San Diego continues to grapple with its structural budget deficit.
City officials tapped the city’s rainy-day fund to cover a $4.7 million deficit at the close of fiscal year 2026 while awaiting a reimbursement from the state’s office of emergency services, according to a report by the city of San Diego’s Department of Finance.
It was the first time in more than a decade that officials had drawn from its reserves.
Several councilmembers voiced concerns about the move during an Oct. 21 City Council Budget and Government Efficiency Committee meeting. Councilmember Vivian Moreno said she was disappointed officials tapped reserves, noting they avoided doing so during the Covid-19 pandemic.
“The fact that we’re doing so now raises serious concern about our financial stability and our ability to prepare for future emergencies,” Moreno said in the meeting.
Mayor Todd Gloria recently said that the city is on stronger financial footing, but the pull from reserves has added to ongoing concerns among councilmembers about the city’s fiscal stability and structural deficit. A structural deficit means ongoing expenses are greater than ongoing revenues.
In an interview with Voice of San Diego, independent budget analyst, Charles Modica, said the structural deficit has shrunk in the past two years, but hasn’t been fully eliminated.
“There is a persistent structural deficit that still needs additional action to address,” he said.
City officials said the largest contributing factor to the budget shortfall was the delayed $7.4 million reimbursement from the California Governor’s Office of Emergency Services for emergency services during the January 2024 floods.
City officials said they expect to receive the money in fiscal year 2027 and the city’s emergency services staff meets with the agency weekly about the reimbursement process. Matt Notley, a spokesperson with the agency, Cal OES, said they are still waiting for paperwork from the city.
“We work closely with local agencies to help them access state funding for eligible recovery costs, providing guidance, and technical assistance through a reimbursement process,” he said in a statement over email. “We look forward to receiving the City of San Diego’s required complete documentation needed to move this reimbursement request forward.”
Officials from the independent budget analyst’s office said in their third quarter review of the budget earlier this year, the delay could create risks for the budget if they didn’t get the money in time.
City officials predicted the general fund’s balance would result in a net increase of $1.7 million if the city received reimbursement sooner. Instead, they did not get the reimbursement in time, leaving them with a $4.7 million budget hole.
So, city officials needed to pull that shortfall amount from the city’s general fund reserves to legally balance the budget.
Modica said the city does not go into a year with the expectation that it will pull from reserves, and that they are ideally contributing money to it.
“Prior to this, we had not had any draws on the general fund reserve in recent memory, so this is worth noting,” he said during the Oct. 21 meeting.
The move has underscored the city’s persistent budget challenges.
The City Council closed a $118 million budget deficit this fiscal year through a series of painful cuts to city services, following a $258 million shortfall the year before.
Over the past year, city officials tried to generate more money for the city to address these gaps, but those ideas failed.
Councilmember Kent Lee said pulling from the reserves again in the future can create more risks for the city’s budget.
“We are increasingly relied on using one-time options in many cases to try to resolve our structural deficit each year, but the structural deficit itself remains,” he said. “We can’t – we won’t continue to be able to keep pulling from some of these reserve pools without creating further risk down the road.”
For the upcoming fiscal year 2028, Modica said the budget deficit he estimates city officials need to solve will be between $15 and 30 million. To solve that, he said one of two things needs to happen.
He said the city needs to cut its spending and reduce the amount of money it spends on programs and services. Or city officials need to have a reliable source of money coming into the city – not just one-time grants.
“The city is drawing on reserves to address real needs, but doing so also creates a future need to replenish those reserves,” said Modica.
The withdrawal drops the city’s combined savings funds from about $207 million to $202 million – or approximately 11 percent of operating revenues. Modica said the Department of Finance committed to replenishing the $4.7 million gap with the Cal OES reimbursement when it comes in, and that any additional Cal OES reimbursement money could be available for other uses.
But the city’s general fund reserves are below this year’s target reserve policy of 14.1 percent. Next year’s reserve policy target is 14.7 percent, and city officials want to reach a 16.7 percent reserve level goal by 2030 – in alignment with best practices from the Government Finance Officers Association.
City officials plan to bring updates to the city’s reserve policy before the end of the year and may propose a different reserve level goal or timeline to get there. They also plan to present the city’s five-year financial outlook.
Mayor Gloria’s Office did not respond to a request for comment.