Item 01 2023-01419 Business Operations Tax Modernization — Sacramento City Council, October 31, 2023 (part 1 of 2)

City of Sacramento
City Council - 12PM Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2023-01419 10/31/2023 Discussion Item 1.

Business Operations Tax Modernization
File ID: 2023-01419
Location: Citywide
Recommendation: 1) Adopt an Ordinance amending Chapter 3.08 of the Sacramento City Code, relating to the Sacramento Business Operations Tax Update of 2024, to be published in full pursuant to Sacramento City Charter, § 32(d); and 2) Pass a Motion directing the City Clerk to return to City Council on November 14, 2023, with the administrative items necessary to submit the Ordinance to the voters at the March 5, 2024 municipal election.

Contact: Pete Coletto, Director of Finance (916) 808-5416, [email protected]; Jackie Rice, Finance Manager (916) 808-5844, [email protected]; Bryan Howard, Program Manager (916) 808-4847, [email protected], Department of Finance Presenter: Pete Coletto, Director of Finance, (916) 808-5416, [email protected]; Jackie Rice, Finance Manager, (916) 808-5844, [email protected], Department of Finance Attachments:
1-Description/Analysis
2-BOT Modernization
3-Proposed Business Operation Tax Modernization Ordinance - Clean 4-Proposed Business Operations Tax Modernization Ordinance - Redline 5-Resolution 2017-0078
6-Management Partners Citywide Financial and Operational Review 7-Management Partners Citywide Innovation and Efficiency Assessment 8-October 3, 2023 Law and Legislation Committee Report
Description/Analysis
Issue Detail: The City’s Business Operations Tax (BOT) was enacted by Ordinance in 1975 and, for non-cannabis businesses, was last updated in 1991. Minimum payment, maximum payment, and gross receipts thresholds have not been adjusted for inflation since 1991. In 2010, Management Partners conducted a Citywide Financial and Operational Review and recommended increasing the BOT as a revenue enhancement strategy. Council subsequently considered but did not advance a non-cannabis BOT measure. In 2020, Management Partners conducted a Citywide Innovation and

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File ID: 2023-01419 10/31/2023 Discussion Item 1.

Efficiency Assessment and reiterated their recommendation to increase the BOT. The City’s 5-year forecast in the fiscal year (FY) 2023/24 Approved Budget projects a structural deficit with ongoing expense growth outpacing revenue growth over the term of the forecast. During the FY2023/24 budget hearings, Council directed staff to explore options to modernize the BOT. On October 3, 2023, staff presented a BOT modernization proposal to the Law & Legislation Committee (Committee) based on a review of practices in comparable jurisdictions and other best practices. The main components of the recommended proposal were:
· Inflation adjustments for gross receipt tax businesses. · Gross Receipts minimum threshold from $10,000 to $50,000. · Minimum payment from $30 to $50.
· No change to 0.04% rate.
· Inflation adjustment of flat fee for all professionals to $684 and per employee rate to $68.
· Inflation adjustment of flat fee for all residential rentals and hotels/motels to $114 and per room/unit rate to $2.85 with residential landlords renting 2 or fewer units exempt. · Add an annual inflation adjustment tied to CPI.
· Increase annual maximum payment cap from $5,000 to $150,000.

Based on FY2022/23 data, the proposal presented to the Committee would result in approximately $6.6 million in additional revenue in the first full fiscal year.

The Committee advanced the staff recommendation with direction to engage with the business community, explore the impact of phasing in the increase of the maximum annual payment cap, explore the impact of alternate values for the maximum annual payment cap, provide additional analysis regarding potential impacts on local grocery businesses and the potential to create a separate tax rate for grocers, and confirm that short-term rentals would be treated equivalently to hotels.

To examine the impact on local grocery businesses, staff analyzed the impact of the BOT proposal on all businesses registered as grocers excluding large regional and/or national chains. There were approximately 75 local grocers that paid BOT in FY2022/23 and staff found that the impact of the proposed modernization would be minimal for those businesses with an average increase of $335 and a median increase of $4. Additionally, sales and services businesses self-select their business type without clear rules on specific characteristics needed to be a grocer. Due to the relatively small impact and the potential administrative complexity, staff recommends the City not create a separate tax rate for grocers.

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File ID: 2023-01419 10/31/2023 Discussion Item 1.

Staff held multiple information sessions for business associations, chambers of commerce and other interested stakeholders and met with businesses that requested additional meetings. The business community had the following questions and concerns:
· More information regarding how the BOT is assessed on the tradeable sector, manufacturing, and administrative offices.

Staff provided clarification that for tradeable sector businesses that generate gross receipts, their tax liability would be determined by those gross receipts. For manufacturers and administrative offices that do not generate gross receipts within the City, their tax liability is determined by total expenses and/or gross payroll within the City. · Concerns regarding the impact on businesses in the downtown area.

To determine the impact on downtown businesses, staff analyzed FY2022/23 data for zip code 95814. In total there were over 1,500 businesses that paid BOT in FY2022/23 with 28 paying the annual $5,000 maximum. For the 28 firms that paid the annual maximum, the average impact under the new BOT proposal would be approximately $12,000 per business per year with the median impact being approximately $4,300. The businesses that paid below the $5,000 annual maximum would see minimal impact under the proposed changes to the BOT. · More information regarding charitable exemptions.

Staff provided clarification that the charitable organization exemption would not change under the proposed modernization of the BOT and the charitable exemption to the BOT is as follows:

1. Business conducted by a charitable, nonprofit or eleemosynary corporation, association or organization if the net proceeds of said business are used exclusively by such corporation, association or organization for a purpose which would qualify as a charitable deduction under Section 17214 of the Revenue and Taxation Code of the State of California if said net proceeds were received as a gift by said organization.

2. The conduct of entertainment, concert, exhibition, or lecture on scientific, historical, literary, religious or moral subject, whenever the receipts are for a religious, educational or charitable purpose.

3. The conduct of entertainment, dance, concert, exhibition or lecture by a religious, charitable, fraternal, educational, amateur theatrical group, military, state, county or municipal organization or association, whenever the receipts are for the purpose and objects for which the organization or association is formed, and from which profit is not

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File ID: 2023-01419 10/31/2023 Discussion Item 1.
derived, directly or indirectly, by any individual.
· Concerns regarding enforcement of the current BOT.

Staff highlighted efforts to ensure compliance with the BOT such as periodic audits and that the City is working on a data sharing agreement with the State to aid compliance. Staff also clarified that there are certain firms, such as financial institutions, which the City is barred from levying a BOT by State and/or Federal law.
· Concerns that the maximum cap increase is too much too soon.

In response to both the Committee direction and business concerns, staff is recommending lowering the maximum BOT annual payment cap from $150,000 to $125,000 and phasing in the increase over five years:

BOT Maximum
Year 1 $ 25,000
Year 2 $ 50,000
Year 3 $ 75,000
Year 4 $ 100,000
Year 5 $ 125,000
The revised ordinance clarifies that short-term rentals will be treated equivalent to hotels for BOT tax liability as requested by the Committee. In addition, the revised ordinance will have a lower exemption for short-term rentals and hotels/motels than residential rentals and allows Council to annually adopt penalties for BOT non-compliance (the current maximum penalty is $115).

If advanced to the ballot by Council and approved by voters, the modernized BOT would go into effect July 1, 2024. Staff believes the BOT modernization proposal in the attached ordinance incorporates direction from the Committee and includes changes in response to concerns expressed by the business community. This proposal differs from the ordinance considered in 2010 in that it does not propose to increase the rate and by increasing the initial threshold payment, effectively minimizes the impact on small to medium-sized businesses, protects large businesses from having an open-ended tax liability, and reduces administrative complexity in the current BOT while maintaining our existing tax rate and adjusting annually to account for future inflation.

Policy Considerations: Modernization of the BOT is consistent with Council adopted Core Budget Policies and Guidelines adopted February 14, 2017 (Resolution 2017-0078, Attachment 4). These policies call for one-time resources to only be used for one-time costs; ongoing expenditures should be matched with ongoing financing sources and reserves are to be used in a planned and strategic manner. The BOT has not been updated since 1991 and since that time City expenses have

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File ID: 2023-01419 10/31/2023 Discussion Item 1.
increased, while the $5,000 annual BOT payment cap has not increased, nor have minimum BOT payments. The City Budget is forecast to be in structural deficit with expense growth outpacing revenue growth. The General Fund revenues generated from the modernization of the BOT will be used to fund essential City services that will benefit residents and businesses.

In addition, the City’s low maximum annual BOT payment cap creates a regressive tax rate structure.

When considering adjustments to the BOT, it is important to recognize that a gross receipts tax is a ‘top line’ tax that does not consider business expenses and can have a larger impact on low margin businesses. The City must also take into consideration that some businesses with high gross receipts may also be large sales tax generators, and a high BOT rate could cause those firms to move or close, negatively impacting other general-purpose revenues.

Economic Impacts: The increased revenue to the City will support and help offset the increased cost of essential City services, which serve local businesses. It will also increase the tax burden on local businesses, with that increase being concentrated on businesses with the highest level of gross receipts.

Environmental Considerations: Not applicable.

Sustainability: Not applicable.

Commission/Committee Action: Not applicable.

Rationale for Recommendation: During the FY2023/24 Budget Hearings, Council directed staff to explore modernization options for the BOT. Given best practices in similarly situated jurisdictions and consideration of impact to local businesses, staff’s recommendation balances the goal of BOT modernization with minimizing the impact on small to medium-sized businesses.

Financial Considerations: The City's FY2023/24 Budget projects a structural deficit with the City facing increased cost growth. In addition, the City has substantial unfunded pension and capital infrastructure liabilities. Modernizing the BOT and raising general purpose revenue is an important step in improving the City’s fiscal position. Revenue estimates based on FY2022/23 BOT data for the revised proposal are as follows:
$ in
millions
Year 1 $3.96
Year 2 $5.04
Year 3 $5.65
Year 4 $6.06
Year 5 $6.33

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File ID: 2023-01419 10/31/2023 Discussion Item 1.

Local Business Enterprise (LBE): Not applicable.

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BUSINESS OPERATIONS TAX MODERNIZATION

BUSINESS OPERATIONS TAX (NON-CANNABIS) HISTORYBOT Established by OrdinanceLast update to non-cannabis BOTManagement Partners recommends City increase BOTCity Counsel considers, but does not advance non-cannabis BOT ballot measure Management Partners again recommends revision of BOT in their Citywide Innovation & Efficiency AssessmentCouncil directs staff to explore BOT modernization options Law & Legislation Committee hears modernization proposal –advances to Council with additional direction19751991 201020102020 2023 2023

CURRENT SACRAMENTO BOT STRUCTURE
•The maximum BOT payment cap is $5,000 per year for all businesses.•Charitable and non-profit organizations that are exempt under State or Federal law are exempt from payment of the City’s BOT. • Accountants, Architects, Attorneys, Doctors, Engineers etc• Flat rate based on # years with license up to $300 plus $30 per licensed employeeProfessional Business Owners • Real Estate Broker, Insurance Broker, or Stock Broker• Flat rate of $100 for primary broker plus $30 per licensed employeeProfessional Brokers •Flat rate of $50 for hotel/motel/short term rental plus $0.75 for each unit in excess of 4•If renting 4 or more residential units, $25 flat fee + $1.75 per each unit in excess of 4Housing & Shelter •Gross receipts equivalent amount determined by expenses in the City or by building permit cost.•0.04% of gross receipts equivalent ($0.40 tax for every $1,000 in gross receipts) for gross receipts over $10,000Construction / Manufacturing / Admin Headquarters • $30 plus 0.04% of gross receipts ($0.40 tax for every $1,000 in gross receipts) for gross receipts over $10,000. All Other Businesses BOT REVENUE BY CATEGORY FY 2022-23 (MILLIONS)Professional Owner$0.6 7%Professional Broker$0.1 1%Residential Rental$0.1 1%Hotel/Motel/Short-T erm Rental$0.1 1%Gross Reciepts Based$7.5 84% Construction / Manufacturing / Admin$0.5 6%Total: $8.9
COUNCIL REQUEST METHODOLOGYT o examine BOT modernization options, staff considered practices in peer city jurisdictions & generally accepted criteria for a good tax system.Based on that methodology, staff made the following findings:•Inflation– The $5,000 maximum, minimum payments, per employee payments, and $10,000 threshold were established in 1991 and have never been adjusted for inflation. City operating costs have also experienced inflation. A modernized BOT should adjust for inflation & contain a mechanism for future inflationary adjustments.•Peer Jurisdictions – Many peer jurisdictions do not have a cap on annual BOT payments. Those with a cap have it set significantly higher than the current $5,000 cap in the City of Sacramento.•Administrative Factors – Standardizing rules where possible makes the tax easier to understand and administer.

STAFF RECOMMENDATION TO LAW & LEGISLATIONGross receipts tax:Gross receipts minimum threshold from $10,000 to $50,000;Minimum payment from $30 to $50; andNo change to 0.04% rate.Flat fee for all professionals to $684 & Per Employee Rate to $68 to account for inflation.Flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85 to account for inflation.Annual inflation adjustment going forward tied to Consumer Price Index.Increase annual maximum payment cap from $5,000 to $150,000.

RECOMMENDATION RATIONALEIncreases minimum payment less than inflation and gross receipts threshold by more than inflation to lessen any impact on small & medium sized businesses.Maintains relatively low 0.04% rate to remain competitive with other jurisdictions.Maintains a maximum cap to protect local businesses from having an open-ended liability.Increases maximum cap to be more in line with peer cities.Contains annual CPI adjustment for minimums, maximums, and thresholds to account for inflation.Standardizes other rules & updates penalties for easier understanding, administration, and enforcement of the tax.Raises additional revenue by adjusting levels that have not been increased in over 3 decades and have had real values eroded by inflation.

REVENUE IMPACT BY BUSINESS SIZEStaff Recommendation# BusinessesAnnual Gross Receipts FY 23$0.036,433$0 - $10,000($0.01)5,872$10,001 - $100,000($0.07)5,306$100,001 - $1,000,000($0.03)2,310$1,000,000 - $5,000,000($0.00)569$5,000,001 - $12,500,000$0.41201$12,500,001 - $25,000,000$0.8796$25,000,001 - $50,000,000$1.1954$50,000,001 - $100,000,001$3.1137$100,000,000+$5.4920,878T otal – Gross Receipts$1.073,749*T otal Other Categories$6.624,627T otal Revenue Impact vs Current BOT ($ millions)
*Excludes count of construction businesses (associated revenue is included) COMMITTEE DIRECTIONBusiness Community EngagementEngaged with business groups, chambers of commerce, and businesses who requested meetings.Feedback - Maximum threshold increase too much too soon, concerns with impacts on certain sectors and downtown, and questions about enforcement/charitable exemptions.In response staff is recommending a longer phase in of increase in maximum annual cap & a lower maximum cap increase.Local Grocer Analysis~75 local (not national chain) grocers paid BOT in FY 23Impact of proposed BOT very low Sales & service businesses self-select their business typeDue to low impact and potential administration complexity, staff is recommending we do not create a separate category for grocersShort-term rentals Phase In / Impact of different maximum cap REVISED STAFF RECOMMENDATIONProfessional Business Owners and Professional Brokers:oFlat fee of $684 & per licensed employee rate of $68oAdjusted annually by CPIResidential Rentals and hotels:oFlat fee of $114 & Per Room/Unit rate of $2.85oShort-term rentals treated equivalently to hotels <- Clarified from original staff recommendationoAdjusted annually by CPIGross receipts/gross receipts equivalent: oMinimum $50 and gross receipts threshold $50,000oAdjusted annually by CPIFor the annual maximum, phase in over 5 years as follows:<- Updated from original staff recommendationoYear 1: $25,000oYear 2: $50,000oYear 3: $75,000oYear 4: $100,000oYear 5: $125,000oEvery year thereafter increases by CPI REVISED RECOMMENDATION BUSINESS IMPACTYear 5Year 4Year 3Year 2Year 1Current BOTAnnual Gross Receipts$50$50$50$50$50$30$0 $50$50$50$50$50$30$10,000$70$70$70$70$70$66$100,000$430$430$430$430$430$426$1,000,000$2,030$2,030$2,030$2,030$2,030$2,026$5,000,000$4,030$4,030$4,030$4,030$4,030$4,026$10,000,000$10,030$10,030$10,030$10,030$10,030$5,000$25,000,000$20,030$20,030$20,030$20,030$20,030$5,000$50,000,000$40,030$40,030$40,030$40,030$25,000$5,000$100,000,000$100,030$100,000$75,000$50,000$25,000$5,000$250,000,000$125,000$100,000$75,000$50,000$25,000$5,000$500,000,000$125,000$100,000$75,000$50,000$25,000$5,000$1,000,000,000 Phase in of maximum cap spreads impact on high gross receipts businesses over multiple years. At year 5, the maximum cap is $125,000 per year. Based on FY 23 receipts, ~10 businesses would pay the maximum in Year 5.

REVISED RECOMMENDATION FINANCIAL IMPACTRevenue Estimate vs Current BOTMaximum Annual CapYear$3.96M$25,000Year 1$5.04M$50,000Year 2$5.65M$75,000Year 3$6.06M$100,000Year 4$6.33M$125,000Year 5 TIMELINE & NEXT STEPSOct 31, 2023 – Council considers Ordinance for BOT Modernization & takes action.Nov 14, 2023 – Administrative approvals to place BOT Modernization on the March Primary ballot.Mar 5, 2024 – If Council places on the ballot, voters will pass or reject the ballot measure.If passed (requires majority vote) the revised BOT would go into effect July 1, 2024.

QUESTIONS
Ordinance No.2023 Adopted on 1
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ORDINANCE NO.

Adopted by the Sacramento City Council
Date Adopted

AN ORDINANCE AMENDING VARIOUS SECTIONS OF, AND ADDING A SECTION TO, ARTICLE IV OF CHAPTER 3.08 OF THE SACRAMENTO CITY CODE, RELATING TO THE BUSINESS

OPERATIONS TAX
BE IT ENACTED BY THE COUNCIL OF THE CITY OF SACRAMENTO:

SECTION 1.

Section 3.08.170 of the Sacramento City Code is hereby amended to read as follows:

3.08.170 Gross receipts.

Every person not falling within the categories described in sections 3.08.180, 3.08.190,

3.08.200, and 3.08.205 shall pay an annual business operations tax as follows:

A. Every person that has gross receipts of $50,000 or less shall pay a flat tax of $50 for each year.

B. Every person that has gross receipts in excess of $50,000 shall pay a flat tax of $50, plus $.0004 for each dollar of gross receipts in excess of $50,000 for the reporting period.

C. Maximum tax. The maximum annual tax liability for any person under this section is as set forth in section 3.08.255.

D. Flat tax rate adjustment. The gross receipts threshold amount and the flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 2.

Section 3.08.180 of the Sacramento City Code is hereby amended to read as follows:

3.08.180 Professionals.

A. Professionals —General. Every person engaged in the profession of: accountant, architect, attorney, audiologist, bacteriologist, certified public accountant, engineer, dentist, mortician, optometrist, osteopath, physician , podiatrist, psychologist, surgeon, or veterinarian shall pay a flat annual business operations tax of $684.

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Nothing in this subsection shall be construed or deemed to apply to any person engaged in any of the professions enumerated in this subsectio n solely as the employee of any other person conducting, carrying on or managing such business, occupations or professions in the city, except, however, that each such employee who has a contractual right to participate in the income or profits of the busi ness, or is a shareholder of a professional corporation organized pursuant to section 13400 et seq., of the California Corporations Code must pay the tax.

Every person who employs an individual who would be subject to a business operations tax under this section if the individual was not exempted from the payment of said tax by the preceding paragraph shall pay a flat annual business operations tax of $ 68 for each such exempt individual in their employ.

B. Professionals —Brokers. Every person e ngaged in the business of real estate broker, insurance broker, or stockbroker, whether full or part-time, shall pay a flat annual business operations tax of $684 for the principal broker or broker of record plus a flat tax of $68 for each employee, agent, representative, or independent contractor subject to supervision by a principal broker or broker of record who devotes time to handling of rents, listing property, collecting or selling property, soliciting or writing insurance policies, or working as a salesperson or floorperson.

C. Maximum tax. The maximum annual tax payable by any firm under provisions of this section is as set forth in section 3.08.2 55. “Firm” is defined as any professional corporation, partnership, or other business entity whose individual members share in the profits of the business entity.

D. Revenue measure. Nothing contained in this chapter shall be construed as giving the city council, or any of the officers of the city in charge of administration of this chapter, any regulatory powers over any licensee who is engaged in the practice of a profession, trade, or calling and is one whose privilege to so engage in such profession, trade or calling is granted by the state or any of its agencies. As to such persons, and as indic ated in section 3.08.020, this chapter shall be construed as existing for revenue purposes only.

E. Flat tax rate adjustment. The flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 3.

Section 3.08.190 of the Sacramento City Code is hereby amended to read as follows:

3.08.190 Contractors.

A. Every person engaged in any type of business activity as a contractor which requires a city building permit shall pay a business operations tax at the time the building permit is issued at the rate of $0.40 per $1,000 for each $1,000 or fraction thereof of the value used to determine the charge for the building permit.

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B. The maximum annual tax payable by any person under this section is as set forth in section 3.08.2 55. It shall be the responsibility of the contractor who has paid the maximum tax to e stablish at the time a building permit is issued that the maximum has been reached and that no additional tax is due.

SECTION 4.

Section 3.08.200 of the Sacramento City Code is hereby amended to read as follows:

3.08.200 Housing and shelter.

A. Rental of residential real property. Except for short -term rentals as defined in section 17.228.104.D, e very person engaging in the business of offering residential real property for rental shall pay a flat annual business operations tax of $ 114 plus a flat tax of $2.85 for each rental unit in excess of three units. Any person with fewer than three units is exempt from payment of the business operations tax.

B. Hotels, motels, short-term rentals. Every person engaging in the business of renting out accommodations substantially on a transient occupancy basis , including short-term rentals as defined in section 17.228.104.D, shall pay a flat annual business operations tax of $114 plus a flat tax of $2.85 for each rental unit in excess of three units per situs.

C. Rental of nonresidential real property. Persons engaging in the business of offering nonresidential real property for lease or rental shall be taxed pursuant to section

3.08.170.

D. Maximum tax. The maximum annual tax liability for any person under subsection A, and for any situs under subsection B, is as set forth in section 3.08.255.

E. Flat tax rate adjustment. The flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 5.

Section 3.08.240 of the Sacramento City Code is hereby amended to read as follows:

3.08.240 Penalties.

If a business operations tax owed under this chapter is not paid within 30 days of the date the tax is due and payable, a penalty shall be added to the unpaid amount. If the tax is still delinquent after an additional 30 days, an additional penalty shall be added to the unpaid amount . The amount of these penalties shall be as established by city counci l resolution.

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SECTION 6.

Section 3.08.255 is hereby a dded to article IV of chapter 3.08 of the Sacramento City Code , to read as follows:

3.08.255 Maximum tax and adjustments.

A. Maximum tax. The maximum annual tax liability under sections 3.08.170,

3.08.180, 3.08.190, and 3.08.200 is as follows:

1. Effective July 1, 2024, the maximum annual tax liability is $25,000.

2. Effective July 1, 2025, the maximum annual tax liability is $50,000.

3. Effective July 1, 2026, the maximum annual tax liability is $75,000.

4. Effective July 1, 2027, the maximum annual tax liability is $100,000.

5. Effective July 1, 2028, the maximum annual tax liability is $125,000.

6. Effective each July 1 thereafter, the maximum annual tax liability shall be increased in proportion to the increase in the Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, San Francisco/Oakland/San Jose area (1982 —1984=100) (or any successor measure) from January 1 st through December 31 st of the immediately preceding year.

B. Gross receipts threshold and flat tax rate adjustments. Effective July 1, 2025 and each July 1 ther eafter, the gross receipts threshold amount in section 3.08.170 and the flat tax rates set forth in sections 3.08.170, 3.08.180, and 3.08.200 shall be increased in proportion to the increase in the Bureau of Labor Statistics Consumer Price Index for All Urban Consumers , San Francisco/Oakland/San Jose area (1982 —1984=100) (or any successor measure) from January 1st through December 31st of the immediately preceding year.

SECTION 7. Rate adjustments.

Notwithstanding any tax rate or maximum annual tax liability imposed by this ordinance, the city council may, in its discretion, at any time by resolution implement any lower tax rate or maximum annual tax liability it deems appropriate, and may by resolution increase such tax rate or maximum annual tax liability, not to exceed the tax rate or maximum annual tax liability established under this ordinance.

SECTION 8. Severability.

If any portion of this ordinance is for any reason held to be invalid or unenforceable by a court of competent jurisdiction, the remaining portions of this ordinance shall remain in effect. The Ordinance No.2023 Adopted on 5
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people of the City of Sacramento hereby declare that they would have adopted each portion of this ordinance, notwithstanding the fact that any one or more portions of this ordinance is declared invalid or unenforceable and, to that end, the provisions of this ordinance are severable.

SECTION 9. Majority Approval; Effective Date.

This ordinance shall be effective only if approved by a majority of the voters voting on this ordinance and shall go into effect on July 1, 2024.

Adopted by the City of Sacramento City Council on by the following vote:

Ayes:

Noes:

Abstain:

Absent:

MAYOR
Attest:

City Clerk

Passed for Publication:

Published:

Effective:

Ordinance No.2023 Adopted on 1
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ORDINANCE NO.

Adopted by the Sacramento City Council
Date Adopted

AN ORDINANCE AMENDING VARIOUS SECTIONS OF, AND ADDING A SECTION TO, ARTICLE IV OF CHAPTER 3.08 OF THE SACRAMENTO CITY CODE, RELATING TO THE BUSINESS

OPERATIONS TAX
BE IT ENACTED BY THE COUNCIL OF THE CITY OF SACRAMENTO:

SECTION 1.

Section 3.08.170 of the Sacramento City Code is hereby amended to read as follows:

3.08.170 Gross receipts.

Every person not falling within the categories described in sections 3.08.180, 3.08.190,

3.08.200, and 3.08.205 shall pay an annual business operations tax as follows:

A. Every person that has gross receipts of $50,000 or less shall pay a flat tax of $50 for each year.

B. Every person that has gross receipts in excess of $50,000 shall pay a flat tax of $50, plus $.0004 for each dollar of gross receipts in excess of $50,000 for the reporting period.

C. Maximum tax. The maximum annual tax liability for any person under this section is as set forth in section 3.08.255.

D. Flat tax rate adjustment. The gross receipts threshold amount and the flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 2.

Section 3.08.180 of the Sacramento City Code is hereby amended to read as follows:

3.08.180 Professionals.

A. Professionals —General. Every person engaged in the profession of: accountant, architect, attorney, audiologist, bacteriologist, certified public accountant, engineer, dentist, mortician, optometrist, osteopath, physician, podiatrist, psychologist, surgeon, or veterinarian shall pay a flat annual business operations tax of $684.

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Nothing in this subsection shall be construed or deemed to apply to any person engaged in any of the professions enumerated in this subsection solely as the employee of any other person conducting, carrying on or managing such business, occupations or professions in the city, except, however, that each such employee who has a contractual right to participate in the income or profits of the business, or is a shareholder of a professional corporation organized pursuant to section 13400 et seq., of the C alifornia Corporations Code must pay the tax.

Every person who employs an individual who would be subject to a business operations tax under this section if the individual was not exempted from the payment of said tax by the preceding paragraph shall pay a flat annual business operations tax of $68 for each such exempt individual in their employ.

B. Professionals —Brokers. Every person engaged in the business of real estate broker, insurance broker, or stockbroker, whether full or part-time, shall pay a flat annual business operations tax of $684 for the principal broker or broker of record plus a flat tax of $68 for each employee, agent, representative , or independent contractor subject to supervision by a principal broker or broker of record who devotes time to handling of rents, listing property, collecting or selling property, soliciting or writing insurance policies, or working as a salesperson or floorperson.

D. Revenue measure. Nothing contained in this chapter shall be construed as giving the city council, or any of the officers of the city in charge of administration of this chapter, any regulatory powers over any licensee who is engaged in the practice of a profession, trade, or calling and is one whose privilege to so engage in such profession, trade or calling is granted by the state or any of its age ncies. As to such persons, and as indic ated in section 3.08.020, this chapter shall be construed as existing for revenue purposes only.

E. Flat tax rate adjustment. The flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 3.

Section 3.08.190 of the Sacramento City Code is hereby amended to read as follows:

3.08.190 Contractors.

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B. The maximum annual tax payable by any person under this section is as set forth in sect ion 3.08.2 55. It shall be the responsibility of the contractor who has paid the maximum tax to establish at the time a building permit is issued that the maximum has been reached and that no additional tax is due.

SECTION 4.

Section 3.08.200 of the Sacramento City Code is hereby amended to read as follows:

3.08.200 Housing and shelter.

A. Rental of residential real property. Except for short -term rentals as defined in section 17.228.104.D, every person engaging in the business of offering residential real property for rental shall pay a flat annual business operations tax of $114 plus a flat tax of $2.85 for each rental unit in excess of three units. Any person with fewer than three units is exempt from payment of the business operations tax.

C. Rental of nonresidential real property. Persons engaging in the business of offering nonresidential real property for lease or rental shall be taxed pursuant to section

3.08.170.

D. Maximum tax. The maximum annual tax liability for any person under subsection A, and for any situs under subsection B, is as set forth in section 3.08.255.

E. Flat tax rate adjustment. The flat tax rates in this section shall be adjusted annually as provided in section 3.08.255.

SECTION 5.

Section 3.08.240 of the Sacramento City Code is hereby amended to read as follows:

3.08.240 Penalties.

SECTION 6.

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Section 3.08.255 is hereby a dded to article IV of chapter 3.08 of the Sacramento City Code , to read as follows:

3.08.255 Maximum tax and adjustments.

A. Maximum tax. The maximum annual tax liability under sections 3.08.170,

3.08.180, 3.08.190, and 3.08.200 is as follows:

1. Effective July 1, 2024, the maximum annual tax liability is $25,000.

2. Effective July 1, 2025, the maximum annual tax liability is $50,000.

3. Effective July 1, 2026, the maximum annual tax liability is $75,000.

4. Effective July 1, 2027, the maximum annual tax liability is $100,000.

5. Effective July 1, 2028, the maximum annual tax liability is $125,000.

SECTION 7. Rate adjustments.

SECTION 8. Severability.

If any portion of this ordinance is for any reason held to be invalid or unenforceable by a court of competent jurisdiction, the remaining portions of this ordinance shall remain in effect. The people of the City of Sacramento hereby declare that they would have adopted each portion of Ordinance No.2023 Adopted on 5
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this ordinance, notwithstanding the fact that any one or more portions of this ordinance is declared invalid or unenforceable and, to that end, the provisions of this ordinance are severable.

SECTION 9. Majority Approval; Effective Date.

This ordinance shall be effective only if approved by a majority of the voters voting on this ordinance and shall go into effect on July 1, 2024.

Adopted by the City of Sacramento City Council on by the following vote:

Ayes:

Noes:

Abstain:

Absent:

MAYOR
Attest:

City Clerk

Passed for Publication:

Published:

Effective:

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REPORT TO COUNCIL
City of Sacramento
915 I Street, Sacramento, CA 95814-2604
www.CityofSacramento.org
Staff Report
May 18, 2010
Honorable Mayor and
Members of the City Council
Title: Transmittal of Citywide Financial and Operational Review Final Report Location/Council District: Citywide
Recommendation: Transmittal of Citywide Financial and Operational Review Final Report for discussion and direction to staff
Contact: Andrew Belknap, Management Partners,(408) 437-5400 Arne Croce, Management Partners, (408) 437-5400
Presenters: Andrew Belknap, Management Partners, (408) 437-5400 Arne Croce, Management Partners, (408) 437-5400
Department: City Manager's Office
Division: Not applicable
Organization No: 02001011
Description/Analysis
Issue: On September 1, 2009, the City Council approved a scope of work and directed staff to release a Request for Proposals (RFP) seeking proposals to conduct an independent citywide financial and operational review. On November 3, 2009, the City Council authorized the City Manager to execute an agreement with Management Partners, a national consulting firm specializing in local government, to conduct the review. Management Partners has completed a macro level review of City operations and finances and prepared a final report with their analysis and recommendations for the City to consider in developing its long-term financial and service sustainability.

Policy Considerations: An independent review of the City's operations and finances compliments the City Council's interest in identifying opportunities for cost savings, efficiencies and right-sizing the organization to meet reduced revenue trends.

Environmental Considerations: Not applicable
1 21
Commission/Committee Action: Not applicable
Sustainability Considerations: Not applicable
Rationale for Recommendation: The Financial and Operational Review Final Report presents several revenue and expenditure reduction strategies for city consideration. Staff is seeking City Council feedback and direction on strategies presented in the Final Report.

Financial Considerations: The Final Report identifies 49 revenue and expenditure reduction strategies for city consideration in developing a plan for long-term financial and service sustainability.

Emerging Small Business Development (ESBD): Not applicable Respectfully Submitted by:

Patti Bisharat,Assistant City Manager
Recommendation Approved:
6us Vina, City Manager
Table of Contents:

Report
Attachments

1. Background
Pg 1
Pg 3

2. PowerPoint Presentation Pg 5

3. Financial and Operational Review - Final Report Pg 18 2 Attachment 1
Background
On September 1, 2009, the City Council directed staff to release a Request for Proposals (RFP) to conduct a citywide financial and operational review. The purpose of the review was to identify cost savings, efficiencies/service delivery changes, and potential revenue opportunities in the General Fund and Utilities Department.

Following a competitive selection process involving nine proposing firms, Management Partners, Inc. was identified as the top proposing firm. Management Partners, Inc. is a national consulting firm specializing in local government with offices in San Jose and Cincinnati.

On November 3, 2009, the City Council authorized the City Manager to execute an agreement with Management Partners to conduct a citywide financial and operational review for an amount not to exceed $129,950. The scope of work required Management Partners to identify strategies to close the City's projected deficit gap and achieve a sustainable balanced budget. The goal of this review was to identify options to the elimination or reduction of services, with a particular focus on strategies that had either not been identified or given thorough consideration in the past. Areas of focus included the following:

New/Increased Revenue Sources - Identifying new revenue sources based on best practice and benchmarking analysis
Expenditure Controls - Developing strategies which cap or save General Fund expenditures
Service Delivery Model Chanqes - Examining alternative service delivery approaches resulting in efficiencies and elimination of redundancies Service Delivery Reductions - Reductions suggested by benchmarking or performance measures
Best practice case studies were utilized by Management Partners to assist in identifying potential financial and operational strategies for the City of Sacramento. Additionally, the scope of work required Management Partners to conduct benchmarking and review of peer agencies to further evaluate and contrast city operations with other agencies.

The Final Report provides 49 specific strategies for city consideration. Strategies are organized into three general categories: corporate governance, revenue enhancement, and expenditure reduction. The Final Report also includes analysis and observations related to the city's utility enterprises. An interim report on key findings and preliminary conclusions was presented to the City Council at the February 11, 2010 budget workshop. 3 Back to Table of Contents
Presentation on Independent
Budget Review
Sacramento City Council
May 18, 2010

MANAGEMENT PARTNERS
IN C 0 R P 0 R A T E Q
Back to Table of Contents
Our Experience
^ Serving
1994
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pr
ca9 governments naflonal
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cts a^^oMM9bud 9
Pted hundr
Un
^^ inc0ude9 San Jose
^^aheom, Orange Co
, San Bernardlln:,
racy, Rancho Cord(
Lon
> MANAGEMENT PARTNERSi N C O R i O R A T E 0 ^
Our Sacramento Engagement
Assist the City in development of a
financiafly sustainable budget
nIdentify alternatives to service cuts
nBring ideas from other cities and push
the envelope on ideas
nProvide the Mayor and Council with a
broad menu of choices to craft a
balanced approached
Our Sacramento Team
Fourteen consultants assisted with this
roject , all of which have worked on
similar engagements in other California
settings
Team included individuals with decades of
xperience managing entire cities as well
s subject matter experts in municipal
finance an d the services delivered by
cities
The Problem
Revenues have dropped to 2005 levels
and are not projected to return to previous
levels for several years
The cost of providing services has
increased substantially above 2005 levels
Annual spending cannot exceed annual
revenues indefinitely
Important Observations
nThe budget has been balanced largely with a variety
of one-time measures - which are mostly used up
n Program reductions are moving the City away from
the goal of being a"full-service" organization
nThe City is unable to fund the operation and
maintenance of new facilities still being constructed
with development fees
nGiven current trends the City's utilities will require support from the General Fund
nThe City organizational structure does not reflect
current financial realities
Employee Costs are City's Largest
Expenditure
Employee Expenses Have Increased In Spite of Reductions in Positions
Expenditures 1,000s
$380,000
$360,000
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
I
2005 / 06
Numberof Employees
2009/10
--Employee Expenditures
Employee FTE
3400
3200
3000
2800
j 2600
2400
2200
- 2000
> MANAGEMENT PARTNERS1 N C 0 R R 0 R A T F. D
7 Are There Solutions?
Yes, but.... they require:
Making difficult decisions on priorities
Making decisions that will be unpopular
with every constituency
Department Irector leaders ipin
approaches to municipal service delivery
Moving to compensation practices whic
re consistent with the economic realities
Buiding support f or r eve nue measures by
continuina fiscal discirAine~j MANAGEMENT PARTNERS
~*~" I N C 0 R R 0 R 4 T E D
Waiting on a Recovery is NOT a Solution
Annual Percentage Change in Property Tax Revenues
20 15
10 5
0 -5
-10
---
What Recovery Looks Like Assuming a Repeat of Last Recovery from Mid- 1990's Recession
--------- _.___-____ -^ -- --- -- -
- -r r --r-T-_r-1_. r -r- - r-^--r--r -r - r- -r- r-r 1-r-rr__T _T I -- -1-rrr____T_ ^ --_-- _
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^ N MV, U) CO t- c0 O O^ N MV, tn 0 t- 00 O O ^ N M t 0 CO r^ c0 O O N MV- r.f) c0 1- a0 CO CO CO a0 a0 a0 a0 a0 O) O) M O) O) O) M O) O) O O O O O O O O O O O O O O 61 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O ^ ^ ^^ ^ ^ r- ^ ^ ^ ^ ^ ^ ^ ^ ^ ^^ ^ N N N N CV N N N N N N N N N N N N N -Actual and Projected Annual Growth in Property Tax Revenues -Average Annual Growth in Property Tax Revenue 1981 - 2008 MANAGEMENT PARTNERSI N' C 0 R a 0 R A T E D
The Big Picture
Revenue
nerd revenu
a
TOT, Parking
CD r_:~
Q usinessy
■ Fees and service charges: Development
proCessing, FBr
■ O$her: Ambulance subscription servce, Police
tows
r8quor6
f $65=$
d: SaIes,
■ Changng priori$ees; S~i~~

MANAGEMENT PARTNERS
N C D RO R n T E D
~~~~~$~~1
~~~~~~~o
10 €
The Big Picture
Expenditures
~ Expendture ReducUon OpUons
Change
Reduce management
Service consolidation
Competitive service delivery
Businesspractice changes
Compensation
3 Examples
Consolidate departments
Public safety dispatch; Animal control
Park maintenance; Convention center; Paint and
body work
Vary fire staffing based on conditions; Police
civilianization; Code notification process / fines
Pension changes; Incent retirees to use Medicare
when eligible; Revise overtime calculation
~ MANAGEMENT PARTNERSI N C D R P D R A T E D
11 Achieving Financial
Sustainability
o No one approach
o Bdanced prograr
n N ew re v enue
WH
I ®v
sd^^ the probilem
nNew ways of do^ng business
nRethinking priorities
nResetfing compensation
> MANAGEMENT PARTNERSI N C 0 R1 0 R A T E D
12 Comments and Questions
ThankY
;)p
M ANAGEMENT P ARTNERSI N C 0 R P 0 R A A TT E EDN C O R P O R D ~ MANAGEMENT PARTNERS
1 N C 0 R P 0 R A T [ D
1 3

CITY OF SACRAMENTO

CITYWIDE FINANCIAL AND

OPERATIONAL REVIEW
April 2010
>

M ANAGEMENT P ARTNERS

I N C C O R P PO R R A T E DN O R O A T E D
Back to Table of Contents
3)0

MANAGEMENT PARTNERSI N C O R P O R A T E D
April 29, 2010
Ms. Patti Bisharat
Interim Assistant City Manager
City of Sacramento
Governmental Affairs
915 I Street, 5th Floor
Sacramento, CA 95814
Dear Ms. Bisharat:

Management Partners is pleased to submit our project report for our work on the Sacramento Financial and Operations Review. The report provides our analysis and recommendations for the City to consider in developing a plan for long-term financial and service sustainability.

This report incorporates the results of your comments on the administrative draft as well as some additional information gathered since publishing that draft.

Our review of the government had one primary objective and one major limitation. The objective was to examine all Sacramento government operations to identify opportunities to close the structural deficit faced by the City. We examined the operations of every department in an objective and independent manner with this goal in mind.

The major limitation of this review is that it is a macro level analysis of the overall operations of the entire government, which is an extremely complex entity with an operating budget of over $400 million and a work force of more than 5,000 employees. The review was not designed to provide focused, detailed analysis of specific, individual government functions. Some of the recommendations, therefore, identify areas where additional analysis will, in our professional opinion, provide significant opportunity for improving cost-effectiveness.

Our work has benefited greatly from the assistance and collaboration of your office and staff in all departments. All have been responsive and helpful. Sacramento's residents are fortunate to have a talented and professional staff.

We look forward to presentingour report and recommendations to the Mayor and City Council.

Sincerely,
Gerald E. Newfarmer
President and CEO
2107 North First Street Suite 470 www.managementpartners.com 408 437 5400 San Jose, CA 95131 Fax 453 6191
City of Sacramento
Citywide Financial and Operational Review

TABLE OF CONTENTS
EXECUTIVE SUMMARY ...........................................................................1 BACKGROUND ......................................................................................11 GOVERNMENT OVERVIEW ......................................................................11 FISCAL CONTEXT ................................................................................... 12 REGIONAL ECONOMIC CONDITIONS ........................................................ 12 IMPACT ON THE CITY ..............................................................................14 The City's Response So Far Has Been Tactical .............................. 15 Full Service City at Risk ....................................................................18 DEVELOPING A FINANCIALLY STABLE CITY GOVERNMENT ........................ 19 Establishing Service Priorities .......................................................... 20 Development of Strategic Alternatives ............................................. 20 A Balanced Approach ....................................................................... 20 PROJECT APPROACH ..........................................................................23 DOCUMENT REVIEW ............................................................................... 23 INTERVIEWS . .. ...... ........ .... ....... .. .................... .. .. ..... .......... ...... .... .. ... ....... 23 PEER REVIEW AND BENCHMARKING .......................................................24 STRATEGY IDENTIFICATION ....................................................................25 COUNCIL BRIEFINGS ..............................................................................26 STRATEGY REFINEMENT ........................................................................26 ANALYSIS AND RECOMMENDATIONS ...............................................27 CORPORATE GOVERNANCE RECOMMENDATIONS .................................... 27 Administrative Structure ................................................................... 28 Restructuring of Boards and Commissions ...................................... 32 REVENUE ENHANCEMENT RECOMMENDATIONS ....................................... 37 Taxes . . .. ... ..... . ... .. ... . . . . .. .. . . . . .. .. .. . . .. .. .. . . . .. .. .. .. .. . .. . .. .. . .. . .. .. . .. .. .. .. .. .. .. . ... . 39 New General Revenue Options ........................................................ 44 Other City Revenues ........................................................................ 56 Revenue Shifts ................................................................................. 57 Functional Revenue .......................................................................... 58 Maximizing New Revenue Sources .................................................. 64 EXPENDITURE REDUCTION RECOMMENDATIONS ..................................... 65 Approach to Expenditure Reduction Analysis .................................. 65 Changes to Service Delivery Models ................................................ 66 Service Eliminations and Reductions ............................................... 87 Business Practice Changes .............................................................. 90 Citywide Compensation Changes .................................................. 105 UTILITY ENTERPRISES .......................................................................115 FINANCIAL CONDITIONS ........................................................................116 WATER ................................................................................................116 SEWER ................................................................................................118 SOLID WASTE ......................................................................................119 STORM DRAINAGE ...............................................................................121 ATTACHMENT A - NAME OF ATTACHMENT A ................................125 City of Sacramento
Citywide Financial and Operational Review
TABLES
Table A: Summary of Recommendations by Category ..............................4 Table 1: Sacramento Tax Revenue for FY 2008/09 and FY 2009/10......40 Table 2: Sacramento Sales Tax Revenue for FY 2005/06 to FY 2009/10 ................................................................................................................. 43 Table 3: Statewide Sales and Use Tax Revenue Allocation ....................44 Table 4: Sales and Use Tax Revenue per Capita and Rates for Sacramento and Peers ............................................................................ 45 Table 5: Sales Tax Rates in Surrounding Areas ......................................45 Table 6: Select Cities with Parking Taxes ...............................................47 Table 8: Sacramento and Peer Cities Transfer Tax Revenue (FY 2009/10) ................ ........... .......... ......... ...................... ....... ...... ................. 50 Table 9: Transfer Tax Revenue Comparison for Selected Northern California Charter Cities ........................................................................... 51 Table 10: City of Sacramento and Peer Cities
Transient Occupancy Tax Revenue (FY 2009/10) ..................................53 Table 11: Transit Occupancy Tax Comparison among
Peer Jurisdictions .................................................................................... 53 Table 12: November 2009 Statewide Local Revenue
Measure Election Results ........................................................................ 55 Table 13: FY 2009/10 Budgeted Development Related
Expenditures and Revenue .....................................................................60 Table 14: Ambulance Subscription Program Revenue
for FY 2008/09 ..... ......................... ........................... ....................... ......... 62 Table 15: Animal Care Services Budget ..................................................71 Table 16: Potential Personnel Cost Savings of Contracting .................... 83 Table 18: Attendance for Recreation Swim per Pool* ............................88 Table 20: Fire Calls for Service In 2009 ................................................. 91 Table 21: Peer Fire Department Engine Company
Staffing (FTEs per Engine) ...................................................................... 93 Table 22: Engine Company Staffing of Adjacent
Fire Departments ..................................................................................... 94 Table 23: June 30, 2009 ending Water Fund Balance
as a percent of annual costs for Municipal Systems ..............................116 City of Sacramento
Citywide Financial and Operational Review

FIGURES
Figure 1: Job Loss from December 2008 to February 2010 ................... 13 Figure 2: Comparative Property Value Declines from
July 2008 to January 2010 .......................................................................14 Figure 3: City of Sacramento General Revenue and
Expenditures From FY 2004/05 through FY 2008/09 ............................. 15 Figure 4: Authorized staffing levels from FY 1999/00 to FY 2009/10 ...... 16 Figure 5: Projected General Fund Revenues and
Expenditures FY 2009/10 to FY 2015/16 ................................................. 17 Figure 6: Public Safety Expenditures as a Percent of
Net General Fund Resources ..................................................................19 Figure 7: Current City of Sacramento Organization Chart .......................29 Figure 8: Sacramento General Fund Actual, Budget, and Projected Revenue and Expenditures (FY 2004/05 to FY 2014/5) ..........................38 Figure 9: Total Revenue Comparison ...................................................... 39 Figure 10: Per Capita Tax Revenue ........................................................41 Figure 11: Sacramento Real Property Tax Revenue
from FY 2002/03 to FY 2009/10 ..............................................................42 Figure 12: Sacramento Business Tax Revenue (FY 2002/03 to FY 2009/10) ........ ...... ................. .... .. ......................... .. ...... .. . .... ........ ...... .... ... 48 Figure 13: Peer Cities Police Operating Expenditures
per Capita for FY 2009/10 .......................................................................75 Figure 14: Peer Cities Major Crimes* per 1,000 Residents in 2008 ........75 Figure 15: Per capita Peer Cities Fire Expenditures for FY 2009/10.......92 Figure 16: Private vs. Public Personnel Costs ....................................... 106 Figure 16: Sacramento Region Monthly Water Rate Comparison ......... 117 Figure 17: Sacramento Region Monthly Sewer Rate Comparison (excluding SRCSD charges) ..................................................................119 Figure 18: FY 2009/10 Sacramento region monthly solid waste rate comparison ............................................................................................120 City of Sacramento
Citywide Financial and Operational Review

EXECUTIVE SUMMARY
Background
The City of Sacramento has been buffeted by the most challenging times to face local government since the Great Depression of the 1930s. Like all cities, the revenue base has been decimated by the recession as major general revenue sources declined after several years of robust growth. The collision of high revenue growth years and the crash after the housing bubble burst and the recession hit in 2007 through 2009 created a major structural deficit problem for the City. Operating expenses continued to grow, largely fueled by increases in employee pension costs and multi-year labor contracts granted in good revenue years, and a balanced budget could not be sustained with the new revenue base, creating the gap between annual revenues and costs which we call the structural deficit. In addition, the state continued to find ways to extract local revenue and use it for state functions, making a bad situation worse.

Beginning in FY 2008/09, the City undertook tactical responses to address the crisis, and to keep expenditures in line with available revenue. These responses included:
General Fund expenditure reductions of $108 million. Some departments have had budget reductionsof approximately 50%. A draw down of reserves for economic contingencies from $30 million to $10 million.
Reduced spending on capital programs, including infrastructure maintenance.
Renegotiation of labor agreements to spread out contracted salary increases.
Increased revenue, where feasible.

These responses are deemed tactical because, by necessity, they often reflect the use of one- time monies or expenditure reductions that are not sustainable (e.g., reductions in maintenance of City facilities and infrastructure). Despite these dramatic and substantial actions, the City has been unable to get out in front of the budget problems it has been experiencing. In fact budget projections in late 2009 for 2010/11 indicated that the City faced a projected General Fund budget shortfall of between $35 and $45 million. At this time, the Mayor, City Council and management recognized that the City was not simply responding to a temporary downturn in the economy where revenues could be expected Management Partners, Inc. 1
City of Sacramento
Citywide Financial and Operational Review
to bounce back quickly to keep current services intact. Rather, the City was facing a long-term financial condition that would require a strategic approach to develop a new revenue and service model that could be sustained indefinitely.

To identify the full menu of options available to bring expenditures and revenue into balance over the long term, the City undertook two initiatives. The first was a Program Oriented Development (POD) review process that City management structured to categorize each service currently provided as either mandatory, essential or an existing program.

For those that were categorized as mandatory, the authorizing act requiring the service (e.g., City Charter, state law, federal regulation) was identified as was the level of service required to fulfill the mandate. The annual cost and number of employees supporting each program was also identified. The purpose of the POD process is to present the City Council with the hierarchy of current services and programs so they can make funding decisions based on the revenue available.

Independent of the POD process, the Mayor and City Council sought an outside, independent review of the City's financial and operating situation.

The goal of this review was to identify options to the elimination or reduction of services, with a particular focus on strategies that had either not been identified or given thorough consideration. After a competitive process, Management Partners was retained for this task. Management Partners is a national consulting firm specializing in local government with offices in San Jose and Cincinnati.

