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HomeMy WebLinkAboutCORRESPONDENCE- 65ASalas, Diana From: Tim Johnson <tjohnson@jlkrllp.com> Sent: Tuesday, April 21, 2020 11:02 AM To: eComment; Councilmember Jose Solorio; Iglesias, Cecilia; Sarmiento, Vicente; Penaloza, David; Villegas, Juan; Pulido, Miguel; Bacerra, Phil; Ridge, Kristine; Downs, Kathryn Subject: Public Comment- Item 65A Dear Council, City Manager Ridge, and Executive Director Downs ... This email is regarding agenda item 65A on the agenda for April 21, 2020 with regards to the city's finances. Although I am a member of the Measure X Citizens Oversight Committee and also a Certified Public Accountant, these opinions are mine solely as a resident of the City of Santa Ana. I am concerned over multiple items in this agenda item. Some of them I believe that the council needs to direct staff in different or more direct directions while others are more concrete. Further, I am afraid that without an honest discussion about the City's finances, the residents may not be aware of the precarious financial situation that the city finds itself in. I also feel that the city may be walking a legal tightrope as it relates to Proposition 218. I want to also say that the City of Santa Ana is by no means alone in this financial storm. Cities all across the nation, state, and county find themselves in the same situation of figuring out how to respond to this health crisis that has turned into the largest economic crisis that we have seen. Some cities are worse off than Santa Ana while others are better prepared. There have been some decisions made in the past that will hurt us while there will also be some decisions that will help us. Regardless of the past, we can only control how we respond to this situation before us. Summary First: This is a long letter ... I get it, I am rambling and may be saying a lot of what you already know and reiterating info in the Staff Report. So here is the summary first: • Please do not just "receive and file" this item like other "receive and file" items. Please discuss it, understand the current reality, ask questions, challenge assumptions, explore options, direct staff to provide multiple options, and at the end of the day face reality. This is the largest financial crisis we have ever seen in our city and time needs to be devoted to it. Additionally, the time to do this is now and not later. The longer we wait, the tougher it will be. • 1 urge you to explore whether the $6.6M Refuse Enterprise Fund transfer to the general fund is a violation of Proposition 218. This is probably the most important thing that you can seek clarification on tonight because this may be illegal and will open the City up to lawsuits while also being a current directive and not an item for future consideration. If you and City Staff believe it is a legal transfer, please state why on the record for the residents to hear and understand. Even if it is "franchise fee revenue" paid by the refuse provider, those funds very likely originate with the residents of Santa Ana who are paying the fees to the city and then the city paying the refuse provider- otherwise the refuse provider would never agree to take on the contract. Courts frown upon cities mis-using fees which are supposed to pay for services but not provide "profit" or provide other general fund revenue because it has not been properly approved by the voters. If there is a balance, this very well may mean that residents have been overcharged historically. Maybe I am wholly off base here, but if I am thinking it, it is likely others may be also and it would be appreciated to have this item specifically addressed in terms of how the balance came to be and what it is intended to be used for. For example, if it was always to be General Fund revenue, why would it go into that account to begin with? • Please do not limit staff to providing a budget with the only specific direction being utilization of the Economic Uncertainty Reserve. Please direct staff to provide a budget proposal taking into account all necessary and prudent measures including multiple options for prioritization. Please do not limit staff in providing a feasibility study on issuing Pension Obligation Bonds. This implies that you are not interested in other options. Please direct staff to provide studies for all options including negotiating with the City's bargaining units and overall pension reform options. Please read some of the smaller nuances of the staff report which may or may not be explicitly stated including: o One time budget fixes will not be enough to solve the budget deficit we will be experiencing o The combined $27M drop in revenue for FY 19/20 and 20/21 may very well be $50M+when all is said and done according to respected economic research (UCLA/Fitch). Now this $50M likely includes the $15M FY 21/22 property tax drop but the $27M is likely the floor for the drop and not the ceiling. Prepare for the worse now while praying for the best. There is a big difference between $50M+ and $27M revenue losses when preparing budgets and creating contingency plans. Please listen to what staff is telling you both explicitly and implicitly. To me, they are hinting that we need long term budget solutions. o Property taxes will likely decrease by around $15M for FY 21/22... this problem is not going away anytime soon so we need to make some systemic changes for the longer term. o CalPERS pension obligations are going to skyrocket based upon current compensation but even more so because of CalPERS investment experience late. This will have MAJOR impact in the future and as such we need to look at ways to reform the city's pension obligations now and not wait any further. 