Oakland’s Annual Budget Deliberations Start – Can Oakland Finally Establish A Rainy Day Fund?

In 1996, Oakland established financial policies intended to bring sound financial practices to the City’s budgeting process.  Specifically, the policies required the City to maintain a reserve against disasters of 7.5% of the general purpose fund.  The policies also were designed to avoid the spending of one-time revenues on recurring expenses.  Why?  Because ongoing expenses are just that – ongoing. When they come due again the next year, one-time revenue won’t be there to pay for them anymore.  For this reason, Oakland’s financial policy since 1996 has limited the City’s ability to spend one-time revenues on recurring expenses without declaring a fiscal emergency.

In particular, the policy has limited the City’s ability to spend more than $40 million in Real Estate Transfer Tax (“RETT”) revenue for ongoing expenses.  This policy recognizes that the excess RETT – a percentage tax on real estate sales – is one of the most volatile and undependable revenue sources, and should be treated as one-time revenue.  Instead, under the policy, excess RETT was to be devoted to increasing reserves, paying pension obligations and repaying negative fund balances.

In October, 2012 and again in June, 2013, the City Council relaxed that policy, making it easier to access one-time revenues for recurring expense.  And now, it seems on the verge of doing so again, eliminating the “fiscal emergency” requirement and allowing the City to spend most, if not all, of the excess RETT revenue, whether one-time or recurring.  Mayor Quan has asked the Council to approve using $20 million of one-time revenues to pay for on-going expenses and to loosen the definition of what constitutes “excess” RETT.

We think modifying the policy is a bad idea, and, in particular, that City Council should not be modifying its financial policies during budget discussions, when Council’s perceived need for extra funds will always trump its motivation to exercise financial prudence.  But passage of some kind of a relaxation of the current policy seems like a sure thing regardless of what we think about it.  So we believe, at a minimum, that Council should adopt the current proposal to couple the policy modification with the start of a rainy day fund policy.

Here’s the short version of what’s happening:  The fiscal year 2014-15 budget Council passed last year had revenues and expenses of $459.87 million in the general purpose fund (the part of the budget where the City has the most discretion over spending) and $1,090.12 billion in the “all funds” budget.  The City is now projecting that general purpose fund revenue is going to be about $30 million more than expected, and revenue from the other funds about $25 million more.  Because much of the spending from other funds is restricted, the city’s focus, as usual, is on the general purpose fund.

But there are two problems with the increased revenue in the general purpose fund.  The first is that much of the money is already spent.  The City has already committed to spend more than $13.5 million on unbudgeted cost of living expenses for civilian employees, new “smart” parking meters, debt service for long-overdue IT services upgrades and more. And the City is obligated to make a large transfer to the voter mandated “Kids First!” set-aside, a match of the Federal “COPS” grant paying for police officers and a further transfer to its reserve account. The budget office is recommending $6.4 million in “revenue and technical expenditure adjustments” – basically, corrections of mistaken assumptions in the original budget.  Add in unbudgeted police academy costs (essential to keep the police department from shrinking even more), Shotspotter renewal and expansion, a more realistic budgeting of police overtime (much of it to make up for the 25% to 35% understaffing of the department) animal shelter reconfiguration, and a variety of other items, and the $30 million disappears pretty quickly.

The second problem is this:  most of the increased revenue is one-time revenue.  Most of the increased costs will be recurring. This once again leaves the administration and Council looking for ways to imprudently spend one-time revenues on recurring expenses.

Apparently recognizing that Council is going to pass some modification of the policy, Council Member Schaaf has sought to couple that modification with the first steps toward a “Rainy Day Fund” to protect Oakland against the next economic downturn. Her plan is quite modest, with these elements:

  • Sets aside 25% of projected Excess Real Estate Transfer Tax in each budget;
  • Sets aside 50% of any year-end surplus following the audit each year;
  • Half of this annual set-aside goes to immediate pay down of the most pressing unfunded liabilities or debt;
  • Half of this annual set-aside goes to a Stabilization Reserve (the “Rainy Day Fund”), only to be used to save services in years when revenues have declined.