Underpinning the Mayor and Council's interest in the identification of alternatives to cutt ing or severely reducing services was Sacramento's long history as a full service "plus" city government. Historically the City has had a mission that goes beyond providing public safety and infrastructure. A variety of programs, services and facilities to improve the quality of life of the residents and maintain a vibrant commercial climate have been developed over the years. Given the natural priorities of the community and the cost structure in police and fire services, City leaders were concerned that with the tactical responses to date the share of net General Fund resources going to public safety grew from 55% to 77%, which threatened the City's long term ability to provide a broad range of services.

Analysis
Management Partners began the engagement with a learning phase that included reviewing recent budgets and annual financial reports to broaden our understanding of the dynamics of the City's revenue base, services and organization structure. Current practices and policies that impact revenue and expenditures were reviewed, including agreements with the City's labor unions. Detailed interviews were conducted with city 2 Management Partners, Inc.

City of Sacramento
Citywide Financial and Operational Review
management staff and department directors to gather their assessment of the situation and ideas on alternatives to outright service elimination. We reviewed the POD process as it progressed and previous actions taken to address the financial problems. The results of the 2009 employee survey were also reviewed to identify employee-generated suggestions to address the City's financial challenge.

To learn from the experiences of others, eleven cities were selected as good "peer matches" for Sacramento. These included seven of the larger cities in California and four other state capital cities in the West and Midwest. A benchmark survey was conducted on a broad range of revenue, expenditure and operating metrics. The purpose of the peer review was twofold: to understand how the financial and operating dynamics of Sacramento compare to similar communities and to identify practices in the peer cities that may have value to apply in Sacramento.

After the learning phase, an inventory of potential strategies to both decrease cost and increase general revenue was developed. This was followed by meetings with City management and key staff from operating departments to vet the strategies, indentify fatal flaws or significant implementation obstacles and gather strategy ideas we had not identified.

Following this step, Management Partners selected the strategies that appeared to have the most promise and utility for Sacramento and did further analysis on the financial and service impacts of the strategies and issues that would be associated with implementation.

The core of this report includes a review of over 40 discrete strategies with an estimated total annual dollar value in the range of between $101 and $154 million. These strategies are grouped into broad categories that reflect the organization of this report. These categories are briefly summarized below.

The Corporate Management section includes opportunities to restructure the City organization to better align and coordinate service delivery and to reduce the number of departments and management positions. It also suggests streamlining the current structure of boards and commissions that are advisory to the Mayor and Council.

The section on Increasing Revenues contains strategies that include new revenue that could be derived from a variety of mostly voter approved taxes; shifting of revenue from a current use to support General Fund expenses; and opportunities from new or existing fees our user charges of one type or another.

The section on Expenditure Reductions includes strategies to consolidate certain services with the County of Sacramento and other cities; changes in the method of service delivery for certain services; revisions to current service delivery business practices; and recommendations to eliminate or reduce some services. Given that the focus of the POD was on what service the City provides, Management Partners' focus was primarily on how various services are provided.

Management Partners, Inc. 3
City of Sacramento
Citywide Financial and Operational Review
A summary of the recommendations by category is displayed in Table A below.

TABLE A: SUMMARY OF RECOMMENDATIONS BY CATEGORY
SacramentoBudget Strategy Annual Financial Impact Summary (in $ Millions) Corporate Management Restructuring $1 $3
RevenueOptions
Voter Approved Tax Options $46 $78
Voter Approved TOT Reallocation $7 $7
Increased Franchise and User Fees $9 $17
Revenue Shifts $3 $3
Revenue Sub-Total $65 $105
Expenditure Options
Service Consolidation $5 $5
Competitive Sourcing $13* $13*
Business Practice Changes $8 $9
Compensation Changes $9 $19
Expenditure Sub-Total $25 $46
TOTAL $101 $154
*Of this amount, $5 million would accrue to the General Fund One of the important implications of Table A is that we are suggesting a balanced approach. This is not an accident. In our experience as consultants who assist local governments, it has become apparent that solving budget problems must rely on a variety of changes and techniques. The problems cannot be solved solely by increasing revenues or by abandoning all traditional business practices by, for example, contracting out all municipal service delivery. Nor can a city afford to gut its internal support and management capability in an effort to preserve front-line service delivery. Doing so would mean it would gradually become unable to operate effectively or in compliance with the myriad of regulations that apply to local government. The answer lies in doing a bit of everything, taking into consideration each city's unique strengths and challenges. Above all, it requires being strategic and future-oriented and a consciousness that the city will be there long past the lifetime of current residents and policymakers.

This report also includes a brief section on the City's major utility funds- water, wastewater, solid waste and storm drainage. While the focus of our work was developing strategies to achieve service and financial sustainability in the General Fund, we were engaged to also provide an overview of the financial condition of these utilities and have made some broad recommendations aimed at improving their fiscal situation. 4 Management Partners, Inc.

City of Sacramento
Citywide Financial and Operational Review
Summary of Recommendations
Following is a high level summary of major recommendations. These include our estimate of the financial impact on the City's General Fund.

These strategies, in conjunction with the options coming from the POD process, give the Mayor and City Council a range of options to close the structural deficit and achieve financial stability while remaining a full service city. All recommendations are included in Attachment A.

Corporate Governance
Two recommendations are made regarding corporate governance. One is to restructure the organization of services and functions into fewer departments. Sacramento has more separate departments for the same mix of services than peer cities. Reorganizing into fewer departments can produce an estimated annual savings of between $1 and $3 million resulting from the elimination of management positions and the merger of duplicative administrative and support functions.

A second recommendation is to streamline the City Council advisory body structure. While direct savings will be minimal, the consolidation of some and elimination of other advisory bodies will free up precious staff time in departments that have had significant personnel reductions.

Revenue Strategies
We have placed Revenue Strategies into three subcategories: voter approved other revenue, and revenue shifts and functional revenue.

Voter Approved
The City has a wide array of revenue options to place on a ballot for voter consideration. Most of these ballot measures can be structured as either a general tax or a special tax. General taxes require a simple majority approval and can be used for any government purpose determined by the City Council. Special taxes require that two-thirds of the voters approve the measure and can only be used for the purpose specified in the ballot measure.

A sales tax of one-quarter to one-half percent per $1.00 would generate from $13.5 to $27 million annually. Cities and counties have the option to add an additional sales tax levy to the basic sales tax rate to be used for general government services. Many cities in California have successfully passed sales tax measures.

A parcel tax could raise from $9.9 to $13.8 million annually. A parcel tax is a flat dollar annual assessment as opposed to the amount of tax being based on the value of the property. Parcel taxes can be at different rates for different types of property, e.g., a rate for commercial property and a rate for residential property. Parcel taxes can be structured as either general or special purpose.

Management Partners, Inc. 5
City of Sacramento
Citywide Financial and Operational Review
A parking tax of 10% could raise approximately $3,000,000 annually.

Several California cities assess Parking Taxes for users of public and private garages. Tax rates range from 10% to 25% of the parking rates.

Sacramento is one of the larger cities in California without this revenue source.

An increase in the real prope rty transfer tax could generate from $2.9 million to as much as $18.0 million annually, depending on the rate increase. With a current tax rate of $2.75 per $1,000 of transaction value, Sacramento is at the low range of other Northern California charter cities with respect to this revenue source.

An increase in the business operations tax could raise approximately $9,300,000 annually. The City has not adjusted business operations tax rates in many years and currently receives less than half the per capita business tax than peer cities.

Establishing an emergency communication system access fee or tax could generate approximately $7.3 million annually. This is a flat monthly fee assessed on telephone and communication lines within the city. The revenue from the fee would go to support the City's 911 emergency communication system.

A reallocation of the transient occupancy tax (TOT) could free up an estimated $7 million annually for general City services. Sacramento allocates 10% of the current 12% TOT to support the Convention Center and visitor promotion. The bulk of the proceeds currently service debt on the Convention Center. As TOT is a general revenue source, most cities allocate all or a significant portion of the tax to the General Fund.

Through a careful process of evaluating the financial impacts on both the City and on the business and residential communities, and the use of polling, it is recommendedthe City craft a ballot measure or measures to raise additional general revenue as part of a balanced plan to achieve service and financial sustainability.

Other General Revenue
Increasing franchise fees or functional revenues both offer another opportunity for increased revenue. Franchise fees are charged to businesses for the right to do business in the city and to offset service demands and infrastructure impacts from their presence. The City currently does not receive franchise revenues from the electric service provider, Sacramento MunicipalUtility District ( SMUD), nor does it collect the maximum franchise fees from commercial solid waste haulers. If SMUD provided a typical franchise fee the City would realize an estimated $5 to $7 million per year. Increasing the franchise fee for commercial haulers to the same level as other providers would raise approximately $800,000 annually.
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Revenue Shifts and Functional Revenue
Shifting revenue currently being used for one purpose to support eligible activities currently funded out of the General Fund is another revenue opportunity available to the City. The use of CDBG funds for eligible code enforcement activities would free up approximately $3.0 million a year for other general services. Shifting the funding for tree maintenance completely out of the General Fund and into the landscape maintenance districts would provide an additional $650,000 annually in revenue for general purpose.

Significant opportunities exist to generate additional general revenue from specific services and functions performed by the City. These include:
Increasing planning and building fees to cover a greater share of applicant/project costs would generate between $1 and $5 million annually.
Establishing a subscription program for ambulance service would provide between $1 and $2 million annually.
Establishing fees for fire inspections performed by engine and truck companies could provide between $230,000 and $790,000 annually.
Competitively bidding the police vehicle tows and awarding an exclusive contract to one company could generate $500,000 to $1.0 million annually.
Establishing a policy that revenue from any new sources, such as digital billboards, and facility naming rights be designated as general revenue and not earmarked for specific projects or programs.

Expenditure Strategies
There are opportunities for the City to significantly reduce the cost of providing current services. With approximately 85% of the General Fund budget going to employee-driven costs, most of these opportunities result either from having a smaller City workforce or having a lower compensation structure.

These have been organized into the broad categories of changing service delivery models, changes in business practices, serv ice reductions and eliminations and changes in compensation policies and practices.

Changing Service Delivery Models
Significant savings can be achieved if the City is willing to abandon the 20th century model of directly providing most services through stand-alone City departments with a public employee workforce. The Sacramento metropolitan area is rich with functional consolidation opportunities between cities and the County. Sacramento County serves a large urbanized population with an organization structure and services that mirror those of the City. Additionally, other cities in the County provided the same services to their residents and businesses. Considerable cost ManagementPartners, Inc. 7
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savings can be achieved by functionally consolidating the provision of many services into a single entity.

The City is currently a party to a number of consolidated service models including libraries and waste water treatment. In December 2009 the City Council and Board of Supervisors directed staff to explore functional consolidations. This work is in progress. Management Partners recommends that the City convene a regional summit to discuss consolidation opportunities and perhaps work with the Sacramento Area Council of Governments to develop a regional approach to studying such opportunities.

This report contains recommendations for specific consolidations with the County and other cities. The estimated savings are:
• Emergency dispatch communication(911) - $2.2 million
• Major crimes investigation - $750,000
• Police property and evidence management- $290,000
• Police special teams units e.g.,SWAT-- $840,000
• Police air support- $200,000 to $500,000
• Animal care services - $308,000
Competitive sourcing is another way to achieve significant cost reductions while maintaining current services. Because of the essential monopoly status of many governmentally provided services, compensation has expanded and inefficient practices have sometimes remained unquestioned. In response to this, a competitive market model has evolved for the provision of many city services. The Lakewood model, first developed in Southern California during the 1950s and 1960s has demonstrated that many city services can be provided under contract either privately or with another governmental provider.

The City currently uses contract providers for certain services including utility billing, some park maintenance, some tree maintenance and some parking garage operations. In addition the development of managed competition has been developed to allow government to get the best value proposition from either an outsourced or directly operated function.

Utilizing a competitively sourced delivery model for several services could eventually result in annual savings of as much as $13 million, with an estimated $5 million of benefit to the General Fund.

Management Partners recommends that the City begin by competitively bidding the following. The estimated savings that would result is significant.
• Fleet Body and Paint Shop- $100,000
• Park Maintenance - $1.4 million
• Golf Course Operations and Maintenance - $879,000
• Convention Center Management and Operations -$1.4 million The City allowed the Parks Unit to bid on a recent contract to maintaining six parks. This practice could be continued for future competitive sourcing 8 Management Partners, Inc.

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processes. In the event services are outsourced, provisions can be included in the contract to provide for the transition of current City workers to the new provider.

Service Reductions and Elimination
The City's POD process brings forward a comprehensive identification of service reduction and elimination options. The focus of Management Partners was on alternatives to service elimination and reduction.

Through the course of our work, however, we have identified two service reductions strategies. First, closure of three swimming pools would save approximately $335,000. Second, eliminating General Fund contributions to facilities run by non-profit agencies that charge entry fees would save an estimated $2.5 million.

Business Practice Changes
A change in the business practices currently used to provide some services can result in significant savings. Recommended changes are:
Restructure fire suppression and ambulance service - $5.7 million
Civilianize certain police management positions - $180,000 to $300,000
Change the response to an initial report for code enforcement violations - $365,000
Consolidate most information technology resources into the central department - $1 to $2million
Lease three community centers to organizations or professional tenants - $450,000.

Compensation Changes
The City of Sacramento is an excellent employer. It offers competitive compensation levels and excellent benefits including a generous defined benefit retirement plan and comprehensive medical insurance. City employees have important jobs to do and they deserve to be, and are, well compensated. Salaries and benefits are 85% of the City's total General Fund expenses. Because these benefits have in many cases eclipsed benchmarks in the private sector, significant savings opportunities exist by changing current policies and practices. It is recognized that most of these issues are subject to future contract negotiations with the City's labor unions. Management Partners recommends the following changes for consideration in future contract negotiations.
Employees picking up all or a part of the employee contribution to the CaIPERS pension plan could raise $2.5 to $10 million and is justified given the City's inability to continue with these generous retirement benefits for new employees
Because existing pension levels are no longer sustainable, changing to a retirement plan for new employees with lower benefits than current plans must be considered. Reverting back to the PERS plans the City had in place up until 2000 is estimated to Management Partners, Inc. 9
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save approximately $3.5 million annually after ten years up to $7.0 million after 20 years, in current dollar value.
Switching to a flat dollar amountfor the City's contribution for health insurance, a common practice could save $1.7 million. Phasing out the practice of paying for retiree health insurance could save $3 to $6 million annually. Lesser cost options such as Health Savings Accounts and application to MediCare for older retirees are available.
Amending the City Charter to conform to state law regarding payment of disability benefits to non-safety employees would save approximately $300,000.
Conforming overtime calculation policies to federal and state law would save $1.3 million.
Including the consideration of private sector compensation in negotiating compensation for positions where the same or similar work is pe rformed in the private sector could reduce costs for positions where the City would still get many qualified applications. The savings from this strategy is undetermined. Avoiding across the board salary increases (COLAs) that exceed the CPI would save the City money and provide the intent of a COLA adjustment, which is maintaining purchasing power not providing a raise. The cost savings could be substantial.

Between the POD review process and the independent assessment by Management Pa rtners, the Mayor and City Council have more than enough options to achieve the desired service and financial sustainability over the next three year and remain a full service city. While the options are plentiful, the choices and decisions are hard.
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BACKGROUND
To provide context for this report, this section includes an overview of the City of Sacramento's financial condition and how it came to be. This background will allow the reader to understand how the structural deficit occurred as well as how the City has addressed the situation in recent years. It will also provide an explanation of why this type of analysis is important.

GovernmentOverview
Founded in 1849, the City of Sacramento is the oldest incorporated city in California. In 1920, Sacramento city voters adopted a City Charter (municipal constitution) and a Council-Manager form of government. The City Council consists of a Mayor, elected by all City voters, and eight Council members, elected to represent separate districts in the City. Each Council member is required to live in the district they represent. The Mayor and Council members serve four-year terms. Elections are staggered.

The City of Sacramento is home to approximately 482,000 residents and is the seventh largest city in California. Population density is approximately four people for every square mile of land. According to the 2000 Census, the City's population is 48% white, 28% non-Hispanic white, 15% black and 17% Asian.

Sacramento is the capital of the State of California as well as the seat of Sacramento County. The City is the core cultural and economic engine of a four-county metropolitan area (El Dorado, Placer, Sacramento and Yolo counties) of over 2.1 million residents. The Sacramento Metropolitan Area is the largest in the Central Valley and the fourth-largest in the state.

The City's economy is broadly based although government is by far the largest employer. Of California's 471,000 state government employees, an estimated 25% work within the City. Transportation is a large sector as well as information technology, leisure and hospitality, professional and business services, higher education, health services and research, and construction. In addition, the Sacramento River provides a deep-water port connected to the San Francisco Bay via a 43-mile channel that allows international shipping.

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The City employs 4,595 full-time equivalent (FTEs) employees and has a total "all fund" budget of $875.1 million, $385.9 million of which is in the General Fund.

Fiscal Context
Many cities and counties in California are facing a fiscal situation that has come to be called a "structural deficit." This occurs when ongoing revenue sources are no longer able to fund ongoing operational expenditures. It is not a temporary situation linked to a particular event or cycle, but rather is a chronic condition requiring action and change.

The financial stresses causing structural deficits are related to increasing service demands, aging infrastructure and escalating personnel costs, often linked to pension increases. Compounding these expenditure drivers are two important facts: in California, local revenues are constrained by various constitutional initiatives approved during the last 30 years and the state has continually shifted local property taxes to accommodate its own budget needs.

These general issues have been exacerbated by the greatest economic recession since the Great Depression. Sacramento has been among the hardest hit regions of the country, suffering from extreme job loss and mortgage foreclosures that have occurred as a result of the recession and from the burst of the housing bubble. As a result, major sources of general revenue have decreased significantly. Some of these conditions are a result of a cyclical decline, but experts are also predicting that we should not expect to see a return of the housing boom that drove so much of the Sacramento economy anytime soon, if ever.

Regional Economic Conditions
Cities depend on a healthy local economy for their livelihood. Most cities' revenues in California are derived from sales tax, property tax and other sources of revenue that are dependent on activity in the underlying local economy.

One of the best measures of the strength of the local economy is the number of jobs it generates. According to the Sacramento Regional Research Institute (SRRI), the six-county Sacramento regional area began losing jobs in October 2007. Figure 1 below depicts Sacramento's job loss compared with the State of California and national situation since December 2008. It is apparent that Sacramento entered the recession sooner and was hit harder than the country as a whole.

Since then, virtually all the major sectors of the Sacramento economy including government, retail trade, construction activities, business and 12 Management Partners, Inc.

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professional services, hospitality and manufacturing have seen employment losses. In early 2010 the rate of job loss in the Sacramento area declined, mirroring national and state trends.

The latest projections are somewhat encouraging as SRRI noted that two of Sacramento's largest sectors (Professional and Business Services and Trade and Transportation and Utilities) have been showing considerable improvements in negative job growth, influencing recent overall economic performance. However it is important to note that the region has still not seen positive job growth since mid-2008, possibly making this the longest recession since the 1930s.

FIGURE 1: JOB LOSS FROM DECEMBER 2008 TO FEBRUARY 2010

0.00 -1.00
-2.00
-3.00
-4.00
-5.00
-6.00
-7.00
-8.00
o~OeL ,at~ ~eo ~D~' PQt ~a~ ,JC~ ~J~ PJQc ~QQ O~~ ~oJ O~v 1at~ q, I0 -0- Sacramento -M- California -n- United States
Source: Center for Strategic Economic Research, December 2009 The Sacramento metro area has also experienced one of the steepest declines in property values in the nation, as illustrated in Figure 2.

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FIGURE 2: COMPARATIVE PROPERTY VALUE DECLINES FROM JULY 2008 TO JANUARY 2010
0 -10
-20
-30
-40
-50
-60
v^ ro OJ -O C Y t D -O N 0 . 0
- 0 0
a 0Y E •
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roo
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6m u - Q p c
^ } c c _° a U Q c' C Ep O y ^ ,al O .. L N ca O ^ 0 M
^
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s > CO a a`^ U c m ` c ~ ` ^ a^ ^ Q ^ oU V Z c L LL N v1 U J a ^ v O cu
r Mo N
Source: Chase Shiller Macro Markets LLC
The region has not experienced this kind of economic collapse in more than 75 years, and the impact has been and will continue to be profound on the City of Sacramento's budget.

Impact on the City
The impact of the cumulative financial trauma on the City of Sacramento has been unprecedented. This is reflected in Figure 3 below. The City has had to cut $108 million over the past two fiscal years. 14 Management Partners, Inc.

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FIGURE 3: CITY OF SACRAMENTO GENERAL REVENUE AND EXPENDITURES FROM FY 2004/05 THROUGH FY 2008/09
$420,000 1
$400,000
$380,000
cro
o $360,000
IE
-5 $340,000
$320,000
$300,000
FY 2004/05 FY 2005/06 FY 2006/07 FY 2007/08 FY 2008/09
Source: Cityof Sacramento Comprehensive Annual Financial Reports ->- Revenue
f Expenditures
As will be explained below, because the City has not been able to cut expenditures as fast as revenues have dropped, a variety of mostly one- time monies have been used to balance the budget. While it is not possible for Sacramento or any city to respond immediately to a significant drop in revenues, on-going expenses must eventually be reduced to match revenue. This must be done soon.

The problem has not yet abated as major general revenue for the current 2009/10 fiscal year is lower than projected when the Council adopted the budget in June 2009. All of the City's major revenue sources, sales tax, property tax, transient occupancy tax and utility users' tax, are down significantly (by some $17.6 million) in 2009/10 relative to the adopted budget. As a result, the City had to use one-time monies at a greater rate than anticipated. Fortunately before the economy started to falter, the City built the economic uncertainty fund to $30 million. This fund helped bridge the gap between revenue and expenditures in FY 07/08 and 08/09 and will help the transition as the City takes steps to achieve financial sustainability over the next three years.

The City's Response So Far Has Been Tactical
As noted above, the City had to use one-time monies to deal with most of the impacts of the revenue reductions to date. In response to this situation the City has undertaken a number of actions including:
Implementing significant budget reductions in all departments.

Some departments have had reductions greater than 50%.
Increasing revenues.
Drawing down the economic reserve that went from $30 million to $10.5 million in three years.
Negotiating labor concessions including salary deferrals. Freezing most hiring and implementing other expenditure controls. Eliminating most General Fund capital improvement projects.

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It is important to note that so far the City has mainly taken a tactical approach to balancing the budget on a year-to-year basis, taking the steps it could without having an overall strategy for the long-term alignment of expenditures with revenues. While an initial tactical approach is unavoidable given the quick and severe impact of the recession, many of the expenditure reductions and other actions taken are not sustainable, and may even make the long-term situation worse.

Examples of such reductions include:
Deferring maintenance of City infrastructure and facilities. Not filling vacant positions without regard to the City's long-term strategic need for the position.
Using the fund balance to support operations.
Reducing support functions such as human resources or information technology below the level necessary for satisfactory long term performance.
Terminating organization development and employee training efforts.

Obviously the economic contingency reserve will quickly be exhausted, maintenance cannot be put off forever, and some types of employees will eventually need to be replaced.

As will be detailed later in this report, the City's major cost is related to personnel expenditures. The City has in fact reacted quickly to eliminate positions where possible (mainly via attrition and an early retirement incentive program). With the elimination of 410 General Fund positions in FY 2009/10, total General Fund supported staffing is lower in FY 2009/10 then it was in FY 2001/2002, as shown in Figure 4.

FIGURE 4: AUTHORIZED GENERAL FUND STAFFING LEVELS FROM FY 1999/00 To FY 2009/10
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Even with major cutbacks in the number of positions, the City's main expenditure driver, personnel costs, are still significantly higher than just a few years ago. The cost per employee is higher than ever. So, while employee service costs in the current year budget have been reduced by almost $20 million compared with the prior year, the City is still spending $100 million more than in FY 2004, when there was a significantly larger workforce. In addition, the City has grown since 2000 and as a result, service demands have increased. Assuming the City resumes growth, it will need more police officers and other municipal employees to keep up with service demands.

Another factor indicative that the City has yet to develop a more strategic approach is that it continues to construct new facilities, even when it is unable to satisfactorily operate and maintain existing facilities. For example, from January 1, 2010 through December 31, 2011 there are approximately 50 new acres in 10 parks scheduled for development.

Although this is funded by development fees, the ongoing maintenance of the parks is a General Fund obligation, which will cumulatively dwarf the impact fees collected.

It is clear that despite the significant expenditure control actions,the City has not been able to get out in front of the deteriorating financial condition. And the worst is yet to come; in FY 2010/11 the City will experience the impact of reduced property taxes from lower property assessments and another significant increase in PERS costs to offset investment losses from the recession.

A structural deficit in the General Fund of between $35 and $45 million is projectedfor FY 2010/11. As Figure 5 shows, in the absence of significant actions to revenue and expenditures, the City's financial condition is projected to worsen over the next five years.

FIGURE 5: PROJECTED GENERAL FUND REVENUES AND EXPENDITURES FY 2009/10 TO FY 2015/16 -
so75.000
$450.000
8425,000
S400,000
$375,000
$350.000
FY10 FYti
Source: Cityof Sacramento
FY12 FYI 3 FY14 FYI 5
-Expenalturss
-i •Ravanues
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Figure 5 does not reflect what will occur. The City has to bring revenues and expenditures in line to have a balanced, sustainable, budget. That is why this evaluation is important. It is a first start, along with the City's new budget process for FY 2010/11, to developing a sustainable budget in which City programs and expenditures are in alignment with the revenues available.

The Mayor and City Council adopted a policy framework on February 11, 2010 that is guiding this work. It can be summarized as follows:
A balanced approach to a sustainable budget using the following strategies:
o Alternative Service Delivery
o Streamlining and Right-Sizing the Organization
o Revenue Improvements
o Use of One-time Reserves
Fiscal and Organization Principles:
o Develop a sustainable budget plan
o A balanced budget for FY 2010/11
o Use one-time resources strategically
o Balance layoff impacts with service level decisions
o Address full service City status
Full Se rv ice City at Risk
Another important factor that should be mentioned is that during the last several years the City has cut deeper in non-public safety services. This is certainly understandable, as police and fire services are core municipal services. However they are not the only municipal services.

Sacramento has taken great pride in being a full service "plus" city, offering a broad range of services that enhance the quality of life for residents. These include an extensive network of parks and recreational facilities, cultural activities, and youth oriented programs. The current financial crisis threatens the ability of Sacramento to continue to provide its residents with a broad array of quality of life services and programs.

With budget reductions being much more severe in the non-public safety departments, the net General Fund po rtion of revenue allocated to the police and fire depa rtments has increased from 55% in FY 2007/08 to 77% in the current year. This dynamic is shown in Figure 6. 18 ManagementPartners, Inc.

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FIGURE 6: PUBLIC SAFETY EXPENDITURES AS A PERCENT OF NET GENERAL

FUND RESOURCES
Source: Cityof Sacramento 2009/10 Budget
If the current trend was to continue (and it cannot for many reasons), spending on police and fire would "crowd out" all other spending, including support services as well as the many municipal amenities that add so much to the current quality of life in Sacramento. Therefore, a serious evaluation of how to decrease the net General Fund resources going towards police and fire as a percentage of total resources must be completed. By necessity, this will involve a discussion of new revenue options as well as expenditure controls and reductions.

Developing a Financially Stable City Government
The above discussion has shown that the City's current economic and budget environment is serious, that a systematic structural budget deficit exists and that existing approaches to deal with the problem are not a solution. As mentioned previously, the recession hit so fast and so hard that cities, including Sacramento, have had to use one-time monies and execute quick expenditure cuts to develop balanced budgets for the current fiscal year. Many of these determinations are, by necessity, of a short-term nature and will not be sustainable or desirable (relative to other options) over the long term.

To achieve a service delivery model that can be sustained in the long run, the City has embarked on developing a plan to be implemented during the next three fiscal years that will bring operating and capital costs to a level that can be sustained by projected revenue.

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There is recognition that the robust economy of the recent past will not return for several years and that the City must fundamentally rethink what services and programs it provides; how these are delivered to the public; and how to provide stable funding for services, programs and capital improvements. These are the foundations of a financial sustainability plan.

Two efforts have been undertaken to provide the Mayor and City Council with the information and policy options to develop this plan. Both are described below.

Establishing Service Priorities
As part of the City Council's budget approval process forFY 2010/11, City management has undertaken a review called Program Oriented Development (POD). The POD process places all current programs and services into one of three categories:
• Mandatory
• Essential
• Existing
This categorization and the costs associated with all current services will be presented to the Mayor and City Council along with estimated revenue. This will allow the Mayor and Council to determine what services they choose to fund up to the projected revenue.

Development of Strategic Alternatives
The City Council engaged Management Partners to conduct an independent review of City operations and finances with the objective of developing alternative methods to deliver and fund current service. The City is seeking to develop recommendations that are actionable and have not been previously identified or seriously considered by the City. To the extent there are service delivery models that maintain current services at lower costs and acceptable revenue increases to support programs, the City will be able to maintain more current services and programs. This will maximize the goal of remaining a full-service city, capable of maintaining a high quality of life for residents and a robust climate for local business.

The objective of both efforts is to design a plan that will identify the core responsibilities of the City and right-size the organization to fulfill these responsibilities within available revenue.

A Balanced Approach
No single strategy can facilitate the attainment of service and financial stability. The City will need to implement strategies with a variety of objectives including:
• Eliminating some current services
• Reprioritizing the use of some non-General Fund revenue • Restructuring the organization
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Increasing both functional and general revenue, the latter requiring voter approval
The ability to continue providing value added services beyond public safety and infrastructure will depend on the willingness of the Mayor and City Council to cut services and programs of marginal community value, implement lower-cost delivery methods for certain services, increase general revenue, and contain public safety costs. The purpose of engaging Management Partners is to provide the Mayor and Council with a broad menu of options to achieve financial sustainability over a three- year timeframe.

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PROJECT APPROACH
Management Partners worked in conjunction with the City Manager's Office and used a number of analytical and management techniques for this project. Information was gathered from a wide variety of sources for analysis in preparing our recommendations. Our methodology and the information sources are discussed below.

Document Review
Management Partners began this project by reviewing documents that are essential to understand the City's historic, current and projected financial condition. Documents reviewed include:
Budgets and financial reports for the current and previous fiscal years Organization charts for all departments
Previous budget-balancing efforts
Employee budget suggestions
Historical City staffing levels
City Charter
Analysis of local economic conditions
Interviews
Management Partners conducted individual interviews with executive staff and department directors to assess current conditions and understand previous budget-balancing strategies.

Employee Suggestions
The City conducted a survey of the workforce in 2009 designed to gather suggestions on addressing the financial challenge. Management Partners reviewed the results of this survey. Employee suggestions were also included in various options brought forth by the departments.

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Peer Review and Benchmarking
A group of 11 peer cities were identified based on a number of different criteria, including demographic information and the dynamics of the community. The peer cites included large California cities and other state capital cities in the West and Midwest. Management Partners gathered basic financial and operational information for each city using surveys and interviews, and compared the results with Sacramento. The purpose of the benchmarking was twofold: to develop a sense of how Sacramento compares to peer cities in revenue, expenses, staffing and services; and to identify potential best practices in other cities that may be transferable to Sacramento. The cities selected for comparison were:

California Peer Cities Other State Capitals
• Bakersfield • Albuquerque
• Fresno • Austin
• Long Beach • Denver
• Oakland • Oklahoma City
• San Jose
• Santa Ana
• Stockton
Peer benchmarking results are used in the strategy discussion areas identified below. Overall, the benchmarking shows that Sacramento measures up well when compared with municipal service providers of similar size and setting.

Data were gathered from the selected cities' internet websites where budget data was available. Budgets posted online were from fiscal year 2009/10. Note that there are some data limitations related to availability of website data. In some cases, format and presentation differences from individual city budgets do not allow for an equal comparison.

Conducting benchmarking to analyze and compare Sacramento with peer jurisdictions is useful to determine how the City is operating and to serve as a point of comparison. Although helpful, benchmarking data should be used carefully. Whenever data from individual city budgets is used for comparison purposes, some format and presentation differences may hamper valid comparisons. The following factors are important to consider when weighing the value of peer comparisons:
• Every city is unique and attempts to compare are always imprecise.
• Reporting standards, particularly with respect to the definition of special funds, designated funds and reserve funds, can vary greatly.
• The data is most useful for illuminating averages, the polar opposites from the average, and where Sacramento falls on the scale. Further research would be necessary to make any definite findings between peer city "X" and the City of Sacramento. 24 Management Partners, Inc.

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Benchmarking provides data to assist in the management decision making process; it is not meant to "grade" a city or to create resource allocation formulas.
The quantitative benchmarking completed in this analysis does not always identify process differences that can substantially impact resource needs. Some process benchmarking may be a logical follow-up in areas where significant quantitative variances are apparent.

Nevertheless, the data contains insights and explanations that will help in identifying peer and nominal or "market" levels for revenues as well as expenditures. More importantly, the results can provide context to the budget decisions the City has to make and the balancing of resource allocations inherent in the budget process.

Strategy Identification
Based upon our knowledge of best practices in municipal finance and local government organizations and the results of the peer benchmarking, Management Partners developed an inventory of potential strategies to decrease costs and increase revenue. Extended meetings were held with the management from each department as well as representatives from the City Manager's Office and Finance Department to review and discuss preliminary strategies and understand their potential financial and operational impacts on the City organization and the community. Detailed development and analysis was then performed on the preliminary strategies with the most promise for Sacramento.

Because the City Budget POD process is the primary venue for determining programs that are not mandated and that may no longer be necessary or sustainable, Management Partners has taken the position that all City services have value and, if possible, should be preserved.

Therefore while there are a few service reduction strategies provided as recommendations in this report, the majority of our effort has been spent on determining how City services can be preserved through one of the following means:
Increasing existing revenue sources, developing new revenues or shifting the use of current revenue;
Restructuring business processes and developing alternative service delivery approaches; and
Considering alternative compensation policies.

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Council Briefings
Management Partners conducted briefings for City Council members and their key staff. The preliminary results of the research and benchmarking were reviewed as well as the categories of strategies under development.

The briefings also provided examples of strategies in each category. The purpose was to give Council members a progress update, to hear feedback on issues related to various strategies and on other areas that should be considered during the review.

Strategy Refinement
The final step was to utilize the information and feedback to refine the strategies. We then prepared recommendations for those strategies that have the most promise for making a significant contribution towards Sacramento's goal of financial and service sustainability. 26 ManagementPartners, Inc.

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ANALYSIS AND RECOMMENDATIONS
Management Partners has developed 49 recommendations to move the City to a condition of service and financial stability. This section of the report contains the conclusions from our assessment as well as our recommendations. The recommendations fall into three main categories:
Corporate Governance. These recommendations strive to optimize the City's organization structure as well as streamline the number and scope of various boards and commissions.
Revenue Enhancement. These recommendations reflect the reality that changing business practices, eliminating services and changing service delivery mechanics will not solve the structural budget imbalance alone. Revenue enhancement measures include increased taxes, fees, user charges, assessments, and other miscellaneous revenue sources.
Expenditure Reduction. These recommendations aim to control expenditures by making changes in the following areas:

1. Restructuring the way City government provides specific services

2. Changing the service delivery model for certain services that have private market competitors

3. Changing the funding source of specific services (also referred to as "shifts")

4. Reducing and/or eliminating specific services

5. Changing business practices to improve the efficiency and/or effectiveness of the City government

6. Changing Citywide personnel compensation policies and practices
Corporate Governance Recommendations
The City is much more than a collection of depa rtments delivering discrete services. It is an integrated corporation that carries out the policy decisions made by the Mayor and City Council. To be effective, the corporation must be organized and governed so it aligns with the organization's overall mission.

The broad category of governance refers to how major services are organized and managed and how the City Council is supported in determining policy. This section of the report analyzes the two aspects of organization governance relevant to a municipal corporation such as the Management Partners, Inc. 27
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City of Sacramento: the administrative structure of the City organization and the role of advisory boards and commissions.

Administrative Structure
City functions are organized administratively within departments. Each department has a service mission and functions are typically grouped into departments to maximize mission fulfillment and efficiency.

There is no single or "right" way to structure city organizations. The structure of a city at any given time is usually a product of history, management preference, latest research on best management practices and the talent of particular individuals. Sacramento, like every organization, has periodically reorganized departments and functions in the interest of improving service delivery and reducing costs.

Based on our experience with cities and our research of best practices, Management Partners has developed the following principles for organizing municipal functions:
• Functions common to multiple departments are best provided by a central department with a strong customer focus, e.g., information technology. This maximizes economies of scale and reduces duplication and misalignment.
• Functions requiring the coordinated work of multiple disciplines are best provided in a single department, e.g., development review. If this arrangement is not achievable, a matrix organization with a clearly established leader is the preferred alternative. This aligns the services provided with the end user or customer and minimizes issues of control or turf in meeting their needs. • Functions that closely coordinate to implement policy are best provided in a common department, e.g., land use and
transportation policy and planning. This ensures alignment with the goals of the policymakers, improves transparency and links planning to outcomes.
• Functions with a common purpose and similar-skilled workforce are best provided in a single department, e.g., landscape maintenance and street maintenance. This improves economies of scale and generally broadens career development
opportunities.

Management Partners reviewed the City's current organization structure using the principles of organization above. In doing so, we looked for opportunities where a change in administrative structure could improve the City's ability to fulfill its missions, reduce the number of departments and department directors, and reduce duplication of administrative and support functions.

The City's programs are currently distributed among 19 departments and offices. These exclude the Charter Offices of the City Attorney, Clerk and Treasurer and the City Auditor. The current organization arrangement is shown below.
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FIGURE 7: CURRENT CITY OF SACRAMENTO ORGANIZATION CHART Residents
Mayor/Council
City Attorney City Clerk
Office of Pi
Informati
Assistant City
Manager
Legislative Affairs
Coordination
Assistant City
Manager
Utilities
April 20, 2010
Compared with the peer cities' organizations, Sacramento has a larger number of departments than most utilize for a similar mix of services. Three cities are organized with eight or nine departments:

Bakersfield, Stockton and Santa Ana
Five cities distribute services between 11 and 14 departments:

Fresno, Long Beach, Oakland, San Jose and Oklahoma City Three cities have between 17 and 22 departments: Albuquerque, Phoenix and Austin.

The Sacramento departments that are found less frequently in the peer cities are:
Labor Relations
Code Enforcement
Neighborhood Services
Youth Development
The functions performed by these departments are more typically housed in other departments.

City Auditor
I
City Manager
Assistant City
Manager
City Treasurer
of Emergency
iervices
ce of Public
Accountability
I
Convention,
Culture & Leisure
JPA Partners
Coordination
Neighborhood
Services
Office of Youth
Development
Parks & Recreation
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The administrative structure of city functions is significant for a number of reasons. With a large number of departments, there is a greater tendency for services to become "siloed." Department staffs tend to focus on their narrow activity and lose sight of the bigger organizational picture. A large number of departments also add complexity to interdepartmental cooperation, often creating turf issues that need to be negotiated or compromised. Often, large stand-alone departments maintain their own administrative support functions such as accounting, human resources and IT. This leads to excess administrative costs and redundant systems.

Each department has a separate director; director positions are more costly than other management positions.

Current City functions can be reorganized into a structure that requires fewer management positions and eliminates redundant administration and suppo rt costs. The number of exempt management positions has been reduced by 12% since the City began budget cutting in FY 2008/09, compared with a 14.2% reduction in the total workforce. One reason for this disparity is that while the City has downsized services, it has tried not to eliminate services. In this situation less than proportionate impacts on management may be observed. However, while management is undeniably important, a reduction of at least a propo rtionate amount to the total workforce is a reasonable objective.

Based on our evaluation of the City's administrative structure, it is clear that current functions can be organized into fewer departments. Through such a reorganization, we estimate the ability to eliminate approximately 10 more exempt management positions (department directors and other management positions).

In addition to saving the cost of management personnel, another benefit of fewer departments is savings from the ability to consolidate multiple administrative and support units. Large departments maintain individual finance, personnel, clerical and IT staffs. Consolidating functions into fewer departments will allow duplicate positions, systems and other redundancies to be eliminated, which will result in additional savings.

The specifics of a new organization structure require further study and will depend on decisions made by the City Council related to future service delivery methods. For example, outsourcing functions will result in fewer management and supervisory positions, but some reductions would be offset by the need for contract managers. Depending upon which departments are reorganized, the City can reasonably expect annual ongoing savings of $1 to $3 million from reorganization.

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Maintenance
Maintenance functions are currently located in three departments:
• General Services Department provides fleet and facility maintenance
• Transportation Department provides street, tree and parking garage maintenance
• Parks and Recreation Department provides park maintenance Each of these departments maintains an administrative and support unit and may have duplicate pieces of equipment. Placing all maintenance functions in a single department would allow for economies of scale through consolidated administration and elimination of any redundant equipment. An additional benefit would be that a single director for all maintenance employees will enhance the City's emergency response capability.

Development Services
Development related services are currently located in four departments:
• Community Development Department handles planning, plan check and building inspection
• Transportation Department provides transportation policy and planning, engineering and traffic engineering
• Parks and Recreation Department carries out park planning • Fire Department conducts plan check and construction
inspections
Each department plays a critical role in planning the physical development of the community and in reviewing development and building applications. Locating all development related services in a common department would streamline the application review, plan check, permitting and inspection processes; provide for consistency in customer relations and enable a single director to resolve conflicts between different service disciplines. The location of transportation and land use planning and policy development in a single department unifies the two critical elements that drive the future development of the community.

Recreation and Leisure
Recreation and Leisure activities are currently housed in two departments:
• Parks and Recreation Department provides youth, community and senior recreation programs; and Community Center management • Convention, Culture and Leisure Department provides golf, cultural programs and large facility management
Locating these functions in a single department would unify community enrichment programs and allow for management and maintenance of all community facilities to be coordinated in one place. The latter should result in savings from economies of scale.

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Community Relations
Community relations and outreach activities are housed in three departments:
General Services Department is responsible for the 311 Call Center
Neighborhood Services Department provides community outreach and event coordination
The City Manager's Office maintains the City's website Unification of these functions in a common department would facilitate a consistent approach for responding to public inquiries and maintaining relationships with neighborhood and community groups.

City management will need to evaluate the pros and cons of various organization structures. More in-depth study is required to identify more precise cost savings and the steps necessary for implementing any desired changes.

Recommendation 1: Reorganize City functions into a
department configuration that reduces costs and
improves the alignment of functions with related
missions.

Restructuring of Boards and Commissions
Another component of municipal organizations is the use of boards and commissions that serve as adviso ry bodies to the City Council. Some boards and commissions have the authority to make certain decisions on behalf of the City Council; those decisions are generally appealable to the City Council. The Planning Commission is one such example.

Each city is unique and over the course of time has developed their own structure of advisory boards and commissions. Sacramento has an extensive system of advisory boards and commissions that includes:
Twenty-eight city advisory boards/commissions
Fourteen joint advisory boards/commissions between the city, county, and regional special districts
Seven city and county joint redevelopment agency
commissions
Boards and commission can have a substantial impact on the deployment of city resources and the direction of precious staff time in the Clerk's Office and operating departments. Below is a high level summary of the work that is completed for each board and commission.

Clerk's Office
Develop monthly and annual attendance reports
Track and archive agendas
Oversee member recruitments
o Develop announcement
o Conduct outreach
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o Process application
o Manage member selection committees
o Draft member appointment resolutions and
oversee the appointment process
o Administer oaths of office
Manage annual conflict of interest statement process
Operating Departments
Provide general staff support (clerical support, develop staff reports, ensure Brown Act compliance, etc.)
Develop agendas
Record meeting minutes
The City's advisory body system has not been evaluated in a number of years. A review is particularly important given the significant reductions in staff in recent years.

Management Partners analyzed the powers and duties assigned to each advisory body and reviewed meeting frequency and attendance reports for the last three years (2007 to 2009). Our review revealed that a number of advisory bodies have not met on a regular basis and others have suffered from the inability to maintain membership (some with systemic vacancies and others with no official members). Some advisory bodies have missions that can be consolidated with another or eliminated due to redundancy. Recommendations for specific boards and commissions are provided below.

Construction Codes Advisory and Appeal Board
In July 2006, the Planning and Building Depa rtment created the four bodies listed below. Prior to their creation, the powers and duties were consolidated under a ConstructionCodes Advisory and Appeal Board. Housing Code Advisory and Appeals Board
Building CodeAdvisory and Appeals Board
Electrical Code Advisory and Appeals Board
Mechanical and PlumbingAdvisory and Appeals Board
The powers and duties of the Housing Code Advisory and Appeals Board are to provide for final interpretation of the provisions of the "Housing Code" and hear cases involving the repair or demolition of substandard buildings, and appeals of dangerous building cases.

The Building, Electrical, Mechanical and Plumbing appeals boards were established for the purpose of determining the suitability of alternate materials and methods of construction and providing reasonable interpretations of their respective codes. They are empowered to approve the use of any material, alternate design or method of construction not specifically prescribed by the applicable code.

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During the last three years, the Housing Code Advisory and Appeals Board met regularly. The Electrical Code Advisory and Appeals Board and the Mechanical and Plumbing Advisory and Appeals Board have each met twice during the three-year period of January 2007 to December 2009. The Building Code Advisory and Appeals Board met three times during the same period.

Recommendation 2: Reestablish a Construction Codes
Advisory and Appeal Board that will consolidate the
mission of the Housing Code Advisory and Appeals
Board, the Building Code Advisory and Appeals
Board, the Mechanical and Plumbing Advisory and
Appeals Board, and the Electrical Code Advisory and
Appeals Board.

Other Boards and Commissions
Based on our review of meeting frequency and attendance reports for the last three years and an analysis of bodies that have difficulty maintaining membership, Management Partners recommends the elimination of five advisory bodies. These are described below.

1. Sacramento Relocation Appeals Board
Board membership consists of the five City appointed members sitting on the Sacramento Housing and Redevelopment Commission. The powers and duties of the board are to:
Hear relocation complaints and transmit findings and
recommendations to the Redevelopment Agency;
Assist public entities in carrying out the policies relating to relocation assistance, last resort housing and real property acquisition; and
Benefit displaced persons, to ensure that such persons receive fair and equitable treatment and do not suffer
disproportionate injuries as the result of programs designed for the benefit of the public as a whole.

The board has not met in the last three years. Since the board makes recommendations to the Redevelopment Agency and each appointed member sits on the Sacramento Housing and Redevelopment Commission, a redundancy exists. Members of this Board can carry out the mission of the Sacramento Relocation Appeals Board through their role on the Sacramento Housing and Redevelopment
Commission. This appears to be the current de facto practice.

2. Board of Plumbing Examiners
The powers and duties of the Board of Plumbing Examiners are to:
Prepare and conduct examinations at least quarterly for the purpose of determining the competency and knowledge of the individuals engaged in plumbing work;
Compile and maintain a current list of individuals holding valid certificates of competency; and
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Compile and keep current a list of agencies maintaining satisfactory examination and qualification procedures and consider any written charges filed.

The board has met four times during the last three years (all of which were in 2009). The core mission of the board to establish and conduct examinations for professionals engaged in the plumbing field is redundant with state licenses and professional trade regulations.

Guidelines for state plumbing licenses, customer complaints, and statewide standards for pluming professionals are set and/or managed by the California Department Consumer Affairs and State Contractors License Board.

3. Meadowview Development Commi tt ee
The Meadowview development is in Council District 8. The powers and duties of the board are to:
Review and comment on proposed activities and assist in the formulation of projects and programs to meet identified goals and objectives, including housing programs;
Comment about the implementation of community development plans and programs; and
Consider such other matters as from time to time the City Council, or the Sacramento Housing and Redevelopment
Commission, or redevelopment agency deem appropriate.

The committee is comprised of twelve community members and property owners in District 8 as well as a student member from Meadowview Resident High School and a member from the
Sacramento City Unified School District. The committee has not met in the last three years and has no officially appointed members. When significant development occurred in the Meadowview area the committee was active. On an ongoing basis, the development issues regarding the Meadowview area can be addressed by the various Citywide development-related commissions, advisory boards, and appeal bodies.

4. Sacramento Commission of History and Science
The mission of the Sacramento Commission of History and Science is to analyze sites and landmarks of historic and scientific importance and other related work; review the annual budget for the History and Science Division of the Convention, Cultural, and Leisure Department and provide an annual review to the Council of collections and archives managed by the division.

The following seven entities appoint members to the commission:
City of Sacramento
County of Sacramento
Cities of Folsom, Isleton and Galt
Sacramento Science Center Board of Directors
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• Sacramento History Center Association Board of
Trustees
• American River Natural History Association
• Sacramento County Historical Society
The commission has not met since 2005 and many of the duties of the commission are currently completed by department staff.

Management Partners was informed that committee members and City staff had previously agreed that the commission should be eliminated but formal action to do so was not completed.

5. Community Racial Profiling Commission
The purpose of the commission is twofold: to provide
recommendations to the Mayor and City Council concerning racially biased policing and to serve as an advisory body to the City to review and analyze traffic stop data. The commission provides the Mayor and City Council with quarterly reports regarding the Sacramento Police Department's traffic stop data collection on racially biased policing.

In July 2000, the Sacramento Police Department undertook a comprehensive study of traffic stops to address perceptions of racial profiling. In March 2004, City Council approved the establishment of the Community Racial Profiling Commission to provide the City with broader community involvement in the monitoring of racially based policing issues. In November 2004, City Council confirmed 15 members of the Community Racial Profiling Commission. The membership requirements are as follows:
• One member shall be a Deputy Chief of the Sacramento Police Department;
• One member representative of the Office of Police
Accountability;
• One member representative of the Sacramento Police Officers Association;
• Eight members representative of the public at-large, residing in the City of Sacramento, with one from each of the eight City Council districts; and
• Four members at-large qualified by interest or experience on matters pertaining to racially biased policing.

In 1999, the Mayor and Sacramento City Council established the Office of Police Accountability for the purpose of monitoring the investigation of citizens' complaints (including racial profiling). In July 2004, the role of the office was expanded to include the Sacramento Fire Department and renamed the Office of Public Safety Accountability (OPSA). Currently, the OPSA has broad oversight authority that includes the evaluation of the overall quality of performance by employees and the authority to encourage systemic change. The office tracks serious complaint case to conclusion, reviews completed investigations, and advises the City Manager of any deficient investigations.
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The Community Racial Profiling Commission has studied and released reports on racial profiling in Sacramento and has worked with the Office of Public Safety Accountability to ensure that racial profiling complaints are addressed. On an ongoing basis, however, the core responsibilities of the Community Racial Profiling Commission can be met by OPSA, whose responsibility includes racial profiling as well as other pe rformance issues related to law enforcement in Sacramento.

Recommendation 3: Eliminate the Sacramento
Relocation Appeals Board, Board of Plumbing
Examiners, Meadowview Development Committee,
Sacramento Commission of History and Science, and
the Community Racial Profiling Commission.

Sunset Clauses
The City of Sacramento does not routinely include sunset clauses when boards andcommissions with a specific focus are established.

