Wednesday, July 18, 2012

Incumbency Perks: Spin Masters with Taxpayer Funded Megaphones

I was just so smitten with Michael Jay Fox when I was 16. 

If you are in power and you hire the right people to run city hall you can count on them to conceal your warts. 

Fiscal matters in an organization with a $90 million budget can quickly become very complicated and confusing. But that does not need to be so.

It need not be confusing. Transparency is improved by clarity and completeness. Hopefully, the budget is at least complete;  in recent years whole (important) sections have been left out of the approved budget. That's why they get paid the big bucks.

Similar to a household budget, the key ingredients to fiscal management include an understanding of income, expenses, savings, capital and borrowing. To manage a budget effectively, it is important not only to make decisions for the current year, but to look several years down the road to better understand how such decisions will impact the fiscal condition of the City in future years.

Wise households don't spend more than they take in and don't commit to investments beyond what they are willing to risk.  Its too bad that the current council doesn't HONESTLY look several years down the road. They flat out don't look beyond 6 years. How many council members asked for a long-term budget projection that goes out for the duration of the debt payments before agreeing to borrow another 10 million dollar? 

BUT THAT'S UNHEARD OF!!! Not true and irrelevant. 

Is it a good idea? Can it be done? Should it be done? Yes to all. 

Will there be lots of uncertainty in long-term projections? YES. Of course. But if the uncertainty is so high that our financial trajectories might go wildly into the red doesn't that argue for taking on less debt? Otherwise, it is not a conservative option to borrow, it is risky.

The biggest reason to not do a long-term projection might be that the city's plans require another couple tech or housing bubbles just to hang on. If we are lucky enough for the stars to align we might not go Greek. That's why our city only gives us a 6 year financial picture when planning on encumbering future councils with more debt payments. 

Hold on, I know what you are thinking. Sure the interest rates are cheap now. But just stay tuned for the whopper when the city tries to slip in at the last minute how much the bonding will really cost. They could have told the public last week but decided that ignorance was better for the public. Too bad that information wasn't disclosed in the staff report. Too bad no council members asked for details. Too bad the council didn't vote to "consider" bonding options rather than to seal the deal without having a firm estimate (or any cap) of the cost to borrow.

You might be thinking, I took out a mortgage without projecting my income out 20 years. Households can take risks on things like buying a house. If households are wrong, they sell their house, take their equity, and downsize (at least in the old version of America). That model does not apply to a city.  

In the City of Encinitas, fiscal management policy set by the City Council and carried out by staff has served us very well over the years. For example, entering this fiscal year 12/13, the City has $9.9 million in contingency reserves, $1.0 million in budget stabilization reserves, and $2.7 million in fund balance (future projects). Let’s discuss the need and types of reserves.
Kerry Miller said that sort of  thing right before and after the last time they borrowed over $20 million for fire stations, the hall park and the library. Yes they already borrowed once to build the park. That borrowing and the fact that they didn't build the park or fire station 1 was what allowed the city build up their reserves. (Remember the justification in 2006 that the fire stations had to be rebuild ASAP or it would cost the taxpayers tons of money for fire station maintenance? What happened there, hum?) 
A contingency reserve is typically established as a percentage of either expected revenues or expenses. It should grow over time. There is no magic in how these reserves are calculated; cities throughout California have a variety of ways in which they do the calculations for their organizations. 

This is no doubt a response to the city getting caught playing accounting games with the budget to inflate the reported reserves. The CM doesn't like to speak in public where he can be questioned on the record. Probably for the same reason, he avoids responding by email about questionable actions the city has taken. Notice that the CM's blog doesn't allow for commenting (just like Andreen's blog and Encinitas You Need Us), nor does the city provide a means for public dialogue about these editorials. The potential for one-way propaganda is pretty high especially when there is a lot of (opaque) trust and little transparency.  
The objective with this kind of reserve is that when there is a downturn in the economy and revenues are lower than expected (long-term), the organization can “back fill” revenues with reserves and continue services to the public for a couple of years. At the same time, the organization then has time to decide how to resolve its budget problems.

Remember, right before the downturn when the city was warned by the public of the coming fiscal danger? The city's Finance Director honorably stated squarely in a public forum that the city was NOT prepared for an (obviously approaching) economic downturn. That was the most commendable act in the public's interest that has occurred at city hall in the last decade (side note: the Finance Director seemed to speak less in public after that).

The stabilization reserve is different in that it should not accumulate over the years; rather, it is an annual amount set aside in the budget to mitigate single-year issues. For example, if the State of California reduces local revenue, projected revenue does not materialize, or there is an unplanned expense, then stabilization reserves can be used.
Good. It shouldn't be counted on when figuring out how much is available for new capital projects.

In addition to reserves, the Encinitas City Council has set policy around the zero-based budgeting process to develop our budget and adopt a two-year fiscal plan. The zero-based budgeting approach requires that we really think about what we need to accomplish in any given year and what the costs might be. This means that the budget is well-examined and vetted for the City to continue serving the public. Zero-based budgeting differs from traditional incremental budgeting that occurs in most government organizations where budgets grow from year to year without a real connection to what will get done.

This has been total bullshit. The former city manager could not show any evidence that the city actually executed zero-based budgeting. Requests for examples resulted in a single budget item change and an admission that the new budgeting hadn't actually resulted in any notable changes to the budget that wouldn't have happened anyways.

 Is the new CM willing to show the public what budgetary decisions he has made and explain why? Or, will it be more backroom decisions, based on trust rather than transparency? 

