Scott Johnson. Mayor, Council and Mr. Johnson:

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1 Scott Johnson From: Sent: To: Subject: Attachments: Mark Whisler Tuesday, May 20, :00 PM Scott Johnson; Mayor Johnson; Angelique Ashby; Steve Cohn; Steve Hansen; Allen Warren; Jay Schenirer; Kevin McCarty; Darrell Fong; Bonnie Pannell; John F. Shirey; John Dangberg; Howard Chan; Kathy McAllister Kings arena FEIR comment: EIR comments.pdf; 6- Public Arena Costs are apx 1.7 Billion v14.pdf; 2- Sac city leaders warn budget surpluses won't last _ Local News - KCRA Home.pdf; 1- budget-surpluses-and-deficits-jpg.jpg; 5- City manager John Shirey fires back at downtown arena critique - Sacramento Business Journal.pdf; 4- Red-Ink-Proposed- Arena-Bond-Would-Add-to-City-s-Rising-Debt (1).pdf; 3- City Long-Term Financial Liabilities.pdf Mayor, Council and Mr. Johnson: The Final EIR for the Kings Arena fails to address many of the defects identified by the comments on the draft EIR, in particular the traffic impacts, noise, and billboards. Please register my objection to the City's adoption of the project and EIR." To (by ) Scott Johnson, Associate Planner City of Sacramento, Community Development Department Environmental Planning Services 300 Richards Boulevard, Third Floor Sacramento, CA SRJohnson@cityofsacramento.org SUBJECT: NOTICE OF AVAILABILITY-DRAFT ENVIRONMENTAL IMPACT REPORT FOR THE SACRAMENTO ENTERTAINMENT AND SPORTS CENTER & RELATED DEVELOPMENT PROJECT (P13-065) (SCH#: ) 1

2 Detailed Comments attached. Please confirm receipt. 2

3 Mayor, Council and Mr. Johnson: The Final EIR for the Kings Arena fails to address many of the defects identified by the comments on the draft EIR, in particular the traffic impacts, noise, and billboards. Please register my objection to the City's adoption of the project and EIR." To (by ) Scott Johnson, Associate Planner City of Sacramento, Community Development Department Environmental Planning Services 300 Richards Boulevard, Third Floor Sacramento, CA SUBJECT: NOTICE OF AVAILABILITY-DRAFT ENVIRONMENTAL IMPACT REPORT FOR THE SACRAMENTO ENTERTAINMENT AND SPORTS CENTER & RELATED DEVELOPMENT PROJECT (P13-065) (SCH#: ) Comments: 1) The EIR does not detail inconsistencies with the General plan accurately or in sufficient detail. 2) The EIR does not study the effects on Housing if the money spent on the Arena was instead used for housing development. 3) The EIR does not study the effects on Air Quality if the money spent on the Arena was instead used to promote bicycle travel and other improvements to Air Quality in Sacramento. 4) The EIR does not study the effects on liquid sewage removal, and the separation required by the State of waste water and storm water, if the money spent on the Arena was instead used for liquid waste water removal development. 5) The EIR does not study the effects on Water Quality if the money spent on the Arena was instead used to improve the Water Quality in Sacramento.

4 6) The EIR does not study the effects on Sacramento s Tree s Program environmental benefits, maintenance and leaf removal if the money spent on the Arena was instead used to improve the Sacramento s Tree Program environmental benefits, maintenance and leaf removal in Sacramento. 7) The continued construction or operation of the downtown arena presents an imminent threat to the health and safety of the public s right to vote. The glare from the Arena as street level could blind people, cook babies in strollers with its heat, cause auto accidents for glare, burn dog feet from heated surfaces, destroy trees and other vegetation because it will act as a reflector to magnify the sun (a solar cooker). 8) The continued construction or operation of the downtown arena presents an imminent threat to the health and safety of the public s right to vote. The EIR does not address the public s right to vote on the Arena and that right alone is an imminent threat as the health and safety issues and two dramatically different outcomes for Sacramento s financial health and public safety have not been finalized by the voters. 9) No attempt was made to study or mitigate the documented environmental harms from the 6 Corporate America billboards, a critical component of this project, that must be seen from the freeways that the City is giving the Billionaire team owners as part of this agreement. Some thoughts on this unstudied harm from Scenic America: The Truth About Billboards: Visual pollution. Sky Trash. Litter on a stick. The junk mail of the American highway. Nothing destroys the distinctive character of our communities and the natural beauty of our countryside more rapidly than uncontrolled signs and billboards, which is why Scenic America works so hard to stop their proliferation and encourage their removal. Billboard Condemnation Costs When a billboard must be removed (or simply moved) for a highway project, its owner often seeks compensation far in excess of the worth of the billboard structure itself. Excess and unwarranted compensation for billboard condemnation is just one way that American taxpayers unduly subsidize the billboard industry.

5 Billboard Control is Good for Business More than 700 communities nationwide prohibit the construction of new billboards. Why? Because billboard control improves community character and quality of life -- both of which directly impact local economies. In fact, despite billboard industry claims to the contrary, communities and states that enact tough billboard controls enjoy strong economic growth. Billboards Degrade the Natural Environment Appreciating natural and manmade beauty is the first step towards conserving our scenery and protecting our natural resources. Billboards Endanger Health and Safety While the industry would like you to think billboards are harmless, their negative effects on our health and our safety have been well documented. Billboards Hamper Economic Growth Billboards make a few people a lot of money. Unfortunately, however, they do serious economic harm to communities. Nature of the Billboard Industry The billboard industry likes to proclaim its small, local nature. When a state or local government considers enacting tougher billboard controls, industry lawyers and lobbyists appear at hearings and speak long and loudly about how the government is threatening another small business with extinction. The reality, however, is quite different. 10) No attempt has been made to study or mitigate the harms caused by the City gifting the naming rights for the arena to sell to the highest bidder. Not only does that cause harm to the City financial position (detailed in section 12) it is part of the same environmental pollution detailed in section 9 on Billboards. 11) The EIR does not include a full description of the project. The EIR the Council is voting on tonight was completed BEFORE the full details were released. In addition No attempt was made to detail the entire public costs for the project. Attached to these comments is my attempt to detail the projects public costs. You will see how these numbers very dramatically from those in the project documents and should be seen as

6 part of the skepticism you should have for those documents. They also lead into the next set of comments. 12) The continued construction or operation of the downtown arena presents an imminent threat to the cities financial health and safety. Let s not be like Stockton. Does anyone care that we are neighbors to the largest city in the country to ever file for bankruptcy? Are not parts of our cities functional economy similar to those of Stockton's? Stockton filed for bankruptcy because it failed to rein in excessive spending. It barrowed too much money with no realistic plan to pay off that debt. No project was too small or too large to ignore and pay for today but pay off tomorrow with borrowed dollars. No analysis of the risks this project suggest for Sacramento have been done. No analysis, no report, not mitigation, no section in the EIR. The EIR fails on this. The EIR fails to Analyze and Manage Community Bond Costs and Interest Projections. The City of Sacramento's financial situation is more precarious than the Council & Mayor are telling its citizens. The elephant in the room too much debt. The cities existing debt has an estimated to be around $1 billion+ in bond debt. One of those expenditures in the City Budget is debt service - which is likely to be 7 to 9% of the city budget expenses. That means for every $100 the city spends an estimated $7 to $9 must be sent to the Wall Street Banks. That money funds no city services, pays no city bills, does not support city staff it just disappears each month. It produces nothing. Generates no income. Creates no ongoing jobs. Cleans no parks. Supports no city services. etc. etc.

