The Morning Report
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Friday, April 07, 2006 | Months after winning an election singularly focused on the ragged state of the city of San Diego’s finances, Mayor Jerry Sanders on Thursday offered a new, upbeat assessment of the city’s fiscal future and his upcoming 2007 budget.
Without offering much detail, Sanders pleasantly characterized the fiscal year 2007 as a stabilization period in which the city will begin to address its multibillion dollar pension and retiree healthcare problems, a monumental deferred-maintenance backlog, depleted emergency reserves and other long-neglected needs. And he made it sound like it wasn’t going to be all that tough.
Indeed, his chief financial officer, Jay Goldstone, suggested that the talk of a San Diego fiscal crisis was more media noise than reality.
The tone of the speech reflects a decided shift from a man who essentially portrayed city finances as broken during his campaign for mayor, going as far as to say he would choose bankruptcy by May of this year if unions failed to concede to his wishes, and who spent much of his first four months in office highlighting the failures of prior administrations.
“The city’s problems are very manageable,” Sanders told a friendly lunch crowd at the Catfish Club. “I want to be clear on that. Bankruptcy is not on the horizon.”
The speech came in anticipation of the release of the mayor’s budget and overall financial recovery plan, which is slated to be slowly unveiled throughout next week. Sanders and Goldstone offered few specifics, and instead issued only broad “budget principles” by which the new budget will be guided.
He listed the winners of this year’s budget, such as public safety, the pension system and potholes, without divulging any losers.
The administration has ruled out tax increases and didn’t give any hint of cuts to come, instead saying only that it expects surplus revenues driven by a strong local economy to fuel a budget that will begin to inject funds into a number of neglected budget corners.
The administration expects property taxes to continue to increase by 8 percent annually in fiscal year 2007, as it has on average in the last five years. However, with increased worries surrounding inflation and a cooling housing market, the possibility exists that property taxes won’t continue the rise of the past half decade.
In recent years, jobs and public services have fallen by the wayside despite a strong local economy and a red-hot housing market as the city’s pension costs have increased substantially. Libraries, parks and other vital services have seen reductions, and hundreds of jobs have been slashed from city’s rolls.
This year, for the first time in a number of budget years, the city’s legally mandated pension payment won’t increase substantially because of the terms of a legal settlement, a detail that provides the administration some breathing room in its short-term budgeting. But that break is essentially a temporary reprieve, as the system will begin calculating its liabilities more conservatively no later than fiscal year 2009, when the city’s annual payments are again expected to rise considerably.
Sanders attributed his change in tenor to having the “true numbers” in the budget after taking the helm in December.
But Sanders and his chief financial officer didn’t deny that there were problems.
“We’re trying to deal with this in a methodical fashion. There are a lot of problems out there,” Goldstone said.
The mayor said he will unveil pension solutions on Monday that will go above and beyond the city’s annual payment and are expected to use a number of different leveraging mechanisms to inject cash into the system immediately. Such methods are predicated on the hopes that borrowed money reaps higher returns than the loan’s annual payment.
The pension system is central to the city’s financial struggles, as it carries a deficit that’s estimated to be at least $1.4 billion, dominated the discussion in the mayor’s race and threatens to consume budgets for years to come.
This year, the pension system handed the city a $162 million bill, a number that is widely accepted as artificially low because of a 2004 legal settlement. Experts say a payment of more than $200 million would be needed to keep the deficit from growing larger.
Goldstone appeared almost nonchalant about the pension system, saying he didn’t believe it needed to be fully funded. The city’s system is currently about 68 percent and the industry generally considers funds that are better than 80-percent funded to be sufficiently healthy.
Sanders predicted that he could return the city to good financial ground by the time his first term concludes.
“It will take the full three years of my term in office to return the city to financial stability,” he said.
The administration has promised that this year’s budget will be the first simple, honest and readable budget to come from the city in recent years. For example, Goldstone said his staff has found 259 unbudgeted positions within the city that were never recorded in the budget, nor approved by the City Council – jobs that he said cost $32 million. The jobs were paid for by unbudgeted revenues, he said.
The office has also implemented “business process reengineering,” a process that essentially reevaluates the city department-by-department in order to squeeze out savings.
Sanders said staff has completed the process on two city functions and reported savings of $1 million and $8 million in the city purchasing and contracting departments, respectively. He said that savings will be applied to a number of the city’s unfunded needs, such as the retiree healthcare benefit, which carries an additional deficit of nearly $1 billion.