The aforementioned Community Racial Profiling Commission and the Meadowview Development Committee are examples of bodies that have a specific mission. Once their mission has been achieved or absorbed by another unit of city government there is no need for them to continue. A sunset clause that establishes a date for the body to complete its work is a practice effectively used by many governments. Several of the City administered bodies that relate to Sacramento Housing and Redevelopment Agency development projects should be reviewed to ensure that their missions are still valid and restructured with a sunset clause if appropriate.

Recommendation 4: Establish sunset clauses in the
authorizing resolutions and ordinances for boards and
commissions that have a specific focus.

The recommended consolidation and elimination of the advisory bodies will produce minimal savings in office supplies and expenses. The greatest benefit to the City will be to free up precious staff time, allowing this resource to be put to a higher use.

Revenue Enhancement Recommendations
The broad goals in developing a multi-year financial and service plan are to bring revenue and expenditures into balance to achieve financial sustainability and remain a full-service city. This will require a balanced program of both expenditure reductions and revenue increases.

Management Partners was tasked with identifying options to achieve the desired goals, including opportunities to increase revenue that can be Management Partners, Inc. 37
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480,000
460,000
440,000
420,000
400,000
380,000
360,000
340,000
320,000
300,000
used for general services and decrease ongoing operating costs. Given that the revenue base of a city is the fundamental factor that determines which services can be provided at what level, it is appropriate to start with a discussion of revenue. This section of the report provides an overview of the City's major revenue sources and identifies specific strategies to enhance revenue generation to support core programs and services.

Figure 8 below illustrates Sacramento's structural deficit. If significant action is not taken to increase revenues and reduce expenditures, the City is projected to have an annual deficit of $50 to $60 million annually for the next five years. Therefore, the following discussion deals with the City's options for moving the revenue line closer to projected expenditures.

FIGURE 8: SACRAMENTO GENERAL FUND ACTUAL, BUDGET, AND PROJECTED REVENUE AND EXPENDITURES ( FY 2004/05 TO FY 2014/5)
- 4 - Revenue
--0-- Expenditures
\ ~ ~ ~ ti
J a~Ja ~Ja ~J cKJa a~0~ e
~`~ e e ~1eac~P ~Q ~ p p ~Q oS~ o~¢ ~o1e o~e o~e
~\,~~ h\,~~ ~\~~ 1\~~ ~\,~~ ~~~\ti yp\1tiQ ~y\1tiQ y~\y,~Q1~\yAQ y~\1he Fiscal Year
Sacramento's revenues come from a variety of sources. Utilities are funded from specific user charges to businesses and residents, a portion of development processing costs are paid by project applicants, and the cost of some recreation programs are partially offset by fees.

Taking the broadest possible look at City revenues, Sacramento ranks relatively low compared to peer jurisdictions. This is mainly because the City lacks some of the subsidiary business operations, such as an electric utilityor an airpo rt, which are run by some of the peer cities. Another reason is that the City does not have some dedicated sources of tax revenues such as a general obligation levy for capital projects that can be found in some other cities. Yet another reason may be because the City does not always collect the full costs associated with some user fee 38 Management Partners, Inc.

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services. Figure 9 shows a comparison of total revenues for the peer jurisdictions.

FIGURE 9: TOTAL REVENUE COMPARISON
While having high total revenues is of some benefit, it is important to note that subsidiary business revenues have to be carefully segregated and used for the business purpose from which they are derived. For example, Long Beach revenues are high because of over $1 billion in subsidiary business unit revenues, but this does not translate into a robust General Fund. In some cases, however, the subsidiary units may indirectly support overall City service provision.

In any event, the focus of this review is primarily on the revenue and costs associated with providing core services that benefit the entire community. These include police and fire protection, park and street maintenance and recreation/leisure programs.

Sacramento is more reliant on general tax revenues than other cities. A basic description of tax authority within California follows.

Taxes
The California Constitution distinguishes between a general tax and a special tax. General tax revenues may be used for any purpose, whereas revenues from a special tax must suppo rt the purpose specified in the ballot measure presented to voters. With specific limitations on the approval processes and rates of taxation, the California Constitution and state law allows cities to seek voter approval for new and increased tax revenue to finance fundamental municipal services. In California, cities may impose any tax that is not otherwise prohibited by state law and a tax must be approved by voters. Revenue derived from taxes is used to finance public services and facilities.

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General and Special PurposeTaxes
Taxes are classified as either general or special purpose. General taxes are those which can be used for any purpose approved by the City Council. Special taxes are earmarked for a specific use. New or increased general purposes taxes must be approved by a simple majority of voters (50% + 1). Further, the California Constitution requires that the vote on any general tax be consolidated with a regularly scheduled general election for members of the governing body of the local government, except in cases of emergency. Special tax measures must be approved by two-thirds of voters. There are no timing restrictions on elections to approve special taxes. As a result, such tax measures can be placed on the ballot during a special election or on the annual November ballot.

City of Sacramento Tax Profile
The most significant portion of revenue that supports the City's general services comes from general purpose taxes. Of the City's $381,209,000 estimated General Fund for the current fiscal year, 66% comes from three taxes: property, sales, and utility users. These are summarized in Table

1. TABLE 1: SACRAMENTO TAX REVENUE FOR FY 2008/09 AND FY 2009/10 Tax Revenue
FY 2008/09
Amended
(in $000s )
FY 2009/10
Amended
(in $000s )
Percent
Chan e
Property $156,063 $126,949 -18.7%
Sales and Use Taxes 69,800 56,104 -19.6%
Utility User Taxes 57,000 57,820 1.4%
Other Taxes 22,788 24,482 7.4%
TOTAL $305,651 $265,355 -13.2%
Source: City of Sacramento 2009/10 Adopted Budget
Figure 10 displays the per capita revenue from major taxes of Sacramento and the peer cities.
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FIGURE 10: PER CAPITA TAX REVENUE
Source: Management Partners' survey. Revenue includes property, sales, utility users, business license, transient occupancy and real estate transfer taxes.

Relative to peer cities, Sacramento has a solid tax base and a diversified revenue profile. While this is positive, it does not lessen the challenges facing the City and the difficult choices that must be made to achieve financial and service sustainability. Cities, like families, tend to live up to their income levels. When incomes decrease, lifestyles must change.

Property Tax
Property tax is by far the most significant general revenue source to the City, accountingfor 39% of total General Fund revenue. The historically stable property and sales tax revenue sources available to Sacramento have declined as a result of the unprecedented current economic recession and contribute significantly to the City's structural deficit.

Figure 11 shows the revenue generated from real property taxes in Sacramento from FY 2002/03 to FY 2009/10. The figure illustrates positive growth for the past seven years; most notably, an increase of 46% between 2003/04 and 2004/05. Since 2004/05, however, the growth rate slowed. A decline of 6% is projected for the current fiscal year (FY 2009/10).

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FIGURE 11: SACRAMENTO REAL PROPERTY TAx REVENUE FROM FY 2002/03 To FY 2009/10
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
$134,557 $138,738
$57,754
93,940
112,145
$130,416
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Actual Actual Actual Actual Actual Actual Amended Budgeted Fiscal Year
Under the terms of Proposition 13 approved by California voters in 1978, a city's ability to increase the basic property tax is constrained, but cities may levy parcel and other assessments which are functionally similar to the property tax. These options are discussed later in this report.

Utility Users Tax
Taxes on the use of non-city owned utilities including gas, electric and telephone are the second largest source of tax revenue, estimated at just under $60 million for the current fiscal year. The Utility User Tax (UUT) may be imposed by a city on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telephone (including cell phone and long distance), sanitation and cable television. The rate of the tax and the use of its revenues are determined by the local agency.

Approximately 150 cities and counties in California levy a UUT.

Sacramento's UUT rate is 7.5% on all utilities with the exception of communications. The passage of Measure 0 in November 2008 reduced the utility user tax on communication usersto 7.0%. The peer average is

5.5%. This is one reason that Sacramento has a higher level of per capita tax revenues than other cities. Sacramento is more reliant on this revenue source than most other cities in the state that have a UUT. On average, in cities with a UUT, the tax constitutes 15% of General Fund tax revenues. In Sacramento, the UUT constitutes about 20% of such revenues. Although the UUT is less volatile and subject to less variation with economic conditions than the sales tax, UUT tax proceeds have still declined during the current recession.
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In the current fiscal year the adopted budget called for UUT revenues of $60.3 million but actual revenues are now projected at $57.8 million.

Because Sacramento already has a relatively robust UUT rate, raising it further is not thought to be a viable option.

Sales and Use Tax
The sale of tangible personal property is subject to sales or use tax unless exempt or otherwise excluded. Sales taxes are imposed on all retailers for the privilege of selling tangible personal property in the State of California and are measured by the retailer's gross receipts. Use taxes are imposed on the purchaser of tangible personal prope rty from any retailer for storage, use, or other consumption in the state.

Sales and use taxes are estimated at approximately $58 million in the current fiscal year. Table 2 shows revenue from sales and use taxes in Sacramento from FY 2002/03 to FY 2009/10. The data show positive growth from FY 2003/04 through FY 2006/07. Revenue peaked in FY 2006/07 and has declined ever since, decreasing by a significant percent each year.

TABLE 2: SACRAMENTO SALES TAx REVENUE FOR FY 2005/06 TO FY 2009/10 2009/10
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Amended Actual Actual Actual Actual Actual Actual Actual Budget Sales and Use
Taxes (in $ millions) $58,194 $62,125 $65,876 $67,491 $69,475 $66,271 $63,800 $57, 800 Percent Change 7% 6% 2% 3% -5% -4% -9%
Sales tax is driven by the condition of the local economy, which is in the worst recession (or just emerging from it) since the 1930s. The fact that sales taxes have fallen so much is unprecedented in the modern history of Sacramento, and can be seen as one of the major factors behind the structural budget deficit.

Statewide, the sales and use tax base rate is currently at 8.25%. The based rate is comprised of a state portion (7.25%) and local portion (1%) for cities and counties. Table 3 outlines the allocation of the statewide sales and use tax revenue.

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TABLE 3: STATEWIDE SALES AND USE TAX REVENUE ALLOCATION Jurisdiction Rate Purpose
State 6.00% Goes to the State General Fund
State 0.25%
Goes towards the State Fiscal Recovery Fund to pay
off EconomicRecovery Bonds
State 0.50%
Goes to Local Public Safety Fund to support local
criminaljustice activities
State 0.50%
Goes to Local Revenue Fund to support local health
and social services programs*
Local 1.00%

0.25% Goes to county transportation funds

0.75% Goes to city and county operations
TOTAL 8.25%
The California Revenue and Taxation Code allows cities and counties to levy special transaction and use taxes. Proceeds from these taxes may be used for general government purposes or a specific purpose, as specified in the ordinance submitted to voters. According to a 2008 HDL Companies report, as of February 2008 there were 97 jurisdictions in 39 counties including 60 cities that implemented this revenue strategy.

New General Revenue Options
Sacramento has other options for raising revenues. Generally these options require voter approval. Those with the greatest revenue potential are discussed below.

General Purpose Sales Tax
As noted in Table 4, the current sales and use tax rate in Sacramento is

8.75%. Two options for increasing the sales and use tax in Sacramento are:
Adopt a new citywide sales and use tax of 0.25%. This will increase the totaltax rate to 9.00% and raise $13.5 million. Adopt a new citywide sales and use tax of 0.50%. This will increase the total tax rate to the state maximum of 9.25% and raise $27.0 million.
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TABLE 4: SALES AND USE TAX REVENUE PER CAPITA AND RATES FOR SACRAMENTO

AND PEERS
Jurisdiction
Sales and Use Tax
Revenue per Ca pita Rate
Bakersfield $0.18 8.250%
Fresno $0.15 8.975%
Long Beach $0.08 9.750%
Oakland $0.14 9.750%
San Jose $0.15 9.250%
Santa Ana $0.15 8.750%
Stockton $0.15 9.000%
PEER
AVERAGE $0.14 9.104%
Sacramento $0.14 8.750%
An important factor in considering local sales tax measures is the sales tax rate of adjacent and nearby cities. To the extent there is price sensitivity among shoppers, there is a concern that having a higher rate will drive customers to businesses in other communities. This is particularly true with respect to high cost items such as automobiles. The current sales tax rates in surrounding communities are displayed in Table 5 below.

TABLE 5: SALES TAX RATES IN SURROUNDING AREAS
Jurisdiction
Sales Tax
Rate
Citrus Heights 8.750%
Elk Grove 8.750%
Rocklin 8.250%*
Roseville 8.250%*
West Sacramento 8.750%
Sacramento 8.750%
*Rocklin and Roseville are in Placer County. Placer County has not approved a 0.50% sales tax for transportation improvements like that approved in Sacramento County One way to address the competitive concern is to discuss with other cities in Sacramento County the possibility of jointly going to the voters in each community with a sales tax measure. Given the current unprecedented financial challenges, most cites find themselves in need of additional general revenue and are contemplating putting measures before their voters. Timing of a sales tax increase is another consideration.

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Citywide Parcel Tax
A parcel tax is often used as an alternative to property tax as a means to raise revenue. It is not based on the value of the property but rather is established as a flat fee per parcel unit. The fee does not have to be uniform across all types of parcels. Common rate categories that are charged different amounts are single family, multi-family residential, commercial, professional, industrial, and vacant parcels.

Due to the pressures placed on the General Fund, a parcel tax to support general government services would provide the City with the greatest flexibility to allocate resources to maintain citywide service. If a special tax is preferred, additional revenue can support:
Public Safety Services (Police and Fire)
911 Dispatch System
Park Maintenance
Convention, Culture and Leisure Services
Recreation Programs and Services
Parcel tax proposals submitted to the voters can be structured to exempt certain classes or types of prope rty. Based on a recent repo rt from the Sacramento County Assessor's Office, there are approximately 152,700 parcels in the City of Sacramento. The number of exempted parcels will vary depending on purpose and type of exemptions listed in the ballot measure. For example, the City of San Jose has a parcel tax to provide additional support for public libraries. The originating ballot measure included standard exemption for non-taxable government and non-profit parcels, which amounted to less than 10% of the total parcels. Due to the large amount of state-owned property within the City of Sacramento, such exemptions may be as high as 35%.

Parcel taxes can be authorized indefinitely or include a provision to last a maximum number of years. In addition, best practice parcel tax measures include a provision that authorizes the City Council to increase the amount annually based on the Consumer Price Index (CPI) or other index.

It is estimated that a $100 parcel tax will raise $9.9 to $13.8 million, depending on the number of exempted parcels.

Parking Tax
Cities in California and across the country have established parking taxes to augment general government revenue and provide an incentive for the use of public transportation and carpooling. Parking taxes are included in the rates users pay when parking in public or private garages. The tax is then remitted to the city. Specific tax measures can limit charges to commercial parking spaces and/or include parking that is connected to residential parking facilities. Normally the tax is levied as a percentage of total revenues. Implementation of a parking tax necessitates that parking 46 Management Partners, Inc.

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facilities maintain reliable records of revenues and transactions and make those records available for periodic auditing.

Table 6 illustrates the parking tax rate in several California cities and a few other large cities in the United States. A total of 24 cities in California levy a parking tax.

TABLE 6: SELECT CITIES WITH PARKING TAXES
Jurisdiction Tax Rate
San Francisco, California 25.0%
Los Angeles, California 10.0%
Oakland, California 10.0%
SantaMonica, California 10.0%
New Orleans, Louisiana 12.0%
New York, New York 18.5%
Pittsburgh, Pennsylvania 37.5%
The Sacramento Transportation Department oversees the operation of City-owned parking facilities and manages 10,236 individual spaces. In addition, the City estimates that there are another 7,900 commercial fee- based parking spaces throughout the City. This does not include state- owned parking facilities or non-public parking spaces.

It is estimated that a 10% tax on all city-owned and commercial parking spaces (excluding state-owned facilities) will generate $3,000,000 annually. Given the shortage of parking provided by the state for employees and visitors, a parking tax offers the City an opportunity to collect revenue necessary to support the service demand caused by the state presence.

Business Operations Tax
Accordingly to California State Law, cities are allowed to levy a tax on business activity. The charges may be fixed (on a per unit basis) or may be based on the number of employees, gross receipts, number of vehicles, and/or the number of rental units, for example. Business taxes are, in theory, identical to all other taxes in that they provide a vehicle for the public to remit dollars to a government agency to support public services and facilities. Under the California Constitution, municipal taxes require a vote of the people in the jurisdiction for which the specific tax measure would apply. By law, there need not be a direct relationship between the services and facilities used by an individual taxpayer and the tax paid.

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The City of Sacramento currently has a business tax structure that separates businesses into five discrete categories and taxes each under a different rate structure. The City's business tax categories are listed below.
• Administrative or Management-related Service Business • Sales and Service Business
• Brokers
• Home Occupation Permit
• Professional Business Owners (accountants, architects, attorneys, doctors, engineers, etc.)
Figure 12 provides a summary of the revenue generated from business taxes in Sacramento from FY 2002/03 to FY 2009/10. Currently the tax raises approximately $7.5 million annually, which amounts to 2% of the City's total General Fund revenue. The last adjustment of the City's Business Operations tax was in 1991.

FIGURE 12: SACRAMENTO BUSINESS TAx REVENUE (FY 2002/03 TO FY 2009/10)
$8,000
$ 7,500
$7,000
$6,500
$6,000
$5,500
$5,000
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Actual Actual Actual Actual Actual Actual AmendedBudgeted Fiscal Year
Table 7 illustrates the level of revenue generation from business taxes in Sacramento and the peer cities. The data show that Sacramento's per capita revenue is lower than five of the seven peers.
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TABLE 7: SACRAMENTO AND PEER CITIES BUSINESS TAx REVENUE (FY 2009/10) Jurisdiction
Business Tax
Revenue
(in Thousands)
Per Capita
Business Tax
Revenue
Bakersfield $3,104 $0.010
Fresno $16,162 $0.035
Long Beach $11,849 $0.025
Oakland $51,775 $0.130
San Jose $12,000 $0.013
Santa Ana $9,305 $0.027
Stockton $9,865 $0.034
Sacramento $7,500 $0.017
As discussed above, Sacramento's revenue per capita from this source is below that of most California peer cities. However, it should be noted that the underlying size of the business sector in the various communities impacts revenue generation and there is no guarantee that overlaying a particular tax structure onto Sacramento businesses would result in equivalent revenue generation. Nevertheless, the City can increase its current rates or conduct an in-depth analysis to determine how much revenue could be increased by implementing a new rate. For example, if Sacramento increased its per capita revenue to Fresno's $0.035 per capita, the City would raise an additional $9,300,000 annually.

As with sales tax, the City can expect opposition to a business operations tax increase from the business community. Careful consideration of the impact of an increased business operations tax on business retention and recruitment is warranted.This dynamic is less of a concern than sales tax rates as city business taxes are generally ve ry small as a percentage of the overall cost of operating a business and are not a significant factor in business location decisions. Business taxes are classified in state law as general taxes and can be approved with a simple majority vote.

Real Property Transfer Tax
A real prope rty transfer tax is a standard charge that is applied to the transfer of ownership of real property. This tax is applied to the sale price of the property and may be paid by either the buyer or the seller, or the buyer and seller may split the payment. Real prope rty transfer taxes can be one of the most economically sensitive revenues, increasing during times of economic expansion and contracting during a slowdown. For example, City of Sacramento's transfer tax revenue decreased by approximately one-third (or -$3 million) between FY 2007/08 and FY 2008/09.

While the setting of the real property transfer tax is preempted by state law at 0.55 per $1,000 sales price for all general law cities (the vast majority of California's 463 cities), Sacramento, as one of the 108 ManagementPartners, Inc. 49
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California cities in the state that have a city charter, retains discretion in this area. Some other charter cities in the state levy a transfer fee that is higher than Sacramento's.

Table 8 illustrates the level of revenue generation from transfer taxes in Sacramento and the peer cities. Sacramento charges $2.75 per $1,000 for a per capita revenue generation of $18. The peer average is $3.01 per $1,000, with per capita revenue of $16.43. The average however, is wildly skewed by the City of Oakland, which has one of the highest rates in California. The peer median is $0.55 per $1,000 for a per capita revenue generation of $2.69. Likewise the median is skewed by the state pre- emption with regard to general law cities.

TABLE 8: SACRAMENTO AND PEER CITIES TRANSFER TAX REVENUE (FY 2009/10) Jurisdiction
Transfer Tax
Revenue per
Capita
Transfer Tax Rate
per $1,000 of Sale
Price
Bakersfield $3 $0.55
Fresno $2 $0.55
Long Beach $21 $0.55
Oakland $68 $15.00
San Jose n/a* $3.30
Santa Ana $2 $0.55
Stockton $2 $0.55
Peer Average $16.43 $3.01
Peer Median $ 2.69 $0.55
Sacramento $18 $2.75
*Revenue is combined with a construction excise tax
While many of the peer California cities have a tax level that is below that of Sacramento's, there are many charter cities, particularly in Northern California that have a higher level (see Table 9 below). (In general this is not a commonly encountered tax in Southern California, even in charter cities.)
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TABLE 9: TRANSFER TAX REVENUE COMPARISON FOR SELECTED NORTHERN

CALIFORNIA CHARTER CITIES
Jurisdiction
Transfer Tax Rate per
$1,000 of Sale Price
Albany $11.50
Berkeley $15.00
Hayward $4.50
Oakland $15.00
Richmond $7.00
San Jose $3.30
San Leandro $6.00
San Francisco $5.00 to $15.00
Average $9.04
Sacramento $2.75
Based on the projected volume of real estate transaction, the City of Sacramento budgeted $7,980,000 in real property transfer tax for the current 2009/10 fiscal year. Each increase of $1.00 per $1,000 will generate approximately $2.9 million in additional revenue annually.

Increasing the tax to the $9.00 average of the cities in table 9 would generate produce close to $18.0 million annually in new revenue, assuming the same dollar value of sales transactions.
911Emergency Communication System Access
A 911 emergency communication system access tax recovers costs associated with providing emergency communication service. The rate structure for 911 taxes is typically charged as a flat fee on communication lines registered with a specific jurisdiction.

Proceeds from a 911 emergency communication system access tax or fee are used to offset and maintain General Fund costs associated with providing emergency communication services (911 call taking and dispatch). This charge currently exists in the form of either a fee or a tax in a number of other California cities, most prominently the cities of San Jose and San Francisco.

The rate structure for 911 fees and taxes is typically a flat amount monthly on phone lines, both land and cellular, the numbers for which are registered within a specific jurisdiction. Typically a different rate is charged for "trunk lines" which serve multiple phones within business sites. Where it is a fee, the amount recovered cannot exceed the actual cost of the existing services. In the form of a tax, the amount approved by the voters does not have to exactly match costs.

Legal challenges have been made against some cities that have implemented fees on telephone customers to fund 911 response and related services. A recent appellate court decision ruled specifically Management Partners, Inc. 51
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against the City of Union City fee. The central legal issues are whether such fees are in fact a fee for service or special tax (or property-related fee) for which voter (or property-owner) approval is required.

It is unclear where the courts will rule that such fee is actually a tax and therefore requires voter approval. The Sacramento City Attorney's Office has recommended that, if such a revenue strategy is pursued, it be structured as a tax and taken to the voters for approval. Management Partners has assumed that approach in this report.

We have attempted to calculate the estimated proceeds from such a tax for the City, but have had difficulty finding recent specific data required to accurately estimate the expected value of this tax. More work would certainly be needed to obtain this data if this particular strategy was to be pursued. For example, more precise information would be needed regarding the current number of telephone lines in the City (current data available is dated). And in particular, given Sacramento's unique status as a capital city, the number of government lines exempt from such a tax would obviously be much higher than that experienced in other cities.

Therefore, we have used existing data derived from work in the City of San Jose regarding the average number of lines per capita and an estimate previously made by Sacramento staff that as many as 45% of the phone lines in the City would be exempt from the tax. Using this methodology it is estimated that a tax of $2.00 per line on 55% of the estimated 557,000 cell and land communication lines in the City of Sacramento could result in approximately $7.35 million annually.

Transient Occupancy Tax
A transient occupancytax (TOT) is applied to the room rates charged for lodging. Cities and counties are authorized to levy a tax on hotels, inns, tourist homes, motels, or other lodging for the privilege of occupying a room or rooms. TOT funds are general purpose revenues that pay for local public services that are enjoyed by both residents and visitors.

State code places no specific statutory limitations on the level of TOT taxes. The City of Sacramento currently charges a 12% TOT. Table 10 illustrates that12% is on par with other peers and is the highest observed rate.
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TABLE 10: CITY OF SACRAMENTO AND PEER CITIES TRANSIENT OCCUPANCY TAx REVENUE (FY 2009/10)
Jurisdiction
Transient Occupancy
Tax Revenue
per Capita Rate
Bakersfield $15 12%
Fresno $23 12%
LongBeach $25 12%
Oakland $25 11%
San Jose $ 7 10%
Santa Ana $18 11%
Stockton $ 7 8%
PeerAverage $17 11%
Sacramento $ 7 12%
While the overall transient occupancy tax rate is on par with peers listed on the above table, the method used to allocate the tax revenues differs significantly from others across the state. Since the mid-1990s Sacramento has dedicated most TOT revenue to support the Sacramento Convention Center. As it is a general purpose tax, cities typically allocate most, if not all of TOT revenue to the General Fund, to be used for citywide services and programs. Typically the TOT constitutes from 3% to 6% percent of total General Fund revenues, but in Sacramento the amount is only about 1%.

Table 11 illustrates how much of TOT the ten most populous cities in California allocate to the General Fund. The data show that the majority dedicate 100% to the General Fund. Sacramento dedicates the lowest amount (17%) to the General Fund.

TABLE 11: TRANSIT OCCUPANCY TAx COMPARISON AMONG PEER JURISDICTIONS Jurisdiction TOT Rate
TOT Rate Percentage
to General Fund
TOT Revenue
Percentage to
General Fund
Anaheim 15.00% 15.00% 100%
Fremont 8.00% 8.00% 100%
Fresno 12.00% 12.00% 100%
Long Beach 12.00% 6.00% 50%
Los Angeles 14.00% 14.00% 100%
Oakland 11.00% 11.00% 100%
Sacramento 12.00% 2.00% 17%
San Diego 10.50% 5.50% 52%
San Jose 10.00% 4.00% 40%
Santa Ana 9.00% 9.00% 100%
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The City estimates that $19.6 million will be generated from TOT revenue in FY 2009/10. Of this, $10.7 million will be used to cover debt service on the Convention Center complex, with the remaining $6.3 million going towards Convention Center operations. The City general fund portion is estimated to be $2.6 million. It is worth recalling that in the mid 1990s the City received upwards of $9 million per year in TOT revenues for the General Fund.

The principle for the establishment of the TOT is that visitors to a city should pay their fair share of taxes to support the core services and infrastructure needs created by their presence. The decision to dedicate the majority of TOT revenue to the Convention Center and other non- general city services denies the City significant revenue from one of the few sources that can offset the lack of taxes paid by state-owned property.

Reallocating a larger po rtion of the TOT to the General Fund would provide additional revenue for core services. For example, splitt ing the tax allocation evenly between the General and Community Center funds would produce an additional $7.2 million of annual revenue to the General Fund to be used for citywide services and programs.

A change in the allocation of the TOT would, of course, have a significant impact on revenue currently used to suppo rt the Convention Center.

There are a number of ways to address this issue. One is to implement the allocation change when the debt it is currently pledged to suppo rt is paid. This will happen in 2012. A second approach is to generate additional direct revenue from the Convention Center operations, requiring increased user fees and concession charges. A third approach is to reduce the cost of Convention Center operations. This third option is discussed in the following section on competitive sourcing.

Given the authorization structure for the current TOT and its legal classification as a general tax, the City Attorney has concluded that any increase or TOT allocation change requires voter approval. TOT taxes require a simple majority vote and measures have a high level of success, given that the tax ispaid by visitors.

Developing a Ballot Measure
As noted, voter approval is required for all new or increased taxes and property-based fees. The threshold for approval is a simple majority for general purpose taxes and a two-thirds majority for special taxes. In November 2009, California voters considered 57 local measures related to local agency taxes or bonds for cities, counties, special districts and schools. As in prior elections, those measures requiring a majority vote were more successful than special taxes requiring approval by two-thirds of the voters. Twenty-three of 36 non-school general taxes passed (64%), while three of eight non-school special taxes passed (60%). Table 12 provides a summary of the election results.
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TABLE 12: NOVEMBER 2009 STATEWIDE LOCAL REVENUE MEASURE ELECTION

RESULTS
Revenue Measure Type Proposed Passed
Passing
Percentage
City General Tax (50% + 1) 36 23 64%
City Special Tax (two-thirds vote) 5 3 60%
City Bond (two-thirds vote) 1 0 0%
Special District Bond (two-thirds vote) 1 1 100%
School Parcel Tax (two-thirds vote) 11 7 64%
School Bond (two-thirds vote) 1 0 0%
School Bond (55%) 2 2 100%
Total 57 36 63%
Source: Michael Coleman, California Local Government Finance Almanac The City has a wide variety of tax measures that could be used as part of a balanced approach to achieve financial and service sustainability. Given the requirement for voter approval, careful analysis must be completed to determine which mix of tax measures and what rates of taxation will enjoy the broadest public support. Any tax measure that is placed before Sacramento residents must be informed by professional polling results that test voter willingness for approval. The polling results will also provide guidance on the likelihood of approval for general- and special- purpose tax measures. Based on the results, City Council can structure a tax measure that has the greatest likelihood of approval.

Recommendation 5: Determine voter willingness to
approve various tax measures and develop ballot
measure(s) accordingly. It is broadly estimated that the City should be able to generate from $10 to $20 million annually in voter-approved measures during the year time frame established for closing the existing gap.

Many advocacy groups focus on a tax increase as a way to address specific programs and services. On both the statewide and local levels proposals for special tax increases are made to support the arts, housing, parks and recreation and libraries, among others. While nearly all of these proposals have public value, the consideration of a tax increase for a specific service by the electorate denies the community the opportunity to establish service priorities for new revenue. Any proposed single purpose tax increase should be discouraged from being put on the ballot. Approval of a tax measure placed on the ballot by the City Council as a general revenue source will allow the Mayor and Council to establish expenditure priorities through the public input process.

In Sacramento, regular elections for membersof the City Council are held simultaneously with statewide general elections that occur in November of even numbered years. Thus, in the absence of an emergency ManagementPartners, Inc. 55
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declaration,the next opportunity to establish or increase a general tax in the City of Sacramento will be on the November 2010 ballot.

Other City Revenues
Other general sources of revenue to cities include rent, franchise fees, concessions and royalties; investment earnings; revenue from the sale of property; proceeds from debt financing; revenues from licenses and permits; and fines and penalties. Certain miscellaneous other revenues have legal limitations on what may be charged and collected as well as how the money may be spent. The most promising of these sources are discussed below.

Franchise Fees
Franchise fees are a form of rent paid to cities by private firms that have been awarded a local monopoly to provide a specific service. In addition to the public receiving a return for the use of public right-of-way by a for- profit company, franchise fees offset the services provided to utilities and the wear and tear that utility operations take on City infrastructure. In cases where utilities are municipally owned there is typically a method to pay the General Fund an amount in lieu of a franchise fee so that general city services are not penalized by the decision to publicly own a utility.

Sacramento voters approved a transfer of 11 % of gross revenue from the City's water, sewer and solid waste utilities to the General Fund. In most cities the largest franchise fees come from private gas and electric and gas utilities.

Electric Utility Franchise Fee
Sacramento is in a unique position relative to the local electric utility, Sacramento Municipal Utilities District (SMUD). As SMUD is an independent publically owned utility chartered by the state, it does not pay the City a franchise fee. As it is not a City-owned utility it is not subject to the 11 % in lieu transfer to the General Fund. This situation deprives the City of a significant revenue sources. As franchise fee formulas are complex, often including factors such as gross revenue and miles of public right-of-way used, it is not possible to make a precise estimate on the City's revenue loss. However, extrapolating from cities that receive franchise fees from private electricity utilities, the loss is probably in the range of $5 to $7 million dollars annually.

Recommendation 6: Pursue legislation that allows the
City to collect payments to the General Fund from
SMUD equal to the voter-approved amount collected
from City-owned utilities.

Commercial Solid Waste Collection Franchise Fee
The collection of commercial solid waste in the City of Sacramento is provided largely by private vendors. The current franchise fee for solid waste collection is 8%. Conversely, the City's solid waste enterprise is required to remit 11% of its gross revenue to the City. Aligning the commercial solid waste collection franchise fee to the 11 % that the City 56 Management Partners, Inc.

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receives from residential customers is a viable and equitable strategy to provide additional revenue to fund Citywide programs and services. This equity adjustment is estimated to generate approximately $800,000 annually for the General Fund. Doing so will require the approval the regional Solid Waste Authority Board. The Board is comprised of eight members, five from the Sacramento County and three from the City of Sacramento.

Recommendation 7: Increase the commercial solid
waste collection franchise fee from the current 8% to
11%.

Revenue Shifts
Revenue shifts can take two forms. One is to take non-General Fund revenue being used for other sources and use the funds to pay for services currently supported out of the General Fund. A second approach is to take a service that is currently funded by the General Fund and transfer the financial support to a non-General Fund source. In essence, the decision around revenue shifts is one of recognizing the flexibility of some non-General Fund and reconsidering priorities for the revenue.

Community Development Block Grant Funds
The Community Development Block Grant (CDBG) funds are federal monies from the Housing and Urban Development Department. They are provided to meet national objectives such as assisting low- and moderate-income families, eliminating blight and/or addressing an immediate or urgent need in the community. Grant amounts are fairly stable and are made annually based on a formula. CDBG funds are flexible and can be used for a variety of purposes including capital projects, economic development, assisting non-profit groups, housing and code enforcement.

In Sacramento, CDBG funds are currently administered by the Sacramento Housing and Redevelopment Agency (SHRA), a joint powers authority between the City of Sacramento and the County of Sacramento.

SHRA uses CDBG funds to support its mission to improve the quality and accessibility of affordable housing. According to the Consolidated Plan required for CDBG funds, the City's annual entitlement is approximately $6,000,000. In the current fiscal year the City is receiving $812,000 of CDBG funds for direct use - $250,000 goes to code enforcement and $562,000 is budgeted for capital projects identified by City Council members and approved by the Council.

The Sacramento Code Enforcement Department uses approximately $3.8 million annual in General Fund revenue to provide code enforcement services. As a significant portion of the code enforcement workload occurs in neighborhoods eligible for CDBG funds, these funds can be used for code enforcement. This would free General Fund revenue for programs and services that have no alternative funding. According to Code Enforcement staff estimates, approximately $3 million of the current Management Partners, Inc. 57
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General Fund budget could be replaced by CDBG funds. The staff from the SHRA has stated they do not believe the use of CDBG funds for code enforcement is allowed under Federal regulations. As many cities do use CDBG funds for code enforcement, we make the recommendation for Sacramento to do so. Using the funds for these purposes would require federal approval. As noted at the beginning of this section, the alternative use of CDBG funds is a case of the City Council establishing priorities for the application of funds that have more than one use. The use of CDBG funds for code enforcement will take funds away from other programs and projects that meet other needs and have value to the community.

Recommendation 8: Utilize Community Development
Block Grant funding to pay for eligible code
enforcement services and eliminate General Fund
support.

Urban Forestry
The Urban Forestry Division is located in the Transportation Department.

This division is responsible for maintaining street trees and major park trees. The 2009/10 budget for the division is $5.5 million. Currently $650,000 in funding comes from the General Fund. Department management has determined that this General Fund support could be replaced by further use of Landscape and Lighting District funds.

Recommendation 9: Utilize Landscape and Lighting
District funds for the Urban Forestry Program and
eliminate General Fund support.

Functional Revenue
Functional revenues are typically fees and charges for services where there is an individual user or customer. Development processing fees, recreation program fees and fire inspection fees are examples. Under state law, cities can charge fees for services that are sufficient to recover all costs of service provision. This can include all direct costs as well as reasonable and appropriate overhead. These revenues can be used to either directly support General Fund activities or fund activities currently being funded with general revenue. Management Partners identified a number of opportunities where additional functional revenue can be generated to fund general city services.

In most cases fees charged by the City do not cover 100% of costs. In addition, during our review we identified some cases where fees are not being charged for services where there is a distinct beneficia ry. In many cases, this reflects aCity Council policy decision to not recover full costs.

Such a policy decision may be made to remain "competitive" with adjacent cities (especially for development-related fees) or to maximize access to ce rtain recreation programs for residents who may otherwise lack the means to pa rticipate. Youth recreation activities are a typical example.
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Given the City's financial condition and the need to make difficult choices about services and service levels, like eve rything else, the City's fee policies must be reviewed in the light of current circumstances and priorities. Opportunities to increase fees exist in the following areas.

Potential revenue estimates are based on gross calculations without the benefit of a detailed fee study.

Development Review Fees
Cities and counties charge fees for the processing of planning applications, building plan check and building inspections. These are services where there is a specific customer and beneficiary of the service.

A best practice is to ensure that new development pays all of the costs necessary for processing, inspections and infrastructure impacts. To charge fees that recover less than the full cost of facilitating the development means that general revenue intended to provide general public services is used to subsidize the cost of private development.

How fees are calculated and the percent of the total cost of the services recovered varies based upon several factors: the methodology used to develop fees, what costs are included in calculating the cost of service delivery and city council policy on cost recovery. By law, the City may charge fees necessary to recover the full cost of providing individual customer-focused services. These include direct costs, appropriate overhead, costs for replacing vehicles and equipment, and space costs.

As noted above, City Council policies impact the amount of fees recovered. Some cities choose to subsidize planning fees for single family residential construction and remodeling in the interest of suppo rting affordable housing. Some cities may subsidize or waive fees for ce rtain commercial development to encourage the attraction of new business that will, in the long term, provide greater general revenue to the city than what is lost in fees. Management Pa rtners understands that the express policy of the Sacramento City Council is to recover 60% of the costs for processing development.

Table 13 displays theFY 2009/10 budgeted expenditures and revenue for development review services. We believe this probably underestimates the expenditure because some indirect costs are lost.

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TABLE 13: FY 2009/10 BUDGETED DEVELOPMENT-RELATED

EXPENDITURES AND REVENUE
Revenue
Construction Permits $4,177,000
Plan Check Fees $2,321,000
Special Use Permit Fees $785,000
Residential Plan Review Fees $85,000
Planning Technology Fees $497,000
Other Fees $62,000
Total $7,927,000
Expenditures
Building Division $4,500,000
Planning Division $4,033,000
Customer Service Division $1,221,000.

Community Develop Admin $3,151,000
Parks and Recreation $550,000*
Fire Department $500,000*
Transportation Dept $500,000*
Total $14,455,000
*Estimate by Management Partners and SacramentoCity staff Based on this analysis we believe that the City provides a subsidy of at least $3.4 annually. More likely the subsidy is closer to $5 million once all costs are appropriately included. The comparison of development-related costs and revenue reflects the policy to recover less than the full cost of processing private development. Management Partners understands that the basis for this policy is an interest to encourage development and remain competitive with surrounding communities for attracting new commercial development.

In 2007 the San Joaquin Partnership, a non-profit economic development organization conducted a comprehensive comparison of the total fees charged by jurisdictions in the greater Central Valley. Sacramento was included in this review. The methodology took typical projects that were representative of different types of development and quantified the total fees to which the project would be subjected in each jurisdiction.

Construction projects that were included compared single family, multi- family, retail office warehouse and manufacturing. The total comparison included both processing and impact fees. Twenty-one jurisdictions, including Elk Grove and Sacramento from Sacramento County, were included in the analysis.

The study showed that the City of Sacramento is below the average in total fees charged for the single family, multi-family and office projects, and above the average for the retail, warehouse and manufacturing projects. In four out of the six projects, Sacramento's fees were lower than those of Elk Grove.
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Clearly opportunity exists for the City to substantially reduce the subsidy for private development, if not completely eliminate it. Increasing cost recovery could yield from $3.4 to $5 million annually if full cost recovery is the target. Even a recove ry target of 75% would generate over $1 million per year of general revenue for broad public services.

Those in the development industry as well as some single family homeowners will object to any increase in development processing fees and complain that it will stifle development or drive away potential new businesses. While it is recognized that no one likes higher fees and that the cost of processing development can be expensive, when placed in the context of the total cost of a construction project, City fees generally amount to a small portion of overall project costs.

Recommendation 10: Revise the current Council
policy regarding the recovery of costs for private
development and adjust fees to decrease the General
Fund subsidy.

Subscription Program for Ambulance Service
In most cities including Sacramento, ambulance transpo rt services are funded from user fees.The City's base charges for a transport are $1,210 for advanced life support calls and $1,055 for basic life support.

Several cities have established ambulance subscription programs.With a subscription program, a household pays an annual fee to the City. Fees generally range between $36 and $60 per year. The subscription guarantees that should a transpo rt be necessary for any resident of the household, the household will not be billed.

By becoming a subscriber, residents authorize the city or fire department to bill their private health insurers and/or Medicare or Medi-Cal, and the membership fee covers the remaining balance. It should be noted that first response medical assistance is always provided to everyone in need, regardless of participation in a subscription program or the ability to pay EMS fees. Those households participating in the subscription program are, in effect, buying insurance so that their costs will be covered.

Nationally, many cities have implemented EMS subscription programs.

The level of revenues from the subscription fees is dependent upon participation rates; obviously more people joining will mean greater revenue.

Table 14 below shows the revenue from ambulance subscription programs in several California cities.

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TABLE 14: AMBULANCE SUBSCRIPTION PROGRAM REVENUE FOR FY 2008/09 Jurisdiction Population
Annual
Membership
Revenue
Revenue
Per
Capita
Corona 148,597 $1,050,516 7.07
Anaheim 348,467 $1,710,000 4.91
Fullerton 137,624 $815,000 5.92
Huntington Beach 202,480 $1,426,000 7.04
Orange 141,634 $650,000 4.59
Burbank 108,082 $180,000 1.67
Santa Ana 355,662 $155,000 0.44
Average 206,078 $855,217 4.52
Median 148,597 $815,000 4.91
Based on the experience of other communities, a subscriber rate of 6% of households is a reasonable estimate. With an annual fee between $35 and $50, the City could expect revenue of $1,000,000 to $2,000,000 annually. As Sacramento ambulance service is an integral part of the Fire Department, this revenue can offset an equivalent amount of General Fund revenue that can then be used for other priorities.

Recommendation 11: Adopt and implement an
ambulance subscription program.

Fire Company Inspection Fees
Fire prevention is of significant benefit to property owners and the community in general. Beyond the potential for serious injury or death, a significant fire can cause residents to relocate into temporary quarters for a long rebuilding period and can put small business out of business.

The Sacramento Fire Department has developed an extensive fire prevention program. At the core of fire prevention is the regular inspection of those properties posing the highest fire risk. These include commercial properties and multi-family residential properties.

Fire inspections are conducted in two methods. Inspections in complex and high-risk occupancies are conducted by full-time fire prevention inspectors assigned to the Prevention Bureau. Smaller and less complex inspections (termed company inspections) are completed by on-duty fire suppression personnel in the course of their daily duties.

The City has an established fee structure for inspections by Prevention Bureau inspectors; it does not currently charge for company inspections.

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Since an individual benefits from the inspection service (a business or property owner) and the resulting revenue provides some offset to the cost of the fire suppression system, charging a fee frees up general revenue for other purposes. San Mateo and Palo Alto are examples of cities that have instituted company inspection fees.

The Fire Department reports an annual volume of roughly 5,600 company inspections. The estimated proportionate cost of the time spent on company inspections is approximately $3,500,000 annually. Although a fee targeted for 100% cost recovery would be too burdensome at $625 per year, a $100 fee would raise $560,000 annually.

Recommendation 12: Establish a fee schedule for Fire
Department company inspections. The amount of fee is
subject to Council policy. Prior to establishing the fee the Fire Department should perform an analysis of the
company inspections to determine if a variable fee
structure based on the size and risk exposure of properties is more equitable.

Competitively Bid Police Towing Services
The City currently contracts with 28 separate towing companies for vehicle tows within the City and receives an administrative fee of $7 per tow. This is collected by the towing companies along with standardized towing and daily storage fees, as set by the City contracts. Tows are rotated between the companies. Approximately $84,000 annually in revenue results from this fee.

Some jurisdictions now handle towing services on a competitive contractual basis. Although there is more "up-front" work to complete the competitive bidding process there is less ongoing handling required to set up the individual contracts and monitor the rotation of towing services.

Most importantly, the revenue generated is substantially greater than that of the current administrative fee. For example, the City of Oakland receives $1.3 million annually from an exclusive vendor that provides tow and storage services, collection and administration of the City's tow fees, lien auction and sale, and various administrative services related to the aforementioned. The contract is for five years. This approach could generate revenue for the City of between $500,000 and $1.0 million annually.

Care must be taken in structuring a request for proposals. The City must retain the authority to set all tow-related charges and ensure that the charges are reasonable and competitive. The exclusive provider would be selected based upon qualifications, past experience and the revenue offered the City in exchange for the exclusive contract. Opposition from existing tow companies can be expected as the present system spreads business to multiple operators.

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Recommendation 13: Select a single company to
supply police-generated tows using a competitive bid
process. If the City decides it does not prefer a single contractor, the administrative fee should be set to ensure it fully covers the cost. The full cost is probably closer to $25 a tow rather than the current $7.

Maximizing New Revenue Sources
Periodically the City has opportunities to receive new revenue from the use of City assets. Examples include the use of City property for cellular equipment, digital billboards placed on City property, advertising on City vehicles and naming rights to City facilities.

When these types of revenue opportunities present themselves there is often a tendency to earmark the funds for specific purposes. A department responsible for maintaining a property where payment for a cellular installation is offered may propose a specific department-focused use for the revenue. For example, proceeds from a ten-year contract with PepsiCo were directed to the CC&L department rather than the General Fund. As another example, Management Partners is of the understanding that proceeds from a franchise agreement with Clear Channel, Inc. are intended to be earmarked for specific projects rather than placed in the General Fund. A best practice is to place all such revenue into the General Fund and allow potential specific uses to compete with other priorities during the budget process.

Recommendation 14: Establish a policy that
designates revenue derived from the use of City
assets as General Fund revenue. This would include
revenue from digital billboards, ads on City vehicles and naming rights for City facilities.

The City of Sacramento has a broad menu of options to raise additional revenue to support core services. Voter approved options collectively are estimated at between $47 and $84 million in annual revenue value. Of course the City would select only one or two measures to place on the ballot. Therefore, revenue from voter approved measures would probably be in the range of $10 to $20 million annually.

The amount of additional revenue from franchise fees depends significantly on the ability to receive an equivalent payment from Sacramento Municipal Utility District. Shifting revenues currently used for other services to general services would produce approximately $3.5 million per year. Increases in functional revenue are estimated to raise at least $5 million annually.

Clearly, increasing revenue available to suppo rt core services will be a significant componentof the City's plan to achieve financial and service stability.
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Expenditure Reduction Recommendations
Cities have very little direct control over revenue. Expenditures however are controlled by City Council policies, priorities and service decisions.

Cities' expenditures are driven by a number of factors:
Number and type of services provided,
Level at which services are provided,
Delivery methods,
Number of staff employed in delivering services,
Organization of services, and
Compensation policies.

Opportunities to reduce operating expenditures correlate with each of the above factors. The following sections discuss expenditure reduction opportunities and recommendations.

Approach to Expenditure Reduction Analysis
Every service provided by the City provides value to someone. Each has a constituency, including residents that use the service, groups that advocate for the value of a service and usually, workers employed delivering the service. Therefore, expenditure reductions are hard, especially in a political/public setting.

Studies of the public sector have shown that the most common approach to reducing expenditures is to leave the service provision "menu" largely unchanged and cut some percentage from each program budget, often with a reduced or eliminated target for police and fire operations. While this is contrary to the approach advocated by professional public finance organizations such as the Government Finance Officers Association (GFOA) and the practices followed in the private sector, it is understandable given public agencies' operating environment.

Making across-the-board cuts often appeals to common ideals concerning equity and "sharing the pain." It also dramatically reduces decision making costs as policymakers, by providing some funding to all activities, do not have to prioritize the value of services and negotiate which ones should be eliminated in their entirety. A common example can be found in typical approaches taken to reducing library or community center operations. Cities often cut back programming and operating hours at all branches uniformly, rather than based on priority or relative utilization. The result is an equal level of mediocre or worse services.

The approach taken in this repo rt is essentially the opposite of the traditional "across the board" or equity cut approach. The City of Sacramento has basically exhausted the ability to make across-the-board cuts to deal with its budget problems. In addition, some City services have been cut to the point where their ability to function satisfactorily is questionable.

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For purposes of this evaluation, every service is assumed to be valuable. Each, however, is being scrutinized carefully and is open to the potential for significant, even radical changes in how the service is delivered, the traditional business practices followed in providing the service and the compensation and benefits paid to the workers providing the services. Service eliminations are considered the least desirable option because we assume that if a service can be delivered satisfactorily in a different fashion, it should be. This saves resources for other valuable programs that would otherwise have to be cut. Service eliminations are also looked at through the prism of the POD program, which is aimed at identifying mandatory vs. discretionary options.

In the sections that follow we look at opportunities to restructure services, including reducing and reorganizing the functions and personnel within departments, changing the deployment of personnel as well as the level of service provided. All of these are examined within the context of maintaining the core service in a way thatfulfills the City's mission.

We first look at opportunities to change the service delivery model, then at opportunities to change business practices and next at service elimination and reduction options. Lastly we identify changes in compensation and benefit policies.

Changes to Service Delivery Models
The current cost of providing services can be significantly reduced in some areas of the City's operations by changing how the service is delivered. Service delivery alternatives offer the potential to maintain what is currently provided without raising taxes or reducing services. In Sacramento, as in most older cities, the preponderance of services are delivered by a workforce employed by the City that exclusively serves the Sacramento community.

One of two most common alternative service delivery methods is functional consolidation, which involves delivering services through an entity serving two or more jurisdictions. The second most common alternative service delivery method is contracting, which uses a non-city entity and workforce to provide the service. These strategies are not mutually exclusive; some alternative delivery mechanisms employ both a consolidated service entity with contract service delivery.

The City of Sacramento currently uses both alternative service delivery methods. Several opportunities for expanding these alternative service delivery methods exist. Doing so will allow the City to maintain service levels at lower costs, thereby allowing Sacramento to continue as a full- service City.

Management Partners has identifiedopportunities to reduce the City's annual operatingcosts by up to an estimates $17.5 million by making changes in how services are delivered.
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Functional Consolidation
Functional consolidations are designed to provide existing or improved community service at a lower cost. This happens largely because of economies of scale. By using a common organization, entities eliminate redundancy, avoid the duplication of equipment and consolidate management and support functions. Typically a larger organization has greater flexibility in maintaining services when employees are sick or on vacation.

Municipal services are delivered through a variety of institutions:
City organizations,
Counties,
Special districts, and
Joint powers agencies.

