Savings should carry Visalia’s city hall through next recession
General Fund, Measure T may be exhausted in 2023-24 but Measure N should have a $9 million left in the tank
By Reggie Ellis @Reggie_SGN
VISALIA – There are no indications as to when the next recession will occur but history says it should be happening now. The economy has already broken records for post-recession recovery and job growth, which experts say means the recession could come at any time. They are already proclaiming a slowdown, the drop in growth lead-up to a recession.
And while many cities are wondering what they will do as they struggle to pull themselves out of the last recession, the City of Visalia has built up enough revenue to weather whatever comes its way.
The Visalia City Council received its mid-year budget report on March 18 and there seems to be plenty of money in the bank for the next four years. Finance Director Renee Nagel said the city will finish the current fiscal year with a surplus of $3.8 million. That’s after setting aside another $1 million in its emergency reserve fund which remains at 25% of the city’s general fund budget, or $15.7 million.
Revenue should be up $1.9 million thanks to projected increases in sales tax, property tax, hotel tax, business licenses, and, just about every other revenue stream. Sales tax is projected to increase by $300,000. This amount does not include the tax on sales made by out-of-state and online retailers from the Wayfair ruling. In its groundbreaking decision last year in South Dakota vs. Wayfair, Inc., the U.S. Supreme Court ruled that out-of-state retailers must collect and remit sales tax even if the retailer does not have a physical presence in the state. According to MuniServices, Visalia’s sales tax monitoring company, the Wayfair ruling is expected to increase sales tax for the city by an additional $500,000. California began collecting on the tax on Monday, April 1.
Property tax is projected to increase by $400,000 over projections thanks to higher property values and a rise in real estate transactions. Vehicle license fees are projected to be $200,000 over projections and transient occupancy tax, also known as the hotel tax, should increase by more than a quarter of a million dollars. Much of that increase is due to Air-bnb stays in Visalia. Nagel reported that city staff has recently ramped up efforts to find Visalia Airbnb rentals which include contracting with a company that can provide addresses on a quarterly basis. Business Licenses are projected to be $100,200 over projections, a 4.1% increase over last year.
“These fees are based on business gross receipts and are a reflection of increased business activity,” Nagel stated in her report.
All other revenues are projected to increase from budget by $800,000. One of the larger increases from budget is in the Fire department. Fire revenues are projected to be higher than budget due to receiving Strike Team reimbursements of $350,800 compared to the budgeted amount of $150,000. On average the Strike team reimbursement is $150,000 annually; however, due to the continued drought, CalFire has needed more assistance from the local fire departments.
Nagel said expenditures were down $2.6 million mostly due to unfilled positions. The majority of the unfilled positions are from the Police Department which has a projected vacancy savings of $1.3 million. The department has a total of 230 allocated positions including 23 funded by Measure T and 18 funded by Measure N.
“The budget always assumes all departments are fully staffed,” Nagel stated in her report. “This is a budget best practice to ensure that operations do not rely on vacancy savings to balance a budget.”
Vice Mayor Steve Nelsen said filling those positions in the police department might save the money in the short term but could have irreparable effects on the city’s safety and end up costing more in the long run.
“We need to do everything possible to fill those positions,” Nelsen said.
Having said that, vacancies may be the only way the city can avoid deficit spending in the future. Beginning in the 2021-22 fiscal year, the city’s General Fund is expected to be $100,000 in the red. That number increases to $700,000 the following year and is expected to rise going forward. The biggest difference in city expenditures from year to year is the city’s annual payments to the California Public Employee Retirement System (CalPERS), the state’s pension system. Overall, the city’s PERS payments will increase from $15 million to more than $19 million in the next five years. The city’s unfunded liability – the gap between interest earnings, employee/employer contributions and fully funding pensions – to PERS is projected to grow 16% over the next five years from $6.9 million to $8 million in 2022-23. After years of overestimating returns, PERS is now lowering its earnings rate to more adequately reflect the market. The rate will be reduced from 7.5% to 7% over the next 15 years.
“Most likely CalPERS will have additional changes which will result in high PERS payments,” Nagel wrote in her report.
City Manager Randy Groom said PERS is attempting to diversify its investing and has asked the state for more leeway in where it invests retirement funds by removing political consideration from its strategy.
“They are trying to invest in what’s profitable and not what’s politically acceptable,” Groom said. “They are asking to be able to do what they need to do to earn the most they can.”
Giving PERS more freedom to invest the city’s pensions was not welcomed by Councilmember Phil Cox. He questioned the investment savvy of those running the retirement system and chastised the organization for its refusal to project earnings realistically and for some “wildly speculative” investments.
“The fact they are asking for more freedom makes the hair on the back of my neck stand up,” Cox said.
About 10% of the city’s PERS payments are funded through Measure T, the quarter-cent sales tax measure approved by voters in 2004. Measure T has kept pace with revenue projections but not amended expenditures. Expenditures outpaced revenues in 2008-09 and the city took action to reduce the fund’s obligations to police officer and firefighter positions and debt payments for the Visalia Emergency Communications Center (VECC). The fire department portion of Measure T will be exhausted by 2023-24 while the police portion will begin seeing deficits in 2022-23. One of the issues with Measure T is that it does not take into account business to business sales, the area of sales tax with the highest rate of growth in Visalia.
The sigh of relief is Measure N. The 2016 half-cent sales tax measure continues to outpace projections. Unlike Measure T, Measure N cannot be used for pension or capital debt obligations. By 2022-23 Measure N should have a cash balance of more than $9 million. Nagel said her projections are best case scenario and do not take into account a recession. However, Nagle said the annual growth in sales tax revenue was conservatively projected at 1% annually over the next four years. Sales tax growth has averaged more than 4% over the last 40 years.
“It’s nice to see a continued increase in sales tax revenue,” Mayor Bob Link said. “If the economy remains positive that environment should continue.”