Petaluma facing fiscal cliff

Rising pension costs and other factors means the city is expected to face serious budget shortfalls after this fiscal year.|

Years after a massive economic recession forced Petaluma to make unprecedented cuts to personnel and programs to balance its municipal budget, Sonoma County’s second-largest city is once again peering over the fiscal cliff.

The latest city financial forecast shows Petaluma running out of money to fund current levels of service some time in April 2018, a turning point that could usher in an annual shortfall of approximately $1 million, said City Manager John Brown. Without new revenue or lower costs of doing business, the recently approved 12-month fiscal budget going into effect in July of this year will be the last balanced spending plan before the city faces an ongoing structural deficit.

In the past, Petaluma has been able to make ends meet through extraordinary measures that included the elimination of entire departments and staff reductions in core areas like police. Yet the stakes are higher this time around, Brown argued, as scaling back further to save on expenses could have an outsize impact on Petaluma’s quality of life.

Petaluma officials will thus be under major pressure to find a way forward before the upcoming fiscal year comes to a close on June 30, 2017, as even new revenue from the passage of a possible sales tax this year has no guarantee of taking pressure off the city’s broader financial troubles, Brown said.

“You really are at a very critical point,” said Brown, who became the city’s top administrator just as the magnitude of the recession was becoming apparent in 2008.

The forecast by Petaluma Finance Director Bill Mushallo shows revenue for the general fund, which is the city’s core operating account, is already expected to be $1.4 million short for the fiscal year that starts in July. The city will bridge that gap with a pool of money left over from previously budgeted expenses that never materialized, with just $8,700 of that money remaining by the end of the 12-month period.

“This is a very, very tight budget,” Mushallo told the Petaluma City Council during a recent workshop.

That remaining money falls far short of being able to bridge the anticipated deficit of just under $1 million for the fiscal year that starts up July 1, 2017.

Echoes of financial crisis

It is far from the first time that Petaluma has looked into the future and seen red ink, with long-term shortfalls anticipated several years out since regular forecasting began in 2011. Yet the recent projection carries new immediacy, and comes as the city has less wiggle room to cut costs, Brown said.

“There just aren’t many more places you can cut at this point,” he said.

Rounds of layoffs, early retirements, department consolidations, service privatizations and other measures largely stabilized between 2012 and 2013, turning Petaluma into what Brown described as a spartan municipal operation still capable of providing “core services.” The city had 350 funded positions at the outset of the recession, and is ending this fiscal year with a roster of 291.

“We’ve been very good at making due, so people haven’t seen the impact of that,” he said.

Petaluma Mayor David Glass referred to current staffing as a “skeleton crew,” and offered the irony that Petaluma as a city has thrived in recent years while the municipal government has continued to stare down deficits. The improved economy has helped bring more money to the city coffers, just not at a rate fast enough to overcome its headwinds.

Budgeted general fund revenues for the upcoming fiscal year were up 31.1 percent since the fiscal year that started in 2011, with the East Washington Place and Deer Creek Shopping Center alone contributing an additional $1 million in annual sales tax revenue, Mushallo said. Yet budgeted expenses over the same period increased by 36.8 percent.

“The local economy in Petaluma is good, the desirability is high,” Mayor Glass said. “However, there is a split between the economic health of the private sector and the economic health of the municipality.”

Rising retirement costs

Among the issues facing Petaluma, along with countless public employers across California, are the costs of paying for the retirement of former employees. The California Public Employees’ Retirement System, or CalPERS, has long required participating employers to cover the difference when the system’s huge investment portfolio fails to generate enough returns, leading to greater expenses for many cities amid a tepid stock market.

For Petaluma, benefit expenses of $12.5 million budgeted for the fiscal year starting July 1 were up 7.2 percent year-over-year, and up 64.5 percent from five years ago, according to historic budget documents. The share of the general fund expenditures allocated to pay for benefits has also crept up during that period, from 23.8 percent in the fiscal year that started in July 2011 to 28 percent for the period beginning later this year.

Petaluma adopted new CalPERS tiers in 2012 and a state-defined plan in 2013 that defrayed some of the city’s retirement costs for new employees, yet expenditures for longer-term employees won’t change without mutual agreement.

