Earlier this month you could almost hear the champagne corks being popped down at City Hall. The 2011 budget was unveiled and it required minimal sacrifice. For a brief moment, a $28 million+ shortfall had been closed.
Yet for all the celebratory backslapping, it was clear that something remained rotten at the core of the city budget. The revised five-year forecast continued to project a deficit next year equal to more than 6 percent of all General Fund spending. According to the City’s Independent Budget Analyst, the budget continued to rely on one-time fixes to close the gap rather than addressing, head on, the need to fundamentally reorder how city government delivers services.
Perhaps most worrisome, the forecast ignores both short and long-term issues with the City’s revenues that should give pause to those that think that the budget problems have been solved. With only the smallest of green shoots starting to show, the city has raised its 5-year revenue projections. The city is projecting for example, that the 2012 city budget, which starts July 1, 2011, the sales tax revenues will increase 4 percent (up from a 2.7 percent forecasted growth rate made last October) and that by 2012 property taxes will return to a growth rate of 3 percent (revised up from a previous forecast of 2 percent). While recent real estate data is encouraging, these rosy scenarios fly in the face of unemployment that distressingly remains above 10 percent in San Diego and ignores significant structural issues with the state’s economy that could hamper growth for years.
If the revenue projections prove overly optimistic, revenue forecasts have real consequences. Most immediately, for every 1 percent drop in property tax revenue, the city must reduce expenditures by $4 million. For every 1 percent drop in sales tax revenue, the city must reduce expenditures by $2 million.
By historically overestimating future revenue, San Diego City Hall has been in a situation of perpetual financial crisis. At least from the perspective of ordinary citizens, there seems to be almost no long-term thinking and no vision of where leaders want to position the city for the future.
Indeed, the time horizon for the city seems to be about four months as it lurches from one budget revision to the next with apparently little if any consideration being given to any timeframe for economic recovery.
All the more worrisome is the fact that few leaders at City Hall seem to be thinking about fundamental changes that the San Diego Association of Governments recently forecast for the San Diego region. Using demographic models and updated census data, SANDAG continues to forecast two critical facts about our region: We are going to see population growth slow and our population is going to be dramatically older.
This is especially important when it comes to long-term sales tax and property tax revenue projections. We know that as people age they tend to consume relatively fewer goods and more services. Under current California law services (for example medical care, professional services and personal care) are not subject to sales tax. Fewer big screen TVs and more visits to medical specialists will have dramatic impacts on the amount of sales tax revenue the city will collect. We also know that the trend is for people to “retire in place”, holding onto their homes for much longer. That decreasing turnover will act as a constraint on property tax revenues, delaying any reassessment of property values as required by Proposition 13 when property changes hands.
Moving forward it is vitally important that the city do at least two things.
First, the city should revise its revenue projections to reflect more conservative sales and property tax assumptions. During the recession of the last two years, the city has consistently fallen short of its already downwardly-revised revenue projections. Secondly, the Mayor needs to articulate a long-term plan in short order, not 18 months as he has announced. The long-term plan must account for the restoration of city services. Presently, his new revised five-year forecast still leaves the city with brown-out fire stations, drastic cuts to library hours, reduced services at Park & Recreation centers and a five-year freeze on city salaries. With all of these cuts and overly-optimistic revenue projections, the city is still facing a $70 million shortfall according to the Mayor’s 2012 forecast.
Although I am a proponent of Proposition D, which would make the strong mayor form of governance permanent, the lack of leadership at City Hall by failing to articulate long-term solutions is making it a tough sell.
Steve Francis is the founder and former chairman of AMN Healthcare Inc. and was a candidate for mayor in 2005 and 2008. You can e-mail him at stevenfrancis@thefrancisgroup.com