City Hall faces its worst budget in decades. Can Sacramento ‘right size’ local government?


Gus Vina is auditioning for a job he might be a little crazy to want. He’s taking the reins as Sacramento’s city manager—on a trial basis—in the middle of the city’s worst budget year in modern history. The job came open suddenly after Vina’s boss, City Manager Ray Kerridge, decided to call it quits.

As the dust settles on Kerridge’s abrupt exit, Vina and his staff are trying to figure out how to close a $40 million budget deficit.

Vina is due to present that budget to the mayor and city council in May. But whatever he crafts will doubtless be transformed by city council politics. Mayor Kevin Johnson has said he thinks more money should be spent on cops. The big city employee unions are lobbying to protect their own from predation. And five of the nine members of the council are running in competitive elections this June.

Setting the politics aside, Vina’s basic message is clear.

The city’s been through bad years, but this one’s different.

“What we’re seeing now is a global permanent devaluation of property and property taxes,” Vina told SN&R. Property taxes, sales taxes, all tax revenue has fallen off a cliff, and isn’t likely to bounce back soon. Vina says it’s time to “right-size” the city, and rethink what local government can do, and what it can’t do anymore.

“It’s all getting re-evaluated.”

Budget free fall

Vina’s predecessor Ray Kerridge was a development rainmaker from Portland, whose mantra was “Get the customer to success.” He left during a particularly tense period at City Hall. Mayor Kevin Johnson openly clashed with council members over his “strong mayor” initiative, and Kerridge was stuck in the middle.

Another likely factor in Kerridge’s quick escape: A scandal in the city’s building department that was caused, at least in part, because Kerridge’s enthusiasm for successful customers went too far. One supervisor was found to be issuing permits in the Natomas flood plain, after the federal government imposed a development moratorium there. And staff were reported to have improperly waived fees for developers. The investigation is ongoing. But Kerridge is long gone.

Vina took over as acting city manager as soon as Kerridge gave notice in February and was made interim city manager earlier this month. He’ll be caretaking the position for the next nine to 12 months while the city council looks for a replacement. And he’s been candid about wanting the job for keeps.

And luckily, Vina’s expertise is in budgets. He was city finance director for a while before being promoted to assistant city manager, where he continued to oversee the city budget. And he was already heading up the budget project when Kerridge decided to bail out on Sacramento.

But will Vina fare any better than Kerridge?

“Given where the city is right now, the most important thing is to get our financial house in order,” said Vina’s colleague, City Treasurer Russ Fehr. “Nobody is better equipped to do that than Gus.”

Timing is everything: Gus Vina took over as interim city manager in the middle of a record economic downturn. He says it’s time to “right-size” city government.

photo by anne stokes

Fehr is a veteran of the budget wars. He was the city’s finance director for nearly four years; before that, he held a similar job with Sacramento County. He’s seen a lot of bad budget years. But he calls this one “unprecedented,” and the worst for local government since the Great Depression.

“The way business was done forever was figuring out how to split up an expanding pie.” Now, for the first time in a very long time, the pie is shrinking.

Sure, there have been regular recessions in the past. There were budget deficits, when expenditures outpaced revenue growth. But there has always been at least a little growth.

Seventy two percent of the city’s general fund revenue comes from taxes—property tax, sales tax and utility tax. Thirteen percent is intergovernmental funds—grants from the state and federal government. And 15 percent is “other” revenue—including things like fees on developers, parking tickets, the admission price to a city pool.

The biggest single revenue source, property taxes, has been in free fall. During the recession of the mid-1990s, they were basically flat, but they recovered pretty quickly, and in 2006-2008, property taxes spiked up dramatically—increasing by about 14 percent every year.

But things changed even more radically the next year. Since 2007, a staggering number of foreclosure sales and short sales and overall devaluation of home prices has pushed the property-tax rolls to shrink for the first time in a generation last year. The 7.5 percent contraction in property values meant an $7 million loss in revenue for the city this year.

The city’s sales-tax numbers are faring no better. In 2006, the city was pulling in a healthy $70 million in sales taxes. The city gets 1 cent of every taxable dollar spent in town—from candy bars to cars. (The sales-tax rate in Sacramento County is 8.75 percent; 1 cent goes to the city; 6 cents go the state; the rest is split up between roads, public transportation, and a handful of special funds for county health and welfare and public-safety programs.) As of this month, the city’s received just $57.2 million in sales taxes over the last year. If the city is taking in $12 million less than in 2006, that means there’s $1.2 billion less economic activity in the city. And things aren’t likely to improve much any time soon, seeing as the Sacramento region’s unemployment rate just hit 13 percent (compared to 10 percent for the state of California).

