The city of San Luis Obispo has a major financial crisis looming — a projected budget gap of $8.9 million annually over the next few years due to rising pensions costs — but the city now has a framework in place for how to attack it.
The City Council expressed its support for a fiscal health plan presented Tuesday by city staff that would use a balanced approach to slashing costs and generating new revenues.
The proposal seeks to make up for about $7.5 million in the city’s general fund under the following formula: a 30 to 40 percent operating reduction including new ways of doing business, 20 to 30 percent increase in employee contributions to help meet budgetary goals, and 30 to 40 percent in new revenue sources.
“I am in alignment with the recommendations,” said Councilwoman Andy Pease. “I think the distribution is an appropriate target.”
An additional $1.4 million would come specifically from the city divisions that handle sewer, water, parking and transit, through cost-cutting strategies and employee negotiations on wages, hours and working conditions. Rate increases on customers aren’t being considered to address the pension problem.
Without a balanced financial strategy, the cuts could mean 68 employee layoffs or an 18 percent decrease in employee compensation, options the city believes would severely impact morale and the city’s ability to attract and retain employees.
San Luis Obispo’s outstanding unfunded pension liability is $148 million. That’s the difference between the estimated cost to pay retirement obligations and the market value of the city’s assets currently set aside to fund them.
A variety of factors have contributed to the pension problem, including losses from the Great Recession, more conservative investment assumptions and increasing city costs to cover pension payments.
New revenue sources the city proposes include marijuana taxation that projects revenues increasing by $500,000 next year up to $3 million annually by 2020-21.
City Council members suggested other ways that the city might generate new funding, such as installing new solar panels on city properties to save on electricity costs and partnering with other cities on emergency and safety response.
Much of the detail in the report, precisely how the cost-cutting and revenue-generating measures could work, still needs to be decided on over the next few months in advance of the next budget cycle.
Pease suggested evaluating whether a free and reduced parking program for city staff is necessary, given the city’s goals to urge people to use alternative forms of transportation.
“Free parking doesn’t support multi-modal goals, and I think these are the shifts we should be thinking about,” she said.
Councilman Dan Rivoire also suggested reviewing the possibility of raising city bed taxes. A 1 percent increase would generate about $700,000 per year, though tourism industry leaders have lobbied against it.
“Maybe it’s worth doing some soul-searching about other revenue streams that are a little more externalized, that are coming from visitors to the community,” Rivoire said.
Council members also supported establishing a recommended pension trust fund.
“While CalPERS’ higher-risk investment strategies could yield higher returns (CalPERS estimates 7 percent in long-term interest), placing the funds in a trust instead would allow the city to limit its exposure to market volatility, still achieve an estimated 5 percent net interest earnings rate, and allow the city to draw funds to pay down pension debt early, resulting in long-term savings,” city officials wrote in a statement.
“I want to appreciate staff and the city manager for being on forefront of a crucial issue for our city and municipalities throughout the state,” said Mayor Heidi Harmon.