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April 16, 2008 > Newark struggles with budget deficit

Newark struggles with budget deficit

In a work session preceding the Newark City Council meeting on April 10, staff addressed the problem of a significant budget deficit. Efforts to stabilize the fiscal situation require a combination of unpalatable decisions that will affect personnel and service to Newark citizens. In the oral communications portion of the city council meeting following this report, allegations were made that purported to uncover funds that could avoid some projected personnel layoffs. Some of this information appeared to be incomplete and selective in nature. In order to present a clear understanding of the origin, nature and solutions to this fiscal crisis, TCV spoke with Newark City Manager John Becker.

TCV: What caused the budget problem?

Becker: It goes back almost four years. The city's revenues have not been keeping up with its expenditures. While we have had growth - not anywhere near the growth over the prior ten years - in the last five years, there has also been significant expenditure growth as well. Sales tax income has been flat, the loss of Sun Microsystems and the decline of domestic auto sales have also hurt us. Property taxes have stagnated as well.


TCV: What has the city been doing to address the deficit?

Becker: About four years ago, we implemented a "flexible hiring freeze" so that if someone retired or left the organization for whatever reason, that position was evaluated to see whether it could be left vacant. This resulted in the reduction of 15 positions. This policy did not include police officers or fire fighters.

In June of last year, we received additional information that informed us that the structural deficit had grown. We approached the council in our budget cycle review - we are on a two-year budget cycle - at the end of the first year of the cycle. Estimates showed a $2.5 million deficit by the end of this fiscal year ending in June. The council authorized $1.1 million in cuts - positions not being filled, department spending reductions across the board. We used reserves and deferred some capital projects to fill the gap.


TCV: Why additional actions are being taken now?

Becker: Now we are seeing real and significant stagnation of property taxes. People are reassessing homes, homes are not selling and we are not receiving the transfer tax from these transactions. Spending has slowed which affects our retail sales tax income. This source of income has actually declined.

Income projections have forced us to formulate a drastic budget balancing plan. Our projections for the next two fiscal years show a $4.3 million deficit and $3.6 million deficit respectively. On top of this, there is projected $700,000 deficit for this fiscal year. We have squeezed all we can out of non-salary accounts which leaves the remaining 75 percent of our expenditures for personnel.


TCV: A question has been raised about city reserves. Why doesn't the city use these funds to retain jobs?

Becker: There are multiple types of reserves. The "operational reserve" of $6,000,000 put aside in case of a disaster. Our approach has always used a conservative approach when addressing the use of these funds. Other cities may spend this money and a result can be bankruptcy. In the event of a large earthquake, we would probably need those funds immediately and it would not last long.

We also have a "PERS reserve." In 1999/2000, we negotiated a pension benefit enhancement for police and fire personnel followed by other employees a couple of years later. As part of the negotiation, a six year contract was negotiated with the provision that the enhancement would not be in effect until the fourth year of the contract. During that four year period, money that would have been used to fund the increase was put into a reserve instead. During this time, the dot com bust, 9-1-1 and the stock market combined to change the rate structure for PERS. We used some of the $5.5 million in that reserve to pay the increased costs. We have spent $2 million so far and anticipate the need for an additional $1.5 as part of our budget balancing strategy over the next two years.

Our "restricted reserves" can only be used for specific expenditures. For instance, gas tax reserves can only be used for streets, right-of-way, etc. Other reserve funds may come from grants for a specific purpose. Reference has been made to a $1 million reserve account. This money is subject to an agreement made with Sun Microsystems that all of their sales tax revenue would be split 50/50. They moved their point of sale to Newark and we benefited. However, when we are billed for their portion, the check must be sent to them. This money is not really a reserve, rather it is money owed.

None of this is a secret. I held employee meetings and individual meetings with all the association leadership groups. Everything was disclosed and summary sheets including a fund balance sheet were distributed showing every dime in our reserve accounts.


TCV: What will happen to planned capital expenditures?

Becker: Our Capital Improvement Plan is funded primarily from capital reserves. At this time, we have about $8 million for that purpose. This is built on surpluses from the General Fund. This is how we built the new fire station and the Silliman Center, improve parks, etc. We have not had surplus in the General Fund for four years so we have been spending this reserve. For the next two years, we will have a "bare bones" capital improvement program. These are prioritized - liability and safety issues at the top of the list including such things as handicap ramps, sidewalk repairs, road maintenance and that type of thing.

Large projects such as Area 3 and 4 have no city dollars allocated. These are privately funded and financed. The developer of Area 3 and 4 pays for any consultants and administrative costs even though the process is controlled by the city. All property owners in the Area 2 project are paying for the specific plan.


TCV: Is there any flexibility in the budget?

Becker: We have built a small amount of "wiggle room" in the budget balancing plan. The second year of the budget is not projected to be as bad as the first year. The cuts brought to the council provide about $3 million per year. Some of this is not sustainable in the long run. Twenty positions (16 layoffs plus 4 positions not filled) coupled with the 15 additional positions vacated over the last four years means a significant change in how we do business. Customer service will suffer as will park and road maintenance. All employees are taking a five percent salary reduction which can be justified since all cities are having similar issues. However, if this continued, we would have serious recruitment and retention problems.


TCV: Is there any light at the end of this tunnel?

Becker: If things get better, we have a reinstatement list that is based on strategic needs. If we do not need as much of our reserves and gas tax money as anticipated, we can begin to recover. The lesson from this issue is a reinforcement of Newark's fiscal philosophy. We addressed our finances correctly, but no matter how conservative and prudent, you are never completely immune. In the long term, the outlook is positive. The Area 3 and 4 project is a reality and Area 2 - 230 acres - can be an exciting development as well. I am cautiously optimistic about NewPark Mall. A number of large companies such as FedEx are occupying previously vacant industrial or light industrial properties. There is no quick fix, but the long term is bright.


TCV: How can this type of deficit be addressed long term?

Becker: We are going to seriously consider a revenue measure to bring before the voters. We will be asking voters how they feel about a general or special tax to address funding of city services.

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