It gets worse. Earlier this year, the Sacramento County grand jury said the city of Sacramento was breaking the law by diverting utility rates to the city’s general fund—a violation of state Proposition 218 which says utility rates can only pay for providing utility service and related programs. (The tax you pay on your utility bill, however, is supposed to go into the general fund.)

The grand jury finding came after some steep increases in water and garbage rates in the summer of last year. “It’s basically a fraud upon ratepayers, to jack up utility bills to pay for other purposes,” said Craig Powell, with the Sacramento County Taxpayers League.

The league has filed a lawsuit, demanding the city repay the diverted utility-tax funds—about $20 million, according to the grand jury. The group is also circulating a November ballot measure that would nix a 9 percent utility tax increase that’s slated to kick in this summer. That would translate to about $1.6 million in utility taxes lost to the general fund.

Even though there are now a few signs that the national economy is slowly recovering—Sacramento can’t seem to catch a break. “It just keeps grinding away at us, and grinding away,” said Fehr.

Which is why Fehr keeps his work travel to an absolute minimum now, to cut down on costs. On the day SN&R visited, an employee had a birthday, but the cake wasn’t paid for with city funds. Instead, her co-workers pitched in to buy it. And while we’re hard-wired to think of government as being wasteful, you might be surprised to learn of the level at which city officials are now questioning their own budgets.

“My new rule is that if you need a pen or a pencil, you’ll need to buy your own,” Fehr said. He’s not kidding.

[page] Shrinking the city

We’re already seeing the effects of the Sacramento’s shrinking government footprint.

City Treasurer Russ Fehr has seen a lot of bad budget years. This one takes the cake.

photo by anne stokes

Closed pools in the summer, longer waits for city workers to clean up illegal dumping, higher fees for everything—have you gotten a parking ticket in Sacramento recently? The city fire department has instituted “brownouts”—idling one fire engine every day, rotating throughout the neighborhoods.

Since 2007, the city has lost 800 employees.

Historically, the city has tried to save money through across-the-board cuts, making sure each department takes a hit, and asking each department to “do more with less.”

Vina says that won’t work anymore. “We have people at burnout stage. When you have an economy that turns on you, and it’s going to last a couple of years, we can put up with that. We can ask people to do more with less. But we’re absolutely at a point where we need to decide the size of the workforce and what we can actually deliver.”

That means deciding what’s essential, and what services the city just can’t provide anymore. So right now city staff is in the process of taking an inventory of every service that the city provides—from police and fire to softball leagues. Each program and each dollar will be put in one of three categories: mandated, essential and existing. That last category will be the first to go.

Mandated programs are basically what they sound like. The city provides them because they are required by state law, or by the city charter, or by ballot measure.

Essential programs have some public-health element, or they involve city legal liability. Trimming trees, for example, is considered essential, because without it branches tend to fall on people’s houses and cars and on the people themselves—and the city is liable for a lot of that damage.

Everything else is an existing service. Adult softball leagues, city support for libraries, youth summer camps—great programs all, but not necessarily essential.

The city does have a small amount, about $10 million, in reserves. Vina is planning to spend some of that money to help meet the current shortfall. But that still leaves $30 million worth of cuts and, if possible, new revenue.

To help ferret out both, the city hired the consulting firm Management Partners to conduct an independent review of the city budget.

In its preliminary report to the council on February 11, the consultants noted, among many other observations, that Sacramento has relatively low developer fees. The city, under Kerridge, held developer fees to about 60 percent of what the work actually cost the city. That’s well short of what a lot of cities charge, according to the consultants.

The city also uses its hotel tax in an odd way, the report found. Of the $20 million it collects every year, $17 million goes to the Sacramento Community Center Fund. Only $3 million goes into the general fund. True, most of that money goes to pay the debt on the Sacramento Convention Center. But it would be possible to divert more of the money into the city’s general fund, at least for the time being.

Former Mayor Heather Fargo told SN&R that Sacramento could consider ending the practice of letting employees take their city-owned cars home at night. In the police department alone, the practice costs $1.2 million.

Likewise, Fargo suggests ending free parking for city employees, which she figures to be worth at least $1,000 per employee per year.

