City of Sacramento
Budget and Audit Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2025-01555 9/16/2025
Update to the Recommendations in the 2020 Citywide Innovation and Efficiency Assessment File ID: 2025-01555
Location: Citywide
Recommendation: Receive updated responses to the Citywide Innovation and Efficiency Assessment conducted by Management Partners.
Contact: Peter Coletto, Finance Director, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, (916) 808-5078, [email protected]; Department of Finance Presenter: Peter Coletto, Finance Director, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, (916) 808-5078, [email protected]; Department of Finance Attachments:
1-Description/Analysis
2-2020 Citywide Innovation and Efficiency Assessment
3-Updated Responses to the Recommendations in the 2020 Citywide Innovation and Efficiency Assessment
Description/Analysis
Issue Detail:
On March 10, 2020, the City Auditor presented the Citywide Innovation and Efficiency Assessment, Potential Strategies report to City Council for discussion and direction (File ID: 2020-00757 [Attachment 2]). The assessment was conducted by Management Partners, an independent contractor, 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. As a result, the report identified 26 strategies for cost savings with 39 recommendations for City operations. The City Manager provided a response to the 39 recommendations with the City Auditor’s report.
The City Manager has provided an update to the 2020 responses at the Budget and Audit Committee meeting on March 26, 2024 (File ID: 2024-00628). Attached are the latest updates (Attachment 3).
File ID: 2025-01555 9/16/2025
Policy Considerations: This report provides Council with updates to the recommendations identified in the 2020 Citywide Innovation and Efficiency Assessment, which could be used by Council to provide future policy direction.
Economic Impacts: None.
Environmental Considerations: California Environmental Quality Act (CEQA): This report concerns administrative activities and government fiscal activities that do not constitute a “project” as defined by the CEQA Guidelines sections 15378 and California Public Resources Code section 21080 and are not subject to the provisions of CEQA (CEQA Guidelines section 15060(c)(3)). CEQA review for any project which utilizes funds allocated in this report, has been or will be performed in conjunction with planning, design, and approval of each specific project as appropriate.
Sustainability: Not applicable.
Rationale for Recommendation: To gain any direction on the recommendations of the Citywide Innovation and Efficiency Assessment.
Financial Considerations: Any future policy direction from Council could have fiscal impact, which would require further analysis.
Local Business Enterprise (LBE): No goods or services are being purchased under this report.
Susana Alcala Wood, City Attorney Jorge Oseguera, City Auditor Mindy Cuppy, City Clerk Howard Chan, City Manager John Colville, City Treasurer City Council Report
915 I Street, 1st Floor
Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2020-00757 March 10, 2020 Discussion Item 27
Title: City Auditor’s Citywide Innovation and Efficiency Assessment, Potential Strategies
Location: Citywide
Recommendation: Transmit the Citywide Innovation and Efficiency Assessment, Potential Strategies Report for discussion and direction to the City Manager.
Contact: Jorge Oseguera, City Auditor, (916) 808-7270, Office of the City Auditor
Presenter: Jorge Oseguera, City Auditor, (916) 808-7270, Office of the City Auditor
Attachments:
1-Description/Analysis
2-City Auditor’s Citywide Innovation and Efficiency Assessment, Potential Strategies
File ID: 2020-00757 Discussion Item 27
March 10, 2020
powered by Legistar™
City of Sacramento
Description/Analysis
Issue Detail: According to the City Code Chapter 2.18, the City Council should be kept apprised of the City Auditor’s work. This report documents the City Auditor’s Citywide Innovation and Efficiency Assessment, Potential Strategies.
Policy Considerations: The City Auditor’s presentation of the Citywide Innovation and Efficiency Assessment, Potential Strategies is consistent with the Mayor and City Council’s intent to have an independent audit function for the City of Sacramento.
Economic Impacts: None
Environmental Considerations: None
Sustainability: None
Commission/Committee Action: None.
Rationale for Recommendation: This staff report provides the City Council with information that may be used to meet its responsibility to provide oversight and supervision of the City Auditor.
Financial Considerations: There is sufficient funding in the Citywide Innovation and Efficiency Assessment, Potential Strategies Project (I01002000) to cover the cost of the Citywide Innovation and Efficiency Assessment, Potential Strategies.
Local Business Enterprise (LBE): None
March 2020
City of Sacramento
Citywide Innovation and Efficiency Assessment,
Potential Strategies
3
4
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
5
6
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
i
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 7
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
ii
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 8
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
iii
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 9
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
iv
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 10
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
v
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 11
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
vi
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 12
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
vii
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 13
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
viii
Appendix 2 – Summaries of Managed Competition Case Studies .............................................. 158 City Management's Response..............................................................................................................162 14
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
ix
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 15
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
x
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 16
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
xi
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 17
Citywide Innovation and Efficiency Assessment, Potential Strategies Table of Contents Management Partners
xii
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
18
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.
19
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 20
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 21
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.
22
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.
23
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.
24
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
25
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
26
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.
27
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.
28
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.
29
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. 30
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;
31
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
32
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 33
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 34
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
35
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. 36
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.
37
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 38
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 39
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 40
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.”
41
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.
42
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. 43
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. 44
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 45
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
46
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 47
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17
FY 18
FY 19
FY 20
Millions
Revenues Expenditures
48
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
49
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
50
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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
51
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 52
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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
53
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
54
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 55
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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. 56
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
57
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 58
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.
59
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 60
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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 61
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
62
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
63
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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.
64
Citywide Innovation and Efficiency Assessment, Potential Strategies Fiscal Context for Efficiency and Innovation Strategies Management Partners
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
65
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
66
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. 67
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 68
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 69
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 70
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.
71
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 72
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.
73
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
74
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
75
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
76
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 77
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
78
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.
79
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 80
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.
81
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 82
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.
83
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 84
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 85
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.
86
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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
$30
$40
FY
2007/08
FY
2008/09
FY
2009/10
FY
2010/11
FY
2011/12
FY
2012/13
FY
2013/14
FY
2014/15
FY
2015/16
FY
2016/17
FY
2017/18
Millions
Budgeted Actual
87
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?
88
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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.
89
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.
90
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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.
91
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 92
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
93
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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.
94
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 95
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.
96
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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. 97
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. 98
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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 99
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.
100
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.
101
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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, 102
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 103
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.
104
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.
105
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.
106
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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.