The Sacramento community benefits from several functional consolidations that are currently in place:
Library services are provided by the Sacramento Public Library Authority, which is a shared entity serving both the City and County
Sewage treatment is provided by the Sacramento County Regional Sanitation District (SCRSD), a district serving multiple communities
Redevelopment activities are undertaken by the Sacramento Housing and Redevelopment Agency (SHRA), a joint City/County entity
Flood control is provided through the Sacramento Area Flood Control Agency (SCFCA), a regional agency
The Center for Sacramento History is operated by the City of Sacramento. The Center is jointly funded by the City and County and serves as the repository for both City and County official records
Models of functional consolidations exist for nearly all services provided by the City. The ultimate functional consolidation is the merging of a major city and urban county such as Miami/Dade County, Florida; Louisville/Jefferson County, Kentucky; and Charlotte/Mecklenburg County, North Carolina. While this concept was previously discussed for Sacramento, the strategy has never moved forward. Merger would be an extremely complex process and most of the benefits can be accomplished more easily through greater City/County cooperation.

Successful consolidations come in all shapes and sizes and it is important to understand some of the basic success factors. These factors were developed based on case studies by a landmark report created in 2002 entitled "Government without Borders." Government without Borders was an extensive report prepared by the Federal Government's U. S. General Services Administration, Office of Intergovernmental Solutions, and released on May 23, 2002.

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The report focused on opportunities for using information technology to consolidate the delivery of services, but also set forth some best practice findings with respect to service integration efforts in general. The findings seem simple and almost self-evident, but the importance placed on maintaining jurisdictional independence while developing service integration models was a key concept. This reflects the fact that "bigger is not always better" in terms of the cost of service, and underscores the reality that the importance of maintaining jurisdictional independence makes full-scale consolidation a costly and often unsuccessful undertaking. Key success factors are listed below:
Consistent leadership and staff support must be provided. Different levels of participation should be permitted. Participants must enjoy equal consideration.
Differing levels of technical maturity is to be expected. Technology issues are secondary to political and cultural issues. Modular project/task orientation helps inter-jurisdictional efforts. Jurisdictional independence and identity is to be respected. A two-year commitment is usually needed before benefits are fully realized.

While it is beyond the scope of this study to look at the full range of potential service sharing and consolidation opportunities in the Sacramento region, it should be noted that the Sacramento region is all ready one of the most coordinated in the entire state for transportation and regional land use planning. It makes sense for the City of Sacramento and other area jurisdictions to build on these successes when it comes to local government service delivery.

Management Partners researched service sharing arrangements that work well in other cities and would be feasible in Sacramento.

Specifically, we looked for examples that:
Involved a service delivered by the City of Sacramento; Featured an organizational approach that seems practical in the Sacramento setting; and
Demonstrated potential cost savings.

The following examples met all or most of these objectives.

1. Waukesha County, Wisconsin - Consolidation of 911 dispatch

2. Salt Lake City, Utah area - Traffic signal operations and maintenance

3. Coachella Valley, California - Street sweeping

4. Milwaukee, Wisconsin - Animal control via the Milwaukee County Intergovernmental Cooperation Council

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These service consolidations are summarized below.

Partnership
What it Does
Members
Governance
Benefits
Other Notes
Waukesha County, Wisconsin
Consolidation of 911 Dispatch Functions
Consolidated Public Safety Answering Points (PSAPs) serving 37 local systems with a population base of approximately 400,000 Waukesha County and 30 local governments
JPA
Upgraded to 800 mhz system with savings estimated at $2.7 million per year when fully implemented.

So far five of nine PSAPs have been consolidated, representing 30 local service providers. The project also includes a shared records management system.

Partnership Salt Lake City, Utah
Regional Traffic Signal System
What it Does Operates approximately 630 traffic signals. Common hardware and software provides integrated control and integration across the region.

Members Utah Department of Transportation, Salt Lake City, Salt Lake County and nine surrounding cities. Area population is approximately 918,000.

Governance JPA
• Benefits Uniform traffic signal operations.
• Shared maintenance costs, equipment specifications and operations standards.
• Twenty-one percent improvement in average travel time. • Shared training and back-up for after-hours response.

Other Notes Used Congestion Management and Air Quality (CMAQ) funds for capital cost. Cooperation allowed agencies to maximize federal funds by reducing administrative expenses.

Partnership Coachella Valley, California
Regional Street Sweeping Services
What it Does Contracts for street sweeping services in member agency jurisdictions.

Administers program and oversees reimbursement for some costs from CalTrans and federal air quality program.

Members Members of Coachella Valley Association of Governments (CVAG): 9 cities, 3 Indian reservations and the County of Riverside. Cities range in population from approximately 4,000 to 49,000. Total area population is approximately 290,000.

Governance JPA - Coachella Valley Association of Governments Benefits Regional approach to storm drain regulations and most cost-effective way to accomplish sweeping.

Other Notes CVAG operates a number of regional programs in the housing and transportation areas.

Partnership Milwaukee, Wisconsin
Area Domestic Animal Control Commission
What it Does Constructed, owns and operates an animal shelter and provides animal control and regulation services.

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Members JPA involving 19 city jurisdictions in greater Milwaukee area. A project of the Milwaukee County Intergovernmental Cooperation Council (ICC), which is composed of the same members. Metro area has a population of 940,000.

Governance Single purpose JPA with member appointed by each jurisdiction. An operations committee provides direct oversight to employees of MADACC.

Benefits Resolved service delivery crisis which resulted from the Milwaukee Humane Society discontinuing animal pick-up services. Analysis showed this option was far superior to independent city operations or private contract.

Other Notes Milwaukee ICC has also spearheaded projects relating to housing, homelessness and revenue sharing.

Partnership Charlotte-Mecklenburg County, No rt h Carolina Various Se rv ices
What it Does The City of Charlotte and the County of Mecklenburg have functionally consolidated municipal service delivery in the metro (County) area. The table below shows the division of service delivery.

Combined City County Separate
911 Service Water and Solid Waste: Disposal Human Resources Parks and Sewer Environmental Programs Information Technology Recreation Airport Human Services Finance
Police Zoning
Transportation Courts and Jails
Solid Waste Code Enforcement
Medical Examiner
Regulated Floodways
Library
Tax Collection
Street Addressing
Members Other than a Council of Governments and a Parks and Recreation Commission, there is no shared governance structure.

Governance Functional consolidation is achieved by inter-local agreements. Six other small incorporated municipalities may opt out of this service delivery if they choose to do so. Five of the six do so for police services.

Benefits While there is no formal review of efficiency, the proliferation of the inter- governmental agreements suggests that both the City and County are convinced of the benefit of such an approach.

Other Notes Political, as opposed to functional, consolidation has consistently been voted down. Some observers have concluded the success of functional consolidation has undercut support for political consolidation.

Current Effo rts
In December 2009, both the Sacramento City Council and Sacramento County Board of Supervisors initiated an effort to examine the options for functional consolidation between the two agencies. Options are being evaluated and prioritized based on the following factors:
Benefits associated with consistency between the jurisdictions Opportunity for improved level of service
Opportunity for cost savings
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Current level of organizational redundancy
Nationwide best practices
Some of the services being considered include animal care, code enforcement and parking fare collection. These are currently being evaluated by a staff working group looking at both the value of consolidation and the ease of implementation.

In addition, as part of the POD process and Management Partners' discussions with City staff; departments have submitted a number of ideas for consolidations with a varying degree of specificity. This includes such major functions as 911 dispatch, personnel and fiscal support services in law enforcement, park maintenance, animal control and code enforcement.

Management Partners has identified the following as good candidates for functional consolidation since they have potential for a high return in cost savings. The cost savings estimates are for ongoing operating costs.

Functional consolidations will require one time transition costs. One of the major reasons functional consolidations do not move forward is that the agencies do not adequately fund the transition effort. In some cases significant capital costs are required to accomplish complete functional consolidation. These costs can delay the realization of ongoing operating savings.

Animal Care
The City of Sacramento operates an Animal Care Services Division within the General Services Department. Division operations includes an animal service shelter, animal licensing, vaccinations and spay/neuter services for adopted animals, public outreach, and code enforcement activities related to animal control. The City currently spends approximately $3.1 million annually on animal care. The division is staffed with 33 FTEs, with nine in animal enforcement, 16 in animal shelter and eight in administration.

Budget information for the division is provided in Table 15 below. The costs are in line with and indeed less than observed in other similar settings. It should be noted that the figures in Table 15 do not include administrative overhead, but do include all services and supplies.

TABLE 15: ANIMAL CARE SERVICES BUDGET
Administration
and Animal Animal Animal
FY 2009/10 Licensing Enforcement Sheltering TOTAL
Expenditures $883,442 $963,691 $1,378,074 $3,225,207
Revenues $558,000 $174,000 $240,000 $ 972,000
General Fund
Subsidies $325,442 $789,691 $1,138,074 $2,253,207
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While costs probably cannot be diminished by a great deal, animal care and control as an industry is migrating to a more regionalized approach.

This is because animal care is increasingly regulated, and hence specialized. Also since domestic animals do not necessarily respect arbitrary boundaries, regional coordination of adoption, licensing and sheltering programs makes sense. Several good examples of regional approaches can be found in Orange County California, where the County serves the unincorporated population and 19 cities with about 2 million in population. As discussed above, in Milwaukee, Wisconsin, a JPA provider serves the County and 17 cities with a population of approximately 1 million.

Animal sheltering may be one of the best options for consolidation and cost reduction in animalcontrol. The approximate cost per animal for the City of Sacramento to operate shelter facilities based on fiscal year 2009/10 numbers above (at 11,400 animals a year) is $121.

The neighboring City of Elk Grove contracts with the SSPCA to shelter animals, provide low-cost rabies clinics, and administer animal licensing.

In addition, the City has access to the SSPCA's internal software which helps place adoptable animals. In FY 2009/10 the SSPCA is under contract to accept up to 3,100 animals (from both the public and City employees) at a rate of $332,814 (approximately $107 per animal) with each animal thereafter at a rate of $107 per animal.

Given the example of the contract described above, the City is spending an additional $14 per animal for shelter services even though it operates on a much larger scale. As an approximate estimate, the City could save $158,274 a year for direct animal services. In addition, the City would share the cost of software and realize at least another $18,600 in savings annually. Although the estimate does not include cost savings from the current administration portion of the division budget nor the potential for more savings by providing the facility, the City could save approximately $177,000 annually by contracting animal shelter services to the SSPCA or similar entity.

Beyond sheltering services, the City can examine consolidating animal control field services with those of Sacramento County. Other cities currently contract with their counties to provide animal control services either per animal or by providing a dedicated patrol officer, as is the case with the City of Citrus Heights. At present, the City compensation levels for animal enforcement personnel are higher than the average cost of equivalent County employees. If the City utilized county employees through a contract it could realize approximately $155,000 savings annually.

Alternatively, the City could enter into a joint powers agreement, joining with the County and other local communities to consolidate patrol services under one organization. Cost savings would depend on the total number of jurisdictions and levels of service agreed upon, but this is likely to be the lowest cost way to provide these services going forward. 72 Management Partners, Inc.

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Recommendation 15: Consolidate animal care services
with either Sacramento County or the Humane Society,
and move towards a countywide JPA structure of all
animal care services. A consolidation could be
established in three phases. During Phase I, a single pet license could be developed. Phase II would consolidate
field services. Shelter services, because of capital costs that may be associated with construction, would be
accomplished during Phase III.

Public Safe ty Communications and Dispatch
The City of Sacramento provides direct dispatch and emergency communications services for the Police Department and is the public safety answering point (PSAP) for fire and advanced life support. EMS and 911 fire calls come into the Sacramento dispatch center and are then transferred to a regional fire dispatch center operated by the Sacramento Regional Fire/EMS Communications Center, a joint powers agency of fire departments.

Dispatch and communication services are good candidates for large scale consolidation. The benefits include:
Establishing a common communication channel and protocols to improve coordination;
Minimizing the purchase of duplicative, expensive computer-aided equipment and technology; and
Lowering operating costs through reduced management positions and economies of scale.

Research by Computer Sciences Corporation suggests that call center consolidation can produce savings ranging from 25% to 50%, based primarily on its work with large private sector firms. While no broad data on potential consolidation savings in the public sector is available, case study research suggests that significant savings also may be available to governments, especially larger ones that can easily aggregate the volume of personnel and work needed to realize economies of scale.

There are many successful models for consolidated dispatch. The San Diego County--Imperial County Regional Communications System (RCS) provides public safety voice and data communications to more than 200 local, state, and federal agencies in San Diego and Imperial Counties. In Monterey County, the Monterey County Emergency Communications Department answers police, fire and medical emergencies for all cities and the unincorporated areas.

The current year's budget for the City's communication unit is $8,882,484.

Assuming a projected cost reduction of 25%, the City could achieve an annual savings of $2.2 million. This is consistent with Management Partners' estimated savings if the City of Cincinnati's operation were to merge with Hamilton County.

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As with any consolidation effort, issues of turf and control as well as stakeholders' investment in the status quo can present significant obstacles. This has particularly been the case with potential police communications mergers. Department management is often committed to consolidation, if their department will control management. Police officers sometimes express concern that having dispatch provided by someone other than their current in-house unit will create officer safety issues.

Lastly, there is usually concern about the potential loss of jobs.

The numerous successful consolidated operations, including the Sacramento Regional Fire/EMS agency serving the City's Fire department, demonstrate that all of these issues can be resolved. A shared governance structure can address oversight issues. The track record of existing consolidations demonstrates that officer safety issues do not materialize. A transition can usually be accomplished without the layoff of any existing personnel since sufficient turnover tends to occur in dispatch positions.

Recommendation 16: Consolidate public safety
dispatch with Sacramento County and other interested
cities.

Law Enforcement Units
It is nearly universal in full service cities that police services consume the largest portion of general revenue. Such is the case in Sacramento. The annual net General Fund cost of the Police Department is budgeted at $125,472,820 in FY 2009/10, accounting for 47.5% of the City's net General Fund expenditures. A number of factors contribute to the expense of providing police services:
• The operation is 24/7/365
• Personnel costs are high
• Sophisticated technology is needed
• Large numbers of vehicle and equipment are required
• Stringent legal requirements for training and personnel management are in effect
• Significant exposure to risk and high liability claims exists As noted in Figures 13 and 14, below, per capita expenditures for the Sacramento Police Department (SPD) are slightly below the average for the peer cities while major crimes are at the average. From a macro standpoint this indicates that care must be taken to avoid reductions in the core service of patrol and call response.
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FIGURE 13: PEER CITIES POLICE OPERATING EXPENDITURES PER CAPITA FOR FY 2009/10
600
500
400
300
200
100
0 a ~ ~C~ .LO Ot~ Co
O~aroa 0
`\t~ ~~ey ~~o, 5ao,o~a~~aP
~Z ~-l-
PJ ooJeio Qroeo aO~ea Oa~a ~ea
Source: ManagementPartners Survey
FIGURE 14: PEER CITIES MAJOR CRIMES* PER 1,000 RESIDENTS IN 2008 90 80
70 60
50 40
30 20
10 0
$ ~ c ~` Qr P e a~ ~oc ~e
o~S ~o ~a ~ac ~ar ~o~
p~ P
*Major crimes include: criminal homicide, forcible rape, robbery, aggravated assault, burglary, larceny-theft, motor vehicle theft and arson
Source: FBI website
Increasingly complex demands placed on police departments require greater specialization and the use of more sophisticated equipment.

These demands are particularly acute in urban areas, which tend to have higher crime rates and a more dynamic policing environment. To address these demands, police departments have developed a number of special units to respond to various situations as well as stand-alone support units.

These units are typically duplicated in adjacent police departments and Management Partners, Inc. 75
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the County Sheriffs office. Consolidation of certain special and support units can provide savings for the City.

Management Partners has identified the following opportunities to save General Fund dollars by consolidating special and support units with the County Sheriff and other adjacent police departments without compromising the public safety mission. These are:
Major Crimes Investigations,
Property and Evidence Management,
Metro Special Teams Units, and
Air Support.

With the exception of air support, each of these functions also exists in the Sacramento County Sheriffs Office and adjacent departments. The Sheriff maintained an air support unit until 2008, when it was cut due to budgetary reasons.

Major Crime Investigation
Major crime investigation is an increasingly costly service. The Sacramento Police Department has 59 positions in major crimes investigation, with a total budget of $7,687,373. Investigation of major crimes is highly complex and time-consuming, and requires increasingly specialized skills and experience to be effective. District attorneys are concerned about consistency and following precise investigative protocols to ensure successful prosecution of suspects. Suspect identification and apprehension in a major crime are time-critical, and require intensive staff-power for relatively brief periods of time. All of these factors make major crimes investigation a good candidate for functional consolidation.

A consolidated Countywide Major Crimes Task Force would afford consistent training, supervision, investigative protocol, and provide expanded resources for time-critical investigations. The District Attorney's Office and Forensic Laboratory will benefit from working with a unified entity, and can establish consistent protocols for investigation, forensics testing, handling of evidence, and other tasks. Cost savings can be achieved by consolidating investigative resources and reducing redundancy in the detective bureaus of individual departments.

It is reasonable to expect that with the elimination of redundant management and administrative support personnel and sharing of physical resources and equipment that the City would realize a savings of at least 10% or $750,000 per year. The savings will depend on the number of agencies that participate in a consolidated unit, and could be even greater. A report prepared in 2004 estimated that consolidation of the Pittsburgh Police and Allegheny County Police major crimes functions could save approximately $1.2 million per year.
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Property and Evidence Management
Sacramento PD operates a Property and Evidence Unit charged with the secure storage, . maintenance and retrieval of stolen property and evidence secured as a result of police investigations and field activities.

The Sheriffs Office and other police agencies in Sacramento County also are mandated to properly log and securely store stolen property and evidence. Property and evidence management has statewide and national standards, regulations, and procedures; thus this function lends itself to consolidation
An example of functional consolidation of property and evidence'among jurisdictions in Northern California is the multi-agency evidence facility located in Ukiah that serves the Sheriffs Department, District Attorney's Office, California Highway Patrol and federal agencies.

Management Partners has also worked with the City and County of Fresno to investigate sharing property and evidence storage facilities.

The study concluded that cost savings of at least 10% could be achieved along with improved logistics to benefit the two departments and the District Attorney.

The current annual budget for SPD's Property and Evidence Unit is $2,900,361. Conservatively, savings of at least 10% or $290,000 per year can be expected from a consolidated function. This savings would result from the elimination of duplicate management and support positions, some specialist positions, as well as equipment and facilities.

Metro Special Teams Unit
Currently, 60.7 positions are assigned to the SPD Metro Special Teams Unit, which includes the bomb squad, SWAT team, hostage negotiation, and other specialized units. The employees in this unit include police officers and reserve police officers. Because of ongoing personnel training requirements and liability costs, the operation of special units is a growing cost item in City police budgets.

Special teams are good candidates for functional consolidations because they require specialized training and equipment and are used only as needed (compared with being in service on a daily basis). The dynamics of maintaining these units in multiple departments results in duplicative management, administrative support, facilities and equipment. One of the best examples of multi-jurisdictional special teams operations can be found in the Los Angeles County Sheriffs Department, which serves approximately 47 cities with special teams as well as the unincorporated area for which the Sheriff has primary service responsibility.

With a 2009/10 budget of $8,444,338 for the Metro Special Teams Division, a conservative estimate of 10% savings in ongoing operating costs should be expected. This is expected to equal approximately $840,000 annually.

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The best way to establish consolidated special and support functions and maximize savings is to form a joint powers agency to manage the consolidated functions under one umbrella. Such a JPA would have a governing board of the chiefs from participating agencies and the County Sheriff.

Recommendation 17: Establish a law enforcement
support joint powers agency with the County Sheriff's
Office and other interested local law enforcement
agencies. The unit would initially be responsible for
investigating major crimes, handling property and evidence and deployment of special tactical units.

Air Support
The Sacramento Police Department operates an Air Support Unit that includes helicopter patrol, surveillance, suspect apprehension support and rescue services. Three air vehicles are used: two helicopters and fixed-wing aircraft. Staffing for the Air Support Unit consists of one police sergeant and four officers who work in two crews with staggered hours to provide seven-day coverage.

Annual operating cost for the unit is $580,000 for labor costs and $598,000 for maintenance, repairs, hangars, fuel, utilities, training, for a total of $1,178,000. In 2009 the Air Support Unit logged 4,186 incident calls. Approximately half of these were either Homeland Security or self- initiated calls. As indicated previously, until 2008, the Sheriffs Office operated a separate air support unit but has ceased operation due to budget constraints.

Sharing of police air support is worthy of exploration given the high cost and specialized skills required to maintain the unit. In addition, some consideration should be given to studying the utilization of unmanned aerial vehicles (UAV) as an alternative to helicopters. The technology behind UAVs is advancing regularly and improvements in remote control and high resolution camera technology could alleviate some of the surveillance, monitoring and evidence-gathering work currently carried out from helicopters.

While air units add real value to police work, they are most cost effectively utilized at a regional level. At minimum, Management Partners estimates a savings of $250,000 to $500,000 can be achieved, depending on the nature of the agreement between the City and County and whether any other law enforcement agencies would participate. The Police Department estimates only $8,500 in General Fund support for the program with the rest being paid from annual grants and external funds.

Savings from a consolidation could free up these grant sources to support other eligible law enforcement activities.
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Although not an immediate opportunity, should the County Sheriff consider reinstating air support, a shared unit would be an effective and economical way to meet the needs of both agencies.

Recommendation 18: Pursue a contract with the
County Sheriff's Office to provide helicopter services
or develop a jointly staffed air support unit, should the County express interest in reestablishing their air
support program.

Other Services
The Sacramento area is rich with functional consolidation opportunities.

As a large urban county, Sacramento County provides the full range of municipal services to the unincorporated areas, with departments generally mirroring those of the City. The duplication in management, administrative and support staff is substantial, as are redundancies in equipment, vehicles and technology. In addition, the other incorporated cities in the County, in most cases, also maintain stand-alone units providing the same functions. Several opportunities for consideration are discussed below.

Plan Review
One example of duplication is in post-planning entitlement services: plan checking and building inspection. All cities and the County use the Uniform Building and Fire Codes (some may make minor amendments) and enforce the same state regulations. In addition to redundant costs, those businesses that work in multiple jurisdictions are required to adhere to different processes, forms and staff. For residents in more remote areas, a city hall may be closer than the County facility. The formation of a Countywide joint powers agency to provide these services on behalf of all cities and the County would result in substantial cost savings and, with strong customer oriented management, better service.

Code Enforcement
Sacramento maintains an effective code enforcement unit, covering building code compliance, abandoned vehicle abatement and graffiti control. Given the scale and scope of the City's code enforcement unit, other cities in Sacramento County may be interested in considering contracting with the City for services. This would become a revenue source for the City which could be used to support other services.

Other Services
Other opportunities include street maintenance, traffic signals, street lights, recreation programs and landscape maintenance. The list is long.

As the City, County, other cities, regional transit and other districts all participate in the Sacramento Area Council of Governments (SACOG), this would be an appropriate organization to coordinate the study and ultimate implementation of functional consolidations.

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Recommendation 19: Initiate a process to evaluate,
select and implement multiple service consolidations
with the concurrence of the Sacramento Area Council
of Governments and member agencies. SACOG would
serve as the lead agency.

Outsourcing or Competitive Sourcing for Service Provision Cities have always relied on the private sector for the delivery of some services. Startingin the 1970s wholesale contracting for services such as refuse collection became commonplace.The concept caught on widely in the 1980s and 1990s, as did a hybrid approach called managed competition or competitive sourcing (public and private service providers compete to discover the best value proposition). Most cities in the United States contract for some services. Estimates are that currently 20% to 30% of municipal services are contracted or subject to market competition.

The principles behind this approach can be summarized as follows:
• A shift from a monopoly environment to a competitive one is good because the presence of competition (or the realistic potential for it) forces innovation and lower costs.
• Competition must be structured around best value, not simply lowest cost. One of the lessons learned from the application of competition is that best value is not always delivered by the lowest bidder.
• A competitive environment does not mean the government gives up control or management responsibility. Even if a service is delivered by a private contractor, the government remains responsible and must provide strong oversight.
• Performance must be measured and the metrics agreed on before contracting. Both cost and performance must be continuously monitored and reported
The application of competitive discipline to the delivery of municipal services is not just a theory. In Southern California many jurisdictions are "contract cities" where most, if not all, basic services are provided either by another public agency or a private provider, including police and fire services. Contracts are used by many cities for street sweeping, traffic signal maintenance, landscape maintenance, water treatment and distribution, construction plan checking, planning, engineering, payroll and investment management. Competitive sourcing is becoming common even in California's largest cities and there are competitive private providers for many municipal services. For example, on November 7, 2006, San Diego voters approved Proposition C, which amended the City Charter to allow the contracting of non-public safety services.

The successful implementation of competition in the delivery of municipal services follows some accepted "best practices." The San Diego Institute for Policy Research reviewed over 100 studies of competitive sourcing and established the following keys to success.
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Trained Procurement Staff. Staff must be properly trained in contracting best practices and, in particular, how to build service level standards into agreements and monitor provider
performance.
Centralized Managed Competition Unit. If bids are to be solicited from the existing workforce, the City should develop an expert team of procurement and competition officials to guide other departments in developing their managed competition initiatives. Performance Measures. It is crucial that the City identify good performance measures to fairly compare competing bids and accurately evaluate provider performance after the contract is awarded.
Reliable Cost Compa risons. The City must establish formal cost comparison guidelines to make sure that all costs are included in the unit cost of providing services. This will assure that an apples- to-apples comparison of competing bidders may be made.
Implementing Performance-Based Contracts. Performance-based contracts should be used to place the emphasis on obtaining the results the City wants to achieve, rather than focusing merely on inputs or trying to dictate precisely how the service should be performed. Performance standards should be included in
contracts and tied to compensation through financial incentives. Vigilant Monitoring and Evaluation. Regular monitoring and performance evaluations are essential to ensure accountability and transparency and that the City's management and service provider are on the same page.
Employee Communication and Relations. Competitive provider selection may encounter opposition from public employee unions who view it as a threat. It is important to provide extensive communication opportunities so that employees and their representatives are appropriately involved in the managed competition process.

Sacramento has historically provided a variety of services through contracts with private providers, including:
Some parking garage operations,
Some park maintenance,
Some tree trimming,
Major street maintenance, and
Certain building maintenance functions.

There is much debate about outsourcing as well as competitive sourcing.

While there have been many examples of success in lowering costs there have also been some spectacular failures. Research on the issue shows that careful use of outsourcing and competitive sourcing can significantly reduce costs but that it must be done carefully to prevent unintended negative consequences.

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Extensive research on the application of competitive dynamics to municipal service delivery has been done over the years. The results have consistently shown that either outsourcing or competitive sourcing, if done correctly, will result in efficiencies. Critics of a competitive approach sometimes cite methodological issues with comparisons of service delivery efficiency, but usually stress problems with public accountability, transparency, equitable treatment of employees and contract monitoring.

While there is no accepted _consensus on these issues, the empirical evidence shows that competitive sourcing can save money. If not done properly, public accountability and other problems can be factors. (References include Privatization: An International Review of Performance by Graeme A. Hodge; You Don't Always Get What You Pay for: The Economics of Privatization by Elliot D. Sclar; Cities and Privatization by Jeffrey D. Greene; Local Government Innovation by Robin A Johnson and Norman Walzer; and Moving Toward Market-Based Government: The Changing Role of Government as the Provider by Jacques S. Gansler.)
Before discussing a framework for introducing more competition into municipal services delivery in Sacramento it is useful to look at the reason that any serious discussion of solving Sacramento's budget problem must involve competitive sourcing of ce rtain services: Doing so could save significant dollars. Costs are reduced and be tter contained over time if they are influenced by the competitive marketplace. The dynamics of a competitive environment and the economies of scale of a contractor that serves multiple clients typically results in savings of between 20% and 40% over municipal servicedelivery. In some cases the savings are more dramatic.

For example, in January 2010, the City of Sacramento accepted bids for the maintenance of six parks. A total of 16 bids were received, including one from the City's Park Maintenance Division. The City awarded the contract to a private provider at an annual cost of $103,020; the Park Maintenance Division's bid was $365,424.

Using supportable cost reduction assumptions, taking a competitive approach to the delivery of certain services can significantly reduce the City's cost while maintaining the current level of service, thus freeing more funding for other services and capital projects.

Management Partners has identified services now provided through the City of Sacramento workforce that are also available through other providers. Table16 below estimates the personnel savings the City is likely to realize from contracting for various services. The estimates were calculated by reducing the employee services budgets for the identified services by 25%, which Management Partners has found to be a reasonable benchmark for this type of preliminary threshold analysis.

The methodology is well-supported by the available literature as well as actual experience, both in Sacramento and in other California cities. 82 Management Partners, Inc.

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Savings may be greater for some services and less for others, depending on the specifics of the contract and the extent of competition.

TABLE 16: POTENTIAL PERSONNEL COST SAVINGS OF CONTRACTING Tpe of Service
Operating Functions
Parking Operations Maintenance and
enforcement (off and on street)
Pavement Maintenancer---------- -- - --- --- -- --
L_ConcreteMaintenance
1Traffic Signal Maintenance- - ----- -- -
^Street Light Maintenance
^Street Marking
I Streetscape Maintenance
- ---^ F---------------, r--- --------------,
, Employee 25 /o Employee
; I Services Services
Expenses* Expenses*-
------, i- -- -
_$8,379,000J L $2,095,000 j
$4,575,000 $1,144,000
_$2,061,000 $515,000
_-J ^L $947'000 ! ^_ $237,000
$1,050,000 _ $263 000
$1,856,000- $464,000
---- - , •= _ _ _ --_ :----- -- -
$354,000 $89,000 1--- -- _-- - __ _ _= -- - -__- it-Tree Maintenance -;i- $3,387,000 ^i $847,000 Park Operations and Maintenance $5,577,000 $1,394,000--- - LSwimming Pool Operations and Maintenance it $1,444,000'1 _$361,000 i Facility Maintenance $4,106,000 $1,027,000-
Fleet Maintenance $8,1192,000,1______$2,048,000-1--- -- --- - -- - -- - --- _ - - -- -------- - _- , Golf Course Maintenance ^ $3,515,000 ; $879,000- --- - -- -- _ _ _ --- Marina Operation and Maintenance-- - _ _. ---- ---- - -- -^ ^ - - $469,000 - -- ----$117,000_^ Convention Center Operation and
,_Maintenance_- 11 $5,548,000; $1,387,000^- - - ---- -- --- i-Old Town Operation and Maintenance
-- - - - - --- - - - - -_ -----
^ _- $885,000 1, __ _ $221,000 ,
TOTAL $52,345,000 $13,086,000**
Source: City of Sacramento FY 2009/10 Budget backup data *Expenses rounded to the nearest $1,000.
**Due to rounding, there is a difference of $2,000 between the column and the row The costs of the services identified in Table 16 are funded by the General, enterprise and special funds. Management Partners estimates the General Fund impact at $5.5 million. This includes both direct General Fund savings as well as the ability for savings in the Golf Fund to go toward paying off General Fund loans and freeing up TOT revenue by reducing the Convention Center costs. As noted above, the application of TOT to the General Fund is subject to voter approval. The estimated $7.6 million in savings to enterprise and special funds could be applied to capital projects, such as street maintenance, or used to fund the maintenance of parks built with development fees.

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The potential for a cost savings of this magnitude, without requiring a reduction of services, suggests that this option should be seriously considered. It should not be rejected out of hand, even if strongly opposed by some stakeholders.

Furthermore, economies can be even greater if multiple agencies providing the same service come together and secure a joint contract. By aggregating service volume, larger contractors may bid on the work and unit costs are often lower. The writing of multi-year contracts with fixed cost increases provides greater predictability of service costs and tends to provide for slower cost growth than the same service publically provided.

Contracting Considerations. Three considerations need to be addressed when considering contracting a service currently provided by City employees.
Impact on Employees. A major concern about outsourcing is the impact on existing employees. Competitive sourcing can be structured to include a contract bid by the existing municipal workforce providing the service. Often, when placed in a competitive environment, the existing workforce can innovate and change operations in a way to win the contract. In the event the decision is made to outsource a service, contract terms with the provider can be written to include the requirement to hire existing workers.
Compensation of the Contract Workforce. A second concern is the employment conditions for those working for a contractor. The City Council has adopted a Living Wage Ordinance that requires City contractors to meet compensation standards. The minimum hourly rate varies depending on the contractor's employee health insurance practice. As of February 2010, the City's living wages rates are as follows:
o If health benefits are provided and the employer's contribution for the benefits is at least $1.61 for each hour of work, the living wage rate is $10.72 per hour.
o If health benefits are not provided or if health benefits are provided but the employer's contribution is less than $1.61 for each hour of work, the living wage rate is $12.33 per hour. Analysis of Financial Impact. In comparing private bids with City department bids, care must be taken to analyze the true financial impact on the City. While including all appropriate indirect costs and overhead in the public bid may accurately reflect true costs, certain City overhead costs may remain even when the service is contracted.

The bottom line for the City is to know the "go away" costs that would result from outsourcing.

Recommendation 20: Conduct competitive selection
processes for services where qualified alternative
providers exist. Conduct a thorough cost analysis to
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as provided by the City and as proposed by the outside
vendor or other agency submitting a proposal. Prepare a plan for addressing the employees who will be displaced through an awarded contract to an outsideentity.

Management Partners recommends the City begin the competitive sourcing process with the following services.

Fleet Management: Body and Paint Function
Fleet management in the City of Sacramento is a division of the General Services Department. The body and paint shop provides a good place to begin to evaluate outsourcing. In FY 2009/10 this unit has an annual cost of $410,000, including all supplies and services as well as personnel costs for four equipment body mechanics.

Recent federal regulations that require the Sacramento Metropolitan Air Quality Management District to implement new coating regulations will necessitate the installation of new paint booth equipment to satisfy emission standards. The estimated cost for these upgrades is between $150,000 and $200,000. In Management Partners' experience, most municipalities contract their body and paint function due to the large investment required for paint booth equipment and the regulations that impact the operation. Based on an analysis of the City's workload for body and paint services as well as the cost to outsource this function, the estimated annual savings is $100,000. This is largely due to the fact that the function can be accomplished with one FTE instead of the current four. One-time savings are connected to the cost avoidance of capital improvements for the paint booth which, as indicated above, is estimated at $150,000 to 200,000.

Park Maintenance
The City has over 200 parks and has experience contracting for park maintenance. The results of the recent competitive sourcing for the maintenance of six parks demonstrate significant opportunities for savings. Currently the City spends almost $10 million per year on park maintenance. While the City should retain some staffing for complex and specialized services as well as to respond to emergencies, Management Partners assumes that approximately $5.6 million of parks maintenance work could be subject to a competitiveness assessment.

With this approach the City Manager and Parks and Recreation Director would be asked to develop a request for proposal (RFP) process that would enable contractors, current parks maintenance staff and even other neighboring agencies (local cities and the County) to submit proposals for these services. Annual cost savings are estimated at approximately $1.4 million.

Golf Course Maintenance
Until 2005 the City operated its golf courses as an enterprise, meaning all costs associated with operating, maintaining and improving the courses were funded by greens fees and concession revenue. This also meant Management Partners, Inc. 85
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that the Golf Fund was reimbursing the General Fund for indirect administrative costs and paying a fee to the General Fund in lieu of the taxes the City receives from a privately-owned course. The competitive dynamics of the golf market did not allow rates to be raised to cover increased costs and the Golf Fund began to be subsidized by the General Fund, particularly for capital improvements. As a result the City is now subsidizing the customers of the golf courses with General Fund revenue that should be available for core services.

Contract maintenance of public golf courses is common and multiple providers exist. In Northern California the cities of Pleasanton, Livermore and Fremont all use private contractors. With five golf courses, an. RFP for contract maintenance should generate considerable interest.

Management Partners estimates an annual cost savings of approximately $878,000 could result from outsourcing maintenance. This would allow the Golf Fund to begin paying back its General Fund debt, providing critical funds for other Citywide uses.

Convention Center and Related Facility Operations and Maintenance Aside from the golf course operations discussed above, the City spends approximately $21 million per year operating the Convention Center, Old Sacramento, the Sacramento Marina, Zoo and a number of other facilities. Aside from the golf courses, these facilities generate approximately $4 million in direct revenues. The Convention Center is the largest in terms of expenditures and revenue generation.

Currently it costs the City approximately $12.4 million to operate the Convention Center. Factoring out the estimated $3.7 million in revenue to the Community Center Fund from facility use and catering revenues not derived from golf or the TOT transfer, the estimated "subsidy" required for operation of the Convention Center is $8.7 million. Most convention centers in secondary market cities such as Sacramento do not make a profit and require some type of subsidy. The benefit of such facilities is to support other economic activity.

Convention centers such as the Sacramento's can be operated under lease, contract or by City employees. Of the 11 peer cities' data analyzed, Management Partners found that 10 operate convention centers. Of those, four are operated by the city and six (Denver, Oklahoma City, Albuquerque, Long Beach, Fresno and Bakersfield) are operated by a contract with SMG. SMG is a national firm that operates convention centers in several states, and is just one example of a competitive option for this service.

A common metric in benchmarking such facilities is the amount of expense incurred for every dollar in revenue, or EIDR. Research indicates that this ratio for the Denver convention center is $1.32 with expenditures of about $14 million and revenues of about $10 million. It appears that the EIDR for Sacramento's Convention Center is about $2.35. This may be one reason that contract operation by a provider such as SMG is a popular option.
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As discussed above in the revenue section of this repo rt, the City should consider allocating a greater share of the TOT revenue currently going to the Convention Center to the General Fund. Pa rt of this increased share of TOT to the General Fund can be provided by lowering the operating costs of the Convention Center. Contracting the maintenance and operation of the Convention Center would reduce operating costs and free approximately $1.4 million annually for the General Fund.

Service Eliminations and Reductions
The reality of the harsh economic climate facing California local government today is that some services, many of them long established, will need to be eliminated or scaled back significantly. This is hard to do.

Existing services were created to address an expressed community need or enhance the quality of life for residents. Eliminating or reducing services will result in a loss or at least an inconvenience for some residents.

In deciding which services to eliminate or reduce, management and elected officials will want to consider a number of factors, including:
Is the service essential?
If it is essential, can it be provided at a lower level? Is the service one that most other cities provide?
How many people are served or use the facility?
How reasonable is the cost for the number served?
Are other public or private alternatives available for the service? While the elimination or scaling back of services is the core of the City's POD budget review, Management Partners has identified two opportunities that are discussed below.

Parks and Recreation: Public Pools
The City of Sacramento operates 13 public pool sites, of which one is a high school pool at Natomas High School. The other sites are McClatchy, Cabrillo, Oki Johnston, Doyle at Northgate Park, Hall, Mangan, Southside, Tahoe, Clunie at McKinley Park, Pannell and George Sim pools. George Sim pool was closed in 2008 and 2009 for renovations and is expected to be operable in the summer of 2010.

The FY 2009/10 Aquatics expense budget is $1,765,765. Program revenue is estimated at $142,702. The net General Fund subsidy is $1,623,063. The FY 2009/10 budget indicates a total of 25.99 FTEs are assigned to Aquatics with employee costs of $1,233,533.

Table 17, below shows the number of city-owned pools in the peer cities.

The number of city pools ranges from three to 12, with Albuquerque and Sacramento having the most. This data indicate that the number of pools that the City staffs can be reduced while an adequate recreation swim program is maintained.

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TABLE 17: CITY-OWNED SWIMMING POOLS IN PEER CITIES
Jurisdiction Number of Pools
Albuquerque 12
Bakersfield 6
Fresno 11
Long Beach 5
Oakland 5
Sacramento 12
San Jose 6
Santa Ana 5
Stockton 3
Average 7.22
Table 18 shows the attendance figures for recreation swimming in 2008 and 2009 for 12 pools. The 13th pool, George Sim, was closed for renovation and thus is not included. In addition, the Natomas High School and Mangan pools closed in July 2009 in response to the need to reduce costs. The Parks and Recreation Department is considering a similar closure for summer 2010. The total recreation swim attendance for 2009 was 80,971. Recreation swim does not include swim lessons or any fee- based aquatic classes.

TABLE 18: ATTENDANCE FOR RECREATION SWIM PER POOL"
Recreational
Swim
2008
Attendance
Days of
Operation
2008 Avg.

Attendance
2009
Attendance
Days of
Operation
2009
Average
Attendance
Natomas HS 8606 85 101 481 18 27
McClatchy 4,410 70 63 2,447 58 42
Cabrillo 5,146 70 74 2,790 41 68
Oki 8,756 69 127 4,172 60 70
Johnston 7,381 60 123 4,608 54 85
Do le/No rth ate 9631 70 138 5,688 60 95
Hall 12,071 70 172 5,452 50 109
Mangan 7993 69 116 2,241 18 125
Southside 14951 70 214 6,923 54 128
Tahoe 16,593 68 244 10,692 60 178
Clunie/McKinley 36,057 85 424 17,231 72 239
Pannell 46,105 82 562 18,246 71 257
Total 177,700 80,971
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Recommendation 21: Continue the closure of Natomas
High School and Mangan pools and close the
McClatchy and Cabrillo pools. These were selected
based on past reductions/closures by staff and recreation swim attendance. In addition, the George Sim Pool will be reopening and this will place constraints on the budget. It is estimated that the annual savings will be a minimum of $335,000. This estimate includes personnel costs only; it excludes additional maintenance savings.

The closure of four pools would still allow the City of Sacramento to operate eight pools, which is just slightly above the 7.22 peer average.

Functionally, the closures will require residents to travel to another pool that is offering a program that meets their needs.

General Subsidy for Fee-Charging Non-profit Agencies
The City of Sacramento has historically committed General Fund revenue to facilities and programs that are operated by non-profit organizations and that charge a fee for resident access. While such a practice was reasonable when City finances were adequate to fund core services, the current and projected financial condition requires that this practice be reconsidered. Below are several fee charging non-profit organizations and the amount of financial subsidy they received from the City in FY 2009/10.

TABLE 19: GENERAL FUND SUBSIDIES TO FEE-CHARGING NON-PROFIT AGENCIES IN FY 2009/10
Non-Profit Entit y Financial Subsid y
Crocker Art Gallery $1,427,910
Sacramento Zoo 517,985
Discovery Museum 143,527
Center for Sacramento History 339,314
Sacramento History Museum 143,527
TOTAL $2,572,263
Since these organizations have the ability to raise funds to replace the City subsidy either through increased fees and/or increased fund raising, any service reduction from withdrawal of the General Fund subsidies need only be temporary. The City's ability to provide no subsidy to the Crocker Art Gallery needs to be evaluated in the context of the deed transferring the property to the City.

Recommendation 22: Eliminate annual subsidies non-
profit entities that charge fees to clients.

Successful implementation of this recommendation will require the City to work carefully with each impacted organization. Organizations have different levels of capacity and some will need more time than others to replace the City subsidy. It is realistic that all of the subsidies can be Management Partners, Inc. 89
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phased out over the three year . timeframe for reaching financial sustainability.

Business Practice Changes
In addition to the model used for delivering services, the manner in which service is provided shapes expenditures. In many cases the traditional approach or business practice embedded within service delivery organizations has changed very little over time. However, technology, social change and innovation all make it possible to change traditional service arrangements to be more efficient. In this section we identify business practice changes which can improve the efficiency and/or effectiveness of the City government.

Law Enforcement Civilianization
Over the last 30 years it has become much more common to fill roles within police departments with non-sworn or civilian employees. The benefits of this approach are mainly fiscal since non-sworn employees have a lower cost, but there is also a benefit from the greater continuity associated with a non-sworn employee. California has always been a leader in this area and Sacramento has been very aggressive at using civilian personnel. However there are several areas where Sacramento can make further gains by assigning administrative and technical duties that do not require sworn status to civilian employees.

Executive Lieutenant Positions
The Sacramento Police Department employs three executive lieutenants, one for each patrol division. Other sworn management personnel in each patrol division include a captain and three to four watch commanders.

Executive lieutenants are responsible for administrative and technical duties in planning, coordinating, assigning and directing the functions of patrol units. Such duties can be performed by non-sworn management personnel, at a lower cost. If possible, existing executive lieutenants can be transferred to a funded vacant sworn position or a position that is vacated by a retirement or attrition.

Recommendation 23: Replace three sworn executive
lieutenant positions with non-sworn administrative
officers (or a similar civilian classification). Estimated annual savings will be $90,000 to 180,000, depending on the final position classification
Fiscal Bureau Lieutenant Position
The Management Unit in the Police Department has a lieutenant position that oversees the Fiscal Bureau. Fiscal services, however, is a standard administrative function that can be found in many departments throughout the City. The responsibility assigned to fiscal service managers does not necessitate a sworn position. In Management Partners' experience, most large criminal justice agencies employ a civilian manger to oversee financial functions and act a liaison to the central budget office. In addition, to a supervising lieutenant over the Fiscal Unit, the Sacramento 90 Management Partners, Inc. .

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Police Department employs a police administrative manager as well as several accounting and analyst positions.

Recommendation 24: Eliminate the sworn Fiscal
Bureau lieutenant position. It will be important to
determine if existing civilian staff can effectively manage the Fiscal Unit. If an additional manager is warranted, the position should be classified as non-sworn mid-
management. Estimated annual savings are $90,000 to
180,000, depending upon civilianization or elimination of the lieutenant position.

Opportunities for Restructuring in the Fire Department
The Sacramento Fire Depa rtment (SFD) is a full service provider of fire suppression, fire prevention, advanced life suppo rt (ALS) paramedic service and ambulance transport services. As with most full service cities, Sacramento's Fire Depa rtment represents the second largest General Fund expenditure, with a current year budget of $100,080,897.

Approximately 20% of department funding is derived from ambulance transport revenue and charges for fire permits and inspections.

Service is provided from 23 stations utilizing the following apparatus: 23 engines, staffed with four-person crews; 9 trucks, staffed with four-person crews; and 12 ambulances, staffed with two firefighter/paramedics. The companies are structured into four battalions, three with six stations and one with five stations.

Response activity for 2009 is distributed among a number of categories identified in Table 20.

TABLE 20: FIRE CALLS FOR SERVICE IN 2009
Call Type Number of Calls
Fire Calls 2,405
Emergency Medical Services 44,786
Overpressure RuptureCalls 618
Hazard Condition Calls 831
Service Calls 3,254
Good Intent Calls 9,302
False Alarms 3,871
Natural Disaster 17
Other 5,727
Total 70,811
Response time standards for fire departments are critical performance measures. This budgetary analysis did not examine the response time issue, as such a study requires a very intensive analysis. Management Partners reviewed the comprehensive analysis conducted with the Management Partners, Inc. 91
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assistance of the project team that worked with the consultant to prepare the Fire Department's 2007 Draft Master Plan.

The 2007 study, based on extensive analysis of 2005 data, did reveal that while the distribution of resources appeared to be appropriate, actual response times for fire calls for a four-minute travel time standard for the initial unit were met 69% of the time and 63% of the time when dispatch time and reflex times are included. Ambulance response time performance exceeded the 90% standard.

Discussions with staff of the SFD chief officers revealed that measures have been taken to improve call handling time in dispatch and reflex time (the time it takes for a fire unit to get "enroute" to an emergency alarm once they receive the alarm notification from dispatch) as well as other actions.

In comparison with the peer cities surveyed, the City's fire expenditures per capita are at the upper end of the range, as shown in Figure 15 below. One reason for this result may be the fact that Sacramento provides ambulance transport services while some others do not.

FIGURE 15: PER CAPITA PEER CITIES FIRE EXPENDITURES FOR FY 2009/10 Source: Management Partners' survey. Sacramento includes unincorporated population.

Restructuring Analysis
Any restructuring of the current service delivery model for fire or ambulance services must be carefully considered in the context of the impacts on response capability and worker injury exposure. As the ambulance crews are an integral part of the overall fire response protocol, Management Partners took a holistic view of the entire suppression/ advanced life support/transport delivery organization and system. This included examining a number of separate but interrelated and dependent areas including:
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Engine and truck company staffing;
The number of different types of apparatus - engines, trucks and ambulances;
The number of resources dispatched to calls; and
The capability of the dispatch system.

Because this study is intended to identify and advance ideas for reducing expenditures by the City of Sacramento, we have by necessity focused on how expenditures for fire services could be feasibly reduced. Any discussion of significant reductions in fire staffing will encounter opposition. Opposition is likely to center on concerns about public safety and the safety of firefighters. While such concerns are important, it is reasonable for policymakers, management and staff to expect that such concerns be documented with specifics about how any proposed change will impact responses and actual service provision. Blanket assertions that public safety will be compromised by any change to existing business practices and is therefore infeasible ignore the reality that the City is unable to afford a"business as usual" approach in the Fire Department or any area of City operations.

The City of Sacramento is ce rtainly not alone in considering options to reduce fire service costs. For example, the City of San Jose is considering options to either change the deployment of fire resources or reduce the number of engine and truck companies.

Engine Company Staffing
Sacramento has historically staffed all truck and engine companies with four personnel. Table 21 shows that among the fire departments of the California peers, some department staff with three people while others staff with four.

TABLE 21: PEER FIRE DEPARTMENT ENGINE COMPANY STAFFING (FTEs PER ENGINE) Jurisdiction
Number of
Personnel Assigned
per Engine
Bakersfield 3
Fresno 3
Long Beach 4
Oakland 4
San Jose 4
Santa Ana 4
Stockton 4
While four-person engine companies are typical for high-density urban communities, much of the Sacramento's service area is suburban in nature. Because Sacramento is an older city that began with an urban core, the Fire Department has long operated with four-person engine companies and this staffing pattern has continued even as newer more suburban areas developed.

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However, engines in suburban California fire departments are most typically staffed with three-person crews. As displayed in Table 22, the fire departments adjacent to the City who are part of mutual aid agreements all staff engine companies with a crew of three.

TABLE 22: ENGINE COMPANY STAFFING OF ADJACENT FIRE DEPARTMENTS Sac-Metro Fire Prevention District
West Sacramento Fire DepartmentFolsom Fire Department.

The number of persons staffing engine and truck companies in fire departments has been the subject of numerous studies. In general "more is better;" that is five persons is better than four, which is better than three. However, higher staffing levels are by far most beneficial in downtown areas with multi-story buildings and higher risk occupancies.

There is much less benefit to staffing above a three-person level when dealing with single story occupancies associated with suburban areas.

The most often cited research is that of the "Dallas Study," conducted by the City of Dallas Fire Department. This study measured the amount of time it took for a first-responder crew to complete key tasks required of a single story residential structure of 2000 square feet. The conclusion after extensive testing was that the average difference between a first responding company with a four-person crew and one with a three- person crew was approximately 40 seconds for individual tasks, but approximately 20 seconds when all tasks were averaged together for the residential structure fire.

Another issue sometimes raised to justify across the board four-person engine company staffing is the National Fire Protection Association's (NFPA) Guideline 1710, which provides suggested standards for career fire departments regarding a number of response parameters. One standard is to have four firefighters on-scene at a fire incident in four minutes or less. However, this personnel complement does not need to respond in the same unit. As detailed in further discussion to follow, Sacramento's current response configuration results in staffing at fires which is more than adequate under NFPA 1710 guidelines.

