TOM BUTT E-FORUM: Daniel Borenstein: Richmond city manager blocked release of report forecasting city's financial fall


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Copied below is the latest column by Contra Costa Times columnist Dan Borenstein criticizing Richmond financial management.

Let’s break this down.

The gist of the Borenstein’s story is that Lindsay allegedly “blocked” release of a five-year financial plan that, had the City Council been aware of it, would have (or could have) resulted in drastic actions to avoid a financial disaster.

First of all, five-year financial plans are not required by law nor do all cities routinely prepare them, although they are considered a good practice for financial planning. Trying to predict what will happen the next five years from a revenue standpoint is largely an educated guess, not a plan. Can you imagine what a five-year plan prepared in 2008 might have looked like versus the reality that the great recession brought? The point is that five-year financial planning for a city is a worthwhile exercise, but ultimately a city has to be nimble and take each year as it comes.

Borenstein uses the term “withheld,” which is provoking but inaccurate. The five-year plan in question was prepared in a preliminary form but not adopted, a good reason for not adopting it being that it showed an unreconciled gap between revenues and expenditures as well as declining reserves that fell under the city’s 7% minimum policy. In other words, it was a work in progress, not a sustainable adoptable plan. The plan that eventually surfaced is marked “confidential” indicating it was for staff use and not for public release. As Lindsay stated to Borenstein, “I thought the five year projection was poor quality work and should be redone before it was placed on the Council agenda for discussion.  It had not yet been redone, and that work is in progress now.”

What did actually happen is that in 2014 Finance Director Jim Goins gave a private briefing to each councilmember, including me, explaining that the current trend of revenues and expenditures appeared to be unsustainable. Bill Lindsay told us the same thing numerous times, and during public hearings on the 2014-2015 budget, Lindsay laid out the facts in writing that included a budget with a substantial structural budget deficit. The following is from the June 24, 2014, staff report on the budget:

At its meeting of June 18, 2014, the City Council received a presentation regarding the fiscal year 2014-15 Operating Budget. As presented at that time, the operating budget was not yet balanced for FY 2014-15, with a $7.6 million deficit yet to be reduced. The preliminary budget showed an ending cash reserve (as of June 30, 2015) at $10.3 million, which is nearly $1 million above the minimum amount required per the City Council’s reserve policy. However, this is due to one-time (non-recurring) revenue, which does not eliminate the existing structural budget gap. For this study session, City staff will provide responses to questions generated at the June 18, 2014, City Council meeting and present preliminary recommendations for operating budget changes to reduce this FY 2014-15 budget gap. 

The City Manager informed City Council that staff would continue to examine the following items in an effort to reduce the FY 2014-15 budget deficit and to maintain the reserve level to at least the minimum required amount:

  • ·         Continue to analyze the structural integrity of all funds, which includes funds subsidized by the General Fund;
  • ·         Implement organizational restructuring and possible personnel reductions;
  • ·         Work with bargaining units to discuss the City’s budget constraints and possible solutions;
  • ·         Consider strategic reductions and/or elimination of projects or programs;
  • ·         Research future revenue opportunities for new and existing projects and programs;
  • ·         Continue looking for grant funds;
  • ·         Take steps to eliminate General Fund subsidies for revenue-based programs; and

Work with departments to identify additional reductions and efficiencies. City Council provided direction to the City Manager to develop recommendations for further operating budget amendments that will allow the reserve balance previously established by City Council policy to be met during FY 2014-15 and to implement additional expenditure reductions and revenue enhancements in order to improve the financial balance. The City Manager will provide preliminary recommendations at the Tuesday, June 24thCity Council meeting.

On July 1, 2014, when the budget was adopted, the staff report made the following recommendation:

The current FY 2014-15 draft budget projects General Fund revenues of $133.3 million and expenditures of $140.9 million. The resulting FY 2014-15 budget deficit is currently projected at approximately $7.6 million. The ending cash reserve (as of June 30, 2015) will be $10.3 million, which is $1.2 million above the minimum amount required per City Council’s reserve policy of $9.1 million.