107
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 108
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 109
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.
110
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.
111
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.
However, labor gets more expensive every year and using it as productively as possible is important in large and small ways. In addition, as shown in the studies cited in this analysis many corporations have aggressively used this strategy to increase productivity.
Achievability
During interviews, HR department staff expressed an interest in shifting away from their current paper-based processes to a more automated approach. The achievability of this strategy is moderate. Automated HR processes are standard practice in other organizations of Sacramento’s size and complexity. Transitioning to such technology will require Information Technology (IT) department support (either in-house or from outside consultants) to develop tools that meet the specific needs of the HR department, training for staff, coordinated implementation, and regular updating and system maintenance.
Background/Analysis
Management Partners understands that the Human Resources and Information Technology departments have already begun efforts to improve automation and that there are already several areas where e- tools and processes are used regularly, but opportunity exists to expand
7 Andersen, Jens Ri is, et.al., “How governments can harness the power of automation at scale.” Public Sector Practice, pages 1-6. February 2019.
112
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
95 and improve on these efforts. Some of Sacramento’s human resources processes are still handled manually with a paper system. Given the repetitive nature of many of these functions, there is a significant opportunity to automate these tasks. Doing so would reduce bureaucracy, save time, lower costs, improve the user experience, enhance data collection and reporting, and reduce errors.
A prime example of the problem is the City’s PAR, which is available electronically, but requires employees to complete the form, print it out and route the physical document to various recipients for approval. Once it reaches HR, staff must transfer the data from the paper form to the City’s human resources management system (PeopleSoft). The City reports that the IT department is working on a project to fully automate the PAR, albeit with very limited capability. PARs are currently used to document and approve a wide range of personnel actions. The IT department project is underway and will create an electronic version that can be used for only two actions: new hires and rehires. However, expanding this effort to fully automate all routine personnel actions, including an online routing and electronic approval process, would create considerable efficiencies Citywide by saving time, improving accuracy and contributing to enhanced recordkeeping and data collection.
An online publication by Ascentis Software, “Cost Savings in Automating HR & Benefits” notes that the Society for Human Resources Management says that “60% to 80% of an HR staffs’ time is tied to repetitive administrative tasks. Much of this time is spent answering employee and manager questions and gathering information for reports.” The amount of paperwork generated in traditional HR management is significant but can be controlled by automating processes and creating a self-service portal for employees.
This frees up HR staffs’ time to focus on core processes, like training and coaching employees.
Another benefit of an automated system would be a reduction in staffs’ time needed to complete HR audits. A single electronic portal would simplify data queries for HR staff and the organization’s employees. In addition, modern electronic systems have layers of security consistent with the needs of large cities like Sacramento which would help reduce errors related to the release of confidential information. Finally, an automated system could allow the City to create a dashboard to track key HR metrics and other information.
The HR Department reports that several years ago the City solicited proposals from qualified firms to begin the process of digitizing forms and other documents. The City received a cost estimate of $250,000 to automate just processing new hires through an automated PAR system. 113
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
96 The department determined the cost of an external vendor to implement only one type of transacation did not make sense when there are more than a dozen types of transactions that need to be automated. As a result, the City’s Information Technology Department was asked to assist. The limited project described above is the result.
Many other opportunities exist for this Department and others to eliminate paper. For example, the City’s process of appointing employees to exempt positions requires a printed appointment letter, routed to and signed by multiple executive staff, all the way up to the City Manager. An electronic process would reduce the time involved for this routine transaction.
Compiling employee data is a third area identified for improvement.
Much of this information is submitted on paper forms such as the annual Supplemental Employment questionnaire and the Alternative Work Schedule declaration. An online process would be more efficient for employees and would create a database for improved tracking and recordkeeping.
Training and certification courses are currently offered online through a public safety focused Learning Management System (LMS) called Target Solutions, and in-person from a variety of sources. The HR Department reports an upcoming transition from Target Solutions to SumTotal, a comprehensive LMS that empowers employees across departments to search the training they need to enhance their performance and grow their careers.
As Sacramento continues to streamline services and programs through enhanced use of technology, it may find collaborating with human resources consultants helpful in automating tasks such as background screening, drug testing, compliance and benefit administration.
Automate human resource and
other support service processes and workflows to
streamline tasks and eliminate manual systems.
114
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
97 Explore Opportunities to Implement Managed
Competition
Strategy Type
Service Delivery Change
Impact Estimate
Based on available case studies from comparable cities, we estimate implementation across all departments could save between 3% and 8% of costs on a number of programs identified below. Summaries of two relevant case studies are included in Appendix 2. The net result from implementing all managed competition opportunities is approximately $3.0 to $8.2 million per year. The wide variance in potential savings is dependent upon the number of available and interested private service providers in the Sacramento area that may wish to bid on such potential contracts.
Achievability
The City will need to navigate its internal rules and practices with respect to contracting and outsourcing. It is also likely that this recommendation could require collaboration with one or more of the City’s labor unions.
Within the State of California, other major cities like San Diego have implemented managed competition programs. We believe this strategy is moderately achievable.
Background/Analysis
Managed competition is a structured program in which public employees compete for the right to continue to deliver public services. The objective is to secure the best value for taxpayers, whether the service is outsourced or provided by the jurisdiction. The City already uses contract providers for certain services, and managed competition is simply an extension of that practice that engages public employees as competitors.
The concept of managed competition allows the private sector to compete with governments to bid to provide services currently provided by the organization’s departments. The government agency designs the criteria and bid components for its departments, and then invites private firms to compete to deliver. The benefits to the community include reduced customer costs and increased public confidence that the services provided are cost competitive. Moreover, managed competition offers other benefits such as the potential to increase revenue without increasing costs. The process can improve customer service through the inclusion of 115
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
98 competitive qualitative performance criteria. Also, managed competition allows governments to focus more on core services where staff may lack the capacity and expertise within the organization.
The City of Phoenix has relied on the process of managed competition since 1979. Staff in the Phoenix Solid Waste Division reported in a 2011 interview that managed competition saved the taxpayers $38 million8.
The City of San Diego has a long history of using the alternate service delivery model. It conducted four phases of managed competition from 2010 through 2015. The process over that four-year period resulted in an estimated savings of $9 million. The City of Chicago also instituted managed competition for its Blue Cart recycling program in 2011.
