San Luis Obispo finalized a multifaceted approach to fill its $8.9 million annual budget deficit over the next three years thanks to rising pension costs.
The plan, approved unanimously Tuesday by City Council, includes new revenue to fill 30 to 40 percent of the gap, budget reductions and new ways of doing business (30 to 40 percent) and increased contributions from employees toward retirement expenses (20 to 30 percent).
If the city doesn't start tackling the problem soon, the city's finances could plummet to $81 million below its reserve requirements by 2031-2032, said City Manager Derek Johnson.
Reserve policies call for a minimum 20 percent fund balance of operating expenditures to prepare for emergencies or unexpected costs, such as natural disasters.
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The city forecasts it can build San Luis Obispo's reserves to a peak of about $21 million over its required levels with careful budget management, Johnson said.
"Since by charter and state law, we're required to have a balanced budget, this is the central reason why we're here today to really set us on that right trajectory," Johnson said before the council's vote. "Our recommendation is to take action and bring revenue and expenditures into alignment."
The council supported reducing the General Fund by $7.5 million and $1.4 million from city divisions that handle sewer, water, parking and transit.
Johnson said the pension problem, a looming issue for local governments nationwide, largely was caused by the Great Recession when values plunged of investments that help pay for the city's retirement costs.
The California Public Employees’ Retirement System manages investments for state government agencies, including San Luis Obispo and other cities. The CalPERS investment portfolio is improved but still recovering from the recession.
CalPERS announced in December 2016 a lower average rate of return on pension investments from 7.5 percent to 7 percent over a three-year period.
The city also has adjusted its retirement packages in recent years, requiring newer employees to work to an older age. In past years, the city paid for all of an employee's pension costs; now city workers pay a portion of those costs, Johnson said.
Council member Andy Pease said she'd like to see the longest-serving employees with the most lucrative pension packages pay more into pension costs than newer employees with lower wages and less favorable packages when the city negotiates retirement compensation with its unions.
"If we can adjust our employee concessions in a way so that the folks who already have a big pension contribute more moving forward, that would be a fair way to distribute the load," Pease said.
The city considered various ways of closing the budget gap, including operational reductions alone, which would have resulted in significant cutbacks in services, including closing a fire station and slashing police services, Johnson said.
Johnson said the idea of asking employees solely to cover the rising pension costs would negatively affect the city's ability to hire and retain staff.
Some other ways in which the city will help pay down the deficit include:
▪ a projected $100,000 in cannabis tax revenue by the end of 2019 (pending voter approval of the tax);
▪ refinancing bonds to save more than $350,000 for the general and parking funds;
▪ generating $150,000 in new business-license revenue and another $50,000 through code enforcement;
▪ saving $100,000 through a water-meter replacement program that more accurately assesses usage on all customers;
▪ energy efficiency savings in its transit (saving $42,000) and sewer ($80,000) funds.
The city has also made about $7 million in one-time payments to help address its budget problem in recent years, Johnson said.