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The Perfect Storm Revisited - Local elected officials need to pay attention

Original post made by peter carpenter on Apr 27, 2011

In December 2008 I wrote the attached Guest Opinion for the Palo Alto Weekly. Now, 2 1/2 years later, in light of the current economic situation I thought it might be useful to update this piece.

First, the Perfect Storm hit exactly as predicted.

Second, even Palo Alto, Menlo Park and Atherton were not spared from the decline in housing prices and the resultant impact on property tax revenues.

Third, local governments are only now beginning to realize that not only do they have a deficit but they have a structural deficit. i.e. one that cannot be covered by the use of reserves.

Fourth, while local governments have finally realized that the current defined benefit retirement programs are unsustainable there has been little fundamental change in those programs.

Fifth and most important, it is going to get worse not better. The housing market has not yet bottomed out, there will be further reductions in property values and even more requests for reassessments and property tax revenues will remain flat at best and possibly even decline further. The Bureau of Economic Analysis has just announced that the personal income in San Mateo County decreased 3.5% from 2008-2009. Personal income changes precede personal spending changes and those precede tax revenue changes. This is confirmed in that Bay Area home prices fell 3.5 % in February 2011 from a year earlier, according to the S&P/Case-Shiller Index.

In addition, local agencies, such as school districts, which also depend on revenues from the State are probably going to see a decrease in those revenues.


We are in for a very slow recovery with regard to property tax and sales tax revenue and local governments would be wise not to plan on any near term increases in those revenue streams.



What needs to be done? Sadly the same things that I urged 2 1/2 years ago:

First, local governments need to recognize that there is a crisis and act NOW. Current deficit which is ignored grows every year until drastic reductions in services become the only alternative. There is no alternative but to insist on balanced budgets which do not assume an increase in property tax revenues.

Second, they need to involve their citizens in a careful look at each of their programs to determine which programs are no longer affordable — however nice or special they might have been in better times, or even how worthy any single program might be. And then the least essential programs need to be eliminated - not reduced but eliminated.

Third, they need to plan now for hiring freezes, elimination of overtime, reduction in services, layoffs, consolidations with other agencies, renegotiated labor agreements and, in the extreme, bankruptcy.

Fourth, they should consider accelerating essential capital-improvement projects (the operative word is essential), as construction costs during this downturn will be substantially less than if the projects are delayed until the recovery begins.

Finally, they need to move the review and approval of new labor agreements out from behind the current wall of secrecy from which the public is excluded. Once new labor agreements have been agreed upon by the negotiators then those agreements should be simultaneously submitted to both the union members and to the public that will bear the costs well before the city councils and special district boards meet in public session to vote on those agreements.

Most of the last 2 1/2 years have been spent sunbathing on the deck and in the wringing of hands. Watch out, the second wave of the Perfect Storm is coming.


Peter


*************************************




Palo Alto Weekly Spectrum - Friday, December 5, 2008



Guest Opinion: Economic 'perfect storm' is brewing for local agencies



by Peter Carpenter

For many years I have been directly involved in local government agencies or in federal programs designed to support local and state agencies.
Never in that period have I seen such financial storm clouds as now appear on the horizon of local governments.
For the last eight years I have had the privilege and the responsibility of serving the citizens as an elected director of the Menlo Park Fire Protection District (which serves Menlo Park, East Palo Alto, Atherton and parts of San Mateo County) — one of the finest fire districts in the country.
Previously, I served as a Planning Commissioner in Palo Alto and, many years ago, as the federal official in the Office of Management and Budget who was responsible for coordinating all federal assistance to state and local governments.
With falling property values yielding less property-tax revenues, falling consumer and business spending yielding less sales taxes, increased retirement costs (because CalPERS has suffered significant loss of capital in the current financial downturn), continued demands for well-above-average salary increases by public employees, and the governor declaring a financial emergency, local governments in California are facing a Perfect Storm.
Unless local governments act promptly to respond to these dramatic changes we will see more of them joining Vacaville and Rio Vista in being forced into bankruptcy.
Housing prices and hence property taxes will be depressed for at least another two years — just about everywhere except the Palo Alto area, it seems.
And if a lot of the current homeowners request reassessments the decreases will be dramatic.
Similarly consumer and business spending are forecast to be depressed for the next two years.
And CalPERS, which is obligated to continue to pay out fixed-benefit retirement payments and which has seen huge losses in its capital, can only turn to local governments to make up the difference.
And local governments have no choice but to pay what CalPERS will demand.
And while this is all happening local-government unions are continuing to ask for significant increases in both salaries and benefits.
The total labor costs for most local governments are between 60 and 80 percent of their total budgets. While California's local governments are blessed with very talented and capable employees, the current process of salary-and-benefit negotiation has gotten out of hand.
Local-government employee unions insist that the standard for setting their pay be that they be above the average of other public employees. But if everybody is above average then the average goes up very quickly.
While we have many superb employees working for local government, those employees should not expect to receive salaries and benefits that are inconsistent with those of the citizens whom they serve or that will bankrupt their employers.
And in most cases those inflationary-spiral labor agreements are being approved in secret without any public input or scrutiny.
As an elected member of the Board of Directors of one of the finest fire districts, what do I think should be done to respond to this Perfect Storm?
First, local governments need to recognize that there is a crisis and act now.
Second, they need to involve their citizens in a careful look at each of their programs to determine which programs are no longer affordable — however nice or special they might have been in better times, or even how worthy any single program might be.
Third, they need to plan now for hiring freezes, elimination of overtime, reduction in services, layoffs, renegotiated labor agreements and, in the extreme, bankruptcy.
Fourth, they should consider accelerating essential capital-improvement projects (the operative word is essential), as construction costs during this downturn will be substantially less than if the projects are delayed until the recovery begins.
Finally, they need to move the review and approval of new labor agreements out from behind the current wall of secrecy from which the public is excluded.
Once new labor agreements have been agreed upon by the negotiators then those agreements should be simultaneously submitted to both the union members and to the public that will bear the costs well before the city councils and special district boards meet in public session to vote on those agreements.
The Perfect Storm can be weathered but not by sunbathing on the deck.

Peter Carpenter is a longtime resident of the Midpeninsula who currently is a member of the Board of Directors of the Menlo Park Fire Protection District.

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