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When Mayor Jerry Sanders unveiled his first budget last month with much fan fair, he and his staff characterized this coming fiscal year as a stabilizing one in the San Diego’s famous financial journey.
For the first time in recent years, there would be no significant cuts in parks and libraries. Police and fire would get funding boosts. The city would begin to get a handle on its billion-dollar pension and retiree health care deficits.
But, with the removal of Sanders’ $374 million borrowing plan for the troubled pension system, the budget remains largely a placeholder one. Although city officials said they were able to begin repairing a broken budget structure in the short time between the city’s shift to a new government and the budget season, it is a budget buoyed by a number of factors that might not stretch into future years. In the short term, it moves the city onward for another year without the pain of past budgets, but without the solutions that will be needed to keep future budgets afloat.
Even if a number of factors fall in line favorably for the mayor and the City Council eventually enacts the mayor’s borrowing plan later this fiscal year, the core issues that Sanders promised to remedy on last year’s campaign trail will remain and likely dominate a term that he’s described as the city’s “rebuilding years.”
As it stands, the city is on course to put into the pension system a payment that meets the terms of a legal settlement, but that pension hawks say falls dramatically short of what would be needed to keep the pension deficit from deepening.
And a number of issues obscured by the city’s pension drama remain creeping worries, such as the city’s depleted emergency reserves. In a report released Friday, Independent Budget Analyst Andrea Tevlin recommended allocating $7.2 million of newfound city revenue to its emergency reserves. Still, that influx would bring the city’s reserves to 2.15 percent of its general fund budget – well below the recommended level of between 5 percent and 10 percent.
“It’s a very, very serious situation,” Tevlin said in an interview. When taken together with other fiscal issues, the parched reserves could impact the credit rating the city receives when its backlogged 2003, 2004 and 2005 audits are released.
In his fiscal year 2007 budget, Sanders was able to avoid the cuts of the past because of a relatively low pension bill and increased revenues, two fortunes that are likely to change in future budgets.
Indeed, Sanders said Friday that two of the positives that kept this year’s budget manageable – white-hot revenue growth and employee wage freezes – will become challenges when configuring next year’s budget.
“Fiscal year ’07 was always expected to be a slightly easier budget year than ’06 and ’08,” said April Boling, who served as chairwoman to the Pension Reform Committee and the Blue Ribbon Committee on City Finances during Mayor Dick Murphy’s tenure.
Jay Goldstone, the city’s chief financial officer, said preliminary estimates show that pay raises due to two employee unions on the final day of fiscal year 2007 could cost $28 million in fiscal year 2008. And a one-time bump in property tax revenues for fiscal year 2007 “will not recur in future years,” according to the IBA report.
“You have to put this year in context,” Tevlin said. “It’s benefited from some circumstances that in all likelihood won’t be there for [the following] year.”
Sanders has said he will not support a tax increase to solve the city’s current problems, so next year’s obligations will have to be covered with the city’s existing revenue stream.
The new batch of city administrators put together the fiscal year 2007 budget on the run. Goldstone, brought in by newly elected Mayor Jerry Sanders to head up city finances, began in February and had a little more than two months to put the budget together. Tevlin, likewise, was a new addition in the new year, as the new form of strong-mayor government took hold Jan. 1 and called for the City Council to employ its own budget guru.
The substance and practicality of Sanders’ borrowing plan came under fire immediately after its release, causing the mayor to draw, at least temporarily, on one of his first major political and financial proposals. Three versions of the budget had to be printed because of changes that had to be made and additional information that was requested, and the Mayor’s Office was twice scolded by the independent budget analyst for making changes to the budget proposal after it had been submitted to the City Council for review.
The budget has been applauded for breaking free from a number of past practices critics say led to dishonest budgets in the past, avoiding deep cuts and beginning to address some of the city’s core financial problems. Others have said it continues past practices by failing to make the service cuts needed in order to truly address the pension deficit.
“They were handed a nearly impossible task and are doing the best they can do,” Boling said.
Goldstone said putting together the budget in the short time frame “stretched staff to the limit.”
Tevlin said although the city’s high-profile financial ills remain to be remedied in future budgets, this year’s process did allow officials to purge a number of prior practices, such as the purposeful exclusion of certain positions and revenues from the budget and a failure to properly accounting for public safety overtime hours.
“There have been a lot of fixes upon which to build a better budget in the future. It doesn’t mean it’s going to be easier (to deal with the city’s financial problems), but it’s going to be better,” Tevlin said.
The Sanders administration has also said “business process reengineering” – essentially a streamlining exercise – will be applied to all city departments. Officials expect to shave 500 jobs from City Hall and save tens of millions of annually.