In 2006 and 2007, the Sacramento County property-tax rolls grew by 14 percent a year. In the last year, the rolls shrank by 7.5 percent. That cost the city $7.3 million the last year alone.

City Councilman Steve Cohn has suggested suspending the city’s public financing of elections, along with the popular Planning Academy and the City Management Academy, which train citizens on the ins and outs of city government.

Almost everyone SN&R talked to agreed that the city will likely look a little shabbier in the coming years. The city’s Neighborhood Services Department might not make the cut. The Graffiti Abatement Program is another possible sacrifice. “It’s going to mean mowing the grass less and changing the sprinklers less often,” added Cohn.

Labor pains

More importantly, it’s going to mean lost jobs. Eighty percent of the city general fund is labor costs. And Vina says up to 400 additional jobs could be lost.

He’s suggesting a combination of consolidating services, where possible, with the county. He’s also pushing for new levels of “alternative service delivery.” That’s city-manager-speak for contracting out, and the unions aren’t likely to go for it.

The largest city union, Local 39, chose not to give up a raise that was scheduled to kick in this year. So, instead, the city imposed more layoffs.

Local 39’s contract expires in June, and many people want to see the city extract concessions from the union. “This is a golden opportunity for the city to claw back some of those salary and benefit hikes,” said Powell of the Taxpayers League.

But the city council may not see it that way. “Local 39 lost a lot of people. I’d say that’s a pretty big concession,” said Councilwoman Sandy Sheedy. She said that the city should certainly take a hard look at Local 39’s contract, but she warned that “We’re talking about people and families.”

“Working families deserve to get paid for what they do,” she said.

Sheedy has historically been a staunch labor supporter. But this is a particularly tricky time to anger unions. The budget is submitted in May, three council members are up for re-election in June, and each is facing an unusually competitive field of challengers. Two other council members, Kevin McCarty and Lauren Hammond, are vying for the same state Assembly seat. To some extent, all of the incumbents have to be thinking about labor’s support right now.

Among the biggest unions are the police and fire associations. The city last year negotiated successfully with both unions to forgo scheduled raises.

Both unions say the city needs to look elsewhere for cuts. In fact, the mayor wants to give an additional $3 million and add 30 officers to the city’s ranks. The city police union has been one of his most steadfast allies. Asked if it was realistic to enhance the police budget while most departments are getting slashed, Johnson’s spokesman Joaquin McPeek replied, “What isn’t realistic is expecting our crime epidemic to disappear without a serious commitment to public safety. For years, we’ve had fewer cops per residents than most major California cities.”

But as other departments have been slashed, public safety now accounts for 80 percent of the city’s discretionary spending (meaning what’s left when you separate out debt and retirement checks and other things the city has to pay out every year).

It’s politically tough to cut public-safety budgets, but police and fire probably aren’t off the hook this year.

For example, like other cities, the police and firefighter unions in Sacramento enjoy very generous pension plans. Where all other city employees, as well as teachers in all local school districts, pay something into their own pension plans, the city picks up the whole tab for police and firefighters. Requiring public-safety personnel to pay some of their pension contribution could save the city $10.9 million every year.

How the city divvied up its general fund budget in fiscal year 2009-10. “Nondepartment” includes things like council member discretionary funds and the Human Rights and Fair Housing Commission. “Charter” includes the budgets for the city treasurer, city attorney, city council and city manager.

The public-safety unions will be quick to point out that they gave up pay raises in exchange for better pension benefits. And they aren’t likely to agree to negotiating contracts they thought were settled a year ago.

“We expect them to leave us alone,” said Officer Brent Meyer, president of the Sacramento Police Officers Association. “I’d expect them to keep their hands off the police budget, because we gave last year.”

Meyer says he thinks the city might be able to save money bringing the parking enforcement and parks public-safety jobs into the police department.

Also on the table is increasing the number of fire-engine “brownouts” from one to four or five every day. The danger there is increased response times for 911 calls, something that, anecdotally at least, has already been attributed to city cuts.

Another idea is to cut the number of firefighters on a truck from four to three. That would save millions, but would be a very tough sell.

“Every city west of the Mississippi, with more than 400,000 people, runs four-person fire crews,” said Chris Harvey, spokesman for the firefighters union. While the county and suburban jurisdictions run three-man crews, Harvey said it’s not a fair comparison to a denser urban area.

Asked where he thinks the money should come from to close the city’s budget gap, Harvey replied, “The city gives away ridiculous amounts of money to developers.”

