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Thursday, May 14, 2009 | The city of San Diego’s budget shortfall, first pegged at $54 million, now will be at least $70 million, and likely higher.
Thanks to falling property taxes, lower-than-projected hotel taxes and the possibility of a state raid on city coffers, San Diego will face a budget gap for the upcoming year that is significantly larger than the $60 million shortfall that was the basis of Mayor Jerry Sanders’ original budget proposal just last month. Before that budget was released, the mayor said late last year that the gap would be $54 million.
On Monday the mayor will present a revised budget proposal for the fiscal year starting July 1 that will estimate revenues totaling at least $10 million less than in the initial budget, said Jay Goldstone, the city’s chief operating officer. Goldstone said figures haven’t been finalized.
This latest downward revision is further evidence that city officials have been slow to accept the severity of this recession. “Maybe this will be our last round of, ‘Oh sorry, we were off, let’s update it,’” Councilman Carl DeMaio said of the city’s revenue estimates.
Lower revenues will make it harder for the mayor to stick to his stated goals of avoiding layoffs and service reductions following cuts made in the fall to close a $43 million midyear budget gap. Also, City Council members may face a harder road in seeking expenses that weren’t included in the mayor’s initial spending proposal, such as reinstating skate park supervisors and funding new police and fire positions.
In recent weeks, the city has been shown to be off on estimates of major revenue sources, most recently property taxes. The city’s initial budget proposal for the 2010 fiscal year included a 1 percent increase in property taxes, but the county assessor said last week that property tax revenues countywide are expected to fall by 2.5 percent, an unprecedented drop.
The assessor’s office has said the city’s drop will be less than the county’s, closer to 1.5 percent, which would correspond roughly to a $10 million decline from the mayor’s first budget proposal. But Goldstone said the 1.5 percent drop includes redevelopment areas where a drop in property values has a different effect on the city’s bottom line.
“We’re trying to analyze what does that 1.5 percent really mean?” Goldstone said.
Also being revised, Goldstone said, are hotel-tax estimates that were initially flagged as potentially optimistic by, among others, Independent Budget Analyst Andrea Tevlin’s office. The city had factored in a 2 percent decline over the current year, but tourism forecasts had painted a potentially gloomier picture, with room demand expected to fall 8 percent during the 2009 calendar year.
This month, the current year’s hotel-tax estimates were revised downward by $1.3 million from the previous estimate. Since the current year is being used as a baseline for next year, that suggests a downward revision is warranted, Tevlin said.
Goldstone said Monday’s budget proposal won’t include service reductions but will instead involve reducing the budgets for some departments that haven’t been spending their entire budgets. He said the proposal will also involve tapping reserve funds, as the mayor proposed in April, though Goldstone said they won’t be among the reserves the mayor has identified as essential, such the reserves for the general fund, the city’s day-to-day account.
Another potentially huge hit that won’t be factored into the mayor’s revised budget is the possibility that the state will borrow millions in property-tax money from the city, a scenario that seems more likely every day.
Gov. Arnold Schwarzenegger, who unveiled his budget plan on Thursday, proposed borrowing from cities and counties if a series of ballot measures, which is trailing in the polls, fails during a Tuesday vote. If the state exercises that option, it could further drain the city’s revenues by up to $36 million, Goldstone said.
Goldstone said the city’s new spending proposal won’t include those cuts because there’s no telling what the Legislature will do. But he said city staffers are drawing up a list of cuts or budget-balancing reductions to put in place if the state goes that route.
Monday’s revision means that dire budget estimates once dismissed as little more than back-of-the-napkin predictions are looking more realistic. In the fall, a think tank founded by former mayoral candidate Steve Francis said the fiscal 2010 budget gap could reach $128 million. Goldstone then called the estimate “superficial,” though he acknowledged it was possible if a deep recession occurred.
Tevlin noted that the city has already tackled a $43 million midyear deficit, in addition to the $60 million shortfall for the upcoming year and the yet-to-be determined additional shortfall that will be included in next week’s revision.
“The net impact of everything that has been done to date is over $100 million,” Tevlin said.
DeMaio said Sanders’ office has repeatedly overstated revenues to put off tough decisions.
“The way you deal with these sorts of economic cycles is you want to err on the side of more budget discipline than less,” he said.
If the city projects too conservatively and saves up too much money, DeMaio said, it could simply be saved up for the 2011 fiscal year, when the city’s annual pension payment is expected to balloon.
Goldstone disagreed. He said revising the budget to account less-than-expected revenue is preferable to overcorrecting with a too-conservative projection. “I would much rather take smaller steps in right-sizing our budget than take a meat axe to it and find out we cut much deeper than we had to and we laid off people who aren’t going to have much luck finding jobs and, more importantly, that we’ve cut services unnecessarily,” Goldstone said.
In defending the administration’s changing revenue projections, Goldstone said the recession wreaked havoc with the city’s estimates, noting that the city is dealing with unprecedented circumstances such as the fall in property taxes. County Assessor Dave Butler has said the county’s assessed value has never declined year-over-year, at least since Proposition 13 went into effect.
Goldstone also said that because city finance officials were seeing unprecedented drops, they assumed the bottom was near. It wasn’t.
Erik Bruvold, president of the Francis-formed think tank now known as the National University System Institute for Policy Research, doesn’t believe the city is purposely low-balling revenue estimates. But he said the past few years have shown that too much of the city’s budget is set aside for expenses that can’t be altered, like debt service.
“They’re still having a hard time getting their heads around finding a way to pay for city services in a way that they can more nimbly adjust downward when tax revenues don’t come in,” Bruvold said.