Ad Hoc Finance Committee Report

Ad Hoc Committee Recommendations re: City Budgetary Challenges

Intro

The City of Santa Fe’s anticipated 2016 Budget shortfall is a challenge necessitating swift response from the City Council. There is no single cause or a simple answer to correct the City’s financial position and the decisions the City Council will be faced with will certainly be complex and challenging. With the desire to aid the City of Santa Fe with this difficult challenge, a group of committed business and community leaders joined forces as an ad hoc committee to offer an independent evaluation of the City’s current financial shortfall, and provide suggestions for addressing the budget shortage and larger systemic issues that contributed to the City’s current deficit position. 

The authors of this study have scrutinized the City’s operations and commitments by going over publicly available records. This collaborative document is intended to provide the City of Santa Fe’s leadership with best practices from private industry and other municipalities and recommendations in full consideration of the City’s broad spectrum of responsibilities. We recognize that these 40+ recommendations are not complete but they may assist the decision-making process.  We also urge the City to examine best practices and structural processes from other municipalities to determine appropriate staffing levels and expenditures.

In finding solutions to the multifaceted causes of the budget shortfall, City Leadership will have an opportunity to modernize services and optimize the City’s enterprise and general services.  Our recommendations are presented in the following sections:

• Expenses
• Revenue
• Growth
• Systemic issues

As all courses of action are considered, the option of raising taxes should not be considered prior to a detail level examination of operations, revenues and corresponding expenses.  Excessive expenses without corresponding benefits reveal important failings in the City and to not address them will continue a cascade of growing issues into the future.

Expenses

Clearly the City cannot continue to “Live beyond its means” – Santa Fe New Mexican – October31, 2015. Services such as senior centers, libraries, parks, recreation facilities and public transportation require maintenance and revenue. If Santa Feans want these services, a way to fund and sustain them must be found. Continuing to add additional services without the revenue to pay for them is irresponsible and unsustainable.

Salaries Wages and Benefits

As in many organizations, salaries and related employee benefits account for a significant portion of annual expenses.  Santa Fe has payroll and related expenses that are disproportionate to its size when compared to other similar communities, with salaries and benefits representing approximately one third of the City’s total appropriations.  Employee benefits are approximately 50% of employee compensation or 1/6^th of the City’s annual expenses.  Because of the scale of this category, even small gains in optimization can have a significant impact in the full budget. The size of this budget item, coupled with a prolonged economic downturn, necessitate the city to address changes in this area.  Gross receipts taxes (adjusted for inflation) have fallen steadily since 2008 and there has not been a corresponding adjustment to the city payroll. Private industry has had to adjust compensation models for all employees in response to changing economic factors and benefit costs and the City needs to do the same. Economic downturns require effective work-force management that addresses both short-term and long-term strategies to control personnel costs.  The recommended changes may require Union support through the collective bargaining process.

The following are recommendations to the City to reduce payroll and related expenses:

• Review the City’s overtime policy and limit or eliminate overtime compensation in all noncritical areas.
• Solicit volunteers to work a reduced hour work-week. To some, a reduced schedule would be a benefit of their position. Reducing the number of hours in the workweek would generate significant savings and might avoid a forced reduction in the workforce.
• Require employees to take a certain number of unpaid vacation days, which would provide a short-term reduction in labor costs.
• When a position is vacated through attrition, it is not automatically filled. Utilize the vacancy to reassign tasks for optimization.
• Implement a hiring freeze in certain departments, functions or on all positions (excluding city health and safety).
• City could offer early retirement incentives or voluntary exit incentives.  There may be one-time costs to implement these strategies.
• All full-time City employees participate in a cost-sharing multi-employer defined benefit retirement plan administered by the Public Employees Retirement Association (PERA).  The plan provides retirement, disability benefits, survivor benefits and cost-of –living adjustments to all participants.  The City elects to pay a portion of the employee’s contribution as an additional benefit.  The City might consider having the employee pay a larger portion of their contribution.
• The City self-insures employee health care benefits through a third-party administrator.  The City sets aside funds to cover anticipated costs and purchases stop-loss coverage for catastrophic or unpredictable claims.  The City might consider increasing the employee’s contribution to better reflect the increasing cost of today’s heath care.  It would be prudent to compare the cost of health care coverage from outside providers.

Other Areas for Expense Investigation

We believe the City should examine its office space, including City Hall, and other infrastructure requirements to ensure efficiency. Wherever possible, consolidation should occur. There are also several other categories in the City’s financial statements where there is not sufficient public information available for us to determine if there are expense reduction opportunities.  We suggest delving deeper into the details of the following areas: Contract Services - $20 million a year, Insurance - $28 million a year, Claims and Judgments - $22 million in 2014, Transportation - $9.6 million.

