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Tim Myers: We got a bond upgrade in the worst circumstances ever

Myers' Musings

Posted: September 12, 2009 3:03 p.m.
Updated: September 13, 2009 4:55 a.m.
 
A short review: In the first part of this series we explored the absolutely astounding news that the city of Santa Clarita received a bond upgrade during these times of incredible financial and fiscal turmoil.

In the second part we explored the first leg of municipal financials, revenues, and determined the city suffered mightily like everyone else during the current difficulties from sudden and precipitous falls in revenues that turned out quite volatile.

Therefore, in order to justify an upgrade, the rating agency must feel the city staff and elected officials possess good control of the other leg of municipal finance: expenditures.

First, we need to understand the concept of fiscal flexibility, also called scalability.

Some also refer to this with the term “shoal water concept.”

Thinking of the fiscal ship in sailing terms, one might think of a municipality like a ship navigating a treacherous rocky approach to a safe harbor.

When the tide runs high, even the most mediocre sailors can move right into the harbor.

When the water goes shoal, however, rocks appear and the good sailors immediately separate from the mediocre when they sail past the wrecks.

Another financial truism: Decisions made in good times will profoundly impact what happens in bad times.

To continue our sailing analogy, a poor sailor might assume continuous high tide (increasing revenues) and build a particularly heavy ship (lots of expenditure commitments) that draws a lot of water.

When the approach goes shoal the only alternative, other than beaching the ship, revolves around throwing off cargo and crew (programs and personnel) to lighten the ship quickly.

Alternatively, the wise fiscal sailor foresees the shoal water and maintains a light ship (low expenditure commitments) that draws little water and can navigate the entrance to the harbor under any circumstance.

Now the folks who like to show up and yell at City Council meetings (“Town Hall Syndrome”) won’t like to hear this, but the city professional staff under the oversight of the elected City Council built a very light ship in several ways.

An instructive comparison: The city of Santa Clarita employs one full-time equivalent employee for every 500 residents.

In contrast, the comparably sized city of Glendale employs one person for every 86 residents.

Doe this profound difference arise because of the profligacy of Glendale?  

No. It arises because Santa Clarita built a more scalable city.

Glendale maintains its own police force, a water utility and a large enforcement mechanism for land use.

In contrast, Santa Clarita contracts its law enforcement (like many other cities in L.A. County) to the L.A. County Sheriff’s Department and its fire protection to the L.A. County Fire Department.

Separate entities, some public and some private, provide water to the citizenry.

Also, during its construction boom Santa Clarita made heavy use of consultants to do plan check, environmental impact and other complex development work.

How did this impact Santa Clarita’s fiscal ship?

Based on comparable cities, Santa Clarita pays about half the cost for law enforcement.

Since Santa Clarita contracts with the massive L.A. County Sheriff’s Department along with many other cities, this spreads the relatively high fixed costs of items like a crime lab, investigative bureaus, SWAT, bomb squads, helicopters and vehicle maintenance facilities over a wider group of population, thus lowering the unit costs for everyone.

The same applies equally to fire protection.

What about utilities? While they provide a rather stable source of service revenue, their management requires a lot of personnel time and attention.

In Santa Clarita, the city effectively offloaded this management to the entities that provide the service.

And finally, the use of consultants contributes to flexibility.

While consultants may charge higher per diems than the equivalent salaries and benefits of a full-time city employee in the short term, in the long term the city can shut off the costs immediately or scale them lower to fit the actual amount of activity.

In other words, since the consultants don’t actually ride on the ship, the captain does not need to throw them overboard in shallow water.

A few other things: In the good times Santa Clarita consistently under-spent its revenues by about 10 percent to build reserves, and when revenues fell Santa Clarita immediately froze hiring (even for vacated positions) and pay increases to maintain maximum flexibility.

That is how one navigates past the rocks of economic difficulty!

Tim Myers is a Valencia resident and CPA who thinks numbers hold the key to everything. His column represents his own views and not necessarily those of The Signal.

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