Burbank, CA – The City of Burbank currently faces a looming budget deficit of ~$49.4million per year, which represents 29.5% of the City’s 2017-2018 budget. This deficit is the result of:
- A court ruling eliminating ~$11.7million per year in revenue
- State legislation requiring ~$15.7million per year in pension payments
- ~$22million per year to address the City’s deferred infrastructure spending
The City has several options for addressing this budget crisis. To date, attention has primarily been paid to drastic service cuts that would be required to balance the budget through reduced spending, alone. But there are several other components, such as updates to the City Charter, a potential add on sales tax measure, and continuing work on labor cost efficiencies, which would eliminate significant portions of the deficit.
This article summarizes the primary causes and implications of the current crisis. It also outlines several options for addressing the deficit. The looming budget deficit has been named the top priority for the City Council over the coming year, and will be likely be a central theme in any “City conversation” over the next few years. This article provides a high-level overview of the primary causes and potential solutions.
Burbank City budget overview
The City budget can be divided into two primary pools of money: The General Fund, and restricted funding. Restricted funding is revenue that can only be allocated for a specific purpose, such as an infrastructure grant or special-purpose tax. The General Fund is funding that the City may allocate as it sees fit, in line with the City Budget.
This article refers specifically to issues surrounding the General Fund.
The City of Burbank receives approximately $167.2million into the General Fund each year. The top five sources of this funding are:
- Property taxes: ~$41.8million (25%)
- Sales tax: ~$32.8million (19.6%)
- Utility users tax: ~$19.9million (11.9%)
- Service charges (intra-city): ~$13.1million (7.8%)
- Service charges: ~$11.4million (6.8%)
This money then gets spent on the City’s budget. The top five spending areas are:
- Police: ~$56.1million (33.6%)
- Fire: ~$34.7million (20.8%)
- Parks & Recreation: ~$19.2million (11.5%)
- Public Works: ~$13.8million (8.3%)
- Community Development: ~$8.1million (4.8%)
Prior to the current crisis, the City’s budget was relatively healthy year-on-year, especially in comparison with other cities. The City also has a well-funded strategic reserve and a AAA credit rating, both signs of excellent financial health. However, the current crisis creates significant challenges that must be dealt with swiftly and decisively, if such financial health is to be maintained.
The Current Crisis
Three events have combined to create an ~$49.4million deficit: Deferred pension funding, a court ruling on the “in-lieu tax”, and deferred infrastructure spending.
Deferred pension funding
Impact on City budget: On average $15.7million per year, over 20+ years. Yearly forecasted impact ranges from ~$2.9million (2018-2019) to ~$23.2million (2029-2030).
In California, pensions for government employees are managed by the CalPERS fund. As of 1997, Burbank’s pension account was “super-funded” – at about 140% of projected expenses. This led the City Council at the time to declare a “pension rate holiday”, during which Burbank stopped paying into the pension fund until it was closer to 100% funded. This created significant available revenue for the City, which the Council used to steadily implement many of the excellent services for which Burbank is well-known today.
Unfortunately, the deferred pension spending led to a decline in the City’s funding status and, when the economy crashed in 2008, CalPERS lost a significant amount of its value. Burbank, like many cities, had burned through the cushion that would have helped protect against this, and suddenly found itself with a significantly under-funded pension account.
Burbank actually fared better than many other cities. Burbank’s pension account is currently ~73% funded, whereas the state average is ~60% funded. This means there is a major shortfall in the State’s ability to fulfill its pension obligations.
To address this shortfall, the California State Legislature passed legislation stating that cities could no longer take “rate holidays” and reduced pension benefits for new empoloyees. All cities are now obligated to make regular payments to refill their pension funds. For Burbank, this resulted in a ~15.7million annual bill they are required by law to pay.
Court ruling on the “In-Lieu Tax”
Impact on City Budget: ~$11.7million per year
One of any city’s key responsibilities is to provide utilities (power, water, etc.) for its residents. Some cities contract with a private company (e.g., Southern California Edison) to provide these services. When they do, they collect various taxes and fees from the utility provider, as a business operating within their city limits.
Other cities, including Burbank, operate their own utility companies (Burbank Water & Power). These cities are not able to collect business taxes from their utility company. Instead, the Burbank City Charter has, since the 1950’s, included an “in-lieu tax” that makes up for the lost tax revenue caused by providing their own utilities.
Recently, trial courts ruled that the in-lieu revenue, as currently written in the City’s Charter, violates California Proposition 26, passed in 2010. As such, the City had to immediately remove ~$11.7million per year from their revenue forecasts.
Deferred infrastructure spending
Impact on City Budget: ~$22million per year over 25 years
Maintaining a City’s infrastructure is an important function of government. It is also an function which is, at best, largely invisible to residents, who don’t notice the behind-the-scenes work. At worst, it creates inconveniences, such as the traffic diversions caused by street maintenance, or temporary building closures due to refurbishment.
It is an unfortunate side-effect of electoral politics that such “invisible or annoying” spending gets postponed in favor of more visible projects that earn the approval of voters. However, infrastructure spending is necessary, and deferring it in favor of more visible projects can have serious long-term consequences.
Burbank City currently estimates it has ~$588million in deferred infrastructure spending. And this spending cannot be further delayed. In some cases, this is due to the urgency of repairs, and in others due to the significantly higher costs associated with delaying any longer.