Looking discretely at the nature of the City's various response environments, avoiding a one-size-fits-all approach provides the opportunity for the Sacramento Fire Department to staff some engine companies with three personnel. Based upon our analysis, we recommend that some of the department's engines be staffed with crews of three firefighters.
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Recommendation 25: Implement three persons per
engine at stations where the suburban nature of the
primary serv ice area and call volumes makes this a
feasible alternative. Management Partners' analysis
shows that 11 of the department's engine companies could move to the three-person configuration, resulting in a
savings of approximately $4.2 million per year.

Truck Company Staffing and the Number of Truck Companies Truck companies in the California peer cities are mostly staffed with four- person crews. Santa Ana staffs trucks with three-person crews; San Jose and Stockton use five-person crews. Given the functions trucks provide in both fire and ALS service and the call volume in Sacramento, Management Partners has concluded that staffing truck companies with four-person crews is the appropriate practice for Sacramento.

The number of trucks required for a department is typically based on the geographic size and configuration of the service area as well as a ratio of engine companies to truck companies. In 2007 the Sacramento Fire Department prepared a Draft Master Plan. As part of this process, the department evaluated truck deployment in other agencies. The results of this study concluded the average number of engines to trucks was 4.4:1.

Currently, with nine trucks, the Sacramento Fire Department is at a

2.5:1.ratio.

Based on Management Partners' analysis, seven trucks are more than adequate to meet Sacramento's call demands. This will maintain a ratio of

3.3:1, still above average. For a point of reference, the City of Fresno, with approximately the same density and about the same size and geographic area as Sacramento, has an engine to truck ration of 3.8:1, with three-person truck staffing and without the firefighter-staffed ambulance of Sacramento to supplement fire ground staffing.

While the number of trucks can be reduced, looking at the system as a whole, Management Partners recommends (based on call volumes) that one truck be replaced with a three-person engine company and one be replaced with an ambulance. Using this approach, the City would retain the same number of fire response units but the two trucks taken out of service would be replaced with one engine and one ambulance unit.

Although maintaining the same number of apparatus, this deployment configuration requires three fewer on-duty firefighters.

Recommendation 26: Replace two truck companies
with one additional engine company and one
additional ambulance unit. This will result in the need for three fewer on-duty firefighters and reduce expenses by $1.9 million per year.

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Response Configuration
The department's current response to a single family structure fire is three engines (four persons each); two trucks (four persons each); an ambulance (two persons); and two battalion chiefs. This puts 28 persons at the fire ground. This is far above what most jurisdictions muster for a single family dwelling and far in excess of the NFPA Standards. The current NFPA 1710 minimum standard to ensure firefighter safety while executing their mission is 15 people including an aerial ladder truck.

From a risk management standpoint, Sacramento's practice puts an unnecessary number of Code 3 vehicles on the road, which places more risk to firefighters as well as the public. This practice also creates an unnecessary amount of wear and tear to the apparatus, which reduces its useful life and increases maintenance repair costs. It should also be noted that in many cases a "fire" call is cancelled because no fire is actually taking place.

Management Partners believes that it would be adequate for the SFD to respond with three engines (minimum is three-persons each); one truck (four persons); one ambulance (two persons); and one battalion chief.

This will enable the assembly of a minimum of 16 at any one incident within the desired time. The optimal response with three four-person engines would result in 19 firefighters on scene. This range of personnel response is greater than the initial response of 11 to 12 personnel used by some departments and the recommended NFPA guideline of a minimum of 15. Protocols can be used to increase the initial response if it appears warranted; should fire or smoke be confirmed by the closest responding company, they can increase the alarm for additional units. In addition, if dispatch gets a confirmed fire they automatically increase the response to a second truck.

This recommendation will reduce the emergency responses for truck companies and provide a more realistic work load of emergency responses, as the current data are distorted by the heavy response numbers generated by "over response" loads to residential structure fires.

This recommendation will also keep more pieces of apparatus in place to provide a faster response to multiple incidents.

Additionally, responses to automatic alarms in commercial, industrial, and high rise buildings can be reduced, since the history and probability of false alarms is so high. This should also have a corresponding increase in the ability of engines and trucks to manage company inspections and training. It should also have a positive impact on the availability of ambulances, should a review of the alarm responses find that more than one ambulance is being dispatched to unnecessary alarms.

Recommendation 27: Change initial response
configuration for fire calls to reduce the number of
equipment and vehicles initially dispatched. This will
have a relatively minor savings from consumables as well as wear and tear on emergency response vehicles,
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estimated at $50,000 per year. However, this action will also 'reduce the risk for accidents and injuries during responses. In addition it will result in equipment being in position for optimal response a higher percentage of the time.

Ambulance Staffing
The call load of ambulances consistently averages more than six calls per day. While this is low by the standard of a stand-alone ambulance, as Sacramento's ambulance crews are firefighters that respond to and assemble for fire ground purposes, this call volume generates many significant peaks. The workload issue should be addressed.

The addition of one full-time ambulance (as a replacement for one truck noted above) will reduce the call load per ambulance and provide the numbers necessary on fire responses. The cost of staffing the additional ambulance is estimated at $768,300 annually. SFD staff has indicated that ambulance revenues would offset the additional cost of staffing an additional full time ambulance.

Recommendation 28: Add one ambulance unit with the
expectation that costs will be fully offset by additional revenues. To the extent that revenues do not cover full costs the other recommendations made with respect to
other fire staffing and business practices more than offset some additional minor expense.

Dispatch Coordination
Any changes in the number of apparatus that are fully staffed on a daily basis or daily staffing of personnel on particular pieces or types of apparatus will require a review of dispatching criteria for certain types of emergency responses, so as to meet minimum established criteria for structure fires.

Recommendation 29: Review dispatch criteria and
protocols prior to implementing changes in apparatus
staffing and initial response numbers.

Battalion Reorganization
Another opportunity to enhance the efficiency of the Fire Department without compromising response is to restructure the department in three rather than the four current battalions. The expansion of the span of control for a battalion chief from six fire stations to eight is not unrealistic as measured against many other agencies.

Recommendation 30: Eliminate one duty battalion
(three positions) and restructure fire companies into
three ba tt alions. This reorganization is estimated to provide annual cost savings of $384,150.

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The recommendations, along with the department's continued diligence in reducing dispatch time and reflex time, should allow the Fire Department to either meet or come much closer to the response standard on 90% of fire calls. The extra ambulance will help maintain the ability to meet and exceed the response time standard90% of the time to ALS calls.

Summary of Fire Restructuring Opportunities
Management Partners' evaluation suggests the following adjustments in the Fire Department:
• Implement three persons per engine staffing at stations where the suburban nature of the primary service area and call volumes makes this a feasible alternative. This would include staffing 13 engine companies with four-person crews and 11 with three-person crews;
• Replace two truck companies with one additional engine company and one additional ambulance unit;
• Change the initial alarm response for residential fire structures and automated commercial fire alarms until a fire is confirmed; • Review dispatch criteria and protocols prior to implementing changes in apparatus staffing and initial response numbers; and • Eliminate one duty battalion (three positions) and restructure fire companies into three battalions.

Phasing in these changes will take time and the department should be tasked with developing a plan to do so in a way that does not disrupt service delivery.

Recommendation 31: Develop the optimum
deployment plan for the distribution of the new asset
pool based upon an analysis of target response
standards. Monitor actual performance monthly and
compare with target outcomes so that appropriate
deployment adjustments can be made.

Because the fire department budget is largely driven by line staffing, any significant expenditure reductions would need to come from staffing reductions. If the total personnel count is left unchanged the only ways to significantly reduce operating costs would be through changes in compensation and benefits (discussed in another section of the report) or from a substantial change in the schedule worked by line staff.

An alternative approach to reorganize fire service delivery and achieve roughly equivalent savings to what was outlined in the restructuring recommendations is to change from the current three-platoon 56 hour week schedule to a two-platoon 72 hour week scheduled used throughout the state by Cal Fire.
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While this structure relies on more scheduled overtime for fire personnel, the number of personnel needed to staff the department is less, which results in significant savings in benefit costs. A careful evaluation of this approach would need to be conducted to understand all of the impacts that such an approach would produce.

This would also require meeting and conferring with the IAFF. Given the historical opposition by municipal fire labor unions to this staffing pattern, it would be expected that opposition from labor would be very strong.

Lease Rooms at Community Centers
Leasing of underutilized recreation centers can reduce the current cost incurred by the City for operations and maintenance. Some City centers have space that would be attractive for day care, non-profit or for-profit recreation program providers as well as a variety of office uses for non- profit organizations, accountants, architects, advocacy groups, and attorneys. The following community centers appear to have the potential for leasing. Since each is unique in its location and operation, it is difficult to use the same common criteria for selecting these sites.

Clunie Community Center at McKinley Park. The facility is currently not staffed unless there is a paid reservation. In addition, the Sacramento Public Library currently utilizes space in the north wing of the Clunie Community Center. The facility is 1.97 miles from Coloma Community Center and 3.18 miles from a Sacramento Area YMCA facility. The programs offered by the YMCA (swim lessons, youth fitness, child care, group fitness and safety) are similar to those offered by the City. Day care operators such as Rainbow Day Care Center, Discovery Tree School, Sacramento Montessori School and the Boys and Girls Club of Sacramento may be potential tenants. Since this facility is primarily used for rental facilities, City programs would not be negatively impacted by the leasing of such facilities.

South Natomas Community Center. In addition to the uses noted above, this facility may be an attractive space for a fitness center. The City may want to consider contacting the Spare Time Club, a developer of private, multi-recreational fitness clubs. They have been in operation since 1972 and offer a unique combination of quality sports, racquet, fitness and social programs for singles, couples and families.

George Sim Community Center: Three community centers, George Sim, Oak Park and Pannell/Meadowview, are within a three-mile radius of each other. The quality of the facility may assist the City in attracting private and non-profit sector organizations to leasing rooms or the entire facility. This site also includes a newly renovated pool.

If all three facilities were leased, the annual potential savings would range between $478,000 and $588,000. This is according to data received from staff. In addition, a successful award of a lease agreement would generate revenue for the City. Any terms in the agreement should also Management Partners, Inc. 99
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include language stipulating the responsibility of the City and tenant regarding capital improvement projects. There may be additional savings in management or administrative costs depending on the impact to the Parks and Recreation Department's staffing needs.

Recommendation 32: Lease rooms or the entire facility
at the Clunie, George Sims and South Natomas
community centers. The City would need to ensure that
any new uses are compatible with the surrounding
neighborhood.

Code Enforcement Notification
The Sacramento Code Enforcement Depa rtment is responsible for enforcing City codes related to junk and debris, abandoned vehicles, zoning, graffiti, dangerous and substandard structures, rental housing inspections, vectors, and environmental health. The depa rtment also issues tobacco retailer licenses, ente rtainment permits, and taxi cab permits and works with the business community to promote health and safety in the workplace. In the current 2009/10 fiscal year, the Code Enforcement Depa rtment has a staff of 90 FTEs and budgeted expenditures of $10,696,979. Approximately 70% of department expenditures are covered by fees for permits and dedicated revenue for specific functions such as abandoned vehicle abatement. The net General Fund cost for FY 2009/10 after accounting for program specific revenue is $3,779,000.

This is a very good cost recovery ratio and one reason that Management Partners believes that other local area cities and the County of Sacramento may be interested in contracting for services or considering service consolidation with Sacramento City Code Enforcement.

In addition to the Administration Division, the department is comprised of the following four divisions.

Business Compliance. Works in cooperation with other City departments to issue permits and licenses and enforces various state and local codes and ordinances relating to businesses. Inspections are conducted to ensure code compliance and to promote public health, safety, and welfare.

Housing and Dangerous Buildings. Enforces City- and state-mandated codes relating to residential and commercial structures that are dangerous, substandard, blighted, or vacant. This division also enforces codes related to pests and mechanical noise through our environmental health section. Building inspections are performed for permit holders repairing or demolishing substandard structures.

Neighborhood Code Compliance. Charged with handling community and neighborhood nuisances such as illegal dumping, abandoned or inoperable vehicles, graffiti, and zoning violations.
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Rental Housing Inspection Program. Charged with addressing the issue of substandard rental properties; promoting greater compliance with health and safety standards; and preserving the quality of Sacramento's neighborhoods and available housing. The program achieves compliance of health, safety and welfare code violations in/on residential rental property that are a threat to the occupant's safety, a threat to the structural integrity of the building, and negative impact on the surrounding neighborhoods.

The work that is completed by the Code Enforcement Department is critical to maintaining and improving the health and safety of the Sacramento community. A viable strategy to reduce expenditures for this function while maintaining a high level of service is to implement a letter notification system for initial non-emergency violations and complaints. At present, the department dispatches a code enforcement officer to investigate all potential violations that come to the attention of the department.

Alternatively, initial inspections can be limited to violations that do not pose an immediate danger to the community. It is estimated that implementing a letter notification system for initial, non-emergency violations will significantly reduce the inspection workload by 20%, thereby allowing for a reduction of five of the current 20 code enforcement inspector positions.

Examples of non-emergency violations proposed for letter notification are:
• Illegal dumping of garbage on public or private property, such as junk and debris like old furniture, car parts, appliances or other visual nuisances.
• Inoperable or abandoned vehicles on private property. • Illegal placement of fences located in the front yards, street side yards, abutting alleys or other public right-of-ways.
• Parking vehicles on unimproved surfaces. (Unimproved surfaces can include but are not limited to lawn, dirt, gravel and plywood.) Examples of emergency violations that will necessitate an initial inspection are:
• Graffiti (necessary to determine if it possesses a criminal threat to the community).
• Compliance of health, safety and welfare code violations in/on residential rental property.
• Plumbing, electrical or mechanical hazards creating a danger to human health.
• Infestations of rodents, cockroaches or other vector violations. • Electrical issues that are reported to present a clear and present danger of fire or electrocution.

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Recommendation 34: Implement a letter notification
system for initial, non-emergency code enforcement
violations. Annual savings are estimated at $365,000.

Information Technology
Information technology (IT) has become embedded in the delivery of all city services in the City of Sacramento. Residents and businesses rely on technology to pay bills, register for recreation classes and obtain important information. Police and fire services are heavily dependent on technology to meet response times, provide efficient communications and manage large volumes of public records. Traffic signals, energy management systems and park and median watering cycles are dependent on technology. As the City of Sacramento adjusts its service delivery to work within constrained finances, the demands for IT for both internal operations and external service delivery will grow.

Management Pa rtners conducted a high-level review of the City's information technology program. This included conducting interviews with IT management and reviewing budget and staffing of the City's IT program as well as comparing the City's to industry norms.

The City's total IT budget, including both centralized services as well as those in departments, is $22.6M. This constitutes 4.47% of the total operating budget of $504M. (The operating budget includes the General Fund plus the operating budget in parking, solid waste, storm water, water, sewer, and marina, with heavy non-operating costs factored out in certain utilities.) Expenditures for IT are higher than the typical range of 2% to 4%, suggesting the possibility for savings citywide. Bringing the percentage of budget down to 4% would reduce annual costs by approximately $2.4 million.

Management Partners did not identify excessive costs in the central IT budget. The 132 Citywide IT-identified employees are approximately

2.9% of total staff, which is at the low end of the typical range of 2% to 5% of total staff in IT-titled positions.

Sacramento's IT operations are heavily decentralized. Of the 132 full time IT employees, 54 are in the central IT department and 79 are distributed among operating departments. Some departments maintain significant IT operations. This inherently results in duplication and unnecessary redundancy and contributes to a myriad of different systems to maintain.

One example is that the City Attorney and City Treasurer, two small departments, maintain separate LAN administrators.

The City's web usage is also highly decentralized, with weak oversight of content and with inconsistent branding on the pages of City departments.

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Industry Trends
The general trend of the IT industry is to consolidate support of all general infrastructure under the central IT organization. In such models network communications, personal computer, and shared network services such as file and print sharing, e-mail, and all central organization information services are consolidated. Central IT organizations, if equipped with proper technological tools, up to date computers and a strong customer service orientation can support personal computers remotely. This approach raises the number of PCs that can be supported by a single technician from 150 to 200 to over 300 in most cases. This approach is used in many cities and counties and is clearly a trend.

The server computers providing file, print sharing and e-mail services can also be consolidated into a maximally efficient number. When coupled with modern software tools, consolidation can offer reductions in the number of server computers required by as much as 30% to 50%.

Consolidation can also offer a reduction in the number of staff necessary to suppo rt the servers, a reduction in the number of server rooms required and lower electricity cost. An IT consolidation can clearly offer the City some cost savings. The exact amount and how the transition should occur will require a more detailed investigation and planning process.

Of equal importance to cost considerations, a consolidated approach can increase the overall capacity of IT resources to the entire organization. As noted in the Principles of Organization discussed earlier, a service common to departments is best served by a single, independent department. Organizations with highly decentralized IT tend to have some departments that are IT-rich and others that are IT-poor, as often decisions on major investments are made based on which department has resources rather than what adds the most value to the broader organization and community.

A central IT staff, with qualified personnel and a strong customer service approach, can meet the needs of all departments and, by leveraging pooled resources, serve those who have not had access to significant IT capacity. An enterprise focused governance committee with a strong chief information officer (CIO) oriented toward maximum IT value will guide investment based on the highest citywide priorities.

A Continually Evolving Industry
The IT industry will continue to evolve, presenting the City with a variety of options to meet future needs. "Cloud computing" is a term that describes several types of IT services delivered to an organization through the web. It is an emerging trend for providing IT services in the private and public sectors. The City of Los Angeles has recently entered into an agreement with Google to provide email and a suite of organizational collaboration tools delivered to city employees through the Internet. It will take some time to evaluate the effectiveness and cost- efficiency of this approach for those core services. However, other software services have proven to be successful. The City of Sacramento Management Partners, Inc. 103
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has already contracted for several department-specific software services to be delivered in this manner.

The demands for IT will continue to grow as the public expects to use the web for service and business transactions and the organization is pushed toward greater efficiency and productivity in a constrained financial environment. IT staffing structures that are both responsive and efficient will be increasingly important.

Recommendation 35: Conduct an optimization study
to identify ways to more efficiently organize IT
governance, operations and systems. While the City
could expect to reduce IT costs by $1 to $2 million
annually, care must be taken to ensure adequate IT
capacity. Many organizations, not recognizing the strategic enterprise importance of IT, have decimated IT functions to the point where they are only capable of "keeping the lights on." This approach hampers the City's effort to maximize efficiency and effectiveness. The City can probably reduce some costs and improve efficiency by shifting the balance between centralized and decentralized operations, with all common functions operating out of central IT and
department specific applications remaining within
departments. An optimization study would also allow for the evaluation of emerging technology trends such as
cloud computing.

City management can expect strong resistance to consolidation from operating departments that currently have significant IT resources.

Arguments will be made that a department is unique and must have its own resources. Service agreements between the IT department and operating department are a commonly used tool to specify IT standards for line departments. Police departments often perceive that security and records confidentiality require independent IT capacity. There are some very specific external mandates that must be met to meet State Department of Justice and F.B.I. standards, and to protect them against civil liability for violations of privacy. Addressing these will require the development of appropriate firewalls and extensive background checks for IT personnel handling police systems. Central IT must work very closely with the Police department to ensure the external mandates are addressed in a centralized system.

IT Strategic Planning
A$100M Strategic Plan was prepared by the Gartner Group in 2001. All of the projects the City decided to implement have been completed and it is time to develop a new strategic plan. Prior to developing a new plan, a formal enterprise-wide IT governance structure should be in place to establish priorities for investment.
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Recommendation 36: Develop a new IT Strategic Plan
that will guide the City's investment in technology. The plan should place specific focus on improving IT services that meet broad organizational needs as well as support collaboration and sharing of IT resources. This will enable the City to derive the most benefit to the most business functions at the lowest possible organization-wide cost.

Plan development would follow the optimization study.

Citywide Compensation Changes
The most significant expense in a city government is the cost of maintaining the work force. Most city services are labor-intensive and the cost of salaries and benefits consume the largest po rtion of general revenue. In Sacramento, 85% of the City's General Fund expenses go to employee salaries, benefits and related costs. The financial impact on the General Fund of a 1% increase or decrease in compensation costs is approximately $3,200,000 annually.

The dynamics of employee compensation issues in California local government are complex. Some information is useful in understanding the context.

The vast majority of local government workers in California and in the City of Sacramento are covered by collective bargaining agreements and represented by unions. Local government is much more highly unionized than most of the private sector. In the City of Sacramento over 85% of all employees are represented by one of 17 bargaining units.

While local government is highly unionized, this is a fairly recent development. Collective bargaining and union representation as we now know it was authorized for employees in California cities in 1968 by the Meyers, Milias, Brown Act (MMBA). Prior to this legislation, local government workers were often covered by a civil service or similar systems, and pay and benefit issues were not formally negotiated.

Current Compensation Practices
Compensation policies and practices for the City are established during the collective bargaining process between the City and the 17 bargaining units representing the City's 4,500+ employees. Several factors determine the compensation practices of an employer, including Ability to pay,
The desired level of experience and skill in the employer's workforce,
Competition in the labor market, and
Union negotiations.

Compensation decisions in the private sector are largely market driven, and the degree of collective bargaining is less than in the public sector. In public agencies political factors come into play with respect to compensation and benefit decisions. These include the ability of unions Management Partners, Inc. 105
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to engage in the electoral process and the perception of value of employee groups in the eyes of the public.

Ever since collective bargaining was allowed for public agencies, employee bargaining groups have been ve ry successful in improving compensation and benefits in the public sector. Currently, public salaries and benefits in the aggregate are greater than private salaries and benefits. Figure 16, below graphically shows this difference on a national basis.

FIGURE 16: PRIVATE VS. PUBLIC PERSONNEL COSTS
■ Benefits
o Wages and Salaries
Civilian Private Industry State and local
government
As Figure 16 shows, the salaries and benefits of state and local government employeesare 45% greater than the private sector. Some of this is due to the fact that local government employs relatively fewer service workers than the economy as a whole, and this class of workers tends to be the lowest paid. Looking deeper, research from the Bureau of Labor Statistics suggests that public salaries tend to be higher than those in the private sector for comparable jobs in the clerical, mid-management and maintenance fields and lower for those in highly specialized professional positions such as lawyers, and executive management positions.

One example of a significant disparity between market compensation levels and the compensation levels in the public sector are the pension benefits in the public sector. Public pension benefits in California are significantly greater than those in the private sector. In the early 2000s, most California cities agreed to costly increases in pension benefits. It turns out that these pension benefits are not necessary to attract and 106 Management Partners, Inc.

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retain personnel, and many see the existing levels as economically unsustainable.

Another factor in public sector compensation and benefit packages is that change is very difficult. With the legal requirements for collective bargaining, the City Charter provisions for binding arbitration for police and fire personnel and the inclusion in the Charter of disability leave payments greater than state law, the City Council has limited direct control over compensation policies and practices.

As the City prepares for negotiations with bargaining units in 2013, Management Partners makes the following recommendations regarding opportunities for the City to reduce and moderate the growth of compensation expenses. Employee groups and the unions that represent them will probably not support many of these changes. However, it must be noted that the City does not exist as an economic "island" where the factors shaping the overall economy and the ability to pay workers do not apply. If the suggested changes are implemented the City will remain a very progressive and attractive employer, and quite able to attract and retain good workers.

Retirement
Defined benefit retirement plans are provided to City employees through three Public Employees Retirement System (PERS) plans and the Sacramento City Employees Retirement System (SCERS) plan. The SCERS plan is a closed system with all new employees coming into a PERS plan. For the current fiscal year the City's pension plan costs are approximately $50 million. Due to the need to make up recent year stock market losses, PERS rates will increase significantly over the next five years, increasing the City's total pension cost by $16 million a year.

The three current PERS plans provide benefits based on the combination of age, years of service in the system, compensation and the plan formula:
• Sworn police personnel:(3% at 50). An employee with 25 years of service can retire at age 50 with a lifetimebenefit of 75% of their final year of compensation.
• Sworn fire personnel:(3% at 55 with the City paying the employees contribution). An employee with 30 years of service can retire at age 55 with a lifetime benefitof 90% of final year compensation
• Miscellaneous personnel:(2% at 55). A non-safety employee retiring at age 55 with 30 years of service receives a lifetime benefitequal to 60% of the final year compensation.

Pension costs are funded through employer (City) contributions and employee contributions. In FY 2010/11 the employer contribution rates will be 23.187% for police and fire and 11.727% for miscellaneous employees.

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Although employee contribution rates are established at 7% for miscellaneous employees and 9% for safety employees, in labor agreements the City has agreed to pay up to 4% of the contribution for certain miscellaneous employees and the full9% for safety employees.

It does not make sense to most current council members and residents why the employer would pay the employee's retirement contribution. This practice began in 1978 when in the wake of the property tax losses from Proposition 13 the state approved a temporary "bailout" plan for local governments. One of the conditions of accepting this funding was that cities and counties not give salary increases during the term of the bailout.

Many cities and counties, in light of the high inflation at the time, thought this was an unfair burden on employees and that recruitment and retention would be hampered. Picking up the employee's share of PERS was a legal way to give the equivalent of a salary increase while accepting the bailout.

The City's current pension provisions are so expensive that they threaten the future financial sustainability of the enterprise. If changes are not made, increasing amounts will have to be dedicated to funding pension obligations, forcing cuts in services and the elimination of positions.

The long-term projections used by CalPers to justify the offering of the plan enhancements have proven to be inconsistent with the actual performance of the economy. Because of this more cities in California are moving back to pension levels used prior to 2000. Not only are these less costly and financially sustainable, they begin to close the gap between private sector and public sector pension benefits. Public employees are one of the few remaining segments of the labor force to enjoy a defined benefit pension plan.

It is not possible to change pension plans for existing employees.

California courts have ruled that a public employee has a property interest in their employment and that pension benefits are a contractual obligation. However, given the cost of current plans, cities in California have started negotiating lower retirement benefit plans for new employees. Although the savings from new plans will not have a significant immediate impact on City costs, the long-term impact is substantial.

The lower cost PERS plan available for miscellaneous employees is 2% at 60. This was the City's plan until 2000. Some California cities that have gone back to this plan include Palo Alto and South San Francisco. Plans can also be structured to calculate pension benefits based on a three- year average of salary rather than the single highest year. Orange County and the City of San Diego have introduced hybrid plans that include a lower defined benefit portion coupled with a defined contribution portion. 108 Management Partners, Inc.

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Optional plans for safety employees include 3% at 55, 2.5% at 55, 2% at 55 and 2% at 50. The 2% at 50 plan was the statewide standard and the City's plan prior to the enhancement to the current plans in 2000.The City of Vallejo recently entered into an agreement with their Fire union to establish 2% at 50 as the retirement plan for new hires.

Given the number and volatility of factors that drive pension plan costs, providing a dollar estimate of the long-term savings of lower benefit plans for a specific agency is not possible without an actuarial review. Based upon general assumptions prepared by the actuarial firm of Bartels and Associates, by switchingto the 2% at 60 plan for miscellaneous and 2% at 50 plan for safety, the City could expect an annual savings after 10 years in excess of $3.5 million in current dollars and more than twice that amount when all employees under thefirst tier system are retired.

Recommendation 33: Institute a lower cost retirement
plan for new hires.

The savings to the City from changing pension benefits for new employees is significant, but will take many years to materialize. A way to get immediate retirement savings is to have current employees pick up more of the cost of their enriched plans. Each 1% of PERS "pick-up" by the employee is worth approximately $3 million, of which $2.25 million is in the General Fund. The most significant opportunity to do this is in the public safety pension plans where the cost of the plan is very high and employees currently do not make any direct contribution to the plan.

Recommendation 34: Negotiate for existing employees
to pay the full employee contribution for the existing
"high benefit" retirement program.

Medical Insurance
The cost of providing medical insurance for employees and a medical contribution for retirees is a significant expense forthe City. Currently the City spends approximately $23.8 million a year on medical insurance premiums for existing employees and approximately $10 million a year on contributions to retirees. For active employees,the City is paying 73% of the total premium cost with employeespaying 27%.

The City's contribution to employee medical insurance varies depending on the level of coverage provided. The base contribution rate is determined by the cost of the lowest priced plan available for single coverage. There are different contribution rates for single, single + 1 and family plans.

The City can better contain and manage medical insurance costs in a number of ways. This includes negotiating plans with higher deductibles and co-pays and fixing the City's maximum contribution rather than having it tied to a plan or index beyond the City's control. The annual reduction in costs for medical insurance can be substantial. For example, ManagementPartners, Inc. 109
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under the current agreements the average monthly City payment per employee for health care is approximately $431 and the average employee cost is approximately $159. Lowering the City's average contribution to $400 month would reduce the City's annual cost by approximately $1.7 million. Employee costs, on average, would increase $31.00 per month.

Recommendation 35: Negotiate a fixed dollar City
employer contribution for employee health care.

Through this strategy, the City's cost increases to known and negotiated levels could then be capped.

The City makes payments to retirees to offset their medical expenses.

The payment amount is based on an employee's years of service with the City. Under current agreements police and miscellaneous retirees receive up to $365 a month. Fire retirees receive $365 a month or the lowest cost health and dental plus $25.00 which ranges from $400 to $591 a month.

The current annual cost for retiree medical contributions is $10 million a year. The City's retiree medical contributions continue even when a retiree reaches the age of 65 and is eligible for Medicare. Of the $10 million annual City cost, approximately $6 million a year goes to retirees that are 65 and older.

People over age 65 are eligible for Medicare if they or their spouse worked for at least 10 years in Medicare-covered employment, and are a citizen or permanent resident of the United States. Many of the retirees for whom the City currently pays medical insurance may be eligible for Medicare, which is the primary and well regarded system of medical insurance coverage for the vast majority of the population over age 65.

Because of changes in Medicare law in the 1980s most, but not all existing City retirees would be eligible for Medicare.

The commitment to pay medical benefits to retirees creates an open ended and unfunded liability. Sacramento, like most cities, funds retiree medical payments on a pay-as-you go basis, with the cost of payments included in the annual budget. Government accounting standards that went into effect in FY 2007/08 require public agencies to report the cost of retiree medical benefits on an accrued actuarial basis and put forth a plan to fund the benefit. An actuarial report completed for the City in 2008 estimated the unfunded retiree medical benefit at $380 million. Fully funding this benefit would increase the City's budget by approximately $25 million annually.

Recommendation 36: Negotiate a phase out of the
City's contribution to retiree medical care and
negotiate the establishment of Retiree Health Savings
Accounts (HSAs). HSAs allow employees to contribute
tax free to a personal account to be used for qualified medical expenses in retirement. Funds drawn out of HSAs are not subject to tax if used for qualifying medical
expenses. As an incentive to employees, the City could
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offer to match contributions to a specified level. This would provide for some. City contribution to post retirement
health, but the amount would be controlled by the City and the obligation would end at retirement.

Recommendation 37: Develop an incentive program to
move retirees over 65 to Medicare. This can be done by
requesting such employees or retirees to sign up for
Medicare A and B coverage. The City can then submit all claims first to Medicare. Should City insurance cover
something Medicare does not, the City can pay the
difference. A small financial incentive for signing up for Medicare should result in major savings from reductions in the current payment of $365 per month. The City of San
Jose operates this type of a program successfully.

Under current labor agreements and policies, employees who are eligible for health insurance may waive coverage and receive $200 per month.

This commonly occurs when employees elect to take insurance coverage under the plan of their spouse or domestic partner. This is not a typical approach used by employers who view the provision of health insurance as a discrete benefit and not a part of overall compensation.

Historically, health insurance cash-outs were typically agreed to based on a recognition of the overall cost savings to the City. In today's economy, this practice bears review and analysis.

The City cost for employees who waive health benefits is estimated at approximately $1.8 million for the current fiscal year. Although discontinuing this practice may result in some employees opting to take City coverage, there may be an overall net savings.

Recommendation 38: Evaluate the estimated impact of
ceasing the health insurance op-out payment to
determine if projected savings make this a viable
proposal for future negotiations.

Disability Pay
Section 253 of the City's Charter provides that all employees disabled during the course of their employment are eligible to up to a full year continuation of salary and benefits. California law only mandates this benefit for public safety employees. Conforming the Charter to state law will decrease the City's cost for this benefit, resulting in an estimated annual savings of $300,000.

Recommendation 39: Initiate a City Charter revision to
conform the payment of disability leave payment for
non-safety employees to state law.

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Overtime Pay
Employees receive overtime pay if they exceed a designate number of hours in a week or other designated work period. Federal law provides for overtime payment only when an employee's actual hours worked in the designated time period exceeds the maximum amount.

The City of Sacramento generally calculates overtime based on the total number of hours paid during the designated period. Under this practice, paid time off such as vacation is treated as hours worked. An employee on a schedule of 40 hours a week who worked an hour of overtime on Monday, Tuesday, Wednesday and Thursday and took vacation on Friday would be compensated for four hours of overtime for that week, even though they actually worked 36 hours. It is difficult to precisely estimate savings from this change because overtime use may be impacted by other paid leave time use. However, assuming an overall budget of approximately $25 million in overtime per year and that 5% of the time paid is derived from the use of paid leave opposed to time worked, the estimated annual savings to the City would be $1.3 million.

Recommendation 40: Change overtime calculation
practices to be consistent with federal law.

Binding Arbitration
Articles XVIII and XIX of the City Charter provide for binding arbitration for sworn police and fire personnel. Binding arbitration removes the final authority for determining salaries, benefits and other conditions of employment from directly elected representatives and vests it in the hands of a party with no financial responsibility for managing the public's money. Police and fire personnel costs represent more the 50% of City's General Fund budget. An arbitrator looks only at the prevailing practices of other public agencies and does not consider the City Council's interest in establishing priorities for the expenditure of public funds that reflect a balance of services to the community.

The City has been to binding arbitration twice. In a 2000 arbitration with the police union, the City settled many significant cost issues including enhanced retirement benefits out of fear for faring worse in arbitration. In 2004 the City went to arbitration with the fire union and generally prevailed. The reality of binding arbitration is that the employer, fearful of the dynamics of the arbitration process, will often concede and enter into agreements that are more costly and result in fewer dollars available to provide other services.

Recommendation 41: Place a Charter Amendment on
the ballot that removes the requirement for binding
arbitration for sworn police and fire personnel.
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Compensation Comparisons
Surveys of the compensation provided by other agencies for similar jobs are usually conducted in conjunction with contract negotiations and used as reference points to negotiate salaries and benefits. In the City's case, some contracts include a requirement to undertake surveys and specify which cities and agencies must be surveyed. The City's compensation surveys only include information from other public employers. This closed system removes compensation decisions from a real labor market and results, in most cases, with compensation being significantly greater than that received for the same or similar jobs in the private sector.

Good private sector compensation information is available from many private employers. The inclusion of private sector compensation information in negotiations will better inform the process with a more accurate perspective on what the real labor market is for the positions under consideration. Examples of such jobs include maintenance, trades, administrative support, professional and technical positions in finance, human resources, engineering and planning.

Recommendation 42: Utilize private sector
compensation information in negotiating salaries for
those classifications where good job matches and
reliable data are available.

Cost of Living Adjustments
Multi-year labor agreements typically provide for annual increases so the value of employee earnings keep pace with inflation in the economy.

These increases are called COLAs (cost of living adjustment). In practice, COLAs take two forms: a negotiated fixed percentage by which the salary schedule will be adjusted or a variable amount usually tied to the U.S.

Department of Labor's Consumer Price Index. For the purposes of maintaining earning power, salary schedules should not be increased by an amount greater than the Consumer Price Index (CPI).

Entering into agreements with COLAs greater than the CPI can lead to significant City cost increases beyond what is required to maintain employee earning power. For example, in the fiscal years 2005/06 through 2008/09, City police and fire salary schedules were increased 5% annually and Local 39 salary schedules increased by 4% per year. During the years covered by these agreements, the CPI for the San Francisco area increased annually at an average rate of 2.5%. As noted above, every 1% increase in payroll, in current dollar value, increases City costs by approximately $3.2 million per year. The City can address this in the short term by negotiating contracts that freeze current salaries to recover the cost of previous COLAs that exceeded CPI. In the long term, future labor contracts can be negotiated to ensure that annual across the board salary adjustments do not exceed the CPI.

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Recommendation 43: Factor the recent sala ry
adjustments that were greater than the increase in the
CPI into upcoming negotiations. Negotiate future labor
agreements so that cost of living adjustments to salary ranges do not increase more than a defined index such as the Consumer Price Index.
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UTILITY ENTERPRISES
The City of Sacramento provides the following utilities:
Water treatment and distribution;
Sewage collection (treatment and some collection is provided by the Sacramento Regional County Sanitation District);
Solid waste collection (all residential and some commercial); and Storm drainage collection.

With a FY 2009/10 budget of $192,264,000, the Utilities Department is responsiblefor 21.7% of the City's total budget. Water service is provided to over 132,000 residential and business customers. The wastewater collection systemserves 60% of the City's prope rties; new development is served by the Sacramento Regional County Sanitation District (SRCSD). The Solid Waste Division serves over 124,000 residential and 1,200 commercial accounts. The storm drain utility maintains a collection system that includes hundreds of miles of pipe, canals and ditches, 45,000 drain inlets and 104 pumping stations.

Utilities are the most basic and universal of all municipal services. Without potable water and effective sanitation cities would not exist. Every resident and business is dependent on daily access to the City's utilities.

Reliable, adequately sized, and cost-efficient utilities are essential to maintain and grow the City's economy.

Sacramento's utilities are also important to the provision of general City services. As a result of a voter-approved charter action, an amount equal to 11 % of gross revenue from the water, sewer and solid waste utilities is paid to the General Fund. This acts as an in lieu franchise fee, or tax, ensuring the City receives the general revenue to cover service cost impacts associated with utility operations that it would receive if the utilities were privately owned. In the current 2009/10 fiscal year, this General Fund revenue is estimated at $20 million.

As part of this engagement Management Partners reviewed the overall financial condition of the utility funds. Utility operations are funded by direct charges for service to users. As is detailed below we believe the overall financial condition of most of the utility enterprise funds requires attention. While our review did not focus on operational issues, there are several recommendations relating to operations that would result in cost reductions and thereby improve the overall financial condition of the utility enterprises. These efforts will help address the fiscal situation in a limited ManagementPartners, Inc. 115
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way. The main solution to the issues discussed below is that utility user rates must be set at a level that is consistent with long-term sustainable operations.

Financial Conditions
The City of Sacramento's utility funds are in a weak financial position.

Unless actions are taken to bolster the financial condition of the utilities, there is a real threat they will begin to require General Fund subsides for operations and be unable to fund the infrastructure maintenance necessary for continued reliable service. The Utility Rate Advisory Commission recommended a multi-year rate structureto the City Council last year that was projected to be sufficient to maintain the solvency of the water, sewer and solid waste funds and generate sufficient revenue for adequate capital funding. The rates approved by the City Council for FY 2009/10 and 2010/11 were less than those recommended by the Utility Rate Advisory Commission and are inadequate to place the funds on solid footing.

Water
The Water Fund's balance at the beginning of the current fiscal year was $1.8 million. This represents2.4% of total annual expenses from the fund.

Table 23 below shows the fund balance of the California peer cities that operate water utilities. Sacramento is far below the fund balance of peer cities.

TABLE 23: JUNE 30, 2009 ENDING WATER FUND BALANCE AS A PERCENT OF

ANNUAL COSTS FOR MUNICIPAL SYSTEMS
Jurisdiction
Water Fund Balance As
a Percent of Costs
Bakersfield 70.0%
Fresno 56.0%
Stockton 43.0%
San Jose 15.0%
Long Beach 11.0%
Sacramento 2.4%
Source:ManagementPartners Benchmarking Survey
With the current rate structure, the Water Fund is projected to run a deficit of $1.7 million in FY 2009/10, which will bring the ending fund balance to a scant $81,000, which is less than 0.10% of annual expenditures. For FY 2010/11 the fund is projecting a surplus of $288,000 bringing the fund balance to $369,000, also quite inadequate at 0.40% of annual Water Fund expenditures. The Government Finance Officers Association (GFOA) recommends that cities maintain an unrestricted reserve or fund balance equal to two months of operating expenses; this is 16.6% of annual operating revenue.
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Utilities often have higher reserve levels because of the need to have capital to invest in system rehabilitation and renewal. Credit rating agencies usually look at fund balance as an indicator of overall fiscal condition of utilities seeking bond financing. Fitch Ratings recently noted that the median fund balance for AA rated water utility issuers was approximately73% of annual operating and maintenance expenditures.

The City's charges for current services are among the lowest in the region as illustrated in Figure 16 below. This indicates there is an opportunity through rate adjustments to bring the Water Utility Fund to the level necessary to fund infrastructure maintenance and maintain fiscal solvency while keeping rates at reasonable levels.

FIGURE 16: SACRAMENTO REGION MONTHLY WATER RATE COMPARISON 001
$89.18
90 $76.38
80 70 - -
60 $50.79 $52.84
50 40 ~ $38.70 ~ -
$33.55 35.72 i
$29.87
30 20 -
17I I
- - - -
. a,
10 -
- -
. .
- ~0 - -T- -
Sacramento Folsom Roseville Citrus West Sacramento Davis Sac Elk Grove (Proposed) Heights Sacramento County Suburban
Source: Cityof Sacramento'stypical single-familycustomer monthly bill Recommendation 44: Adopt a multi-year water rate
plan sufficient to meet infrastructure investment
during the next 20 years and build the fund balance to
a minimum of 17% of annual operating costs during
the next five years.

The need for rate increases to build an adequate fund balance can be mitigated by reducing operating costs. One opportunity to accomplish this objective is to eliminate the water fluoridation program. When the City Council authorized the water fluoridation program in 1998, the annual operating costs was estimated at $350,000. In FY 2008/09, fluoridation Management Pa rtners, Inc. 117
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costs $761,650. This amount is estimated to increaseby approximately $74,000 in the current fiscal year to $835,900.

In a recent analysis of the Fluoridation Program, the Department of Utilities identified major issues with the program and recommended that the program be eliminated. The principal conclusions of the analysis are:
Sodium Fluoride is becoming increasingly expensive to purchase. Fluoridation advances the deterioration of equipment and results in increased infrastructure maintenance costs.
The City is not contractually or legally obligated to fluoridate its water.
Several industrial water customers, such as Campbell Soup, Coca Cola, and Proctor & Gamble do not need fluoridated water and have a process to remove it.
Fluoride is mainly beneficial to infants and small children and there are other effective sources of fluoride (such as fluoride mouthwash and toothpaste) that are readily available to the public.

In light of the need to increase the Water Fund balance while minimizing the rate increases required to do so, elimination of the fluoridation program provides a cost-savings opportunity to help the fund achieve financial stability.

Recommendation 45: Eliminate the water fluoridation
program. Estimated annual savings are $836,000. It is
recommended that elimination of the program not affect
the rate structure. This will allow the savings to accrue to the Water Fund balance.

Some cities have sold or are considering selling their water systems to private providers. There are a number of water companies in the United States that supply fresh water to cities. The largest in California is the California Water Service Company. Evaluating the impacts of this approach on a system as large as Sacramento's is very complex. Given the current competitive rates and the stable General Fund revenue that comes from the voter approved fund transfer, we do not see this evaluation as being a high priority at the current time.

Sewer
The Sewer Fund is projected to have a surplus of revenue over expenditures in the current fiscal year of $117,000. The projected year- end fund balance for June 30, 2010 is $2,823,000, which is 12.7% of annual fund expenditures. However, the fund is projecting a deficit of $1.7 million in FY 2010/11. This will bring the fund balance to $1,156,000, representing4.6% of total annual expenditures. Unless rate increases are made to sufficiently cover annual costs, the fund balance will continue to decline. This poses the threat that the Sewer Fund will become a 118 Management Partners, Inc.

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30 20
15 10
0 General Fund burden and will not have insufficient funding for system maintenance.

Like water, the City's sewer service charges are among the lowest in the region, as shown in Figure 17 below. The opportunity to develop a financially sound enterprise while maintaining reasonable rates should be achievable.

FIGURE 17: SACRAMENTO REGION MONTHLY SEWER RATE COMPARISON (EXCLUDING SRCSD CHARGES)
45 40
35 $ 27.90
25 $17.50 $17.50 $17.50 $17.50
$14.04
$5.72
5 West City of Sacramento Citrus Heights Elk Grove Folsom Roseville Davis Sacramento Sacramento County
(Proposed)
Source: City of Sacramento's typical single-family customer monthly bill Recommendation 46: Adopt a multi-year sewer rate
plan sufficient to meet necessary infrastructure
investment during the next 20 years and build the fund
balance to a minimum of 17% of annual operating
costs during the next five years.

Solid Waste
The projected year-end fund balance of the Solid Waste Fund for June 30, 2010 is $17,000 with an annual expenditure budget of $56,485,000, representingonly 0.03% of expenditures. As currently operated, the City's solid waste enterprise is not on sustainable footing. An insufficient Solid Waste Fund has resulted in practices that have increased ongoing operating costs. For example, the lack of adequate capital funds to purchase new collection trucks results in the City buying used trucks.

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30 25
20 15
While the initial cost is lower, the ongoing maintenance costs are higher and the equipment will last a shorter amount of time. In contrast to water and sewer, the City's solid waste collection charges are the highest in the region, as shown in Figure 18.

FIGURE 18: FY 2009110 SACRAMENTO REGION MONTHLY SOLID WASTE RATE

COMPARISON
45 40
35 $22.05
10 )
$23.98
$25.50 $25.66
hAf
$27.35
$28.87 $29.47
$35.23

38.23 Roseville West Folsom Citrus Elk Grove Davis Sacramento City of City of Sacramento Heights (Proposed) County Sacramento Sacramento (Proposed) No Can
(Proposed)
Source: City of Sacramento: Typical single-family customer monthly bill As significant rate increases will be required to maintain a financially sound Solid Waste Fund, getting out of the solid waste collection business may be in the City's best interest. Many California cities provide solid waste collection by granting a competitively bid franchise to a private disposal firm. The franchise is regulated by the city and the city retains rate-setting authority. This is the standard service delivery method used in the San Francisco Bay Area, and much of Southern California. The competition moderates rates and tends to improve collection efficiency.

Given the size of the customer base, a competitive bid for the City's waste franchise would generate considerable interest.

Recommendation 47: Conduct a competitive franchise
bid for the City's solid waste service.

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the 11 % of gross receipts from the voter-approved tax that is currently collected from the solid waste operation.

The City provides yard waste collection as part of the solid waste enterprise. For years, the collection method was for residents to place piles of leaves in the street for collection crews. This is a costly and inefficient collection method. Making containerized collection of green waste mandatory is an opportunity to decrease operating costs for solid waste. Unfortunately, this would require removal of a prohibition on such a mandate approved by the voters (as Measure A) many years ago.

However, the City has been transitioning residents to voluntary use of green waste collection containers, the standard practice in most communities for yard waste, over the last few years. As a result, a majority of residents now use containers. Management Partners recommends that the City institute a surcharge for users who do not transition to containerized collection and phase out of the "loose collection" practice as soon as possible. This will generate some one-time revenues from the sale of surplus equipment (improving the solid waste enterprise's balance sheet) and reduce solid waste operating costs, which will translate into more competitive rates for customers.

Recommendation 48: Implement a phase out of "loose
collection" of green/yard waste and move to
containerized collection, using a price incentive. Use
savings to benefit the Solid Waste Fund and improve the competitiveness of City rates.

Storm Drainage
Because of the restrictions of Proposition 218, the City Council cannot raise storm drainage rates without voter approval. The last rate adjustment for this fund was in FY 1996/97. While the fund has a projected June 30, 2010 fund balance of $5.5 million, representing 14% of total annual expenses, with rates remaining flat and expenditures projected to increase, it will run yearly deficits and exhaust its fund balance by June 30, 2012. At that point, there will be no dedicated source of capital funds and storm drainage will become a growing drain on the General Fund, exceeding $10 million a year by FY 2014/15.

Recommendation 49: Place a measure on a future
ballot asking voters to approve a rate adjustment for
storm drainage services and to establish a framework
for the City Council to establish future rates. The
measure should provide for rates that are sufficient to meet anticipated capital requirements during the next 20 years and build the fund balance up to a minimum of 17% of
annual fund expenditures within five years.

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CONCLUSION
The City of Sacramento has managed well through the most challenging financial times in 75 years. By making a number of difficult decisions and tactical actions the City has decreased expenditures significantly in response to a near-free fall decline in revenue. Unfortunately, the impacts of the recession are more severe and prolonged than a simple economic downturn. Even with the actions taken, a structural budget deficit of $30 to $45 million exists in the coming 2010/11 fiscal year. Therefore, the City has embarked upon the development of a plan to achieve long-term financial and service stability.

Two discrete initiatives have been undertaken to develop this plan. The first, to thoroughly review and determine priority categories of all current services, was accomplished by City staff. The second was to engage Management Partners to identify revenue and expenditure strategies to achieve financial sustainability while remaining, as much as financially possible, a full service government. Together, these two initiatives provide the Mayor and City Council with fact-based tools that will allow them to transcend the emotional reactions and arguments that are frequently attendant to difficult public decisions.

Management Partners has presented several strategies that, if implemented, will achieve the City's goals. The strategies that are recommended are all grounded in the real world where they have been successfully used by other cities. Using a combination of revenue increases, changes in service delivery, reorganization, service reductions and changes in compensation policies, the City can develop a balanced plan that is doable over the next three years, credible with the public and not reliant on the slash and burn approach of gutting all non-mandatory and essential services.

Implementation of the strategies will be difficult. Increasing general purpose revenue significantly will require going to the voters with one or a package of tax measures. The City will need to demonstrate to the electorate that hard decisions were made to reduce expenditures and that some increase in taxes is essential to maintain the high quality of life enjoyed by residents and to retain a vibrant climate for business.

The economic realities that have dictated the tough policy decisions already taken by City leaders drive the decisions discussed in this report.

Management Partners stands ready to support and assist the City as it works through its decisions to meet the requirement that the budget be 4balanced.

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ATTACHMENT A - SUMMARY OF RECOMMENDATIONS
Recommendation 1: Reorganize City functions into a department configuration that reduces costs and improves the alignment of functions with related missions.

Recommendation 2: Reestablish a Construction Codes Advisory and Appeal Board that will consolidate the mission of the Housing Code Advisory and Appeals Board, the Building Code Advisory and Appeals Board, the Mechanical and Plumbing Advisory and Appeals Board, and the Electrical Code Advisory and Appeals Board.

Recommendation 3: Eliminate the Sacramento Relocation Appeals Board, Board of Plumbing Examiners, Meadowview Development Committee, Sacramento Commission of History and Science, and the Community Racial Profiling Commission.

Recommendation 4: Establish sunset clauses in the authorizing resolutions and ordinances for boards and commissions that have a specific focus.

Recommendation 5: Determine voter willingness to approve various tax measures and develop ballot measure(s) accordingly.

Recommendation 6: Pursue legislation that allows the City to collect payments to the General Fund from SMUD equal to the voter-approved amount collected from City-owned utilities.

