City may soon see red

The relatively smooth fiscal road the city of Chico has traveled lately is about to turn rocky—even, perhaps, nearly impassable.

For the past two years, since adopting its deficit-reduction strategy, the city has been able to balance its annual budgets—despite the recession—and avoid the kinds of shortfalls that have plagued state government and so many cities and counties in California.

That good fortune seems about to end.

Such was the word Tuesday (March 2) from Jennifer Hennessey, the city’s finance director. The occasion was her second-quarter 2009 (October through December) financial report to the City Council. She had news both good and bad to deliver.

The good news is that, thanks to less spending than expected that offset decreased revenues, primarily in sales-tax receipts, the city’s budget will balance out at the end of the current fiscal year on June 30. The city had spent only 45 percent of its budget by the end of the quarter, thanks largely to tight management and a 10 percent cut in the number of employees.

The bad news is that spending is projected to increase next year due to employee step and cost-of-living increases, as well as increased mandated contributions to the CalPERS retirement system and higher health-insurance premiums. With incoming revenues projected to drop even more than they did this year, the city will face a $3.6 million budget shortfall in fiscal year 2010-11.

That’s ominous enough, but there’s another possibility that could make the figure much scarier.

As City Manager Dave Burkland explained, the state wants to “borrow” some $2 billion in local redevelopment funds ($11.2 million from the city alone) to help offset its huge budget deficit, but that effort has been challenged in court.

Redevelopment funds can be used only for capital-improvement (i.e., building) projects. If the state wins in court, Burkland explained, Chico would be forced to delay some planned projects until the money is repaid, but its general-fund operational budget would not be affected.

If the state loses, however, it may decide to appropriate gas-tax and transportation funds instead—money that so far it has not touched. That money would come out of the general fund and thus increase the size of the deficit.

“Would you call that a catastrophic situation?” Councilwoman Mary Flynn asked.

“Absolutely,” Burkland replied. “We’ve planned for a reduction in gas-tax revenues, but not at the level of $11.2 million.”

It would be better to lose the redevelopment funds, Hennessey added.

Burkland said he’d be working with department heads to come up with a budget strategy. A hiring suspension remains in place, as does the rest of the city’s deficit-reduction strategy.

The city’s goal, he said, is threefold: to keep its core services, to minimize service reductions, and to maintain a functional and productive workforce.

Possible solutions, he said, include: reductions in outsourcing contracts and other nonsalary budget categories; voluntary position reductions through incentivized retirements (aka golden handshakes); and wage and benefit concessions on the part of employee groups.

The last would yield the most savings, of course, and Burkland elaborated on it. “The first thing is to have an open discussion,” he said. “I’m going to ask the employee groups to provide their own solutions. We need real savings. I believe the employees understand the situation.”

At the same time, he added, he intends to have back-up plans, and has asked department managers to come up with their own reduction plans. (He didn’t say so, but it was obvious he was referring mostly to layoffs.)

“We’re going to be faced with some really tough decisions in the next six months,” Flynn stated, wrapping up the discussion. “It’s going to be very difficult. But as an organization we are doing pretty well, given what could be, and what I’ve seen happening in other parts of the state.”