“There’s very little left that the city can do for impacting the PERS program,” Brown said, other than hope for an improved stock market to lessen the city’s share of the cost.

The city also faces other looming expenses for replacing the equipment and facilities that allow its ongoing operations, including long-delayed plans replace the aged headquarters of the Petaluma Fire Department, Brown noted.

Sales tax studied

How Petaluma planners may ultimately bridge the looming revenue gap remains an open question, but one that notably comes up at a time when city residents may choose whether to tax themselves to boost city services.

Following a push by several members of the Petaluma City Council in 2015, the city is currently in the midst of studying whether some form of a new sales tax has a shot of approval at the ballot box. The measure is generally described as a road repair-focused effort, though the option exists to pitch the tax as one that could be used for a variety of purposes.

The ultimate form of the tax could be significant in light of the city’s broader budget woes – a tax focused just on road repair would do little to take pressure off the general fund, since only a small amount of that money goes to roads. A tax that included provisions for other areas like police, meanwhile, could potentially take the place of general fund dollars that could then be pointed toward other purposes.

Current polling is meant to evaluate the public’s appetite for various options, yet Councilman Mike Healy, who first pitched the idea of a new road tax, said memories of failure for a general tax known as Measure Q in 2014 are not being taken lightly. Polling at that time showed the one-cent general tax had a good chance to pass, yet the measure ultimately failed 56.7 percent to 43.3 percent.

While a first round of polls show better margins for a general tax, which needs only a simple majority vote to pass, Healy said his instinct was that the narrowly applied mechanism of a specific tax, which needs a two-third majority, had a better shot. A county general tax aimed at roads known as Measure A failed in 2015, with 61.6 percent of county residents voting “no” amid some criticism that the tax may ultimately go toward funding other purposes.

“The scars from Measure Q are still pretty fresh with me,” said Healy, who supported Measure Q.

Mayor Glass echoed the call for a specific tax, arguing that the public wanted the assurance that the money would only go to roads.

“The overwhelming long-term desire in this community has been to find a path to fix the streets,” he said.

Had Measure Q passed, Brown said the money would have funneled largely to road repair, though its broader focus including public safety and some other uses would have also helped to free up the general fund. While emphasizing that a possible ballot measure is still under development, road repair would be a “dead-bang guarantee.”

“The rest of the city’s needs are in question. We’re going to do more polling in June to see how things look at that point,” he said, cautiously adding that a measure that took heat off the general fund could be a “game changer.”

Other revenue eyed

While Glass came out against Measure Q in 2014, the mayor said he still acknowledged that the city was facing a major challenge for revenue. He called for a two-cent bump in the city’s 10 percent tax on hotel room stays, something he argued could generate around $500,000 in new general fund revenue. New hotel projects now in the pipeline, including the redevelopment of the old silk mill and a facelift to the historic Hotel Petaluma, could double that, he said.

Glass reasoned that such a tax could even stand a better chance of passing if paired with a roads-specific measure this November by presenting a kind of cost-sharing dynamic between visitors and residents.

“That is a funding source that bridges into totality the $1 million we need annually for the general fund,” he said. “Maybe we can’t do all of that in one election cycle, but I hope we do something.”

A voter-approved increase to the transient occupancy tax on hotels is among the things that could well move the needle for revenue in Petaluma, but Brown said there are others. The forecast does not take into account the permitting income and subsequent economic bump from possible new development, a potentially significant omission with several projects in the pipeline.

“You can start to see light at the end of the tunnel,” Brown said.

Major economic improvements could also help float the city through improved tax revenue, while a current $5.7 million emergency reserve could, in theory, play a role in plugging holes in Petaluma’s balance sheet. The city may also be able to raise some fees.

Brown said it seemed inconceivable that the public would accept a budget that included further cuts to police. The Petaluma Police Department’s 62 funded positions are down from a high of 77 in 2008, a level widely cited as a bare-minimum force for a community of around 60,000 people.

Still, all options would be on the table.

“Sometime around April 2018, you run out of money,” he said. “We have all of next year to plan for that.”

(Contact Eric Gneckow at eric.gneckow@arguscourier.com. On Twitter @Eric_Reports.)

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