Monday, April 13, 2009 | To balance the budget without laying off employees, Mayor Jerry Sanders today proposed siphoning more than $20 million from one-time funds to close a budget shortfall of $60 million.

It’s a practice he has criticized in the past, most recently in November, when the City Council voted against his proposals to close libraries and recreation centers to close a $43 million midyear budget gap. The council instead decided to take money from one-time funds, including a fund for improvements to libraries.

At the time, Sanders said, “There will be no magic the next time around.”

But on Monday, he advocated taking nearly $4 million from the same library fund for the budget year starting July 1. In addition, he wants to pull $18 million in reserves that city officials said they discovered only recently during the budget-cutting process in the fall. Both moves are expected to wipe out those funds.

The move allows Sanders to avoid service reductions such as slashing hours at libraries and park and recreation centers, moves that were unpopular with the public and City Council last year. But because the money won’t be replenished, it doesn’t solve the city’s ongoing budget deficit and it’s not clear whether it will affect the city’s future borrowing costs.

In addition to tapping the reserves, Sanders proposed cutting $30 million through labor concessions, a move he said would provide savings in future years and prevent employee layoffs at a time when jobs were scarce. Those contracts are headed to an impasse hearing before the City Council on Tuesday.

Sanders also said the city would increase its revenue by nearly $7 million through new or increased user fees meant to cover the cost of services.

This year, the mayor isn’t proposing putting any more cash in the city’s main reserves. But Chief Financial Officer Mary Lewis said the city will still have enough money to meet its goal of a reserve totaling 7 percent of the general fund, the city’s main account. To do so, city officials will reallocate unspent money that city departments had earmarked for future use.

The mayor reiterated the importance of building a reserve, which he wants to later increase to 8 percent of the general fund.

“During this difficult economic time, some people might advocate raiding our city’s reserves rather than safeguarding them,” Sanders said. “I might agree if someone could assure me exactly when this difficult economic time might end and no one can.”

However, he said the city will seek to draw down other reserves, known as internal stabilization reserves. Those aren’t part of the general fund reserves.

Sanders said those funds will be used only on one-time expenses, including community plan updates and a $1.6 million fire station alert system, so they won’t burden future budgets.

The internal stabilization reserves were created to back up debt service funded out of hotel-tax money, including Petco Park, the Convention Center expansion, trolley extensions, and improvements to Balboa Park and Mission Bay. If hotel tax revenues fell, the reserves provided a way to make the bond payments.

Sanders said the funds are not legally required and suggested today that they may have been created to squirrel away money.

“What we really think is perhaps past city mangers used that fund to put money in as another reserve,” he said. “We don’t know. We’ve never had to tap that.”

The city’s chief operating officer, Jay Goldstone, said city officials only became aware of the funds through the fall’s budget-cutting process. “Previous administrations buried these dollars, and apparently they did a good job,” he said.

However, the funds could affect the city’s bond rating. The city is required to set aside a certain portion of money as part of its bond issues, typically equivalent to its annual bond payments. The internal stabilization revenues are above and beyond that, so they are not required, nor are they referenced in the city’s official bond documents.

But the city does tell credit agencies about the practice, according to a report by the Independent Budget Analyst’s Office. So drawing down the funds could affect the city’s credit rating as it plans to issue new debt.

Alan Gibson, a director of U.S. public finance for Fitch Ratings, said the agency is meeting with San Diego officials next month about upcoming bond offerings. He said the agency considers a city’s reserves as part of its rating process. But he couldn’t say how San Diego’s proposal would affect the city’s bond ratings.

Many cities are pulling from their reserves, he said. But whether it affects their credit rating — and therefore their interest rate — depends on their financial situation as a whole and their upcoming plans for future budgets.

“If they draw down this upcoming year and have a plan to replenish, that’s clearly very different from if they have no plan to replenish,” Gibson said.

In January, the Independent Budget Analyst’s Office suggested doing away with the internal stabilization fund, saying it was one of a hodgepodge of funds that made the reserves more complicated and less transparent.

But instead of spending them, as the mayor is proposing, IBA staffers then suggested consolidating them with the city’s existing reserves to bulk up the reserves. That’s because the office generally opposes using one-time money to bridge budget shortfalls, said Penni Takade, the office’s deputy director.

“For the most part, we really think the city needs ongoing solutions to its budget and this isn’t one of them,” Takade said. “It might put a Band-Aid on things, but it wouldn’t solve things completely.”

Of course, Independent Budget Analyst Andrea Tevlin drew criticism last year when she proposed doing exactly that — raiding one-time funds — to temporarily keep libraries and recreation centers open.

One of those funds was the library system improvement fund, which was created as part of a plan to build new and expanded branch libraries.

This year, Sanders is proposing draining that fund to help close the budget gap. His spokeswoman, Rachel Laing, said that move was necessary because the City Council kicked back a plan that would have allowed parking meters to operate at night and on weekends and allowed rates of up to $3 an hour.

Laing said parking revenues had been built into the budget, and the mayor needed to find something else to bridge the gap.

Takade said the IBA’s office will be looking closely at the use of one-time funds to make sure they’re really funding expenses that won’t be repeated. One concern is what will happen in 2010-2011 fiscal year, when the city’s budget gap could grow because of, among other things, an annual pension payment that could grow by $100 million.

“We just know there’s going to be more budget gaps to close next year and in future years,” Takade said, “so this use of these funds, if it’s really matched up with one-time expenditures, really what they’re using it for is to get through this year.”

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