As it turned out, Lindsay did successfully pursue efforts to reduce the 2014-15 budget, including personnel reductions by attrition, reducing the city’s contribution to pensions and organizational restructuring. At the end of FY 2014-2015, unaudited results showed that a projected $7.6 million deficit had been turned into a surplus of over $1 million.

If anyone deserves criticism for adopting an unbalanced budget for 2014-15, it is the City Council, which made the call, took the risk and voted for it unanimously. Lindsay should be lauded, not criticized, for his hard work over the ensuing twelve months that turned a deficit into a surplus.

Borenstein’s characterization was, “Lindsay's failure to confront growing shortfalls, advise council members of the dangers and convince them to realign income and spending did not sit well with two major rating agencies, Moody's Investors Service and Standard and Poor's.” This is simply not accurate. There is no evidence that Lindsay ever tried to put an inappropriately happy face on the city’s financial challenges.

The second major criticism from Borenstein is the use of one-time or non-recurring revenues to balance budgets. Everyone agrees this is not a good practice, but not everyone agrees on how that terminology is applied to specific revenue sources. Borenstein and the bond rating agencies, for example, consider the money from the Chevron tax settlement that resulted in payments of $114 million over 15 years to Richmond, which were front loaded and decline over the years, to be one-time revenues, a windfall that should not be used to balance the general fund budget. We consider them as simply a predictable, if declining, revenue stream. If the settlement had not been reached, they would have simply been tax revenue if Richmond had prevailed in litigation, and if Chevron had prevailed, there might have been nothing. By settling, they became predictable. We know they will continue to decline, but the responsible thing to do is to recognize and plan for that decline, not pretend the revenue stream doesn’t exist.

Finally, it is clear that Borenstein believes the City of Richmond should make drastic cuts in its general fund expenditures for programs and services and redirect revenue to pay down unfunded pension and OPEB obligations.

What Borenstein and other recent critics have not and will not do is walk in our shoes. Borenstein (and his frequently cited Moody’s for that matter) have the luxury of telling us only what we are not doing; not what we should do. If we lopped what they consider one-time or non-recurring revenue from our budget, paid full Annual Required Contribution (ARC) on our OPEB (Other Post-Employment Benefits), made significant contributions to unfunded pension obligations and raised our minimum reserve target from 7% to 10% or 15%, or even more, we would be looking at chopping some $30 million (nearly a third) from our general fund budget.

The results might look like a 10% or more reduction in our police force, closing libraries, swimming pools and fire stations, drastically curtailing maintenance of streets, parks and community centers, and gutting code enforcement. Crime would probably increase, businesses and developers would be deterred from coming to Richmond and complaints about the appearance of the city would go off the charts.

Anyone who criticizes the City of Richmond for financial management should be willing to present an alternate plan, showing where they would cut programs and services, not simply state that boated compensation should be reduced and undefined efficiencies implemented.

Theodore Roosevelt said:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

I, for one, appreciate Dan Borenstein’s incessant focus on the unsustainable state of public employee benefits and his interest in the City of Richmond. That’s why I invited him to make what turned out to be a very enlightening and helpful presentation earlier this year at a City Council meeting on public employee benefits. He really knows his stuff, and I think it will help us continue to get our house in order. But I don’t agree with his hide-the-ball conspiracy theories involving Bill Lindsay and his invocation of bond rater actions as proof of Richmond’s financial disorder. As I have said more than once, it was the bond raters who contributed perhaps as much as anyone to causing the great recession. They have little credibility but wield great power. If anyone should be investigated, it should be the bond raters.

Getting Richmond’s financial house in order continues to be a challenge, and we continue to pursue it responsibly, balancing all the needs of the city. We will get there, but not all at once and not by crippling in one fell swoop the city’s ability to provide basic programs and services. What is important is that we are going in the right direction. The patient is actually recovering, not dying. 

 

To read Borenstein's article, click here.

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