This is a good starting point, but only that.  Both Make Oakland Better Now! and Oakland’s Budget Advisory Committee have advocated for a strong, rules-based, Rainy Day Fund provision in the City Charter.  Placing the requirement in the Charter ensures the City Council can’t amend the policy every year when it wants to spend the money.  And studies have shown that a strict rules-based Rainy Day Fund provision, is the only kind that works.

In 2011, Oakland’s Budget Advisory Committee recommended a much more aggressive Rainy Day Fund provision.  Specifically, the BAC proposed that when the City’s revenue grows by more than 3% over the previous year, half of the excess be paid into a RDF. Using Budget Office data, the BAC estimated that, had the City adopted this policy in the 1990s, Oakland could have completely avoided the 2007-2010 layoffs and loss of services by dipping into the accrued fund:

Screenshot 2014-06-09 at 5.42.01 AM

Make Oakland Better Now! supported a similar proposal.

One thing we know for certain about the future is that there will be other financial downturns.  Council Member Schaaf’s Rainy Day Fund proposal is a starting point for a system to reduce or eliminate the impact of future recessions.  But Council should proceed to evaluate, present to the voters and implement a full-blown, City Charter- based Rainy Day Fund that will protect us from economic downturns for generations to come.

This subject comes to Council’s Finance and Management Committee on Tuesday, June 10 at 9:15 a.m., and will likely come to Council for special meetings the evenings of June 24 and July 1 when Council is expected to modify the 2014-15 budget. Reports for this Tuesday’s Finance and Management Committee meeting are here, here and here.


Make Oakland Better Now!

OakTalk Here is the blog of Make Oakland Better Now!, an Oakland community grassroots group of a grass-roots group of voters, volunteers, and policy advocates committed to improving the City of Oakland by focusing on public safety, public works, and responsible budgets. Founded in 2003, we’ve researched, lobbied, and successfully campaigned for a number of new, impactful policies, including the city’s Rainy Day Fund, Measure Z and Operation Ceasefire.

This Post Has 12 Comments

  1. jimdexter

    Good Morning MOBN,

    It is the logic that disturbs me:

    It is a bad idea to commit murder, but if we commit murder, we also believe that we should stockpile our murder weapons so that the murder can be done efficiently.



  2. Mr. Grumps

    This piece far too ideologically neoliberal/Republicrat. Also analysis of one-time costs vs ongoing costs superficial and counterproductive.

    Getting OPD up to appropriate staffing level, adding police resources to support full crime investigation capacity, steps to improve police morale and even establishing a police commission office to manage OPD competently are all one-time costs to be funded in whatever expeditious manner.

    Such one-time investment costs, if well-managed (implying a police commission or other such office or individual to remove Council and Mayor from immediate oversight),would reduce high ongoing costs due to excessive low-morale turnover (50 to 60 cops a year or the output of a couple of police academies), high overtime costs (which make annual tab for too many cops at $200K per cop), high rate (75%) of expensive disability retirements and so on.

    Any of you folks ever had a real private-sector job in management?

  3. Mr. Grumps

    I neglected to mention the potential ongoing financial benefit to Oakland if crime is reduced to same level as nation as a whole. This would change the entire financial environment of the city for the better. More money for support of dysfunctional families and for the schools that teach their children. More jobs for those without. Well-worth a substantial one-time investment.

  4. Knowsbetter

    I don’t see City Council ever not spending money. And I don’t see any City Managers or Mayors cleaning house of overpriced, non-qualified Nepots and Crones. Alas Oakland, you survive despite woeful levels of mismanagement. If the Port assets were not on the books, we could have fixed this place by now via Bankruptcy.

