Open letter to the mayor and council members of Half Moon Bay

Letter

Posted by
Wed, February 4, 2009


Dear Mayor Muller and Council-members,
I am a 14-year resident of Half Moon Bay and retired business executive.  I have followed developments in the Beachwood matter and it seems clear that we are on the brink of discovering whether we can continue our normal Coastal lifestyle, in the City that we all love, or whether we are destined to be a bankrupt entity, with the stigma and financial stresses that are manifest in such an event.  I am a homeowner and I have little desire to see my home value decline, nor experience the loss of services and other negative impacts that would result from a City-filed bankruptcy.  I am sure that all responsible Half Moon Bay residents share these feelings.

Absent any fairy dust coming our way from either Sacramento or Washington, despite the large amounts being generated for other needs, it seems that we are on our own to resolve our situation.  "Our situation" is not only the Beachwood matter, but also the significant shortfall in budgeted operating revenues, already announced as $920,000, but which I suspect will creep much higher ($1,500,000?) given the stagnant state of the economy.  It could be, that on an annualized basis, we find ourselves $2,500,000 - $3,000,000 in the hole (half for the Beachwood settlement under the existing terms and half for the operating shortfall, in conservative round figures); at least we need to prepare contingency plans for such an eventuality, which I know that the City government is doing under the Council’s direction.  This potential $3,000,000 shortfall constitutes about 25% of the City’s 2008/2009 fiscal year budget (balanced on paper at $11.65 million) - a daunting prospect.

The budget document is a comprehensive booklet, but its utility is compromised by events.  No one could have predicted the economic meltdown that has overcome the nation and indeed the world, but the assumptions in the budget, in our own little backyard, seem surreal:
 

     

  • No contingency plan for paying the Beachwood settlement; just a hopeful reliance on AB1991;

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  • Optimistic economic forecasts, including increased revenues from such forecasts (+10.5% over the previous year);

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  • Increased total spending, up about 5% (with total personnel costs up 12%, including 3% across-the-board pay increases for all personnel);

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  • Police services expenditures up 10.4%.

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All in all, when Beachwood was looming and real, let alone the standard need for prudent budgeting, the budget represents a remarkably cavalier attitude.

Total personnel costs make up about 65% ($7.6 million, including the City Attorney at $200k contracted) of total budgeted expenditures ($11.65 million), and although I am sure that this ratio is quite consistent with similar governments, the numbers are quite staggering when considering the little town that we are; some random examples:
 

     

  • There are four unions for just 50 employees;
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  • The average cost-per-employee, salary and benefits, equals about $138,000;
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  • The average cost per Police employee, including clerical, is $181,000;
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  • The Police Chief’s position costs about $275,000;
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  • The City Manager’s position costs about $285,000;
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  • City-provided health benefits cost about $1,100 per month per employee (and if an employee does not want the benefit, for any reason, or less than the full benefit, the balance is paid as additional salary);
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  • All employees receive City-paid defined-benefit pension contributions (calculated at about 14% of base pay for non-Police, and approx 32% of base pay for Police).  Upon retirement, all employees receive defined-benefit pensions, which have become increasingly uncommon in the competitive business world, even for the largest corporations, because they are so expensive to maintain;
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  • The number of paid holidays, vacation allowances and other compensatory benefits are all very generous by private sector standards.
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And, in addition, the City’s auditor has issued a "(inability to continue as a) going concern" opinion warning, which will be inconvenient when trying to sell a bond or borrow money of any sort.

What to do?  The solution will likely not be one big idea, but the sum of several ideas and actions, such as:   

     

  1. Determine if we can resolve the current Beachwood decision per the wetlands ‘interpretation’ idea that Mr. George Muteff has written about recently.  However, although he may be legally sound in his assessment, I suspect that the City’s vocal opposition residents will contest any attempt to make Beachwood developable, regardless of the merits, or the consequences for the City (such as sinking into insolvency).
  2.  