7 Currently interest rates are at a 50 year low - so the cost of debt (interest) is likely also at a 50 year low. Unfortunately the city is contemplating borrowing another quarter billion dollars for an arena with, most likely, another quarter million dollars in debt service (interest) obligations. If interest rates double over the next five years - which is very likely and the city continues to refinance debt since it certainly doesn't have much of a plan to pay it off - the cost of servicing that debt could rapidly rise to 10%, maybe 15% of the city budget. This would severely impact the city's ability to pay its bills, meet its obligations to its employees maintain a full staff for all the programs the city taxpayers are paying for and expect. I do not think Sacramento will be absolutely end up like Stockton, but there is a measureable risk they will if they proceed with this project. The cost to service this exponentially growing debt is exactly why Stockton fell apart financially. When you pay current bills with borrowed money (like the Mayor and Council and current Kings owners are currently doing) there will always be a day of reckoning when that bill comes due. Attached and included in this response is the Report from the Sacramento City Treasurer titled The Long-Term Financial Liabilities of the City of Sacramento which shows that the City Debt is approaching $2 Billion even without the debt he did not include in the report such as some bonds he said he chose not to include, local school bonds, and other local bonds which are a cumulative burden on the Sacramento Taxpayers. Note: it is not clear what the Bond Counsel - in its prospectus attached to the council report tonight - did with the missing debt and debt burden of City Taxpayers in its analysis of the City debt situation. Certainly a default by a school district, former redevelopment agency bond, park district or other local government depending on the same taxpayers for paying their debt would impact the financial environment for this bond and building program. While the City seems unable or unwilling to provide a complete financial analysis, the Cities entire future health and living environment could suffer from the lack of that analysis. The City Finance Director did an interview with KCRA channel 3 on May 1, 2014 in which it seemed clear the City will soon be broke and unable to pay its obligations. A copy of the interview transcript is attached with the chart they used on the news that night about the City debt. Beyond what was said in the interview is the fact that City plans to use the barrowed Arena money and the money they barrowed to make the Arena payments for the next 3 years just to pay for city staff deficits. They hope to hide the ballooning deficit by transferring as many city

8 jobs to Arena supporting jobs as possible to avoid default on their obligations. Never-the-less even that plan will not stop the inevitable fact that the City is projected to run out of money to pay its bill just 60 short months from now. This City itself projects - even without the Arena to be soon unable to pay its bills at a projected rate of nearly $1 million a week. So the City ALREADY the classic 2 step to bankruptcy: too much debt and too little income. (Side Note: Wall Street Bond lenders are not the city of Sacramento or the local school districts friends. In my humble opinion, the Wall Street Bond lenders get their money up front and have been shown to care little if a City is burdened with excessive debt and soon - excessive interest payments.) The EIR was not prudently done and is wasteful to an extent beyond real administrative or office holders discretion. The effect on the cities city reserves for financial emergencies has not been studied and the city can get caught like Stockton did. To say you have the right to make poor financial decisions or that you trusted someone else to tell you what to do is not sufficient. Remember that Banks loan you money when you don t need it and never when you do. I don t ever want our new city hall repossessed like Stockton s was by its bond holders. You have failed to complete this EIR because if it had a strong Financial Analysis section that described your options and provided some real facts on what could happen to the City of Sacramento living environment - then the EIR would have been helpful, as it should have been, in you making better more informed decisions. As it is it failed and you will fail without that complete analysis that must be provided to you. 13) As someone who was nearly murdered in my 20 s by a large unruly crowd I have been unable to attend any of your meetings since you seem to bully, denigrate, belittle, anyone with an opinion who dares express it in opposition to yours. Your audience is more like a lynch mob than a group of citizens expressing their opinions. You have allowed a mob rule mentality into your meetings that is un-american and antidemocratic. See addendum #5 for how residents are treated for speaking out in the press. You refused to move to a larger venue to accommodate your citizens, instead herding them into designated areas from which they will be cramped, uncomfortable, and unable to

9 move around and discuss their options. Kind of like how cattle are handled when loaded onto trains. This is now how our government and Council meetings are supposed to work and has prevented you form hearing fully from your constituents. 14) With only hours between the release of your 2600 pages of documents (which the staff had a year and millions of dollars of outside legal help to prepare), when you take your final vote please excuse any grammatical or phrasing errors in the report as there was simply not enough time to complete it fully and you refused to extend today s vote. Sincerely Yours, Mark Whisler EA, RMP, ABR, MBR, MLO Broker Owner- Whisler Land Company Commercial & Residential Real Estate Listings & Sales- Managing Partner - Quepos Properties Enrolled Agent- Whisler Financial Group Broker Owner - Community Realty California Home Loans with Integrity & Representation Broker Owner - Whisler Land Company Property Management Managing Partner - MicroCampaigns ext Capitol Ave Suite 100 Sacramento, CA ext 6 all messages are transcribed into and and sent to me 24/7 - please be patient as it may take a few seconds or longer to connect Fax was The Whisler Companies 35th year in Business. Addendums: 1-Chart of City Projected Budget Deficits 2- City of Sacramento interview with KCRA Channel 3 on and chart on the city inability to pay it s bills Report from the Sacramento City Treasurer titled The Long-Term Financial Liabilities of the City of Sacramento

10 4- Report from Eye on Sacramento Proposed Arena Bond Would Add to City's Rising Debt Sacramento City Manager John Shirey has fired back at a city watchdog group s criticism of the new financing plan Sacramento Business Journal 6- Public Costs for the Sacramento Kings Arena are $1.7+- Billion - not the $200+ million number the City has been using

