To halt layoffs and rescue schools, Mayor Adams dips into little-known internal funds

By DON McINTOSH, Associate Editor

When union business manager Richard “Buz” Beetle learned late last year that the City of Portland might lay off workers in road maintenance, he wanted to know: Could the cuts be avoided by tapping reserves? Beetle’s union, 850-member Laborers Local 483, represents several hundred City of Portland employees who work on roads, parks and sewage treatment, and scores of their jobs were on the line.

Beetle knows labor law, but he’s no accountant. To look at City finances, he hired economist Peter Donohue. Donohue’s findings took the union by surprise.

The City of Portland, with an annual budget of about $500 million, was publicly proposing to curtail street cleaning, close park restrooms and community centers, and lay off 100 workers, in response to a $14 million to $28 million budget shortfall — all while sitting on a $120.6 million unrestricted fund balance and a $50 million general fund reserve.

Donohue, who’s analyzed public employer finances for dozens of unions, calls City budget documents fantasy fiction. So instead of studying budgets, he spends his time looking at the Comprehensive Annual Financial Report (CAFR), an independently audited document that bondholders, bond underwriters, and bond rating agencies use to assess a public agency’s financial position. Donohue scoured 10 years of the reports for Portland, and found steadily growing balances in the city’s eight “Internal Service Funds.”

Internal service funds are a way to account for centrally purchased goods and services, and to spread out administrative costs among City bureaus. The way it works, the City charges each bureau for facilities, vehicles, printing, technology, insurance, and human resources services that the bureau uses. So in any given year, Donohue explains, what the bureaus pay and what the City spends to provide those services should be about the same, and the internal service fund balances, which are managed by the City’s Office of Management and Finance (OMF), should tend to zero out.

But in Portland’s CAFRs, internal service fund balances have been rising. In the last six years, the City’s Technology Services fund, for example, took in $36 million more than it spent, leaving $38.9 million in “unrestricted net assets” as of June 30, 2011. The Facilities Services Operating fund took in $11.6 million more than it spent over that same time period, leaving a balance of $23.3 million. All told, the eight internal service funds totaled $120.6 million last June, having grown $54.6 million in six years.

Armed with that information, members of Local 483 began to make the obvious point, in City budget hearings and council sessions: During a budget crisis, isn’t it better to draw down internal fund balances than to halt street paving, terminate trash pickup in parks, and eliminate the Dutch Elm Tree disease program?

The union wrote a letter to City Council, and Jan. 9, the City’s chief administrative officer Jack Graham (who heads OMF) responded with his own letter to City Council, which seemed to say “keep your hands off those funds.”

“Internal service funds’ balances are needed to meet the financial obligations of the internal service providers,” Graham wrote.

Donohue, seeing the letter, was incredulous, saying the City had sworn in its CAFR that those funds had no outside restrictions on their use.

Local 483 kept at it, bringing it up at every public meeting. At length, the mayor’s office agreed to answer Local 483’s questions about the funds. Beetle, joined by union communications assistant Megan Hise, met April 9 with Mayor Sam Adams, the mayor’s chief of staff, the head of human resources, and Graham. On the assumption that “where there’s smoke, there’s fire,” Beetle smelled smoke and went looking for fire, but in the hour-long meeting, all he got was more smoke.

“We know that the city has got something in mind for this money,” Beetle told the mayor and his aides, “and we’d like to get an idea of what that is.” But they never really answered. An audio recording of the meeting shows that Graham basically re-reads his Jan. 9 letter, talks about how important reserves are to maintaining the City’s exceptional AAA bond rating, and gives a general defense of the idea of putting money aside to buy police cars and computer servers.

Then, on May 3, Adams pulled a rabbit out of a hat: After hearing months of emotional testimony from workers and the public, the mayor figured out a way not only to avoid the worst of the proposed service cuts, but also to contribute $7 million to three Portland school districts to lessen teacher layoffs. How had he done it?

The public explanation is that the mayor’s budget trims overhead and administration. Instead of cutting front-line workers who provide the services, the mayor’s proposed budget cuts whole layers of managers in some bureaus.

But wade into the nitty-gritty, and it seems that … the mayor took Local 483’s suggestion. The mayor’s proposed budget appears to draw down internal service fund balances by about $1 million, and reduce by $3.9 million what bureaus pay into the internal service funds. And it finds another $6.3 million savings in the OMF budget through such measures as “extend police vehicle life cycles” ($238,000), “reduce 1900 Bldg MM Reserve” ($210,000), line items which sound very much like tweaks to the internal service funds. Of course, it’s not entirely clear that’s what’s happening.

Seeking confirmation, the Labor Press called the mayor’s spokesperson and was referred to the OMF spokesperson, who promised that a City budget officer would call. Three days and several reminders later, the call hadn’t come.

“I think we dodged a bullet,” Beetle said, “because of members standing up and bringing attention to this early on.”

The mayor’s proposal still has to be voted on by City Council. The City is required to adopt a budget no later than June 30, the close of the fiscal year.