Revenue

The City of Santa Fe has many ways it can increase revenue without raising taxes. We support the following recommendations to help fund the current deficit before any tax increases are considered.

Asset sales (land, real property, water/mineral rights)

• Consideration should be given to the sale of land, real property, and water/mineral rights.  The dollar amount of deferred maintenance and current maintenance costs for City property should be considered as relating to sale of City property.  The committee understands an inventory of all city-owned land, real property, water & mineral rights is being compiled and this list can be utilized to select assets for sale.
• City needs to consider leasing land and property at current market rates and ensure all fees for such leases are being collected.
• Consideration should be given to privatizing certain Enterprise services such as solid waste management, parking, etc. The water company could pay the City a franchise fee as is common with privatized utilities.
• Suggest a restructuring of the Railyard area’s ownership and leasing structure to fee simple and possibly sell portions of the City owned Railyard property. With 96% of the Railyard property being leased, there doesn’t seem to be a viable way to increase revenue from the property in its current structure.  With mounting deferred rent and continued City bonds, changes are necessary to get this enterprise obligation on better financial footing. This restructuring might include the disbanding of the Railyard Corporation to reduce duplication of City positions and staffing overhead, and in doing so create a new property management division to professionally manage all City property assets.

GRT – Collection & Allocation

• Recommend enforcement of state law regarding GRT exemptions on sales that are shipped out of the state. Currently the City of Santa Fe may lose as much as 10-20% of GRT because a significant number of high-dollar retail sales that are purchased in-person and then shipped out of state.  A City ordinance could be put in place if the state tax department doesn’t assist with clarification and enforcement.
• Ensure collection of GRT/Lodgers tax on all short-term City rentals. The committee understands a plan is under development to ensure all GRT/Lodgers tax is collected. The plan should include checking for proper licensing of short-term rentals at the same time tax is audited.
• Recommend paying off the water bonds to free up GRT revenue for other uses to move funds away from Enterprise spending to general allocation.
• Recommend investigating GRT increases that were implemented for specific projects and remain as part of the current GRT. Request rates and dollar amounts through the past 20 years. These should be removed or clearly reallocated.

Fee collections (Water, parking, licenses)

• Water:
  • A plan to collect delinquent water bills needs to be implemented. There is an issue of 30% of water users being 90 days or more delinquent. This number is unnecessarily high since assistance is available to low-income users. We are concerned the installation of new meters is resulting in higher bills and possibly increasing the amount of delinquency due to high volume of unresolved customer billing issues.
  • An Autopay system might greatly increase the timely payments of water, sewer and refuse bills.
  • The amount of water leakage needs to be made available and addressed.

• Parking Tickets/Traffic:
  • The dollar amount of unpaid traffic citations needs to be quantified and a plan to collect delinquent citations needs to be implemented.
  • Aged tickets need to be written off and no longer considered collectable.
  • Consideration could/should be given to issuing a “cup of coffee” coupon good at local restaurants to vehicles with out-of-state license plates being ticketed.  This would appear more tourism-friendly and it is believed that restaurants would participate.
  • Review enforcement of cell phone use in cars. Can a photo station be utilized to ticket violators?

• Permits, Licenses and City Hall functions:
  • The dollar amount of unpaid license fees needs to be identified and a plan to collect delinquent fees implemented immediately.
  • Recommend technology upgrades for efficiency in applying, renewing and distributing licenses and permits. The current online renewal site needs to be updated and the number of online services expanded to include a computerized method of distributing renewal notices and online payments. This would reduce mailing costs and the long term efficiencies gained through more sophisticated consumer interface would create an expense reduction while elevating services.

• Charges for Services (Recreation, ambulance)
  • Consideration should be given to increase the fees to use City-owned recreational facilities.
  • Clarification is needed regarding whether or not charges are waived for individuals (i.e., low-income families, City staff, or others who use facilities) and if so, the dollar amount of revenue that is being lost.
  • Clarification is needed if there are unpaid ambulance use charges and if so, the dollar amount is needed and a plan implemented to collect.

Additional Revenue Thoughts:

            The costs to the City arising from commuter reimbursement and cost of use on City vehicles created by city employees living outside of city limits and using city vehicles is unknown. Is it possible to increase compensation for these commuters as a way to enable them to live in Santa Fe and not commute?