  3. Can the Glen Cree parcel be carved out and provided to Mr. Keenan for development?  This has space for 43 homes in the original plan.
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  5. Cancel plans for the community park on Highway 92, zone it/convert it to developable land and provide it to Mr. Keenan.  The proposed park will never be developed in the foreseeable future anyway, due to it’s huge development cost, estimated at $11 million (plus continuing maintenance costs), let alone finding the $3 million to buy it from POST.  Furthermore, it is unnecessary, given the fantastic landscapes which we have all around us, including quite a big ocean, miles of beaches, miles of protected bluff-tops, mountain trails, the Coastal Trail and other recreational and natural areas.  However, I recognize that this idea will not get past ("the") POST and the vocal opposition minority.
  6.  

  7. If 1, 2 and 3 are hopeless prospects, renegotiate with Mr. Keenan to reduce the amount owed.  What we have as bargaining chips are his decency in not wanting to be seen as the Darth Vader of Half Moon Bay, plus the real threat of bankruptcy, in which he would get much less, much later.  Such a renegotiation, properly handled, may result in a substantial reduction of the City’s obligation.  Plus, a full-page advertisement in the Review acknowledging the court’s decision and the City’s commitment to fulfill its responsibility.

Regardless, substantial reductions in the City’s expenditures are needed to prepare for the worst.  So, how to find $3,000,000?

Restructure the City government.  Personnel costs constitute two-thirds of the annual budget, and it is in personnel where the largest savings must be achieved.  Although virtually all employees are represented by bargaining units, a bankruptcy would cause greater losses for employees than a negotiated restructuring.  Reading the union contract agreements, it appears that layoffs can be achieved with 10 days notice and three weeks severance, a relatively flexible situation.  Although layoffs are not the desired action - other than Item 1 below - pay-cuts are preferred, while maintaining jobs:

     

  1. Outsource the Policing function to the County Sheriff, including elimination of the Police Chief position.  Target annual savings of $1,000,000 (from a budget of $4,526,862); assuming greater productivity through scale (of a larger Sheriff’s department) and more efficient management span of control.  Hopefully, many HMB officers would receive opportunities to sign on with the County.
  2.  

  3. Outsource Public Works activities; from the budget document, this appears to be somewhat outsourced now, but additional opportunities may exist.
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  5. 15% reduction in salary/wage costs for all personnel, employees and contractors, for all remaining departments.  This should equal about $400,000.
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  7. Reduce the cost of City-paid health benefits by 50%.  Assume (non Police) headcount at 35 x $1,100/month health benefit cost = $38,500 x 12 months = $462,000, of which 50% = $231,000 annual cost reduction.  This still provides for over $500 per month to every employee, which is enough to buy good coverage, still without any employee contribution.  Also, no payment to employees of unused allowances.
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  9. Reduce non-personnel expenses by 10% across the board (excluding the outsourced Policing function).  This should generate $350,000 savings.

The above items represent nearly $2,000,000 in annualized cost reductions to the City.  A couple of revenue ideas:

     

  1. An increase in the sewer charge, on the property tax bill, to equal about an average $50.00 increase in the annual charge per customer; 6,000 parcels x $50 = $300,000.  This should represent about a 15% increase in the average customer’s sewer charge.
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  3. A new parcel tax of $95.00: 6,000 parcels x $95.00 = $570,000.

I expect that both of these taxes (although maybe not the sewer charge) will require two-thirds voter approval.  Will voters vote for survival or insolvency?

Achieving all of the above, about $2,850,000, is a difficult proposition, but not impossible; and this amount may not be needed, pending a smaller bond.  Some of these ideas could be modified or replaced with others, but the point is, the status quo cannot continue.

In regards to the proposed bond measure, if the current amount ($18 million plus fees), which is impossible to float, could be substantially reduced through negotiation, and by using existing cash funds (ABAG payment, operating reserve fund, et al - maybe $7 million total in such funds) I expect that a bond, in a $5 million to $8 million range, will be possible to float, with an identified funding source to service/repay it; i.e. the restructuring and cost reductions outlined above.
Yours sincerely,

Stephen L. Waller

About the Author


Steve Waller, 59, is retired and engaged in personal investing and part-time strategic consulting, following a long career in the air express and logistics services sector.

