San Diego City Council members are weighing budget cuts and the possibility of spending down reserves in the face of a big revenue miss in the current-year budget and ballooning pension costs in the next.
The city faces a projected $154 million deficit in fiscal 2022, which begins July 1, nearly twice the $86 million shortfall projected in November.
San Diego Mayor Todd Gloria, a Democrat who took office in December, partly laid blame for the deficit at the feet of his predecessor, two-term Republican Kevin Faulconer, saying the city faces financial challenges due to lingering budget issues from the past administration and plummeting revenues caused by the COVID-19 pandemic.
“The city faced structural budget deficits even before the pandemic wreaked havoc on our economy, leaving us with fewer resources to repair our crumbling infrastructure,” Gloria said in a statement.
City departments will be proposing cuts to their budgets in coming weeks, but Gloria said he’s “confident that we will propose a balanced and responsible budget while doing all we can to protect core neighborhood services.
“Repairing our city budget won’t be a quick or painless process,” he said.
The extent of the current shortfall was revealed when the city’s finance department released the
Fiscal year 2021 revenues are projected to be $86 million below the budget forecast.
"Most of the revenue shortfalls are due to the ongoing COVID-19 pandemic and the impact of the State’s Stay at Home Orders on travel, special events, and revenue generated from city property and facilities," according to the mid-year report.
The pandemic has taken a bite out of the city's visitor business. The city's convention center, instead of hosting free-spending out of towners, has been repurposed as a homeless shelter since April.
With 1.4 million residents, San Diego is California's second most populous city. It carries issuer ratings of AA from both S&P Global Ratings and Fitch Ratings, and Aa2 from Moody's Investors Service.
The city is projected to have $205.6 million in reserves which comprises 15.14% of the budget.
The
The valuation updated demographic projections to reflect lower mortality rates among plan participants and higher-than-expected pay increases for city employees.
As a result, the fiscal 2022 pension contribution requested by the city's pension board will increase $49.3 million from fiscal 2021 to $414.9 million, a 13.5% increase.
The San Diego City Employees' Retirement System is 70.2% funded, according to a presentation by the city's actuary, Gene Kalwarski of Cheiron.
The City Council discussed and then approved on Tuesday the budget priority resolution it gives the mayor annually as he drafts his own budget proposal. The mayor has until April 15 to release his proposed budget to be reviewed and approved by the City Council by June 15.
The mayor had asked city departments in January to cut their budgets based on a three tier structure of 2% cuts for public safety, homelessness, transportation, environmental services, and storm water services; 4% for departments that provide support for these services; and 8% for all other departments. The reduction proposals will be evaluated by the city’s executive management before they are submitted to the mayor’s office for inclusion in his proposed budget.
The City Council is trying to balance the reduction in revenues and the proposed cuts against employee retention problems and retirements, as well as concerns over reducing core services.
A report by the city auditor in April 2020 found the city’s employee vacancy rate has increased every year since 2011 and was at 14.3% in 2019. The report also found that city wages are lower than salaries offered by competing cities making it difficult for the city to retain high-quality employees.
Eight council members proposed a 3% cost of living raise for employees, who have not received a raise since 2018. A cost of living increase would increase the projected deficit by $18 million to $172 million, according to city finance officials.
San Diego has not been spared from the disruption caused by the pandemic and faces a historic financial loss, said City Councilmember Joe LaCava, D-District 1.
“As the mayor and council move forward this fiscal year to close a historic funding gap, we must lead with our values, ensuring a budget that prioritizes equity, high value services, and human capital, “ LaCava said. “If we are to become a great city, we must change the institutional and systemic barriers that prevent all San Diegans from enjoying the opportunity our city offers.”
Making those changes will require not only re-prioritization and restructuring in some areas, but force harder conversations in other areas as council members work to balance the budget, LaCava said.
With city employee salaries comprising roughly 70% of the city’s general fund, LaCava recommended the mayor not simply make across-the-board cuts to balance the budget, but be surgical in contemplating layoffs by considering the impact on each department.
He pointed to a study done by the city in 2018 that estimated that employee turnover costs the city $39 million a year. The fire department has lost senior staff resulting in increased overtime costs and residents have complained that some public-facing departments have lost institutional knowledge due to early retirements resulting in a shortage of mid-career personnel to train and oversee new hires, LaCava said.
“It is essential that city leaders make every effort to address salary inequities, but also maintain staff salaries during this pandemic, and work strategically to quickly hire and retain staff,” LaCava said. “I also urge the completion of a workforce report to leaders identifying which city positions face challenges related to recruitment, retention, and employee satisfaction as recommended by the Office of the City Auditor in an April 2020 audit.”
Council members supported the use of general fund reserves to cover shortfalls in fiscal years 2021 and 2022 and using the $7.9 million pension payment stabilization reserve to help cover the increased pension costs.
One council member proposed waiving the $11.3 million contribution to the Infrastructure Fund in fiscal year 2022, but several council members included a laundry list of street improvements they would like to see in their districts.
While he agreed that city leaders may not be able to do everything, Council President Pro Tem Stephen Whitburn said he is glad there was broad agreement around homelessness, improving streets and supporting city employees.
Councilmember Chris Cate, the council’s lone Republican, reminded council members that their priority needs to be protecting core services and passing a balanced budget.
“We need to make hard choices given the deficit, which has doubled in size,” said Cote, who chairs the budget committee.
City Council members universally agreed that this year’s budget process was going to involve tough choices, but they don’t want to lose momentum on making changes toward furthering racial equity.
The City Council should not lose sight of programs proposed to deal with racial inequities as it works to create a balanced budget, City Councilmember Monica Montgomery Steppe, a D-District 4, said during Tuesday’s council meeting.
“I understand this is going to be a tough budget year, but we are in a time when COVID-19 has exposed what has been an issue in our nation for a very long time. Some of our neighborhoods have experienced two and three times the rate of positive cases and unemployment and we continue to underinvest in these communities,” Steppe said.
Steppe recommended that the city form an Office of Race and Equity and create a Climate Equity Fund for mitigation, adaptation and resilience and planning to support neighborhoods most vulnerable to climate crisis as identified in the city’s climate equity index as being very low to low access to opportunity areas.
Given the dynamic economic environment and continued uncertainty facing the city, Gloria said he is exploring various mitigation options to address the budget shortfall and will communicate next steps in the coming weeks. While there is news of a federal stimulus package on the horizon, the amounts and restrictions remain unknown and approval by Congress remains uncertain, Gloria said.
City leaders hope that they will know how much federal or state stimulus funding is available by the time the finance staff releases the third quarter financial report in the spring. That report will include any necessary budget adjustments for the City Council’s consideration, including the use of reserves, if still necessary, according to the city finance staff.
