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Monday, Oct. 12, 2009 | The message from Mayor Jerry Sanders over the last three weeks is clear: The national economic recession caused the city of San Diego’s unprecedented $179 million budget deficit.
“The magnitude of our budget problem for fiscal year 2011 is a direct fallout from plummeting tax revenues brought on by the recession and rising pension costs due to investment losses on Wall Street,” Sanders said.
Later that day his office sent out a release titled, “Recession Delivers Large City Deficit.” Last week, Sanders echoed his earlier comments when City Council met to discuss the deficit for the first time.
No one doubts Sanders has a point, but does he have the point?
The recession has eaten into the property, sales and hotel taxes, exacerbating the city’s budget problems for next year. But plenty of other sources have long warned of budget problems beyond troubled economic times as the city slogged through tough budget years even during boom times.
The office of the city’s Independent Budget Analyst has long predicted large deficits and last year proposed pages of cost-cutting and revenue-boosting measures needed “to restore long-term financial health.” Each of the city’s five-year forecasts projected that 2011 would have the worst deficit of any year in the report. The city’s first forecast, from November 2006, pegged next year’s deficit almost to the number.
These gloomy outlooks point to a “structural deficit” in the city’s finances. A structural deficit occurs when the city takes in less money than it needs to keep pace with expenses and liabilities regardless of the economic cycle.
I wanted to find a quick way to evaluate the recession’s impact on the city’s budget. I turned to Erik Bruvold, the president of the non-partisan National University System Institute for Policy Research think tank.
Full disclosure: the Institute for Policy Research, which is now linked to National University, was founded and funded by Steve Francis, who ran against Sanders for mayor last year. Bruvold also has worked as head of intergovernmental affairs for Sanders.
Bruvold estimated half the city’s deficit was due to the recession with the other half caused by structural or other issues.
He compared fiscal year 2011 revenue projections from the city’s first five-year forecast, released three years ago, to the forecast released earlier this month. This comparison shows the difference between the city’s revenue expectations prior to the recession to its expectations as it wallows in the downturn.
Since the city’s revenues depend on property, sales and hotel taxes — all affected by the recession — comparing revenue projections is the cleanest indicator of the recession’s impact, Bruvold said. Further, there have been no fundamental changes in city tax rates in the last three years.
Though Bruvold believes the recession has affected the expense side of the city’s ledger, it is unclear in what ways. For example, the city has shed hundreds of positions that lower its expenses, but contractor costs have decreased as well. Neither can give a strong indicator of the recession’s impact.
For a quick analysis, Bruvold said, we’re left with the money that’s coming into the city. Three years ago, the city projected revenues of $1.152 billion in 2011. Now, it is projecting revenues of $1.062 billion. The difference is $90 million.
The $90 million figure is about half of the $179 million deficit. Or what Bruvold called “half the enchilada.”
“The $90 million shortfall in revenues I think is a very accurate estimate of what the impact of the recession has been on the city’s bottom line,” Bruvold said.
The mayor has attributed one expense — a ballooning pension payment — to the recession. Bruvold conceded that some pension cost increases were due to the recession. But he said it was impossible to quantify how much the recession mattered without an actuarial study. Besides, the city has always projected an increase in pension payments for fiscal year 2011. The 2006 five-year forecast predicted a payment of $212 million next year, about $13 million less than today’s estimate.
“I think that it is critical that policy makers and the public think about this as a slowdown in the economy and a structural deficit,” Bruvold said. “I’m disappointed that so much of the rollout of this has focused on the recession. That leads people to believe that we just need to wait out the recession and everything will be OK.”
To check Bruvold’s method, I turned to the Office of the Independent Budget Analyst. Tom Haynes, a fiscal and policy analyst, said his office has stayed away from evaluating the magnitude of causes making up the deficit.
Still, he said Bruvold’s numbers show that the recession has had “a significant impact” to the city’s revenues.
“I will say that from our perspective, it’s not just the recession,” Haynes added. “We have been on record as saying the city has a structural deficit.”
I brought these findings to city Chief Operating Officer Jay Goldstone. Goldstone liked Bruvold’s approach on the revenue side, but said it ignored the recession’s impacts on the city’s expenses, particularly on pension payments.
A better way to measure the recession’s impact on the deficit, Goldstone said, compares the differences between this year’s revenue and pension payment to those projected for next year. The city is expecting revenues to decrease by $67 million from the previous year and the pension payment to increase by $57 million. Together those two numbers equal $124 million, or about 70 percent of the deficit.
“I am comfortable that about 70 percent of our deficit is due to the recession,” Goldstone said.
Goldstone concedes that the entire $57 million in increased pension payments isn’t recession-driven because numerous complicated factors enter into the city’s annual required contribution. But he’s confident the majority is recession related, citing the $30 million lump sum payment to the pension fund required next year because pension assets have lost substantial value.
Aside from the recession’s impact, the message from the Mayor’s Office on the budget deficit has focused on two other points. Major cities in California also face large deficits — regardless of their specific amounts. Second, without the city’s past corrective measures, such as pension reforms and the elimination of hundreds of positions, the deficit would be much higher.
The mayor’s cost cutting has been so effective that Goldstone implied the city could have escaped its structural problems, save for the recession.
“Given the $179 million, the city has a structural deficit,” Goldstone said. “Is it the same one we have had before? I would say no, given all the reform measures we have talked about before. We now have a new structural deficit caused, or virtually caused, by the recession.”