I would like today to engage the well-informed and smart Café readership in an exercise in government fiscal forecasting. (Sorry. No name calling, no accusations of malfeasance or reflections on “why I am ideologically correct.”) I also apologize for the length in this first post.

The question I would like to pose to all of you is how large do you think the structural deficit is that the city of San Diego’s general fund faces in FY 2009 and how deep will the cuts have to be or how large will the tax increases have to be to balance the budget?

By our math, as things stand today, the FY 2009 deficit is $63.8 million and some combination of cuts, higher-than-expected revenue, tax increases and delays in taking action on the “significant issues” will be required to close that gap. To put that in context, the city will spend about $38.8 million on its libraries this year about $100 million on park and rec.

But that is a rough estimate which I readily admit may be significantly off. That is why I think today would be a great day, in the spirit of open-source programming to see how well open-source policy research can work and whether it is possible to predict what the FY 09 structural deficit is when the mayor releases an updated Five-Year Forecast sometime later this year or early next. Indeed, if they are reading it wouldn’t it be great to hear from Jay Goldstone, Andrea Tevlin, or Fred Sainz as to how these numbers should be tweaked?

To come up with the $63.8 million dollar deficit, I started with the Five Year Forecast (FYF) released in January 2007, that identified, after what the Mayor called “significant areas” and “corrective actions,” a FY 2009 deficit of $96.3 million (see attachment 4 of the document linked above).

In March, the mayor released his budget. Particularly relevant are the “Fiscal Recovery section” and the Financial Summary Section. As I read these documents, there seemed to be three significant developments in the FY 08 budget that would require an updating of the fiscal forecast in a significant way.

2. Revenues were higher

First, revenues were substantially up during FY 2007, coming in $38 million more than what was estimated in January. I am treating those as growth in the revenue base as they are largely a result in greater than expected hotel tax revenues (TOT) which, in turn, was driven by higher occupancy and higher room rates than anticipated. Since the city has built in a modest decline in the rate of growth in TOT, I think it reasonable to assume that the new revenue base is $38 million greater than the FYF projected and that this will continue into the out years. Unless someone really objects, I think the mayor’s numbers here seem pretty reasonable and unlikely to miss the mark.

2. Required Pension contribution lower

The city saved $5.8 million when the retirement administrators came back with a lowered required contribution, in large part because of healthy investment returns. Given the expected performance of the markets in 2008 (but accounting for the “smoothing” that will reduce its positive impact for any one year) it seems reasonable to conclude that FY 09 will also see a similar decrease in the “Annual Required Contribution” (ARC). I did not think it was prudent to reduce the ARC by more than that.

As the city attorney frequently notes, this is based on a 20-year amortization rate and not the 15-year rate that the voters passed. We can debate the right schedule perhaps in future posts but, for now, let’s simply take the revised ARC and assume that it will continue to improve the starting fiscal situation by $5 million. But if readers are smart on pensions and think that number should be tweaked lets get a new one.

3. Police Salary increase wasn’t in the Five Year Forecast

The February Five Year Forecast did NOT build in a pay raise for SDPD. Indeed, the forecast assumed NO salary increases, other than the ones already negotiated, between FY 08 and FY 12. This year’s budget does not have the clearest explanation for how the salary increase for police officers impacts the out year forecast. The best I can find is on Page 2 of this document. (As an aside: It would be VERY helpful in next year’s budget if the city could break out for the general fund the same categories of expenses it used in the Five Year Fiscal Forecast because it would really let us see how the budget passed this year helps (or hurts) the budget we will get next. Even the federal government provides that kind of guide and if the mayor is really committed to reforms that strengthen the long term finances of the city this would be a nice one to enact).

The Independent Budget Analyst did provide an estimate that for every 1 percent increase in police salaries it would increase expenditures by $1.3 million (Page 13).

Assuming that the IBA is right but that vacancy rates in the Police Department continue to run high, we conservatively estimated that expenditures in the FYF 09 would need to go up $10 million to account for the negotiated salary raises. If the vacancy rate closes in FY 09 it could “hurt” the forecast by as much as $12 million

All this seems to work out as follows (in millions of dollars):

Initial Deficit (Attachment 4 of the Five Year Forecast) $-96.3
Higher than Forecasted Revenues +$38.0
Lower Pension Contribution Needed +$5.0
Paying for the Police Salary Increase -$10.0
Currently Projected FY 09 Deficit -$63.3

There is, it seems at least two other major issues that are in play. The Five-Year Forecast did not, as far as we can tell, build into its model health care cost increases since the city’s expenses for benefits is flat (see Attachment 3 in the forecast and the lack of year-to-year increase in the benefits budget). I think that is right since the savings from eliminated positions are already “counted” in the corrective actions. As we read this, the only way for the city to hold the line on its benefit costs is for ALL health care premium expenses to either be “managed away” by restructuring the plan providers/provisions or for employees to absorb all cost increases.

None of these documents make clear how the city intends to proceed but it is likely unrealistic to expect employees (without intense labor push back) to shoulder all of the additional costs when health care premiums have been increasing from 8 percent to 14 percent a year since 2000, according to the Kaiser Family Foundation(Page 9).

That starts to represent a MAJOR decrease in employee take home pay and I don’t’ think it is politically realistic. But have we missed something and are these fears unfounded?

Second, I nor the public, was able to make sense of what could be “one-time” revenue the city used in FY 08 and which is built into the Forecast. Rather than make guesses, I treated all the budget clean up as ongoing revenue and savings. I know that leads to an underestimation of the deficit so if readers can provide a better breakout it would be helpful.

Now, all this said the city’s s documents are not laid out to be friendly to folks that want to do their own analysis. I readily admit that I may have overlooked something in the FY 08 budget which made cuts impact FY 09 or that I have missed one time revenue/expenses that make things in FY 09 even worse. But even assuming a “fudge factor” of 20 percent, that would still leave a gap of more than $50 million dollars. Serious money on a general fund of $1.1 billion.

Frankly I hope readers catch something I have overlooked because a $50 million structural deficit scares the heck out of me. Hopefully some of the folks in the press office will stop calling folks names and questioning our motives and, instead, engage and tell me why this is simply muddleheaded and help us understand the deficit.

And Café readers. The links provided give good information. Post up what they tell you about how big a hole the City will face next year. I know it can more fun to call people names but $60+ million is serious money and the community better start talking about what it would mean to close the gap.


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