Last week, the Council emerged out of closed session directing staff to communicate and negotiate with the unions regarding the possibility of a ballot measure and pension reform. The goal is to combine these two topics and create/work within a timeframe if possible.

For savings to occur, it is important to have something fully implemented prior to next year’s budget. The key word is “implemented,” as savings need to be delivered in advance of the city manager’s budget in 2012 so that we can save services from being cut and save additional city employees from being laid off. Otherwise every city department better hope that federal grants come raining down for every city position because our budget will be entering a $70 million dollar deficit year. Who knows, maybe once-plentiful federal money will be pouring out of the sky since there will be a presidential election.

I am concerned that the truth regarding pension reform is not being shared appropriately. I think that the process needs to be public so residents, retirees and city employees can hear the information first hand from both sides. The council chambers should be used each time to allow a public audience to observe first hand about the realities and limitations of the current pension system and hear the proposals directly from the negotiator’s mouth.

This would eliminate any disconnect from union representatives and the union membership. It would also allow retirees to be fully plugged in as they cannot rely on the current union membership to fully support their interests. Finally, a public process would allow residents to see what each side says as the residents will be the final judge who would approve through a ballot measure. Even changing the the current pension match from 250 percent to 249 percent requires voter approval.

For too long we have wasted time back and forth about what was said or what was not said and even the tone of voice in which words were delivered.  There is nothing to hide, so let’s get it all on the table. If we cannot come to agreement then it is off to the ballot box with an actuarial sound set of pension reforms that include management and the city council. However, if there can be an alternative, through negotiation and education, which delivers true savings to maintain city services then that would be ideal.

Moreover, it cannot be reducing a 250 percent pension match to 230 percent. The savings needs to verified and substantial since the problem is not small. These changes must go to the ballot box to alter the City Charter whether by fiat or mutual agreement.

Otherwise, we head down the same road of mistrust on both sides with silly games and political posturing with closed-door meetings. Pension systems have dramatically changed as we know in the non-union private sector, however they have also changed in unionized organizations like the construction trades. Local governments are next.

This topic is too important to have behind closed doors. Let’s suspend all boards and commissions not in the city charter and put these meetings as the top priority and on TV. There could be no other topic more important to San Jose so let us focus and get it done.  We need to move past this expeditiously so we can focus on the San Jose of the future, which is not solely about reducing services.

In other news last week the Council voted 10-1 to exempt affordable housing projects that are in the pipeline from paying park fees. I will let you guess who voted no.

Inviting volunteers to staff some city-financed programs in San Jose’s libraries would allow more libraries to stay open longer.

Last week I featured some of the budget memos I submitted to the mayor. Here are the rest that I submitted. Budget memos are only allowed to be signed by one councilmember. Doing things differently in some areas means we can spend more in other areas.

Strong Neighborhoods Program (SNI)
The Redevelopment Agency (RDA) spent $105 million on the neighborhoods deemed to be within the SNI areas. These areas represent roughly a third of San Jose. The SNI program is another example of a program that was started with “extra money” the city had in the early 2000s. The current budget proposal allocates $585,721 from the general fund to support a scaled-down SNI program. I propose using all of these monies for specific code enforcement issues throughout the city of San Jose. At one time the city had 19 code enforcement officers; now we have 2.5.  If we use this funding for code enforcement, we could increase the number of code officers to at least eight code officers.

Boards and Commissions
The City Charter requires the City to have a Planning Commission and a Civil Service Commission. However the other 40-plus boards and commissions are not necessary. These boards and commissions require paid staff to attend, prepare and manage them. The staff includes employees from the city clerk, city attorney, city manager, city department staff and City Hall facility staff to set up meeting rooms.

I propose eliminating all commissions and boards that are not in the Charter. Another option would be to have these 40-plus boards and commissions meet no more than two times a year, taking into consideration that if there is a time-sensitive issue and/or project that necessitates the need of a meeting, then those exceptions could be warranted. These reductions would save the city money on employee costs. This suggestion is not new. Gov. Jerry Brown has proposed the elimination of 43 state commissions and boards. The City of San Jose would be wise to follow suit.

