An Open Letter to Mayor Rennie Regarding Measure G—Facts matter; Transparency Matters and Honesty Matters!

October 24, 2018

Dear Mayor Rennie,

Thank you for your reply to my email. I was surprised to learn you have been aware for years of the purposeful overstatement of salary and benefits expenditures by millions of dollars in the approved budget. It is deeply disappointing that you did not take action upon learning of it. More troubling is that you seemingly do not grasp the material harm this practice has inflicted on the Town’s residents by preventing the Council from allocating the Town’s financial resources properly and effectively. You are fully aware that salary and benefit expenditures are the Town’s single largest expense and accounts for almost 45% of the Town’s expenditures. Getting this right is critical.

I am copying the entire Town Council because you have made the serious claim that all of the Council Members were fully aware of this practice. To be clear, it is your assertion that the entire Town Council was fully aware of the practice of padding the annual operating budget for salaries and benefit expenditures by millions of dollars every year. Knowing this practice was in place, you are saying the Town Council every year passed a resolution adopting an annual budget that had a material overstatement of salary and benefit expenditures and never disclosed to the public the magnitude of this overstatement.

The overstatement of the budget for salaries and benefits by millions of dollars intentionally misled the residents into believing the Town would require additional tax revenues in order to fund, “essential Town services” such as public safety, community development, parks and public works as well as fixing potholes and improving traffic flow. This is exactly the claim made in the ballot language for Measure G and was also put forth in the Town Manager’s budget transmittal letter to the Town Council (reference page A-4).

Apparently you and the Town Council knew that the salary and benefit expenditures budgeted to deliver these “essential Town services” was purposely overstated and was never meant to be spent. And knowing this, you and Council Members Jensen and Leonardis still put forth this false narrative claiming in the ballot argument that the current revenue levels are insufficient to pay for “essential Town services”.

Additionally this practice grossly misrepresented the financial condition of the General Fund by projecting lower budget surpluses than what the Town Council really knew would occur.

This strikes me as a massive violation of the public trust. As Mayor, why would you think that this was good public policy?

In my prior email I documented the magnitude of this practice. During your term on the Town Council I have calculated the cumulative overstatement of the budget for salaries and benefits was $9,506,860. To put this in perspective, each year this would equal to three or four times the proposed sales tax receipts assuming sale tax receipts of $800,000 per year. This practice would allow the Staff and Council at the end of every year to make the misleading claim that they significantly under-spent the budget, even if every other budget category was over-spent.

By adopting the overstated annual budget the Council was essentially representing to the public that this padded level of salary and benefits was required to ensure the residents would receive the “high level of services” they valued and to keep their “unparalleled quality of life” intact. But in reality, the Town Council knew that this money would never be spent because it was “cushion” and therefore not needed.

This misleading narrative didn’t stop at the adoption of the annual budget. It continued through the mid-year budget update process. I want to remind you that at the last Council meeting, the Town Manager made much about how everyone would have a chance to review the budget performance at the mid-year review. Much was said about transparency and the ability to make mid-year adjustments based on the mid-year performance analysis. In order to verify this, I performed a review of the mid-year update for FY 2016.

It was necessary to choose FY 2016 because the format used for the adopted budget and the mid-year update were consistent. In later years the Staff changed the format for the mid-year update, thereby making comparisons almost impossible. Please see the attached analysis.

The first page is the adopted budget for the general fund for FY 2016. You can see that salary and benefits were budgeted that year to be $23,179,753.

The second page is the mid-year update that was presented in Q2 of FY 2016. The last column on this schedule presents the Staff’s projection for salary and benefits for FY 2016 as of the mid-year update.  As of the mid-year update, the Staff strangely projected that the salary and benefits will be slightly MORE than the adopted budget, forecasting $23,203,333.

The third page is from the FY 2017 budget and it shows what actually happened in FY 2016. You can see that in reality, salary and benefit expenditures came in under the mid-year update forecast by $2,286,574. How did that happen with only 6 months remaining in the fiscal year?