According to the City’s projections, it saved $4.7 million in recycling costs in the year following implementation or about 3% of the $144 million budget for recycling and sanitation.
In 2017, the City of Sacramento began a process that resulted in managed competition. In July of that year, the City Council authorized the City Manager to explore negotiations with the Sacramento Kings, SMG and Live Nation to operate one or all of the City’s various convention center venues. After approximately one year of negotiations, the City determined, based on several operational and process improvement changes made by staff in the Convention and Cultural Services Department, that it was in the public’s interest to allow the City to continue operating the Convention Center complex venues.
Based on the savings ranges observed through managed competition in San Diego and Chicago, we have provided estimated ranges of potential savings for various services provided by Sacramento in Table 16. The total cost of these services is taken from line-item budgeted personnel expenses (salary and benefits) from the FY 2019-20 budget. Given that savings under managed competition can be highly variable, we have calculated amounts based on 3% and 8% of personnel costs. These proportions represent the savings seen in Chicago’s Bureau of Sanitation and San Diego’s Fleet Maintenance Operations Division and constitute what we believe are reasonable ranges given the results experienced in other cities. Potential savings at each level are estimated in thousands.
8 “Governments Save Money Using Managed Competition” by Hilton Collings. Government Technology. January 17, 2011.
116
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
99 Table 16. Potential Managed Competition Savings of 3% and 8% for Select City Services, in Thousands Type of Service
Total Expenditures
(Thousands)
3% of
Expenditures
(Thousands)
8% of
Expenditures
(Thousands)
Solid Waste $59,178.3 $1,775.3 $4,734.3
Parking Operations Maintenance and Enforcement $36,064.9 $1,081.9 $2,885.2 Pavement Maintenance $6,434.3 $193.0 $514.7
Concrete Maintenance $470.9 $14.1 $37.7
Traffic Signal Maintenance $1,247.0 $37.4 $99.8
Street Light Maintenance $3,995.0 $119.9 $319.6
Street Marking $2,193.2 $65.8 $175.5
Streetscape Maintenance $3,940.6 $118.2 $315.2
Urban Forest Maintenance $5,096.4 $152.9 $407.7
Park Operations and Maintenance $13,708.3 $411.2 $1,096.7 Aquatics Operations and Maintenance $1,691.3 $50.7 $135.3 Facility Maintenance $4,847.2 $145.4 $387.8
Fleet Maintenance $14,953.4 $448.6 $1,196.3
Marina Operation and Maintenance $789.5 $23.7 $63.2
Convention Center Operation and Maintenance $4,709.1 $141.3 $376.7 Historical Site Operation and Maintenance $2,395.8 $71.9 $191.7 Golf Administration $67.9 $2.0 $5.4
TOTAL $161,873.1 $4,853.3 $12,942.8
Source: Line-item data for Proposed FY 2019-20 Budget for the City of Sacramento The City would benefit from identifying services within each department to include in a managed competition request for proposals. As noted above, taxpayers benefit from the results of managed competition through either streamlined public services or outsourcing the service to a third-party provider, and service cost reductions (i.e., revenue enhancements and/or expenditure reductions). The process also provides for greater public transparency about the true costs to deliver public services.
Since an in-depth and concurrent analysis of each of these program areas would be infeasible, the next step would be for the City to prioritize the program areas and select two to three programs to analyze each year.
Prioritize the program areas and
select at least two to analyze in-depth annually for the next several years.
117
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
100
Continue to Innovate Parking Services
Strategy Type
Service Delivery Changes
Impact Estimate
Maximizing the revenue potential through simple efficiencies will increase parking revenues. This can be achieved through a combination of introducing Sunday metering and daily demand-response parking rates. A conservative estimate of $1.4 million in gross revenue is expected by simply introducing Sunday meter rates and enforcement. However, this change would also result in increases for both one-time equipment costs and ongoing labor costs. Consequently, the additional net revenue is estimated at $875,000 to $1.0 million annually, however, this revenue may not accrue to the General Fund.
Achievability
We believe this strategy is moderately achievable.
Background/Analysis
Management Partners was impressed with the work done within the Parking Services Division. The Division has been creative about making the City the “front door” for parking services and setting Citywide parking policies and technology strategies while simultaneously incorporating private property into the available inventory. We were especially impressed with the Division’s willingness to “fail fast” using pilot programs, its desire to partner when possible, a tolerance for business and political risk, and for its policy analysis of curb space management and overall transit interoperability. Nevertheless, there are additional opportunities to generate revenues based on our review of the City’s parking practices.
City regulations have established parking meter fees for Monday through Saturday, but parking at meters is free on Sundays. Among the peer cities, Long beach, Minneapolis and Phoenix charge for Sunday parking for all or most metered spaces (Long Beach excludes some downtown parking from Sunday fees but not in the downtown core). The City of San Jose charges for metered parking on Sundays in the vicinity of HP Pavilion when events are occurring. The cities of Denver and San Diego do not apply metered parking charges on Sunday.
Given Sacramento’s vibrancy, the Division should evaluate expanding the parking meter fees by including Sundays. Sacramento’s FY 2019-20 118
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
101
budget estimates parking meter revenues at $11.6 million. Based on meter usage, pricing structure, and revenue data provided by the City, and adjusting downward for expected reduced traffic on Sundays, introducing parking meter fees on Sunday could generate between $1.1 and $1.3 million in gross revenue. There would also be an estimated $300,000 in additional citation revenue. It is understood that labor expenses, transaction fees, and State remittances will offset revenues.
However, accounting for these expenses, the net revenues are still estimated to range from $875,000 to $1.0 million annually.
The consulting team considered the potential impacts of these changes on businesses and, therefore, on the City’s sales tax. A complete analysis of this issue would be difficult because it would rely on highly speculative assumptions.
However, if parking meter rates were set at an absurdly high level, and no other reasonable parking alternative existed, there could in theory be some impact to businesses and the City’s sales tax. However, our expectation is that meter rates would be set at market levels and this would ensure little or no impacts to businesses.
Expand market-based parking
meter fees and enforcement to Sundays.
Disabled parking is widely abused across the nation, including in California9. The problems associated with this abuse include a loss of revenue, adverse effects on parking availability for disabled individuals and the inability to regulate parking through the current pricing model.
The latter two of these problems have also been addressed in a City Auditor’s report from February 2019.