Growth

If Santa Fe is to continue to be a great place to live and work and to achieve a long-term balanced budget, it should have a clear road map and strategy to manage its growth to create opportunity for all.  This will require a strategic approach to smart growth including environmental considerations, regional partnerships, embracing new technology and creating a culture of accountability with stakeholder consensus.  Government should focus primarily on the critical tasks that are the foundation of a strong and safe community - economic opportunity, infrastructure and protective services.  A healthy sustainable rate of growth would be 1.5%-2%, or about 400 new housing units a year.

Smart growth and appropriate economic development should be a priority for the Council in both the short- and long-terms.  Growth creates GRT which pays for city staff and services.  Support and resources to grow local businesses help to create career opportunities and a prosperous community.  We are suggesting both short- and long-term goals.  Some of these initiatives are already moving forward and we strongly support their continued momentum.

Short-term – 12 month horizon

• Create a clear plan and map of suitable areas designated for growth and infill using existing roads and infrastructure – St. Michael’s Dr., South Meadows, Railyard, Mutt Nelson Rd., Airport Business District, etc.
• Adequately fund immediate improvements at Santa Fe Airport for the convenience of existing fliers and to enable recruitment of additional carriers and encourage Fly Local.
• The construction industry has been hit hardest by the recession.  We support the reduction of impact fees to stimulate the construction industry, GRT, and job creation.
• We support the Mayor’s effort to refocus the Santa Fe Homes program to build more workforce housing by waiving fees, simplifying water requirements, and fast-tracking approvals.
• The City can qualify for State of New Mexico LEDA closing funds which are available for suitable projects and should be leveraged.
• Whenever possible, economic development staff should have business experience.
• We believe that improved communications with local and regional economic development partners can help grow the local economy and generate GRT.
• Take steps to attract future retirees with means to Santa Fe.  Leverage assets such as low property tax, reasonable home prices, our reputation as a healing and healthcare destination, affordable recreation, arts, climate, and quality of life.

Long-term – 3-5 year horizon

• Lobby at state and federal levels to impose a modest GRT (2%?) on online sales in Santa Fe.
• Advocate and fund the ten year Master Plan for the Santa Fe Airport including the reinforcement of the runway to allow for more frequent large plane landings.
• Expand local “business incubation” resources with a second location/microlab with access to broadband, perhaps at the Railyard.
• Revisit the Railyard Master Plan to ensure the property is economically self-sustainable and working for the benefit of the community-at-large.
• Explore possible partnerships with local institutions such as Santa Fe Institute/LANL/RDC/UNM re: mutual goals for growth and job/career creation.
• Explore best possible options and uses for City-owned land and assets.

A growing economy creates tax revenue for local government to provide services and infrastructure for residents, and also creates opportunity to find a career, raise a family, be educated, and enjoy prosperity.  Crime and other social problems are directly linked to a lack of opportunity, lack of aspiration, and inability to find meaningful work.  Our community must grow, and the City has the opportunity to shape this growth by making smart decisions for the benefit of all.

Structural Issues for the City of Santa Fe Budget Review

City management and operational procedures have developed over decades. Various city planning consultancies are now incorporating more robust analytics for City performance alternatives which help evaluate and implement alternative strategies. These are available to Santa Fe as we consider our options for being a 21^st Century city.  Our focus as a subcommittee was on the larger structural approaches and/or policies which might be adopted as part of a balanced and thoughtful budget review process.  Most of the items require significant analysis, and perhaps the introduction of new technology, which is beyond the scope of this document but which could impact the bottom line of the City, if not immediately, then medium-term. 

Enterprises – The City appears to use Enterprises more extensively than other cities.  This may be appropriate, however, to the extent that the Enterprises themselves are not returning revenue adequate to cover their expenses, the committee focused upon strategies for realigning the relationship, or even divesting part or all of the Enterprises and letting the private sector address the mismatch.

Water Enterprise:  In 2014 there was a $3.5 million operating loss (revenues do not cover operating expenses).  This is contrary to the perception in the public.  It is possible that the “more accurate” new metering will increase revenues adequately to address this shortfall, however, if not, adjusting rates may be warranted.  GRT should not be used to close the deficit, even though it was used to enhance the bond rating.

Transit Bus System:  The $8.5 million operating deficit reflects an approximately 10% fare box coverage of expenses.  This is unsustainably low.  It is possible (probable) that Santa Fe could radically change its transit modalities by incorporating jitneys, share cars, and bike sharing.  Would a public-private partnership or a private sector partner be able to improve service (even to tourists) and lower or eliminate the deficit? Ridership numbers should be used to adjust the scope of service to a more balanced level even if profitability can’t be achieved.

