staff and services. If the service cuts get too deep, residents will lose some of the benefits of living in Palo Alto, and homes will be less desirable, cutting home values.

Some proposed cuts in services alarmed many people, causing negative reactions and objections. The proposal to close Animal Services is an example.  Dozens of people from all across the country wrote objecting to the closure.  Both Finance and Policy and Services Committee meeting were inundated by protestors opposing the loss of Animal Services and the many benefits it provides.  As a result, closure was pulled from consideration, but ways to cover the resulting deficit of over $300,000 are open. A likely approach is cutting some animal services while trying to get support and volunteer work from the community.

Other service cuts already have been accepted by Finance, including freezing vacancies of six police positions, one police captain, and six firefighters. Traffic enforcement will be hit significantly. Cuts in staffing for Community Services, Planning and Public Works also were approved tentatively. Outsourcing operations such as golf course and city hall maintenance are being adopted, and more outsourcing may be done later.

The biggest cuts in staffing and services could be pushed back a few years, but eventually significant cuts will be required unless revenues are surprisingly strong.

The public is beginning to react to some of the proposed service cuts and fee increases. Rent increases proposed for community gardens, artist studios at Cubberley, and lawn bowlers would have raised about $100,000. This hardly seemed worth all the antagonism the higher rents caused.The increases to users of the facilities would be 50% to 100%.  Those increases drew almost a dozen speakers opposing them at a recent Finance Committee meeting. Some rents were projected to double, creating hardships for many artists and gardeners.

The major cause of these deficits is pension benefits that continue to escalate.  While benefits for new hires were made more reasonable by City Manager Keene, current employees are assured of pensions equaling 60% to 90% their last year’s salary – including overtime at 50 for public safety employees and 55 for others.

These generous payouts resulted from extremely optimistic estimates of earnings in CalPers investments that are supposed to pay government pension costs. Estimates were 7.75%, even 8% while actual returns have been slightly over 7% the last 5 years. Recently assumed earnings were reduced to 7.5%, probably still too high. 

Overestimating employee pension investment returns isn’t just a California problem. States and local governments nationwide are overestimating pension investment returns. The New York Times reported investment return assumptions in New York still is assumed as 8%.

Ballot measures to raise more revenue won’t be voted on until 2014 per Council agreement, so deficits will continue to cause financial conflagrations for years.