Copied below is the latest column by Contra Costa Times columnist Dan Borenstein criticizing Richmond financial management.
Let’s break this down.
The gist of the Borenstein’s story is that Lindsay allegedly “blocked” release of a five-year financial plan that, had the City Council been aware of it, would have (or could have) resulted in drastic actions to avoid a financial disaster.
First of all, five-year financial plans are not required by law nor do all cities routinely prepare them, although they are considered a good practice for financial planning. Trying to predict what will happen the next five years from a revenue standpoint is largely an educated guess, not a plan. Can you imagine what a five-year plan prepared in 2008 might have looked like versus the reality that the great recession brought? The point is that five-year financial planning for a city is a worthwhile exercise, but ultimately a city has to be nimble and take each year as it comes.
Borenstein uses the term “withheld,” which is provoking but inaccurate. The five-year plan in question was prepared in a preliminary form but not adopted, a good reason for not adopting it being that it showed an unreconciled gap between revenues and expenditures as well as declining reserves that fell under the city’s 7% minimum policy. In other words, it was a work in progress, not a sustainable adoptable plan. The plan that eventually surfaced is marked “confidential” indicating it was for staff use and not for public release. As Lindsay stated to Borenstein, “I thought the five year projection was poor quality work and should be redone before it was placed on the Council agenda for discussion. It had not yet been redone, and that work is in progress now.”
What did actually happen is that in 2014 Finance Director Jim Goins gave a private briefing to each councilmember, including me, explaining that the current trend of revenues and expenditures appeared to be unsustainable. Bill Lindsay told us the same thing numerous times, and during public hearings on the 2014-2015 budget, Lindsay laid out the facts in writing that included a budget with a substantial structural budget deficit. The following is from the June 24, 2014, staff report on the budget:
"At its meeting of June 18, 2014, the City Council received a presentation regarding the fiscal year 2014-15 Operating Budget. As presented at that time, the operating budget was not yet balanced for FY 2014-15, with a $7.6 million deficit yet to be reduced. The preliminary budget showed an ending cash reserve (as of June 30, 2015) at $10.3 million, which is nearly $1 million above the minimum amount required per the City Council’s reserve policy. However, this is due to one-time (non-recurring) revenue, which does not eliminate the existing structural budget gap. For this study session, City staff will provide responses to questions generated at the June 18, 2014, City Council meeting and present preliminary recommendations for operating budget changes to reduce this FY 2014-15 budget gap.
The City Manager informed City Council that staff would continue to examine the following items in an effort to reduce the FY 2014-15 budget deficit and to maintain the reserve level to at least the minimum required amount:
- Continue to analyze the structural integrity of all funds, which includes funds subsidized by the General Fund;
- Implement organizational restructuring and possible personnel reductions;
- Work with bargaining units to discuss the City’s budget constraints and possible solutions;
- Consider strategic reductions and/or elimination of projects or programs;
- Research future revenue opportunities for new and existing projects and programs;
- Continue looking for grant funds;
- Take steps to eliminate General Fund subsidies for revenue-based programs; and
Work with departments to identify additional reductions and efficiencies. City Council provided direction to the City Manager to develop recommendations for further operating budget amendments that will allow the reserve balance previously established by City Council policy to be met during FY 2014-15 and to implement additional expenditure reductions and revenue enhancements in order to improve the financial balance. The City Manager will provide preliminary recommendations at the Tuesday, June 24th City Council meeting."
On July 1, 2014, when the budget was adopted, the staff report made the following recommendation:
"The current FY 2014-15 draft budget projects General Fund revenues of $133.3 million and expenditures of $140.9 million. The resulting FY 2014-15 budget deficit is currently projected at approximately $7.6 million. The ending cash reserve (as of June 30, 2015) will be $10.3 million, which is $1.2 million above the minimum amount required per City Council’s reserve policy of $9.1 million."
