O.C. Cities Should Take Care With Budget Surpluses

Commentary

O.C. Cities Should Take Care With Budget Surpluses

Despite slow recovery, fiscal challenges still loom

Officials in a few Orange County cities are debating how to spend budget surpluses, an enviable situation that many cities still recovering from the Great Recession would welcome. A recent national survey shows most cities still face major fiscal challenges. Anaheim and Santa Ana, for example, might be better off banking the current surpluses and paying down debt so they are better prepared for the inevitable next downturn.

The National League of Cities’ latest annual survey finds that local governments are seeing their third year of slow growth after being hammered for six straight years with declining revenue in the wake of the recession. While 82 percent of finance officers say their cities are in a better fiscal position in 2015 than they were in 2014, cities are still operating at 92 percent of their 2006 peak revenue levels. Most areas are unlikely to meet or exceed prerecession revenue highs for several more years.

The survey also finds that three key factors – infrastructure needs, pensions and retiree health benefits – present major threats to city budgets that are likely to persist indefinitely if not addressed.

Recent budget decisions in Santa Ana and Anaheim suggest that policymakers may be getting distracted by revenue growth and underestimating the looming fiscal threats.

For example, Santa Ana officials recently approved plans to spend an $11.2 million surplus on dozens of wish-list projects. Some of these items – like $500,000 for a pension stability fund and over $2 million to address deferred maintenance at city facilities – seem like reasonable expenditures in light of the National League of Cities’ findings. But many of the spending items – including 44 new city vehicles and a city “branding” study, for example – seem like nice-to-have, but noncritical items.

In a similar vein, city officials separately voted to spend nearly $4 million from its rainy day fund for improvements at the Santa Ana train station.

This comes after Santa Ana had replenished its rainy day reserves from approximately $3 million in 2010 to $45 million in 2014, equal to approximately 21 percent of general fund expenditures. Removing $4 million reduces that rainy day fund to less than 20 percent of expenditures, significantly lower than the average 25 percent set-aside by governments surveyed by the National League of Cities.

This sort of fiscal decision-making suggests that city officials may be ignoring or underestimating Santa Ana’s unfunded pension liability – more than $400 million – or the real prospect of another economic downturn in coming years.

Meanwhile, city leaders in Anaheim welcomed a similar budget surplus of $10.4 million this summer. While they did opt to place $200,000 in a rainy day fund and make some infrastructure upgrades, they chose to spend a major portion of the surplus on hiring new public safety personnel and expanding after-school programs.

Anaheim faces approximately $500 million in unfunded pension liabilities and will see an increase in pension costs this year of roughly $4 million, from $52 million this year to $56 million next year. These costs are only going to rise further given the California Public Employees’ Retirement System’s current plans to increase employer contribution rates.

In that light, applying the current surplus to those costs would have been a more prudent strategy than spending it on things that will only drive up costs further in future budgets.

After being battered in the Great Recession, the impulse to use budget surpluses to catch up on nonessential spending is understandable, but misguided. Such moves suggest that officials may have failed to learn an important lesson: economic downturns are brutal on city budgets. When times are good, you need to prepare as much as possible for the next inevitable downward swing.

Leonard Gilroy is director of government reform at Reason Foundation. This article originally appeared in the Orange County Register.

Leonard Gilroy is vice president of government reform at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He also serves as senior managing director of the Pension Integrity Project at Reason Foundation, which assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.