Analysis: Lafayette will have its hands full paying for pay raises

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The City-Parish Council’s decision to authorize $3.8 million in pay raises for the Lafayette Police Department was unanimous but not without complication. While the move is a victory for police, who said the new money was needed to stop a crisis in officer turnover, the added costs have put a spotlight on a weakening of the city‘s finances.

And there could be more pressure coming. At the next council meeting, raises for firefighters, the city marshal’s office, and other LCG employees are on the table. If all of these raises are approved, a total of $7.5 million in expenses would be added to the city general fund.

Even if these other pay raises fail, by 2022 the new pay plan for police alone will set the city general fund on track to fall below its $20 million minimum fund balance set by LCG policy.

This news may come as a surprise. A year ago the city was carrying a $50 million fund balance and generating more revenue per year than it spent. Compared with the parish budget — which is effectively zeroing out its general fund balance this year while spending every dollar that comes in the door — the city seemed flush.

But outgoing Mayor-President Joel Robideaux’s last budget taps into $11 million of city general fund balance to cover costs for 2020, and the city is projected to spend more than it generates in revenue over the next few years, decreasing that fund balance with each annual deficit. And that’s all before factoring in pay raises for police — or anyone else. 

This circumstance feels like an about face for anyone who thought the city’s financial health was strong, but a different picture emerges when we dig into the numbers. 

So what happened?

The basic story: Expenses have grown faster than revenue. 

City general fund revenue — essentially undedicated revenue available for discretionary spending — is budgeted to grow $6.1 million between 2014 and 2020, but expenses will grow $24 million over that same time period, and that’s before we factor in the $3.8 million in added costs to give pay raises to police starting in 2020. 

Revenues and expenses
City General Fund
2019 (projection)$102.5$107.8
2020 (budgeted)$101.6$112.6
Total increase (2014-2020)$6.1$24.5

With the added expense of increased police pay, the city general fund balance is projected to dip below the minimum threshold set by LCG’s fiscal policy of maintaining a fund balance equivalent to 20% of expenses by 2022. 

Budget projections with police pay raisesRevenueExpensesMarginFund Balance

The city general fund carries a minimum fund balance to maintain government operations while responding to any emergencies or unexpected expenses. And the city general fund is now on track to fall below that minimum in just two years time.

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If the council decides to also approve all of the additional proposed pay raises without doing anything to offset these added expenses in the budget, this downward trend will worsen.

Budget projections with all proposed pay raisesRevenueExpensesMarginFund Balance

In this scenario, not only will the city’s general fund balance cross the 20% minimum threshold next fiscal year, it’s projected to actually run out of money by 2023. In other words, the city would be headed quickly toward joining the parish in insolvency.

But even without these other pay raises getting approved, the city’s finances are moving in the wrong direction.

What was the biggest cost increase? Consolidation.

Some of the growth in expenses was organic, driven by the increasing cost of retirement, for example. Some of the growth was due to decisions made to give raises or increase staffing across public agencies. But the biggest increase in expenses to the city general fund stemmed from shifting more of the burden of paying for LCG’s operations from the parish to the city.

From 2016 to 2020, the city’s share of LCG’s expenses increased by almost $20 million, whereas the parish’s share fell almost $9 million. The reason for this change was a difference in accounting philosophy from the end of former Mayor-President Joey Durel’s administration to Robideaux’s on how to fairly allocate costs between the city and parish.

Because the city and parish are consolidated, they share costs for things like the mayor-president’s office, the city-parish council, public works and more. How much each pays is determined by an elaborate series of two dozen formulas called a cost allocation schedule.

Want to know more about how consolidated government works (or doesn’t)? Here’s an explainer.

In Durel’s last budget, he split many of these costs based on population, including the cost of the mayor-president’s office, the council office, the legal department, the CIO, public works, city hall maintenance, community development, and operating subsidies to the Lafayette Science Museum, the Heymann Center, LCG’s golf courses and the Cajundome. Since 54% of the parish’s population lived in the city, the city paid for 54% of these costs, while the parish was responsible for 46%.

Robideaux took a different approach. For the mayor-president’s office, the council office, the legal department, public works, city hall maintenance and community development, he allocated costs based on the relative amount of non-dedicated property and sales tax revenue, which resulted in the city paying for 81% while the parish pays 19% in the current budget. For the CIO position, for instance, he allocated costs based on the relative amount of non-dedicated sales tax, which resulted in the city paying for 87% while the parish pays 13%. For operating subsidies to the Lafayette Science Museum, the Heymann Center, LCG’s golf courses and the Cajundome, he zeroed out the parish’s share entirely and made the city responsible for 100% of those costs.

All together these shifts in policy have increased the city’s total allocation of LCG’s shared expenses 10%. Put another way, if Robideaux’s last budget used the same cost allocation schedule as Durel’s, the city general fund would have $10 million more available in its annual budget. That would be enough money to pay for all of the aforementioned raises without having to deplete the city’s general fund balance or make drastic cuts elsewhere.

To be clear, both Durel’s and Robideaux’s approaches are valid. Both plans received approval from the cost consultants LCG hires to verify that the allocation of expenses between the city and parish is fair. And both plans were approved by the council. In the end, these decisions come down to a judgment call.

But shifting this cost burden from the parish to the city has had the effect of leaving the city general fund without enough money to be able to give raises and maintain a healthy fund balance without being forced to make drastic cuts elsewhere in the city’s budget.

What’s the outlook?

It’s important to note that the city’s financial situation may not be as dire as it looks on paper. That’s because for the last few years, actual expenses have come in millions of dollars under what was projected, contributing to the buildup of what was once a $50 million fund balance. If that trend continues, it could significantly improve the financial health of the city’s general fund.

But revenues have also underperformed. The budget projects city general fund revenues growing at a rate of 2% per year. Yet city general fund revenues have only grown 2% once in the last five years. By and large, income growth has flatlined. That means accommodating increased spending could get more difficult, unless the region’s economic fortunes dramatically improve. 

There is not yet any discussion of how to offset these increased expenses, or if the incoming mayor-president or city council will be able to find new revenue or new savings to help ensure the city’s finances stay afloat.

But the debate about whether we can afford to pay our first responders and city employees fairly brings to light that while the city may be better off financially than the parish, it’s still facing significant financial challenges of its own.