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12 5/2/2014 Sac city leaders warn budget surpluses won't last Local News - KCRA Home By David Bienick B I O Sac city leaders warn budget surpluses won't last Retired workers' pensions, medical costs outpacing taxes UPDATED 7:16 PM PDT May 01, 2014 Share 0 8 NEXT STORY Sheriff: Cal Fire official missing after killing fiancee 3 Text Size: A A A Couldn't load plug-in. HIDE T RANS CRIP T POSTPONEMENT THEY ARE CONFIDENT THE NEW COMPLEX WILL OPEN IN WE ARE GETTING OUR FIRST LOOK AT THE CITY OF SACRAMENTO BUDGET. FOR THE FIRST TIME IN SIX YEARS, THE CITY HAS A SURPLUS INSTEAD OF A DEFICIT. DAVID BIENICK HAS BEEN LOOKING INTO HOW THE CITY PLANS TO SPEND EXTRA MONEY, AND WHY THE SURPLUS WILL NOT LAST FOR LONG. LAST YEAR PEOPLE AT SACRAMENTO CITY HALL WERE PREDICTING BUDGET DEFICITS AS FAR AS THE EYE CAN SEE, SO THE SURPLUS CAUGHT THEM BY SURPRISE. BUT IF THEY DO NOT GET USED -- BUT THEY SAY DO NOT GET USED TO IT. THE POLICE DEPARTMENT IS HIRING. A FIRE STATION SITS IN THE OPEN FULL-TIME, AND CITY PARKS SHOULD BE CLEANER AND BETTER MAINTAINED, ALL THANKS TO A SACRAMENTO CITY BUDGET THAT HAS FINALLY PULLED OUT OF THE RED. CITY LEADERS IN THE BUDGET TURNAROUND HAS BEEN FASTER THAN PREDICTED, MAINLY BECAUSE OF A BETTER HOUSING MARKET AND GROWING PROPERTY TAX REVENUES. WHEN THE PROPERTY TAXES REBOUND, THAT IS BENEFITING US. BUT THE FINANCE DIRECTOR WARNS GOOD TIMES WILL NOT LAST. SHE PREDICTS A SMALL 1/3

13 5/2/2014 Sac city leaders warn budget surpluses won't last Local News - KCRA Home BUDGET SURPLUS THIS YEAR AND NEXT, THEN DEFICITS GROWING TO NEARLY $41 MILLION FIVE YEARS FROM NOW. THE MAIN REASON, RETIRED CITY EMPLOYEES WHO GET PENSIONS AND MEDICAL BENEFITS FOR LIFE. THE MEMBERS ARE LIVING LONGER, AND THE REALITY OF THAT GOOD FACT IS IT WILL COST US MORE OVER TIME TO PAY FOR PENSION BENEFITS, SO WE HAVE TO BEAR THE BURDEN OF THOSE COST. THEY ADD UP TO MORE THAN $1 BILLION. RIGHT NOW THE CITY HAS NO IDEA HOW THEY WILL PAY. THE DEFICIT WILL BE WORSE YEARS FROM NOW WHEN THE TEMPORARY SALES TAX EXPIRES. THE CULINARY BUDGET PROPOSAL -- PRELIMINARY BUDGET PROPOSAL WILL PUT SOME MONEY AWAY, BUT ALSO CREATES A NEW TRAVEL FUND WITH KEVIN JOHNSON'S JOB WITH THE U.S. CONGRESS OF MAYORS. A FINAL BUDGET MUST BE IN PLACE BY JUNE. THEY ARE IN A POSITION THAT REQUIRES A LOT OF KNOWLEDGE AND EXPERIENCE, AND I PUT TRUST IN THAT. I HOPE THEY WILL DO THE RIGHT THING. IF YOU KEEP THEIR CAMERAS -- YOUR CAMERAS IN THEIR FACES. YOU THAT WE WILL. THE DOWNTOWN ARENA IS EXPECTED TO GENERATE MILLIONS IN TAX REVENUE FOR THE CITY. BUT THE TIMING AND CERTAINTY IS STILL UNKNOWN. SACRAMENTO, Calif. (KCRA) Sacramento city leaders warned Thursday that a $2 million project budget surplus for the coming fiscal year will revert to deep deficits in future years. S ACRAMENTO BUDGET F ORECAS T The budget proposal released this week by City Manager John Shirey includes funding for 14 additional police officers, eliminates rotating closures of fire stations and improves city park maintenance. "It's amazing, actually," said resident Vanessa Zullo. KCRA V IEW LARGE City leaders said the budget turnaround was faster than predicted and was mainly due to the improving housing market and increased property tax revenues. "When property taxes rebound, that's been a benefit to us," said City Finance Director Leyne Milstein. However, Milstein warned the good times likely will not last. Milstein predicted small surpluses this year and next, then deficits that grow to nearly $41 million over the next five years. The main reason is retired city employees' pension and medical benefits, Milstien said. "Our members are living longer," Milstein said. "And the reality of that good fact is that it will cost us more over time to pay for those pension benefits, so we have to bear the burden of those costs." Those costs add up to about $1.2 billion in unfunded liabilities. The city budget picture will grow dramatically worse in 2019 when a temporary sales tax increase, 2/3

14 5/2/2014 Sac city leaders warn budget surpluses won't last Local News - KCRA Home approved by voters as Measure U, is set to expire. The preliminary budget proposal sets aside $1 million for retirees' medical expenses. It also continues to fund city council members' pet projects and creates a $40,000 fund for travel related to Mayor Kevin Johnson's presidency of the U.S. Conference of Mayors and the National Conference of Black Mayors. Milstein said the associations will pay the mayor's travel expenses, and the city fund will pay for a city staff member to accompany him. The first city budget hearing is scheduled for May 8, and a final budget must be approved by mid- June. "(Council members) are in the position that requires a lot of knowledge and experience, and I put trust into that," said resident Danny Bagwil. The future downtown arena is predicted to generate millions of dollars in additional revenue for the city. Furthermore, if federal officials determine the Natomas area is no longer at risk for catastrophic flooding, a building boom could begin. However, Milstein said both of those things have the potential to help the city's finances, but she said they are still too preliminary to include in revenue forecasts. Share 8 0 Copyright 2014 by KCRA.com All rights reserved. This material may not be published, broa 3/3

15 Meeting Date: 1/28/2014 Report Type: Staff/Discussion Report ID: City Council Report 915 I Street, 1 st Floor Title: Long-Term Financial Liabilities of the City of Sacramento Location: Citywide Issue: The long-term financial liabilities are obligations from past events or transactions which will be paid out of future budgets. As such the long-term liabilities are of concern to policy makers. This report presents the long-term financial liabilities developed over time from issuing debt for facility development and land acquisition and from the insufficient funding of pension and retiree medical benefits. Recommendation: Receive and file. Contact: Russell Fehr, City Treasurer, (916) , Office of the City Treasurer Presenter: Russell Fehr, City Treasurer, (916) , Office of the City Treasurer Department: City Treasurer Division: City Treasurer Dept ID: Attachments: 1-Description/Analysis 2-Final Long-Term Liabilities 2014 Report City Attorney Review City Treasurer Review Approved as to Form Reviewed for Impact on Cash and Debt Joseph Cerullo Russell Fehr 1/23/2014 1:39:23 PM 1/17/2014 4:19:59 PM Approvals/Acknowledgements Department Director or Designee: John Colville - 1/23/ :31:21 PM James Sanchez, City Attorney Shirley Concolino, City Clerk Russell Fehr, City Treasurer 1 of 16 John F. Shirey, City Manager

