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California Cities Begin to Emerge from Recession, Brace for Pension Increases

May 15, 2013 By

While Stockton, Calif., officially went bankrupt on April 1 (with its 300,000 population, it's the largest U.S. city  ever to fail), and with a number of other California cities still in financial difficulties, there are encouraging signs in the Golden State.

Gov. Jerry Brown unveiled a state budget this week that carries an $850 million surplus, and most Silicon Valley cities are also doing better, said San Carlos Assistant City Manager Brian Moura. "There's more job growth, more companies are starting up, housing values are going up, the sun is shining, and there's more traffic on 101 -- all the indicators tell you there's more activity," he said.

In addition, San Carlos is now receiving sales taxes from Internet retailers such as following the passage of California's online sales tax legislation in 2011.

That's a welcome change from two years ago, when Digital Communities looked in on San Carlos following relentless budget cuts that weakened services and spurred the city to try some innovative shared services and restructuring measures. While other California cities such as Vallejo, San Bernardino and Stockton went into bankruptcy, San Carlos acted early enough -- in part by outsourcing police, fire and parks -- that the "B" word wasn't part of the discussion. The city even managed to put some money aside to fix the Senior Center roof and upgrade an antique permitting system.

Moura says that San Carlos is doing well, all things considered. "The parks look better than before," he said, "and the city is saving half a million dollars a year. In police, we actually have more coverage and more services than when we had our own department, and we're saving more than the $2 million we planned ... In fire, we planned to save $1 million a year; for the first year of operation, we actually saved $ 2.3 million. So in each of the three areas, we have more service, and we've had major savings."

Moura says the demonstrated savings while providing better service means the city won't be going back to business as usual.

In fact, the shared services model is being embraced by several nearby cities. The cities of Millbrae and Half Moon Bay transferred their police departments to the county, and even though they're smaller than San Carlos, each city is saving more than $1 million per year, said Moura. "It shows that it's a viable way of delivering police services and saving considerable money. And some other cities around the Bay Area have asked us for some of the reports and documentation."

The city of Morgan Hill went from having its own fire department, but transferred that to the county and saved some money. Then, under continuing budget pressure, it contracted with Cal Fire, the state organization, and saved an additional $800,000 per year. "A lot of times people are critical of the state," said Moura, "and yet in the Morgan Hill example, the state of California, through Cal Fire, was the most cost-effective provider."

Coastside Fire Protection District in Half Moon Bay was in deficit and struggling, and Moura said it also contracted with Cal Fire -- a move that, over several years, gave the city a surplus of $9 million, with about $1 million more in surplus each year.

While the new way of doing things doesn't sit well with everyone, the indications are that returning to business as usual is not an option. An attempt last year to get Coastside to dump the Cal Fire contract and return to a standalone fire department, for instance, was defeated.

Pensions: The Next Challenge

As cities in California and other states struggled through the recession, rising pension costs were eating up as much as 80 percent of local government budgets.

The California Public Employees' Retirement System (CalPERS) recently decided to increase pension costs on cities the year after next, said Moura, by as much as 50 percent over a three- to five-year period. Some cities are already having trouble with the current CalPERS rates, so that's the next challenge.

And while a U.S. bankruptcy judge ruled that Stockton is broke, he will wait to decide if pensions will be renegotiated as part of the settlement.

Photo from Shutterstock


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