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Another View on a Budget Positive
Council Members like to use the size of the city's contingency reserves as evidence of the city's financial health. Indeed, the large reserves will help the city weather typical short-term blips in the economy. That stability means that the city can avoid a pointed fiscal problem due to acute economic shifts. The city now sets aside $9.3 million for reserves in the draft budget for next year. This is a good thing and the city should be commended for budgeting that reserve.
This does not mean the city has managed their funds wisely or the city's budget maintains adequate funding for the efficient maintenance of its facilities and acquisition of needed capital improvements. Indeed, it appears that the large reserve was made possible by loans the city has recently taken. The public was told that those loans would fully fund projects that are not now fully funded in the city's 6 year (draft) budget.
A short history is worth reviewing.
From a June 22, 2006 UT Article:
In January, the council foresaw the financial difficulties and prioritized its capital projects, shifting money from other projects to build the $20 million library now under construction on Cornish Drive behind City Hall.
That left projects short of money. The council had three choices: spend its reserves, borrow money or not build until the city had saved the money for construction.
In May, the council instructed the city's financial officers to draft a budget that assumes a $23 million bond issue.
From a May 25, 2006 UT report:
Financial consultants last night confirmed the City Council's worst fears over the coming year's tight capital budget: There is no easy way out.
City Finance Manager Jay Lembach indicated in a report that delaying three priority projects – three replacement fire stations, a central public works yard and the first phase of a 43-acre public park – eventually would cost the city millions of dollars more each year they are delayed because of rising construction costs.
The proposed budget falls $23 million short of estimates for those projects.
Three years ago the city was $23 million short. Then they borrowed $20 million (without a vote of the taxpayers). Here is more from the same article:
The city has decided to join the masses in coping with a small purse and big expenses. It will borrow its way out of the hole.
Council members reasoned that borrowing money would enable the city to build its priority projects – three replacement fire stations, the first phase of a 43-acre public park and a central public works yard – within the next six years.
The city purchased a public works yard and built one fire station. The current draft budget does not appear to have any funding for the other two fire stations and Hall Park operations are not budgeted in the next 6 years. The city currently does not have enough to fund Phase I of the park.
Again, from the UT article:
By moving forward, the city also would avoid the burden of escalating construction costs that would add millions of dollars each year to the projects if they were delayed because of lack of money.
If the council decides to issue bonds to cover the shortfall, Encinitas would be able to build the facilities and pay $7.3 million less than what they would have to pay if they delay the projects, Lembach said. The city would pay $1.4 million each year in interest for 30 years.
Activist Matt Walker criticized the council for developing a capital budget without a comprehensive plan, which includes moving money from other capital projects to pay for a new $20 million library at Cornish Drive behind City Hall.
“You spent it all on the library. Now you do not have enough money for fire stations, the public works yard, things we need,” Walker said. “Leaving yourself in that kind of lurch is not a plan.”
The analysis of the cost escalation was flawed at the time it was issued and the city's conclusions turned out to be incorrect. Many city watchers thought the city was using scare tactics and smokescreens to justify the bonding. Matt Walker turned out to more right than most people recognize. Not only is the city left in a lurch, the city seems to have picked up his plan to sell the Quail Gardens Drive property to fund their budget holes.
The contingency reserve in 2006 was $6 million before the city borrowed $20 million. At the same time, the city was also $23 million in deficit for its priority infrastructure projects. Now, after the $20 million loan, the city's contingency reserve is up to $9 million, but it is not clear if there is enough money for two fire stations* and city staff confirm that there is not enough money to open the Hall Property Park. Those commendable contingency reserve levels were possible because the city issued lease-revenue bonds.
It is time for more intellectually honest budgetary discussions.
*The funding for the fire stations is not shown in the budget. Staff recently implied that there is some funding, but did not explain why it could not be incorporated into the official budget. Confirming the presence of a problem, building the fire stations is not on the list of goals for the fire department, which can be found in the Two-year Operations Budget.