16 Description/Analysis Issue Detail: Policy Considerations: The City exists, in large part, to provide services and infrastructure to its residents, businesses, and visitors. The City has incurred, in issuing debt and providing employee benefits, over $2 billion in long-term liabilities which have to be paid down over time. The payment creates intergeneration equity policy issues. While the next generation will have access to and benefit from infrastructure funded with long-term debt, and it is reasonable to pass some of the cost of that infrastructure into the future, it is impossible to develop a policy justification for passing current employee liabilities into the future for payment. However, the reality of the current budget situation makes accelerating the payment of benefit liabilities devastating to the provision of services. This creates a dilemma to be resolved in the budget process. Economic Impacts: Environmental Considerations: None Sustainability: Not Applicable Commission/Committee Action: Not Applicable Rationale for Recommendation: Information Only Financial Considerations: The long-term liabilities of the City total nearly $2.2 billion. The liabilities represent outstanding principal balances on bond issues and other debt, unfunded liabilities in pension plans, unfunded liabilities in the retiree medical plan, and other outstanding obligations. The timing and level of the payments against the longterm liabilities is and will be a significant budget issue now and in coming years. Local Business Enterprise (LBE): Not applicable 2 of 16

17 Background The Long-Term Financial Liabilities of the City of Sacramento Russell Fehr City Treasurer January 28, of 16

18 The Long-Term Financial Liabilities of the City of Sacramento Along with the severe short-term fiscal challenges brought on by the deep and prolonged recession, the City also faces known long-term financial pressures. In developing short-term and intermediate budgetary plans it is important also to consider and plan for the long-term financial issues. The Finance Director and City Manager are directing attention to these issues in the budget process, and the issues are alarming. This report is a presentation and discussion of the current long-term financial liabilities of the City of Sacramento. Specifically, the report and presentation focus on those long-term liabilities which will be paid from future revenues, also referred to as unfunded liabilities, in that funds are not currently set aside to pay for these liabilities. These long-term liabilities for which the City has not currently set aside funding total well over $2.1 billion. In the standard summary financial presentations of the Annual Budget and Annual Financial Report (CAFR) the long-term liabilities are not presented together as a unit; they are, rather, found scattered in the presentation. Over a year ago, the City Manager requested the City Treasurer prepare the report and presentation focusing on the long-term liabilities of the City. This is the second annual report discussing the long-term financial liabilities of the City. The City Treasurer presented the first report to the City Council in January The goals of this report are: 1. Present the different types and values of long-term liabilities together; 2. Identify trends; and 3. Discuss prominent policy issues. Long-term liabilities A long-term liability is a financial obligation arising from past events or transactions and payable more than one year in the future. This can take the form of future payments to individuals or organizations, the future provision of services, or future transfer of assets. Examples of City of Sacramento long-term liabilities include outstanding principal balances on City bond issues; future costs of remediation of toxics at City land fill sites, and future pension payments to retirees. A critical point is that though the payments are made for service rendered in the future, the obligations for which those payments are made have been incurred in the past up to the immediate present. The current level of long-term liabilities does not include any obligation which will be incurred in the future. 2 4 of 16

19 The Long-Term Financial Liabilities of the City of Sacramento The City of Sacramento has currently unfunded long-term liabilities in excess of $2.1 billion. The major categories of unfunded long-term liabilities include debt, post-retirement benefits, and other future costs. The following table gives the values of the City s unfunded long-term liabilities in comparison to prior year levels: Summary of Long Term Liabilities Liability Prior Value Current Value Change Debt $823 million $1,014 million $191 million Benefits $950 million $ 985 million $35 million Other Future Costs $167 million $166 million ($1 million) Total $1,940 million $2,165 million $245 million The long-term liabilities have grown from year to year by $245 million. The growth in debt was due to the planned issue of water and wastewater bonds; other debt liabilities declined. Growth in benefit unfunded liabilities was confined to the safety retirement and retiree medical plans. The miscellaneous other future costs have remained unchanged. Funding Long-Term Liabilities Long-term liabilities, by their very nature, are paid in the future. Depending upon the type of liability and discretionary decisions made by financial entity (the City), long-term liabilities may be funded in different ways. There are two broad categories: (1) payment of the long-term liabilities out of future budgets with future revenues; and (2) setting aside funds at the time the long-term liabilities are being incurred. The first method is typically used to pay debt, and the second is used to fund and pay employee benefits. These two categories, however, are not mutually exclusive. An example of the future payment category is debt and debt service. A long-term liability is established when bonds are issued and funds are borrowed. The long-term liability is the value of the outstanding principal on the debt. The payments of principal and interest over time are included in annual budgets. The debt service payments are funded with revenues collected in the future. This payment in the future is the plan when the funds are borrowed. The concept underlying this method is that those in the future paying the debt will receive benefit from the facilities constructed or improved with the debt. There is a plan to issue debt for projects and to include the debt service in future budgets. The capacity to pay the debt is assessed before the debt is issued. An example of setting aside funds while liabilities are being incurred is the actuarial funding of pensions. In theory, an employee and the employer would annually contribute sufficient funds into a 3 5 of 16

20 The Long-Term Financial Liabilities of the City of Sacramento pension plan so that those funds plus future investment income on those funds would be sufficient to make pension payments to the employee after retirement. If sufficient funds are not set aside, or if investment income is not sufficient, then supplemental payments must be paid from future budgets. These payments then often extend beyond the careers of the individuals receiving pensions. However, employee-benefit programs which could be funded on an actuarial set aside basis are not. Payments are being made out of budgets on an annual basis without the benefit of accumulated investment income. In the long term, this practice makes the benefits more costly, but in the shortterm this funding method requires setting aside additional funds, putting pressure on stressed budgets. The City of Sacramento s funding of its long-term liabilities is discussed in detail in this report. The reality is that the City will have to pay down these long-term liabilities, and the timing of paying down pension liabilities is a serious budgetary issue. Continuing to extend payments decades into the future presents serious issues of inter-generational equity: having future taxpayers pay for something from which they receive no benefit. Yet accelerating the paying down of the liabilities, as is being proposed, creates serious budgetary problems. Though the policy issues seem clear, the pragmatic budget problems are extraordinarily difficult. DEBT The City borrows funds for capital projects and other capital needs such as acquiring land, building and restoring facilities, and acquiring equipment. The long-term liability for debt is the outstanding principal balance of the debt. Even though interest payments will also be made in the future, the value of those interest payments is not included in the long-term liability. The City s debt is in three forms: 1. Bonded debt A security issued (sold) by the City paying principal and interest at regular intervals over time in exchange for up front funding. Bonds are negotiable, being traded on secondary markets. 2. Leases This is a form of short-term borrowing used for equipment. The equipment is leased over a fixed period with the City typically owning the equipment at the end of the lease. Leases typically have a term of five years or less. 3. Loans Funds borrowed from other governmental entities or financial institutions. Payment of principal and interest is specified in the terms of the loan. The outstanding loans are with state agencies. 4. Swap This is associated with the Kings Loan and associated debt issue. The actual debt issue was variable rate. At the insistence of the former team owner, an interest rate swap which artificially fixes the interest rate was put into place. Over time, and at present, the variable rate has been far less than the fixed rate swap, giving the swap value to investors. If the loan 4 6 of 16

