Petaluma facing fiscal cliff
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.
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