For three years, 2004 - 2006, Waller was CEO of Midnite Express in Los Angeles, an international logistics group with annual revenues of $50 million, primarily serving the entertainment industry.

In mid-2003 he completed a yearlong strategic stabilization and turnaround assignment as the President of Global Delivery Systems - SureWay Worldwide, a $60 million specialist express transportation and logistics group based in New York City.

Prior to joining GDS, during 2001 and early 2002, Waller consulted to DHL Worldwide Express in San Francisco, as the Principal of ExpressConsult, working on strategic projects.

Until April 2001, Waller spent 26 years at DHL, joining in London, UK, and working in all aspects of the company’s operations.  His responsibilities included the opening and/or initial development of DHL in the UK, Iran and Greece in the mid 1970s.  He held various senior management positions in Europe and the Middle East, including General Manager of the UK, and European and Middle East Marketing Director.

Waller joined DHL in the US in 1981 and held senior sales, marketing, operations, aviation, strategic planning and general management positions throughout two decades of service.  These included Senior Vice President of Field Services, SVP of Network Transportation and SVP of Strategic Development.

Waller served as President of the Air Courier Conference of America (ACCA) in the early 90’s and was Chairman of it’s International Committee for several years prior to that.  He was instrumental in the aggressive advancement of express industry positions that greatly assisted the sector’s competitiveness and development.

Waller served as a director of Varsity Logistics, Inc, a Transportation Management Systems (TMS) software company for 8 years, the last year in 2007 as non-executive chairman (until its sale to a strategic buyer) and is a past member of the NCR Transportation Advisory Board.

Prior to joining DHL, Waller pursed a career in advertising in New Zealand and the UK, working for McCann-Erickson and other agencies, and as Advertising and Public Relations Manager for Glaxo Pharmaceuticals in New Zealand.  He earned a Diploma in Advertising (NZ Institute of Advertising) in 1970. 

Waller lives in Half Moon Bay, California.  He was widowed in 2008, following 35 years of marriage; two sons (30 and 29).


I don’t agree with everything that Mr. Waller says in his letter, but it’s clear that he has done his research, and he has definitely nailed three important points:

(1) The City Council’s lack of prudent planning on behalf of citizens.

—“No contingency plan for paying the Beachwood settlement; just a hopeful reliance on AB1991”

Exactly. Rather than exercise due diligence before signing the $18 million settlement agreement with Kennan, our esteemed City Council majority (Muller, Fraser, Patridge, & McClung) exercised gross incompetence by banking on a Hail Mary pass called AB1991, with no concrete back-up plan .

(2) The HMB Police Department is bleeding the town dry.

—“Police services expenditures up 10.4% [in the latest budget]”

—“City-paid defined-benefit pension contributions…approx 32% of base pay for Police…”

—“The average cost per Police employee, including clerical, is $181,000.”

—“The Police Chief’s position costs about $275,000.”

—“Outsource the Policing function to the County Sheriff, including elimination of the Police Chief position.  Target annual savings of $1,000,000 (from a budget of $4,526,862).”

Even without the Beachwood judgement, HMB was, and still is, headed down the same path towards bankruptcy as Vallejo and Gilroy and many other California cities due to excessive Police Department salaries and benefits.

(3) The City Council should consider bankruptcy as a positive tool.

—“What we have as bargaining chips are…the real threat of bankruptcy, in which [Keenan] would get much less, much later.  Such a renegotiation, properly handled, may result in a substantial reduction of the City’s obligation.”

The Old Guard City Council members’s refusal to explore bankruptcy takes that option off the table in any negotiations. This is another example of their incompetence and their failure to exercise due diligence on behalf of the citizens. Why doesn’t the Old Guard majority want to talk about bankruptcy? Because bankruptcy would put their master Kennan toward the back of the line in getting paid rather than in the front where he is now.