65AW: Receive and file report relating to updated FY 2019-20 General Fund revenue estimates. Generally, receive and file reports do not receive any feedback from council. They are essentially administrative in nature. Literally, we received it, we will archive it, thanks, next item. There generally are no questions asked, no comments given, or clarifications sought. Make no doubt about it. This "receive and file" agenda item is much more than just receiving and filing it. Council and the public needs to fully understand the gravity of the situation that we find ourselves under. The Finance Team is highlighting things before you which I can only hope that they are doing as much so that you can see the situation. They have done this with other "receive and file" items but again, it has been literally a "receive and file". Maybe even part of the situation we are in is because of the receive and file scenarios instead of discussing items that the Finance Team is highlighting for you. So first, I hope that you do more than just "receive and file" the updated revenue estimates. Please ask questions, understand it. Maybe if you understand it already, be the council member who asks a question because they know that the public may not understand it and there is a need for the public to know. The public has a right to understand the fiscal situation that the city is in because of the COVIDI9 impact. They need to understand that the City is now expecting to have $12.35M less revenue in the current fiscal year ending June 30, 2020 than was budgeted for. They also need to know that the projected 20/21 revenue will be $15M less than our current year budget. As importantly, it appears that these shortfalls may very well be on the rosy side of the spectrum and that things may be quite a bit worse. This is important to understand the projections, and I direct you to the 2nd full paragraph of page 2 of your Staff Report which in part reads "If UCLA Anderson Forecast and Fitch Ratings are both correct the City could lose $50+ million of revenue by the end of 2020." So, despite the chart showing the revenue sources that the city believe is most impacted, if both UCLA and Fitch are correct the impact on the city will be $50M instead of $27M by the end of the year. However, it is very possible that this $50M figure also includes the $15M property tax reduction which will impact FY21/22, but regardless, the $27M combined impact should likely be viewed as a floor to the reduced revenue and not a ceiling. Additionally, it is important to note that this is not a quick turnaround due to the trailing revenue reductions that likely will happen. Additionally, notice that the staff report indicates that "As the City receives more information, the projection may worsen and revised estimates will be prepared for City Council consideration." To me, this language is setting the stage for additional revised downward projections. The staff is letting you know, or at least hinting, that things may get worse but likely not better. Now no one can be expected to know the real impact of this crisis ... that is unreasonable. However, we should have plans in place to where we know what will happen if/when revenue projections are worse than expected. If we do not take immediate and strong response, we will be in a worse situation in a few months. We need to do more than "receive and file". We need to fully understand these scenarios. This is especially true with seemingly that California may be slower to economically reopen as compared to other parts of the country. Someone needs to ask: 1. What is the city going to do if the revenue decrease is $50M instead of $27M by the end of 2020? 2. Is the $50M projection by the end of 2020 including the $15M of forecasted property tax revenue in 22/23? 3. What are the priorities for the residents of Santa Ana? 4. How do we related those priorities to budgetary spending? S. How do we measure the progress on achieving the desired results associated with those priorities? 6. What is the timing for making these decisions? would suggest that an item of this magnitude is much more than a traditional "receive and file". This item needs a strategic response. One that puts all things on the table. One that everyone needs to work together for the greater good of the entire city. I recommend that this start now. If it starts later, it may be too late to make as much change as could be effectuated now. If things turn out better than what they may be now, we have gone through an exercise that allows everyone to be more knowledgeable on our city's finances which will only make us stronger. I would also like to point out that the City will receive lower Gas Tax revenue which is used for traffic signals, light maintenance, median landscaping, pothole repairs, sidewalk repairs, etc ... I think we can agree that this is an area we need to improve upon. Unfortunately, the reduced revenue will hinder the City's ability to provide these services and our residents will suffer. Even if we have a fund balance in the Gas Tax Fund, that only means that we likely have repairs to do in arrears. Measure M funds for street improvements will also suffer with certain projects being placed on hold. This will have an impact today and going forward. This was also an area that Measure X was specifically mentioned as a use of funds, which unfortunately those funds went elsewhere. 