The stakes are high as the city prepares its 2015-16 budget for approval at the end of this month. The budget shortfall may reach nearly $9 million this year, almost $3 million deeper in the red than last year’s budget.
Richmond is facing its fourth consecutive year of a budget deficit. Reaching into reserves — a risky measure that was used last year — is out of the question. One-time funding won’t secure the city’s finances and dipping into reserves last year contributed to Moody’s Investor Services’ recent downgrade of the city’s bond rating.
Richmond’s current fiscal troubles are partially the result of revenues lost during the financial crisis, but years into recovery the city has yet to catch up with the economic boom that has swept the rest of the Bay Area. All the while the city’s expenditures have continued to grow.
The city is looking for a way out, but it won’t be easy. Every department is grappling with how to get by on the bare minimum while still serving the city.
“This is going to be a base year,” says Richmond City Manager Bill Lindsay. “We’re asking departments to check everything top to bottom and ask for only the base required, then to cut more off of that.”
Last year the city had a budget shortfall of nearly $6 million, even after departments shaved 17 percent off their expenses across the board. Those cuts covered part of the budget gap, but for every step towards a balanced budget, the city has slipped two steps backwards.
“Our scheduled salary increases are going to have an impact this year,” Lindsay explains. City staff last year deferred on their scheduled salary increases to help close the budget deficit, but that band-aid fix last year exacerbates the troubles facing the city this year. The city now has to account for another $8 million to cover the six percent salary increases.
Current employee healthcare and pension benefits have also boomed from $26.7 million in 2010 to $36.8 million this year. The city’s retiree healthcare and pension obligations are also a cause for concern, currently at a staggering $446 million.
Further greasing this slippery slope was the announcement last month that Moody’s downgraded the city’s bond ratings, citing “very narrow liquidity” and “unusually weak budgetary management.”
The downgrade had been years in the making. “With a $45 million cumulative deficit over the last six years, the 2014 audit emphasized that any further deficit spending would reduce the likelihood that the city will be able to continue as a going concern,” wrote Moody’s analysts.
“In my mind, the downgrade does not come as a surprise, and, in fact, I expected that this could have happened several years ago,” Mayor Tom Butt said at the time.
Moody’s downgrade won’t shake the city’s financial situation in the short term, but that doesn’t mean it’s not reason for concern, says the city’s bond lawyer John Knox.
“This is a pretty strong signal from Moody’s that the city needs to avoid further deficit spending if it wants to achieve a decent credit rating,” Knox warns.
Knox doesn’t recommend a specific way out of this trouble (“That’s what the City Council gets paid the big bucks for,” he says.), but from the market standpoint, he recommends avoiding both deficit spending and using one-time payments to cover ongoing expenses. “What it will take to get there, I don’t even know,” says Knox.
That’s where the City Manager comes in.
“We’re trying to make a commitment for the city to adopt a budget that’s not only good for this year, but is something that can be sustained in future years,” says Lindsay.
Unlike last year and the year before, when Richmond adopted unsustainable budgets, Lindsay is working to put the city in a more secure position financially with this year’s budget. “The city needs a significant course correction,” he recently told the Contra Costa Times.
This course correction will manifest itself in a few ways. First, the city is looking to freeze hiring for new positions. “When a position opens up, we might share those responsibilities among other staff members,” Lindsay explains.
Through attrition the city may be able to save money, but it has its own cost. “If we cut positions, the city has to be concerned about the potential long-term damage caused by the reduction of services,” the City Manager explains.
The City is also expecting revenue from Measure U, a half-cent sales tax passed in November, to supplement the city’s revenue. Though the tax was originally targeted for roads and youth program, its funds go into the general fund and may be tapped to cover expenses.
Richmond’s City Manager has been hustling since February to prepare the city’s budget, but the decisions of what to cut and what to fund ultimately falls on City Council. The first meeting discussing the budget is scheduled for Tuesday, June 16th.
“Getting a balanced budget is simple,” explains Lindsay. “All you need to have is your revenues, your expenditures, and as long as your revenue minus expenditures is a positive you’ve got a balanced budget.” Getting there, however, is another story.