Given its role as a statewide leader on parking issues, the City should continue to explore whether it could build a coalition of cities to address the fraudulent use of disabled placards in the state. Because disabled parking is regulated by State law, it would take State action to modernize and improve the system. There are, however, proven technology solutions available to dramatically reduce fraud, which helps ensure parking is available for those truly in need.
The City Auditor’s Office has previously examined this issue and provided recommendations for addressing it.
9 “High Cost of Disabled Parking Abuse” NBC Los Angeles. August 21, 2014. 119
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
102
Use Design-Build to Expedite the Completion of Capital
Improvement Projects
Strategy Type
Process Improvement
Impact Estimate
The precise impact of using a Design-Build approach varies from project to project, but studies indicate a range of potential savings over traditional Design-Bid-Build project costs, and faster project completion times 10. These factors are important considerations for long-term capital improvement planning and ongoing operational support costs.
Adoption of a Design-Build approach by Sacramento could result in substantial cost and time savings associated with capital project construction. Based on information referenced in a 2005 Design-Build Effectiveness Study (see also the footnote below), we believe the City could see a cost savings of approximately $6.8 million a year in the CIP, plus an additional $741,000 in the General Fund, if the magnitude of capital projects remains fairly consistent.
Achievability
Design-Build projects have recently been specifically authorized for California communities. We rate the achievability as moderate.
Background/Analysis
Design-Build projects, and related methods such as “Design-Build- Finance-Operate-Maintain,” combine professional design services and construction into a single contract. Design-Build has been successfully and widely utilized for decades in the private sector and by larger cities across the country, but has been slow to develop in California, in part due to the State’s historical opposition toward the practice in favor of the tradition Design-Bid-Build method.
10 A 2005 study prepared for the U.S. Department of Transportation – Federal Highway Administration, Design-Build Effectiveness Study - Final Report, builds on prior studies and provides comparative information on the relative merits of using design – build methods and important factors to consider to maximize effectiveness. A seminal Design-Build study conducted in 1998 found dollar savings of 6% and time savings of 33%. The 2005 study provides a range of savings values with averages/medians similar to the 1998 study. 120
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
103
Advocates of Design-Build cite significant benefits versus the traditional approach of awarding separate contracts to design and construction firms. Such benefits can include:
• Greater flexibility in awarding contracts,
• Single point of accountability for design and construction, • Higher quality construction,
• Fewer contract change orders and delay claims,
• Faster project completion,
• Lower overall project cost, and
• More opportunity for innovation11.
Examples of city/state government Design-Build projects planned or in process include:
• Caltrans: High Occupancy Vehicle (HOV) Lanes on U.S. Route 50 ($300 million),
• Caltrans: Route 210 Americans with Disabilities Act (ADA) Improvements ($7 million),
• City of Los Angeles: Los Angeles Street Civic Building Project ($400 million)12, and
• City of San Jose: San Jose International Airport Economy Lot 1 Parking Garage ($43 million).
In recognition of the benefits of Design-Build, the California Legislature has steadily, albeit slowly, made it easier for local governments to employ the practice. The most recent substantive change occurred in 2015 with the adoption of Senate Bill (SB) 785, which repealed most of the existing statues that applied to different types of jurisdictions and replaced them with one statute for “local agencies.” While it is encouraging that the state is making it easier for localities to utilize Design-Build methods, it is important to note that it must be thoughtfully considered and that this method will not be appropriate for all projects.
Table 17 applies the cost savings estimates noted above to projects in key programmatic areas including transportation, utility infrastructure and City facilities recommended in the FY 2018-19 to FY 2023-24 Capital Improvement Program (CIP) Budget. While Design-Build may not be appropriate for all projects, if the City utilized the methods for half of the
11 “Design-Build for Public Works Projects” League of California Cities presentation, David S. Gehrig, Hanson Bridgett, May 6, 2015.
12The Los Angeles project is a public-private partnership utilizing the Design-Build-Finance-Operate-Maintain method discussed later in this strategy section.
121
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
104
projects shown in Table 17, an approximate savings of $7.6 million could be achieved.
122
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
105
Table 17. Potential Cost Savings for Capital Projects Using Design-Build Methods Program/Project Area
Number of
Projects
5-Year CIP
Total
(Thousands)
6% Estimated
Savings
(Thousands)
6% Estimated
Savings Applied to
50% of Projects
(Thousands)
Transportation 49 $135,200 $8,247 $4,124
Utilities 31 $72,500 $4,423 $2,211
General Government (City
Facilities) 14 $24,300 $1,482 $741
Convention, Culture and
Leisure 8 $6,800 $415 $207
Parks and Recreation 12 $5,300 $323 $162
Public Safety (Fire Station
Replacement) 1 $3,500 $214 $107
TOTALS 115 $247,600 $15,104 $7,552
In addition to the potential cost savings, use of Design-Build contracts can result in substantially faster timeframes13 to design and construct multi- year projects. Figure 32 provides a comparison of Design-Build and Design-Bid-Build methods using a hypothetical 10-year infrastructure project valued at $10 million.
Figure 32. Comparison of Capital Project Cost and Duration Using Design-Bid-Build and Design-Build Methods
13 We estimate the Design -Build process would be 33.5% faster, which in a 5 -year project schedule would reduce the timing by 1.7 years. The average time savings associated with projects identified in the 2005 study is 27%, but delivery methods have improved over the past 15 years.
$10,000
$9,400
120
80 40
60 80
100
120
140
$9,000
$9,200
$9,400
$9,600
$9,800
$10,000
$10,200
Design-Bid-Build Cost Design-Build Cost
Cost (000s) Duration (Months)
123
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
106
Use of Design-Build and other forms of alternative contracting methods can facilitate collaboration and innovation for public-private partnerships14 and quickly deliver sustainable infrastructure projects (see also the Innovations section, strategy I3 for expanding the use of green infrastructure). These issues were also referenced in the presentation cited in Footnote 11 above. From these perspectives, utilizing Design- Build processes aligns with other established City initiatives such as the Green Building Policy, the Demonstration Partnerships program and the Sacramento Urban Technology Lab (SUTL) that seek to leverage strategic partnerships to foster economic development, livability and sustainability.
