The City Of San José's Budget Crisis - Silicon Valley Community ...

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2012
The City of San José’s Budget Crisis
INSIDE
Introduction
The City’s Budget
The Balancing Act
Impact of Cuts
Choices for the Future
Introduction
The City’s Budget
San José is Northern California’s largest city with a population of nearly
one million people spread over 180 square miles. Over the past 40 years,
the city has doubled in size and grown increasingly diverse. Today, San José
residents speak 56 different languages and nearly 40 percent were born
outside the United States.
Like many cities across California and the nation, San José has been
experiencing multi-million-dollar budget shortfalls in recent years.
However, San José’s budget troubles go back a decade, preceding the
current downturn. Over that time, the growth in city expenses has outpaced
the growth in revenues.
The city’s budget is comprised of the general fund and a number of smaller
capital funds and special-purpose funds. The capital and special-purpose
funds are restricted for specific uses, while the general fund is the source
for most of the city’s day-to-day operations. Therefore, this fact sheet
focuses on the general fund.
There are several sources of revenue for the city’s general fund (see Figure
1). Property and sales taxes are the primary sources, but the city only
receives a small percentage of the total tax collected: 9 percent of the
property taxes and 12 percent of the sales tax. For example, a San José
resident who owns a home assessed at $450,000 pays about $4,500 in
annual property tax. However, the city only receives about $405 of that
property tax. If that resident buys a $1,000 computer, she pays 8.25 percent
sales tax or $82.50, but San José only receives $10 of that sales tax.
Figure 1: General Fund Revenues (FY 2011-12 adopted budget)
As Figure 2 shows, 61 percent of the city’s general-fund expenditures
go toward public safety (fire and police services) and community services
(libraries, parks, etc.), things that directly impact the city’s residents.
The remaining 39 percent pays for essential services that may not be as
visible, such as workers’ compensation payments, convention center lease
payments and replacement of fire equipment.
Figure 2: General Fund Expenditures (FY 2011-12 adopted budget)
The city’s charter requires that the city council approve a balanced budget
each year by June 30. The current community-based budget process takes
nine months (see Figure 3) and there are several points for public input.
Figure 3: Timetable for FY 2012-13 Budget
October/
November
Public release of early budget forecast and city council review
of that forecast.
January Community budget survey conducted. Public meeting held
at which neighborhood leaders and youth commissioners set
priorities. City staff reviews financial and service results for
prior year.
March Mayor’s March budget message outlines general direction for
the year.
May City manager presents proposed budget to city council. City
council holds multiple public study sessions and community
meetings in each city council district to receive public input.
June City councilmembers submit budget requests to the mayor. The
mayor delivers June budget message.
June 30 The city council votes to adopt a final budget.
San José faces significant challenges in financing its future and continuing to meet its mandate to provide
services to its residents. Pressures of a struggling housing market, sluggish consumer spending and high
levels of unemployment are strangling growth in revenue. At the same time, the city faces ballooning
employee retirement benefits and health-care costs.
Service cuts alone are unlikely to solve the current problem. Significant reform must be considered –
reform in the pension system, in ways of governing, in ways of engaging the citizenry. To design these
reforms, we must raise questions and seek answers about the contract the city has with its residents.
What services do people expect from their government and what are they willing to pay for those services?
Silicon Valley Community Foundation has developed this fact sheet in hopes of creating common ground,
based on reliable facts, to encourage honest dialogue. We are aware of the upcoming state audit and the
controversy over projected pension payouts, but we believe that the city’s budgetary problems stem from
deeply rooted structural imbalances between expenditures and revenues that warrant careful examination.
There is much at stake here for the city, the county and Silicon Valley. Join us and other community
members in seeking effective, equitable and long-term solutions.
25%
11%
6%
50%
8%
Capital
Maintenance
Community
Services
Non-Departmental
Public Safety
General
Government
26%
13%
9%
7%
9% 19%
17%
Utility Taxes
& Franchise Fees
Transfers &
Reimbursements
Other Agencies
Licenses,
Permits & Fees
Other
Sales Tax
Property Tax
San José has experienced general-fund budget
shortfalls over the past decade driven by
escalating costs and diminishing revenues.
Those shortfalls have been exacerbated by two
deep national recessions. These deficits result
from structural imbalances that continue year
after year and require systemic solutions.