Given this, it is a very fair assumption that the Staff (and perhaps the Council) knew at the time of the mid-year update was prepared that the salary and benefit expenditures were massively overstated from a budget perspective. But instead of telling the public this, there was no disclosure at all. A review of the video of the Town Council session when this analysis was presented convincingly demonstrates that the Staff made no disclosures and the Town Council made no inquires. There was a total cone of silence.

The consequence of this overstatement was that the public continued to believe that the Town was “on track” to spend approximately $23,203,333 for salaries and benefits for “essential Town services”. Additionally the public was lead to believe that there would be a slight General Fund surplus $995,720 for the fiscal year, when in reality it would be in excess of $3,200,000. This lack of transparency denied everyone the ability to reallocate available funds to other essential needs, such as repairing potholes and improving traffic flows.

In closing, there is much that you and the rest of the Council need to explain to the public. I am glad we have an election in 2 weeks and sincerely hope you explain why you allowed this misleading and harmful budgeting process to continue and how you intend to fix it, if you are re-elected.

Once again I will remind you that facts matter, transparency matters and honesty matters. The current budgeting process fails all three of these tests.

 

Phil Koen

3 Responses

  1. Joe Sordi

    I thought an explanation of this was given by the town manager at the Oct 16 meeting. Essentially, it is to have on have monies on hand to properly conduct future negotiations with unions and to fulfill possible unfilled staff positions.
    In any event, if this is something not new to current administrations and staff, then I don’t see excoriating current Mayor, TC, and staff for what has been an ongoing policy.

  2. Anonymous

    Hi Joe,

    Again thank you for your post. In my opinion the explanation that was given really doesn’t make any sense. Let me explain why.

    The budget for salary and benefits is based on an authorized headcount (whether filled or vacant) of 159 people. That is the maximum number of full time employees that is authorized under the 2019 budget.

    Based on this 159 headcount, the staff creates the budget for salary using the highest pay level for each position, regardless of each individual’s actual pay rate. For example a police officer at the introductory step 1 pay level makes $49 per hour. At the maximum step 5 pay level the rate is $59.56 per hour. There is a 20% premium between the step 5 pay level and step 1 pay level.

    By intentionally building the budget based on the highest pay level the staff over states the actual salary expense and creates a spending “cushion”. This cushion has historically been around $2.5m each year for the past 4 years. This is a lot of money.

    Obviously if the position goes unfilled, there will be a benefit from that. As I understand it there are less than a handful of unfilled positions at any time. If we assume the worst case that 5 positions are unfilled for the entire year at a salary of $130,000 each, that only accounts for $650,000 of the $2,500,000 cushion.

    Regarding the claim that there needs to be money on hand for future negotiations with the unions, that also makes no sense. The annual budget explicitly stated that the budget for salary and benefits did not include any money resulting from pay increases from the union negotiations. In fact at the October 16 meeting the Town Council passed resolutions increasing the budget for salaries and benefits by $1.5m as a result of the recently completed negotiations. The original budget never intended to have money for pay increases included.

    So, what does this all mean?

    In a nutshell the Town Council purposely over budgeted salary and benefit expenditures by millions of dollars and never disclosed this to the residents. They denied all of us the opportunity to have this excess properly allocated to other critical spending needs, such as road repair or traffic calming measures. The residents were repeatedly told that there wasn’t any additional funding for anything, when in fact there was approximately $2.5m.

    To me this was wrong and that is why I wrote my open letter to Mayor Rennie.

    I hope this helps explain the situation.

    Phil

  3. Jak

    October 31, 2018
    Good Afternoon Joe, Jak here,

    I read your statement about “excoriating” and will respectfully disagree with that as a description of what we have been doing. Let me give you some background in addition to what Phil has said. Facts and Truth can be more excoriating than fabrications and deception once you understand that you’ve been duped by people with whom you have placed your trust.