For example, Harvey cited the decision last year to give almost $6 million for the development of a mermaid bar, disco and pizza restaurant on K Street. City officials will be quick to point out that those dollars came from redevelopment funds and couldn’t be used for general fund purposes. But Harvey’s not convinced. “This is a fiscal emergency,” he said.

Also in the “ridiculous amounts of money” category: In 2006, the city paid $55 million to developer Thomas Enterprises for a chunk of land in the downtown rail yards. The money was deemed to be urgently needed so that Thomas could complete its purchase deal with Union Pacific Railroad, and to finally make some progress on developing the toxic abandoned area.

But when the city later did an appraisal, it decided the property was only worth $8 million. Thomas Enterprises disagrees and says the land is really worth 10 times that much. The issue just went to an arbitrator last week. If successful, the city could eventually recoup as much as $10 million for the city’s general fund, and another $30 million to $40 million in transportation funds.

[page] Sacramento vs. Sacramento

It doesn’t help Sacramento that the biggest property owner in town, the state of California, is also the town’s biggest tax deadbeat.

If the state did pay property taxes on its $4 billion worth of office buildings, or if it paid utility taxes on its light, water and garbage bills, the city would be $8 million richer.

Instead, the city has taken on a sizable commitment in providing police and fire protection, roads and other services to support the functions of state government with little compensation.

The main benefit of hosting all those state offices—state workers spending money and paying local taxes—isn’t what it used to be, either. When the state imposed “Furlough Fridays,” it kicked the local recession into overdrive.

Sales-tax revenue to the city has dropped by about $12 million a year over the last four years.

“It was the dumbest thing the governor could have done,” Cohn said, adding that the city isn’t getting as much as it gives. “Let’s comb through all the things we do for state government. It seems we have a huge obligation there, without any revenue coming back.”

Of course, the chances of the state ponying up money to help the city of Sacramento are pretty slim. More likely, the state will take money away from Sacramento later this year to help balance its own budget.

Which is why the league the League of California Cities, the California Transit Association (a coalition of local transit agencies like Sacramento Regional Transit) and the California Alliance for Jobs (construction companies and building trades unions) have teamed up to push another ballot measure that would forbid the state Legislature from raiding local property taxes, redevelopment funds and transportation funds.

“It would help,” said Vina. He explains the relationship between City Hall and the state Capitol this way: “You do a great budget at home. You’re making your car payment and your mortgage. Then your neighbor comes along and says, ‘Oops, now you’ve $900 less to work with.’”

The measure has 750,000 signatures, plenty to qualify it for the November ballot.

Meanwhile, Sacramento still has to consider a local ballot measure that would give the city’s mayor greater power over the city purse.

Last year, Johnson pushed hard for two ballot measures to overhaul the city charter.

The first was a measure that would create an independent city budget analyst position. The city council agreed to create the budget analyst job, thereby avoiding the need to place it on the ballot. It could help. But many of the details have yet to be worked out. One estimate is that the office would cost $500,000 to staff. In that case, the burden to save more money than it spends would be considerable. But if the council opts to give the office fewer resources, the question arises as to just how effective it can be.

The mayor also pushed for an outside audit of city finances. And while the city council balked at the particular firm Johnson wanted to use, it did agree to hire Management Partners to conduct a review. The consultant’s final report is due next month.

Then there’s the possibility of some new iteration of Johnson’s strong-mayor initiative—which so far has been stalled by fierce political opposition and by the courts—coming back this fall.

The mayor has made it clear he thinks he should have a lot more control over the budget. Said the mayor’s spokesman McPeek, “It’s all about accountability.”

“If you make a single executive accountable for how taxpayer dollars are spent, and it becomes very clear who will be rewarded or punished for the quality of fiscal decisions made by the city.”

And one feature of his earlier strong-mayor initiative would be to make the independent charter officers, like Vina and Fehr, into direct employees of the mayor. Critics say that would politicize the process even more than it is now. “That’s not even a discussion we’re having right now,” said Sheedy, a vocal critic of the strong-mayor plan. “Right now we’re going to keep the city running.”

But it’s going to be a shrinking city.

There will be a heavy emphasis on maintaining fire and police—though even these will continue to take hits—and not a lot else. Vina says the economic recovery, when and if it comes, is going to be a slow one. And local government always lags behind the rest of the economy. “If we’ve hit bottom, we’ll make it out of this mess,” Vina said. “If not, we’re going to have to regroup.” Either way, he said, “Business as usual is not going to work anymore.”