21 The Long-Term Financial Liabilities of the City of Sacramento is prepaid, then the investors must be compensated for the future value of the interest rate swap at current interest rates. The June 30, 2012 value was $ 10 million. The following table compares current debt levels with prior year levels: City Outstanding Debt Principal (amounts in millions) Category June 2013 June 2014 Change Lease Revenue Bonds $733 $699 ($34) Utility Revenue Bonds $0 $246 $246 Loans $56 $41 ($14) Equipment Leases $20 $18 ($2) Kings Loan Interest Rate Swap $14 $10 ($4) Total $823 $1,014 $191 The increase in debt is solely attributable to the issue in 2013 of the water and wastewater bonds, and the liability for debt service is confined to the two enterprise funds. The last General Fund backed bond issues date to The total City debt not does include the debt of the former redevelopment agencies for which the City elected to become the successor agency. This debt is paid from a dedicated property tax allocation and is not a liability of the City. Reduction of Outstanding Debt and Debt Service The annual debt-service payments made on City debt issues, the loans, and the equipment leases include principal and interest components. The long-term liabilities are reduced with the principal payments. But reduction in debt-service payments does not match the reduction in the long-term liabilities. Budgetary reduction comes when debt issues and individual loans or leases are paid off. The over $50 million in long-term liabilities outside the new revenue bond issues has not resulted in reductions in annual debt-service payments. It is important to note that debt service will not grow over time unless the City takes on new debt. The debt portfolio contains no variable-rate exposure or derivative products that could cause debt service to increase. 5 7 of 16

22 The Long-Term Financial Liabilities of the City of Sacramento The reduction of principal and debt service is illustrated in the following graph. This does not include utility revenue bonds issued in 2013, as that obligation is confined to the Water and Wastewater Funds: Roughly one-third of the annual debt service is a net cost of the General Fund paid from discretionary resources. Over the next eight fiscal years, through Fiscal Year , approximately $40 million per year in principal is being paid with the long-term liability being reduced by a like amount. Yet over that period the only reduction in debt service comes from paying off short-term equipment leases. In 2021, the final payment on a 1993 debt issue will be made with a debt-service reserve, and annual debt-service payments will be reduced by $15 million. The City did not issue long-term bonded debt between 2006 and 2013, and has not issued General Fund backed debt since After having issued the water and wastewater revenue bonds in 2013, current plans are to issue debt for the Downtown ESC in 2013, for the Community Center Theater in 2014 or 2015, and for additional water and wastewater projects in OTHER FUTURE COSTS There is a series of future costs classified as long-term liabilities which are neither debt nor employee benefits. The long-term liabilities in this general category total $166 million. Prominent examples include: 6 8 of 16

23 The Long-Term Financial Liabilities of the City of Sacramento 1. Landfill Post-Closure Costs ($20 million) There are long-term costs associated with the City s closed refuse-disposal sites. A long-term liability is recorded while the actual costs are paid year to year. 2. Risk Claims ($63 million) Claims are paid by the City in the future for events which have already happened. Long-term liabilities are estimated and recorded. Reserves have been established to fund future claims payments 3. Development Impact Fee Credits ($43 million) A long-term liability is recorded with the credit is granted. Funding of these separate liabilities is mixed. Costs associated with the closed landfill sites are funded from the solid-waste fund, and some reserves have been established. For liability claims, departments are assessed in the budget process, and reserves are established in the City Liability Fund. These reserves appear to be sufficient to meet known and anticipated claims over the next several years. POST EMPLOYMENT BENEFITS The City has $985 million in unfunded long-term liabilities for post-employment benefits to be paid to those who worked for the City and their survivors. These benefits include pensions, the retiree medical benefit, and payoff of leave balances upon retirement. In very round numbers, and expressed in an actuarial basis, the long-term liability for these benefits is approximately $3 billion, but only $2 billion has been set aside to fund those benefits. In actuarial terms the retiree medical benefit is unfunded. The following table summarizes the funding status of the long-term benefit liabilities: Plan Actuarial Liabilities and Assets For Pensions and Retiree Medical Plans Actuarial Liabilities Actuarial Assets Unfunded Liability Funding Ratio PERS Safety $1,313 m $1,077 m $237 m 82 % PERS Misc. $861 m $709 m $152 m 82 % SCERS $382 m $292 m $90 m 76 % Retiree Medical $473 m $0 m $473 m 0 % Comp Absences $34 m $0 m $34 m 0 % Total $3,063 m $2,078 m $985 m 67% 7 9 of 16

24 The Long-Term Financial Liabilities of the City of Sacramento Funds are currently set aside only for the pension plans. The retiree medical benefit is funded on a current basis; payments are made to retirees out of the annual budget. The compensated absences are recorded as liabilities yet are paid out every year as employees retire. The Pension Plans City employees and retirees participate in one of three pension plans: 1. PERS Safety Members of this plan receive the higher, and more costly, safety retirement benefit. 2. PERS Miscellaneous Members of this plan receive a lower, and less costly, benefit. 3. SCERS This was the pension plan for City employees until 1978 when the City entered CalPERS. All employees hired after this date became members on a PERS plan. During the 1980s, active safety members of SCERS migrated to the PERS safety plan funded with a transfer of assets. SCERS provides both a safety and miscellaneous benefit. Normal Costs and Unfunded Liabilities Payments to the pension plans are of two types. Payments according to the actuarial assumptions are normal costs. These, in effect, keep the pension plans current. The normal costs are shared by the City and most employees. An employee share is calculated. Payments against any unfunded liabilities are made by the City only. Unfunded Liabilities The pension plans have a collective unfunded long-term liability of $479 million, and the unfunded long-term liabilities have grown significantly in recent years: Pension Fund Unfunded Liabilities Valuation Date PERS Safety PERS Misc SCERS Total June 30th 2005 $ 93 m $ 71 m ($ 3 m) $ 161 m 2006 $ 121 m $ 89 m $ 30 m $ 240 m 2007 $ 118 m $ 92 m $ 30 m $ 240 m 2008 $ 140 m $ 107 m $ 32 m $ 279 m 2009 $ 189 m $ 140 m $ 84 m $ 413 m 2010 $ 196 m $ 144 m $ 98 m $ 438 m 2011 $ 214 m $ 160 m $ 100 m $ 474 m 2012 $ 236 m $ 152 m $ 95 m $ 483 m 2013 $ 90 m $ 479 m Dollar Change $ 143 m $ 81 m $93 m $ 318 m 8 10 of 16

