City lay-offs appear imminent thanks to troubles on Wall Street
and falling tax revenues.
City lay-offs appear imminent thanks to troubles on Wall Street and falling tax revenues.
The council will discuss cuts Nov. 5 after voting 6-0 Monday night to buy back $42.7 million worth of auction rate notes it -issued in 2003. Councilman Perry Woodward was absent.
The $42.7 million figure represents the amount Gilroy still owes investors after issuing nearly $46 million worth of notes in 2003 to fund the construction of the Sunrise Fire Station, the new police station, the sports complex and improvements at the corporation yard. The city had the cash for the projects back then, but rather than spend its own money, it opted to externally finance the projects and pay a lower interest rate to investors than it expected to earn on investing its un-spent reserves in securities and federal bonds.
The gamble – which netted the city more than $600,000 – panned out until a few weeks ago, when interest rates on the notes shot up as jittery investors could not sell them and were required to keep them, triggering automatically higher interest rates based on a weekly index. Gilroy only has $152,000 per month budgeted for the interest payments on its notes, which anticipates an annual rate of about 4 percent, but the weekly rates shot up from about 3 percent to nearly 12 percent, and now hover near 8 percent, according to Craig Hill, the city’s financial adviser who works for San Rafael-based Northcross, Hill & Ach.
“In a mater of weeks, we’ve all had heart attacks and come back down,” Hill told the council Monday.
But the city’s unions are still having heart attacks as they prepare for lay-offs that City Administrator Tom Haglund said the council “needs” to consider.
“It’s at our doorstep, and it’s because the previous city manager and councils have made some really fiscally irresponsible decisions,” said Tina Acree, business agent for the local chapter of the American Federation of State, County, and Municipal Employees, which represents 126 Gilroy employees that include the city’s equipment mechanic, building inspector and deputy fire marshal.
“When you gamble, whether it’s in Vegas or on Wall Street, it’s a gamble – there are no guarantees. And in this situation, it’s not solely the employees who will suffer, but the entire community,” Acree said. “I guess we don’t all know the ebbs and flow of a market.”
Buying back the city’s notes will cut the general fund reserves from $16.6 million to $14.2 million – down from $26 million a year ago – and it will also lower Gilroy’s investment portfolio balance from $60.7 million to $17.3 million. The council also heard from staff that this year’s general fund deficit would likely balloon from $3.9 million to nearly $6 million thanks to lower-than-expected revenues and shrinking sales and property tax receipts. September sales tax receipts, for example, fell $428,618, or 38 percent, compared to September of last year, according to city figures.
Despite the gloomy projections, firefighter Jim Buessing, who represents Gilroy Fire Local #2805, said there were too many variables at this point to say whether lay-offs were definite.
“Everything is pretty much wait and see. The council is blind as to what any forecasts may be until Nov. 5, and the market’s still playing around,” Buessing said, adding that the potential sale of Gilroy Gardens could relieve tight funds, but if there are lay-offs, every department will be affected even though the police and fire departments account for about $28.8 million, or 74 percent, of general fund expenditures.
“I would expect all the departments are going to make some cut backs, but what those are going to be and how deep they are is to be determined,” Buessing said.
Acree disagreed and said AFSCME and the city’s Management Association, which represents 35 employees, will bear the bulk of cuts.
“I don’t think police and fire will receive the same percentage of hits,” Acree said. IT Director David Chulick, who serves as presidents of the management group, did not return messages.
Police Officers Association’s President, Cherie Somavia, sided with Buessing and said each department will take a hit, but noted that nothing is final as of yet.
“There’s a whole lot of uncertainty, but there’s also a belief that no matter what scenario occurs, it’ll result in some kind of lay-offs across the city and probably in the police department, as well,” Somavia said. “We don’t really have anything to say to anybody now because there are a lot of speculation and rumors.”
There is also speculation in the marketplace, and the national credit crunch coupled with the city’s creditor, MBIA, slipping in its rating have also prevented Gilroy from being able to secure a letter of credit to refinance the notes and re-sell them on the market. Finance Director Christina Turner said she hopes refinancing could happen by December 2009.
“This is like a temporary time-out in the hopes that we’re able to refinance,” Turner said. The worst case scenario, though, would be an inability to refinance due to market conditions, in which case the city would be stuck with its own debt and would have to find a way to pay itself back.
The roughly $43 million will come from the city’s water and sewer funds, which have about $39 million in them. There’s another $4.2 million in another sewer fund, and finance officials plan to pool about $39.8 million from these three sources and then take another $500,000 from a separate debt fund and the remaining $2.4 million from the general fund reserves.
With all these numbers swirling around, Mayor Al Pinheiro encouraged calm dialogue among the unions and the council, but made it clear Monday that everyone should brace for lay-offs.
“We need to work together and think of what’s best for community in general,” Pinheiro said.