While the City Council adopts a two-year plan, staff prepares and presents a five-year fiscal plan that allows us to see what downstream impacts are coming our way and provides for more timely budgetary decisions to occur. A great example currently under implementation is Council’s pension reform strategies that will help offset Public Employee Retirement System (PERS) increases over the next couple of years.
Pension Reform = give staff a raise to cover an inconsequential increase in the amount they pay out of THEIR share of the pension contributions to CalPERS! This increases their lifetime payouts without reducing their paycheck. SWEET. The public was better off without "PENSION REFORM"

Dizzy Yet?

Good, prudent and consistent fiscal management in Encinitas has allowed our organization to serve the community at appropriate levels in spite of the recession that has swept across America. Additionally, the City Council has been able to move forward on critical initiatives, most recently improving the fire and medical response times in Olivenhain and on July 11th approving to move forward with the complete construction of the Encinitas Community Park and improvements at Moonlight State Beach.
Prudent = Borrow?  

They borrowed $20 million right before the downturn. If they hadn't they would have been forced to cutback. They even tried raising fees fees and taxes (e.g. Prop C). 

Here in Encinitas, we remain focused on the prudent uses of citizen tax dollars to continue providing an exceptional quality of life to our residents and businesses.

That is what he says, but ask the CM about questionable transactions and expect obfucation, stonewalling, and being strung along. Need examples? We've got a bunch of questions for to try for yourself. So much fun!

Let's stay connected, Gus Vina

Love the show.


  1. Stocks will go down as the worst Council member ever in the history of Encinitas. Bought and paid for by the employee unions and special interests. Very sad for Encinitas.

  2. Stocks has no credibility. Propaganda is more dangerous when it comes from a likable, competent, and trusted personality.

  3. Dizzy? My head was spinning during the meeting about the Hall Park and Moonlight Beach on July 11. There was talk aplenty about the city's strong financial position, but very skimpy details about how the borrowing of $8 million and reallocation from 17 other funds of $7 million would play out.

    There was no explanation of how the raided funds would be replenished in coming years in a very depressed economy. Anything to worry about?

    The proposed borrowing failed to mention associated costs such as consultant fees, trustee fees, and insurance fees. Nothing was said about total bond cost needed to net the city $8 million. It could easily be $1 million more. Anything to worry about?

    The question about the needed revenue stream from the projects for the bond repayment wasn't answered. Mayor Stocks said there would be no tax increase, but said nothing about where the necessary money would come from. The General Fund is already stretch to the limit. Anything to worry about?

    After a decade of saying there was no significant contamination on the Hall property, the city had to fess up because the cleanup required by the county is part of the construction bid. The city itself will be overseeing the cleanup. Anything to worry about?

    There may be surprises, cost overruns, and unexpected expenses. Anything to worry about?

    The disconnect between what was explained at the meeting and the reality was enough to send anyone reeling from the room.

  4. My experience was about the same as cardiffian.
    There was nothing anyone could do. With about fifeen handwritten boards of numbers layed out first to show council the great logic of this scheme in detail and then moved to face a different direction on the floor. No one really knew what all the handwritten posters proved? Still don't. It amazes me that this super majority council would stage such a performance. Cities with a open city council would have let the taxpayers know of the details of a transfer of $7 Million from worthy city projects and borrowing $8 million. But we witnessed our devious super majority council during the 4th of July holiday give the public the leagally least
    possible notice of this comitment of public funds, staged a presentation with a floof full of handwritten graphs and figues and most knew that the die was cast when the agenda of the non televised special meeting was posted.
    Anyone against this hates kids.
    If I had read a story of another city council that orchestrated a quick, stealthy, mid summer, holiday scheme to commit the taxpayers to $8 mil in loans and $7mill from existing projects in this economy and gave next to no notice and voted immediately after the presentation right before the election and were indicted, I would believe it. Oh, and they used the taxpayers money to hire lawyers to make sure that they did not have to remove 46,000cubic yards of toxic contaminated soil, as the county recommended, and will permanently bury it on site for our future generations.
    We have a right to be very apprehensive. This super majority can change the general plan, zoning, height restrictions and will probably try. We have witnessed how fifteen million dollars of taxpayers money can be floated into a special interest project, like Encinitas Community Park's six new fields, in three hours, and they do not feel that citizens should know about this until after they have committed them.
    Too late. It has been voted on. You had an opportunity to offer your opinion on the 11th at 7.

    1. Oh yea, we still have the $23 million bond and the re finance to fund the building of the park earlier.
      All of the $800,ooo of storm/ flood money will be transferred to the special use park.

  5. I too was dismayed that City Attorney Glenn Sabine disingenuously said, when asked by Councilmember Muir about the legality of lease revenue bonds, well if they aren't legal, there's a lot of cities, statewide, in trouble, ha ha, smirk, smirk.

    Lease Revenue Bonds may be "legal," but they are legal only with a lease revenue stream derived from use and occupancy of the leased property, NOT from money coming directly out of a city's General Fund. Once again false logic is used to confuse and distract potential park users, eager for the park to be built, finally.

    Excellent post, Kevin. I've missed these more analytical pieces on the Leucadia Blog.

    The City, through Council and staff, yes including City Manager Gus Vina, constantly uses exaggeration, subterfuge, and backroom deals to bypass the public's being able to give meaningful input, BEFORE forgone conclusions are drawn, and the decision is actually made.

    Cardiffian, your post is also "right on the money." I'm so grateful for the perseverance of those who have withstood being marginalized and sometimes traumatized by bully mayors, including Jerome Stocks, now, and Dan Dalager and Christy Guerin, before.

    This is NOT a police state. I'm hoping for and working toward change, come November. If we do have an elected mayor, I favor a term of two years. We don't need more strong arm mayors. It's been bad enough with only one year terms! Furthermore, the position of mayor should remain primarily an honorific; the successful candidate should NOT be paid a penny more than already paid through Council's current compensation for various agencies, allowances, and generous pension benefits after only 5 years on Council.


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