Beyond the standard Design-Build approach, the Design-Build-Finance- Operate-Maintain (DBFOM) model (and variants like DBFO and DBFM), and similar long-term leases offer an integrated delivery method that combines the design and construction responsibilities of Design-Build contracts with performance-based operations and maintenance (O&M) contracting and private financing for system development over a fixed period of time (usually anywhere from 25 to 99 years). In exchange for taking responsibility for the asset during the lease period, the private partner has the right to collect the revenue from the project and/or is compensated through payment for services based on performance specifications for the duration of the contract. The responsibility for performance of O&M activities in the long term is transferred to the private partner, creating incentives to optimize life-cycle costs.
There is a great deal of variety in long-term lease arrangements and especially in the degree to which financial risks are transferred to the private partner. Contracting and financing for a project delivered under a long-term lease generally require the incorporation of a new concession company created for the sole purpose of the project called a special- purpose vehicle (SPV). The SPV is the recipient of revenues, which are leveraged to issue bonds or other debt on a non-recourse basis to pay for project development costs. Depending on the revenue sources and the risk allocation, private partners may or may not be exposed to revenue risks.
In nearly all cases, the public agency sponsoring the project retains full ownership over the project assets throughout the concession period, although tax ownership can be (and often is) transferred via lease-
14 Public-Private Partnerships: A Design-Build Primer Done Right. Design-Build Institute of America, October 2016. 124
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
107
leaseback or similar approaches to allow for tax depreciation. Debt and equity providers in long-term concessions impose strict discipline on the Design-Build and O and M contractors working for the SPV through contractual structures that include enforceable liquidated damages, security packages, and warranty provisions forcing the concessionaire to proactively manage both financial and operational risk.
Regardless of whether the SPV held taxable or tax-exempt status, a DBFOM in the form of a long-term lease would allow for arms’-length financing of the capital improvement program, while simultaneously offering the promise of accelerated infrastructure delivery, life cycle asset cost savings of 25%-30%, and improved commercialization opportunities.
Develop guidelines to determine
when it is most advantageous to use Design-Build and
similar public contracting methods to streamline capital project planning/ construction, align with existing
strategic partnership initiatives and reduce overall
infrastructure costs.
125
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
108
Evaluate the Feasibility of Public Employee Gainsharing Strategy Type
Service Delivery Change
Impact Estimate
The process of estimating cost savings that may be possible requires identifying the functional areas in the organization that may be good candidates for gainsharing and then engaging with appropriate City and labor representatives to explore the concepts.
Based on gainsharing results in other large cities, we roughly estimate that a sustained effort in this area could save Sacramento up to $5 million annually after an implementation period of one to two years.
Achievability
The City will need to review its internal rules and practices with respect to contracting and procurement. Collaboration with one or more of the City’s labor associations will be essential. The City Attorney’s Office will need to advise the City Council as to State and local laws related to gainsharing; however, Sacramento Charter Section 105 provides as follows:
105 Rewards.
The city council may, on notice from the city manager, reward any city employee for conduct which is heroic or meritorious. The form or amount of such reward shall be discretionary with the city council, but shall not exceed in any one instance one month’s salary.
Based on the experience of a similar policy developed in a comparable California city, we assess the achievability as moderate.
Background/Analysis
Gainsharing is a system or approach to managing that incentivizes a higher level of performance through the structured involvement and participation of employees. As performance improves, employees share in the financial gain created by cost savings. Enhanced performance yields greater compensation, in turn promoting continuous improvement through a reinforcing cycle.
Modern gainsharing dates to the 1930s when a labor union leader, Joe Scanlon, developed an arrangement that would ultimately be called the Scanlon Plan. The premise of the Scanlon Plan was for labor and 126
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
109
management to collaborate on how to reduce costs, boost productivity, and eliminate waste. The resulting savings were shared by the company and the workforce. For the plan to work, management had to share responsibility and information with workers, and employees had to become more productive, more resourceful and more flexible. Perhaps most important, workers and managers had to sit down together and talk to each other. And because labor and management were working together toward a common goal, they inevitably began to see themselves as colleagues, not opponents.
The consulting team generally discourages clients from starting a gainsharing initiative by picking departments or functional areas from a pre-established list. Our experience is that the list changes from city to city based on local circumstances. Of course, practically speaking, an organization can deploy gainsharing in just about any business unit.
However, it works best when the agency or department has the following attributes:
• Solid historical financial and operational performance data: It is important to establish both financial and operational baselines and key performance metrics, and a focus on outcome-based metrics (i.e., units of work produced), not input-based metrics (i.e., number of assigned staff).
• Measurability of Work: Certain types of services, such as the number of oil changes performed, and acres of grass mowed are easy to measure, while other service areas may be less
measurable.
• Focused Work Scope: Gainsharing can be more difficult if an agency performs a wider variety of functions. For example, solid waste is easier to gainshare than planning and zoning.
• Functional areas with high numbers of staff: Greater success is possible in larger work units than in those with under 10 people (but gainsharing can still work in small units).
• Management Style and Commitment: The management team
must believe in shared decision making.
• Culture of Teamwork: The values of the department or function should support teamwork and performance improvement.
• Stable Workforce Climate: Employee relations should be relatively stable.
• Buy-In: Both management and employees should be enthusiastic about gainsharing.
• Effective Communications: There should be a strong
communications and feedback loop between management and employees.
127
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
110
• Alignment with Organizational Strategy: Gainsharing must be an integral part of the department or function’s goals and objectives.
Local government organizations possessing these qualities have successfully implemented gainsharing initiatives in several functional areas as shown in Table 18.
Table 18. Functional Areas of Successful Gainsharing in Other Communities Functional Area of Successful Gainsharing Programs
Solid Waste Fleet services
Facilities maintenance and building management Call center operations and management Parks maintenance, including mowing and landscaping Right-of-way maintenance and management Specialty facilities management (e.g., park venues and
recreational facilities)
Street maintenance, including pothole repair, strip
patching, crack sealing, and guardrail construction and maintenance
Inventory management courier services, and supplies
delivery
Parking meter maintenance and management, parking
meter coin collection and counting
Implementation
The typical approach to implement gainsharing starts with the City providing direction on the functional areas it would like to explore, including any parameters that should be considered. Then discussions are held with labor groups and other stakeholders to discuss options for gainsharing, estimate potential savings, identify potential benefits for employees, and formulate recommendations for further consideration.
Identify one or two functional areas
to begin gainsharing implementation.
Once the City has determined the appropriate functional area to begin gainsharing, there are five implementation tasks as discussed below.
