City Council Dips into Reserves to Balance Budget

By Stephen C. Smith
Irvine Tattler Publisher
Posted June 23, 2008

All Five Council Members Vote for Budget,
But Differ Whether to Control Spending

Councilman Steven Choi said that “everyone wants to keep on spending, and nobody wants to cut.” (Photo Source: City of Irvine)

The Irvine City Council unanimously adopted its 2008-2009 fiscal year budget on June 10, but that's where the unanimity ended.

The three-member council majority — Mayor Beth Krom, and Councilmen Larry Agran and Sukhee Kang — argued that no consideration of fiscal restraint was necessary, even though expenditures are projected to exceed revenues by $7.8 million. They supported dipping into the Contingency Reserve, a fund created for natural disasters and severe economic downturns, to help balance the budget.

Councilman Steven Choi and Councilwoman Christina Shea, the two-member council minority, expressed concern that expenditure reductions were not considered, as required by economic policies enacted by a prior City Council in 1987.

“It's a matter of philosophy,” Choi said during deliberations. “We can try to maintain current service levels without any tightening of our belts, even though we do have at this time sufficient contingency funds. It would have been to me more ideal if the budget could have been designed to have the best cuts without too much noticeable sacrifices in critical service areas. I don't hear any such effort at all. We're simply dipping into the contingency fund, hoping that as the years go by the economy will recover pretty soon.”

Choi cited the 1987 policy which stated, “The City will pay for all current year expenditures with current year revenues.”

“That is the principle that our prior Council members have set up,” Choi said. He noted the “luxury” of the contingency fund currently having about $24 million before using it to balance the proposed budget, calling that achievement “admirable,” but compared Irvine's deficit spending to the State of California's current budget crisis. “Everyone wants to keep on spending,” he said, “and nobody wants to cut. Expend, expend, expend — without regard of the ability to secure enough revenue.”

Agran accused Choi of attacking city staff and challenged him — as the hour approached 1 A.M. — to start recommending specific budget cuts.

Choi responded by suggesting the council members begin by symbolically foregoing a $80/month increase in the $800/month stipend they receive for serving on the City Council. “That would be one small step,” Choi said.

Agran ridiculed the proposal. “This is the kind of nonsense that you get from people who want to do things that are symbolic,” Agran said. He then claimed it would be extremely costly to implement the reduction, that it would require the expenditure of attorney fees to rewrite a city ordinance so that they could forego their salary increase.

Choi's motion failed 4-1, although Shea told him, “At least you're making an effort to cut whereever you can.”

Agran: More Free Bus Rides

Agran made his own symbolic gesture, but it was to increase the deficit, not lower it.

Citing the current high gasoline costs, Agran proposed extending free rides on the IBC Shuttle “through the end of the year.”

“It seems to me that with the crisis in gasoline prices, with the dramatic changes that are taking place, with the fact that we want to get people acculturated to using the Shuttle service with the train service as well, that we would be well-advised to continue the free service on the Shuttle buses through the end of the year and see if we can build up ridership to several thousand a day,” Agran said. “And if we do that, what we have projected in terms of revenue would come on line. If we have just a few hundred [riders], then we'll be disappointed.”

But Agran's proposal ignored several basic economic realities:

• People who ride a bus for free aren't necessarily going to ride a bus when it costs money.
  
  
• Adding more riders will increase wear on the vehicles, and more weight will reduce gas mileage.
  
  
• The expenditures estimated last November could not foreseen the radical increase in fuel costs the last few months.
  
  
• Agran's proposal would forego the projected farebox revenue, which for the fiscal year is $132,000.

The Irvine Tattler reported on May 17 that according to staff reports the Shuttle will average about 800 riders per day, and require a subsidy from the General Fund of $1.2 million. Do the math, and it works out a subsidy of $1,500 per rider for the fiscal year. Those cost estimates were before the recent exorbitant increases in fuel prices.

Agran defended his refusal to consider any budget cuts, comparing his philosophy to “Ever-Normal” programs during the Eisenhower Administration.

“We stand ready to deploy the reserves as needed, to construct what I call an "Ever-Normal" budget,” Agran said. “We want to have a very stable budget and fiscal policy, so by creating and deploying reserves as needed, contingency reserves, we can maintain services at their current level and indeed continue to qualitatitively and otherwise improve services modestly, year-by-year, and we can do so without raising taxes.”

When a Policy is Not a Policy

Choi's evocation of the 1987 Comprehensive Financial Policies was dismissed by City Manager Sean Joyce, who claimed that action taken in 2005 by the City Council “replaced” the 1987 policies.

A review of the November 22, 2005 City Council meeting video online through the City's web site shows that isn't true.

During that meeting, the council considered a proposal to modify the 1987 policies, not to replace them. The council approved renaming the Reserve of Economic Uncertainties to the Contingency Reserve, increased the reserve from 5.5% of General Fund expenditures to 15%, and expanded the circumstances under which the council could use the reserve. City Manager Joyce at the time described these as an “amendment” to existing policy, not a replacement. Councilman Agran described it as an “expanded scope more suitable to our needs.”

The 2005 action did not revoke the principle that, “The City will pay for all current year expenditures with current year revenues.” It did not revoke the rule that, “These monies shall not be considered available for compensation adjustments, increases in staff or services levels.” It did not revoke the requirement that, “Funds in this reserve shall be expended only after expenditure reduction programs and other available sources of revenue have been considered.”

$3 million of the shortfall is for anticipated employee compensation increases after new contracts are negotiated later this year. The 1987 policy, which was not revoked in 2005, stated that the reserve could not be used for compensation adjustments.

Although the city manager's June 10 opening remarks claimed that service levels had not been reduced and in fact some had been enhanced, questioning by Councilwoman Shea determined that in fact several staff positions were going unfilled and $2.4 miilion in Community Development contracts had been delayed or completed. So the 1987 requirement that expenditure reduction programs be considered was honored.

The November 2005 video is also enlightening given Councilman Kang's May 17 proposals to subsidize Irvine and Tustin Unified School District shortfalls in their upcoming fiscal years.

Kang made a similar proposal in 2005. He proposed a permanent policy to give ten percent of the city's annual budget surplus carryovers to the school districts, and to develop a process for the city permanently subsidizing the school districts.

Then-City Attorney Joel Kuperberg warned that such proposals may be illegal:

Councilmember Kang's motion does raise some implications with a doctrine called the Gift of Public Funds prohibition. It is because of that that the City has historically deliberated in-kind relationships to assist the school districts through activities that provide rather clear benefits to the City as well as the school districts. The transfer of cash, or the cash equivalents, to the school districts without compensating benefits to the City might raise some constitutional issues for which the Council members would be personally responsible.

If it was illegal three years ago, one wonders why it's not illegal now.

Note: Stephen C. Smith, the author of this article, was a City of Irvine budget analyst from 1985 through 1988, and served on Irvine's Finance Commission in 2006.