No good news for Vero Council on 2011 budget
There is very little good news for residents as Vero Beach enters the next budget cycle, where it is under pressure to consolidate utility systems, cut skyrocketing employee pension costs and trim staffing to levels it can actually sustain.
At its quarterly “special call meeting” Monday, with an agenda full of every controversial issue facing the city, the council took little action but got the bad news full force:
*Pensions will need to be revamped as the city is spending more on them than revenues will bear – and already the unions are flinching.
*Costs for health benefits are also on the rise, prompting Councilman Sabe Abell to resurrect the little researched, and widely panned, option of an employee health clinic.
*An effort the Council dreads – laying off employees -- will surely have to be addressed. Vero has bloated staffing levels, with 22 employees per 1,000 residents – far more than any other Florida city its size.
Ultimately, Monday’s meeting was one of taking baby steps toward June, when the tough decisions will have to be made on a final budget by a council that will have four seats up for grabs in November.
Under pressure to consolidate utility systems with the county, the Council approved a smaller rate hike to water and sewer bills than it had approved late last year. The vote came down 3 - 2 with Councilmen Ken Daige and Brian Heady voting against the measure because they opposed any further increases in utility rates.
Heady pointed to the nearly 60 percent increase projected for city water and sewer rates over the next five years, which is putting the city utility in the precarious position of possibly losing nearly 40 percent of its customer base – those who live outside city limite -- by 2017.
“I think if the rates were in line, we wouldn’t have county residents ready to bolt the minute the franchise agreements are up,” Heady said.
Looking to the future, Heady warned his fellow council members -- and anyone else who would listen -- that City of Vero Beach taxpayers will be left holding the tab if county and Indian River Shores customers leave the system in search of stable and affordable rates.
“If we keep raising to the point where the county customers bolt, we’re going to leave the debt to a smaller group, to the city taxpayers,” he said, referring to all the debt service payments on the city’s capital investments to build, maintain and improve the system, including payments on the $11 million deep-well injection plant currently being built at the airport.
“I have a hard time voting for anything that places the debt on my grandchildren or places the debt on a smaller group of people.”
Originally, water rates were set to go up 7.5 percent and sewer rates 29.5 percent last October. To cushion the blow, the city split the difference, passing a phased-in 18 percent increase on October 1, coupled with another 18 percent on April 1, which, staff projected, would shake out to what it needed to balance the budget over a year’s time.
Customers have been paying the first step of the sewer rate hike, along with higher rates for drinking water, for six months now, but the second half of the sewer increase will now only be about 10 percent of the total bill.
The revised increase raises the rate from $2.93 to $3.59 per 1,000 gallons, instead of the $4.06 per 1,000 which was scheduled. Water and sewer director Rob Bolton said that, instead of the scheduled $6.78 increase, typical water and sewer customers using 6,000 gallons (or 6 kgal as it’s listed on the bill) of service would see an increase of $3.96 per month.
To offset the loss of revenue, the city has eliminated six positions from the water and sewer department, trimmed capital expenditures and figured in delayed payments on debt service budgeted for the current year but not due until next year. About 87 percent of the operating costs of running the system are fixed, making it tricky to drastically reduce costs over the short term.
The good news is that the water and sewer system, which ran in the red most of the prior fiscal year, is now scheduled to actually have some operating cash on hand. The number of days’ operating cash on hand is one factor used in determining the fiscal health of a utility.
At the same meeting the council got status reports and projections on pension and health benefit costs for the current and coming years.
In 2010, the City of Vero Beach will contribute about $4.6 million toward underfunded city employee and police pensions. In 2011, if no changes are made to the plan, that contribution is projected to rise to about $5 million.
Finance Committee member Pilar Turner spoke during public comment, seeking to put these costs into perspective in terms of the city’s revenue stream.
“Our ad valorem (real estate) tax revenue for this year is around $4.6 million,” she said. “Keep that in light that pension costs are $4.3 million for a year and healthcare costs are $5.5 million for a year.”
The city’s contributions, as a percentage of payroll, have increased and are expected to increase for at least the next two years, provided that the stock market remains steady, allowing equities to recover.
The city’s defined benefit plan assumes an 8 percent rate of return on investments over a 10-year period and the average rate of return over the past five years has not even come close to that, hovering somewhere between 1 and 4 percent.
This has resulted in steadily increasing contributions by the city and the fund being about 22 percent unfunded as to future liabilities.
“The rates of return I don’t think are feasible,” said Vice Mayor Sabe Abell. “I can just tell you that I don’t have anything like a defined benefit plan, but I do know that the market is down 15 to 20 percent from high and was down 30 percent for people with even conservative retirement plans,” he said.
“Something has to be done,” Abell said. “Defined benefit plan is not possible.”
Vero resident Richard Winger also spoke in support of changing the plan.
