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Wednesday, June 24, 2009 | San Diego city officials have trumpeted their bridging of an $83 million shortfall for the upcoming budget year. But there’s more pain coming.

For one thing, state legislators are expected to borrow or simply keep funds that go to cities and counties. Mayor Jerry Sanders has said that depending on the state’s move, the city could be on the hook for up to more than $70 million, throwing out of whack the budget city officials just approved for the fiscal year starting July 1. That spending plan relied largely on cuts to worker compensation and tapping reserves to close the gap.

But even if the state doesn’t take a cent, city officials say San Diego could still face a budget shortfall in excess of $100 million for the 2011 fiscal year. That could force officials to consider unpopular cuts they’ve managed to avoid this year, such as closing city facilities and laying off employees. It could also bolster the arguments of those looking to raise taxes or fees to provide long-term revenues for the city, and ratchet up the pressure to reduce the city’s looming pension payment.

Councilman Todd Gloria said residents whose recreation centers were spared this year are worried about what will happen in 2011.

“The problem is growing and the options are fewer,” he said.

The biggest factors in the expected 2011 budget shortfall are the faltering economy, which has decimated city revenues, and the city’s annual pension payment, which is expected to balloon as the retirement system’s portfolio has taken a beating in the recession.

The city still hasn’t felt much of the pain from the recent tumble in the stock market because of the delayed aspect of pension payments. The city’s payment to the San Diego City Employees’ Retirement System during the 2010 fiscal year is based on the retirement fund’s value as of June 2008.

Similarly, the city’s annual payment into the pension system for the 2011 fiscal year will be based on how the retirement system’s assets look as of the end of this month. And that’s expected to take a significant bite of a city budget that will already be hard hit by drops in property, sales and hotel tax revenues.

In February, the pension system’s actuary estimated that the city’s 2011 payment into the pension system could reach $250 million — nearly $100 million more than this year — based on the state of the pension system’s assets at the time. It’s now believed that the pension payment will be somewhat less than $250 million because the pension system’s assets have increased in value since then. However, the pension payment is still expected to be tens of millions more than during the 2010 fiscal year.

Councilman Carl DeMaio said he’s worried city officials will return to underfunding the pension system to avoid making tough decisions. Specifically, DeMaio cites an arcane pension provision called the corridor, meant to ensure techniques used to spread out the pain of a particularly bad year don’t get out of hand. The Mayor’s Office is studying that and other issues related to the pension, saying they want to ensure the city isn’t endangering services because of overly conservative assumptions.

DeMaio said such a move would repeat the mistakes of the past. “It’s quite an attractive gimmick to manipulate the corridor and see the effect it would have on the pension payment,” he said.

Jay Goldstone, the city’s chief operating officer, said the Mayor’s Office isn’t counting on changes in the way the pension payment is calculated, saying the decision is ultimately up to the retirement board. A committee of two actuaries and Goldstone are studying the assumptions used by the pension system, including the corridor. But Goldstone said the committee hasn’t yet decided what recommendations, if any, to make to the retirement board.

The $100 million-plus estimate for the city’s 2011 budget gap doesn’t include any further cuts to this year’s budget because of state action. Sanders has said that if the state does take money, everything would be on the table, including cuts to public safety.

The pension payments and flagging tax revenues aren’t the only reasons for the 2011 budget shortfall. Other factors include new facilities that require increased operating costs, and the city’s use of more than $20 million in reserves to bridge the gap for the upcoming year.

Goldstone said that decision was driven by the fact that the economy is such a big part of this year’s budget problem and residents’ opposition to cuts proposed last year, such as shuttering library branches and recreation centers.

“We thought the exposure to the city was minimal to hold the services for one more year and tap some of those reserves,” said Goldstone, who added that they weren’t among the reserves considered critical.

DeMaio, the only council member to vote against the budget, said the city should have made tougher cuts this year to prepare for the 2011 deficit. He noted that the city’s cuts to the workforce have been almost entirely in vacant positions.

DeMaio said elected officials must shave unneeded layers of management and implement stalled reforms such as the privatization measure known as managed competition. That, he said, would likely eliminate wasteful expenses like a bonus program for water and wastewater employees.

Andrea Tevlin, the city’s independent budget analyst, said reforms like managed competition are unlikely to solve a nine-figure deficit for 2011. Thus far, she said, the city has closed each year’s budget gap through piecemeal measures such as refinancing debt and using downtown redevelopment dollars to help pay the ballpark debt.

All the low-hanging fruit is gone, she said, and there’s no silver bullet except to determine whether residents would be willing to support a major fee increase.

“Now we’ve really got to look outside the box or look at some significant service-level reductions or find some new revenues,” Tevlin said.

Any ballot measure would probably be too late to aid the 2011 fiscal year. But Councilman Tony Young, chairman of the council’s Budget and Finance Committee, has pledged to start the 2011 budget process months earlier than usual. The council also plans to form a citizens committee to study city revenues, including potential tax or fee increases and ways to make the city more attractive for businesses.

In a recent interview, Sanders said the defeat of the state’s ballot measures last month suggests citizens are unlikely to approve a tax increase but added that he wouldn’t rule anything out.

Gloria said the fact that the city is still facing a shortfall in 2011 despite the recent cuts demonstrates that the city has yet to fix the so-called structural budget deficit — a shortfall that persists year after year, even in good economic times.

“The missing ingredient in this is the political leadership to explain what things may cost and how to pay for them,” he said. “I think that’s a part of what the conversation will be for the 2011 budget is having that frank and honest discussion.”

Please contact Rani Gupta directly at rani.gupta@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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