  5. Do right by our city

    I agree with Mr. Grumps, except what is a neoliberal/Republicrat? If i know what this is, I may (or may not) want to add it to my vocabulary. I also agree with Knowsbetter. Get those awful people out of office who are mismanaging our city; and get in more police! I recommend that all Oaklanders pay attention and vote in a good mayor for a change; someone who is not already “inside.”
    It’s time to clean house, but only with someone who has good, concrete plans. There is one good candidate. Please everyone, figure it out!

  6. Mr. Grumps

    Neoliberal/Republicrat: Corporate Dems, Republicans for whom the first duty of government is “proper” financial management, avoiding debt, limiting taxes etc.

    1. Scott Law

      All of the costs you list here are ongoing expenses, not one time.

      “Getting OPD up to appropriate staffing level, adding police resources to support full crime investigation capacity, steps to improve police morale and even establishing a police commission office to manage OPD competently are all one-time costs to be funded in whatever expeditious manner.”


      And yes, as do right by our city writes,: “It’s time to clean house, but only with someone who has good, concrete plans. There is one good candidate. Please everyone, figure it out!”

  7. Former BACer

    To Jim:
    Wisdom is understanding what you can change and what you cannot, focusing on the former and not wasting your energy on the latter. The watering down of the financial policy is likely inevitable — Oakland does it every time there’s budget strain. The only way that cycle will change is if the financial policy is insulated from politically-motivated, short-term decision-making, which a charter amendment would accomplish.

  8. Former BACer

    To Grumps:
    Appropriate choice of name… And funny you’d accuse the post of being illogical when your main argument is … an ad hominem. (An RDF is “Republicrat?” Well thank my stars, I guess no one told that to Gov. Jerry Brown, the main proponent of an RDF in California…)

    As far as I understand your actual argument, it seems to be that one-time funds should be spent on public safety, fiscal stability be damned. I have good news, we don’t have to speculate on what your policy would produce because we experienced it. Dellums tried your approach — he took RETT money and hired as many officers as possible getting us to 800+ officers for a few months… which was followed a few more months later by the biggest layoff of police officers (80!) in Oakland’s history. The end of Dellums term left OPD broken and at some of the lowest staffing levels in its history.

    RDFs do three things, and very well: (1) they smooth revenue cycles, making budgeting more predictable; (2) they help cities avoid or better weather economic downturns (and the economy is cyclic, these happen frequently); and (3) by setting aside some revenue in high growth years they prevent cities from (unwisely and unsustainably) budgeting at the peak of the revenue cycle.

    What does this all mean? In the short term Oakland spends less, but in the long term the services and programs (and yes police officers) Oakland provides will be there in the tough economic times, when they are most needed.

  9. Mr. Grumps

    Jerry Brown is, of necessity, a Corporate Democrat and a financial hawk. He has to be such as a practical matter in this political environment.

    I understand well the argument for an RDF and support such when instituted at an appropriate time. I just think that Oakland is not in a position right now to make financial circumspection the fundamental goal of governance. The first goal is to get Oakland moving forward by investing in structural change in how city hall deals with Oakland’s crime and other socioeconomic problems. Once such progress is underway city hall finance should improve and long-term financial obligation imbalances can be fully addressed. Without dealing with Oakland’s essential social and economic problems, financial vitality will never come.

    And, yes, basic restructuring of how city hall deals with public safety and related problems is a one-time investment. Maintenance of the restructuring is ongoing expense. As I pointed out ongoing expenses will be much reduced as a result of one-time restructuring. Ongoing expense reductions will come from: less OPD turnover; far less retirement disability payment; far less overtime payments; less economic “friction” due to crime; increased city revenues due to economic growth made possible by reducing crime and resulting social dysfunction.

  10. Ryan

    “$1,090.12 billion in the “all funds” budget”? I seriously doubt that. I assume you mean either $1.09 billion or $1,090.12 MILLION.

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