Thursday, March 7, 2024

My 3.5.24 Meeting Summary - A Path Forward

Last night the Council started our meeting with a recognition and celebration of the City's 60th anniversary.  People were invited to share their history with Clayton and what being in Clayton has meant to them.  The event was organized by our City Clerk and it was great to hear from and talk with people.

After the celebration, we moved into our regular meeting and discussed several significant items:

- We received a presentation regarding the City's five year financial forecast.  The forecast was similar to what we've seen in the past.  Deficits beginning this year, and continuing for all foreseeable years growing larger each year.  As with any forecast, it relies on many assumptions.  These assumptions in the long run will almost certainly be off by some degree, but barring some incredibly significant event like a global pandemic, not off so much that the forecast is not directionally accurate.

Clayton is generally more predictable than other cities for a number of reasons.  We're smaller both in size, population, number of employees, and the types of activities those employees perform.  This makes expenses easier to predict.  We have a concentration of revenue from property taxes which are generally the most stable tax base available.  This means that the city's revenues are less elastic when it comes to economic swings, making revenues easier to predict.  The areas of highest volatility are health care and pension (PERS).  These are costs that we do not have the ability to influence so large swings could have a significant impact to the finances of the City.  

Overall the forecast for the General Fund was as follows:
More on how to address the projected deficits below.

- We reviewed the current Reserve Policy.  The Reserve Policy controls how the City's overall reserves should or should not be used.  Currently the General Fund Reserve is approximately $7.7M.  This represents approximately 125% of our annual General Fund expenses.  For perspective, most public agencies have general fund reserves significantly lower - Concord at 30%, Contra Costa County at 10%.

It's also important to note what these reserves represent.  All of the $7.7M is an excess of tax collection over and above the amount of services provided by the City.  Part of this is due to overly conservative budgeting and staff vacancies.  And it is certainly prudent for the City to retain a portion of funds for unforeseen circumstances, or to fund longer range activities over time.  But it is also true that over time, this underspending that has led to the larger accumulation of fund balance, necessarily means that certain activities or services that have been deferred could have been performed.

On a 5-0 vote, we adopted a policy setting our general reserve at 40%.  We also adopted on a 5-0 vote assignments within the reserve for specific purposes like potential budget stabilization, capital projects, vehicle replacement, etc.  Making these assignments is not a commitment to spend, however it does indicate the intention to utilize these funds for certain things for the betterment of the City.

- We discussed potential actions we could take based on the above forecast presented - either increasing taxes (revenue measures), or decreasing services (austerity measures).

When I ran for re-election in 2022, I committed to not supporting any tax increase unless it was a last resort.  When I first raised the issue of structural deficits in Jul-21, I did so with the intention of starting discussion, and motivating analysis.  Unfortunately that did not occur in earnest for a variety of reasons and in 2022 I did not believe that a sufficient level of diligence had occurred to support going to the taxpayer and asking them to tighten their belts as the City had not demonstrated it had done the same.

This is why after I was re-elected, I lead the Council to look at all potential ways to decrease costs and  increase revenues.  I wrote about what actions we took in greater detail here:  

What we did that hadn’t been done previously was to begin to gather the information necessary to assess where we are as a City. Instead of rushing out pushing an idea of an exorbitant tax increase immediately, As Mayor in 2023, I took a more measured and prudent approach. Doing this allowed us as a City to make smarter choices, have more thoughtful conversations, and ultimately coalesce around a better approach that works for the City.

Based on the work we've done throughout 2023 and continuing, I believe we've taken all significant steps available to us in order to increase revenue and reduce costs.  We've looked at our Expense Policy, our Investment Policy, our Master Fee Schedule, conducted time studies on hours spent in all major areas including maintenance across the city.  We updated how we operate in several areas across City Hall to reduce unnecessary work.  We've invested in new technology and new ways to work to make the time spent by staff more efficient.  We've begun investments in our energy and utility infrastructure to be more cost and energy efficient over time.  We will continue to pursue any and all ways that are available to reduce cost and be more efficient.  

