Aide To Aldermen: In The Soup

Chief of Staff Jeff Rainford addressed the aldermanic Ways & Means committee this morning. Here is what he was prepared to say:

State and local governments across the country are facing a one-two-three punch: declining revenues because of the global recession, declining state aid because they have their own budget problems, and increased pension obligations because of the stock market crash last year.

California, Illinois, and Nevada face budget shortfalls that are approaching 50%. Many large cities face budget shortfalls between 10 and 20%.

St. Louis is no exception. Based on first quarter collections, the City’s Budget Division expects revenues to come in close to 5% lower than last year. (By comparison, the State of Missouri’s revenues are tracking to go down by double that.)

Although the three employee pension funds won’t formally provide City government with their funding requirements for several months, we expect their costs to go up very significantly next year.

That means City government will face a budget shortfall in the current fiscal year that will approach $20-million, about 5%. It means the budget shortfall in the next fiscal year could top $40-million, which is about 9%.

It doesn’t end there. If the City cannot control its pension costs, we will face shortfalls approaching an additional 7% over the succeeding four years.

That means if nothing is done about the pensions, and everything else goes right, we would be looking at budget shortfalls of more than 15% over the next five years.

So, how did we get here?

In this decade, the City budget—not counting the airport and water division-- has grown from $376-million to $520-million. That is almost a 40% increase.

We have added new initiatives. Dedicated money for health care, building demolition, affordable housing, recreation centers, and crime prevention.

But, a lot of the new money has gone into the rising cost of pensions and health care. During this decade, the cost has grown from $18-million to $75-million, a more than 400% increase.

The combination of the rising costs of benefits, spending on new initiatives, and general inflation has meant the core operating budget has almost been stagnant. That has required us to tighten our belts. The number of general fund employees has dropped from 6,200 to 5,550.

Here is another way of looking at it. In 2000, the average total compensation per employee cost City government $43,000. Today, we are spending about $68,000 per employee—an increase of 36%. Unfortunately, our employees probably don’t know that… because the increased costs have gone to rising pension and health care costs, instead of pay raises.

What happened with the pensions? During the 1990s, the stock market was hot, and the three systems had surpluses. So, the trustees convinced lawmakers to increase the benefits. Then, in 2000, the stock market crashed when the technology bubble burst.

Very quickly, the three systems went from having large surpluses to large unfunded liabilities. The City’s costs went from about $7-million to year, to more than $60-million per year. Along the way, the City raised the sales tax and borrowed and allocated $145-million to the three systems. We got caught up.

Just as we got caught up, the stock market crashed again. Collectively, in the last two years, the three systems lost close to $500-million. So, we are in the soup again.

By our estimates—and they are only estimates—we expect that if we cannot control the costs of our pensions, they will rise from $61.5-million in the current fiscal year to more than $100-million five years from now.

As for our tax collections, we actually are faring better than the State of Missouri, and better than many of our peer cities. However, we expect our revenues to go down by almost 5% in the current fiscal year. That would make this the worst fiscal picture for the City since the early’80s when Vince Schoemehl laid off thousands of employees.

Because we have already tightened our belts, we have already used up most of the easy ways to cut the budget. That means cutting the budget gap will be very hard. We think if we do across the board cuts, we will reduce the effectiveness of every service we provide to the taxpayers—including important public safety services.

Instead, we think we need to decide what the core functions of City government should be, do our best to protect them, and eliminate spending that does not address our core mission. Government as we know it is going to change.

It will take dozens of ideas. Every single one of them will have strong opposition. Someone will have a very good argument against every idea. So, it will be tough.

So, what’s next. First, we have to address the current fiscal year. That means approving a pay bill, and closing the expected gap in the current fiscal year. We think that will be about $20-million.

As we are doing those two things, we have to develop a plan to address the $40-million shortfall expected in next year’s budget. We expect to come to you in early January with a menu of ideas. After you give us your input, we will begin implementing the best ideas right away.

Of course, there will be overlap. Cutting this year’s operating budget will help us with the shortfall next year.

To get through these tough times, we have been and will continue to defer capital maintenance, including replacing vitally needed rolling stock. At some point soon, we are going to have to address that.

Paul Payne is going to go over the options for the current fiscal year. He would welcome your input on that. We would welcome your ideas to address the problem for both this year and next year.

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