25 The Long-Term Financial Liabilities of the City of Sacramento Since the conclusion of the Fiscal Year , the unfunded long-term liabilities in the pension plans have grown by $318 million, from $161 million to $479 million. In the recent year, the overall increase is attributable to the safety plan, where the unfunded liability grew by $22 million. The unfunded liabilities in the PERS Miscellaneous Plan and the SCERS Plan both dropped. The unfunded liability is a debt the City, as the employer, owes to the three pension plans. And like the bonded debt, these long-term liabilities are payable with interest at the pension-plan discount rate, currently 7.5%. The current discussion at CalPERS, which has significant policy and budgetary impacts, is how the $389 million in the safety and miscellaneous plans will be paid down. After the very large losses in the investment portfolios in 2008, PERS initially chose both the actuarial recognition and the repayment of the new unfunded liability over long periods of time to lessen the financial impact on the State and local governments. PERS is now proposing paying down the unfunded liabilities over a shorter period of time. This is a very significant multi-year budget issue. Why There Are Unfunded Liabilities The obvious reason for unfunded liabilities would be the weak performance of investment markets in recent years. There are actually four fundamental reasons for unfunded liabilities in the pension plans: 1. In half the years since 2000, investment returns have fallen below assumptions. The aggregate return in the period is below the assumption. The result in Fiscal Year was far below assumptions. Financial markets have been volatile in the past decade and a half, after a decade of steady growth. The PERS pension plan investment income has failed to meet the target level in 6 of the past 13 years due to these market conditions. 2. There has been a recognition that people live longer after retirement. This increases the assumptions of how long retirement benefits will be paid and how much will be paid over time. This results in both an increase in unfunded liability and an increase in normal cost. 3. Both PERS and SCERS had employer contribution holidays, depriving the funds of assets. That was a mistake. The normal cost should have been paid into the plans every year. The fact that bad market years are certain was ignored. 4. Retiree benefit levels were enhanced, increasing the liabilities, without an increase in assets or contributions. The argument was put forward that benefits could be increased with no cost. Again the certainty that bad market years were in the future was ignored. Plan trustees and custodians lost their way of 16

26 The Long-Term Financial Liabilities of the City of Sacramento PERS Rates Payments to the two active PERS pension plans are determined by applying rates to salary. The Fiscal Year rates are broken into components and are shown in the following table: Components of PERS Rates FY Rate Component Safety Plan Miscellaneous Plan Employer Normal Cost % % Employee Normal Cost % **6.820 % Total Normal Cost % % Unfunded Liability Cost % % Total Rate % % Share of Rate to Unfunded 34 % 33 % Employee Share % % Employer Share % % **Employee share payment to PERS is 7%. This rate is an actuarial calculation For the coming fiscal year, the pension rate for safety employees will be just over 40 percent of salary and other applicable compension, and the rate for other employees will be approximately 20.5 percent. Of the overall rate for both plans, approximately two-thirds of payments are for normal costs and one-third for the accumulated unfunded liabilities. In recent years, the pension rates have grown with the unfunded liabilities. This trend is shown in the following tables: Recent History of Safety Rate Fiscal Year Normal Rate Unfunded Rate Total Rate % % % % % % % % % % % % % % % % % % % % % 7 Year Rate Change % % % of 16

27 The Long-Term Financial Liabilities of the City of Sacramento The overall safety rate has increased by 7.7 percentage points, or 23.8% over the seven years since the City began to make budget and staffing reductions in reaction to the severe recession. Most of the increase, over 6 percentage points, has been due to payment toward the growing unfunded liabilities in the safety plan. Recent History of Miscellaneous Rate Fiscal Year Normal Rate Unfunded Rate Total Rate % % % % % % % % % % % % % % % % % % % % % 7 Year Rate Change (0.296%) % % The miscellaneous rate has increased by approximately 2.8 percentage points, or 15.1%, over seven fiscal years. The normal rate has declined slightly while the rate for unfunded liabilities has increased. Fiscal Year was when the City began making budget and staffing reductions in the General Fund. There also has been a significant overall decline in tax revenue in the period represented in the tables. In the General Fund the increase in pension costs due to the increasing rates has been financed by the reduction in positions. Future Pension Rates Future increases to PERS pension rates are certain. The Finance Director is very well aware of the economic trends and PERS s proposed actions. Information on a forward-looking basis is incorporated in the budget information being brought to the City Council. SCERS The City also provides a retirement benefit through the SCERS pension plan which was closed to new members when the City enrolled in PERS in As of June 30, 2013, there were 35 remaining active employees in the SCERS plan and approximately 1,230 annuitants. There was a significant increase in the SCERS unfunded liabilities in 2006 in recognition of the 14 years that the City made no contributions to SCERS. The increases in 2008 and 2009 were due to the losses in investment portfolios in the recession. The SCERS investment and fiscal management board, AIFM, chose to of 16

28 The Long-Term Financial Liabilities of the City of Sacramento recognize the losses over a three-year period, unlike PERS. The unfunded liability and City contribution have now both declined for two years. Retiree Medical Benefit The City provides medical benefits to retired employees. Retirees have access to the group medical plans. In addition, retirees meeting certain service thresholds are eligible to receive monthly payments to offset medical insurance costs. One-half the benefit is earned after 10 years of service, and the full benefit is earned after 20 years of service. The benefit is pro-rated for retirees between 10 and 20 years of service. This benefit is paid from the annual budget to retirees; it is not actuarially funded. Even though the benefit is funded on this pay-as-you-go basis, financial standards require the City to account for the benefit as if it were actuarially funded. This results in an unfunded liability currently of $472 million which has grown by $92 million since Fiscal Year A portion of this liability is on the balance sheet; the remainder is a note. The City does an actuarial study of the retiree medical benefit on a regular basis. The last was completed during the current fiscal year. The following table sets forth how the benefit would be funded actuarially and changes since the study for Fiscal Year : Retiree Medical Plan Calculated Actuarial Funding FY FY Change Liability $ 380 m $ 472 m $ 92 m Payments Normal $ 16.4 m $ 18.3 m $ 1.9 m Unfunded $ 15.1 m $ 25.7 m $ 10.6 m Total $ 31.5 m $ 44.0 m $ 11.5 m Rates Normal 6.1 % 6.8 % 0.9 % Unfunded 5.7 % 9.5 % 3.6 % Total 11.8 % 16.3 % 4.5 % In other words, to pay for this benefit on a sound actuarial basis, total payments into the trust fund in the current year would have to be $44 million with $18 million being the normal cost proactively funding the benefit for the remaining career of active employees and $26 million paying down the of 16

29 The Long-Term Financial Liabilities of the City of Sacramento $472 million unfunded liability. Most of this $44 million would come from the General Fund. Benefit payments would be made from the trust fund. In time, as the balance in the trust and investment income accumulated, contributions would drop significantly. This, however, would take decades. This payment is far greater than the current $11 million under the pay-as-you-go method. In the short run the current method is less expensive. But under the current method benefit payments are always made from principal, never with investment income. In the longer run, the actuarial method of funding the benefit is less expensive due to investment income. The practical problem is that it is clearly beyond the budgetary capacity of the City to absorb an increase to the budget of over $30 million, the difference from the current payment level to full actuarial funding. The growing unfunded liability for the retiree medical benefit is an immediate problem for the City for debt issuance, credit rating, and investor evaluation. The credit-rating agencies are taking note of the growing unfunded liability, but this has not yet caused a rating downgrade. The institutional investors who hold City bonds and are the potential purchasers of future City debt issues are also interested in the funding status of this benefit. From a long-term fiscal perspective, the status quo for the retiree medical benefit is not sustainable. The City has established a retiree medical trust fund with PERS and has seeded that trust fund with an initial deposit of $2 million. Additional funds need to be deposited in the trust fund every year. COMMENTS Sound financial management and planning integrates the short-term, immediate needs with a longterm perspective. The City Manager has asked that this information be brought forward at the start of the Fiscal Year budget process. This is an example of the sound fiscal management of the City. The short-term budget financial planning will consider that the General Fund has very little or no debt capacity, that financial markets are changing, that pension rates continue to rise, and that the retiree medical benefit presents a financial challenge. Difficult issues will be addressed rather than deferred or ignored. In the short-term, the debt-service burden on the General Fund will remain more or less unchanged until debt issues are paid off in the decade of the 2020s. Yet debt service will not increase over time unless new debt is issued. The level of debt and debt service is controlled by the City. The costs of employee benefits are different and will continue to increase with no change in the workforce and in compensation to which pensions apply. As PERS shortens the period for the payment of unfunded liabilities and the City continues with the current funding of the retiree medical benefit, the costs of employee benefits will increase. PERS has modeled the rate increase over the of 16