Recommendation 7: Increase the commercial solid waste collection franchise fee from the current 8% to 11 %.

Recommendation 8: Utilize Community Development Block Grant funding to pay for eligible code enforcement services and eliminate General Fund support.

Recommendation 9: Utilize Landscape and Lighting District funds for the Urban Forestry Program and eliminate General Fund support.

Recommendation 10: Revise the current Council policy regarding the recovery of costs for private development and adjust fees to decrease the GeneralFund subsidy.

Recommendation 11: Adopt and implement an ambulance subscription program.

Recommendation 12: Establish a fee schedule for Fire Department company inspections.

The amount of fee is subject to Council policy.

Recommendation 13: Select a single company to supply police-generated tows using a competitive bid process.

Recommendation 14: Establish a policy that designates revenue derivedfrom the use of City assets as General Fund revenue.

Recommendation 15: Consolidate animal care services with either Sacramento County or the Humane Society, and move towards a countywide JPA structure of all animal care services.

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Recommendation 16: Consolidate public safety dispatch with Sacramento County and other interested cities.

Recommendation 17: Establish a law enforcement suppo rt joint powers agency with the County Sheriffs Office and other interested local law enforcement agencies.

Recommendation 18: Pursue a contract with the County Sheriffs Office to provide helicopter services or develop a jointly staffed air support unit, should the County express interest in reestablishing their air support program.

Recommendation 19: Initiate a process to evaluate, select and implement multiple service consolidations with the concurrence of the Sacramento Area Council of Governments and member agencies. SACOG would serve as the lead agency.

Recommendation 20: Conduct competitive selection processes for services where qualified alternative providers exist.

Recommendation 21: Continue the closure of Natomas High School and Mangan pools and close the McClatchy and Cabrillo pools.

Recommendation 22: Eliminate annual subsidies non-profit entities that charge fees to clients.

Recommendation 23: Replace three sworn executive lieutenant positions with non-sworn administrative officers (or a similar civilian classification).

Recommendation 24: Eliminate the sworn Fiscal Bureau lieutenant position.

Recommendation 25: Implement three persons per engine at stations where the suburban nature of the primary service area and call volumes makes this a feasible alternative.

Recommendation 26: Replace two truck companies with one additional engine company and one additional ambulance unit.

Recommendation 27: Change initial response configuration for fire calls to reduce the number of equipment and vehicles initially dispatched.

Recommendation 28: Add one ambulance unit at an additional annual cost of $768,300, with the expectation that costs will be fully offset by additional revenues.

Recommendation 29: Review dispatch criteria and protocols prior to implementing changes in apparatus staffing and initial response numbers.

Recommendation 30: Eliminate one duty battalion (three positions) and restructure fire companies into three battalions.

Recommendation 31: Develop the optimum deployment plan for the distribution of the new asset pool based upon an analysis of target response standards. 126 Management Partners, Inc.

City of Sacramento
Citywide Financial and Operational Review
Recommendation 32: Lease rooms or the entire facility at the Clunie, George Sims and South Natomas community centers.

Recommendation 34: Implement a letter notification system for initial, non-emergency code enforcement violations.

Recommendation 35: Conduct an optimization study to identify ways to more efficiently organize IT governance, operations and systems.

Recommendation 36: Develop a new IT Strategic Plan that will guide the City's investment in technology.

Recommendation 33: Institute a lower cost retirement plan for new hires.

Recommendation 34: Negotiate for existing employees to pay the full employee contribution for the existing "high benefit" retirement program.

Recommendation 35: Negotiate a fixed dollar City employer contribution for employee health care.

Recommendation 36: Negotiate a phase out of the City's contribution to retiree medical care and negotiate the establishment of Retiree Health Savings Accounts(HSAs).

Recommendation 37: Develop an incentive program to move retirees over 65 to Medicare.

Recommendation 38: Evaluate the estimated impact of ceasing the health insurance op-out payment to determine if projected savings make this a viable proposal for future negotiations.

Recommendation 39: Initiate a City Charter revision to conform the payment of disability leave payment for non-safety employees to state law.

Recommendation 40: Change overtime calculation practices to be consistent with federal law.

Recommendation 41: Place a Charter Amendment on the ballot that removes the requirement for binding arbitration for sworn police and fire personnel.

Recommendation 42: Utilize private sector compensation information in negotiating salaries for those classifications where good job matches and reliable data are available.

Recommendation 43: Factor the recent sala ry adjustments that were greater than the increase in the CPI into upcoming negotiations.

Recommendation 44: Adopt a multi-year water rate plan sufficient to meet infrastructure investment during the next 20 years and build the fund balance to a minimum of 17% of annual operating costs during the next five years.

Recommendation 45: Eliminate the water fluoridation program.

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Citywide Financial and Operational Review
Recommendation 46: Adopt a multi-year sewer rate plan sufficient to meet necessary infrastructure investment during the next 20 years and build the fund balance to a minimum of 17% of annual operating costs during the next five years.

Recommendation 47: Conduct a competitive franchise bid for the City's solid waste service.

Recommendation 48: Implement a phase out of "loose collection" of green/yard waste and move to containerized collection, using a price incentive.

March 2020

City of Sacramento
Citywide Innovation and Efficiency Assessment,
Potential Strategies

1730 MADISON ROAD • CINCINNATI, OH 45206 • 513 861 5400 • FAX 513 861 3480 MANAGEMENTPARTNERS.COM 2107 NORTH FIRST STREET, SUITE 470 • SAN JOSE, CALIFORNIA 95131 • 408 437 5400 • FAX 408 453 6191 3152 RED HILL AVENUE, SUITE 210 • COSTA MESA, CALIFORNIA 92626 • 949 222 1082 • FAX 408 453 6191 March 3, 2020

Mr. Jorge Oseguera
City Auditor
City of Sacramento
915 I Street, 2nd Floor, Room 219
Sacramento, CA 95814
Dear Mr. Oseguera:

Management Partners is pleased to transmit this innovation and efficiency assessment on behalf of our firm and Faegre Baker Daniels Consulting. This assessment was designed with two primary objectives:

1. Provide an independent assessment of the City’s current and projected near- and medium-term fiscal condition; and

2. Identify 10 to 20 opportunities to gain efficiency/cost savings and generate additional revenue, without displacing existing public employees.

In addition to preparing a fiscal model and financial forecast, the consulting team conducted this assessment through an extensive, but high level, review of documents and data, numerous individual interviews, outreach to City departments through focus groups, and research about best practices in six other large cities in California, Colorado, Arizona and Minnesota.

This report identifies 26 strategies, including six that were first presented in our Citywide Financial and Operational Review (2010) and Fire Innovation and Efficiency Study (2012). These combined strategies could increase ongoing revenues, or cost savings, ranging from $69.3 million to $79.3 million, and one-time revenues, or cost savings, ranging from approximately $20.3 million to $22.9 million.

Along with the efficiency and innovation strategies, this report includes 39 recommendations for improving City operations in connection with strategy implementation.

Thank you for the opportunity to assist you and the City of Sacramento.

Sincerely,
Jerry Newfarmer
President and CEO

Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Table of Contents
Executive Summary 1
The Fiscal Model ............................................................................................................................... 2 Revenue Generating and Cost Saving Strategies ......................................................................... 5 Vetting by City Management and Strategies Initially Considered but Not Included .............. 10 Project Approach 13
Review of Documents and Data ................................................................................................... 13 Interviews with Key Leaders......................................................................................................... 14 Interview Themes....................................................................................................................... 15 Outreach to City Departments ...................................................................................................... 16 Focus Group Themes ................................................................................................................. 16 Best Practices Research ................................................................................................................... 17 Study Limitations ............................................................................................................................ 18 Organization of Report................................................................................................................... 19 Peer City Research 20
Heightening Efficiency and Controlling Costs ........................................................................... 20 Leading Innovation ......................................................................................................................... 22 Fiscal Context for Efficiency and Innovation Strategies .................................................................. 26 Fiscal Context................................................................................................................................... 26 Fiscal Model Capabilities ............................................................................................................... 26 Current Fiscal Environment .......................................................................................................... 27 Baseline Forecast Assumptions ..................................................................................................... 32 Staffing ...................................................................................................................................... 32 Wage Increases........................................................................................................................... 33 Pension ...................................................................................................................................... 33 Health ........................................................................................................................................ 34 Overtime/Premium Pays ........................................................................................................... 34 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Vacancy Savings ........................................................................................................................ 34 Services and Supplies/Other Expenses/Equipment ................................................................... 35 Reimbursements ........................................................................................................................ 36 Capital Improvement and Multi-Year Operating Programs .................................................... 36 Debt Service ............................................................................................................................... 37 Measure U ................................................................................................................................. 37 Economic Downturns ................................................................................................................ 38 Property Tax .............................................................................................................................. 40 Sales Tax .................................................................................................................................... 41 Utility Users Tax ....................................................................................................................... 42 Other Taxes and Revenues ........................................................................................................ 42 Department Revenues ............................................................................................................... 43 Alternative Economic and Spending Scenarios .......................................................................... 43 Recession Magnitude ................................................................................................................. 44 New Construction Level ............................................................................................................ 44 Ownership Transfer Average Value Increase ............................................................................ 45 Sales Tax Growth Rate .............................................................................................................. 45 Pension Discount Rate .............................................................................................................. 45 Salary COLAs ........................................................................................................................... 45 Staffing Growth ......................................................................................................................... 45 Inflation Rate ............................................................................................................................. 45 Capital/MYOP .......................................................................................................................... 46 Measure U Set-Aside ................................................................................................................. 46 Other Major Uncertainties ............................................................................................................. 48 Unfunded Deferred Maintenance .............................................................................................. 49 Legal Challenges to the City’s Enterprise Tax .......................................................................... 51 Children’s Fund Initiative ......................................................................................................... 51 Summary of Budget Forecast Shortfall ........................................................................................ 52 Efficiencies, Innovations and Previous Recommendations ............................................................ 54 Additional Factors for City Consideration .................................................................................. 54 Efficiency Strategies ........................................................................................................................ 55 Modernize Business Operations Tax ............................................................................................. 56 Strategy Type ................................................................................................................................... 56 Impact Estimate ............................................................................................................................... 56 Achievability .................................................................................................................................... 56 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Background/Analysis ..................................................................................................................... 56 Civilianize Administrative Positions in Police and Fire ........................................................... 62 Strategy Type ................................................................................................................................... 62 Impact Estimate ............................................................................................................................... 62 Achievability .................................................................................................................................... 62 Background/Analysis ..................................................................................................................... 62 Police .......................................................................................................................................... 64 Fire ............................................................................................................................................. 65 Reduce Overtime 66
Strategy Type ................................................................................................................................... 66 Impact Estimate ............................................................................................................................... 66 Achievability .................................................................................................................................... 67 Background/Analysis ..................................................................................................................... 67 Change Staffing on Ambulances to One Firefighter/ Paramedic and One Firefighter ....... 72 Strategy Type ................................................................................................................................... 72 Impact Estimate ............................................................................................................................... 72 Achievability .................................................................................................................................... 72 Background/Analysis ..................................................................................................................... 72 Conduct a Utility Billing Audit ...................................................................................................... 74 Strategy Type ................................................................................................................................... 74 Impact Estimate ............................................................................................................................... 74 Achievability .................................................................................................................................... 74 Background/Analysis ..................................................................................................................... 74 Implement an Energy Savings Performance Contract ............................................................... 77 Strategy Type ................................................................................................................................... 77 Impact Estimate ............................................................................................................................... 77 Achievability .................................................................................................................................... 77 Background/Analysis ..................................................................................................................... 77 Case Studies ............................................................................................................................... 77 Energy Efficiency Efforts in Sacramento .................................................................................. 78 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Implement a Business Operations Tax Amnesty Program and Explore Additional Compliance Opportunities ............................................................................. 80 Strategy Type ................................................................................................................................... 80 Impact Estimate ............................................................................................................................... 80 Achievability .................................................................................................................................... 80 Background/Analysis ..................................................................................................................... 80 Update Pavement Cut Fees .............................................................................................................. 83 Strategy Type ................................................................................................................................... 83 Impact Estimate ............................................................................................................................... 83 Achievability .................................................................................................................................... 83 Background/Analysis ..................................................................................................................... 83 Reduce the Number of Take-Home Vehicles .............................................................................. 88 Strategy Type ................................................................................................................................... 88 Impact Estimate ............................................................................................................................... 88 Achievability .................................................................................................................................... 89 Background/Analysis ..................................................................................................................... 89 Automate Human Resources (HR) Processes............................................................................. 93 Strategy Type ................................................................................................................................... 93 Impact Estimate ............................................................................................................................... 93 Achievability .................................................................................................................................... 94 Background/Analysis ..................................................................................................................... 94 Explore Opportunities to Implement Managed Competition ................................................ 97 Strategy Type ................................................................................................................................... 97 Impact Estimate ............................................................................................................................... 97 Achievability .................................................................................................................................... 97 Background/Analysis ..................................................................................................................... 97 Continue to Innovate Parking Services..................................................................................... 100 Strategy Type ................................................................................................................................. 100 Impact Estimate ............................................................................................................................. 100 Achievability .................................................................................................................................. 100 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Background/Analysis ................................................................................................................... 100 Use Design-Build to Expedite the Completion of Capital Improvement Projects ........... 102 Strategy Type ................................................................................................................................. 102 Impact Estimate ............................................................................................................................. 102 Achievability .................................................................................................................................. 102 Background/Analysis ................................................................................................................... 102 Evaluate the Feasibility of Public Employee Gainsharing ................................................... 108 Strategy Type ................................................................................................................................. 108 Impact Estimate ............................................................................................................................. 108 Achievability .................................................................................................................................. 108 Background/Analysis ................................................................................................................... 108 Implementation ............................................................................................................................. 110 Gainsharing Examples ................................................................................................................. 112 Restructure Solid Waste Service Delivery Through Contracting, Managed Competition or Gainsharing ................................................................................................ 114 Strategy Type ................................................................................................................................. 114 Impact Estimate ............................................................................................................................. 114 Achievability .................................................................................................................................. 116 Background/Analysis ................................................................................................................... 116 Alternative – Contract Out Residential Collection ................................................................. 116 Cost Effectiveness of Contracting ............................................................................................ 117 Potential Revenue .................................................................................................................... 118 Alternative – Use Managed Competition Approach in Solid Waste ...................................... 118 Alternative – Use Gainsharing Approach in Solid Waste ...................................................... 118 Other Solid Waste Changes to Improve Operational Effectiveness ........................................ 119 Innovation Strategies 120
I1. Improve Fleet Procurement ............................................................................................................ 121 Strategy Type ................................................................................................................................. 121 Impact Estimate ............................................................................................................................. 121 Achievability .................................................................................................................................. 121 Background/Analysis ................................................................................................................... 121 Fleet Replacement Planning, Funding and Optimal Surplus Point....................................... 122 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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I2. Establish a Capital Asset Management System ......................................................................... 127 Strategy Type ................................................................................................................................. 127 Impact Estimate ............................................................................................................................. 127 Achievability .................................................................................................................................. 127 Background/Analysis ................................................................................................................... 127 Infrastructure Inventory ......................................................................................................... 128 Capital Improvements and Preventative Maintenance Backlog ............................................. 128 I3. Expand the Use of Green Infrastructure ...................................................................................... 130 Strategy Type ................................................................................................................................. 130 Impact Estimate ............................................................................................................................. 130 Achievability .................................................................................................................................. 130 Background/Analysis ................................................................................................................... 130 I4. Analyze the Cost/Benefit of the Community Workforce Training Program (CWTP) ........ 134 Strategy Type ................................................................................................................................. 134 Impact Estimate ............................................................................................................................. 134 Achievability .................................................................................................................................. 134 Background/Analysis ................................................................................................................... 134 I5. Monetize Sewer and Stormwater Assets for Fiber Optic Deployment ................................. 137 Strategy Type ................................................................................................................................. 137 Impact Estimate ............................................................................................................................. 137 Achievability .................................................................................................................................. 137 Background/Analysis ................................................................................................................... 137 Previous Recommendations ................................................................................................................ 139 PR1. Closely Monitor and Manage City Hiring, Eliminate Vacant Positions and Give Departments Greater Flexibility on Staffing ............................................ 140 Strategy Type ................................................................................................................................. 140 Impact Estimate ............................................................................................................................. 140 Achievability .................................................................................................................................. 141 Background/Analysis ................................................................................................................... 141 Internal and External Constraints .......................................................................................... 142 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
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PR2. Calculate Fair Labor Standards Act Overtime in a Manner Consistent with Federal Laws ............................................................................................................................ 144 Strategy Type ................................................................................................................................. 144 Impact Estimate ............................................................................................................................. 144 Achievability .................................................................................................................................. 144 Background/Analysis ................................................................................................................... 144 PR3. Eliminate General Fund Subsidies for Non-Essential Services .......................................... 146 Strategy Type ................................................................................................................................. 146 Impact Estimate ............................................................................................................................. 146 Achievability .................................................................................................................................. 146 Background/Analysis ................................................................................................................... 146 PR4. Establish a Paramedic/Ambulance Subscription Program ................................................... 148 Strategy Type ................................................................................................................................. 148 Impact Estimate ............................................................................................................................. 148 Achievability .................................................................................................................................. 148 Background/Analysis ................................................................................................................... 148 PR5. Pursue Legislation to Collect Franchise Fees from the Sacramento Municipal Utility District .............................................................................................................. 150 Strategy Type ................................................................................................................................. 150 Impact Estimate ............................................................................................................................. 150 Achievability .................................................................................................................................. 150 Background/Analysis ................................................................................................................... 150 PR6. Amend Charter to Remove Binding Arbitration for Police and Fire ................................. 151 Strategy Type ................................................................................................................................. 151 Impact Estimate ............................................................................................................................. 151 Achievability .................................................................................................................................. 151 Background/Analysis ................................................................................................................... 151 Conclusion 153
Attachment A – List of Recommendations ....................................................................................... 154 Appendix 1 – Summary Baseline Forecast of General Fund and Measure U ............................ 157 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
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Appendix 2 – Summaries of Managed Competition Case Studies .............................................. 158 City Management's Response..............................................................................................................162 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Tables
Table 1. Ongoing and One-time Benefits Associated with Implementing Recommended Strategies .................................................................................. 7 Table 2. List of Individual Interviews ......................................................................... 14 Table 3. List of Department Focus Groups ................................................................. 16 Table 4. Peer City Background Information ............................................................... 20 Table 5. Forecasting Methodology Promotes Realistic Alternatives ..................... 27 Table 6. Key Economic and Spending Assumptions in Fiscal Forecast Model ... 44 Table 7. Maintenance Backlog Identified in City of San Jose Comprehensive Review ................................................................................................................ 50 Table 8. Range of Potential Fiscal Outcomes and Annual Budget Shortfalls in Millions .............................................................................................................. 53 Table 9. Potential Savings from Positions Suitable for Civilianization1 .............. 64 Table 10. Departments with Overtime Expenditures >$50,000 Over Budget in FY 2017-18 ................................................................................................................. 68 Table 11. Sacramento Excavation Cost Recovery Fees Per Linear Foot, by Age of Street Surface ..................................................................................................... 84 Table 12. City of Los Angeles Street Damage Recovery Fees, Original and Revised ............................................................................................................... 84 Table 13. Estimate of Linear Feet of Excavations, per FY 2019-20 Budgeted Revenue .............................................................................................................. 84 Table 14. Potential Revenue from Revised Pavement Cut Fees ............................... 85 Table 15. Distribution of Take-Home Vehicles by Department or Functional Area .............................................................................................................................. 89 Table 16. Potential Managed Competition Savings of 3% and 8% for Select City Services, in Thousands .................................................................................... 99 Table 17. Potential Cost Savings for Capital Projects Using Design-Build Methods ............................................................................................................ 105 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Table 18. Functional Areas of Successful Gainsharing in Other Communities .. 110 Table 19. General Fund Revenue Estimate for Solid Waste Contract ................... 115 Table 20. City of Sacramento Fleet Age ....................................................................... 122 Table 21. Current and Recommended Vehicle and Equipment Replacement Intervals ............................................................................................................ 123 Table 22. Summary of Deferred Maintenance Needs for Facilities, Parks, and Pavement (in Millions) .................................................................................. 129 Table 23. Ambulance Subscription Program Revenue for FY 2017-18 .................. 148

Figures
Figure 1. Annual Deficit and Cumulative General Fund Available Balance in Millions from FY 2007-08 to FY 2027-28 ......................................................... 4 Figure 2. Unemployment Rates, 2000 to 2019 ............................................................... 28 Figure 3. Sacramento Metropolitan Statistical Area (MSA) Median Home Price in Thousands, 1991 to 2019 .................................................................................. 28 Figure 4. Sacramento MSA Home Sales Volume, 2000 to 2019 ................................ 29 Figure 5. Sacramento Percentage of Households Able to Afford a Mortgage, 1991 to 2019.................................................................................................................. 29 Figure 6. General Fund Staffing, FY 2003-04 to FY 2019-20 Approved Budget ..... 30 Figure 7. General Fund Revenues and Expenditures in Millions, FY 2007-08 to FY 2019-20 ................................................................................................................. 30 Figure 8. Pre-Recession versus Actual Recurring Revenues, General Fund Plus Measure U, from FY 2002-03 to FY 2018-19 .................................................. 31 Figure 9. Revenue vs. Personnel Cost Growth, FY 2007-08 to FY 2018-19 .............. 32 Figure 10. General Fund Personnel Costs in Millions, FY 2007-08 to FY 2027-28 Projected ............................................................................................................. 33 Figure 11. Projected Pension Costs, through FY 2037-38 ............................................. 34 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Figure 12. Cost Savings from Vacancies in Millions, FY 2007-08 to FY 2018-19 ...... 35 Figure 13. Service, Supplies, and Other Expenses in Millions, Projected through FY 2017-28 ........................................................................................................... 35 Figure 14. Projected Reimbursements to General Fund in Millions through FY 2027-28 ................................................................................................................. 36 Figure 15. Combined Capital and Multi-Year Operating Programs in Millions, Projected Expenditures through FY 2027-28 ................................................ 37 Figure 16. Projected Debt Service Expenditures in Millions through FY 2027-28 .. 37 Figure 17. Measure U Allocation of Funds Projection in Millions through FY 2027- 28 .......................................................................................................................... 38 Figure 18. History of Economic Downturns in the U.S., 1927 to 2019 ....................... 39 Figure 19. Aggregate Reduction in California City Revenues from Six Recent Recessions .......................................................................................................... 39 Figure 20. Property Tax Revenue in Millions, Projections through FY 2027-28 ...... 41 Figure 21. Sales Tax Revenue Projections in Millions through FY 2027-28 ............. 42 Figure 22. Utility Users Tax Revenue Projections through FY 2027-28 ..................... 42 Figure 23. City of Sacramento Other Taxes and Revenue Projections in Millions through FY 2027-28 ........................................................................................... 43 Figure 24. City of Sacramento Department Revenue Projections in Millions through FY 2027-28 ........................................................................................... 43 Figure 25. Matrix of Fiscal Forecast Scenarios With Assumed Likelihood of Outcome ............................................................................................................. 47 Figure 26. Matrix of Forecast Scenarios: Annual Change in Available Balance and Ending Available Fund Balance .................................................................... 47 Figure 27. Sacramento Business Operations Tax Revenue, FY 2008-09 to FY 2018- 19, in Millions.................................................................................................... 57 Figure 28. Per Capita Business Tax Comparison FY 2009-10 to FY 2018-19 (Estimated) ......................................................................................................... 58 Figure 29. Per Capita Business Tax Growth FY 2009-10 to FY 2018-19 (Estimated) 58 Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners

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Figure 30. Per Capita Business Tax Growth, Proximate Cities, FY 2015-16 to FY 2018-19 (Estimated)1 .......................................................................................... 60 Figure 31. Growth in General Fund Overtime Expenditures, All Departments – FY 2007-08 to FY 2017-18 ........................................................................................ 69 Figure 32. Comparison of Capital Project Cost and Duration Using Design-Bid- Build and Design-Build Methods ............................................................... 105 Figure 33. Correlation between Odometer Mileage and Repair Costs ................... 125 Figure 34. Correlation Between Months in Service and Repair Costs .................... 126

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

1 Executive Summary
In January 2019 the City contracted with Management Partners and a sub-contractor to Management Partners, Faegre Baker Daniels Consulting, to complete a Citywide Innovation and Efficiency Assessment.

The two primary objectives of this work were to:

1. Provide an independent assessment of the City’s current and projected near- and medium-term fiscal condition; and

2. Identify 10 to 20 opportunities to gain efficiency/cost savings and generate additional revenue, without displacing existing public employees.

To accomplish this work, Management Partners delved into all facets of the City of Sacramento’s management and operations. We conducted extensive interviews with City leaders, the executive team and City employees. We also facilitated numerous employee focus groups. We reviewed pertinent documents that shape City operations and management, including master plans, budgets, performance metrics, resident surveys and workload information and related data. We conducted benchmarking of other similar cities, evaluated Sacramento service levels and compared Sacramento operations to industry best practices where available. Overall, we worked to assess the efficiency of staff deployment, work processes and organizational structure.

While a report such as this can be read as being critical, because its very nature involves probing existing operations for potential improvements, that is not our intent. In fact, Sacramento should be proud of the services it offers residents. Few, if any, large urban cities in California can boast of the range of services delivered by the City of Sacramento. The City was also quite literally devastated by the Great Recession in 2008-2011, when it lost nearly a third of its full-time staffing and implemented many service-delivery changes in order to survive. This was a traumatic experience and Sacramento has been understandably focused on rebuilding over the last several years.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

2 Therein lay the challenges going forward. Our detailed analysis shows that the City’s fiscal position is tenuous, even with the approval of the Measure U sales tax in November 2018.

In the foreseeable future the City will not be able to afford staffing levels such as those it had in 2008. And while there are some revenue options available to the City, it has already passed one of the most effective revenue measures with the sales tax initiative. Given the growth in service demand since 2008, and the fact that “doing more with less” is not a sustainable manner of operations, the City simply has no choice but to either embrace alternative service delivery approaches or reduce services.

Given the City’s objective of not displacing existing employees, transitioning service delivery will be challenging but not impossible.

Existing employees can be retrained and transferred to fill vacancies, and other strategies are possible as well. In addition, transitioning services can be phased in as employees resign or retire on a voluntary basis.

As dictated by the objectives of the City, this report is organized into two major sections. The first is a discussion of the detailed fiscal model we have developed for Sacramento. This can also be thought of as a statement of the problem the City faces. The second major section is a discussion of various efficiency and innovation strategies the City may choose to deploy in order to address the fiscal challenges; in other words, a menu of possible solutions.

Below is a brief summary of each section of the report. The summary of efficiency and innovation strategies includes a description of several items initially considered by Management Partners, and discussed with City Management, but ultimately not recommended for implementation.

The Fiscal Model
The fiscal model shows Sacramento’s likely fiscal condition over a 10- and 20-year forecast period. We focus on the 10-year forecast because it is, due to the nature of forecasting, the most accurate, and it is within the next 10 years that the City will face its most serious fiscal challenges. By 2030, the pension cost issue currently pushing so much of the City expenditure side of the equation will have begun to abate, and employer rates are projected to diminish (assuming no further retirement enhancements are provided).

The model is structured to be rigorous and realistic. It is rigorous in the sense that it tracks a large number of variables and draws deeply from City source documents such as actuarial projections, payroll data and spending history in order to be as accurate as possible. It has been Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

3 updated to reflect the labor MOUs approved by the City Council in December 2019, the 6/30/19 CAFR and the midyear budget review. The model’s architecture derives from bankruptcies in Stockton and San Bernardino, where the cities were forced to develop a forecast that could not only pass muster with a Federal Bankruptcy Court, but also withstand attack from extremely well-funded and motivated bond insurance firms and Wall Street financial institutions. The model is realistic in the sense that the assumptions used are designed to reflect “real world” circumstances. For example, recessionary events are modeled based on actual observed impacts on California cities over the last 50 years. The workforce and payroll assumptions are modeled in a dynamic way with step raises, vacancy and employee turnover savings, and overtime based on historical trends. Another major difference from many other forecasting approaches is the fact that gradual increases in employee compensation are included, because it is unrealistic to assume no increases will be granted in the presence of general price level increases and collective bargaining agreements.

There are a number of uncertainties and unknowns which impact model outcomes. These include the magnitude of an unavoidable future recession, construction and development levels, sales and property tax growth levels, salary cost-of-living adjustments (COLAs), the degree to which deferred infrastructure maintenance is addressed and the California Public Employees’ Retirement System (CalPERS) pension discount rate. These are all risks the City faces in common with other California local governments. Sacramento also has some unique uncertainties. These include the degree to which Measure U funds are used for existing programs or new initiatives, the potential loss of the enterprise tax, and the fate of the Children’s Fund Initiative on the March 2020 ballot.

What we call the base case or most likely scenario would involve a moderate economy along with moderate spending levels. This scenario assumes that $25 million in annual Measure U funding is “set aside” for funding new projects and programs. With this set of economic and spending assumptions, there is an average annual shortfall in the General Fund of approximately $13 million per year in Fiscal Years 2019-20 through 2027-28. This would result in the available General Fund balance being exhausted in FY 2024-25.

A very important and positive point about Sacramento’s fiscal position is that it currently has strong reserves. As of June 30, 2019, the General Fund had $55.2 million in its Economic Uncertainty Reserve, $20.1 million in reserves for pension and other post-employment benefits (OPEB), and Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

4 $32.9 million in unassigned balance. These are in addition to $102 million in fund balance committed to capital projects and other programs. These reserves provide the City with time to make changes to increase revenues or decrease expenditures.Graphically the baseline forecasts are shown in Figure 1 below which shows both the annual shortfall and the cumulative General Fund balance. Figures have been updated through January 2020.

Figure 1. Annual Deficit and Cumulative General Fund Available Balance in Millions from FY 2007-08 to FY 2027-28

Obviously, results will be worse if the City funds maintenance projects it is currently deferring, the Enterprise Tax is lost, or if the Children’s Fund Initiative (Measure G) is approved by the voters on March 3. These outcomes are discussed further below. To the extent that a higher vacancy rate is experienced, expenditures will be lower and this will result in lower shortfalls.

In summary, the purpose of the financial forecast in this report is to provide context and illustrate the need for pursuing strategies that will increase revenue and/or lower expenditures. For instance, Table 8 indicates a potential range of $13-90 million in average annual shortfalls, depending on the outcome of the issues discussed above. In contrast, the strategies listed in Table 1 below identify opportunities to increase ongoing revenues or reduce expenditures by $69-79 million.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

5 Revenue Generating and Cost Saving Strategies
The narrative below provides a summary of the strategies developed as potential options for the City of Sacramento in dealing with the deficit situation discussed above. A full description of each strategy can be found later in this report.

As discussed previously, these strategies were developed from an intensive review of Sacramento operations and budget materials.

Management Partners has estimated economic impacts based on the information available, but each strategy will require more study and analysis before implementation. In addition, many of the strategies may require collective bargaining. However, the strategies presented in this report are used in other local governments in California.

Probably the biggest challenge or paradigm shift the City of Sacramento faces is to become open to alternative service delivery approaches, and specifically to be open to delivering services with fewer public employees. Historically, Sacramento and many cities in California have delivered services by employing workers and having those workers perform the services. Unfortunately, and mainly because of pension cost increases, which neither employees nor the City have much control over, public employees have become much more expensive than was the case prior to the Great Recession. Therefore, going forward, the City will have no choice but to raise revenue, employ fewer public employees or deliver service differently, at least over the next 10 to 12 years. While the objective of avoiding displacement of existing employees will be a challenge as noted above, it is not inconsistent with reducing the number of employees over time, because a variety of strategies can be employed to avoid displacement and use voluntary attrition to reshape the organization.

Table 1 summarizes the potential benefits in ongoing and/or one-time cost savings and revenue enhancements associated with implementing the “efficiency” (E), “innovation” (I) and “previous recommendation” (PR) strategies presented in this report. The strategies are further grouped by their level of achievability.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

6 We use the term achievability as a gauge for whether a particular strategy is possible and the extent to which it will yield the estimated results. For example, a high degree of achievability means that the available data, and/or experiences from other cities, suggests that a strategy can be implemented and is likely to result in significant savings. In contrast, a low degree of achievability means that there was less available data or that other unknown factors may influence whether a strategy will result in substantial or predictable savings. However, achievability does not imply the ease or likelihood of implementation. As noted previously, each of the strategies in this report present a level of difficulty and many may be unpopular.

As shown in the first row of Table 1, the City can realize between $69.3 million and $79.3 million in annual revenue or cost savings, and between $20.3 million and $22.9 million in one-time revenue or cost savings. In some cases, the City will need to seek voter approval for revenue increases. Additionally, a number of the cost saving initiatives may require bargaining with employee unions. Neither is easy or fast to accomplish.

These strategies represent opportunities to enhance organizational effectiveness, generate cost savings/revenues or advance broader community/societal goals. Specific monetary benefits or potential added costs are not included for some of the strategies because such analysis was beyond the scope of work; or they represent best practices for which quantifiable savings cannot be estimated; or additional data and analysis would be necessary to quantify them.

Though efforts can be made to minimize the impacts on City employees, the significant changes that are necessary to create financial sustainability in Sacramento will, inevitably, affect employees. While we examined the strategies to estimate how many employees could be affected it became apparent that such an estimation would be too speculative because the strategies can be implemented in various ways and combinations.

Like most cities, Sacramento will also need to consider how to implement strategic changes in the context of its labor agreements and negotiations.

As a result, some of the strategies may require more lead time and may require consideration in the negotiation process.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

7 Table 1. Ongoing and One-time Benefits Associated with Implementing Recommended Strategies Strategy
Range of Annual
Benefits
Range of One-
time Benefits
Savings in
Which
Fund?
Achievability

Total potential benefits
resulting from
implementing the
recommended
strategies:

From $69.3 million to
$79.3 million in
revenue or cost savings
upon full
implementation
From $20.3
million to $22.9
million in
revenue or cost
savings

EFFICIENCY STRATEGIES
E1 Modernize Business
Operations Tax
Up to $9.3 million in tax
revenue
General
Fund
High
E2 Civilianize Administrative
Positions in Police and
Fire
$287,000 in cost
savings
General
Fund
High
E3 Reduce overtime Between $3.1 and $3.3
million in cost savings
for police/fire alone
General
Fund
High
E4 Change staffing on
ambulances to one
firefighter/paramedic
and one firefighter
$500,000 in cost
savings
General
Fund
High
E5 Conduct a Utility Billing
Audit
$2.2 million in fee
revenue
Utility funds High
E6 Implement an Energy
Savings Performance
Contract (ESPC)
$1.8 million in energy
cost savings
General
Fund, other
funds
High
E7 Implement a Business
Operations Tax
Amnesty Program and
explore additional
compliance
opportunities
Modest upward
adjustment in base
revenue
Between
$650,000 and
$1.3 million in
revenue
General
Fund
High
E8 Update Pavement Cut
fees
$1.7 million to $2.4
million in revenue, plus
$530,000 in project
management savings
Other funds High
E9 Reduce the number of
take-home vehicles
$904,800 in cost
savings
General
Fund, other
funds
Moderate
E10 Automate Human
Resources processes
At least $179,000 in
cost savings
General
Fund
Moderate
E11 Explore opportunities
to implement managed
competition
$3.0 million to $8.2
million in cost savings1
General
Fund, other
funds
Moderate
Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

8 Strategy
Range of Annual
Benefits
Range of One-
time Benefits
Savings in
Which
Fund?
Achievability

E12 Continue to innovate
parking services
Between $875,000 and
$1 million in revenue
Other funds Moderate
E13 Use Design-Build to
expedite the
completion of Capital
Improvement Projects
$6.8 million in capital
cost savings
$741,000 in General
Fund cost savings
General
Fund, CIP
Moderate
E14 Evaluate the feasibility
of Public Employee
Gainsharing
Up to $5 million after
implementation
General
Fund, other
funds
Moderate
E15 Restructure Solid
Waste Service Delivery
Through Contracting,
Managed Competition
or Gainsharing1
Between $1.9 million
and $3.2 million in fee
revenue
Between $19.6
million and
$21.6 million in
revenue
Solid Waste
Fund,
General
Fund
Low/Moderate

INNOVATION STRATEGIES
I1 Improve Fleet
Procurement
Better fleet utilization
will produce overall
savings
General
Fund, other
funds
High
I2 Establish a Capital
Asset Management
System
Adequate planning will
reduce risk of failure,
enhance public
health/safety and
optimize cost
Other funds High
I3 Expand the use of
Green Infrastructure
Broad environmental,
social and economic
benefits for city and
property owners
Other funds Moderate
Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

9 Strategy
Range of Annual
Benefits
Range of One-
time Benefits
Savings in
Which
Fund?
Achievability

I4 Analyze the cost-
benefit of the
Community Workforce
Training Program
(CWTP)
Costs and benefits must
be quantified to
determine optimal
community benefit
CIP Moderate
I5 Monetize Sewer and
Stormwater Assets for
Fiber Optic Deployment
Can be pursued on a
pilot basis through
intergovernmental
partnerships
Utility funds Low/Moderate

PREVIOUS RECOMMENDATIONS
PR1 Closely Monitor and
Manage City Hiring,
Eliminate Vacant
Positions and Give
Departments Greater
Flexibility on Staffing
Addresses the current
growth rate of full-time
equivalent (FTE)
positions, which is
fiscally unsustainable.

Eliminating 50% of
currently vacant
positions saves $20.8
million per year
General
Fund, other
funds
High
PR2 Calculate Fair Labor
Standards Act Overtime
in a manner consistent
with federal law
$1.1 million in savings General
Fund
Moderate/High
PR3 Eliminate General Fund
subsidies for all non-
essential services
$2.6 million in savings General
Fund
Moderate
PR4 Establish a
Paramedic/Ambulance
Subscription Program
$1 million to $1.5
million in fee revenue
General
Fund
Moderate
PR5 Pursue legislation to
collect franchise fees
from the Sacramento
Municipal Utility
District
$5 million to $7 million
in fee revenue
General
Fund
Low
PR6 Amend Charter to
remove binding
arbitration for police
and fire
Potential significant
salary/benefit savings
and increased collective
bargaining leverage
General
Fund
Low
1 The range of cost savings excludes potential savings from managed competition in solid waste, as shown in Table 16, to avoid double-counting, because strategy E15 assumes that solid waste would be contracted out.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

10 Deciding which strategies to pursue and then implementing the selected strategies will be a major undertaking for the City. It will almost certainly require one-time costs and consultant services. In addition, implementation has to take place in the 2020 – 2022 period when the City will still have reserves to fall back on.

Vetting by City Management and Strategies Initially Considered but Not Included
The consultant team had the advantage of “fresh eyes” which allowed us to examine Sacramento broadly and, as a result, resulted in identifying numerous efficiency and innovation strategies. However, we learned after exploring some of these strategies further that some would not be workable and some had already been implemented by the City. The consulting team provided an initial draft report to the City in September 2019, and an extensive dialogue took place at that time and with respect to a second draft submitted in November 2019. This dialogue resulted in a number of refinements for accuracy and completeness. For instance, examples of strategies that had been considered but had already been implemented in full or in part are outlined below.
• Conducting dependent healthcare audits;
• Conducting cell phone/information technology equipment audits; • Pursuing naming rights and sponsorships at community facilities; • Contracting for supplemental staffing capacity in Development Services;
• Expanding animal care partnerships; and
• Eliminating retiree health care benefits for newly hired firefighters to align the group’s benefits with other bargaining groups1.

In addition, several other strategies were included in the first draft of the report but later excluded from the final report. These strategies, and the rationale for eliminating them, are discussed in the following sections.

Better Monetize City Property and Facilities
We reviewed and analyzed opportunities to monetize the City’s surplus property and facilities. However, we also learned that the City Auditor’s Office was in the process of completing a review of City-owned and

1 This change was implemented on December 10, 2019 with the City Council’s approval of the Memorandum of Understanding with the Sacramento Area Firefighters, Local 522.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

11 leased properties. We agreed with the City Auditor’s Office that this is an important area to improve efficiency and general cost savings. But since an analysis of this issue was already underway, we concluded it would be duplicative to include an analysis in this report. However, we encourage the City to conduct periodic updates to its analysis to ensure that assets are not contributing to the City’s deferred maintenance backlog.

Increase the Transient Occupancy Tax
In our 2010 report (Citywide Financial and Operational Review), we noted that the Transient Occupancy Tax (TOT) represented an opportunity to raise additional General Fund revenue (among other revenue raising options). We noted that the City had been dedicating most of this revenue source (83%) to support the Sacramento Convention Center. By submitting a local ballot measure and dedicating a higher percentage of revenue to the General Fund, the City could have realized significant revenue gains. (Local ballot measures to increase the TOT have a high likelihood of success, given that the tax is paid by visitors and the threshold for approval is a simple majority vote (50% plus 1) if the revenue is used for general purposes.

We revisited this strategy for the current report but ultimately decided not to recommend it for further consideration. Given the City’s continued commitment to support the Convention Center and tourism, including recent decisions to pledge TOT revenues to repay debt, diverting existing TOT revenues is not feasible.

Monetize the City’s Off-Street Parking
Monetizing off-street parking is a common strategy used by cities as they explore ways to improve financial conditions. So, while we examined this issue in Sacramento, we also had numerous discussions with City staff about past efforts to innovate and improve efficiency. City leaders believe that operational innovations and better parking management will produce better overall results in the long-term without impacting existing staff.

For example, the City initially contemplated monetizing the parking system in 2011. The City engaged Walker Parking Consultants and Bank of America/Merrill Lynch to estimate the value of the City’s off-street parking assets. The studies valued the assets at between $89 million and $128 million. At the time, City leaders made the decision to modernize the parking operation rather than pursuing a monetization strategy.

Citywide Innovation and Efficiency Assessment, Potential Strategies Executive Summary Management Partners

12 Our preliminary analysis indicated that the City could realize at least $150 million in one-revenue if it pursued an off-street parking monetization strategy, though a portion of this would be used to liquidate existing debt. The particulars of the existing debt and the uncertainty of the value of potential lease agreements ultimately led us to table this strategy for purposes of this report. However, given the success of parking monetization in other communities, we believe this is a strategy the City may want to reconsider in the future.

A complete list of recommendations is provided as Attachment A.

Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

13 Project Approach
The consulting team (Management Partners and Faegre Baker Daniels Consulting) conducted this innovation and efficiency assessment for the City of Sacramento through a variety of methods. These included an extensive review of documents and data, outreach to City departments through focus groups, interviews with key elected and organization leaders, best practices research with other large cities, development of a fiscal model tailored to Sacramento, preparation of a long-term financial forecast, and development of innovation and efficiency strategies that would improve the organization’s effectiveness, increase revenue and save money. These methods are summarized further below.

Review of Documents and Data
To inform our work, the consulting team gathered and reviewed volumes of documents and data, to the extent they were available. Of course, this included existing and historical budget data upon which the consulting team’s financial model and long-term forecast are based. For example, the budget and financial analysis included a review of:
• Budget data by account code;
• Chart of accounts;
• Comprehensive Annual Financial Reports (CAFRs);
• Current City-prepared financial forecast;
• Tax revenue data, including property, sales and utility user taxes; • Personnel costs, including detailed data such as salary step, job title, vacancies, CalPERS tier;
• CalPERS valuation reports;
• Other Post-Employment Benefits and retiree medical data; • Memoranda of understanding (MOUs);
• Historical cost of living increases;
• Debt service; and
• Unmet capital needs.

Examples of other documents and data reviewed included:
• Overtime reports from each department;
• Software user/license fees;
Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

14 • Copies of department strategic plans;
• Reports on office supply expenditures;
• Data regarding unoccupied City facilities;
• Unfunded capital improvement project backlog;
• Workers’ compensation injury summary reports;
• Cost recovery data in various departments and programs; • Fee schedule for special event billing;
• Data regarding the bail schedule and allocation; and
• Statistics regarding the City’s fleet.

Interviews with Key Leaders
During March and April of 2019, the consulting team conducted 37 individual interviews with key elected and administrative officials in Sacramento. Table 2 below provides a listing of the positions interviewed.

Table 2. List of Individual Interviews
Mayor Vice Mayor City Councilmembers (7)
City Manager Assistant City Managers
(3)
Utilities Director
Business Services
Manager (Utilities)
Wastewater Drainage
Manager
Water Division Manager
Convention and Cultural
Services Director
Finance Director Fire Chief
Human Resources Director Deputy Fire Chiefs (3) Chief Information Officer Deputy Police Chiefs (3) Public Works Director Recycling and Solid Waste Manager
Police Chief Parking Services Manager Facilities and Property Management Manager
Maintenance Services
Manager
Youth, Parks and
Community Enrichment
Interim Director
Engineering and Water
Resources Division
Manager
Community Development
Director

Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

15 Interview Themes
There were several key themes that emerged from our initial interviews with members of the leadership team, which are summarized below.

These themes were helpful in understanding the organization and helped to inform our analysis and the recommended strategies.

Overtime Expenditures Are Not Well Controlled. Both Fire and Police departments’ overtime utilization regularly exceed budget. Sacramento, like other communities across the country, struggles to recruit and retain police officers. A combination of low unemployment rates and heightened public scrutiny of law enforcement makes it more challenging to attract and retain police officers. As a result, police staff shared that vacant positions contribute to the increase in overtime. The Fire Department indicated that it lacks the tools to adequately monitor and track overtime use; and they noted that the Police Department has better data tools and more effective analytic tools to manage overtime. The interviews made clear that the City lacks a comprehensive system to manage employee overtime.

Sworn Personnel Are Performing Non-Sworn Duties. We learned in the interviews that 18 sworn positions in the Fire Department are performing non-sworn duties, such as providing public information. We observed similar issues in the Police Department. However, the Police Department has begun to create non-sworn positions to ensure sworn personnel can remain focused on regular police work.

Paper-Driven Personnel Processes Are Inefficient. During the interviews and focus group conversations, staff expressed frustration regarding the additional time the City’s current paper-driven processes require. Staff noted the “old-fashioned” process is overwhelming and inefficient. Moreover, they said this makes it more difficult to track, monitor and analyze human resource data and trends.

Deferred Maintenance and Capital Improvement Needs Are Not Adequately Addressed. In interviews, each department shared lists of unmet capital improvement and deferred maintenance needs. In one example, staff noted that employees sometimes build parts to repair infrastructure because systems are outdated, and they cannot be serviced by private vendors. It was noted that deferred maintenance can result in higher costs in certain areas.

Approaches to Staffing Are Inflexible and Inconsistent. The City does not have a consistent strategy regarding the types of services that are delivered through contracts and contracted staff vs. in-house staff. For example, the Street Maintenance Division in Public Works utilizes Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

16 contracted services seemingly more broadly than does the Youth, Parks and Community Enrichment Department which tends to utilize more in- house staff and limited contracted services. This inconsistency may be due in part to differences in the historical growth pattern in each work unit or differences in workflow where new workload or non-routine projects, for which no staffing has been previously allocated, can be more easily contracted out without violating labor agreements.

Enhance Cost Recovery Efforts. Staff noted in interviews that there are some city fees that have not been updated to reflect the cost of services delivery such as the business operations tax. They are included in our recommendations below.

Outreach to City Departments
In addition to the individual interviews, the consulting team facilitated 12 separate focus groups with a cross-section of employees from the various departments on April 23 and 24, 2019. The focus groups included approximately 10 to 15 employees representing different functional areas within each department. Table 3 provides a listing of the focus groups conducted.

Table 3. List of Department Focus Groups
Public Works Department Convention and Cultural Services Department
Information Technology Department Utilities Department
Offices of the City Manager, City
Attorney, City Clerk and City Treasurer
Fire Department
Community Development Department Human Resources Department Economic Development Department Police Department
Youth, Parks and Community Enrichment
Department
Finance Department
Focus Group Themes
In the focus group sessions, employees shared what they believe are the challenges and opportunities for improving their operations.

Recruitment Processes and Timeframes Need Improvement. As we also heard in the individual interviews, focus group participants were Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

17 frustrated about the length of time it takes to recruit and fill vacant positions. Much of the discussion focused on modernizing the recruitment process with better technology and reducing recruitment timeframes. Repeatedly, we heard that the City loses applicants to other employers because the process takes so long – and that this impacts organizational effectiveness.

Procurement Process Is Overly Complicated. Employees urged that the overall procurement process, including the number of steps involved, be improved. Although the City recently implemented a new software system, focus group participants noted that more training on the system be provided to improve efficiency.

Policies and Procedures Are Not Well Documented. Focus group participants said the organization needs a stronger commitment to documenting policies and operating procedures. We heard there is an over dependence on institutional knowledge, which is especially problematic in large, complex organizations. Employees said the City would benefit from better documentation of administrative practices and procedures.

Better Communication About Strategic Priorities and Administrative Practices Is Necessary. Employees expressed an interest in improved information sharing about organizational priorities, or when internal policies and practices change.

Improving How Information Technology Services Are Provided Is Necessary. In each of the focus groups, participants said that the level of service they receive from the Information Technology Department (IT) was reduced following the centralization of that function. Previously, employees responsible for IT duties were housed within each department. Focus group participants noted that following the organization change it became unclear who served each departments’ IT needs. In addition, some participants said that it is now harder to plan for future technology needs.

Best Practices Research
To identify practices, innovations and efficiencies that have been successful in other large, complex cities, the consulting team identified a list of six peer cities. Key consulting team members conducted teleconferences with representatives from each city to explore best practices. The six cities were as follows:

1. Denver, Colorado

2. Long Beach, California
Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

18 3. Minneapolis, Minnesota

4. Phoenix, Arizona

5. San Diego, California

6. San Jose, California
The best practices and key lessons from the outreach to other large cities informed our analysis. These issues are discussed in more detail in the Peer City Research section of this report.

Study Limitations
The assessment performed by Management Partners and Faegre Baker Daniels Consulting was a high-level review of major operations and business practices in Sacramento. The purpose of this work effort was to help the City identify and prioritize efficiencies that would increase revenue, reduce costs, or both. Additionally, the scope of this assessment included reviewing the organization for opportunities for innovation, including a review of best practices in other large cities.

While the consulting team had an opportunity to work with each department, this assessment was not a detailed organization review of each department and its various operations, structure, staffing or management systems. The strategies presented herein represent ideas for improvement, not a final implementation plan. More work will be required to vet and understand the ramifications of each strategy. Change within any organization is resisted and objections to the changes suggested here can be anticipated. Still, the status quo is not sustainable for Sacramento so serious consideration of revenue enhancement and expenditure control measures should be considered while the City still has time. The strategies presented here, despite their limitations, can be a useful starting point.

Further, the assessment was not an audit, and the consulting team’s analysis was in some areas constrained either by a lack of detailed data available from the City or because a more exhaustive review was beyond the scope of work. More specifically, this report is consistent with Phase 1 of the City’s request for proposals. The report focuses on identifying best practices, alternative service delivery options, operational changes to improve service or reduce cost, opportunities for new or increased revenue, expenditure shifts from the General Fund, and budget and cost implications. Implementation of these strategies would be part of a Phase 2 work effort, though that phase was not part of this contract.

