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Wednesday, October 19, 2005 | Voice Special Report
Editor’s Note: Each week leading up to the Nov. 8 election, the Voice of San Diego will explore a specific aspect of the mayoral candidates’ plans for San Diego’s fiscal recovery. This is part three in a five-part series. Read parts one and two.
When they began their campaigns for mayor, Donna Frye and Jerry Sanders shared a fairly similar philosophy on taxes. It went something like this: although they didn’t support increasing taxes, no potential solution could be discounted given the city’s dire financial picture. Five months and nearly two election cycles later, they couldn’t be farther apart on what has now become one of the campaign’s central issues.
The distinction between their two tax stances appeared subtle at best for most of the primary campaign that whittled the field of contenders from 11 to two.
But in a post-primary cocktail and hors d’oeuvres celebration, Sanders set the tone early for the runoff election. He told a group of loyal supporters that the choice on Nov. 8 would be simple: one candidate wanted to raise your taxes, the other didn’t.
Now that argument has entered the center stage.
Frye, a city councilwoman, floated the possibility of asking voters to approve a 10-year, half-cent sales tax increase to help bridge a budget gap ripped open by a pension deficit that’s estimated to be more than $1.4 billion.
In this low-tax city, just the mention of taxes can be life or death for a politician. And in these scandal-laced times, even as more and more observers agree the cash-strapped city needs to look at a tax increase, a public with little confidence in its government is likely to be more skeptical than usual to a tax increase.
In taking a step back from the pension system, Frye has changed the tone of her campaign in recent weeks by casting the city’s fiscal problem as much wider than just the pension system. She points to an infrastructure deficit of $1.2 billion, faltering public safety communication systems and a study that shows the city is more than $500 million short of meeting the basic needs of a big city.
It is projected the tax increase would raise about $110 million. Literature from the Frye campaign shows the added revenue from the tax increase as a key component in closing the projected $250 million gap – alongside a combination of benefit reductions, layoffs, a hiring freeze and other budgetary restructuring.
Frye says her proposal is honest about what it will take to solve San Diego’s entire fiscal problem.
“You need to hear the truth and you need to understand when you go to vote which candidate is telling you the truth,” she said at a recent debate.
Her suggestion has become an easy lightning rod of criticism for her opponent as the Nov. 8 election approaches.
“The tax increase would be used to pay for the mistakes of Councilmember Frye and her colleagues,” said Sanders, who has now flatly ruled out raising taxes as mayor.
The former police chief is no stranger himself to being labeled the friend of a tax increase. And he has embraced two lesser publicized, but controversial methods for taming a pension deficit that threatens to consume an ever-growing chunk of the city’s annual operating budget.
His stout no-tax stance appears to have largely been brought about by a last-second ad campaign launched by his formal rival Steve Francis in the primary election that accused both Frye and Sanders of seeking tax increases.
When Sanders launched his campaign, he said conditions would have to improve greatly before voters could be asked to accept a tax increase.
“Given the magnitude of the city’s financial problems, any candidate who tells voters he’s taking options off the table – such as no new taxes or fees or no consideration of bankruptcy under any circumstances – is insulting the intelligence of his or her constituents,” his campaign literature read.
“But until city leaders can convince taxpayers that city government is being run as efficiently as possible, that it is accountable to residents, and that city leaders are committed to living within their means, it is unrealistic to consider increasing taxes or fees on residents. Voters will not and should not approve any increases until trust has been restored in the city’s operations.”
The day after Francis’ ad ran, Sanders changed his tone. He took a tax increase off the table and said he would prefer taking the city into bankruptcy before asking for a tax increase.
In the July 26 primary, Sanders edged out the millionaire businessman to secure second place and a trip to the runoff election, where taxes have lately carried the debate.
By the numbers
There are as many theories on the roots of San Diego’s fiscal demise as there are zeroes in its deficits. One goes like this: City officials focused on big projects, didn’t ask for more money from taxpayers, and ended up starving other funds or offering future pension benefits in order to make do.