30 The Long-Term Financial Liabilities of the City of Sacramento next six fiscal years for accelerating the payment of unfunded liabilities and has given estimates of the additional rate increases due to changes in longevity assumptions. The payment of long-term liabilities is by definition long-term. Payment of liabilities incurred in the past and the present will be passed to the next generation to future residents of the City. This poses the policy issue and concern of inter-generational equity. People pay taxes and fees in return for services and infrastructure. There should be some temporal consideration in the determination of benefit. The City has issued water-revenue bonds to be repaid over 30 years. A major project is rehabilitation of the Sacramento River Water Treatment Plant. In looking at inter-generational equity, the benefit to future residents of clean, safe water from the Treatment Plant is clear; in 25 years residents will still be paying for the water-plant improvements but they will still benefit from water treated at the plant. Standards have been established matching debt term and infrastructure types proposed for financing. The policy issue is more the level of debt taken on and the amount of debt service being incurred. In the ideal situation, as is usually modeled when debt is issued, level debt service becomes a lessening burden over time as the community and revenue grow. As the recent recession has shown, this is not always the case. Level debt service in the General Fund became a larger share of the budget as revenues fell. It is a different matter to propose pushing payment on unfunded pension liabilities decades into the future. The benefit of paying on benefit liabilities in the future, when those liabilities have been incurred now or in the past, is impossible to establish. Payments on some liabilities have been purposely pushed into the future to avoid the impact of paying in the present, putting the responsibility for difficult decisions on others. Yet there is the objective reality that paying more for liabilities now will have devastating impacts on services, staffing levels, and perhaps other types of employee compensation. Paying the increasing pension costs in recent years has been financed by reductions in staffing levels. But this does not change the fundamental policy issue; there is no coherent policy justification to further defer these costs. Indeed, arguments of fairness and equity have been distorted to the point that not paying toward liabilities or continuing to push payments off into the future is presented as the right thing to do in order to preserve a status quo ante. Resolving the dilemma will be the central theme of the City s budget process of 16

31 Inside City Hall Published on Saturday, 30 November :49 Red Ink Proposed Arena Bond Would Add to City's Rising Debt by Craig Powell In January, city treasurer Russ Fehr issued a stunning report on the city s expanding debt obligations: The city was approaching $2 billion in debt, half in outstanding borrowings, the other half in rapidly rising liabilities for employee pensions and retiree health care costs. The city s ratio of total debt to general fund revenue ($372 million) ranks among the highest in the country, which puts the city at greater risk of insolvency, particularly during economic downturns (like the one we re slowing exiting). Many Sacramentans have been facing similar challenges: rising debt and falling incomes. Most have responded by halting their borrowing and paying down their debt. That s what rational people do. That s not what our city has been doing. Instead, it has launched the biggest borrowing binge in city history with little to no regard for the future risks to basic services or taxpayers. City leaders seem to have one overriding preoccupation: how to find new ways to borrow more money much, much more money. The latest city borrowing plan, as revealed by documents prepared by the city s investment banker, Goldman Sachs, and obtained by city watchdog Eye on Sacramento, is to borrow as much as $304 million to finance a $212 million cash subsidy for the proposed new arena in addition to noncash arena subsidies that include 3,700 free parking garage spaces (almost half the city s total garage spaces), six electronic billboard sites and seven parcels of valuable real estate with a collective value of more than $138 million, according to an EOS analysis. Fehr said he expects the final amount of the arena bond to be a bit less than $304 million, perhaps in the range of $280 million. But he also recently released a snapshot summary of the proposed arena bond that still reflects the city s originally projected $304 million bond offering. The city claims the noncash subsidies have a value of just $46 million and that the total subsidy is only $258 million, the subsidy figure frequently used by The Sacramento Bee. Part of the city s claim: that the 3,700 garage spaces it intends to give away to the Kings owners have no value, despite a parking study that the city commissioned last year that found that an average city garage space has a value of more than $15,000, which would put the value of the garage-spaces giveaway at about $58 million. The city hasn t bothered to obtain appraisals of the seven properties it plans to give away, even though two prominent Sacramento developers have privately been warning that one of the city properties, 60 acres adjoining Business 80 near Haggin Oaks Golf Course, has a

32 market value four to five times higher than the value assigned to it by the city. Another parcel is being used by Crocker Art Museum as a parking lot. The city claims it s worth just $490,000 even though the Crocker has been netting $200,000 annually using it as a parking lot. Why is the city resisting calls for appraisals? Because they don t want the public to know that the properties are being grossly undervalued and the actual subsidies are much higher than advertised. A citizens lawsuit is pending that asserts that the city is defrauding the public by intentionally understating the amount of the arena subsidy. After EOS representatives reviewed the Goldman Sachs projections and conferred with Fehr, the arena financing plan started to come into focus. The city is projecting that the $304 million bond would be issued at an interest rate of 5.75 percent and would require total payments of $770 million, of which $466 million would be interest. Put another way, in order to obtain $212 million cash to subsidize the arena, the city will be paying back $3.20 for every $1 cash subsidy, $2.20 of which would be interest cost, making it almost certainly the most expensive and inefficient borrowing ever issued by the city. Why is it so expensive? First, instead of deploying a traditional 25-year bond with fully amortizing principal and interest payments, the city plans to issue a long-term 35-year bond with interest-only teaser payments for the first seven years. In its eighth year, it would shift to partially amortizing payments for 13 years and wouldn t become fully amortizing until the bond s 21st year. Annual payments would start at $17.5 million, rise to $19.9 million and reach $23.9 million for the bond s final 16 years. Why borrow $304 million when the city needs $212 million to fund the cash portion of its arena subsidy, a startling $94 million difference? First, the city is borrowing more in order to have the cash to make interest-only bond payments in the early years, comparable to an individual taking out cash advances on a credit card to make the minimum payments on that same credit card. Second, the city is borrowing almost $30 million to fund a third of the annual $9 million backfill to the general fund to replace the hit to the general fund caused by diverting city parking profits to arena bond payments in the early years a general fund subsidy grossly mislabeled by city staff as city parking revenue in its key March 26 report to the council, perhaps to hide from the public the actual source of the funds. The rest of the borrowing is to create reserves, fund future parking garage repairs and cover bond issuance costs of $6 million. EOS estimates that because the city is not using a traditional 25-year term bond with fully amortizing annual payments, but instead plans to issue an exotic 35-year bond that doesn t start to fully amortize for 21 years, the city will incur $196 million in higher, unnecessary interest costs over its term, a stunning 73 percent hike in public costs. EOS further estimates that the average Sacramento family s share of arena bond costs will amount to $5,200. If a traditional 25-year bond were used, the average Sacramento family s cost share would be $3,900. An NBA arena typically becomes functionally obsolete just 18 to 20 years after it s built. As a result, annual payments will likely be payable on the bond for 15 to 17 years after the new arena has reached functional obsolescence, putting the city in the likely position of having to finance a second arena (to keep the team) while still making jumbo payments on the first one (if it even still exists). By that time, of course, every current councilmember and senior city manager will have almost certainly moved on. But city taxpayers will still be here, scrambling to handle the arena deal s heavy legacy costs.