This assessment was conducted and the report prepared between February and August of 2019. Additionally, as noted previously all strategies were discussed extensively with City management in fall 2019.

Citywide Innovation and Efficiency Assessment, Potential Strategies Project Approach Management Partners

19 These discussions, and other updated information (such as the 2019 CAFR and FY 2019-20 Midyear Budget), resulted in refinements to the report where applicable.

Organization of Report
The remainder of this draft report is organized into various topical sections as follows:
• Peer City Research;
• Fiscal Context for Efficiency and Innovation Strategies; • Efficiencies, Innovations and Previous Recommendations, and • Conclusion.

Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

20 Peer City Research
The consulting team identified six large cities which have evolved successfully through periods of significant organizational change or budget constraints. These cities are also recognized for innovative management or service delivery practices. Background information about these cities, along with the City of Sacramento, is provided in Table 4.

Table 4. Peer City Background Information
Peer Cities
Population
Size1
State
Capitol
Land Area
(Square
Miles)1
Number of
FTEs
Total Budget
FY 2019-20
(Billion)
Denver, Colorado 716,492 Yes 153 12,095 $2.45
Long Beach, California 467,354 No 50 5,645 $3.41
Minneapolis, Minnesota 425,403 No2 54 4,252 $1.70
Phoenix, Arizona 1,660,272 Yes 517 14,822 $4.55
Sacramento, California 508,529 Yes 98 4,7743 $1.20
San Diego, California 1,425,976 No 325 11,820 $4.30
San Jose, California 1,030,119 No 177 6,647 $4.66
PEER AVERAGE 954,269 213 9,214 $3.51
1 Source: US Census Bureau; 2018 data
2 Minneapolis borders St. Paul, which is the state capitol. 3 This represents the grand total of all staff positions for FY 2019-20, including all funds. The General Fund only staffing totals 3,599 FTEs.

In each community, we spoke with staff responsible for finance, and budgeting. Our questions were focused in two areas including how the cities work to heighten efficiencies and control costs, and how the cities lead efforts that foster innovation.

Heightening Efficiency and Controlling Costs
Outsource Services. All of the cities discussed outsourcing services as a well-tested method to improve efficiency and reduce costs. Several reported outsourcing custodial services, security services and right-of- way landscaping services. Of course, Sacramento also outsources these Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

21 same services. San Jose also shared that the City released one of its infrastructure maintenance responsibilities when it legally transferred sidewalk repair to property owners, thereby reducing costs.

Reevaluate Service Levels. Each community implemented temporary and permanent strategies to reduce services, programs and expenses to rapidly adapt to the financial challenges triggered by the Great Recession.

Short-term actions included closing public facilities (i.e., libraries, fire stations, etc.) as well as reducing hours of operation of others. Peer cities also implemented permanent efficiency measures. For instance, San Jose reduced costs by combining the General Services Department with the Public Works Department (which Sacramento has also implemented).

Control Personnel Costs. Most of the communities discussed methods used to control personnel costs. For example, San Diego implemented a five-year salary freeze. In addition, communities also pointed to their successes negotiating wage and pension (or pension contribution) reductions with employee groups.

Enhance Efficiency. A number of the communities discussed other efforts to heighten efficiency. The City of Long Beach noted that it continuously reviews functional areas to optimize efficiencies. An example is regularly reviewing public safety departments to ensure sworn staff perform sworn duties and segregating administrative tasks and assignments to non- sworn employees. Similarly, the City of San Jose Police Department expanded its staffing of community services officers to 40 FTEs to do as much as possible through civilian employees. Minneapolis has also begun the process for civilianizing areas of police and fire so that the sworn positions can be more focused on core public safety services.

Manage Department Budgets and Expenditures. The City of Phoenix’s budget process, in particular, is a good source of best practices and its work in this area has helped to control expenditures and ensure accountability.

As in most cities, the Finance Department in Phoenix leads the budget process. What is unique, however, is the rigorous year-round budget analysis conducted by Finance staff and the resulting estimates they provide to the operating departments. These budget estimates form the basis of each department-prepared budget proposal. Moreover, budget process in Phoenix starts in October with a thorough review of the current year budget based on the first three months of revenue and expenditures. Projections are then refined for the remaining nine months in the existing budget year. This process is called the “3+9 Technical Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

22 Review.” Starting the following year budget process with an intense focus on the current year has improved the overall accuracy of the budget.

The 3+9 Technical Reviews also allow the Finance Department to prepare highly accurate budget estimates for each department based on the early collaboration with the departments. These estimates also consider the independent analysis performed by the Finance Department, which includes regression analysis of prior expenditures, vacant positions, performance metrics and other variables. During this process, for example, the Finance Department evaluates each position that has been vacant for more than six months, and this can lead to positions being eliminated from the final budget estimate.

Departments then prepare their annual budget submittal based on the Finance Department’s estimate, and the expectation in Phoenix is that departments will submit proposed budgets at or below the estimate.

Further, departments whose submittals exceed the budget estimate (and this is not common unless there are service level increases) have a high bar to pass. To reinforce these practices, the performance evaluations and performance pay for department executives are, in part, based on how well they adhere to the Finance Department estimate for their department.

Leading Innovation
Employee-Identified Changes. We asked the peer cities about their efforts to foster innovation. Several communities described periodic programs to encourage employees to identify and recommend costs savings, efficiencies and innovative ideas. In Long Beach, the best ideas were recognized, and employees received a one-time payment, which was based on ten percent of the first-year savings. In subsequent years, the best employee ideas were published in City communications, though the City suspended the monetary award.

Organizational Transformation. We found two excellent examples of transformative programs aimed at improving government operations and lowering costs through employee-led innovation.

Denver – Peak Performance:

In 2011, Denver’s Peak Performance program was established to “increase taxpayers’ return on their investment in city government [by] empowering employees to improve processes through training, coaching and support.” Denver reports that its efforts have improved efficiencies and reduced costs by working to “innovate every day.” The Peak Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

23 Performance program uses some elements of the Six Sigma methodology for process improvement.

A key component of the initiative is the Peak Academy, a training/mentoring program that empowers employees to identify and implement process improvements. To date, more than 2,000 employees have received “black belt” training (a one-week course offered once per month) and more than 6,000 employees have participated in “green belt” training (a four-hour class held twice monthly). The City reports that over 2,500 innovations have been implemented with a total savings of $36 million consisting of $13 million in hard cost savings and $23 million in time savings (calculated at the average hourly rate of employees involved in each improvement process).

Participation in the Peak Academy is voluntary, though its popularity has grown so dramatically that it maintains a waitlist of interested departments and employees. One contributing factor to the program’s popularity is the City of Denver guaranteed that no employee would lose their job. More important, the program has improved internal processes and transformed the organization culture in Denver.

Further, the City of Denver has also established an Innovation Fund (iFund) to support budget requests that are first vetted by an interdepartmental team of City leaders. Funding is recommended for projects that will measurably improve operations or service delivery, maintain data integrity and/or include technological advances. Improving customer experiences and eliminating backlogs/time delays are key considerations as well. Although many of the projects include implementing modern information technology solutions (e.g., replacing legacy systems, improving online portals), it is important to note that the Peak Performance program is not based on technology per se, but on changes in business practices that will result in improved outcomes.

Phoenix – Comprehensive Organizational Review Evaluation (CORE):

We found Phoenix’s CORE program to be another successful model of innovation in local government services. CORE provides a system to conduct an in-depth analysis of City departments’ operations. The City describes the program as way to examine:
• “Who we are;
• How we do business;
• What we could do better;
• What prevents us from accomplishing that; and
• How we measure success.”
Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

24 The premise of CORE is that the City must look beyond the status quo because it represents a way of working that will not be sufficient in the future. Unlike Denver’s voluntary program, CORE required department heads complete a ten-page Assessment Tool and to engage their staff in the process.

Further, between 12 and 20 employees are appointed annually to the CORE Implementation Team from various departments. This team’s role is to help the organization move forward with process improvements.

Recent examples of CORE successes include employee recommendations for eliminating paper warrants in the Finance Department, an updated travel policy and a new security badging system.

Since its inception, CORE has generated $135 million in savings.

Both Denver and Phoenix provide examples of public agencies that innovate through employee-led programs aimed at improving efficiency and reducing costs; but the by-product of these efforts is a transformation of the organization culture to focus on continuous improvement.

Innovation in Sacramento:

The City of Sacramento has implemented many important and innovative programs to create business and community partnerships, foster economic development and entrepreneurship, maximize the use of new technology, improve livability and encourage sustainability. Examples include:
• Rapid Acceleration, Innovation and Leadership in Sacramento (RAILS);
• Smart City Collaborative;
• Sacramento Entrepreneur Academy;
• Demonstration Partnerships Policy;
• Wireless network improvements;
• Sacramento Urban Technology Lab; and
• Green City Initiatives such as Sac-To-Zero.

The City of Sacramento also strives for innovation using its Innovation and Economic Development Program housed in the City Manager’s Office. For example, the City established an Innovation Team that is led by Sacramento’s Chief Innovation Officer (CIO). The CIO’s role is to catalyze entrepreneurship and expansion of innovation sectors in the City. These efforts are focused on the unique mixture of government, technology, transportation, health and life sciences that converge in Sacramento and harnessing them in ways that promote inclusive economic opportunities.

Citywide Innovation and Efficiency Assessment, Potential Strategies Peer City Research Management Partners

25 Additionally, Sacramento’s Innovation and Economic Development Program is committed to partnering with academic leaders to advance innovation and emerging technologies, and to bridge efforts of private enterprise with the work of lawmakers and policy leaders. Other critical goals in Sacramento include expanding innovation capacity in City Hall through training and leveraging partnerships, expanding experimentation and risk-taking, using data-driven decision making, and developing a culture of continuous improvement.

Innovation in the cities of Denver, Phoenix and Sacramento are built on common goals that reflect best practices in both the private and public sectors. However, the programs in Denver and Phoenix have been in place for a number of years. This has allowed the programs to mature and create inertia for change and innovation. One common denominator in Denver and Phoenix is having an overarching strategy that guides the overall program goals and the initiatives it undertakes. Based on our interviews, Sacramento has not yet developed a comprehensive innovation strategy. Such a strategy would provide a more structured approach to driving process improvement across departments, in addition to the current innovation priorities.

Create an innovation strategy to
guide internal and external initiatives, drawing from the more developed similar programs in Denver and
Phoenix. The innovation strategy should include the City’s Chief Information Officer in its collaborative efforts.

Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

26 Fiscal Context for Efficiency and Innovation Strategies Fiscal Context
The purpose of this section is to determine how large a structural shortfall the City faces in future years. We begin with a brief discussion of the current fiscal environment, followed by a review of the major assumptions that form the basis of a 10-year baseline forecast of the General Fund and Measure U. We test the sensitivity of key assumptions to confirm the validity of the baseline forecast, and then finish by discussing three additional areas of uncertainty in the forecast that would significantly increase the magnitude of the structural shortfall. At the close of this section the range of potential shortfalls is laid out – a necessary precusor to considering the revenue-raising and expenditure- reducing recommendations contained in this report – and how much of the potential shortfall the recommendations could resolve.

Fiscal Model Capabilities
Management Partners has prepared a long-range fiscal model for the City. The fiscal model is flexible and dynamic. It can generate a wide array of alternatives (many more than are described herein). It has a control panel of assumptions, an extensive dashboard of charts, and instant graphing of 360 categories of revenue and expense compared to past trends and budget. It provides both a 10-year and a 20-year look at the forecast. Variables can be changed to quickly generate alternate outcomes. General Fund FTE growth and budget adjustments can be adjusted in six functional areas: Admin/Support; Police; Fire; Development and Public Works; Culture, Parks, Recreation and Youth; and Non-departmental. The timing and magnitude of recessions can be adjusted, along with the funding of unmet deferred maintenance needs, changes to revenue sources, and allocation of Measure U funds. The model can show the impact of specific dollar budget reduction targets, or cutting FTEs through projected attrition, or adopting recommendations from this report. The model is not a substitute, however, for the City’s detailed budget process that sets annual spending priorities.

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27 Following “best practices,” the City already engages in forecasting, but this model provides a comprehensive and impartial outside perspective on the City’s financial condition and sustainability. Management Partners identified external and internal factors we believe are driving revenues and spending levels over the next 20 years for the General Fund and Measure U. The first 10 years are the most critical, and it is that period that is discussed in this report. By the early 2030s the City should begin receiving the benefit of lower annual pension costs as unfunded actuarial liabilities (UAL) are paid off. This should create fiscal capacity for the City in the years beyond, but the next 10 years will present significant challenges that must be weathered first.

The fiscal model creates a baseline forecast, given current service levels and known increases, before any corrective actions. Our goal is a realistic forecast, as illustrated by the choices shown in Table 5.

Table 5. Forecasting Methodology Promotes Realistic Alternatives Less Realistic More Realistic
Straight-line revenue projections Projections reflect economic cycles as a stress test for City finances
Assume no wage increases Build in reasonable wage increases to reflect cost pressures
Exclude impact of movement within
wage scales
Include net impact of merit increases and
savings from employee turnover
Budget optimistically for lower overtime Rely on actual trends that reflect higher overtime use
Budget for gross personnel costs Budget for anticipated vacancy savings Hold staffing levels constant Include some growth to respond to community and workload growth
Maintain current pension discount rate Assume slow decline in pension discount rate over the next 20 years
After preparing the baseline forecast, alternative scenarios are generated using variations on the key baseline economic and spending assumptions, both to test the sensitivity of the fiscal model, and to get a sense of the potential risk of higher or lower structural shortfalls that will confront the City in coming years. Finally, the model can incorporate the results of budget strategies the City chooses to employ, including the recommendations contained in this report.

Current Fiscal Environment
Sacramento survived the Great Recession by doing what most cities did, cutting staff and eliminating cost of living increases. The City no longer Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

28 picks up a share of the employee pension contribution to CalPERS and has made greater use of contracting out in selected areas. The City performs the same basic services as it did 10 years ago, and in some cases services have expanded.

It took a long time for local agencies to recover from the Great Recession.

Figure 2 shows the unemployment rate, which even in 2014 was still 8% in Sacramento and California as a whole, fully five years after the Great Recession officially ended in mid-2009.

Figure 2. Unemployment Rates, 2000 to 2019

A major impact of the Great Recession was a dramatic decline in property values, following the equally dramatic rise in values that preceded it.

Figure 3 shows the median home price in Sacramento from 1991 to the present. The median sales price peaked in 2006, then dropped to 2001- levels over three years, a drop of just over 50%. Prices remained stagnant for three more years until the beginning of an unsteady climb over the last seven years. Prices in 2019 have returned to the 2006 pre-recession peak.

Figure 3. Sacramento Metropolitan Statistical Area (MSA) Median Home Price in Thousands, 1991 to 2019

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29 There are concerns about sustainability of prices at this level, reinforced by the slow-down of home sales over the past year (see data from Trulia.com in Figure 4).

Figure 4. Sacramento MSA Home Sales Volume, 2000 to 2019

There are also concerns about housing affordability at this level of sales price. Figure 5 shows the Housing Opportunity Index (HOI) from the National Association of Home Builders for the Sacramento MSA from 1991 to 2019. The HOI estimates the percentage of households that can afford a typical mortgage at the median home price in the metro area. The HOI is on a scale of 0 (no one can afford a typical home mortgage) to 100 (where everyone can afford it). The Sacramento HOI has steadily declined since hitting a high of 83 in 2012 (when home prices had plummeted), to 40 in 2019. Even at 40, Sacramento’s HOI compares more favorably to San Francisco (7), San Jose (14), Oakland (21) and Vallejo (30), which is why there is a market for Sacramento homes for people commuting all the way into the Bay Area.

Figure 5. Sacramento Percentage of Households Able to Afford a Mortgage, 1991 to 2019

In coping with the recession, Sacramento, like many other cities, reduced its staffing levels. As shown in Figure 6, the City cut General Fund staffing by 1,205 FTEs. Over the past eight years, 850 positions have been

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30 added. The passage of the original Measure U half-cent sales tax enabled 442 positions to be restored. The recently adopted FY 2019-20 budget approved an additional 145 FTEs, compared to the adopted FY 2018-19 budget.

Figure 6. General Fund Staffing, FY 2003-04 to FY 2019-20 Approved Budget

Figure 7 shows the total revenues and expenditures of the General Fund from the start of the Great Recession to the currently adopted budget and $12 million of capital spending. This chart shows the significant drop in revenues and consequent reduction in expenditures to match. Since 2014, expenditures have grown at a compound annual growth rate (CAGR) of

8.2%, while revenue growth has begun to taper off.

Figure 7. General Fund Revenues and Expenditures in Millions, FY 2007-08 to FY 2019-20

$300
$350
$400
$450
$500
$550
FY 08
FY 09
FY 10
FY 11
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FY 15
FY 16
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Millions
Revenues Expenditures
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31 Figure 8 provides another way to view the “revenue gap” that has developed since the Great Recession. This chart shows the pre-recession growth trend in recurring General Fund revenues per capita, compared to the actual recurring General Fund and Measure U revenues per capita. A significant gap has begun to close with the passage of the two Measure U sales tax increases in 2012 and 2018. Most cities are still facing a sizeable gap which makes it difficult to restore services to historic levels, adjusted for population growth.

Figure 8. Pre-Recession versus Actual Recurring Revenues, General Fund Plus Measure U, from FY 2002-03 to FY 2018-19

However, another consideration is the rate at which expenditures are increasing. Figure 9 compares the 38% cumulative growth in recurring revenues per capita from 2008 to 2019, to the 62% cumulative rate of growth in personnel cost per budgeted FTE. Basically, the cost of an average position is growing at a rate faster than revenue adjusted for the size of the population being served.

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32 Figure 9. Revenue vs. Personnel Cost Growth, FY 2007-08 to FY 2018-19

A major portion of personnel expenses is for retirement costs paid both to the City’s legacy pension system and to CalPERS for the bulk of City retirement costs. These costs will double over the next 11 years as CalPERS increases rates to improve the funded status of the pension system, while incorporating a reduction in the discount rate of the system. Pension costs are discussed further below.

Baseline Forecast Assumptions
Management Partners has prepared a long-range forecast of the General Fund and Measure U, building upon historical revenues and expenditures and the recently adopted FY 2019-20 budget. Personnel costs are based on the City’s position control report for all authorized positions (filled or vacant) under the FY 2019-20 adopted budget. Key assumptions in developing this forecast include the following:

Staffing
The baseline forecast assumes growth of 13 FTEs annually. This is much lower than the FY 2019-20 budget increase of 145 FTEs over the FY 2018- 19 amended budget staffing levels, and the seven-year average of 121 FTEs increase per year. However, the increases since FY 2012-13 were fueled by the recession recovery and the approval of the Measure U sales tax. It would be very difficult to sustain these levels of growth in the future without new sources of revenue or major efficiency gains. The 13 FTEs are intended to respond to the highest priority of workload demands on the City.

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33 Wage Increases
The forecast includes an estimate of the wage and incentive increases included in the labor MOUs approved in December 2019, and thereafter assumes annual cost of living adjustments (COLAs) of 2%. The forecast also incorporates estimates of merit increases and savings from employee turnover (replacement employees being hired at lower steps than the more senior employees who left). Actual COLAs will be negotiated in the meet and confer process with employees. This forecast assumption is not intended to dictate what the outcome of such future negotiations will be but is rather a reflection of the inflationary pressure on wages, and with all other revenues and costs in the forecast inflated over time, it is only realistic to include wage inflation as well. Figure 10 shows past and projected major elements of personnel expense. The projected trend reflects the lower annual growth in FTEs.

Figure 10. General Fund Personnel Costs in Millions, FY 2007-08 to FY 2027-28 Projected

Pension
The forecast starts with the CalPERS 2018 valuation, which sets the unfunded liability amounts and employer rates for normal costs for FY 2020-21. The impacts of a workforce transitioning over time from the higher “Classic” benefits to the lower benefits accorded new hires under the Public Employees’ Pension Reform Act (PEPRA) are built in. While the discount rate (the actuarial earnings rate assumption) is currently 7% and CalPERS has not yet acted to change it, their desire to reduce volatility in the rate-setting process will lead it to a lower-risk investment portfolio, which may reduce yields in the future. The discount rate has already declined from 8.75% in 1992, to 7% effective FY 2019-20. Private actuaries such as John Bartel believe that preparing for a gradual decline of another 1% is prudent. The forecast assumes a reduction in the Increase in FY 2020-21 assumes new
positions filled and overall vacancy
rate drops to 3% long-term
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34 discount rate to 6% over a 20-year period, starting in FY 2023-24. Figure 11 shows the projected total pension costs for the General Fund from FY 2007-08 through FY 2037-38. By FY 2031-32, pension costs will be double FY 2018-19 levels due to the combination of higher salaries and rising unfunded liability payments, ultimately reaching 20.8% of total General Fund expenditures.

Figure 11. Projected Pension Costs, through FY 2037-38

Health
After the increase in health contributions approved in the recent labor MOUs, the assumed future growth rate is 3%, assuming a continuation of the recent labor MOU language for sharing of premium cost increases with employees.

Overtime/Premium Pays
The City traditionally incurs significantly higher actual costs for overtime, and premium pays for call-back, night shift and out-of-class assignments, compared to the adopted budget. Therefore, the forecast grows these costs from estimated FY 2018-19 levels (a continuation of the trend over the past 10 years) rather than using the FY 2019-20 budget. Future increases are proportionate to projected salary increases.

Vacancy Savings
Budgeted personnel costs, excluding overtime and premium pays, have ranged from 4% to 16% below budget over the last 12 years, as shown in Figure 12. This is partly due to departments keeping vacant positions to offset costs for non-budgeted positions and overtime. The average net savings over the last five years was 6.93%. The City does not budget for

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35 vacancy savings, but this forecast does assume a vacancy rate of 15% in FY 2019-20 (because of the 145 new positions), and 3% thereafter. This rate is applied to salaries, health, other benefits and pension normal costs.

The savings are not computed on overtime costs (which often escalate as career position vacancies grow), or on OPEB costs or pension unfunded liability costs, which are computed independently of payroll in any given year.

Figure 12. Cost Savings from Vacancies in Millions, FY 2007-08 to FY 2018-19

Services and Supplies/Other Expenses/Equipment
These costs took a major hit as a result of the Great Recession, as shown in Figure 13, and then increased rapidly during the recovery years. Going forward, the forecast assumes 2% growth, based on the rate of inflation.

Figure 13. Service, Supplies, and Other Expenses in Millions, Projected through FY 2017-28

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36 Reimbursements
The City maintains an extensive system of reimbursements from other funds which are booked as expense credits (negative amounts that reduce net expenditures). Figure 14 shows that reimbursements flat-lined during the recession, but growth resumed in recent years. The forecast assumes future growth in these credits proportionate to personnel cost increases.

In addition, the forecast includes $20.25 million projected to be transferred from the Innovation Fund to the General Fund in FY 2020-21 through FY 2023-24; it is assumed that these amounts are one-time revenues.

Figure 14. Projected Reimbursements to General Fund in Millions through FY 2027-28

Capital Improvement and Multi-Year Operating Programs
Capital costs are based on the Five-year Capital Improvement Program (CIP) through FY 2023-24, with $20.3 million budgeted in FY 2019-20 and an average of $8.2 million budgeted annually over the next four years, with 3% growth thereafter. Multi-year Operating Programs (MYOP) continue at the FY 2019-20 budgeted level of $10.7 million. The combined expenditure total for capital and MYOP is shown in Figure 15.

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37 Figure 15. Combined Capital and Multi-Year Operating Programs in Millions, Projected Expenditures through FY 2027-28

Debt Service
These amounts are based on the adopted budget for FY 2019-20 and a City forecast through FY 2023-24, with a continuation at the FY 2023-24 level thereafter to preserve that level of debt financing capacity within the forecast. Debt service expenditures are shown in Figure 16. These numbers exclude debt service on any new bonds to be paid from Measure U, which is addressed in the following section.

Figure 16. Projected Debt Service Expenditures in Millions through FY 2027-28

Measure U
The forecast is based on the line item budget supplied by staff for Measure U expenditures (most of which are currently budgeted as reimbursements to the General Fund for expenses incurred there). The

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38 current expenditures total $89.2 million compared to budgeted revenues of $103.6 million. The remainder is available for future appropriation.

Various proposals have been made for additional expenditure of Measure U funds for affordable housing, homelessness programs, and augmented services for under-served areas of the community.

The 2018 vote that increased the sales tax rate from 0.5% to 1.0% resulted in an increase in sales tax revenue of $50 million. The question is how much of that $50 million to “set aside” for such community investment over time. This issue is of critical importance as the level of set-aside, if large enough, could come at the expense of program support to the General Fund. This would have the effect of increasing net General Fund expenditure levels accordingly, and thus result in a greater structural shortfall in the General Fund.

Figure 17 shows the allocation of funds assuming a $25 million set-aside starting in FY 2020-21. (A total of $7.5M was set aside in FY 2019-20, that can be either be spent as debt service or “pay-as-you-go.”) The green portion represents the debt service paid on the optional issuance of bonds, which is phased in over time. If bonds are not issued, these resources continue to be available on a pay-as-you-go basis. The fund balance shown is the “available balance” as computed for the City budget ($8.1 million for FY 2019-20).

Figure 17. Measure U Allocation of Funds Projection in Millions through FY 2027-28

Economic Downturns
Recessions have occurred on average every seven years since 1927, as shown in Figure 18. The actual period of the recession is represented by the vertical orange bars. The red line shows the U.S. unemployment rate.

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39 Figure 18. History of Economic Downturns in the U.S., 1927 to 2019

Based on an analysis of State Controller financial transaction reports for cities, the revenue loss from taxes and permits during the last six recessions ranged from 3% to 33% for all California cities, as shown in Figure 19.

Figure 19. Aggregate Reduction in California City Revenues from Six Recent Recessions

In terms of timing, there is no crystal ball, but there are several indicators pointing to a moderate recession starting in FY 2021-22:
• California Legislative Analyst Office (LAO) –The LAO’s Fiscal Outlook for the 2020-21 State Budget includes a “recession scenario” with a downturn starting in January 2021 that roughly averages the severity of the dozen recessions following WWII.

Their recession scenario assumes that the unemployment rate in California begins to rise in January 2021, eventually peaking at 8%, and begins to decline in 2022.

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40 • UCLA Anderson School of Management –In December 2019 they indicated that “although we have lowered the risk of a recession, the second half of 2020 remains problematic for the economy.” • Business Economists – In August 2019, 74% of business economists polled saw a recession starting by the end of 2021: 2% believed it would occur by the end of 2019, 38% by the end of 2020, and 34% by the end of 2021. The other 26% believed a recession would not occur until 2022 or later.
• Inverted Yield Curve – The past seven recessions occurred after a full inversion of the yield curve (where short-term yields are higher than long-term yields). This occurred in March 2019, the first time since the Great Recession, and has continued to widen. • JPMorgan Chase – In June the firm predicted a 45% chance of recession in 2020 (up from 20% they estimated in early 2018).

Property Tax
Figure 20 shows the decline from the Great Recession, and the stable recovery since FY 2013-14. The property tax growth rate is determined by several elements described below, which result in a long-term average growth rate of 5.0%.
• It is assumed that 97% of existing parcels will grow by the 2% Proposition 13 inflator limitation (which can be lower if the California CPI calculation is less than 2%, but 2% is assumed). • The remaining 3% of parcels are assumed to increase an average of 35% due to ownership transfers, which triggers reappraisal at true market value under Proposition 13. (The average value increase for transfers is generally in the 35% to 40% range in other cities based on property tax auditor reports.)
• Proposition 8 recoveries are based on current County Assessor projections and are assumed to phase out over eight years. (Proposition 8 affects parcels whose true market value dropped below their Proposition 13-limited values. Such parcels received the lower value until the real estate market improved, and then could be increased without respect to the 2% annual growth limit until they regained their Prop 13-limited value.)
• New construction is a major component of property tax growth, as it is added to the assessment rolls at true market value. Over the past 30 years, 45,497 new housing units have been constructed in Sacramento, for an average of 1,517 a year. This is a reasonable Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

41 assumption of the ability of the market to absorb new housing.

Over the past 10 years the commercial sector has accounted for roughly $400 million a year in building permit value. The forecast assumes 1,500 new housing units (the average over the last 30 years) and $400 million in annual non-residential construction value increases. This means that not every new development is a windfall for the City. A significant amount of growth is already built into the forecast.
• Finally, as the Successor Agency’s Recognized Obligation Payments Schedule (ROPS) is paid down, the City receives around 24% of the freed-up property tax increment.

Figure 20. Property Tax Revenue in Millions, Projections through FY 2027-28

Sales Tax
Figure 21 shows the decline of sales tax revenues caused by the Great Recession. Overall, the growth rate in the City’s 1% tax has averaged

2.33% over the last 14 years (FY 2003-04 through FY 2017-18). The future growth rate is determined by the short-term forecast provided by Avenu Insights (whose pre-recession growth is 3.8% in FY 2020-21) , Estimates are updated through the second quarter of 2019.

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42 Figure 21. Sales Tax Revenue Projections in Millions through FY 2027-28

Utility Users Tax
This is a stable, but overall slow-growing tax, as shown in Figure 22.

Separate growth rates are computed for the individual utility service categories based on actual payments: electric (2%), gas (1%), telecommunications (1%), cable (-0.5%), wireless (-5%), and prepaid (2%).

Figure 22. Utility Users Tax Revenue Projections through FY 2027-28

Other Taxes and Revenues
Figure 23 shows the trend for the remaining taxes and other revenues.

Transient Occupancy Tax (TOT) is assumed to grow at a pre-recession rate of 3%, Business Operations Tax (BOT) is assumed at 1%, Real Property Transfer Tax (RPTT) assumes growth of 2%, Enterprise Tax revenue growth is assumed to be 2.5%, and other sources are projected to

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43 be in the 0% to 2.5% range. This category is rather volatile due to one- time revenues.

Figure 23. City of Sacramento Other Taxes and Revenue Projections in Millions through FY 2027-28

Department Revenues
Figure 24 shows that these revenues are volatile but were on a generally downward trend through FY 2013-14. Thereafter the economic recovery resulted in higher building-related fees, and the new Cannabis fees, accounted for the gain through FY 2018-19. Pre-recession growth for building permits and fees is 4%, while growth in most other fees is 2%.

Figure 24. City of Sacramento Department Revenue Projections in Millions through FY 2027-28

Alternative Economic and Spending Scenarios
The foregoing assumptions describe the “most likely” outcome. However, to illustrate the potential range of impact for key assumptions used in the

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44 baseline forecast, we have identified a high and low alternative to the major economic and spending assumptions shown in Table 6. These are discussed further below.

Table 6. Key Economic and Spending Assumptions in Fiscal Forecast Model Economic Assumptions Spending Assumptions
Recession Magnitude Salary COLAs
New Construction Level Staffing Growth
Ownership Transfer Avg. Value Increase Inflation Rate
Sales Tax Growth Rate Capital/MYOP
CalPERS Discount Rate Measure U Set-aside
Recession Magnitude
• Moderate Economy Assumption: The forecast projects the next recession will occur during FY 2021-22 and on a seven-year cycle thereafter. This is considered a “moderate” recession: a 7.5% cumulative reduction from normal growth rates over an 18-month period for each of the following revenues -- sales tax, TOT, BLT, RPTT, and building permits -- and a 3% property tax reduction.

The property tax loss would lag by one year due to the annual lien date, which causes some delay in reflecting current values. Over a three-year period, 90% of the losses would be recovered. • Stronger Economy Alternative: Results in a weaker recession (lower revenue loss) with a 2% property tax loss and 5% loss for other affected revenues over 12 months (in other words, the weakest of the prior six recessions).
• Weaker Economy Alternative: Results in a stronger recession (higher revenue loss), with a 4% property tax loss and 10% loss for other affected revenues over 24 months (more like the 1980’s recession, but still not be considered a “severe” recession).

New Construction Level
• Moderate Economy Assumption: The forecast assumes the addition of 1,500 new housing units/year (the average over the past 30 years) and $400 million in non-residential new
construction/year (reflective of recent years’ experience). • Stronger Economy Alternative: 2,000 new units/year and $600 million non-residential new construction/year.
• Weaker Economy Alternative: 1,000 new units/year and $200 million non-residential new construction/ year.

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45 Ownership Transfer Average Value Increase
• Moderate Economy Assumption: The forecast assumes a 35% average gain for 3% of parcels that are transferred (the low end of the range seen in other cities).
• Stronger Economy Alternative: 45% average gain for 3% of parcels that are transferred.
• Weaker Economy Alternative: 25% average gain for 3% of parcels that are transferred.

Sales Tax Growth Rate
• Moderate Economy Assumption: The forecast envisions a 3.1% pre-recession growth rate for FY 2022-23 and after.
• Stronger Economy Alternative: 3.5% growth rate.
• Weaker Economy Alternative: 2.5% growth rate.

Pension Discount Rate
• Moderate Economy Assumption: The forecast assumes the pension discount rate will decline to 6% over 20 years starting in FY 2023-24.
• Stronger Economy Alternative: maintain 7% discount rate. • Weaker Economy Alternative: decline to 6% over 10 years starting FY 2023-24.

Salary COLAs
• Moderate Spending Assumption: The forecast assumes a 2% annual COLA.
• Higher Spending Alternative: 2.5% annual COLA.
• Lower Spending Alternative: 1.5% annual COLA.

Staffing Growth
• Moderate Spending Assumption: +13 FTE/year.
• Higher Spending Alternative: +31 FTE/year.
• Lower Spending Alternative: No FTE growth.

Inflation Rate
• Moderate Spending Assumption: 2% CPI.
• Higher Spending Alternative: 2.5% CPI.
• Lower Spending Alternative: 1.5% CPI.

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46 Capital/MYOP
• Moderate Spending Assumption: Capital and Multi-year
Operational Programs remain at 100% of FY 2020 budget levels. • Higher Spending Alternative: 125% of FY 2020 budget levels. • Lower Spending Alternative: 75% of FY 2020 budget levels.

Measure U Set-Aside
• Moderate Spending Assumption: The forecast reflects a $25 million annual set-aside (which allows continued growth in General Fund reimbursements). Any transfers from the
Innovation/Economic Development Fund to the General Fund are in addition to this amount.
• Higher Spending Alternative: $40 million annual set-aside (which requires a reduction in General Fund reimbursements). • Lower Spending Alternative: $10 million annual set-aside (which allows increase in General Fund reimbursements).

This range of alternatives in key economic and spending assumptions creates a matrix of nine different scenarios, with the “Moderate Economy- Moderate Spending” scenario being the baseline forecast (see Figure 25 below). By assigning a probability outcome to each scenario, a weighted average of all nine scenarios can be compared to the baseline forecast scenario as a check to see how reasonable this outcome is, given the range of potential alternative assumptions. This probability is not statistical in nature, but rather is a common sense, experience-based weighting, keyed to the foregoing sources of information and observable trends in local government budgeting (e.g. the State Controller’s Report on local government revenues and expenditures). Because demand virtually always exceeds the supply of municipal services, cities tend to spend more during a stronger economy, when revenues are growing, but are forced to spend less (due to the balanced budget requirement) when the economy is weaker. Thus, we observe ups and downs in rate of growth in municipal spending based on the state of the overall economy. It is unlikely that cities will spend less during economic expansions when revenues are strong because there are always unmet needs local governments desire to address.

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47 Figure 25. Matrix of Fiscal Forecast Scenarios With Assumed Likelihood of Outcome

Figure 26 shows how changes in the forecast assumptions affect the annual change in the General Fund “available balance,” (which includes unassigned balance, an economic uncertainty reserve, and pension and OPEB reserves), for all nine scenarios. Red bars show the “structural shortfall.” Each chart is presented on a common scale that allows a clear comparison. Under the “Stronger Economy-Lower Spending” the City would be in great financial shape, but this is a low probability occurrence.

Equally low in probability is the worst-case scenario of the Weaker Economy-Higher Spending.

Figure 26. Matrix of Forecast Scenarios: Annual Change in Available Balance and Ending Available Fund Balance

Stronger Moderate Weaker
Economy Economy Economy
LowerLower
Spending
Moderate
Spending
Higher
Spending 10% 15% 5%
Matrix of 9 Alternate Forecast Scenarios
5% 5% 10%
5% 35% 10%
(Dollars in Mil.)
Annual Change in Available Balance
Higher
Spending
Stronger Economy Moderate Economy Weaker Economy
Lower
Spending
Moderate
Spending
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
($120)
($100)
($80)
($60)
($40)
($20)
$0
$20
$40
$60
19 20 21 22 23 24 25 26 27 28
weighted average
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

48 Figure 1, which appeared earlier in the Executive Summary of this report, shows the annual shortfall and resulting fund balance for the baseline forecast, assuming no corrective budget actions. (In reality, the City is not legally allowed to incur a net deficit in the General Fund.) The weighted outcome of the nine scenarios for change in fund balance (represented by the green line in the Net Change figure) matches the baseline forecast relatively closely. Based on this review, the “Moderate Economy- Moderate Spending” scenario was retained as the baseline forecast.

However, if annual wage adjustments and staffing growth exceed the forecast assumptions, or new construction does not meet projections, then the annual shortfall will not decline in later years, as under the baseline forecast, and will instead continue to grow. Note that these outcomes also do not reflect the funding of deferred maintenance, the potential loss of the enterprise tax or the potential passage of the Children’s Fund Initiative, which are discussed below.

Other Major Uncertainties
There are three remaining items of major uncertainty that must be incorporated into the budget forecast; one that is under the City’s control, and two that are not. The three areas are:
• Unfunded deferred maintenance,
• Legal challenge to the Enterprise Tax, and
(Dollars in Mil.)
Moderate
Spending
Higher
Spending
Ending Available Fund Balance
Stronger Economy Moderate Economy Weaker Economy
Lower
Spending
($200)
($100)
$0
$100
$200
08 10 12 14 16 18 20 22 24 26 28
$0
$50
$100
$150
$200
08 10 12 14 16 18 20 22 24 26 28
$0
$100
$200
$300
$400
08 10 12 14 16 18 20 22 24 26 28
($400)
($200)
$0
$200
08 10 12 14 16 18 20 22 24 26 28
$0
$100
$200
$300
08 10 12 14 16 18 20 22 24 26 28
($600)
($400)
($200)
$0
$200
08 10 12 14 16 18 20 22 24 26 28
($200)
($100)
$0
$100
$200
08 10 12 14 16 18 20 22 24 26 28
$0
$50
$100
$150
08 10 12 14 16 18 20 22 24 26 28
($100)
($50)
$0
$50
$100
$150
08 10 12 14 16 18 20 22 24 26 28
weighted average
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

49 • Potential passage of the Children’s Fund Initiative on a 2020 ballot.

Their potential impact on the baseline forecast is discussed below.

Unfunded Deferred Maintenance
The City has a substantial and increasing backlog of deferred maintenance, as identified by staff. Conservatively, the City is not spending the $30 million a year that it should be on maintenance for streets, facilities, parks and swimming pools (Public Works is working to better identify these needs, and the likelihood is that their analysis will show an even greater actual need). It is assumed that this amount would be borne by the General Fund, but Measure U is also a potential funding source that could be considered, as many of the public facility projects needing attention are in under-served neighborhoods. It is the City’s choice whether to fund these amounts or not, but the old adage of “pay me now, or pay me later” is certainly true with respect to maintenance.

If done on a timely basis, when the work is still in the “preventative maintenance” stage, the costs are much lower than when the work is delayed for so long that it becomes a much costlier repair. The classic example is with street resurfacing, where the costs are $4.50 per square yard for a surface seal (if applied every five to seven years) but escalate to $81 per square yard for full reconstruction of the street. Current accounting practices do not require governments to recognize deferred maintenance obligations as balance sheet liabilities, and most cities have not performed the facilities evaluation required to know how bad their deferred maintenance backlog really is.

In Sacramento, staff have identified the following maintenance backlogs. • Street Paving: $27.8 million per year is needed per a 2017 report just to maintain the current Pavement Condition Index (PCI) of 66. (By comparison, the nine-county Bay Area average PCI is 67.) Staff identified an average of $9.4 million that is currently budgeted for street paving, leaving $18.4 million per year as the unmet need.

Moreover, we are advised by the City that the PCI in 2019 was 60, which connotes a further deterioration of streets.
• Facilities: $44.6 million is the total backlog per a 2017 report. If it is assumed these costs are spread over 10 years, then this equals an annual need of $4.5 million per year (which, of course, excludes cost escalation and further degradation of facilities that can occur over time). Staff have identified $1.8 million as currently budgeted, leaving $2.7 million per year as the unmet need.

Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

50 • Parks: $140.4 million is the total backlog per a 2019 deferred maintenance list. If it is assumed these costs are spread over 20 years, then this equals an annual need of $7 million per year.

There is currently nothing budgeted for deferred maintenance in park facilities, leaving $7 million per year as the unmet need. • Swimming Pools: $17.5 million is the total backlog as estimated by staff. If it is assumed these costs are spread over 10 years, then this equals an annual need of $1.75 million per year. There is nothing currently budgeted to maintain the City’s swimming pools, leaving $1.75 million per year as the unmet need.

This does not account for all types of City facilities, nor is it an exhaustive review. Nor does it include the additional maintenance needs that will arise in the future. It does include 2% growth over time.

In 2017 the City of San Jose performed a comprehensive review of its deferred maintenance and infrastructure backlog and identified $1.5 billion as the current backlog in deferred needs. The areas and estimated costs identified are presented in Table 7 below.

Table 7. Maintenance Backlog Identified in City of San Jose Comprehensive Review Infrastructure Area Deferred Maintenance Cost
Buildings $147,100,000
Convention Center/Cultural Facilities $67,570,000
Fleet $8,600,000
Parks/Open Space $156,900,000
Service Yard $2,520,000
Information Technology $2,730,000
Streets/Traffic $789,000,000
Storm Sewer $295,000,000
Total Deferred Maintenance Costs
(excluding airport)
$1,469,420,000
San Jose Population 1,043,058
San Jose Deferred Maintenance Per
Capita
$1,409
Sacramento Population 508,172
Sacramento Potential Deferred
Maintenance
$715,893,172
On a strictly pro-rata basis, Table 7 shows that if the $1,409 backlog per capita from San Jose is applied to the 508,172 population of Sacramento, the potential backlog would be approximately $716 million. There may be Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

51 differences between the two cities that make this figure too high (or low), but a similar review in Sacramento is warranted. Achieving a sustainable long-term budget requires knowing how big the deferred infrastructure maintenance backlog is and developing a long-term funding solution plan to pay for such maintenance on a timely basis.

Legal Challenges to the City’s Enterprise Tax
In 1998, a majority of Sacramento voters approved a general tax of 11% on the City’s utility enterprises (water, sewer, storm drainage and solid waste). Each year, this general tax results in a transfer of between $30 million and $35 million from the City’s utilities to the City’s general fund.

A legal challenge to this enterprise tax was filed in 2018, alleging it violated the California Constitution because such a measure required approval by two-thirds of City voters. After further review, a Sacramento Superior Court judge issued a decision and order agreeing with this legal challenge and ordering the City to cease transferring funds from the utility enterprises to the general fund. However, the City believes this ruling was incorrect and it filed an appeal of the decision with the Third District Court of Appeal. The City Attorney’s Office has estimated this appeal process could take two to three years to resolve. The potential loss of this funding as a result of the lawsuit is a financial risk to the City.

Children’s Fund Initiative
Measure G on the March 2020 ballot requires that the “Sacramento Children’s Fund” receive funds equal to 2.5% of the “City of Sacramento’s audited total actual annual unrestricted revenues.” Eligible uses of funds include the following:
(1) Mentoring, counseling and culturally based healing practices, alcohol and drug use prevention and intervention, job training, transitional employment, and case management.
(2) Summer and after-school learning, artistic, cultural, and media expression, career-based internships, and family support services. (3) Early childhood education, parent/child play groups, and family support services.

The measure further states that: “All monies in the Sacramento Children’s Fund shall be used to supplement and not supplant or reduce the amount of unrestricted revenue the City of Sacramento expended for eligible children and youth services in any fiscal year below the amount so expended in the 2019-2020 fiscal year.” The City will have to determine what this FY 2019-20 expenditure turns out to be, as it effectively becomes Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

52 a maintenance of effort requirement, i.e., the City must continue to spend no less than the amount it spends on the existing programs.

If the initiative is approved, the provisions would take effect starting with FY 2021-22 and continue through FY 2032-33. The base to which the 2.5% would be applied will have to be determined, given the broad reference to “unrestricted revenues.” The three most likely outcomes and their rationales are as follows:
• Total of General Fund revenue and Measure U revenue, because Measure U is a general tax whose revenues are unrestricted. This is a base of $636 million in FY 2021-22, which would require $15.9 million in diversion of revenues.
• Total General Fund excluding Measure U, because the Measure U sales tax is accounted for in a special revenue fund. This is a base of $535 million in FY 2021-22, requiring $13.4 million in diversion of revenues.
• Only non-departmental revenue of the General Fund, because departmental revenue is applied against specific departmental programs. This represents a base of $426 million in FY 2021-22, requiring $10.6 million in diversion of revenues.

If voters approve the initiative, whatever revenue level is settled upon will be the amount used to create or expand existing programs for youth, and General Fund revenues used to pay for all other programs (such as police, fire, public works) will have to be cut by the same amount in order to not exacerbate the existing structural shortfall. If those non-youth programs are not reduced by a comparable amount to the revenue diversion, then the net General Fund shortfall increases by that amount.

If the voters defeat the initiative, then there is no loss of General Fund revenue, and no increase in funding for youth programs (except what may be approved in future City budgets).

Summary of Budget Forecast Shortfall
Table 8 shows the full range of potential outcomes depending on how the individual areas of major uncertainty are resolved.
• The baseline forecast shortfall of $13 million is the average annual shortfall from FY 2019-20 through FY 2027-28 under the baseline forecast (moderate spending-moderate economy scenario); see Figure 1.
• The deferred maintenance amount is based on an unmet annual need of $30 million. (Public Works is working to better identify Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners

53 these needs, and the likelihood is that their analysis will show an even greater annual need.) How to address deferred maintenance is the City’s decision to make. The costs are not going away and will only escalate over time, but the timing and amount is an annual budget decision.
• The fate of the $31 million Enterprise Tax is currently in the hands of the courts, and potentially in the hands of the voters. • The outcome of the Children’s Fund Initiative will be decided by the voters. The $16 million projected impact assumes 2.5% of the full General Fund and Measure U revenue base, to be
conservative. (The ultimate amount will hinge on the legal determination of what is “unrestricted revenue.”)
Table 8. Range of Potential Fiscal Outcomes and Annual Budget Shortfalls in Millions Outcome
Annual
Baseline
Shortfall
Deferred
Maintenance
Funded
Enterprise Tax
Lawsuit
Children’s
Fund Initiative
Total
Annual
Impact
Base Forecast Only $13 - - - $13
Base+Child Initiative Passes $13 - - $16 $29
Base+Deferred Maint funded $13 $30 - - $43
Base+Enterprise Tax Loss $13 - $31 - $44
Base+Maint+Child $13 $30 - $16 $59
Base+Tax Loss+Child $13 - $31 $16 $60
Base+Maint+Tax Loss $13 $30 $31 - $74
Base+Maint+Tax Loss+Child $13 $30 $31 $16 $90
Recognizing there is realistic basis for a projected annual General Fund shortfall ranging from a low of $13 million to a high of $90 million is critically important as the City Council and staff consider the following strategies and recommendations.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

54 Efficiencies, Innovations and Previous Recommendations Management Partners has grouped strategies developed during the innovation and efficiency project work into three categories.

The first we identify as efficiencies. These are strategies which can reduce expenditures, raise revenues or both.

The second consists of innovations. These are emerging best practice service options which may provide value to the community and improve the functioning of the City, but they may not generate cost savings or revenues. Indeed, they may have costs to execute.

The final category of strategies consists of ideas previously recommended by Management Partners which may be achievable. While the City has implemented many of the strategies suggested by Management Partners in previous reports (in 2010 and 2012), there are several which have not been implemented but which are doable and have been accomplished in other municipalities.

Each strategy is numbered sequentially. Strategy discussions include an explanation of the type of strategy it is along with an estimated impact (usually in annual estimated savings or revenue generation), an assessment of achievability, a detailed discussion of the background and analysis underpinning the strategy and sequentially numbered implementation recommendations so the City understands the steps necessary to achieve the savings or revenues estimated.

Additional Factors for City Consideration
As we explain in this report, some of the innovation and efficiency strategies have been contemplated by the City in the past, but we believe the strategies continue to have merit today.

Almost all of these strategies will be difficult. They will take time and effort to implement, and some will require engaging with bargaining units or passing legislation. However, the realignment of City services, implementation of best practices and increases in appropriate revenue Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

55 categories will help to create a financially sustainable future in Sacramento.

Efficiency Strategies
The strategies in this section focus on ways to reduce costs, raise revenues or both. Of course, finding long-term structural solutions that improve Sacramento’s financial outlook is the primary purpose of this engagement.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

56 Modernize Business Operations Tax
Strategy Type
Revenue Enhancement
Impact Estimate
Sacramento currently collects approximately $7.3 million annually in its Business Operations Tax. Based on per capita revenue generation and successful efforts of peer cities, Sacramento could increase these revenues by approximately $9.3 million (total of $16.6 million).

Achievability
Though subject to a public vote, we believe the achievability of increasing the Business Operations Tax is high because it has not been adjusted in nearly 30 years, has not kept pace with inflation and it lags significantly behind the trend for setting the level of such taxes in other large cities.

Background/Analysis
According to California state law, cities are allowed to levy a tax on business activity. The charges may be fixed (on a per unit basis) or may be based on the number of employees, gross receipts, number of vehicles, and/or the number of rental units, for example. Business taxes are, in theory, identical to all other taxes in that they provide a vehicle for the public to remit dollars to a government agency to support public services and facilities.

Under the California Constitution, municipal taxes require a vote of the people in the jurisdiction for which the specific tax measure would apply.

By law, there need not be a direct relationship between the services and facilities used by an individual taxpayer and the tax paid. For general taxes such as Sacramento’s Business Operations Tax, a simple majority of 50% plus one is needed to pass a local ballot measure (as opposed to a special tax which requires a two-thirds majority for passage).

The City of Sacramento currently has a business tax structure, based on gross receipts that separates businesses into five discrete categories and taxes each under different rates. The City’s business tax categories are listed below.
• Professional services (accountants, architects, attorneys, doctors, engineers, etc.)
• Contractors
• Residential and non-residential property rentals
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

57 • Businesses without a fixed place of business within city limits • General business category for businesses not enumerated in the other four categories
It is important to note that even though the Business Operations Tax is based on gross receipts, the tax is capped at $5,000. In 2010, City staff pursued ballot measures to modernize the Business Operations Tax and to establish a Medical Marijuana Dispensary Business Operations Tax. In July 2010, the City Council placed a measure on the ballot for the medical marijuana dispensary tax (which was ultimately successful) but declined to move forward with the Business Operations Tax measure.

Figure 27 provides a summary of the revenue generated from the Business Operations Tax in Sacramento from FY 2008-09 to FY 2018-19.