65A(2): Affirm the hiring freeze for all City vacant positions as of March 23 2020 As noted, there are 82 General Fund vacancies, and total vacancies of 153, that will remain unfilled right now. These unfilled positions will "save" the city about $7M for the current year and another $8.6M for next fiscal year. First, we should be asking ourselves why do we have so many unfilled positions in certain parts of the city while other departments have had many people hired and filled all vacancies. For example, I believe that Code Enforcement had additional hires budgeted for in the current year ... just a few if I recall correctly from their presentation to the Measure X Oversight Committee. This department I believe is impacted by the hiring freeze. Contrast that with the Police Department which had many officers budgeted for and ultimately hired and as such, their vacancies would presumably be minimal. The city chose to focus hiring on the police department at what ultimately is the detriment of other departments. Now, I want police officers to be hired but it should not necessarily be at the expense of another department due to limited hiring resources. I would ask that the city look at not prioritizing one unit over another when it comes to devoting of Human Resources and other hiring assets. Regardless, under the circumstances it would only seem prudent to affirm the hiring freeze for right now. I would also urge the city to utilize this time of doing without to determine what positions are truly needed going forward once we get out of this fiscal crisis in a few years. 65A(3): Transfer $6.6M from the Refuse Enterprise Fund to the General Fund during FY 19/20 The city has analyzed the city's Refuse Enterprise Fund and found that it has an available balance of $6.6M which can be transferred to the General Fund. It is proposed to utilize this $6.6M to help offset the decrease in revenue in the current fiscal year. The staff report indicates that this is from "franchise fee revenue". However, I am concerned that this is a violation of Proposition 218. Now, I honestly am not a Proposition 218 expert of an expert in the Refuse Enterprise Fund, so I would urge the council to ask for the opinion of the Finance Department and also the City Attorney to distinguish why the balance in this fund should not be utilized to reduce fees charged to the city's residents OR be directly refunded to the rate payers of the city since it appears that the amount that has been paid to the city exceeds the cost of providing such services to the residents of the city. I believe that Proposition 218 limits the ability of the city to charge residents fees for services beyond the cost of providing such services. If the rationale that this $6.6M buildup is due to "franchise fee revenue" charged by the refuse service provider, I would be very cautious about this because it simply feels like a shell game tome. It feels like if the city's refuse provider is required to pay to the city a "franchise fee" which is now deemed to be available to be used for the General Fund, that the service provider would simply build this "franchise fee" cost into the cost that they are charging the city's residents through fees that we, the residents, ultimately pay. Further, this one item accounts for a major component of making up for the 19/20 expected revenue shortfall due to COVID-19 and there literally is one paragraph, with three sentences included in the staff report. I believe that there should be major questions asked of this particular item especially as it relates to the legalities of the rates that residents have been charged historically in receiving of refuse services. I also question if this reserve has been built up over the past 10 years, why is it only coming to light right now. If it was able to utilized for General Fund purposes, why have we not accessed it historically. Is it possibly because now we are in very strenuous times and we may be pushing the boundaries of Proposition 218? Is it because the city did not want to be in a position that it may be required to pay back this balance to the residents? I urge the council to ask hard questions with regards to this particular item. This item deserves more than one paragraph with little explanation. If this actually represents fees charged in excess of the cost of providing of services, it feels like the city is balancing the budget on the back of residents who have been overcharged in the past ... using other people's money for a purpose it was not designated for. Please, pause and ask questions so that residents understand. As councilmembers it may make perfect sense to you, but to residents, this is certainly an area that feels like it is getting brushed under the rug to get onto the next item. Further, it would seem that due to the magnitude of this item and the possible violation whether perceived or actual, that council would direct staff to provide an analysis of whether this is a violation of Prop 218 prior to directing the funds over to the General Fund. More than three sentences is needed on this item to make an informed decision. 