33 There is also a major risk that bond costs will be much higher than projected. When Fehr floated the broad outlines of the arena financing plan in March, he estimated that the bond would be sold at an interest rate of 5.5 to 5.75 percent. Since then, the municipal bond market has been hammered, with long-term interest rates rising 2 percent over the summer before easing back somewhat in the past few months. (Market rates remain 1 percent higher than what they were when Fehr made his interest prediction.) Muni bond mutual funds have experienced 22 consecutive weeks of net cash outflows, reducing the demand for such bonds and driving up rates. With fears of the Federal Reserve easing back on its ultra-easy monetary policy, the recent Detroit bankruptcy and increasing concerns over the burden of retiree costs on struggling California cities (including Sacramento), the muni market is in a period of major volatility entailing a very real risk of further rate hikes. Instead of modifying his interest projection to reflect higher current market rates, Fehr is sticking by his 5.75 percent interest rate prediction for the bond, claiming he anticipated the rise in rates over the past six months. If the arena bond were to be issued at a rate 1.5 percent higher than Fehr s March prediction, the higher rate will drive up taxpayer costs by $121.5 million, according to EOS findings. Total interest costs would soar to $587 million and total payments would hit $892 million. Taxpayers would be on the hook for paying back $4.20 for every $1 of arena cash subsidy, $3.20 of which would be interest costs. Bond payments will be reliant primarily upon parking profits. If parking profits aren t sufficient, the city s hotel tax would be tapped. (The city s general fund currently nets $4 million per year from the hotel tax.) Finally, if both of those sources aren t enough, the general fund will be on the hook. Goldman Sachs optimistically assumes that parking revenues will rise 50 percent in the first three years of the bond. City officials say they have plans to aggressively raise parking revenues by raising hourly meter rates by 40 percent in the first two years, significantly expanding the number and location of parking meters, extending the hours of meter operation and expanding the number of neighborhoods subject to permit-only parking, not because such permits raise city revenue (they re free), but because the city captures major fine revenue from hapless folks who park in permitonly areas without the requisite permit. The city has not discussed, or perhaps even considered, the potential impact of major hikes in meter rates and a broad expansion of meters on Sacramento businesses and residents. Midtown businesses (and city revenues) will be hurt if cost-conscious shoppers elect to dodge higher parking costs by shopping in meter-free areas outside of town. While an updated parking report is expected this month, we don t know whether it will include an analysis of the negative impact of such aggressive new meter policies on businesses and patrons. The city s plan to issue $304 million in arena bonds is not the only major borrowing the city has done this year or is planning. Earlier this year, the city issued $250 million in new utility revenue bonds (pushing total city debt well past $2 billion), the first bond sale in a plan to issue $2 billion in utilities bonds over the next 15 years to install water meters, replace water and sewer pipes and rehab the city s water plant. Critics of the plan, including Sacramento Metropolitan Chamber, urged the city to use far less debt and finance most of the improvements using less expensive pay-as-you-go water and sewer rate hikes. Last week, Fehr outlined to the city council a plan to issue $45 million of new debt to finance a rehab of the Community Center Theater, which would impose a new $3 million annual burden on the general fund. Next door, the Sacramento Convention and Visitors

34 Bureau has promised to bring to the council a plan for a major expansion of the Convention Center, despite the fact that the center is currently losing $16 million annually, according to a September EOS report. (Maybe the city should hand the Convention Center over to Kings owners instead of other city properties.) Cost estimates for the proposed center expansion have been as high as $220 million, according to media reports. Meanwhile, CalPERS has issued advisories to California cities to expect to pay much higher annual pension contributions in future years. Sacramento is facing a pension cost hike in the neighborhood of $30 million annually, and city budget director Leyne Milstein has stated that the city s existing revenue sources will not be enough to fund the added expense. City manager John Shirey has advised that the city s retiree health care cost liability is increasing by $30 million each year. Adding to the city s future financial stress is the expiration of the Measure U sales tax hike in six years, which will punch a further $27 million annual hole in the general fund. In short, the city, while barely emerging from the recession, is rapidly building a tower of debt: pension debt, retiree health care debt, utilities debt, parking meter debt, theater debt and, unless voters intervene, very expensive arena debt. Meanwhile, the general fund, the lifeblood of core city services, is facing mounting burdens with no identifiable means of meeting them. This is how cities go bankrupt. To read EOS s latest report on the city s proposed arena bond financing, go to eyeonsacramento.org. You can download the arena initiative at ourcityourvote.com. The deadline for voters to sign the arena initiative and submit it to Voters for a Fair Arena Deal is Dec. 7. Craig Powell is a local attorney, businessman, community activist and president of Eye on Sacramento, a civic watchdog and policy group. He can be reached at craig@eyeonsacramento.org or Category: Inside City Hall InsidePublications.com Copyright All Rights Reserved.

35 4/30/2014 City manager John Shirey fires back at downtown arena critique - Sacramento Business Journal Apr 24, 2014, 7:32am PDT Firing back at arena critique Ben van der Meer Staff WriterSacramento Business Journal Twitter LinkedIn Google+ Sacramento City Manager John Shirey has fired back at a city watchdog group s criticism of the new financing plan for a downtown arena, saying in essence it was being compared to apples when the actual deal is closer to oranges. In an sent to media, Shirey said Eye on Sacramento was being misleading in describing the debt the city of Sacramentowill incur as part of the project as effectively a muni junk bond, because such a label assumes the city s taxable debt under the plan would be compared to an index for AAA-rated tax-exempt debt. Enlarge Photo AECOM rendering, courtesy of Sacramento Kings Sacramento's city manager has fired back at a criticism of the new financing plan for a dow ntow n arena, saying in essence it w as being compared to apples w hen the actual deal is closer to oranges. There are few AAA-rated cities in California and even fewer AAA-rated leaserevenue bond transactions, Shirey said in the , noting Sacramento s current rating for such bonds is A. More to the point, taxable rates are always higher than tax-exempt rates for the simple reason that investors pay taxes on their interest earnings. A day earlier, Eye on Sacramento president Craig Powell criticized the interest rate on the city s lease-revenue bonds of 6.7 percent as the same as muni junk bonds sold by bankrupt Jefferson County, Ala. last year. Shirey s said the interest rate is based on a conservative projection for when the debt is actually issued, given current rates of 6 to /2