There are three ways to balance a budget:
increase revenues, cut costs or do a combination
of both. Cities raise revenue through fees, taxes
and grants from state and federal agencies,
but their ability to increase these sources is
seriously limited. They cut expenses by deferring
services, reducing staffing (through layoffs, hour
reductions or attrition), increasing efficiencies,
reforming systems or cutting services. San José’s
leadership has used a combination of revenueenhancing and cost-cutting strategies to address
shortfalls over the past decade, but has not been
able to contain the primary driver of continuing
shortfalls: rapidly escalating costs per employee
(see Figure 4).
Figure 4: Rise in Per Employee Costs
(FY 2001-02 – FY 2011-12)1
Employee costs started to increase during the
Internet boom in the mid-1990s when city
revenues were growing rapidly. The city boosted
employee compensation to compete with privatesector jobs. Unfortunately, various successive city
councils – and in some cases, outside arbitrators
– continued to increase pay and benefits at a
rate that the city could not afford when revenue
growth began to slow.
Following the lead of the State of California,
the city council and outside arbitrators also
significantly enhanced retirement benefits. The
maximum benefit for public-safety employees
(after 30 years of service) grew from 75 percent
of final salary to 90 percent and a guaranteed
3 percent annual compounded cost-of-living
adjustment was awarded to all employees.
While both employees and the city make
deposits into the retirement funds, the city
currently contributes more than three-quarters
of the total cost. As a result, the city’s annual
retirement contribution has grown from $73
million to $244 million over the past 10 years
(see Figure 5). Retirement costs now exceed
more than 50 percent of base payroll costs.3
The growing costs of health care benefits have
added additional financial burdens. For example,
the monthly premium for the city’s lowest cost
family-health plan has nearly tripled over the past
10 years.4
These pay and benefit increases have proven
unsustainable. In 2010 and 2011, all San José
employees made concessions, including a 10
percent cut in total compensation, to help close
the revenue/expense gap; services were cut and
employees laid off as the city closed the two
largest shortfalls in its history ($118.5 million in
2010-2011 and $115 million in 2011-2012).
Over the past decade, the city has eliminated
close to 2,000 positions, bringing the city’s
current staffing level to approximately 5,400
FTEs, which is what it was in 1988, when
San José’s population was about 765,000
(see Figure 6). With the city’s current population
at 958,789, this means that the city is serving
approximately 200,000 more residents with the
same number of city workers it had 23 years ago.
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
5400
7453 7418 7213
6787 6672 6843
6992 6985
6623
5840
0
1000
2000
3000
4000
5000
6000
7000
8000
Figure 6: Change in Number of City’s Full-Time Equivalents5
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
$73 $70 $72
$96 $97
$117
$133 $136 $135
$186
$244
S0
S50
$100
$150
$200
$250
Figure 5: City Contributions for Pension and Retiree Health Care Costs (in millions)2
The Balancing Act
-40%
-20%
0%
20%
40%
60%
80%
100%
General Revenue Average Cost per
Employee
# of Employees
19%
85%
-28%
… on selected city services
Since 2001, San José has been forced to make progressively deeper cuts
to balance its budget. In some cases, positions or programs have been
eliminated altogether. In others, programs or hours have been scaled back,
limiting access to important services.
• Public Safety
The number of sworn police officers and firefighters has been reduced
over the past three years to historically low levels (see Figure 7). These
lowered levels have increased response times to all but the most serious
situations by 20 percent and reduced community policing. The police
department has been forced to prioritize cases and is often unable to
respond to property damage or theft complaints. It has also eliminated
some services, such as the police-school-liaison program, and most
crime-prevention programs.
Figure 7: Change in Number of Sworn Police Officers and Firefighters6
• Community Services
Ten years ago all San José neighborhood branch libraries were open six
days a week; today, they are open four days a week. Since 2007-2008,
staffing throughout the library system has been reduced by 26 percent.7
While a modest surplus for next year may allow the city to open four
newly constructed libraries and one new community center during
FY 2012-2013, current forecasts indicate the city may not be able to
sustain these restored services.
The city’s Park, Recreation and Neighborhood Services staffing has been
cut by 47 percent since 2001.7 Of its 54 community centers, the city
currently operates the Grace Community Center (a therapeutic
recreational facility) and 10 community centers as large, regional hubs.