Parking:  At this point, the parking revenues barely cover the cost of collecting the parking fees.  Other than attempting to maintain short-term parking throughout the central area, operating the parking enterprise almost does not seem justified.  Are there less expensive metering approaches?  Is this a service that could be “profitably” privatized?

Environmental Services/Solid Waste:  While marginally profitable on an operating basis, this is an area that is often commercially attractive to companies who are experts in the management of both recyclable and disposable waste.   Ongoing evaluation of privatization options is warranted. 

Railyard Property:  The possibility of selling this asset has been addressed in another section. Long-term public commitments can be accomplished through deed restrictions and access to financing may be enhanced if the land and buildings are not owned separately.

Overhead:  Management overhead in the City is estimated at 10%.  Even if only one-half of that burden could be eliminated in the event of privatization, there should be some expectation of savings associated with paring down the government -run Enterprises.

Other Structural Considerations:

Funds:  Radically reducing the use of special funds within City operations would help transparency and cash management, and should improve budgetary controls.  The acquisition and installation of the new OpenGov.com platform is commendable and may also assist in streamlining the use of funds to “carry-over” allocations that have not been budgeted in succeeding years.

Internal Debt Management:  We recommend exploring ways that the City can fund more of its own debt in an effort to reduce the negative interest margin reflected in the substantial amount of invested cash. Even if just $100 million of the City’s cash were used to pay down existing bonds or fund new projects in lieu of external debt, the savings could be $2-3 million per year, just in the spread between the City’s cash investment rates and borrowing rates. 

Training:  Using outside support to train staff (and citizens) on “best practices” will be necessary as “business as usual” is replaced by best practices.  Specifically, seek professional support for the Finance Committee/Council which can provide recommendations and guidance on financial policy, practices, and ongoing operations.

Public – Private Partnerships:  To the extent possible (and perhaps with an expert on the Anti-Donation Laws of New Mexico), consider ways to use Tax Increment Financing, crowd funding, and City-owned property to accelerate or instigate strategic objectives of the City without putting additional pressure on the budget. 

GRT vs. Other Taxation:  The GRT is inherently regressive and corresponds with the economic cycles, exacerbating the City’s finances precisely when the City needs to invest more in the community.  Increasing alternative taxation should be done in conjunction with lowering the GRT burden in order to not stifle economic activity. 

Regional Efficiencies:  Wherever possible look for efficiencies that can be obtained through City-County collaboration or even merging of certain services or functions.  San Francisco, Denver, and Sitka are examples, among many others, where substantial consolidation has been used to help rationalize overlapping jurisdictions.  In some instances both the powers of a City and County have been maintained. We believe the time is right to begin conversations about merging City and County operations such as HR, technology, accounting and transportation.  

Potential Medium to Long- Term Annual Budget Impacts: 

In general, these estimates are little more than wild guesses of the potential budgetary impact, however, they reflect a possible dollar range benefit of these recommendations.  We hope there will be a further discussion on many of the points contained within this report.  We support City Leadership in their pursuit to balance city finances. In doing so we hope Santa Fe will also seize the opportunity to structurally alter the way the City delivers services to better serve the constituents in addition to mitigating budget shortfalls.

Useful Resources

University of Pittsburg – Fiscal Policy and Governance Report

http://www.iop.pitt.edu/documents/Key%20Challenges%20and%20Strategies%20for%20Local%20Governments.pdf

United States Environmental Protection Agency Guide to Smart Growth

http://www.epa.gov/sites/production/files/2014-06/documents/sg-and-economic-success-for-governments.pdf

Santa Fe Chamber of Commerce list of local statistical analyses and reports

https://santafenmcoc.wliinc24.com/news/newsarticledisplay.aspx?ArticleID=209

Thank you to the committee members (and unnamed others) who devoted hours, experience and wisdom in support of this project:

Carl Luff – White and Luff Financial

Charlie Goodman - Kokopelli Property Management

Colin Keegan – Santa Fe Spirits

Ellen Marshall – Marshall Rose and Assoc.

Jeff Gruber – J N Gruber Group

Justin Greene – Dashing Delivery

Kim Shanahan – Santa Fe Area Homebuilders Assoc.

Liz Serendip – Southwestern Title and Escrow

Marc Tupler – Santa Fe Trust

Pat Murray – First National Santa Fe

Richard Robinson – CPA

Rick Berardinelli - Berardinelli Funeral Services

Simon Brackley – Santa Fe Chamber of Commerce

Tory Bloodworth – First National Santa Fe

Wayne Nichols – Nichols Agency