65A(4): Direct staff to prepare FY 20/21 budget using Reserve for Economic Uncertainty. Staff has preliminary indicated that FY 20/21 will have General Fund revenue reductions amounting to at least $15M as compared to the current year budget. That loss of revenue with the projected additional expenditures of $19.9M means that the city has approximately a $35M shortfall to budget for in the upcoming year in just the General Fund. I think we can agree that this pandemic is exactly what economic uncertainty reserves are for although just as the City Finance Department hinted at in the mid -year budget update, this reserve is likely too low, but now is not the time to right size it to 2% of revenue instead of the 1% it at. Although it would be nice to have that extra 1% if the Reserve were increased previously when times were not as rough. However, utilizing this Reserve only provides $3.1M of relief in FY 20/21. Major other measures are required especially considering the long-term lingering impacts that we may be facing with loss of property tax revenue in FY 21/22 and potentially sky rocketing CaIPERS pension obligations due to underperformance of the pension fund's investments in the 22/23 year. There is no short-term relief in sight and as such, the financial crisis we are seeing ahead of us needs to be tackled with long term strategies and notjust one-time relief measures. I would urge the City Council to ask more about the one item in the staff report without a potential annual amount next to it..."Seek concessions with the City's employee bargaining groups." Utilizing the Unappropriated Fund Balance or the Economic Uncertainty Reserve are one-time hits and ones that will not continue into the future with any impact. However, exploring concessions from the city's employees should be explored. It is the one items that is not really discussed in the staff report. As such, it is the item that I feel will likely not be explored much. Now I understand, no one wants to make less money and virtually no councilmember wants to be the one to even explore this option, but when you are in charge of an enterprise the size of our city, it has to be an option that is explored. How much impact would it have? What are some dollar savings based on certain percentage reductions? How does the City even go about renegotiating previous contracts? Which contracts have the biggest bang for the buck? Would the City's employees rather have a pay and benefit reduction as opposed to the city reducing services or headcount? These are options that business owners are certainly grappling with as we speak. These are options that have to be explored and explored in an open and honest way. If we do not start exploring this now, it may be too late and then the City will be forced to go down roads that are even worse. I urge the council to direct staff to not only prepare a 20/21 budget utilizing the Reserve for Economic Uncertainty but also bring back quantifiable options for concessions with the City's employee groups. Secondly, I would urge the council to direct staff to bring back a 20/21 budget that is closer to the UCLA Anderson/Fitch GDP forecast whereby revenue will drop by $50M+. The city council and the residents deserve to see what our city services will look like under this scenario also. 65A(51: Direct staff return with a feasibility analysis for issuing Pension Obligation Bonds (POB) The City's pension costs are increasing annually and as discussed in the Staff Report, the city has a sizeable CalPERS Unfunded Actuarial Liability (UAL). This UAL costs the city 7% per year. It is expected that the future UAL will increase due to the recent investment performance of CalPERS being far lower than its target rate of return. I feel that council and residents should understand what issuing a POB is and is not. We should also understand the magnitude of the City's UAL and what it means today and into the future. However, I find it ironic that this is a recommendation to issue these POBs without also instructing staff to bring back feasibility studies of other cost savings measures such as mentioned above with regards to options with the City's bargaining groups. Or, what one-time expenditures will be cut in the FY 20/21 budget. The council and residents should have all the information so that we can all make good quality choices for today and tomorrow. By singling out direction to Staff on this one item without directing them on other items, it implies that POBs are a higher priority than other options available. For example, I believe that the everyday resident does not understand what one-time expenses that would be cut in the FY 20/21 budget would "feel like" on an everyday basis. There may be one-time items that should be kept while there may be recurring obligations that should be renegotiated. Again, maybe staff knows this but the residents do not. I would urge you to not only direct staff to come back with feasibility analysis on POBs but also on all cost saving measures including renegotiating with employee bargaining groups, pension obligation restructuring at the state level for existing employees as well as future hires, and any other options that should be placed on the table including outsourcing where savings may be obtained. Overall I am concerned for our city. This pandemic has already brought havoc on society and now we will feel the economic impacts of such havoc. This is no time to tip toe around sensitive items. The time to act is now. I pray for wisdom for 5 each and every one of you who are devoting so much of your time to the residents and business owners of this city. pray for the city employees who are working so hard to provide you with information to allow you to make good decisions. I pray that we get out of this economic turmoil better off than what we may think, but I also pray that we prepare for the worst -case scenario. Blessings to you and your family, Tim Johnson, CPA WRosenbergrer CVAO'd:Ldk6A4t"tans+ Proudly part of the Wglobal fainily Tim Johnson, CPA Partner t (949)860-9892 19 (714) 743-1065 0 tjohnson@jlkrllp.com 2601 Main Street, Suite 580, Irvine, CA 92614 This message (including any attachments) contains confidential Information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message. Any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. 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