Information Technology
Management Partners’ study for the City of San Jose showed that we spend less than 1 percent of the budget on information technology while other comparable cities spend 5-7 percent on information technology. Because of this the City of San Jose, for example, currently runs on desktop software that is 10 years old. The Capital of Silicon Valley needs to do a bit better.

The City of San Jose has two phone systems. One is a VOIP system that costs approximately $300K a year. The other system is a legacy Centrex ATT system that costs approximately $2.1 million a year.  To replace this legacy system will cost $1 million in one-time costs. However it would generate approximately $1 million in annual savings afterwards. There is $600,000 in reserves for this project however $400,000 is needed to move forward.

I would suggest allocating the first $400,000 from the portion of the Council offices’ rollovers that will be swept into general fund (as was done last year in the Mayor’s budget) be allocated to this upgrade. The ongoing savings should be allocated to the Information Technology Dept to allow for the further investment of money, time and implementations of new web-based technologies that allow for residents to interact easier with city government. as we will need to do more with fewer resources.

Libraries
Eliminate all services and programs at libraries and reallocate. Use the savings to increase library hours to keep libraries open including the opening of newly constructed libraries yet to open.  Libraries are in the City Charter and should be funded so that they are open for business. The additional programs are not part of the Charter. Consideration should be given to programs that are 75 percent or more volunteer driven. (This would save $1.2 million and allow one of the three libraries that are currently closed to open four days a week or add 2.5 hours a week to every library city wide).

The topic of increasing volunteer opportunities in our libraries should be discussed with the union to see if there is a way for volunteers to augment current library staff to allow branch libraries to stay open longer.

The City should gather pricing information regarding outsourcing a branch library or multiple branch libraries from a company such as Library Systems & Services, which has been providing library services since 1981 and currently oversees libraries throughout the United States, including in 47 cities in California and cities in Oregon, Texas, Tennessee and Kansas.  The City has an obligation to San Jose residents to investigate all options to keep libraries open.

Dept. of Finance
The City should outsource payroll services the way that Cisco (70,000 employees) and most other companies have. The money saved can be used to save finance positions for other core services like the oversight of the City investment portfolio.

Last week was the deadline for councilmembers to submit their input in writing to the mayor. Budget memos are only allowed to be signed by one councilmember. Here are some of the budget memos I submitted:

Outsource Park Maintenance
In 2007, I proposed a pilot program specifically to outsource park maintenance at the Rose Garden Park. At that time, my proposal was refuted by the council.

Now, 2011, the Parks Department has put forward a proposal to outsource park maintenance as a way to continue to provide service.  The potential cost savings deems this action worthy of council’s support. Currently it costs $4.1 million to maintain parks (and keep bathrooms open) that are two acres or less in size.  If the City outsources this activity, the cost is said to be reduced to $1.3 million providing a possible $2.8 million in savings.

$12.8 million is the cost to maintain the parks larger than two acres. Outsourcing park maintenance for these parks would most likely yield at least 50 percent in cost savings. This savings could save 36 police officers from being laid off if the council chose to use the savings for this purpose.

If the savings is more than 50 percent than those dollars could go back to the Parks Department to pay for the watering of the parks. The goal is to reduce watering at parks from $3 million to $2.5 million. Therefore, the City should try to save as much money as possible to pay for watering to avoid killing the lawns during summer. Additional savings could go to maintain “dog poop bags” (In fact, there is no reason why the stocking of dog poop bags could not be done by the private contractor.) If there are additional savings, perhaps the city could remove the policy of not opening any new parks and instead use the additional savings to move forward with opening parks city wide.
HNVF
The Healthy Neighborhood Venture Fund (HNVF) began in in the late 1990’s/early 2000’s. These monies are a result of the tobacco industry settlement.  At that time, other municipalities used these funds to pay for infrastructure costs.  San Jose, however, decided to use these costs on starting a new program, HNVF.

