San Diego city schools weathered years of tumultuous state funding by banking on better times and better funding ahead.

Those times came, thanks to statewide voter-approved tax increases and changes to the way California public schools are funded that sent more dollars to districts serving large populations of English-learners, students in poverty and foster youth.

Yet, San Diego Unified is again staring down the barrel of insolvency – a prospect that’s left San Diego County Office of Education fiscal oversight officials “extremely concerned.”

City school officials must cut $116.6 million in spending from next year’s $1.3 billion budget to avoid trouble, and are set to consider everything from a reorganization of the district office to changes in health benefits to an unspecified number of “strategic layoffs” of teachers and staff, according to staff and Dec. 13 board meeting agenda documents.

“We are striving to avoid people losing their jobs,” said Patricia Koch, interim chief financial officer for the district. “To the extent that we can do this with attrition and vacancies, that is our goal, because while we need to balance the budget, we also want to treat people as fairly as we can. … The idea would be to roll back the ones (cuts) that are closest to the classroom to the extent we could if there are additional resources.”

San Diego Unified officials are used to spending money faster than they receive it, which has resulted in budget shortfalls totaling millions of dollars each year. But this time, it’s different.

“We will have to take some actions to address next year’s deficit that are different than the actions that have been used in the last few years,” said Koch, who joined the district last month.

In years past, the district sold off property and heavily leaned on its reserve fund to avoid making major cuts. Doing so took a toll, draining the reserve account to bare-minimum levels required by the state.

The district’s general fund reserves – which exceeded $134 million in 2008-09 – now total less than $28 million and will drop below $27 million in the coming years, budget documents show.

“When you have reserves, you spend them down and that is deficit spending,” said Koch. “It is not an evil act. When done carefully, it is the logical thing to do rather than piling up money that can benefit students today.”

But now, with no reserve cushion, no new major revenues coming in and student attendance declining, the prospect of cutting nine figures from the budget has become a reality.

Nonetheless, school board members recently doled out 4 percent employee pay raises that take effect this school year. That move added $30 million to the problem, bringing the total deficit to $116.6 million for next year and at least $50 million more for 2018-19.

Koch said the raises were justified because the district “needs to attract and retain quality staff, especially teachers, and there is a teacher shortage in the state of California. So, the board needs to balance a number of priorities and they elected to offer the raises in order to continue to ensure we have the best quality teachers in the classroom.”

Despite the daunting figure, Koch said she’s confident the district will remain solvent and make the cuts necessary to achieve a balanced budget.

In fact, in her view, the district has had a balanced budget for years, regardless of the history of deficit spending.

“The district has had a balanced budget for a number of years, and we have a balanced budget this year. We will have a balanced budget next year,” Koch said. It’s balanced “as long as you have enough resources to pay the bills.”

To balance this year’s budget, officials had to cut $24.6 million. Most of the money came from special education and early education programs. Some preschool programs were closed this year, and other sites began reserving spots for parents willing to pay.

While recent changes to California’s school funding system benefitted the district’s bottom line, Koch said it has also “created a dilemma, because the money has strings attached. … It is granted to school districts to provide enhanced services to especially needy groups and while that is an important activity, it does not help us recover from years and years of shortfalls and inflationary pressures on the rest of the budget. So as utility costs go up, as pension costs go up, as benefits costs go up, the state allocation that can go toward those things is not going up.”

Making $116.6 million in cuts amounts to nearly 9 percent of all general fund spending planned for next year. That’s two times more than all the money budgeted for books and supplies next year at the 129,000-student district. To put it another way, the district would need to slash more than half of all non-teaching staff salary costs, or 19 percent of all teacher salary costs to come up with the money.

Though exactly where the money will come from hasn’t been detailed yet, Tuesday’s board presentation shows staff hopes to squeeze significant savings from three large groups: $44 million from the central office, $52 million from school sites and $21 million from centralized support services, a category that includes special and early education programs.

In addition to declining student attendance, which results in less state funding, rising employee benefit costs – and retirement costs in particular – are worsening the financial situation for San Diego Unified, records show.

“Pension costs are increasing, and they are increasing quite dramatically,” said Koch.

Just two years ago, the district spent $75.7 million on contributions to the California State Teachers’ Retirement System. This year, the cost is nearly $124 million, budget documents show.

Amplifying the costs are new contribution demands from the teacher pension system aimed at reducing unfunded liabilities that have piled up statewide. District contributions to teacher pensions will total more than 19 percent of salary costs by 2020-21, up from less than 13 percent this year and less than 9 percent in 2014-15. Districts must also account for pension costs on their balance sheets differently today than they did years ago.

Though there is “nothing concrete” indicating San Diego Unified will get more money than currently expected from the governor’s budget next year, Koch said it’s possible they will see more cash, which would make some of the cuts made by the board this week unnecessary by next fall.

“Prop. 55 passed, so that continues those revenue sources,” Koch said, referring to a statewide measure that extends tax hikes on the wealthy to fund education. “The jobs market is good and unemployment is down, so the current strength of the economy is an encouraging factor.”

Correction: An earlier version of this post said that two years ago, the district spent $47.8 million on contributions to the California State Teachers’ Retirement System. That figure represented the district’s estimated costs for 2014-15; final numbers show the actual costs were $75.7 million.

Ashly is a freelance investigative reporter. She formerly worked as a staff reporter for Voice of San Diego.

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