Archive for November 16th, 2009

Tucson City Budget:  2010 and beyond

Let’s understand the magnitude of the problem.

The FY 2010 budget has a “Structural Imbalance” of about $45 million or 10% of general fund revenues.

The FY 2010 budget is ‘balanced’ only because of one-time factors; these go away next year.

Borrowing, Rio Nuevo loan repayment, Legal settlement, Personnel savings = $29 million

Defeat of ‘Home Rule’ may prohibit the use of $20 million for at least a year.

Rating Agencies expect ‘Unreserved Fund Balance’ to be 10% or credit rating may fall;
Currently, this fund is about 4.5%; need to ADD $23 million to this fund ‘promptly’

FY 2014 is when budget is forecast to be ‘Structurally Balanced’

Sun Tran & Van Tran

These require a $32 million subsidy from the General Fund – on top of a large subsidy from the federal government.  Can we afford to maintain subsidy at this level?  Perhaps we should consider a combination of fare increases and route reorganizations.  Currently, fares make up only 22% of the actual cost to operate the program.  Yes, fares were raised from $1.00 to $1.25 recently.   In these economic times we may need to consider raising fares to a more appropriate level.  I view this as a ‘User Fee”; you pay for it if you use it.  There may be routes that are underutilized.  We may need to put some routes on hiatus until the budget in healed.

Action Plan:  1) Research transportation systems in similar cities to determine level of subsidy and fare level.  This may show that Tucson is out of line and could help support a fare adjustment.  2) Examine utilization of routes.  We may find that some have very limited utilization.  Make a list and take a hard look at the bottom end.

Parks and Recreation – User Fees

An examination of the FY 2010 Adopted Budget reveals that fees to participate in many Park & Rec programs represent less than 10% of the actual cost to run the program:

Adaptive Recreation = 10%
Aquatics = 3%
Recreation Centers = 6%
Sports = 9%
Teens = 0%
Tennis = 4%
Therapeutic Recreation = 1%

I view these as a ‘User Fee”.  I believe participants will understand if they are asked to pay a larger portion of the actual cost.  In 2006, many of these fees were actually reduced.  Perhaps we at least consider rolling back to the 2006 fee schedule?  Is it possible to maintain these programs at the same level yet lower the cost?  We may find that there is a large pool of volunteers who would very much enjoy facilitating many of these programs – paid staff is not the only way to make these happen.

Action Plan:  1) Review pre-2006 fees.  2)  Research feasibility of volunteer program

Outside Agencies

This area is ripe for favoritism and facilitating ineffective agencies.  This needs to be a thorough and arms-length competitive process.  If you are effective you receive more, if you are ineffective you get nothing.  There is a perception that once your organization gets on the list you are on the list forever.  There needs to be political will to remove ineffective agencies.  I work with and financially support the Community Foundation for Southern Arizona (CFSA).  CFSA has in place a competitive process to evaluate grant applications from charitable organizations.  This includes site visits, program evaluations, financial review, effectiveness evaluation vs. similar organizations, fundraising…  Perhaps CFSA would be willing to directly assist the City with applications.  At the very least we need to adopt this model.

Pension and Retirement Plans
The FY 2010 CAFR will reveal that the various pension and retirement plans are $700 million under-funded: we have promised employees and retirees benefits that exceed the money set aside by $700 million.  This is a drain on the City’s resources.  To show you the impact:  If these plans were fully funded, this would free up about $30 million/year.  Question: Why do we offer pension and retirement plans?  Answer: to attract and retain the best possible employees.  My contention is that these plans have become much too generous relative to the private sector and can be modified.  If employees wish to continue the benefits, we need to ask employees to contribute a larger portion of the actual cost.  If employees do not wish to contribute more, then benefits need to be modified according to the level the City and employees can afford.  I believe City employees have opted out of the Social Security system.  The City would save a significant amount of money if we discontinued the Pension plans and transitioned employees to Social Security.  The vast majority of private industry has terminated their defined benefit plans and converted to defined contribution plans.  Perhaps this should be considered.

As an example, fire and police employees pay a flat rate of 5% of salary – the City makes up what is required to fund the pension program: currently over 22%.  Police and fire employees need to contribute more: I suggest a percentage of the cost of the plan.  Here is the problem:  The pension plan for police and fire is controlled by state statute and can only be amended by the Legislature – Tucson cannot alter it on its own.  So this will take some coordination with other cities and the Legislature.  You can bet the labor unions will have a say.  But is has to be done: the plans are way too generous and are like vampires on the cities’ budgets.

Tucson Supplemental Retirement System (TSRS): This is the plan for most city employees who are not police or fire.  We do control these plans.  We must consider the full range of options to bring costs in line.  New employees pay 40% of the cost, while longer-term employees pay only 5% of salary.

Other Post Employment benefits (OPEB): for some reason we have agreed to pay health insurance for many employees after they leave the City’s employment to cover the gap until Medicare begins.  Why do we do this?  Private employers do not do this.  This benefit is on a ‘pay-as-you-go’ basis; we have set aside zero funds to pay for this.

Action Plan:

1)  Consider he full range of options for TSRS:
Perform a review of pension programs relative to private employers
Ask all TSRS employees to pay 40% or more of pension costs
Review OPEB and consider terminating or modifying this program
Give serious consideration to transitioning to a defined contribution plan

2)  Police and Fire plans:  Begin discussions with other municipalities regarding modifying these programs.  Present a unified front to the Legislature.  Work with the Legislature to modify these.  Given the current makeup of the Legislature, I believe we have a window of opportunity now.

3)  OPEB: give strong consideration to modifying OPEB

Self Insurance Fund
This fund has a $18 million negative fund balance and had a operating loss of $6 million for FY 2008.  At this level, this could hurt our credit rating.  If we get hit with a large loss, we have not set aside sufficient assets to pay and would have to take from general fund.  Some years ago, the City switched from buying insurance from outside insurance companies and decided to self fund.  I am sure it looked good on paper.  The problem is that the political temptations are simply too great to operate this properly.  The Council has chosen to charge City departments rates lower than what is necessary and the large deficit has built up over time.  In addition, there is political temptation to dip into the pool of cash to balance the budget.