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Reckoning Day 

Even with a freshly passed tax extension, Eureka faces millions in cuts. What happened?

It seems Eureka's days of fiscal reckoning are upon us.

"The problem is the city has kicked the can down the road as far as it could. Now it's at our feet," Police Chief Andrew Mills said, explaining why just six months after voters overwhelmingly passed a tax extension to protect public safety spending, his department is facing large cuts and widespread layoffs.

Several weeks ago, Eureka's department heads were feeling pretty good. In November, city voters passed a half-cent transaction-and-use tax extension estimated to bring in an additional $4 million into city coffers in each of the next five years and the city's mid-year budget review had sailed by without any cuts. Then they sat down with City Manager Greg Sparks, who broke the news.

With a mandate that California cities have to begin paying down unfunded liabilities, pension costs are skyrocketing. To make matters worse, the city is also looking at increases in liability, property and workers compensation insurance. Sparks told the group that the city is facing a budget shortfall of more than $2 million in the coming year, an amount roughly equivalent to 12 percent of the city's general fund — the fund that pays for the bulk of services residents count on, things like road maintenance, police and fire response.

When word of the shortfall broke recently, along with word of plans to bridge the gap through about $1.7 million in cuts to the police and fire departments, the general response from the community was confusion: Wasn't the tax extension supposed to stave off these types of public safety cuts? What happened?

The answer to that question is nuanced and touches on everything from rising insurance premiums to new City Hall leadership that has brought in a new accounting and budgeting philosophy. But, really, it all starts with city pensions and California's Public Employees' Pension Reform Act of 2013 (PEPRA).

The California Public Employees Retirement System, known as CalPERS, is funded through a complex formula in which both public employees and their employers contribute into a pool of funds that's then invested in the stock market. The idea is that gains from those investments will make the fund sustainable, ensuring that there's enough money for current employees to draw their pensions after retirement.

But the recession of the late 2000s led to devastating losses for the CalPERS system, leaving municipalities throughout the state with large unfunded pension liabilities. The system was in danger of collapse, with far less money than would be needed to pay for future retirees' pensions. So in 2012, the state Legislature passed the reform act, which included a wide array of provisions designed to bring the system into balance. Most crucial to Eureka's current situation, the act mandated that beginning in 2015-2016, municipalities begin paying down their unfunded pension liabilities over a five-year period.

This spelled trouble. Recent history has seen Eureka quite generous with its pension contributions, especially when it comes to police and fire employees. In 2014, for example, the city was contributing 42 percent to its police officer's pensions and 45 percent to those of its firefighters. That means for every $1 a police officer was getting in salary, the city was paying another 42 cents toward his or her pension.

But — those costs aside — the city also has racked up huge unfunded liabilities due to the stock market's near collapse in the late 2000s: $13.2 million for the police department and $10.5 million for Humboldt Bay Fire. Beginning next year, the city's going to have to start paying down those liabilities while still making its normal pension fund contributions. For the 2015-2016 fiscal year, that means payments to CalPERS of $920,000 for the police department and another $726,000 for fire, and that's just to pay down the city's unfunded liabilities. In total, the city will pay about $3.8 million in pension costs in the coming fiscal year, a number equaling about 15 percent of the city's general fund.

And pension costs are expected to do nothing but increase through the five-year PEPRA repayment period, with CalPERS estimating the city's police contribution alone will balloon from $921,000 next year to $1.4 million in 2020-2021.

But pension costs, though the driving force, aren't the sole cause of Eureka's financial squeeze. Sparks said liability, property and workers compensation insurance premiums are all going up, and also noted that the city is spending $1.2 million over three years on its general plan update process. Sparks is also leading a new regime at City Hall — he, Mills, Community Development Director Rob Holmlund and Finance Director Wendy Howard have all signed on in the last year and a half — with a new philosophy on budgeting and accounting, which is leading to some changes.

For example, there are some city expenditures — like vehicle maintenance and work from the city attorney's office — incurred by all city departments. Sparks said city departments are now being asked to pay these costs proportionate to their use, meaning the police department is paying a heftier share of these expenses than it has in the past. There are also some old accounting tricks that just aren't on the table anymore.

For example, Mills said he's been told that traditionally the city has budgeted with the assumption that a handful of police officer positions will remain vacant throughout the year. This allowed the city to nominally "fully staff" the department, while at the same time count on a few hundred thousand dollars coming back into the general fund at the end of the fiscal year — "savings" the city has traditionally used to balance its end-of-the-year books. "That's not sustainable," Mills said, adding that his position is that the city council has allocated him a certain number of police officer positions and he's intent on filling every last one of them.

Amid the backdrop of increasing expenses, revenues are also remaining flat. Sales tax revenue — which accounts for about two-thirds of the city's general fund — has recovered from its sharp fall during the recession but shows no signs that it will markedly increase in the coming years. In fact, Sparks cautioned that he's worried that auto sales, which have spiked in the last couple of years, may actually decline in the coming years, bringing city tax revenue down with them.

And there are those pension costs, which are going to do nothing but rise through the 2020-2021 fiscal year, meaning the city might just be entering five years' worth of belt tightening without much of a safety net to fall back on. The city is starting this year's budget process with just about $700,000 in reserves, after dipping into its savings last year to fend off deeper cuts to police and fire. The city's stated goal is to have 60 days of operating expenses in reserves — which equates to more than $4 million — so Sparks is recommending the city council begin building those back up this year.

"I want to make sure we're giving the council a sustainable budget where we're not just putting off hard decisions," Sparks said. The city council was slated to begin discussing the proposed budget as the Journal went to press. It's unclear how this process will unfold.

But with public safety spending accounting for two-thirds of general fund spending, it seems almost impossible that police and fire will escape the process without large cuts. Currently, Humboldt Bay Fire Chief Ken Woods is proposing freezing any positions that become vacant and cutting virtually all overtime expenses, which means the Myrtle Avenue station will likely be closed for 200 to 250 days next year. In the police department, Mills is proposing cutting all police service officer positions and the use of annuitants, or retired officers who come back to work on a part-time basis. Both departments will forgo any equipment replacements and upgrades.

"This has to be sustainable," Mills said, adding that he'd like to find a way to dodge cuts but it just isn't realistic. Across the street at the fire station, Woods agreed. "We need to fix this problem and we realize this picture isn't going to get any better soon," he said. "It's going to be a struggle."


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