Rainy Day Dollars?

Reserve Would Be Smart, But Don’t Bet on It

By Craig Powell
February 2019

The most fiercely debated issue in the political fight over Measure U was how would the Sacramento City Council spend its nearly $100 million annual take from the 1-cent permanent addition to local sales taxes.

Now the focus has shifted to City Hall, where council members have moved quickly to organize a Measure U Citizens Advisory Committee, which is supposed to advise the council on how to spend the money.

The threshold issue, however, is: Will anyone really have much say in how the bulk of Measure U money is spent?

You see, the city is haunted by the growing demands of a very big and unforgiving creditor, the California Public Employees Retirement System, whose claims against City Hall will effectively double over the next four to five years, increasing by $62 million annually, according to both CalPERS and city estimates. 

The problem is complicated by the fact that our city government has over the past five years grown increasingly reliant on the nearly $50 million that the original, supposedly temporary, Measure U 

generated. The city’s spending of such funds is already largely “baked” into the annual budget, leaving the council only $50 million in “new” money from Measure U to spend. The smart move would be for the city to bank a large chunk of the new money over the next three to four years. A savings account would provide some running room and critically needed time to bring down other spending and grow Sacramento’s revenue sources before mega-invoices from CalPERS overwhelm the budget.

For example, the city could build up a $100 million reserve of Measure U money and reduce current baseline spending by $30 million each year. Then Sacramento can spread out the burden (and fiscal pain) of paying dramatically higher CalPERS bills until other revenues (hopefully) grow to handle the pension obligations. 

Of course, if a recession strikes, all bets are off. City tax revenues would melt while the CalPERS stock portfolio nosedives, which would drive up the city’s unfunded pension debt and trigger calls for even higher pension contributions.

Most pension experts expect California cities to face even higher annual pension bills than are now forecast—without a recession. Why? Because CalPERS habitually overestimates the rate of return projected for its asset portfolio. Sometimes, reality really bites.

There is one hopeful sign. In October, the City Council directed the city auditor to hire an outside consulting firm to identify 10 to 20 cost-savings opportunities to bring down city spending in the face of looming CalPERS rate hikes.

The city ordered a similar consulting report in 2009. In 2010, Management Partners delivered 49 recommendations, only a handful of which were ever acted upon. But hope springs eternal, right?

The council might want to peruse Eye on Sacramento’s budget report “Blueprint for a Post-Measure U Sacramento,” issued during the Measure U campaign (see eyeonsacramento.org).  It identifies 22 cost-savings measures the city could implement to reduce its general-fund spending by more than $125 million per year—without cutting core public service levels. 

But let’s get real for a moment. Mayor Darrell Steinberg didn’t press city voters to approve a sales tax hike so he could set up a fat reserve to protect the city from looming CalPERS bills. He and his council mates are going to spend the money, probably every penny. Steinberg even has plans to borrow against the new revenues to build new housing.

Nor is the mayor or council majority inclined to trim much of the city’s wasteful, inefficient spending, as that would upset their most demanding political backers, the city’s highly influential public employee unions.

So, what’s likely to occur is that the City Council will launch a dozen new programs and initiatives with the Measure U windfall, only to cancel them when the big bills from CalPERS come due or the city’s economy sinks into recession, whichever comes first.

And I really am trying to be optimistic.

Craig Powell is a retired attorney, community activist and the president of Eye on Sacramento, the local government watchdog and policy advisory organization. Powell served as chair of the No on Measure U campaign committee. He can be reached at craig@eyeonsacramento.org or (916) 718-3030.

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