In 1996, Oakland established financial policies intended to bring sound financial practices to the City’s budgeting process. Specifically, the policies required the City to maintain a reserve against disasters of 7.5% of the general purpose fund. The policies also were designed to avoid the spending of one-time revenues on recurring expenses. Why? Because ongoing expenses are just that – ongoing. When they come due again the next year, one-time revenue won’t be there to pay for them anymore. For this reason, Oakland’s financial policy since 1996 has limited the City’s ability to spend one-time revenues on recurring expenses without declaring a fiscal emergency.
In particular, the policy has limited the City’s ability to spend more than $40 million in Real Estate Transfer Tax (“RETT”) revenue for ongoing expenses. This policy recognizes that the excess RETT – a percentage tax on real estate sales – is one of the most volatile and undependable revenue sources, and should be treated as one-time revenue. Instead, under the policy, excess RETT was to be devoted to increasing reserves, paying pension obligations and repaying negative fund balances.
In October, 2012 and again in June, 2013, the City Council relaxed that policy, making it easier to access one-time revenues for recurring expense. And now, it seems on the verge of doing so again, eliminating the “fiscal emergency” requirement and allowing the City to spend most, if not all, of the excess RETT revenue, whether one-time or recurring. Mayor Quan has asked the Council to approve using $20 million of one-time revenues to pay for on-going expenses and to loosen the definition of what constitutes “excess” RETT.
We think modifying the policy is a bad idea, and, in particular, that City Council should not be modifying its financial policies during budget discussions, when Council’s perceived need for extra funds will always trump its motivation to exercise financial prudence. But passage of some kind of a relaxation of the current policy seems like a sure thing regardless of what we think about it. So we believe, at a minimum, that Council should adopt the current proposal to couple the policy modification with the start of a rainy day fund policy.
Here’s the short version of what’s happening: The fiscal year 2014-15 budget Council passed last year had revenues and expenses of $459.87 million in the general purpose fund (the part of the budget where the City has the most discretion over spending) and $1,090.12 billion in the “all funds” budget. The City is now projecting that general purpose fund revenue is going to be about $30 million more than expected, and revenue from the other funds about $25 million more. Because much of the spending from other funds is restricted, the city’s focus, as usual, is on the general purpose fund.
But there are two problems with the increased revenue in the general purpose fund. The first is that much of the money is already spent. The City has already committed to spend more than $13.5 million on unbudgeted cost of living expenses for civilian employees, new “smart” parking meters, debt service for long-overdue IT services upgrades and more. And the City is obligated to make a large transfer to the voter mandated “Kids First!” set-aside, a match of the Federal “COPS” grant paying for police officers and a further transfer to its reserve account. The budget office is recommending $6.4 million in “revenue and technical expenditure adjustments” – basically, corrections of mistaken assumptions in the original budget. Add in unbudgeted police academy costs (essential to keep the police department from shrinking even more), Shotspotter renewal and expansion, a more realistic budgeting of police overtime (much of it to make up for the 25% to 35% understaffing of the department) animal shelter reconfiguration, and a variety of other items, and the $30 million disappears pretty quickly.
The second problem is this: most of the increased revenue is one-time revenue. Most of the increased costs will be recurring. This once again leaves the administration and Council looking for ways to imprudently spend one-time revenues on recurring expenses.
Apparently recognizing that Council is going to pass some modification of the policy, Council Member Schaaf has sought to couple that modification with the first steps toward a “Rainy Day Fund” to protect Oakland against the next economic downturn. Her plan is quite modest, with these elements:
- Sets aside 25% of projected Excess Real Estate Transfer Tax in each budget;
- Sets aside 50% of any year-end surplus following the audit each year;
- Half of this annual set-aside goes to immediate pay down of the most pressing unfunded liabilities or debt;
- Half of this annual set-aside goes to a Stabilization Reserve (the “Rainy Day Fund”), only to be used to save services in years when revenues have declined.
This is a good starting point, but only that. Both Make Oakland Better Now! and Oakland’s Budget Advisory Committee have advocated for a strong, rules-based, Rainy Day Fund provision in the City Charter. Placing the requirement in the Charter ensures the City Council can’t amend the policy every year when it wants to spend the money. And studies have shown that a strict rules-based Rainy Day Fund provision, is the only kind that works.
In 2011, Oakland’s Budget Advisory Committee recommended a much more aggressive Rainy Day Fund provision. Specifically, the BAC proposed that when the City’s revenue grows by more than 3% over the previous year, half of the excess be paid into a RDF. Using Budget Office data, the BAC estimated that, had the City adopted this policy in the 1990s, Oakland could have completely avoided the 2007-2010 layoffs and loss of services by dipping into the accrued fund:
Make Oakland Better Now! supported a similar proposal.
One thing we know for certain about the future is that there will be other financial downturns. Council Member Schaaf’s Rainy Day Fund proposal is a starting point for a system to reduce or eliminate the impact of future recessions. But Council should proceed to evaluate, present to the voters and implement a full-blown, City Charter- based Rainy Day Fund that will protect us from economic downturns for generations to come.
This subject comes to Council’s Finance and Management Committee on Tuesday, June 10 at 9:15 a.m., and will likely come to Council for special meetings the evenings of June 24 and July 1 when Council is expected to modify the 2014-15 budget. Reports for this Tuesday’s Finance and Management Committee meeting are here, here and here.