Case study: Burbank’s deteriorating streets
Deferring maintenance on streets also makes later repairs considerably more expensive. For every dollar spent to maintain a “good quality” street, $4-5 must be spent to maintain a “poor quality” street.
Burbank plans street maintenance by dividing the City into sectors. Each sector receives maintenance work once every ten years. And each sector is only repaired to the extent that funding allows. The result is that many streets go without maintenance for twenty years, or more.
Total deferred infrastructure costs
The total deferred maintenance expenses facing Burbank City are as follows:
- Community facilities: ~$172million
- Municipal facilities: ~$124million
- Streets, bridges, traffic, & transportation: ~$285million
- Security & safety: ~$7million
The City Manager’s office estimates that, to meet 75% of the City’s deferred infrastructure needs, will require ~$22million per year over the next 25 years. However, once the City’s infrastructure is brought up to date, annual maintenance would likely be less than $10million per year.
The Current Crisis: Summary
The City faces three primary challenges to its budget:
- Deferred pension funding: ~$15.7million per year
- Lost “in-lieu revenue”: ~$11.7million per year
- Deferred infrastructure spending: ~$22million per year
This yields a total budget deficit of ~$49.4million, or 29.5% of Burbank City’s 2017 budget.
Potential Solutions
There are five primary avenues the City Council can follow to close the budget deficit, and to make room for the necessary infrastructure spending: Reaffirming the “in-lieu” revenue language in the City Charter, service level reductions, alternative service delivery methods, labor cost efficiencies, and revenue enhancements.
Reaffirming the “in-lieu” revenue language
As mentioned earlier, the City lost its “in-lieu” revenue because the Courts ruled that it violated Proposition 26, as currently written in the City Charter. However, it is believed the revenue could be preserved through a voter-approved update of the City Charter wording. This change alone would result in approximately ~$11.7million in annual revenue.
Service level reductions
To address the deficit through cuts alone, it was estimated that the City would need to:
- Close two fire stations
- Cut several law enforcement programs and reduce the number of sworn officers
- Close 14 parks and other civic centers
- Reduce City maintenance programs
- Extend administrative processing times (e.g., Planning Department approvals)
- Close the Burbank Central Library
- And more…
A detailed overview of the possible service level reductions can be found in this MyBurbank.com article.
Alternative service delivery methods
Alternative service delivery methods can mean several cost-saving approaches, but primarily means contracting out services the City currently provides directly. Candidates to become contracted services include: The Burbank City Jail, parking control, crossing guards, animal shelter services, the Supplemental Nutrition Program, and the BurbankBus senior and disabled transit program.
While alternative service delivery methods can create cost savings, they involve trade offs that may not be appropriate in every situation. And, given the relatively small extent of savings from these approaches, any solutions within this category could only represent a portion of a blended overall solution.
Labor Cost Efficiencies
In addition to labor cost efficiencies implemented this year, three primary efficiencies have been presented. First, City employees may be asked to pay 50% of normal pension cost. Second, the City would continue workers compensation cost savings. This is an ongoing project, which has already yielded significant savings, with focused work currently underway with the Burbank Firefighters Association. However, these changes are not quick fixes – they require long-term cultural change, and possibly legislative action. Finally, the City could establish a “115 Trust”, an accounting and investment vehicle the City could use to generate investment returns that could be used for pension-related costs. This would build upon a compensation policy the City adopted that has already saved the City money and improved its financial forecast.
Revenue enhancements
Whereas the previous three approaches relate to reducing spending, revenue enhancements relate to implementing or raising taxes and fees, thus increasing the size of Burbank’s annual budget.
There are a wide range of potential revenue sources. These sources vary key dimensions, including how much revenue they would likely generate, and which groups would bear the burden of the costs (residents, businesses, or non-residents).
For example, a .75% Sales Tax increase (the maximum allowable, per legislation) would generate ~$20million in revenue, eliminating a significant amount of the deficit. In Burbank, about one-third of the sales tax revenue comes from residents, another third from local businesses, and the final third comes from non-residents shopping in Burbank.
Alternatively, increasing the Parcel Tax by $100 per single-family parcel and $1,000 per other parcel would generate ~$6million in revenue. Any increase to the parcel tax must, however, take into account the school district budget, for which parcel taxes are the only way of generating additional tax revenue.
Implementing 1% increases to the transient occupancy tax and transient parking tax rates would generate ~$1million and ~$250,000, respectively. The transient occupancy tax is paid almost exclusively by non-residents, while the transient parking tax is shared across residents, businesses, and non-residents.
Finally, a series of utility-related taxes could generate ~$6.4million per year. These taxes would be paid by residents and businesses, with varying ratios based on the specific tax.
A more in-depth overview of the City of Burbank’s potential revenue streams can be found in this PDF, which also includes the electoral support required for each measure to be enacted.
Conclusion
The City of Burbank currently faces a looming budget deficit of ~$49.4million, or 29.5% of the City’s 2017 budget. Of the three primary causes of this deficit, two are unavoidable legal obligations. The third is deferred infrastructure spending, where the cost of further deferring it would be prohibitively expensive.
Thankfully, the City has several options for resolving this crisis, and is in better financial shape than many other cities to do so. Addressing this crisis will require City Council to make difficult decisions about Burbank’s long-term future, both as a City and as a community. But it also presents an opportunity to re-affirm the community values around which Burbank is organized.