Budget Crisis

The San Francisco Chronicle has a good story today looking at the highest paid city employees in the Bay Area. The story warns that generous employee benefit packages that cities agreed to in the boom could lead to a financial meltdown.

"While cities can afford generous employee compensation when tax revenue is pouring in, it causes fiscal problems in lean years like this one, said Tom Davidoff, a professor at UC Berkeley's Haas School of Business.
"If I'm the mayor and I want to make the world a better place and get re-elected, I'm inclined to spend a lot of money," he said. "When there's a lot of money to spend, that's great. But the problem is that the economy tends to be cyclical."
During the dot-com and housing booms, cities were flush with cash and spent lavishly, committing to salaries, raises, benefit packages, overtime structures and staffing levels that now appear unsustainable, he said.
"It's a predictable outcome," Davidoff said. "You can fire or lay off your way out of the problem, but that's a very painful and unpopular way to go."

Oakland claims it was facing a deficit of $10 million at the end of 2007. But there is reason to believe this is deliberately -- and dramatically -- understated. With property values plunging as much as 30 percent, the city will have to refund taxes to thousands of homeowners this year. These homeowners, most of whom bought in 2004, 2005, 2005 and 2006 are paying taxes on an assessed value that can be as much as $100,000 times greater than what they can actually sell their properties for. Since these folks pay way more than everyone else, this readjustment will lead to a healthier, more equitable city. It will also lead to a poorer city.

Some reasonable people calculate the budget shortfall in excess of $100 million. If true, that means Oakland is going to be firing lots of city workers.