Task 1 – Develop goals and performance measures. After selecting the operation where gainsharing will be deployed, work with city officials to develop specific goals and performance measures for the gainsharing program. Describe at a high level the current state of the selected operation’s finances and performance and create a definition of a Most Efficient Organization. The following sub-tasks would each be a collaboration with City staff.
• Convene a meeting with City staff to discuss high-level goals and objectives for the gainsharing program;
128
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
111
• Summarize the selected operation’s current financial status using City-provided data;
• Summarize the current operational status, i.e., key performance metrics using City-provided data; and
• Define the specific financial goals and key performance metrics for the to-be-created Most Efficient Organization (MEO).
Task 2 – Develop strategies. Facilitate the development of preliminary strategies for achieving the gainsharing goals.
• Collaborate with City staff to identify preliminary but specific steps required to transition from the status quo to the MEO (generic examples include increasing billable hours, reducing shrinkage, more effectively managing work, consolidating selected operations, improving staffing models, and refining scheduling and tasks);
• Prioritize the specific steps based upon speed of implementation, overall financial value, and degree of difficulty/risk; and • Collaborate with City staff to consider the following administrative topics: gainsharing participation (e.g., union only, some managers, all managers), levels of gainsharing (i.e., percentages or dollar amounts), timing/frequency of payments, inclusion/exclusion from retirement calculations, potential impact on routine labor negotiations, and other logistical and administrative issues.
Task 3 – Present gainsharing. Present the gainsharing program to union leadership.
• Collaborate with City staff to prepare a draft presentation for union leadership to describe the gainsharing program;
• Include summaries in the presentation of other successful gainsharing projects, the “rules of engagement” for labor- management collaboration on gainsharing, the proposed goals and objectives, and potential action steps that might be taken to move the selected operation to the MEO;
• Gather feedback from union leadership on the proposed model and focus on potential barriers to implementation and their recommendations for further improvement; and
• Gather feedback from the union on selected logistical and administrative issues (listed above).
Task 4 – Conduct planning meetings to identify how to manage and monitor the process. Facilitate planning meetings with labor and 129
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
112
management to agree on gainsharing goals, the strategies to achieve the goals, and how gainsharing will be structured. Develop a plan for managing and monitoring the gainsharing program, and collaborate with City staff to meet with union leadership to:
• Agree on gainsharing goals;
• Develop strategies and specific steps to achieve the gainsharing goals (including a process to add and refine strategies going forward);
• Create a draft structure for the gainsharing model (e.g., participants, percentage of savings shared, payment timing, other); and
• Establish an initial draft scorecard for measuring the implementation of gainsharing in the selected operation.
Task 5 – Implement the process.
• Implement agreed-upon cost savings strategies to achieve goals; • Measure financial and operational progress;
• Schedule monthly management meetings to review the Monthly Labor-Management Report; and
• Pay gainsharing as earned (typically every 6 or 12 months).
Gainsharing Examples
To illustrate some of these concepts further, the City of Indianapolis15 implemented gainsharing in its fleet services division many years ago.
The union-proposed approach allowed employees to receive 30% of operational savings that the employees generated beyond an agreed- upon baseline. The results over seven years included the following:
• Cumulative savings of $8.6 million or about an 18% expense reduction;
• Headcount was reduced via natural attrition (with no layoffs) even as the fleet grew;
• Billable hours per mechanic increased from 1,190 to 1,442; • Vehicle turnaround time dropped from 47 hours to 18 hours; • Injury time off dropped from 909 hours to 22 hours a year; • Grievances taken to arbitration dropped from 41 to 1 a year; • Written customer complaints dropped from 149 to 5 a year;
15 Indiana is a “right to work” state.
130
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
113
• First three years of cumulative staff bonuses were $75,659, $64,016, and $154,000.
As noted by the then president of the fleet services AFSCME Local 3131, “It’s not like it used to be . . . we run this whole thing together.” More recently, in 2018, the City of Baltimore16 implemented a successful gainsharing program in its Fleet Services Division. The City, in collaboration with the three local unions that represent employees, completed a successful pilot program in June of 2018 and made its first gainsharing payments to employees in August of 2018. The City and its three local union labor partners recently completed the second phase of the gainsharing program, with gainsharing checks paid to employees in February of 2019.
Determine departments or
functional areas suitable for gainsharing.
Initiate discussions with labor
associations affiliated with the identified departments or functional areas.
16 Maryland is not a “right to work” state.
131
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
114
Restructure Solid Waste Service Delivery Through
Contracting, Managed Competition or Gainsharing
Strategy Type
Service Delivery Changes
Impact Estimate
The Recycling and Solid Waste Division of the Public Works Department provides refuse collection services to residential customers. (Commercial, industrial and institutional collection is performed by private companies.) The current monthly rate for residential collection (assuming a 64-gallon container) is $36.89. Some customers may use larger or smaller containers, which have higher or lower monthly costs. Solid waste revenues estimated in the proposed FY 2019-20 budget are approximately $64.4 million.
There are three options for restructuring solid waste services including contracting the services, using a managed competition approach to improve efficiencies and lower costs, or using gainsharing to promote improvements and lower costs through employee suggestions and initiatives.
We understand that the City Auditor’s Office previously examined the concept of contracting out the solid waste function, but the idea was dropped due to concerns about displacing public employees.
However, the consulting team presents this concept for reconsideration because of the opportunity to lower costs or increase revenue. As an example, contracting residential collection would enable the City to negotiate a franchise fee from the company selected for the contract. For instance, the City of San Bernardino recently negotiated a 20% franchise fee when it contracted its solid waste operations. However, San Bernardino’s contract involved both residential and commercial collection, and commercial collection is generally thought to be more lucrative. Consequently, the percentage Sacramento could negotiate is likely to be lower because it would only involve residential collection. We estimate Sacramento could negotiate a franchise fee of approximately 15%, which would generate additional net revenue in the range of 4%, because the Solid Waste Fund already contributes an 11% franchise fee to the General Fund. This is estimated to generate an additional $2.6 million of ongoing revenue to the General Fund. As has been discussed previously, the franchise fee is being challenged legally under Proposition 218. A franchise on a private contract is not subject to 132
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
115
Proposition 218 restrictions. If the City’s existing fee is successfully challenged, this strategy would increase exponentially in value.