The tax raises approximately $7.3 million annually, which amounts to

1.4% of the City’s total General Fund revenue. Aside from the addition of marijuana businesses in 2010 (which is not included in our analysis), the last adjustment of the City’s Business Operations Tax was in 1991.

Figure 27. Sacramento Business Operations Tax Revenue, FY 2008-09 to FY 2018-19, in Millions

Source: Revenues based on FY 2008-09 to FY 2017-18 Actuals and FY 2018-19 from City of Sacramento Budget documents.

Our 2010 report included information on per capita business tax comparisons for seven peer cities. Sacramento’s per capita revenue was among the lowest. Since 2010, the City’s per capita revenue has slightly declined, while three of the peer cities including San Jose, Oakland and Santa Ana have enjoyed significant gains, as shown in Figures 28 and 29. $7.35 $7.37
$6.86
$8.03
$8.25
$9.28
$9.99
$7.32
$7.99
$8.87
$7.29
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0Millions
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

58 Figure 28. Per Capita Business Tax Comparison FY 2009-10 to FY 2018-19 (Estimated)

Source: Revenues based on FY 2009-10 to FY 2017-18 Actuals and FY 2018-19 estimates from Sacramento and peer budget documents.

Figure 29. Per Capita Business Tax Growth FY 2009-10 to FY 2018-19 (Estimated)

Source: Population data for per-capita based on US Census estimates for July 1, 2018.

Since 2010, Oakland’s business tax revenue has increased from $51.8 million to $81.9 million, San Jose’s from $12.0 million to $26.5 million (general business tax portion), and Santa Ana from $9.3 million to $12.8 million. While economic growth in this timeframe has generally led to increased revenues, these three peer cities in particular have benefitted from concerted efforts to either modernize their ordinances and/or San Jose Oakland Santa Ana Sacramento
FY 2009/10 $12.69 $132.51 $28.66 $15.80
FY 2018/19 Est. $25.41 $189.21 $37.90 $14.34
$12.69
$132.51
$28.66
$15.80
$25.41
$189.21
$37.90
$14.34
$0
$50
$100
$150
$200
100.27%

42.79%

32.24%
-9.22%
-20% 0% 20% 40% 60% 80% 100% 120%
Sacramento Santa Ana Oakland San Jose
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

59 increase/improve auditing and monitoring efforts. For example, San Jose implemented a Business Tax Amnesty Program in 2012 (and is now embarking on another program), and ran a successful ballot measure campaign in 2016 to modernize their general business tax. Changes to the general business tax included:
• Increasing the tax base and cap;
• Creating a broader and more progressive structure; and • Adding an annual inflator.

The City of Oakland conducted comprehensive audits in 2015 and 2017 that resulted in one-time recoveries and an upward adjustment to the base. Improved software and monitoring efforts in all three peer cities has also helped ensure collections.

As noted, the Sacramento business operations tax is capped at $5,000.

Modernization efforts such as those approved by San Jose voters can result in significantly higher revenues. It is also interesting to note that the City’s tax on marijuana businesses has no cap. A marijuana business generating $20 million in gross receipts would pay $800,000 in tax revenue, while a different type of business with the same amount of revenue would result in a Business Operations Tax calculation of approximately $8,000, with only $5,000 remitted to the City.

At the request of City staff, Management Partners also reviewed business tax revenue of five jurisdictions proximate to Sacramento: Davis, Elk Grove, Roseville, Stockton and West Sacramento. Elk Grove and West Sacramento staff indicated that their business license revenue is fee- based, so these cities were excluded from the analysis. In California, fees can only recover actual costs for providing services. At best, fees would be revenue neutral and, therefore, would not be helpful in increasing revenue.

In comparing Roseville’s business tax revenue growth to Sacramento from FY 2009-10 to FY 2018-19 (estimated), we note that Roseville’s per capita growth was 13% as compared to Sacramento’s decline of approximately 9% as shown in Figure 29. Additionally, Roseville’s total business tax revenue during this timeframe increased by nearly 34% (from $673,578 to $900,675) while Sacramento’s revenue declined by approximately 1.1% (from $7.37 million to $7.29 million) as indicated in Figure 27.

With regard to Davis and Stockton, both jurisdictions have passed marijuana business taxes and include this revenue in their budget totals without separating general business tax revenue. In order to draw a direct comparison to Sacramento, Figure 30 shows per capita revenue Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

60 growth from FY 2015/16 to FY 2018/19 (estimated) including business taxes associated with marijuana businesses. Per capita revenue growth in both jurisdictions considerably outpaced Sacramento.

Figure 30. Per Capita Business Tax Growth, Proximate Cities, FY 2015-16 to FY 2018-19 (Estimated)1

Source: Population data for per-capita based on US Census estimates for July 1, 2018. 1Includes business tax revenue associated with marijuana dispensary businesses.

It should be noted that the underlying size of the business sector in the various communities impacts revenue generation and there is no guarantee that overlaying a particular tax structure onto Sacramento businesses will result in equivalent revenue generation. Nevertheless, the City can take positive steps to modernize its ordinance and increase monitoring efforts to improve its business operations tax revenue generation. In 2010, we estimated that if Sacramento doubled per capita revenue, the City could raise an additional $9,300,000 annually. Based on the results of the peer agencies discussed above, we believe the 2010 estimate still holds true.

As with sales tax, the City can expect opposition to a Business Operations Tax increase from the business community. Careful consideration of the impact of such a tax increase on business retention and recruitment is warranted. This dynamic is less of a concern than sales tax rates as city business taxes generally represent a small percentage of the overall cost of operating a business and are not a significant factor in business location decisions. As previously mentioned, business taxes are classified

8.42%

4.97%

1.44%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Sacramento Stockton Davis
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

61 in state law as general taxes and can be approved with a simple majority vote.

Prepare and submit a local ballot
measure to modernize the Business Operations Tax.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

62 Civilianize Administrative Positions in Police and Fire Strategy Type
Expenditure Control
Impact Estimate
In FY 2018-19, sworn personnel costs added, on average, $74,435 per position in annual expenses as compared to non-sworn personnel.

Currently, there are four full-time positions within the Police Department, and three full-time positions in the Fire Department performing duties that do not require sworn status and which could be filled by non-sworn personnel. There may be more such positions in each department, but this analysis was aimed at identifying positions which could be handled with non-sworn or civilian personnel based on position descriptions and successful approaches used in other cities.

The sworn personnel should be reassigned to existing vacant positions within their respective departments commensurate with their training and skills.

In order to estimate potential cost reductions, Management Partners did not rely solely on the difference in costs for sworn and non-sworn personnel referenced above. We also attempted to identify job specifications for non-sworn personnel that closely matched the work being done in the sworn classifications indicated. Then we compared total compensation including salary, benefits and unfunded pension liability. The analysis found that when fully implemented and employees had reached top step, civilianization would save at least $286,000 annually. This analysis does not include any overtime associated with these positions or any costs associated with disability or disability retirement. Additional savings could be realized if additional positions can be converted.

Achievability
Although the City will need to work closely with the Sacramento Police Officers’ and the Firefighters’ Associations to complete the process, the achievability is considered high.

Background/Analysis
Civilianization is a process involving the replacement of fully attested, sworn police and fire officers with “civilian” staff who have either no police powers or limited police powers and who provide either administrative or specialist support. Over the last 30 years, it has become Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

63 more common to fill roles that do not require sworn credentials with non- sworn or civilian employees to more efficiently utilize personnel.

This approach reduces personnel costs in the long run and ensures that sworn officers provide critical public safety services, especially during times when hiring is not keeping up with demand and funds are limited.

It is important to note that the actual salary of civilian positions may initially appear higher than that of a sworn employee; however, the difference in retirement costs will result in savings. The approach further allows sworn personnel to focus their tasks on core functions of protecting people and property and shifts a portion of their workload away from administrative and non-core functions. The specific positions identified below are recommended for conversion based upon an analysis of whether police and/or fire duties are required for completion of the workload tasks.

During interviews, the Police Department staff shared examples of recent civilianization successes. For instance, the Department relies on civilian Community Service Officers who provide basic evidence collection related to burglaries and other property crimes, and employs a civilian Public Safety Communications Manager, which was previously staffed by a sworn Police Captain. Hiring the Communications Manager allowed the Police Captain to be reassigned to a position that involves sworn responsibilities. Finally, in FY 2019-20 the Police Department converted a sworn position to a civilian Media and Communications Specialist position that is in the Public Information Unit.

During our interviews with Police and Fire personnel, staff identified several other positions potentially suitable for civilianization, and expressed a desire to continue this trend. The Police and Fire departments are large enough that movement of these positions is likely to be achievable without creating any negative employment actions against existing employees. The salary and benefits savings for the positions identified by City staff are shown in Table 9 and are described in greater detail below.

This should be considered a threshold analysis in that the consultant team did not evaluate every sworn position, instead relying upon the perspective of department leadership. It is quite possible that other positions might be candidates for civilianization over time. A more detailed position by position analysis could discover these opportunities.

The threshold analysis shows however some of the potential of this strategy.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

64 Table 9. Potential Savings from Positions Suitable for Civilianization1 Classification FTEs Top Salary Step Savings
Police: Digital Forensic Investigator 3 $118,913
Police: Volunteer Coordinator 1 $27,213
Total Police 4 $146,126
Fire: Media and Communications Specialist 1 $66,929
Fire: IT Support Specialist 2 $73,506
Total Fire 3 $140,435
Civilianization Total Savings 7 $286,561
1Estimated savings based on FY 2018-19 budgeted salary and benefit rates at the top step of each classification as contained in the City’s position budget report.

Police
Digital Forensic Investigator
Three sworn employees currently work in the Police Digital Forensics Unit. The forensic work conducted by these officers does not require police powers. All three positions should be considered for conversion to trained civilian personnel. Based on the City’s current technology specialist classifications, conversion to non-sworn Digital Forensics Investigators could save $39,638 per position at the top step of the salary range, $118,913 for the three members of the unit.

Convert three positions within the
Police Department Digital Forensic Unit from sworn to
non-sworn positions.

Volunteer Coordinator
The Police Volunteer Coordinator is currently a sworn officer position.

This position oversees civilian volunteers and is also a good candidate for civilianization. Based on the City’s current coordinator classifications, conversion to a non-sworn Volunteer Coordinator could save $27,213 per position.

Convert the Police Volunteer
Coordinator position to a non-sworn position.

Police Training Unit
Lastly, the Police Training Unit is staffed by sworn personnel. The staffing in this unit should be reviewed for positions appropriate to convert to civilian employees. A detailed review of this unit was not Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

65 conducted and, therefore, estimates for potential savings were not included in Table 9. However, it appears there is an opportunity for additional savings.

Conduct an audit of current Police
department administrative duties to determine the non-
sworn duties that can be consolidated and civilianized.

Fire
During our review, we identified 18 Fire Department positions currently filled by sworn fire personnel that are conducting primarily civilian duties. Of these, the Public Information Officer and two Information Technology (IT) positions should be considered for civilianization. The remaining 15 positions should be studied further by the Department to identify duties that can be shifted and consolidated into non-sworn positions in the future.

Converting the three positions to non-sworn personnel will generate savings of $140,435. Additional savings may be achieved by redistributing the duties of the remaining 15 positions that are involved in outreach, diversity, and peer support duties.

Convert the Fire Public
Information Officer and two IT positions to non-sworn
positions.

Conduct an internal audit of
current Fire administrative duties to identify non-sworn duties that can be consolidated and civilianized in the future.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

66 Reduce Overtime
Strategy Type
Process Improvement
Impact Estimate
As the City Auditor’s Office also found in its 2017 audit report concerning overtime in the Fire Department, improving processes related to the appropriation and use of overtime by departments is necessary to improve internal controls and eliminate unnecessary costs to the General Fund.

The consulting team’s analysis shows that 92% of unplanned overtime expenses are attributable to the Police and Fire departments; therefore, changing the way overtime is budgeted and expended in public safety is especially critical.

Some departments view overtime through the lens of salary savings: that overtime is justified if there are commensurate salary savings to cover the added cost. This appears to be the case in Sacramento’s Police and Fire departments, where the majority of overtime expense is incurred. We acknowledge that paying overtime to existing employees can sometimes be less costly than hiring additional employees. However, an over reliance on overtime can also be inefficient, impact the workforce and add unnecessary costs, as discussed in the City Auditor’s report.

Our experience is that offsetting overtime costs with vacancy savings is a common and appropriate practice when proper internal controls to manage overtime exist and when the overtime is focused on balancing staffing with fluctuations in workload. However, as the City Auditor’s report indicated, the City appears to lack sufficient internal controls and proper data to effectively manage overtime; and it is clear that overtime is being used for more than just managing fluctuations in workload.

Additionally, it is noteworthy that use of overtime in Sacramento has been growing substantially. For instance, overtime increased about 264% in the six years between FY 2011-12 and FY 2017-18, an unsustainable 44% per year.

Our experience is that using best practices for data gathering, measuring and reporting can alone help to control unnecessary overtime spending, even without instituting other internal controls or policies that restrict overtime. For instance, we estimate the departments could reduce overtime costs by 2% to 3% annually by simply improving the data and Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

67 information technology (IT) systems, which would give department leaders better tools to manage overtime expenditures.

We also believe targets should be set for an additional 10% reduction in overtime expenditures. In the Police and Fire departments alone, these reductions would save between $3.1 and $3.3 million a year.

Achievability
The data needed for Police and Fire Department managers to improve overtime management likely exist within the City’s legacy information technology (IT) systems. However, it is clear additional IT resources and assistance will be necessary. The Police Department’s finance unit currently develops useful reports from these data figures to assist department management in the early detection of overtime anomalies.

However, similar overtime-focused reports are not being created for the Fire Department.

Effective management of overtime through improved business systems (i.e., software) better data and more proactive management is highly achievable.

Background/Analysis
The use of overtime in public sector organizations is common, particularly within functional areas where there is great fluctuation in the regular workload or in the turnover rate, which results in vacant positions. These fluctuations make it more difficult to right-size the number and level of positions required for the workload. Accordingly, most public sector agencies budget for overtime, yet try to manage it carefully.

The fluctuations in the workforce, and thus overtime expenses, have been exacerabated by recruitment challenges and the substantial number of vacancies in the public safety departments. For instance, we understand the City’s prior hiring freeze resulted in 100 vacancies in the Fire Department. Further, our experience is that filling vacancies in police agencies has become especially challenging due to an industry-wide shrinkage of the candidate pool for people interested in law enforcement careers. This is in addition to the complex and exacting process for recruiting, testing, conducting backgrounds, and training of police officers. This process, though necessary, adds significant time and costs for police agencies.

Managing overtime costs can be challenging in every department, and especially so in public safety due to the various complexities that are Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

68 involved. However, overtime in police and fire departments can be managed effectively despite these complexities.

The City Auditor’s Office examined the use of overtime in the Fire Department in a report from February 2017. Among its findings were that a lack of internal controls, including inadequate practices related to FLSA premium pay and overtime, increased the department’s costs substantially.

Public safety functions already represent more than half of the City’s General Fund expenditures (projected at 55% in FY 2019-20). The growing overtime costs in these departments pose an even larger burden on the budget and limit the resources available to fund other vital programs.

However, the Police and Fire departments are not the only overtime- intensive departments funded by the General Fund. Management Partners analyzed the City’s FY 2017-18 budget to identify departments whose overtime expenditures exceeded their overtime appropriation by more than $50,000. Table 10 highlights the six departments where overtime expenses are much higher than their overtime allocations.

Table 10. Departments with Overtime Expenditures >$50,000 Over Budget in FY 2017-18 General Fund Departments Budgeted Overtime Actual Overtime Cost Over-Expenditure
of Overtime
Community Development $360,223 $628,090 ($267,867)
Fire $3,322,314 $16,059,8801 ($12,737,566)
Parks and Recreation $146,157 $643,215 ($497,058)
Police $2,759,717 $9,609,718 ($6,850,001)
Public Works $244,478 $954,838 ($710,360)
Information Technology $.00 $234,803 ($234,803)
Overtime Total - General Fund $6,832,889 $28,130,544 ($21,297,655) 1 Includes overtime related to urban search and rescue, which is reimbursable.

These unplanned overtime costs exceed $21 million, 92% of which are attributable to the public safety departments (32% in the Police Department and 60% in the Fire Department). This problem of unplanned overtime costs has persisted for at least the last 10 years based on our review of City budget data. In fact, as shown in Figure 31, this problem has become more significant over time.

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69 Figure 31. Growth in General Fund Overtime Expenditures, All Departments – FY 2007-08 to FY 2017-18

Source: Sacramento budget data
This chart makes a couple of important points. First, the time period between 2007 and 2012 shows fairly stable overtime costs which proves that overtime can be controlled. Second, while the City has grown since 2012 it is hard to find any reason overtime costs have grown so rapidly, other than lack of control. Indeed, if these costs had grown at half the rate actually observed (or 22% per year) in the last 6 years the savings would amount to many millions of dollars.

Uncontrolled overtime expenditures can devastate an organization’s efforts to balance spending with revenues. Moreover, our experience is that excessive overtime has a particularly negative impact on the public safety workforce resulting in fatigue, on-duty injuries, and increased incidents of sick leave.

The City’s budgeting practices for overtime should also be reevaluated.

For instance, the annual appropriation for overtime changed very little in the 11 year period illustrated in Figure 31. The departments point to this practice and note that it underestimates the actual need for overtime.

While these concerns about the budgeting practice are valid, the low budget estimates did not cause the dramatic increase in overtime costs in the Police and Fire Departments during the last 11 years.

Another challenge in better managing overtime in police and fire relates to the lack of data available to department staff who are responsible. We interviewed multiple Police and Fire leaders and found divergent assessments of this data problem. Police leaders generally felt comfortable that they receive the information necessary to understand $-
$10
$20
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Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

70 and track overtime. For example, they receive visual graphs and data from their Department’s finance staff regarding individual employees’ use of overtime. Police leaders say this allows them to drill down and truly understand what they spend. While the Police Department appears to be more effective at controlling overtime costs, expenditures in FY 2017-18 were still 348% above the overtime budget.

The Fire Department reports a very different experience. One manager rated the quality of the overtime-related information received as a “C-.“ Specifically, Fire leaders indicate they do not have ready access to the data necessary to analyze and better manage overtime. The result is that the Fire Department’s overtime expenditures during the same period were 483% above the overtime budget. Our understanding is that the Fire Department is working to update the existing Telestaff software with the expectation it will improve overtime tracking.

Providing department leaders with real-time and easy-to-consume data regarding overtime issues, helps them collaborate to implement proven overtime reduction strategies and reduce costs. Although the Police Department is generally satisfied with the data it receives, both departments would benefit from a visual overtime dashboard to allow management personnel to better understand expenditures as they are happening and to develop strategies to optimize overtime. Some report types currently used by the Police Department may be helpful to Fire.

These reports could help Fire managers take immediate steps to better control overtime, while additional IT resources and reports are developed to further optimize overtime.

For example, the departments should use payroll, time and attendance, emergency run, work orders and other data points to develop dashboards that organize and analyze the data to answer essential questions. Some of these questions are listed below.
• What are the major trends in overtime over the past few years (by code, by individual, by time, by function, by station)? • What are the major outliers in overtime over the past few years (by code, by individual, by time, by function, by station)? • What are the main drivers of the overtime outliers?
• Are there specific overtime codes that no longer represent the work requirements associated with the tasks such codes were originally designed to cover?
• Are there instances of apparent misuse of certain overtime codes? • To what extent can sick leave be predicted?
• How is overtime correlated with the number and complexity of emergency calls?
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71 • How is overtime correlated with overall staffing levels? • How is overtime changing as a percentage of all public safety compensation?
Establish a cross-functional team
including Public Safety, Information Technology and
Finance staff to create a dashboard, monitor and provide guidance to all departments regarding methods to
manage overtime.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

72 Change Staffing on Ambulances to One Firefighter/
Paramedic and One Firefighter
Strategy Type
Service Delivery Change
Impact Estimate
Salary and benefit savings by changing from a two firefighter/paramedic ambulance staffing model to one firefighter/paramedic and one firefighter model would be approximately $500,000 annually (once all 15 ambulances convert to this staffing model). The savings estimate is calculated based on the salary and benefit cost differential between firefighter/paramedic positions and firefighter positions. However, this issue was previously examined by the City Auditor’s Office and there is an open recommendation for addressing it.

Achievability
Based on the recently adopted City budget for FY 2019-20, six new firefighter positions were approved and could therefore facilitate ambulance staffing instead of paramedics because emergency medical technician (EMT) certification is a minimum qualification for hiring. Once they successfully graduate from the recruit academy, these new firefighters, could be placed on six department ambulances. As new recruits are hired, the remaining nine department ambulances could ultimately be converted to the new staffing model. We believe this strategy is highly achievable, though we also note that the change would need to be considered in a labor negotiation context.

Background/Analysis
As a general practice, all Sacramento fire engines are staffed with at least one paramedic. Because an engine always responds to any emergency medical services (EMS) call, the current practice of staffing all ambulances with two paramedic/firefighters ends up providing at least three paramedics on every EMS incident. This response model requires a trained paramedic to drive the ambulance to the nearest medical facility (i.e., they are not treating the patient). A firefighter/EMT could perform the driving task with no impact on the level of medical care currently being provided to the patient being transported. (Some cities use a civilian EMT for the ambulance driver role.)
The proposed model is consistent with the approach used in other California cities.

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73 Like many departments that have made a practice of hiring paramedics exclusively for many years, Sacramento Fire now has a challenge to maintain EMS skills sets with the hundreds of medics that are currently working for the agency. Skills degradation is a common concern of fire department EMS quality assurance staff, and it is generally understood that many fire-based EMS systems need to re-think their staffing practices to achieve an optimal balance of public safety, cost effectiveness and quality assurance.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

74 Conduct a Utility Billing Audit
Strategy Type
Service Delivery Change
Impact Estimate
Savings from utility billing audits vary widely based upon the types of utility bills analyzed, the size and complexity of the audit client, and geography. Documented savings of 2% are not uncommon. However, since Sacramento conducted a utility billing audit in 2012, we assume the savings from a follow-up audit would be 1%.

According to the City’s FY 2019-20 Proposed Budget, the Storm Drainage Fund is expected to receive $37,754,000 in charges, fees, and services. The Wastewater Fund is expected to receive $43,019,000, and the Water Fund is expected to receive $139,191,000. The combined total expected revenue from these three funds is $219,964,000. If the City were to realize a 1% increase in revenues as a result of the audit, the increase in revenues would be approximately $2.2 million.

Auditing invoices the City receives for its utilities is another method of ensuring accurate billing and guarding against overpayment. Our experience is that such audits are also conducted by third-party firms and they often result in savings that more than cover the cost of the audit itself. While we believe this would be financially worthwhile given the City’s efforts to reduce costs, it is not possible to estimate the potential savings.

Achievability
Utility bill auditing is a relatively mature and competitive industry. There are several national and regional experts from which clients can choose and the use of competitive RFPs is common. In addition, clients can often structure transactions so that the audit costs are paid out of any future savings. This practice helps to mitigate the risk that the City would have up-front costs it would not be able to recoup. We believe this strategy is highly achievable.

Background/Analysis
Audits are common tools for monitoring water, wastewater, and electricity use and costs. Sacramento has a unified billing system that includes water, wastewater, and solid waste utilities. The City is in the process of installing water meters for all customers. When this program is complete, enhanced billing policies can be considered, such as tiered Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

75 water rates (where high water users pay more for excess water use) and metered sewer charges (based on winter water use).

About two-thirds of the wastewater collection system in Sacramento is managed by the City. (The other third is managed by the Sacramento Area Sewer District [SASD].) Wastewater is transmitted to the Sacramento Regional Wastewater Treatment Plant, operated by Sacramento Regional County Sanitation District (Regional San). In 2010, Regional San engaged KPMG to conduct a review of the City of Sacramento sewer use charges and sewer impact fees. (Regional San conducts these “reviews” from time to time for their contributing agencies.) The review concluded there was a need for process improvement. KPMG noted a significant number of times where the sewer impact fees were not being assessed correctly and where sewer user charges were being billed incorrectly. They made seven recommendations to improve policies and procedures, internal controls, documentation and recordkeeping, and coordination with SASD.

The outcome of this report illustrated the usefulness of billing system audits as well the specific need related to the City of Sacramento.

Regional San issued an RFP for a new audit of the City of Sacramento in 2015. The results of this audit are unavailable at this time.

A related strategy Management Partners considered is to combine the existing utility bills with a non-City utility such as PG&E or SASD. We have concluded this does not merit further consideration because the geographic areas for both PG&E and SASD are vastly different from the City boundaries, and the billing systems are specifically designed for each service.

We understand that the Department of Utilities has conducted past utility billing audits – most recently in 2012. An update to the last audit would provide an opportunity to ensure its recommendations were implemented. Further, we believe an updated audit would allow the City to examine a broader sample of residential accounts, since the prior audit of 100,000 customers was based on a review of only about 25 accounts.

Further, periodic audits (every five to ten years) are a best practice and help to ensure accurate billing and revenue capture. This is especially important given Sacramento’s complex billing system.

Develop a process to continually
review utility billing to reduce errors, maximize
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76 collections, and improve data quality and accuracy of utility billing.

Another utility auditing approach relates to analyzing the invoices received by the City of Sacramento for the various utility services it receives, e.g., electricity, telecommunications, gas. This is a best practice because these utility invoices often contain errors. For instance, Engie Impact, one consultant that provides such audits, estimates that 17% of all utility invoices contain errors.

The consulting team’s experience is that such utility invoice audits typically pay for themselves and can sometimes be structured in ways that the third-party audit company’s fees are paid directly from the savings.

Conduct a third-party audit of
utility invoices received by the City.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

77 Implement an Energy Savings Performance Contract
Strategy Type
Service Delivery Change
Impact Estimate
Our research and experience indicate that energy savings performance contracts (ESPCs) typically save cities about 10% in energy costs. Based upon budgeted figures provided by the City of Sacramento, an ESPC could save approximately $1.8 million in the current fiscal year, or about $10.4 million over the next five years. Total utility costs for all City departments are budgeted at $18.2 million for FY 2019-20 and have grown about 2.4% per year since FY 2015-16. Utility costs include electric, gas, and water utilities, all of which could be addressed by an ESPC.

Achievability
Although staff reported having a poor experience with an energy service company (ESCO) concept in the past and expressed concerns about the lack of capital to make the necessary infrastructure investments, we believe implementing an ESPC is highly achievable.

Background/Analysis
An ESPC is a partnership between an agency and an ESCO. Typically, the ESCO conducts a comprehensive energy audit for the agency’s facilities and identifies operating and capital improvements to save energy. In consultation with the agency, the ESCO designs and constructs a proposed project that meets the agency's energy conservation needs and arranges the necessary financing. The ESCO guarantees that the proposed improvements will generate sufficient cost savings to pay for the project over the term of the contract. After the contract ends, all additional energy cost savings accrue to the agency. The savings are typically guaranteed, and agencies often enter into multiyear contracts. Also, we understand that the City Auditor’s Office is currently conducting an audit of the City’s various “green” efforts.

Case Studies
Many public agencies deploy ESPCs and experience financial as well as sustainability gains. About 10 years ago, in response to a spike in annual utility costs, the City of Charlottesville, Virginia used an ESPC to reduce energy consumption and costs. The City evaluated 1,478,499 square feet of its municipal buildings and schools. Through the ESPC, the City developed a plan to upgrade lighting, transition to a solar water heating Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

78 system and implement water conservation measures. As a result, Charlottesville invested about $1.8 million in the plan improvements and reduced its greenhouse gas emissions by 1,996 tons. These upgrades generated an annual energy savings of 10%.

The United States Government Services Administration conducted an analysis in 2014 of 10 energy savings projects to determine if the agency achieved its goal to reduce energy use intensity by 30%. The study found that the ESPC projects (with contract terms from 12 to 23 years) reduced... “… energy consumption by 365 billion Btu per year, resulting in a first- year guaranteed cost savings of $10.8 million, which will be used to pay back the investment over time. A key result from the project was the average 38.2% proposed energy savings…2
Energy Efficiency Efforts in Sacramento
The City developed a Climate Action Plan (CAP) for Internal Operations in 2016 and has incorporated the comprehensive CAP into the 2035 General Plan. The CAP targets an energy reduction goal of 25% by 2035 (with the baseline of 2005). So far, Sacramento has implemented a number of energy efficiency retrofits including:
• Convention Center lighting project;
• Hart Senior Center and Panatoni heating/ventilation/air conditioning system (HVAC) replacements;
• Kinney Police Station light-emitting diode (LED) retrofits, • Citywide LED traffic signal retrofit;
• Streetlight LED retrofitting (currently underway and planned for completion in 2020); and
• Swimming pool variable frequency drives.

To complete this work, the City is also partnering with the Sacramento Municipal Utility District (SMUD).

The City also has adopted a Green Building Policy for construction of new municipal buildings. As part of the Green Building Policy, Sacramento implemented an Energy Services Contract with Solar City.

2 “Energy Savings from GSA’s National Deep Energy Retrofit Program” by John Shonder. Oak Ridge National Laboratory, page 2. September 2014.

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79 The contract was a power purchase agreement to provide photovoltaics (PV) solar systems at four City facilities.

While we understand the City’s previous poor experience with one contractor, we encourage the City to continue efforts to implement energy efficiency projects, especially when they can be completely funded from energy savings. In addition, approaching the effort comprehensively will connect all of the City’s existing policies (i.e., Green Building Policy, General Plan, Climate Action Plan, etc.) and ensure that all potential energy efficiency opportunities are identified. After a Citywide ESPC energy audit has been completed, Sacramento can evaluate the costs and benefits of the various energy efficiency projects identified across the organization and make informed strategic decisions about prioritization.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

80 Implement a Business Operations Tax Amnesty Program
and Explore Additional Compliance Opportunities
Strategy Type
Service Delivery Change
Impact Estimate
Subject to state and local laws, well-marketed tax amnesty programs can be an effective tool to capture delinquent payments and increase ongoing revenue collections. An amnesty program associated with the business operations tax represents a significant opportunity that can be replicated for other revenue sources based on initial results. Additional collections enhancements include conducting targeted revenue audits or implementing third-party collections strategies.

The City of San Jose has conducted successful business tax amnesty programs, most recently in 2006 and 2012, and has just established a new program in 2019. Their efforts generated $1.3 million in 2006 and approximately $2 million in 2012. Although San Jose’s tax structure is different (Sacramento’s tax is based on gross receipts, while San Jose’s business tax is largely based on the number of employees a business has), the revenue generation estimates can be scaled because all jurisdictions have substantial numbers of non-compliant businesses or businesses that under-report payments owed.

Based on Sacramento’s current business tax revenue level of $7.3 million, and applying San Jose’s 2012 collection rate, a successful business operations amnesty tax program could potentially generate a range of $650,000 to $1.3 million in one-time revenue.

Achievability
The City will need to navigate its internal rules and practices with respect to adopting tax amnesty programs. Implementing this strategy is highly achievable.

Background/Analysis
A comprehensive revenue maximization strategy is not only a best financial practice, it is a necessary component in addressing structural budget imbalances. Comprehensive strategies most often consist of targeted and ongoing revenue audits, continuous billing/collection improvements, full cost recovery of fees and periodic amnesty programs.

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81 Currently, the City contracts with a provider to conduct Business Operations Tax compliance reviews that include an outreach component.

This effort can be augmented by the recommendations in this strategy to ensure that revenue generation is maximized. An amnesty program will be especially important if efforts are successful to modernize the tax.

Tax amnesty programs generally provide an opportunity for a specific group of taxpayers (those who have not paid the taxes required) to pay back a certain amount owed, usually in a lump sum. Amnesty programs typically include a waiver of interest and penalty payments if the violators come forward during the program period. (For California the statutory limit for collection of back taxes is three years, plus the current year).

The opportunity exists for Sacramento to implement an amnesty program for the Business Operations Tax. A successful model to consider is the program adopted by the City of San Jose. The main components of the San Jose program include:
• A reciprocal agreement with the Franchise Tax Board (FTB) to share taxpayer data for developing contacts (also used for ongoing tax auditing purposes);
• Direct outreach to the business community;
• Waiver of all interest and penalties during the amnesty period; and
• A reduced payment amount for sole proprietors (estimated to comprise 50% of general business in the City).

The 2006 San Jose amnesty program generated $1.3 million in one-time revenue, while the 2012 program generated approximately $2 million in one-time revenue. (San Jose’s general business tax was up $2.6 million in FY 2012-13, but some of the increase can be attributable to an improving economy.) It is important to note that amnesty programs, as well as targeted tax audits, also generate ongoing revenue as newly compliant businesses continue to pay the annual tax.

A tax amnesty program similar in nature to that of San Jose could potentially generate more than $1 million in one-time revenue and result in a modestly higher level of ongoing revenue.

Another option for capturing past due payments is to increase the use of an outsourced, third-party collections strategy for taxes and/or fees.

Collections work is typically utilized for high-volume and highly repetitive collections. Economies of scale are important both to keep costs Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

82 low and to capture a high level of collections. We recommend that the City explore using a comprehensive, third-party collections agency for all its outstanding fines and fees. The collections industry is generally highly efficient, and a well-managed procurement process could yield meaningful results.

In our experience, most firms providing this service work on a contingency basis where the third-party partner pays itself out of incremental collections. For targeted tax revenue auditing (which typically occurs on a one-time basis), however, it is recommended that fixed fee arrangements be pursued rather than contingent fees. A targeted procurement process could be utilized to solicit proposals for revenue audit work.

Implement a business operations
tax amnesty program and explore additional tax/fee
compliance opportunities based on results.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

83 Update Pavement Cut Fees
Strategy Type
Service Delivery Change
Impact Estimate
Sacramento has the authority to adjust the pavement cut fee based on an analysis of all costs occasioned by such excavations. Our analysis shows that implementing a fee adjustment similar to one recently taken in Los Angeles could generate from $1.7 to $2.4 million in additional annual revenue which could be used for certain capital facilities and maintenance.

Achievability
One of a city’s most valuable assets is its streets and the associated rights- of-way. Utilities use these rights-of-way and often need to make pavement cuts to install or maintain their assets. Many cities have not discovered that the full cost of the damage incurred from a pavement cut is larger than calculated. Consequently, they do not charge as much as necessary to fully recover the costs for such cuts. The result is a deterioration in pavement condition which becomes a responsibility of the City. Shifting this (or any) burden to the City, when it should be funded by private entities, magnifies the challenges of finding sufficient funding for other capital improvements and infrastructure maintenance.

Los Angeles recently adopted a fee revision that will increase revenues from pavement cut fees by nearly ten-fold (up to $70 million annually).

Adjusting the pavement cut fee is highly achievable.

Background/Analysis
Sacramento requires the execution of an encroachment permit to make a pavement cut. The fee for this encroachment is established by the Sacramento City Code as “not to exceed an amount reasonably necessary to recover the estimated costs of all future maintenance, repair, or resurfacing that would be necessary to fully mitigate the damage and degradation caused by the excavation.” The fee decreases with the age of the street surface and is established by resolution of the City Council.

Sacramento’s current per-linear-foot pavement cutting fees are shown in Table 11.

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84 Table 11. Sacramento Excavation Cost Recovery Fees Per Linear Foot, by Age of Street Surface Surface Age Transverse Cut Linear Cut
Less than Five Years $7.00 per foot $3.50 per foot
5 to 10 Years $6.00 per foot $3.00 per foot
10 to 15 Years $4.00 per foot $2.00 per foot
Over 15 Years $2.00 per foot $1.00 per foot
Source: City of Sacramento Fees and Charges Database
In 2017, the City of Los Angeles conducted a Street Damage Restoration Fees Study to establish the impacts of pavement cuts on City roadways and determine appropriate cost recovery fees for street maintenance and repair. Los Angeles’ Street Damage Restoration Fees were established in 1996. As a result of the study, Los Angeles revised its Street Damage Restoration Fees (SDRF) for the first time in 2018. Prior to the fee revision, Los Angeles’s charges were based on the square footage of the trench, street classification, and age of surface. The new structure simplifies fees into two categories: Local Streets at $8.24 per square foot and Select Streets at $19.44. Select Streets are those that carry greater traffic loads.

These changes increased revenues from street cut recovery fees from $8.3 million in FY 2017-18 to an estimated $70.7 million for FY 2018-19. A summary of Los Angeles’ pre-and-post-revision Street Damage Restoration Fees is provided in Table 12 below.

Table 12. City of Los Angeles Street Damage Recovery Fees, Original and Revised SDRF Version Local Streets per Square Foot (SF) Select Streets (per SF) Original $5.18 to $7.78 $14.18 to $21.26
Revised $8.24 $19.44
Source: City of Los Angeles Municipal Code, Section 62.06 Based on the range of potential fees received by Sacramento, as detailed in Table 13, we estimate that the City issues permits for approximately 86,000 linear feet of excavations per year.

Table 13. Estimate of Linear Feet of Excavations, per FY 2019-20 Budgeted Revenue Range Fee FY 2019-20 Budgeted Revenue Revenue/Fee = Linear Feet Lowest Excavation Fee per Linear Foot $1.00 $150,000 150,000 Highest Excavation Fee per Linear Foot $7.00 $150,000 21,429 Midpoint of High and Low Linear Feet Range (Average Linear Feet) 85,715 The City currently charges for excavations based on linear feet, without considering the width of the excavation. For example, the fee for a 12-foot long transverse cut would be $84.00 plus base encroachment fees, Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

85 regardless of whether the trench is six inches wide or five feet wide.

However, a six square foot trench (12’ x 0.5’) causes less damage to the road surface than a 60 square-foot trench (12’ x 5’). A revision to the Excavation Cost Recovery Fee should therefore be based on square feet, which would more accurately reflect the impact on road surfaces.

The average linear feet for excavations calculated in Table 13 above represents our best estimate for linear feet of cuts to City road surfaces performed in one year. To approximate the number of square feet represented by the same level of annual excavations, we assumed a typical trench width of three feet, or approximately 254,144 square feet of excavations per year. This forms a basis for comparing possible fee revision scenarios, using the same assumptions regarding fee calculation and the area of road surface being excavated. We believe that cost recovery fees should be more aligned with the lifecycle needs of the asset than the depreciated value of the asset. Therefore, it may not make cost recovery sense for fees associated with trenching in older streets to be at lower rates.

Our estimates for potential revenues under a revised fee system are shown in Table 14, below. The first fee scenario charges all pavement cuts at the current rate for surfaces that are less than five years old. The second scenario increases the current top rate by 5.9%, the same approximate adjustment applied to the top Local Streets fee by the City of Los Angeles.

The third scenario is a $10 per square foot flat fee, accounting for differences in repair costs for low-capacity and high-capacity street surfaces. These scenarios provide a range of between $1.7 and $2.4 million in potential new revenues.

Table 14. Potential Revenue from Revised Pavement Cut Fees Fee Scenario
Excavation fee
per SF
Annual
SF
Estimated Total
Revenue
Potential New
Revenue
Scenario 1: Based on current top rate $7.00 257,144 $1,800,005 $1,650,005 Scenario 2: Based on Los Angeles increase
of 5.9% $7.41 257,144 $1,906,432 $1,756,432
Scenario 3: Cost recovery for low and high
capacity streets $10.00 257,144 $2,571,435 $2,421,435 Sacramento may benefit from a street damage restoration and recovery study like the one performed in Los Angeles to determine if the current pavement cut fee is adequate to recover the full costs related to the pavement damage. Developing an estimate of potential new revenues from a revised Excavation Cost Recovery Fee would require an in-depth study of the fees charged at each existing age bracket for both Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

86 longitudinal and transverse cuts, as well as an audit of the impact of excavations on the City’s street surfaces. If warranted by the study findings, the City should consider proposing a fee revision to the City Council.

Conduct a street damage
restoration and recovery study to ensure that the
excavation cost recovery fee captures all related
pavement life cycle costs.

Furthermore, the City may also consider establishing a moratorium on street cuts for a specified period following a pavement resurfacing project. Five years is the most common moratorium period among jurisdictions that have enacted this policy. The impacts of cutting an asphalt street are highly variable based on circumstances but, as part of its 2017 Street Damage Restoration Study, the City of Los Angeles estimated up to a 66% decrease in functional life.3 This reduction in useful life and asset value is especially harmful in the case of new streets, which have otherwise not experienced significant depreciation. The study also found that street surfaces that had experienced trench cutting had PCIs that were, on average, 11 to 15 points lower than non-cut surfaces.

Establish a moratorium of five
years on pavement cuts following new street
construction or major resurfacing projects.

The City has an internal coordination team, the Advanced Planning and Asset Management Group, that meets to help coordinate on construction and maintenance. The plan is for the Group to expand its collaboration to include non-City utilities, such as PG&E, SMUD, Verizon, and various 5G partners. The Group currently relies primarily on meetings, phone calls and emails to coordinate activities. Unfortunately, meetings, phone calls, e-mails, and trading spreadsheets are time consuming and are not as efficient as web and map-based right-of-way management tools.

Time-management research estimates that use of email for coordinating professional work may contribute to a productivity loss of 63 minutes per day checking for updates, addressing notifications, or locating and sorting project-critical emails.4 We used this research as a proxy for daily

3 “Street Damage Restoration Fee Study” Shahin and Associates. City of Los Angeles Bureau of Street Services. June 2017.
4 “How to Spend Way Less Time on Email Every Day” by Matt Plummer. Harvard Business Review. January 22, 2019.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

87 time coordinating project management activities with inefficient tools.

Assuming improved tools could reduce coordination time by half, we estimate potential savings of up to 7%, or $530,113 for FY 2019-20, based on payroll costs for the Advanced Planning and Asset Management Group; and the Pavement, Concrete, and Streets Maintenance Groups.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

88 Reduce the Number of Take-Home Vehicles
Strategy Type
Process Improvement and Service Delivery Change
Impact Estimate
The City has an inordinately high percentage of take-home vehicles as compared to the size of its fleet. A spreadsheet provided by the Fleet Management Division showed a total of 432 vehicles have been authorized as take-home vehicles on a full-time or seasonal basis5. This issue was also addressed in two reports prepared by the City Auditor’s Office in December 2011 and June 2019, which also concluded that the number of take-home vehicles resulted in substantial costs.

We estimate that the City may be able to reduce the number by as many as 300 vehicles, while still being able to maintain necessary after hours and emergency response coverage. For the purpose of estimating the impact of such a reduction, the following conservative assumptions have been made: the average round trip for a take-home vehicle is 20 miles; the current IRS standard mileage rate is $.58/mile; the reduction in vehicles is estimated at 300; and there are 260 work days per vehicle per year. Over the course of one year, the impact estimate for mileage alone is $904,800.

These savings will accrue to the various funds that support the respective department or program.

Management Partners understands that, in some instances, the City has factored the value of take-home vehicles into the total compensation for certain employees. In these instances, the reduction of take-home vehicles is likely to result in negotiations that could offset savings, though it is not possible to estimate the amount of such an offset. However, as noted above, the estimated savings are for vehicle mileage alone and do not include the additional liability or long-term fleet costs such as vehicle replacement.

A side benefit that cannot be calculated or estimated without additional data is related to proper use of City vehicles for City business. San Joaquin County, California; Indianapolis, Indiana and Evansville, Indiana found an excessive amount of staff using vehicles for personal use, which

5 According to the Fleet Management Division, seasonal take-home vehicles are those which are assigned in six-month increments.

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89 shortens the life of the vehicle and drives up fuel costs, in addition to potential increases in accident and damage repair costs.

Achievability
Re-assessing the need and number of take-home vehicles is a common problem in many public agencies because, without clear policies and uniform implementation, the use of city vehicles tends to grow over time.

Our experience is that this is a problem in many organizations.

Addressing it saves money in a variety of ways and reduces unnecessary liability. Further, the almost one-in-five ratio of take-home vehicles in Sacramento alone is cause for a reevaluation of existing policies and practices. As noted previously, changes to take-home vehicles may require negotiations with affected bargaining units. Given the potential that certain take-home vehicle assignments could require negotiation with the bargaining unit, we rate the achievability of this strategy as moderate.

Background/Analysis
It appears the number of take-home vehicles citywide has increased over time. For instance, the City Auditor’s previous analyses showed a total of 3586 take-home vehicles. However, as noted above, recent data provided to the consulting team by the Fleet Management Division reflect a total of 432 take-home vehicles. Table 15 summarizes these take-home vehicles by department or functional area.

Table 15. Distribution of Take-Home Vehicles by Department or Functional Area Department/Functional Area
Number of Take-Home
Vehicles Authorized Percent of Total
Fire Department 21 4.86%
Fleet Management 4 .93%
Information Technology 2 .46%
Miscellaneous 41 9.49%
Police Department 197 45.60%
Water, Wastewater, Drainage 167 38.66%
TOTAL 432 100.0%
Source: Fleet Management Division
One interesting point of comparison is that the number of take-home vehicles authorized by the Police Department declined almost 10%, from

6 A 2011 report by the City Auditor’s Office concerning light -duty vehicles identified 243 take-home vehicles, and its 2019 report about the Department of Utilities fleet estimated an additional 115 take-home vehicles.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

90 218 in 2011 to 197 in 2019. This is important because the Police Department has the largest share of take-home vehicles and it generally has the strongest rationale for authorizing them. However, the overall number of take-home vehicles is still large. It represents almost 20% of the City’s 2,179-unit on-road fleet inventory, and this does not include City vehicles that are taken home on an on-call, standby basis.

The City’s policy regarding take-home vehicles is addressed in the Administrative Policy Instructions (API #21). The policy was last revised in 2001 and another revision is currently being drafted. There are four variations of take-home vehicles referred to in the Transportation Policy as described below.
• "Duty Hour Retention" means vehicle assignment on a continuous basis during duty hours.
• "Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle when it is deemed in the public interest and the task(s) to be performed require(s) immediate response during off-duty hours.
• "Seasonal Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle for a defined period of time.
• "Intermittent Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle when task(s) performed require employee's presence at times other than their normal work schedule.

The assignment of city-owned vehicles is covered in Section 7 of the policy and states that
“All individual vehicle assignments must be justified in writing to the City Manager prior to the assignment and are subject to periodic review. City vehicles may be assigned to individuals when essential to the City for public safety, on-call assignments, and other special or emergency assignments.”
The City of Sacramento does not have a formal vehicle assignment policy containing criteria to justify the need for a vehicle.

However, all vehicles, including take-home units, are reviewed annually by the Fleet Management Division but the focus is on identifying underutilized units. This review uses a 5-year, 6,000-mile average as a minimum standard. Departments are required to fill out an “Underutilized Vehicle Retention Justification Form” if their vehicles do not meet the 6,000-mile minimum criteria. This form is used to justify Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

91 why the vehicle should not be turned in and how returning the vehicle will impact the department’s operations.

To our knowledge, the 6,000-mile minimum standard used by the Fleet Management Division is applied to all light- and heavy-duty vehicles.

Furthermore, it does not consider construction-type, hour-metered units.

This “one size fits all” approach is common among government organizations. However, it fails to consider that vehicles and equipment perform different functions with various mileage characteristics. For example, a police patrol vehicle will travel as much as five times the annual mileage that a pick-up truck belonging to the Street’s division will travel. Vehicles used within a water treatment plant setting will never accumulate the mileage that a Parks and Recreation vehicle would use.

The study and new policy should further establish a minimum number of callouts to justify assigning a take-home vehicle. Together, they can form the basis for determining if a city vehicle qualifies to be taken home or whether an alternative means of transportation should be considered such as reimbursing an employee for using their own vehicle or drawing a vehicle from a pool. Justifying the use of an assigned vehicle or piece of equipment, computing minimum utilization standards and identifying alternative means of transportation would normally be addressed as part of a fleet utilization or “right-sizing” study.

Assigning a certain number of take-home vehicles, based upon specific and definable criteria, is a best practice. The most common examples are vehicles for Public Works staff who work on emergency repairs, and police detectives who may need to go directly to a scene at any time during the day. As part of the analysis for determining need for take- home vehicles, the following questions should be asked on a case-by-case basis:
• Who has the vehicle and what is their job title?
• Why do they need the vehicle?
• Do any supervisors need a take-home vehicle, or will the calls be handled by lower-level staff?
• Does the need fall in line with business needs for after-hours service and emergencies, or is it simply a convenience for the employee to have the vehicle?
The City Auditor report s from 2011 and 2019 also addressed these issues and we understand there are open recommendations which have not yet been implemented . Moreover, we understand that certain take -home vehicle assignments have been made to augment the City’s compensation Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

92 and benefits package. In other words, changes to these policies could raise issues in a collective bargaining context.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

93 Automate Human Resources (HR) Processes
Strategy Type
Process Improvement and Service Delivery Changes
Impact Estimate
This strategy is a broad approach to automating HR systems such as making appointments to exempt positions, compiling employee data, and processing Personnel Action Requests (PARs). There are many other examples of HR workflows that could also be automated. Therefore, our recommendation is to automate HR processes to the maximum extent possible. This will save many hours of human labor and improve productivity.

Our financial analysis focused on processing PARs to illustrate how much money potentially could be saved by automating just one workflow or process. To do this, we first estimated the minutes spent processing a single PAR; then estimated the number of times per year a PAR is processed for each full-time employee, and each temporary or seasonal employee. Then we multiplied the result of these estimates by the expected fully loaded cost of manually entering the data into the system a second time by HR staff.

The City’s PAR form is currently a PDF-fillable document that must be completed by the requesting department, and then re-entered into the HR system by HR staff. The duplication of effort by not having an automated system adds unnecessary costs to the City.

The Human Resources Department estimates the City processed 5,000 PARs in FY 2018-19. They explained this estimate was based on processing one PAR for each full-time employee per year; and, approximately two PAR’s per temporary and seasonal employees. The department also estimated it takes 10 minutes each for both the requesting department and HR staff to process a simple PAR, with more comprehensive ones requiring 20 minutes each. However, the HR staff will still need to verify data entered by the departments. Therefore, the This represents a range of 15 to 35 minutes to process a PAR.

As noted above, the problem with the current system is that each PAR has to be filled out twice. When a PAR is submitted to HR, a personnel technician manually enters the form’s data into a PeopleSoft database.

The fully loaded hourly cost for data entry in HR is estimated at $42.88/hour.

Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners

94 Therefore, eliminating the extra data entry task in HR would save 5 to 15 minutes for each PAR. This represents 417 to 1,250 hours, or an equivalent cost of $17,900 to $53,600.

Automating just the PAR form can save at least $17,900 per year in labor.

However, this is just one example of an automation opportunity. An article by McKinsey and Company7 found that four out of five HR processes are at least partially automatable, with the potential to reduce costs by at least 30%. We estimate there are at least 10 such manual processes in the Human Resources Department. Using the modest savings illustrated in the PAR example as a proxy, this could represent a savings of over $179,000 annually if these positions were repurposed to fill other vacancies in HR or other departments. In other words, the cost savings would necessitate lowering the overall FTE count.

A common criticism of automating paper processes is that the time saved represents a small fraction of the overall work effort of any single position and therefore the savings are not worth the effort or investment.

Sacramento City CouncilOctober 31, 2023

Sacramento City Council
October 31, 2023