Tonight, after almost two months of discussion, the Oakland City Council will finally adopt a budget that closes our $83 million General Fund deficit. Mostly, discussion surrounding this has been all about what we’re going to lose. But in between all the devastating cuts and annoying fee increases, there are some positive things happening in the budget process too. Here’s one of them.
So, Oakland used to have a General Fund reserve, which we could use to close budget holes in the event that, oh, I don’t know, the economy collapsed and property taxes were down for the first time since like 1983 or something. So instead of having to, oh, I don’t know, lay off all your park maintenance staff and give up on repairing streets or something, we could avoid some of those cuts by using money from the reserves to pay people until revenues returned to normal. It’s sort of like how they say you should keep enough money to live off for three months in a savings account in case you lose your job.
Anyway, theoretically, we have this 7.5% General Fund reserve, except, of course, that we don’t, because we managed to spend basically the entire thing a couple years ago without anybody noticing. Not only is this bad for our budget, it’s also bad for our bonding capacity – ratings agencies like to see evidence that you’re going to keep paying your bills if times get tough.
Of course, there’s nothing we can do now about idiotic decisions that were made in the past, but happily, we can take steps to make sure we don’t even find ourselves in this situation again, and to that end, one of the pieces of legislation the Council will be adopting tonight is an amendment to our General Fund reserve policy (PDF).
Recognizing that we’re too broke right now to put anything back into the reserve, the proposal would slowly start rebuilding the reserves as the economy improves, by mandating that any revenue received from the Real Estate Transfer Tax in excess of $40 million be placed into the reserve. This has the added benefit of not allowing the City to get all bloated by relying on unsustainable revenues to cover ongoing costs, which we’ve been doing with the Real Estate Transfer Tax for the last several years.
Once we’ve been doing that for a while, and get to the point that we have a General Purpose Fund reserve of 10%, we would still only get to spend the first $40 million of Transfer Tax revenues. Anything above $40 million would then be split as follows: 50% would go to repay our negative internal service fund balances, 30% would go to fund our unfunded obligations to the Police and Fire Retirement System, 10% would go into a trust to help pay for Other Post-Employment Benefits (retiree medical), and the remaining 10% would be put into the Capital Improvements Reserve Fund.
The proposal would also prohibit the City from using one time revenues other than Real Estate Transfer Tax (from property sales and the like) to cover the costs of ongoing services. Instead, half of that revenue would have to go to paying off the negative balances in our internal service funds, and the other half would go to pay off negative balances in other funds.
These rules could be suspended only in the event of a fiscal emergency, which would have to be declared by a majority vote of the City Council.
At the budget meeting two weeks ago, staff noted that the proposal had been extremely well received by the rating agencies, whose only question was how quickly the policy could be adopted.
During the discussion, the big question among the Council was what should constitute a fiscal emergency. Under the proposal before them that night, the Council would only have the option of declaring a fiscal emergency in a situation where the General Purpose Fund was facing a deficit of at least $30 million, which seemed reasonable to me. Several Councilmembers, however, felt that the $30 million threshold was too limiting.
Council President Jane Brunner complained that the proposal tied the Council’s hands too tightly, suggesting that Real Estate Transfer Tax revenues in excess of $40 million should be allowed to bring back previously cut services, and saying that reserves should be available in the event that there’s an earthquake or riot or fire, and the Council needs something like $5 million to deal with the catastrophe.
Brunner further argued that the City’s problem “is not that we need these rules, but that we’ve been dipping into the reserve too much.” I thought that fact the Council has dipped into the reserve to the point that it basically no longer exists would indicate that they do, in fact, need rules to prevent them from doing so, but maybe that’s just me.
Well, not just me. District 2 Councilmember Pat Kernighan felt the same way, noting that if we had adopted this policy five years ago, we wouldn’t be in such a dire situation now, and saying that she appreciated the fact that the restrictions would prevent the City from growing staff to an unsupportable level in the future.
After further discussion, there appeared to be a general consensus that the proposal was a good idea in theory, but that the 10% reserve was too high, and the $30 million limit for a declaration of fiscal emergency was too restrictive – the Council should be able to declare a fiscal emergency by majority vote whenever they thought it was necessary. Jane Brunner kept fixating on the transfer tax limits, saying the Council should be able to use transfer tax revenues over $40 million at their discretion, because sometimes they have things they want to do but can’t afford. Which, again, the whole point of the reserve rules is that the Council will stop doing things they can’t afford, but whatever.
District 5 Councilmember Ignacio De La Fuente, obviously frustrated, asked what the point was of approving the proposal at all if there were no restrictions on what does or does not constitute a fiscal emergency. Sadly, nobody else agreed with him, all concerned that the restrictions would limit the Council’s ability to spend money too much, and eventually the ordinance passed, with the reserve level remaining at 10%, but without any limits on what would or would not constitute a fiscal emergency. Jane Brunner voted no and District 6 Councilmember Desley Brooks abstained.
The ordinance will have its second reading at tonight’s meeting. The new rules are certainly a step in the right direction and will theoretically keep us from finding ourselves in such a crisis situation ever again. Of course, that will only happen if we don’t declare fiscal emergencies and suspend them constantly, which I’m concerned we will. I can sympathize with the Council’s concerns that requiring a $30 million deficit to declare a fiscal emergency and suspend the rules was too limiting. But it seems like they went too far in response. Why not suggest a lower deficit limit, or add language like “or also in the event of a natural disaster” in anticipation of the situation referenced by Brunner? Having zero criteria except being able to find five Councilmembers who want to spend more money seems like a recipe for…well, ending up right back in this exact same situation.