As it turned out, Lindsay did successfully pursue efforts to reduce the 2014-15 budget, including personnel reductions by attrition, reducing the city’s contribution to pensions and organizational restructuring. At the end of FY 2014-2015, unaudited results showed that a projected $7.6 million deficit had been turned into a surplus of over $1 million.
If anyone deserves criticism for adopting an unbalanced budget for 2014-15, it is the City Council, which made the call, took the risk and voted for it unanimously. Lindsay should be lauded, not criticized, for his hard work over the ensuing twelve months that turned a deficit into a surplus.
Borenstein’s characterization was, “Lindsay's failure to confront growing shortfalls, advise council members of the dangers and convince them to realign income and spending did not sit well with two major rating agencies, Moody's Investors Service and Standard and Poor's.” This is simply not accurate. There is no evidence that Lindsay ever tried to put an inappropriately happy face on the city’s financial challenges.
The second major criticism from Borenstein is the use of one-time or non-recurring revenues to balance budgets. Everyone agrees this is not a good practice, but not everyone agrees on how that terminology is applied to specific revenue sources. Borenstein and the bond rating agencies, for example, consider the money from the Chevron tax settlement that resulted in payments of $114 million over 15 years to Richmond, which were front loaded and decline over the years, to be one-time revenues, a windfall that should not be used to balance the general fund budget. We consider them as simply a predictable, if declining, revenue stream. If the settlement had not been reached, they would have simply been tax revenue if Richmond had prevailed in litigation, and if Chevron had prevailed, there might have been nothing. By settling, they became predictable. We know they will continue to decline, but the responsible thing to do is to recognize and plan for that decline, not pretend the revenue stream doesn’t exist.
Finally, it is clear that Borenstein believes the City of Richmond should make drastic cuts in its general fund expenditures for programs and services and redirect revenue to pay down unfunded pension and OPEB obligations.
What Borenstein and other recent critics have not and will not do is walk in our shoes. Borenstein (and his frequently cited Moody’s for that matter) have the luxury of telling us only what we are not doing; not what we should do. If we lopped what they consider one-time or non-recurring revenue from our budget, paid full Annual Required Contribution (ARC) on our OPEB (Other Post-Employment Benefits), made significant contributions to unfunded pension obligations and raised our minimum reserve target from 7% to 10% or 15%, or even more, we would be looking at chopping some $30 million (nearly a third) from our general fund budget.
The results might look like a 10% or more reduction in our police force, closing libraries, swimming pools and fire stations, drastically curtailing maintenance of streets, parks and community centers, and gutting code enforcement. Crime would probably increase, businesses and developers would be deterred from coming to Richmond and complaints about the appearance of the city would go off the charts.
Anyone who criticizes the City of Richmond for financial management should be willing to present an alternate plan, showing where they would cut programs and services, not simply state that boated compensation should be reduced and undefined efficiencies implemented.
Theodore Roosevelt said:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
I, for one, appreciate Dan Borenstein’s incessant focus on the unsustainable state of public employee benefits and his interest in the City of Richmond. That’s why I invited him to make what turned out to be a very enlightening and helpful presentation earlier this year at a City Council meeting on public employee benefits. He really knows his stuff, and I think it will help us continue to get our house in order. But I don’t agree with his hide-the-ball conspiracy theories involving Bill Lindsay and his invocation of bond rater actions as proof of Richmond’s financial disorder. As I have said more than once, it was the bond raters who contributed perhaps as much as anyone to causing the great recession. They have little credibility but wield great power. If anyone should be investigated, it should be the bond raters.
Getting Richmond’s financial house in order continues to be a challenge, and we continue to pursue it responsibly, balancing all the needs of the city. We will get there, but not all at once and not by crippling in one fell swoop the city’s ability to provide basic programs and services. What is important is that we are going in the right direction. The patient is actually recovering, not dying.