A number of City Hall observers said it was too early to judge Sanders’ financial recovery plan six months into his term, but the budget process did reveal some insights into Sanders’ attitude shifts regarding the city’s finances and how he will manage as his term moves forward.
Sanders underwent a distinct change the week before he released his first budget as San Diego’s leader.
For nearly half a year on the campaign trail and his first months in office, the former police chief sounded like the most ardent critics of the city’s financial past, present and future.
On the eve of the release of his budget, when he officially assumed ownership of the city’s financial problems, the mayor’s doom-and-gloom cleared, giving way to more calming, optimistic proclamations. To be sure, Sanders continues to point out that his entire term will be devoted to rebuilding the city’s finances and acknowledges the challenges that lay ahead, such as police officer recruitment and retention, the $1.4 billion pension deficit and other financial issues.
But as the budget season winds down toward completion, a different Sanders has evolved from the one who came in barnstorming in his opening days in office in December, calling loudly for the pension board to step down and supporting City Attorney Mike Aguirre’s controversial attempts to become the chief legal counsel to the retirement system. Now, in policy debates, he lists further away from those pension critics that he often echoed during the campaign.
“There’s a big difference between campaigning and governing,” said Andrew Berg, director of governmental relations for the National Electrical Contractors Association, who said he’s been impressed by the mayor’s work.
Staying true to what he described on the campaign trail, Sanders has left much of the budget detail to Goldstone and his staff. The mayor has instead spent time during the budget season as the booster he said he would be, meeting in New York and Washington, D.C. and supporting efforts such as the tourism industry’s new advertising campaign.
Boling said she is holding out final judgment on the budget until it is approved by City Council, but said she’s concerned that Sanders appears to have backpedaled on a campaign promise to direct at least $200 million from this year’s budget into the pension system regardless of the size of the bill delivered by the pension system.
Instead, Sanders has gone with the pension system’s $162 million estimate, a number that has become a mini-debate itself within the pension saga. Critics say it’s artificially low, dragged down by the terms of a legal settlement and off-the-books liabilities hidden by pension accounting. Pension watchers like Boling believe at least $200 million would need to be pumped into the system to keep the burdensome deficit from growing, though such a payment would require nearly $40 million in cuts to city services.
“I don’t see that in his budget, and that’s disappointing,” said Boling, who advised Sanders on pension issues during the campaign.
The mayor said Friday that he trusts the $162 million number, as it has been verified by a number of professionals.
The financial issues that face Sanders as his first budget rolls toward final approval:
– The famous pension system. Sanders’ $374 borrowing plan, the centerpiece of his original budget proposal for next year, was stricken from budget over concerns related to the uncertainty of the city returning to the Wall Street in the coming year.
Even if the city does return to fiscal credibility this year and is able to borrow, the plan received serious scrutiny when it was released and Sanders will likely face contention when the issue comes up again. Pension obligation bonds don’t offer the potential rewards they once did because of increased interest rates. As such, they are now greater risks than they were just a year or two ago.
After Aguirre opined that a vote of the public would be necessary for the bonds to go forward, Sanders said he would also put before the council other analyses of options for dealing with the deficit, such as selling city land or bankruptcy.
The 2007 borrowing plan is part of a larger $674 million borrowing proposal. However, the issuing of bonds won’t erase the pension deficit; it merely has the potential of making a portion of the deficit less expensive. With or without the bonds, significant portions of future city budgets will be consumed by payments to the pension system or paying off the bonds.
The city’s contribution to the retirement system is expected to jump again in two fiscal years when the system switches from a 30-year to a 15-year amortization schedule. And, as the pension system and City Council begin to address some peculiarities in pension accounting, it is possible that the pension deficit and the city’s annual payment to the system could increase as well.
– Retiree health care. The mayor took the first step of quantifying the retiree health deficit at nearly $1 billion, ahead of most municipalities, who will all soon be forced to report that number to credit rating agencies. As such, the city will likely soon have to forge a strategy for either setting up a trust fund to pay the future liabilities or crafting a legal strategy to challenge their duty to pay the benefit.
The city will pay $21 million out of this budget to cover the retiree health care, but if it were to attempt to pay down the entire deficit as is recommended actuarially, its payments would be nearly $100 million more.
Indeed, a number of other issues remain on the horizon, as listed in the independent analysts report, including a long log of deferred maintenance and ongoing recruitment and retention problems in the Police Department.
The report also offers some suggestions of potential resources that should be explored by the City Council to help relieve the budget pressure, such as: refinancing debt when that option is available, pension obligation bonds, sale or lease of city land, and possible tax and fee increases to address the city’s structural deficit. Sanders has ruled out tax increases.