For the past decade, the City has given out tens of millions of dollars to non-profit/charity groups with limited oversight.  Further, these monies go to pay for the staff of the non-profits/charities rather than to the services themselves.  Instead of having these funds go to groups outside of the City Charter, I suggest using the millions of dollars on services within the City of San Jose Charter as listed below:
Six police officers
Two attorneys
Two planners (focused only on economic development)
One city clerk
One auditor
One information technology specialist

Fire
The traditional 24 hour shift may not be the best utilization of our skilled workforce. We should know if there are any advantages by staffing alternate shifts of 12 hours, 10 hours, etc….to keep all fire apparatus running including re-opening the now closed fire station on Communications Hill.
Water Pollution Control Plant
Investigate cross training of police and fire fighters on disaster preparedness of the WPCP.  This would allow the Alviso Fire station and police officers to be funded by Environmental Services Department (ESD) 24/7. Council should make it policy that the crossed trained fire fighters and police offers are on call for the WPCP and therefore should be paid by fees.

Thanks and praise to all those who have died in military service to our country allowing you and I freedom on this past Memorial Day.

On Tuesday the Council will discuss the fiscal reform proposals that Mayor Reed has researched and constructed. It will not be not an ordinary city council meeting but instead a major discussion being held in big cities across the country.

Last week, the Council had a study session regarding the City’s retirement system.  From my view, the presentation given by staff, which included the director of retirement services, Russell Crosby, was one of the best I have seen.  A step by step explanation of the retirement system was provided.

It is clear that the retirement system itself does not scale. Through no fault of the individual retirement participant, the system itself is structured on a poor foundation that will eventually collapse .

The meeting included candid comments from Mr. Crosby.  The most notable comment was the “death spiral,” which is when you have employee-to-retiree ratio parity. For example, in the past, the City has had as many as six employees supporting each retiree. That has now dropped to approximately 1.3 employees-to-retiree and continues to fall as the baby boomers retire and live longer.

The city pension system is like a mini Social Security system that constantly requires new people paying in to keep it afloat.  Some use the “Ponzi scheme” analogy when it comes to defined benefit plans and there appear to be similarities. San Jose has funded a portion of the total amount it needs to cover all those who are eligible, which is unlike Social Security, which is not funded but rather has a file cabinet in Virginia of IOU’s passing it on to the next generation.

Some say just don’t worry and pay later. The City cannot emulate the issuing of IOU’s as the Federal government has done and raise the national debt to pay retirees. If San Jose stopped paying the minimum annual payment the pension fund would run out of money in approximately eight years. So, some might say, well let’s just pay half the payment. Well, that would allow the payments to go further past eight years but not much more as there will be additional costs to not making the full annual payment.

To some extent you may think of the pension system as something one could walk away from, like a mortgage payment on a house that is underwater. But since the taxpayers are on the hook and retirees are dependent that changes the analogy.  It would be like walking away from a house, however, the difference is you have left your friends inside the house with no food or utilities and they are bed-ridden.

One stat that basically admits the retirement system does not scale is that the fund has only a 25 percent chance of actually earning the assumed rate of return. Anytime it does not hit the assumed rate of return, it creates an unfunded liability. Personally, I would not do something so important in my own life if I only had a 25 percent chance of making the goal. If we want a higher likelihood of hitting the assumed rate of return then we must lower the rate. But that will require more revenue going into the pension system in the short term, which equates to more cuts in services, thus layoffs or raising taxes and seeing the new revenue only going to the pension system.

The Retirement Reform Budget Study Session is available here. I highly recommend downloading the presentation and reviewing it as I feel it is one of the best presentations given to the Council on the retirement system and contains much more information than I have written in this short blog post. I have already shared it with a few retirees that have emailed me on the topic. Accurate information is beneficial as demonstrated by the police union hiring an independent actuarial who confirmed that changes must happen to the pension system.

On another topic the total amount of sick-leave liability on the books today is $114,825,100. Approximately $20 million could be paid out this year based on individuals with the ability to retire.

On to happier matters: Congratulations to the Lincoln Glen Little League for hosting the 2nd Annual Challenger Game. The Challenger Game includes mentally and physically challenged 5-18 year olds who each get a buddy from the Little League to play a baseball game.  Puts life in perspective.

The City of San Jose did not need to go to voters before issuing a bond to purchase the Hayes Mansion, but it would need supermajority approval before issuing a road-paving bond.

Although we are entering “road paving season” we have next to nothing for the maintenance of our 2,300 miles of road. This issue was raised at the city council meeting last week.