    We first recognized a problem with the town’s finances over 2.5 years ago when Phil realized that the town was roughly 2 years out of compliance with GASB 54 (Government Accounting Standards Board). He had to have extensive “discussions” with not only the town’s Director of Finance and the Town Manager, but also with the town’s auditor. After many long conversations and painful discussions, the Town Manager, the Director of Finance and the town’s auditor all admitted that Phil was right. They had been out of compliance for years even with the auditor looking over their shoulder. Since then, many other issue have surfaced. The letter to Mayor Rennie is a recap of the most egregious and seriously deceptive financial problems we have found to date.

    For background, Phil was a public company CFO and CEO and currently serves as a Chairman of the Board of a local corporation. We did not know each other when we started this endeavor. But we had a common interest to determine how much was right, or wrong with the way the town had been conducting business with the taxpayers money. We were finding questionable practices that needed a spot-light shined on them. The Open Letter to Mayor Rennie is the latest.

    Our information that you see published is obtained from the Town’s Consolidated Annual Financial Reports (CAFR) that are audited and filed with the state. And the best practices are published in the Government Finance Officers Association (GFOA). I would say from my layman’s standpoint, the town tries, but fails and uses budget measurement metrics that I cannot find within any reputable accounting system, and certainly does not get mentioned in the Best Budgeting Practices as published by the GFOA. More on that in our article on https://lg-ca.com/why-does-the-town-measure-performance-using-budget-numbers/

    We have tried to work with the town, but proving the town wrong on GASB 54 was the beginning of a strained relationship. You are right in that the town (most of Council and all of staff) seemed to have stopped listening to us, but in retrospect, they weren’t listening when Phil first figured out the GASB 54 problem. Things haven’t changed much. Few on the Council acknowledge the problems and staff doesn’t listen, so we decided to let the public decide by outing the information we have found. The numbers are the numbers and can be verified using the town’s own data. We’ll also be glad to further explain anything you (or anyone reading this, including the Staff and the Council) do not understand.

    It’s now up to the Court of Public Opinion to determine if they have been deceived by the Rennie, Jensen, Leonardis sales tax measure, or not. We look at these three council people as the typical politicians who need more and more money regardless of ho much they have currently or how much will be coming into the account in the next few years..

    The town can amass money and the town can invest it at 1.0% – 1.5%. But is that a good practice?

    The town can make whatever payments they want to pension debt (as long as it is over the minimum) and incur debt at 7.5%. But is it a good practice when you have $16,000,000 in cash?

    Phil’s whole letter was to essentially ask the public, “Why Would You Accept This Kind of Action by The Council and the Staff”? More importantly, “Why Would Rennie, Jensen and Leonardis want a sales tax in addition to the $16,000,000 the Council amassed in just 4 years? And why did they not tell us that the town has more cash (on a per capita basis) than any other town with 60,000 or less population except property-tax-rich Los Altos”? Why have they been so deceptive to the public they serve? When Phil publicly reminded the Council and Staff in a June 5th Council meeting that they were amassing cash for at least 4 years, why were they asking to tax us even more after he showed them the proof?

    It’s not like we haven’t been proactive. We have met with all of the Council people many times. We have religiously attended the Finance Committee meetings. Phil has offered to tutor the Council as a group or individually to help them understand government finances. Unfortunately that has not worked, so we have now decided to go to the Court of Public Opinion to let the public decide.

    Keep this in mind.
    • The town will get $7,200,000 from SB1 (2017).
    • The town will get $100,000 every year from the land sale of the first section of the North 40.
    • That will happen again when the north section sells.
    • The town will get two huge bumps with the construction of 300+ market rate units hit the market
    • The town will get another huge bump when they build the 450,000 square feet of commercial businesses!.
    • The town will get $572,000 every year for the next 30 years with measure B which has just passed through the court systems
    • The town just received a $700,000 IDEA grant for traffic signals.
    It goes on and on.
    • With all of this money coming in, and the Council knew all of this, why tax us even more??

    In short, Rennie, Jensen, Leonardis and the staff have not told you the truth by not telling you the whole story.

    If they omitted these facts, how many more have we not found?

    We’re just two Los Gatos residents fed up with the lack of transparency and honesty.

    If this is excoriating, then so be it.

    My preferred phrase would be, “Whistle Blower”

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