Santa Cruz Good Times

balancing act Last October, the Santa Cruz Firefighters Association agreed to a 10 percent compensation reduction to help the city close its deficit. Other city labor groups, including the Police Officers Association, have since agreed to similar reductions. GT sits down with the city manager to check the city’s fiscal pulse
City Manager Martin Bernal inherited a less than favorable budget situation when he took over the position in 2010.

In 2009, then-City Manager Richard Wilson told Good Times that, in his three decades at our fiscal helm, he had seen “nothing even close” to the financial crisis the city was facing. The last time the city even hoped to break even was in 2001, he added, and budgeting should be tough for some time to come. Having served as assistant city manager under Wilson for 13 years, Bernal knew what he was in for when he succeeded him—but that hasn’t made it any less hectic.

“It used to be that you could predict budgets pretty reasonably, and once you had all of the numbers, you could adopt a budget and it didn’t really change much over the [following] year,” Bernal says. “Now it’s constantly in limbo, for a variety of reasons.”

These reasons include outside factors, such as the state, which has been grappling with its own multi-billion dollar deficit (which began at $26 billion earlier this year), the recession, and even the federal budget, which doesn’t directly impact the city’s general fund but could indirectly harm local budgets considering the city’s reliance on some federal funds and grants. On top of that, the budgeting process is continuously in flux as the city awaits outcomes of negotiations with its own bargaining units.

“Budgeting has become a lot more hectic,” Bernal goes on. “It seems like we’re doing it constantly. Normally, if you go back and look at documents, the proposed budget and the final document and what ended up happening after that year are probably all pretty close. Now, the draft and the proposed budget can somehow be very different from what happens at the end of the year.”

$2.8 Million to Go

In 2009, closing the budget gap meant cuts to services and defunding public spaces like the Beach Flats Community Center, Teen Center, Harvey West Pool, the Surfing Museum, and others. The following year, a tax raise landed on the Nov. 2, 2010 ballot, asking residents if they would support paying an additional 1.5 percent in utility taxes to help maintain jeopardized public safety funding. (Turns out they would—the initiative, known as Measure H, was approved and will now generate an additional $1.6 million for the city annually.) But this time around, Bernal says the city will most likely balance its budget—and close its deficit, which was initially pegged to be $8 million—without service cuts or new or increased taxes.

The budget for fiscal year 2011-2012, which begins July 1, is contingent on 10 percent concession reductions in each of the city’s labor groups. The projected $8 million fiscal hole shrunk by $1 million when the city reached such an agreement with its firefighters last fall, and by another $1.6 million thanks to new revenues coming in from Measure H. Eleven city executives, including Bernal, agreed to a 10 percent compensation reduction in mid-April, and police followed suit on April 26. Next up for negotiations is the Service Employees International Union [SEIU], which makes up 60 percent of the city’s workforce and whose contract expires in September. If they also consent to the reduction, the city will then be looking at a $2.8 million gap.

The compensation reductions will be achieved through measures including pension reform (moving to a two-tiered retirement plan), having employees pay more toward retirement and healthcare, and waiving scheduled Cost Of Living Adjustment raises.

Bernal hopes these changes will help the city’s underlying, structural problem: that it spends more than it makes. The recession has translated into less tax revenue, and yet employee costs continue to rise.

“The reality that we face is that, as a result of the recession, and growing retirement and healthcare costs—employee costs in general—we have a revenue base that’s smaller than our expenditure base,” explains Bernal. “As we project that out over time, even with modest increases in revenue, it still gets worse and worse.” The current fiscal year saw $67 million in income and $69 million in expenditures.

Tax revenues should pick up when the economy does—whenever that is—and when it does, Bernals says that Santa Cruz has a reservoir of upcoming hotel projects that could help boost the cash flow.

“Hotels are an opportunity area for us—we’re a tourist destination and yet we have a pretty outdated hotel inventory,” says Bernal. “So we have potential in that regard. We’re lucky, we have lots of proposals that have come forward and all they’re really waiting for is to get picked up, or make it through the approval process.” He points to the La Bahia Hotel project, which has been tied up in debate for a decade, but would generate an estimated $750,000 for city tax coffers and around $10 million in spending at local businesses each year.

California Dreamin’

Many of the state’s means of fixing its own bookkeeping failures don’t sit well with local officials. From Gov. Jerry Brown’s plan for realignment—which would mean axing funding for the state’s 400 or so redevelopment agencies and flowing those funds to the cities themselves to use at their own discretion—to smaller changes, like adding a $4 fee to parking tickets (“Everyone gets mad at us when it was the state who increased the cost,” Mayor Ryan Coonerty tells GT), cities report feeling a shift of the burden.

According to Bernal, a portion of the projected $2.8 million deficit is a result of the state’s crisis. “We were anticipating $2 million, but in the past two weeks we’ve heard from the state that they are likely not to fund booking fee reimbursements”—for years, the state has reimbursed local governments for the fee they pay each time they book someone in jail—“and some other police related funding,” says Bernal. “If we have to pay for that, that’s an additional expense.” Additionally, Bernal echoes the concern of other outspoken city figures that the state’s dissolution of redevelopment agencies would bring

The remaining $2.8 million deficit will be dealt with over the next year—the city has some “cushion time,” according to Bernal, thanks to its reserves.

Despite it all, Santa Cruz will be ending the current fiscal year better than expected. “We thought we’d be in a deficit this year and draw down the reserve by $3 million, but we’re actually only going to draw it down about $1 million,” explains Bernal. “Because it won’t be drawn down as much, the balance will be about 14 percent of expenditures in our reserve, and our policy is to maintain 10 percent.”

Bernal will present his proposed 2011-2012 budget to the city council in May, which will then vote on it in June.

Comments (1)