Remember Ross Perot’s “That Giant Sucking Sound” line from the NAFTA debate? Well it fits San Diego’s current financial mess quite well.
Here’s why. Unless the economy is in the tank, each year the city collects more money than the previous year. Using April Boling’s analogy, Bertha gets a raise.
The city of San Diego has seen an average increase in General Fund revenue of 5.5 percent. This year has been exceptionally good revenue-wise with the city enjoying a solid 8.1 percent increase ($83 million). Times won’t always be this good.
A key question I ask when evaluating the efficiency of a city government is: Where does all the increased revenue go?
If increased revenues go to providing expanded services to residents, then the city by and large is probably efficient. If increased revenues go to higher operating costs, then the city is probably not efficient. What’s worse, if the increased revenues go to higher operating costs at a time when services are cut, there is a big problem.
So where are all the increased revenues flowing into the city of San Diego going?
You guessed it…to pay for those liabilities. And it is only going to get worse as we swallow hard and follow the mayor’s five year financial plan.
Here are some statistics to consider:
In 2001, the city’s annual contribution to the pension system was $44 million into the pension system — with the retirement system covering health care. This year we will put $165 million into the pension system (which does not pay “down” the debt — just keeps us from negative amortization), and provide $25 million for retiree health. That’s an increase of over 422 percent in seven years. During the same period of time, the city’s revenue has increased by 46 percent (and this is counting enterprise fund expansion where much of the money goes to capital expenditures.)
Since FY 2004, the city has pumped more than $550 million into the Pension System. During the same time, that amount roughly matches the increase in the City’s Deferred Maintenance liability.
Looking to the future, it doesn’t get any better.
Increased revenues flowing into the city for the foreseeable future will still have to be diverted to pay off past liabilities. Take a look at the chart below from the mayor’s five year financial plan to see what I’m talking about.
Start from the baseline of $1.021 billion in revenues and expenditures as adopted in the FY 2007 General Fund budget. Over the next five years our revenues in the General Fund will increase $162 million. During the same five year period, liabilities and standard operating costs for existing services will increase $341 million.
For every new $1 the city takes in, we are projected to pay out $2.10. The giant sucking sound you hear is that oncoming crisis that Scott Peters says does not exist.
As the mayor outlines in his financial plan, we must bring our increased expenditures over the next five years into balance with the projected increases in revenues. That’s where tough cuts will come into play.
Mind you, this year we actually beat the five year financial forecast by taking in double the revenue the mayor anticipated ($83 million v. $45 million.) So this year’s budget was a bit easier than the forecast anticipated — hence a little room for police raises. Nevertheless, while the economy in San Diego remains strong, not every year will bring such solid revenue growth.
When folks like Scott Peters and others on the council buck the mayor and propose salary increases for certain labor units, we “bust” the financial plan. The mayor’s line item for salary and wages in the chart below is key. With the increases for the police officers this year, add $18 million to that line for FY 08 and every year thereafter. See what I mean? Cave in to the labor unions, and that line skyrockets.
We need to exercise fiscal discipline to balance the budget and pay down our debts. But paying off debt is not enough. Over the next five years, our city will grow in population requiring additional services in our neighborhoods. To adequately meet those needs, I firmly believe that we need to go even farther than the mayor’s five year forecast and implement even more reforms to how City Hall operates.
In my next post, I’ll suggest one place to start: reforming pension benefits.