A question was asked about issuing bonds to pay for road paving. To issue bonds you need a source of revenue, such as a tax. For example, the $300 annual parcel tax for road paving that was discussed during the Council study session last year. This parcel tax would require appproval by a two-thirds supermajority of San Jose voters; however the two-thirds requirement may drop to 55 percent if the legislature changes the law as is currently being discussed.

I asked the question at the council meeting: “Did San Jose voters approve the bonds for the Hayes Mansion and Golf courses?” (In my view these are an example of self-inflicted wounds as the City chose to purchase these facilities). The answer from the city attorney was no, since they were lease revenue bonds. Cities can issue lease revenue bonds anytime as long as there is collateral such as property for the bond.  I asked what was the collateral for Hayes Mansion and got a fuzzy answer that the City took over a lease from HRLP, which is approximately $5 million a year from the general fund.

I then asked about the collateral for the golf course and was told the course itself was the collateral. This seems strange but apparently it is legal as it is called “certificates of participation.” I then asked: So, when we issue commercial paper to pay the SERAF payment to the State, does that diminish our ability to borrow? The answer was yes, since we may exceed our debt ceiling.

I then asked what city property is not collateral today, since so many city properties are being used as collateral, including the California Theater, Mexican Heritage Center, etc.. The answer was that the finance department maintains a list, however, not one property could be identified at the council meeting that was not collateral for debt. To be fair, sometimes any of us could be asked a random question and not know the answer. However it would seem like there must be one property that has not been secured as collateral for the purpose of borrowing. I suspect we may be near the end of having properties available as collateral.

As individuals we may dream of things we cannot afford and furthermore sometimes we cannot say no to someone. Same is true for government—both the elected officials and the voters who elect them.

It is pretty common to hear from residents, when discussing our City budget: “But i pay my property taxes.” As I have covered before on a prior blog post, your property tax bill does not flow 100 percent to the City. Much of it is taken by the school districts, County, community colleges and special districts. (This does not include various parcel taxes, school bonds, hospital bonds, that are collected via your property tax bill.) Even with all these other government entities taking nearly 90 percent of your property tax, this remaining portion is the number-one source of revenue, by a large measure, for the City of San Jose.

So I got to thinking: How many houses does it take to pay for a city service?

The average single-family home in San Jose (excluding the Redevelopment Areas, such as downtown condos) has a 2010-2011 assessed value of about $356,000. This combines newly assessed properties as well as grandfathered pre-Prop 13 homes.  Of the 1 percent secured property tax levied on those homes, the City receives approximately 12 percent of the tax revenue. That works out to around $427 per home.

Using an average annual cost per full time firefighter of $185,000, it takes 433 homes to support one firefighter. However we do not staff a one-engine fire station with one firefighter in San Jose 24/7, 365 days a year.  We staff it with 14 fire fighters to cover all of the shifts, vacation, sick time, etc…throughout the year. Therefore it takes 6,062 houses to cover just the staffing of a one engine fire station—and that does not include the cost of the fire engine. 6,062 houses is almost an entire Zip Code that is needed to pay for one fire station with no money to fund asphalt for roads, electricity for street lights, police, libraries,etc.

According to the County Assessor’s office, there are 207,220 single family homes (including owner-occupied housing such as townhouses and condo flats) in San Jose (again excluding the Redevelopment Areas: Downtown, North San Jose & Edenvale). All those homes should generate enough property tax revenue to support 478 firefighters. However the City currently has 660 fire fighters, so all of the property tax generated from all of the City’s single family homes is only sufficient to support 72 percent of the City’s firefighters. Of course, this analysis ignores the property tax we receive from all of the other types of secured property in the City like commercial property. Around 85% of the City’s assessed value (excluding RDA areas) is from residential.

What exacerbates this is approving housing projects that do not pay property tax and suburban sprawl (both of which I have historically voted against).  The higher the density of infill market-rate housing (not affordable housing) the more property taxes generated in a smaller geographic area to pay for city services without expanding city streets, sewers and call for service areas.

How about if we combine all property tax and sales tax? In 2008-2009 all property tax (residential & commercial) and all sales tax covered 82 percent of the fire department and police department budget only. In our 2010-2011 budget year these same revenue sources only paid for 72 percent even though we have less personnel.

Other choices could be used in this analysis, such as the golf cources or the Hayes Mansion, which are two items I think the City should exit.  Both divert money from core services every year.