However, even with all of these efforts, it is now clear that the City needs more revenue in order to operate.  Rapidly rising inflation impacting the cost of all goods and the ability for Clayton to stay competitive from a staff compensation perspective has only exacerbated this need.  Increasing revenue is the only way that allows the city to provide necessary services and continue to help make Clayton a wonderful place to live and raise a family.  

Staff proposed placing a ballot measure this November 2024 to increase sales tax between 0.5% and 1.0%.  The rationale for doing so had merit.  Sales tax is paid by anyone who shops in Clayton so an increase in sales tax would generate a portion of revenue from those visiting and shopping within Clayton.  A 0.5% increase would not be sufficient to cover the projected deficits, so staff recommended the higher amount. A 1% increase in sales tax would keep Clayton in line with other nearby cities as well.

While I think a sales tax measure has merit, I raised a few concerns.
  • The sales tax base in Clayton is relatively small, approximately 11% of general fund revenue.  Sales tax revenue tends to be more volatile with market changes over time.
  • Currently Clayton has a Landscape Maintenance District (LMD) that assesses a per parcel tax on every household of approximately $290/year.  The LMD funds a significant level of maintenance in the City.  The LMD is also going to sunset in 2027.  Because tax measures can generally only be placed on the ballot during general election years, this means that in order to maintain the current funding that the LMD relies on, we would also need to seek voter approval for the continuation of the LMD.  This means that if we were to move forward with a sales tax measure in 2024, we would again need to come back to the voters and seek approval for another tax in 2026.  I didn't think it would be reasonable to ask voters to approve taxes multiple election cycles in a row.
  • The LMD is a special tax.  This means it can only be used for specific purposes.  Because the City has a small number of employees, the same group of people could be doing general work in the City at a point in time, then immediately do work that qualifies under the LMD.  The tracking and administrative burden to ensure record keeping and financial reporting is burdensome and is not a value add activity.  In addition, the protocol for required meetings can also be a burden on staff time as well.
  • Recently our City Manager informed us of his resignation.  This means that there will be significant time and energy dedicated to filling this vacancy.  This short term uncertainty adds risk should we seek to pursue a sales tax in 2024 as there is quite a bit of activity needed to give us the highest chance of success.
As an alternative, I suggested another plan.  Rather than rush to seek a sales tax measure for 2024, I suggested that we allow the LMD to sunset, and in 2026 place on a the ballot a general parcel tax that would replace what the LMD covers in addition to the other shortfalls we have as a city.  This means that residents would stop paying the approximate $290/year LMD assessment, and instead pay a general assessment.  This has several advantages:
  • It gives us time.  Successfully passing a revenue measure takes significant work in informing residents of why this is necessary and what value it adds.  The more time we take to do this the greater chance of success.
  • It makes us more efficient.  Shifting from a special tax which is what the LMD is, to a general tax means that all of the non-value add tracking, recording, reporting, and meeting goes away.  
  • It's more stable.  Property taxes in Clayton are a stable less subject to market volatility.
  • A single request.  Instead of asking for taxes in 2024, and then again in 2026, this method only asks the residents for money a single time.
Ultimately I considered how we would set up our revenue sources if we were starting from the beginning.  There was widespread agreement that a general parcel tax was a better overall outcome.  Unlike many other issues the Council has discussed recently, we were able to discuss these alternatives and reach a consensus.  We approved this course of action 4-1.  Councilmember Tillman was supportive, however she believed that a sales tax measure in 2024 was a better choice so she voted no.

Because it will take time to execute this plan, we know that we will need to use some of our reserves to fund current operations.  The use of reserves should have a high bar to overcome.  In this case, because we have a plan, and it's for a limited duration, I believe it is appropriate in this instance.  

If we are successful, we will set up the City to get out from under the weight of looming deficits and struggling to pay a market rate to our employees.  We will have created the environment where the City and its residents can thrive.

Over the next 18-24 months the City will be engaged in all of the activities necessary to bring a ballot initiative forward in 2026, including taking the time to do a detailed assessment so we can quantify and demonstrate what this amount will be used for.  During that time there will be questions and I look forward to discussing it with our residents.