Daniel Borenstein: Richmond city manager blocked release of report forecasting city's financial fall
By Daniel Borenstein, staff writer © 2015 Bay Area News Group
Posted: 11/05/2015 06:00:00 PM PST| Updated: 48 min. ago
City manager Bill Lindsay, right, speaks before Richmond residents and homeowners during a city council meeting at Richmond Memorial Auditorium in Richmond, Calif., on Tuesday, Sept. 10, 2013. (Ray Chavez/staff archives)
With one of Richmond's credit ratings recently downgraded to junk-bond status, interviews and newly released documents show that City Manager Bill Lindsay in May 2014 blocked release of a report predicting the city's financial fall.
A five-year fiscal forecast warned of mounting general fund shortfalls as expenditures continued to exceed revenues. Thirty city staff members spent months working on the document. Then Lindsay squelched it.
"I thought the five-year projection was poor quality work and should be redone before it was placed on the council agenda for discussion," Lindsay explained Wednesday.
It was a costly decision. Eighteen months later, the city still awaits the fiscal forecast. Meanwhile, the delay set off a chain of events that could cost the city as much as $33 million.
Lindsay's failure to confront growing shortfalls, advise council members of the dangers and convince them to realign income and spending did not sit well with two major rating agencies, Moody's Investors Service and Standard and Poor's.
Of 68 California cities Moody's rates, only Richmond has been dropped to junk-bond level, meaning greater risk to investors who loan the city money. The rating agency in its August downgrade, the second in three months, criticized Richmond's financial management, structurally imbalanced budget and paltry reserves.
In September, Standard and Poor's took similar action, lowering its Richmond rating to one category above junk bond. S&P cited the city's "weak management" and "the lack of a plan in place that is sufficient to address the city's ongoing structural imbalance."
By then big damage had already been done. The Moody's downgrade provided JPMorgan Chase the option to end an interest-rate hedging deal and charge the city a termination fee of up to $33 million.
Now city officials are scrambling to borrow money so they can pay the fee. Some of that cost will be offset if interest rates remain low. The exact amount will be determined by details of the deal and future market conditions.
Meanwhile, Lindsay promises to present a new five-year forecast in December. As for the 2014 document, he says he released it to the council a year later after some members asked about it. But he never told the public.
In October, businessman Richard Poe filed a Public Records Act request seeking a copy. The city balked. Senior Assistant City Attorney Everett Jenkins falsely claimed, "There is no plan available" for that time period. But Poe, who knew better, persisted and prevailed.
Lindsay said he blocked release of the forecast in 2014 because he disliked the assumptions and methodology, even though they were very similar to a more-positive analysis released the prior year.
Releasing the forecast in 2014 could have had political repercussions. The city was preparing to seek voter approval for a half-cent sales tax increase. Officials hinted that much of the money would go toward fixing badly deteriorating streets.
Release of the forecast would have shown that to be impossible. The city needed the tax just to stay afloat. Indeed, the only things keeping the city in the black since then are the sales tax, one-time proceeds from a questionable bond refinancing deal and the city's failure to make minimum payments on the debt for its worker's retiree health care program.
Nevertheless, Richmond's expenditures still exceed ongoing income. That's a key reason the ratings agencies downgraded Richmond.
The city has a "long-term structural imbalance with reliance on one-time revenues," Moody's wrote. "This already weak financial position will deteriorate without strong cost-cutting measures in the very near term."
But city leaders have buried their collective heads in the sand. Amazingly, Lindsay still maintains that the city has no structural deficit, even though both rating agencies flatly say otherwise. And, sadly, some council members have bought into Lindsay's line.
Mayor Tom Butt on Tuesday lashed out at Moody's and S&P. "They want us to cut our budget to the bone, they want us to lay off people, to curtail programs, to spend less money, put more money in reserves, pay off our pension obligations and that sort of thing."
Actually, they want prudent fiscal management. The alternative would be to quit living on borrowed money. Then the ratings agencies wouldn't care.
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or email@example.com. Follow him at Twitter.com/BorensteinDan.