We also believe Sacramento could negotiate other substantial revenues from a prospective contractor, including both one-time and ongoing revenues. Some examples of these additional revenues are outlined below.
Purchase of Equipment and Other Personal Property. This involves the contractor purchasing most or all of the City’s personal property (excluding real estate) used to provide residential collection services. San Bernardino (a city 56% smaller than Sacramento) negotiated a one-time payment of $12.2 million for this personal property. However, this included property related to both residential and commercial collection.
Scaled to Sacramento, we estimate this could result in one-time revenue in the range of $13 to $15 million.
Procurement and Transition Reimbursement. This involves reimbursing the City for its costs to undertake the procurement and transition to the contractor. Based on the San Bernardino example, where the City received a $250,000 reimbursement, we estimate that Sacramento could warrant a reimbursement of $600,000.
One-Time Franchise Payment. This involves negotiating for a one-time payment to the City for the right to provide solid waste services, which in San Bernardino amounted to $5 million. Scaled to Sacramento, we estimate this could generate a one-time payment of $6 million in addition to the annual franchise fees discussed previously.
Infrastructure Repair Fee. This requires the contractor to pay an annual fee to assist the City with maintaining its streets and roads, given the wear and tear caused by the contractor’s refuse vehicles. San Bernardino received $250,000 annually which, scaled to Sacramento, would amount to an annual payment of approximately $600,000.
Based on the foregoing, Management Partners estimates the City could generate from $1.9 to $3.2 million in on-going revenue and from $19.6 to $21.6 million in one-time revenue as shown in Table 19.
Table 19. General Fund Revenue Estimate for Solid Waste Contract Revenue Type Ongoing Revenue (in millions) One-Time Revenue (in millions) Annual franchise fee* $1.3 to $2.6
Purchase of equipment $13.0 to $15.0
Procurement and transition reimbursement $0.6
One-time franchise payment $6.0
Infrastructure repair fee $0.6
TOTAL $1.9 to $3.2 $19.6 to $21.6
* Net revenue in addition to the existing 11% franchise fee paid by the Solid Waste Fund. 133
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
116
Achievability
The City will need to navigate its internal rules and practices with respect to contracting and outsourcing. It is also possible that this recommendation could require collaboration with one or more of the City’s labor associations. The achievability of this strategy is considered to be low to moderate due to the magnitude of the changes and the number of unknowns it involves.
Background/Analysis
While our scope did not include a detailed analysis of solid waste operations, our interviews with Recycling and Solid Waste Division staff and our experience with other cities suggests that there are several opportunities to reduce costs and improve service associated with the City’s solid waste operation.
Modern solid waste operations are designed to meet two primary objectives: cost-efficient operations and high levels of waste diversion from landfills; i.e. efficiency and effectiveness.
Alternative – Contract Out Residential Collection
The City currently uses in-house crews for residential collection while, as noted previously, commercial, industrial, and institutional collection are performed by private companies.
The trend in California in recent decades has been away from using city crews for refuse collection due to the costs of government employees and benefits. Most large cities in California use contractors for solid waste collection. Examples include San Jose, San Diego, San Francisco, and Oakland. A primary opportunity for improvement would be contracting out or franchising a portion of or all of the residential solid waste collection function.
Recent examples of cities that transitioned from city crews to contractors include the City of Hemet, which in 2011 contracted its solid waste service to CR&R Incorporated. Newport Beach is another example, contracting its residential solid waste services (commercial service had already been contracted) in 2013 (also to CR&R). San Bernardino contracted its solid waste, street sweeping, and right-of-way cleanup in 2016 as a single package of services to Burrtec Waste Industries, as a requirement for reducing costs and exiting bankruptcy.
Private haulers that serve multiple jurisdictions bring economies of scale in several areas including capital acquisition, fleet maintenance, workers’ 134
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
117
compensation, employee recruitment, safety and training programs, customer service/billing, technology, and management.
With state recycling requirements that have been in place for over 25 years, refuse haulers have gradually expanded their businesses to include materials sorting, recycling, public education, and in some cases, street sweeping and other related services, working in partnership with individual cities and counties. In addition, the more sophisticated companies use specialized routing systems to reduce travel times. They track and closely monitor performance measures based on their experience.
Given the expertise developed in many jurisdictions and by these waste companies, and the economies of scale that large operations can provide, it is likely that contracting these services to a private company will result in lower or similar costs to provide the service, and new franchise and a variety of one-time fees for an exclusive agreement with the City.
Another advantage of contracting refuse collection service is that it reduces the operational complexity and scale of services that the City must manage. By contracting for these services, the City would reduce its day-to-day responsibilities. This allows city staff to focus on the strategic elements of waste management.
Cost Effectiveness of Contracting
Considering the challenges related to the City’s budget, the likelihood of continued rapidly increasing personnel costs driven largely by CalPERS increases, and the significant savings that can be realized by contracting with private companies, City leaders should investigate options for contracting solid waste services to private providers. Contracting would insulate the City from the pension increases that it will face in the coming years. Most cities have found that the fully burdened costs of labor (including long-term pension costs) and the full cost of maintaining an up-to-date fleet exceed the cost of contracted operations.
Sacramento has a robust commercial market for solid waste services, with the commercial market served by Waste Management, Republic, and Atlas. The City could solicit proposals from private partners to at least benchmark the market price for all or, potentially, some subset of solid waste services. This could be done using a managed competition model that engages public employees as a potential vendor, either with or without a gainsharing component.
The decision to contract a service as critical as solid waste collection requires policy discussions, a preliminary cost analysis and careful 135
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
118
planning. Further, in deciding to contract, City managers are able to determine the terms of the relationship with its contractor, requirements for employing City staff, the cost for use of City streets, and diversion standards and requirements. The best way to evaluate the potential cost savings of contracting and cost impacts to customers is to prepare a request for proposals and seek competitive proposals from private companies.
Potential Revenue
In addition to better controlling City costs, including pension costs, outsourcing the solid waste function has the potential to increase on- going revenues through franchise fees, street repair fees, and one-time revenue related to an upfront franchise payment, selling equipment, and offsetting the City’s transition costs.
Issue a request for proposals (RFP)
to obtain competitive proposals for solid waste collection and recycling services.
Alternative – Use Managed Competition Approach in Solid Waste
Managed competition is a process designed to allow private sector vendors to compete with public sector organizations to provide services in the most cost-effective way possible. The goal is also to encourage vendors and the public sector organization to identify ways to improve efficiency and service to the public at the lowest cost.