Fifty-three miles of city parks are no longer patrolled by park rangers on
a regular basis.
• Capital Maintenance
Streets and sidewalks have deteriorated throughout the city, streetlights
have been turned off to save electrical costs, potholes have increased and
landscaping has been removed from roadways unless adjacent property
owners commit to paying for maintenance. With deferred maintenance,
the backlog to repave and repair streets now stands at $277 million.8
When other transportation repairs and maintenance are added in, the
backlog increases to more than $400 million.7
… on support for services provided by nonprofits
San José historically has partnered with nonprofits to provide communitybased, cost-efficient services, such as after-school programs, gang
prevention and intervention, senior services, domestic violence and homeless
services, often to those most in need. Our community benefits from a strong
nonprofit sector and many people depend on the services of organizations
such as the YWCA and YMCA, Catholic Charities, Gardner Health Clinics,
EMQ Families First and the other nonprofits that contract with government
to provide services. The capacity of these agencies to serve the public has
seriously decreased over the past two years, with general-fund allocations
to nonprofits falling by 38 percent from $11.5 million to $7.1 million.9
… on our business climate
The financial crisis facing local governments and the quality of public
services are linked to the region’s economic competitiveness. According
to two recent studies10, the deteriorating quality of the educational
systems, cultural amenities, recreational opportunities and community life
has made it more difficult for businesses to attract and retain a highly
skilled pool of talent.
April 2012
1 City of San Jose, Office of Mayor Chuck Reed (figures provided by the City Manager’s Budget Office).
2 Federated City Employees’ Retirement System, 2010 Comprehensive Annual Financial Report &
Police and Fire Department Retirement Plan, 2010 Comprehensive Annual Financial Report
(for FY 2001-02 through FY 2009-10); City Manager’s Fiscal Reform Plan (for FY 2010-11); OMB
ABS Report - Salary and Fringe Benefit Costs by Union Code & Fund for the 2011-2012 Adopted
Budget (for FY 2011-12).
3 OMB ABS Report - Salary and Fringe Benefit Costs by Union Code & Fund for the 2011-2012
Adopted Budget.
4 City of San Jose, Office of Employee Relations.
5 City of San Jose Adopted Operating Budgets, FY 2001-02 through FY 2011-12.
6 City of San Jose, 2008-2009 Adopted Operating Budget & 2011-2012 Adopted Operating Budget.
7 City of San Jose, Fiscal and Service Level Emergency Report.
8 City of San Jose, Department of Transportation.
9 The Impact of Government Funding Cuts in Social Safety Net in the Nonprot Sector
Silicon Valley Council of Nonprofits, September 2011. http://www.svcn.org/svcn/2009/03/budget.html.
10 Silicon Valley in Transition: Economic and Workforce Implications in the Age of iPads,
Android Apps and the Social Web
Silicon Valley Workforce Boards: NOVA, work2future, Santa Cruz Co., San Mateo
Co. July 2011. http://www.work2future.biz/images/documents/TechStudyFullReport_03.pdf and
Silicon Valley CEO Business Climate Survey 2011, Silicon Valley Leadership Group. http://svlg.org/
press/library.
Impact of Cuts…
0
500
1000
1500
2000
2500
Sw or n Po lic
e Sw or n Fi re 2008-09 2011-12
1395
753
1087
22% cut
650
14% cut
Choices for the Future
We believe these facts demonstrate the magnitude of the budget problem. We also believe
that the solutions to this problem will require our collective knowledge, experience and
talent. Make no mistake, however. Solving this problem will require us to make some very
difficult decisions and people with strongly held views must be willing to compromise for the
common good. If we do nothing, we risk losing vital city services and damaging the city’s
social contract with its residents.
For more information or to get involved, contact the mayor’s office at 408.535.4800 or go to
www.sanjoseca.gov/council.asp to contact your council member.
About
Silicon Valley Community Foundation
Silicon Valley Community Foundation is a comprehensive center of philanthropy. Through visionary leadership, strategic
grantmaking and world-class experiences, we partner with donors to strengthen the common good locally and
throughout the world. We are a non-partisan organization committed to producing information that stimulates factuallybased discussions about complex and politically charged issues.
2440 West El Camino Real, Suite 300 | Mountain View, California 94040
Phone: 650.450.5400 | Fax: 650.450.5401
www.siliconvalleycf.org

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