“I agree with the vice mayor’s comments, you’re not going to be able to maintain a defined benefit plan, it’s impossible,” said Winger.
The alternative to defined benefit is a defined contribution plan, where the employer contributes a certain amount per year, and the employee also contributes and accepts the risk of those funds going up or down in market value prior to their retirement.
Under the current defined benefit plan, general employees contribute 2.25 percent of their salaries and the city makes up whatever the difference is to achieve the defined benefit.
To back up his position that the city needs to change its plan, Abell quoted an expert study stating that defined benefit plans are “almost impossible to support.”
The actuary will come back with options for the council in June, which can be incorporated into the 2010- 2011 budget in July.
The city is also reviewing various options of getting the cost of employee health benefits under control. The proposal on the table is for the city to support a base health plan, with the employees having the ability to choose and pay for upgrades to the base plan. A formal proposal with firmer cost estimates is expected at the June quarterly budget review.
“We’ve targeted, we’re trying to find $1 million,” said Gabbard. “When the issue of the (proposed employee health) clinics went by the wayside, we knew we had to do something.”
Any change in employee pension or health benefits would need to be negotiated with the Teamsters local union, and Teamsters representative Steve Myers said that employees already on 5 percent furloughs cannot afford to have more taken out of their paychecks to fund pensions or health premiums.
In the current year, the Teamsters negotiated a deal to accept furloughs in exchange for the city picking up a 14 percent increase in healthcare costs for union employees.
“I would object to and I’m going to object to any employee increase in contributions,” Myers said. “Employees have agreed to sacrifice and continue to sacrifice taking furlough days. There’s no way the employees can sustain their way of living with all these reductions.”
Local resident Joseph Guffanti, wearing a Communication Workers of America union t-shirt, respectfully disagreed.
“I don’t want to see them lose their jobs, but the people are hurting,” Guffanti said.
Guffanti said that city employees can’t be immune to the economic suffering being experienced by the people who are paying their salaries through their taxes and utility bills. “Some of that hurting has to be shared,” Guffanti said.
Abell then told the Council he thinks a city-run health clinic for municipal employees is still a viable option.
“With the health plan, I think there are other options, and I still haven’t given up on the option of the clinic situation where we can save $250,000,” Abell said.
The City of Vero Beach started out the year with a budget calling for 508 full-time and 41 part-time employee. Actual employment as of Monday was 483 full-time and 25 part-time employees.
The actuary reminded the Council that, despite recent efforts to begin to trim the number of employees, the city’s payroll keeps growing, that it increased by $2.3 million in one year recently on a chart he was presenting at the meeting. He said those increases in payroll alone accounted for $280,000 in pension contributions this year.
Mayor Kevin Sawnick, who floated an idea last month that the city should plan for a 10 percent reduction in staffing next year, asked the Council to bring forth cost-cutting ideas and started the discussion with a few of his own.
Sawnick said he is researching what it would cost to have a “functional capacity evaluation” of the city staff to determine if the taxpayers are getting their money’s worth from every employee.
“I know the city gets some flack from people about the staffing levels,” Sawnick said. “I think we need to have someone come in to look at our staffing levels and to look at certain positions.”
Secondly, he suggested resurrecting and revamping a long-defunct program that the city used to have, which provided economic incentives to employees who offer tangible ways to cut the budget in their own city departments.
“I’m confident that employees are always looking for ways to save on the budget but sometimes it helps to have a monetary incentive,” Sawnick said.
Thirdly, Sawnick said he wanted the staff and council to take a hard look at changing or reducing the amount of money the city transfers into the general fund from utility receipts.
“Hopefully we can come up with some good ideas to make everyone happy,” Sawnick said, adding that he was optimistic about finding ways to make cuts internally and maintain an optimum level of service to residents.
“No crazy idea should he left out,” Sawnick said.
Former Councilman Charlie Wilson reminded members of the Council that he intends to have a referendum placed on the ballot that would amend the city charter, disallowing an electric utility as a permitted city function.
“One of the questions that perhaps you should ask yourselves, is what the result would be, what the impact would be of dissolving the department that operates the electric utility?” Wilson said.
Wilson cited an example of a deal brokered by the City of St. Cloud in which the Orlando Utilities Commission took over all of its employees and, after a period of time, its pension liabilities.
“You may want to consider that in your deliberations,” Wilson said, urging the Council to have the actuary crunch numbers which would take this into account.
The Council members had no comments on Wilson’s reference to the referendum.
Sawnick asked his fellow officials to take everything they had heard and received into consideration, and come back in June to set policies that will determine how the city crafts its budget going forward.
“You’ve given us a lot of homework to do between now and our next budget hearing,” Council member Tom White said. “We can really cut some corners next year and still bring the quality of life that we’re used to.”