A number of cities across the country have used a managed competition approach for solid waste services, including the cities of Phoenix, Arizona and Chesapeake, Virginia.
The financial benefits of a managed competition approach are difficult if not impossible to estimate properly because they depend on many unknown variables including the amount of the cost proposals that would be submitted from prospective vendors and the public sector organization.
Alternative – Use Gainsharing Approach in Solid Waste
As discussed earlier in this report, gainsharing is an approach that creates incentives for improved performance through the structured involvement and participation of employees. As performance improves, and costs are lowered, employees are able to share in a portion of the savings.
Gainsharing presents another alternative for improving services and lowering costs in the solid waste function. In fact, solid waste is one of the 136
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
119
key areas where gainsharing has been successful in other communities.
However, estimating the financial benefits of gainsharing is not possible at this point. Developing such an estimate would require working with employee stakeholders to identify productivity improvements that lead to cost savings.
Other Solid Waste Changes to Improve Operational
Effectiveness
Though Management Partners recommends the City consider contracting out its solid waste function, we acknowledge this would be a major change and would be challenging in terms of transitioning the services and addressing concerns about displacing City employees. Consequently, if the City decides to continue directly providing solid waste collection services, there are many operational improvements that should be implemented.
One efficiency relates to the work schedule. For example, the Division is exploring whether to move from a 4 x 10 workday to a 5 x 8 workday.
Given the strenuous nature of solid waste work, a 5 x 8 workday makes more sense because worker productivity typically falls late in the day due to the difficult work. We note that one advantage of the current 4 x 10 schedule is that it reduces the number of weekly mobilization/ demobilization cycles from 5 to 4, and this has a positive effect on productivity. Nevertheless, though employees probably prefer the current four-day work week, the current model results in workers picking up refuse from as many as 1,200 houses per day and this exacerbates the productivity challenge.
During our interviews, staff noted that the existing routes are now out of balance due to changes in development patterns. Therefore, an updated re-routing analysis is also necessary to consider transit times to landfills, transfer stations, and other disposal sites.
Conduct a re-routing exercise to
balance routes, workload, and tonnage on a periodic basis.
Further, modern solid waste systems allow all trucks to be monitored in real-time including their location and documenting each location where the loading mechanism is activated. These additional data figures can provide day-to-day assistance for managers overseeing the program.
Utilize Global Positioning System
(GPS) to monitor efficiency of refuse collection trucks. 137
Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
120
Innovation Strategies
The efficiency strategies in the preceding section focus on ways to reduce costs, raise revenue or both. Finding long-term structural solutions to improve Sacramento’s financial outlook is the primary purpose of Management Partners’ work on this engagement.
However, the City Auditor’s Office also requested we include analyses of other improvements or innovations that would enhance organizational effectiveness. In some cases, these innovations are likely to have positive financial implications. However, estimating the financial benefits is often less straightforward or not possible given the available data. In some cases, more in-depth analysis would be required to develop a reasonable estimate than was possible under the current scope of work.
138
Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
121
I1. Improve Fleet Procurement
Strategy Type
Process Improvement and Service Delivery Change
Impact Estimate
Analysis of fleet operations indicated that several innovations are possible. Much of the fleet is composed of older vehicles and the City may be able to reduce maintenance costs by having a more current fleet, which may require rethinking the current “pay as you go” funding approach. Other improved management techniques might also be adopted as noted in this discussion.
Achievability
The City and Fleet Management take justifiable pride in using pay-as- you-go funding to replace the fleet. Sacramento, in its efforts to be a good financial steward, seeks to avoid debt and leverage to the extent it can. As a result, we anticipate there will be potential pushback from those who want to avoid adding debt to the City balance sheet. In anticipation of that concern, we have suggested that this strategy be used only on a limited and case-by-case basis. Implementing this strategy is highly achievable.
Background/Analysis
As discussed previously, the City Auditor’s Office conducted two audits pertaining to the City’s fleet: an assessment of the use of light-duty vehicles in 2011, and a review of the fleet in the Utilities Department in 2019.
During our interviews, Management Partners learned that Sacramento’s capital fleet needs are managed on a pay-as-you-go (i.e., cash) basis, a process that eliminates interest expense. We also learned, however, that Fleet Management’s user departments have a number of vehicles that have reached the end of their useful lives and need to be replaced. Due to a lack of capital funding, those vehicles are being retained in the fleet.
This practice results in higher maintenance costs.
During our interviews with the departments, we were also told that the shortage of replacement vehicles sometimes results in the need to rent equipment rather than buy it, even when buying would be more cost effective. Public Works staff specifically mentioned a need for additional light-duty vehicles and expressed concern about the life cycle costs for some older vehicles. This issue may be partially solved by better 139
Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
122
management of take-home vehicles, as discussed previously in this report.
Fleet Replacement Planning, Funding and Optimal Surplus Point
An effective fleet replacement program has three components:
• A replacement planning process that projects when each vehicle and equipment should be replaced and its projected cost, • A financing and funding process that ensures there are sufficient funds available to purchase vehicles and equipment when the replacement date is reached, and
• Procedures and criteria to identify which vehicles and equipment should actually be replaced given the available resources.
Each of these components is described below.
Fleet Replacement Planning
The City’s fleet of 2,433 units is comprised of 2,179 on-road vehicles and 254 off-road units. A total of 1,632 units (roughly 67% of the fleet) are less than 10 years old, while the remainder of the fleet, numbering 801 units (15% of the fleet) is more than 15 years old. Table 20 shows the age and number of fleet units that range between 5 and 20 or more years.
Table 20. City of Sacramento Fleet Age
Fleet Age Number of Units Percent
5 Years or Less 1,023 42%
6 to 10 Years 609 25%
11 to 15 Years 428 18%
16 to 20 Years 219 9%
Over 20 Years 154 6%
TOTALS 2,433 100%
Typically, public agencies establish replacement criteria that take into consideration years in service, as well as miles or hours driven.
Sacramento appears to use both miles and hours, except for construction equipment for which usage data are not available.
For the most part the City’s life expectancy mileage intervals are comparable with other government agency intervals for sedans and light- duty trucks. However, some medium-duty trucks appear to have replacement intervals that exceed those typically practiced by most government agencies. In addition, some heavy-duty and construction- 140