In May, a progressive think tank put out a study that showed that San Diegans pay substantially less in taxes, and received substantially less in basic services, than their counterparts in California’s other nine biggest cities.
It showed that the city collects an average of $464 per citizen toward its annual operating budget, whereas California’s 10 largest cities collect an average of $678 per person. Those are statistics that were a source of pride when San Diego was regarded as a model of fiscal soundness; in today’s climate they are more of a beacon for further questioning.
But anti-tax advocates say such comparisons don’t tell the true story. They say that there’s plenty of money pouring into city coffers each year that is simply poorly spent by politicians. They say the city can reduce jobs, increase efficiency and better maximize the taxpayer’s dollar.
Others say the city’s growing revenues erase the need for a tax increase.
Indeed, city revenues increased by about $40 million this fiscal year because of growth in property taxes and other areas. However, most of that new money went directly into paying the city’s ballooning pension bill. Even after increasing its pension payment about $35 million this year, the city will likely see the pension deficit grow this year.
In a campaign that’s zeroed in almost singularly on solving the pension deficit, the Frye and Sanders financial recovery plans agree on a number of things: the need for a legal challenge to current pension benefits, substantial cuts or freezes in benefits, jobs and wages, and a rearrangement of other city spending priorities.
What they don’t agree on is the size of the city’s future budget deficit and how to fill it.
The Frye camp predicts the city’s annual budget deficit will reach $250 million in the next 10 years. Officials with the Sanders campaign don’t believe those numbers, saying that they believe they can downsize and outsource sufficiently to cover the city’s pension costs.
Sanders has accused Frye of artificially inflating the numbers to justify the tax increase. Frye, borrowing a line from advisor and former mayoral candidate Pat Shea, has said the next mayor can’t simply cut their way out of this problem.
An actuary volunteering on the Frye campaign has put the pension deficit at $1.9 billion, which would increase the annual pension burden to the city’s budget. (The pension system currently reports the deficit at $1.37 billion, but that figure is predicted to grow and the system has been accused of utilizing aggressive accounting to artificially shrink the deficit.)
Frye said she plans on changing how the city pays its retiree health costs, choosing to account for all the future costs of that benefit rather than the pay-as-you go approach employed currently by the city. To date, that method has pushed the burden of today’s expenses to future taxpayers and left the city with an additional estimated deficit of $500 million for retiree health benefits. She estimates this change alone will add $50 million in expenses to the annual budget.
“I don’t want to leave you with a mountain of debt,” Frye told a group of San Diego State University students last week in explaining the possible tax increase.
Frye advisors have also said she would put a cap on salary and pension costs in order to free up cash to go toward San Diego’s infrastructure needs.
Recently, she has argued that the pension deficit is only one component in a wide-ranging fiscal crisis that extends from everything from roads and water pipes to the communication systems of the city’s public safety departments.
The Sanders camp measures the gap differently – instead looking for enough immediate cuts in the budget and outsourcing city jobs to the private sector to ramp up the city’s annual pension payments.
Sanders and his pension advisor, former Pension Reform Committee Chairwoman April Boling, hope to begin ramping up the city’s annual pension payment to between $200 million and $250 million in the next two-to-three years.
From there, the plan employs two methods to tame the pension deficit in the future.
Sanders has committed to a minimum of $200 million in pension obligation bonds and said he will consider selling “non-essential” city land in order to stabilize the pension fund.
Pension obligation bonds are also the subject of great debate. Critics say bonds only continue to push current pension costs onto future generations. Supporters say they help stabilize a troubled fund.
In the end, Sanders says there’s no way voters will approve a tax increase. Frye says she thinks they will and intends to ask if they are willing to sacrifice the services that have already begun to be cut in tight budget times.
“What type of a city do you want to live in? What type of services is it that you want and what type of services can you live without?” she asked the group of SDSU students.
Please contact Andrew Donohue directly at