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Deficits, Transparency, and Making Sense of San Diego's Financial Footing

As published in the San Diego Daily Transcript

by Steve Francis

Thursday, July 16, 2009

If the first rule of holes is that when you are it one you need to stop digging, the second is that before you can fill a hole you had better know how much dirt you need.

The failure of the City of San Diego to release an updated Five Year Forecast, a five year overview of the revenues and expenses for the City’s General Fund, flies in the face of this sage advice.

Last publically updated in November 2008, at that time the forecast painted a bleak and troubling picture. Long term, the forecast projected a cumulative deficit of $223 million. This past year a combination of falling revenues and continued cost pressures forced City Hall to continue to cut the budget. First in a mid-year budget adjustment and then in the FY 2010 budget, painful decisions were made. These included a roll back in employee salaries, several million dollars in fee increases, and cuts to city services

But even these reductions didn’t put much of a dent in the long-term problem.

Indeed, for San Diego taxpayers, when it comes to the FY 2011 City of San Diego budget Al Jolson famous quote rings too true. “You ain’t seen nothing yet.”

At least three challenges loom on the horizon and suggest that is critical to get the forecast out immediately so that as a community we begin a discussion about the painful choices that are going to be required.

First, since November the economy has significantly worsened. The Five Year Forecast assumed, for example, that in the fiscal year (FY 2011) that will begin next June property tax receipts would increase 1%. While there are glimmers of hope in the real estate market, median prices in many neighborhoods in San Diego continue to fall. The thousands of homes and condos in the so-called shadow inventory (homes in foreclosure but not yet listed for sale) are likely to be released by lenders in a way that for years keeps property values in check. The County has at LEAST 32,000 pending applications for property tax adjustments and has proactively lowered the assessed value on more than 70,000 other parcels. Every 1% decline in property tax receipts translates into a $4 million decline in revenues so if we optimistically assume that receipts will be flat in 2011, that translates into a $4 million shortfall in the revenues projected in the November forecast. Probably more realistically, assuming a 1% decline it would mean an $8 million gap for FY 2011.

November’s projections for sales tax (a projected 2.0% increase in FY2011) and TOT receipts (projected to grow 5% next fiscal year) are also likely to prove illusory. Again, taking an optimistic projection that these revenues remain flat, it would mean an additional $15 million shortfall to be closed. A 1% decline in next year’s revenues would equate to a $30 million shortfall below projections.

The budget math becomes even harder when we consider that to close this year’s gap the Mayor used approximately $15 million in one time solutions that are no longer available.

Finally, looming on the horizon is the biggest of all budget tidal waves, the bill that will soon be delivered to City Hall from the San Diego City Employee Retirement System (SDCERS).

As taxpayers are all too painfully aware, San Diego’s pension plan remains in deficit. To pay benefits, the system relies upon contributions from the City, from employees, and from investment gains on the plan’s assets.

The rub is that investment losses have been so deep as to make one’s head swim. On June 30, 2008, the S&P 500 stood at 1280. A year later that same index stood at 919, a 28% decline. The chances of getting out of the hole without massive increases in contribution rates is as unlikely as the Padres making up the 20 game deficit they currently face. Indeed, in March the head of SDCERS suggested that the city could be looking at a $100 million INCREASE it is required contribution. Even if the buoyancy in the market during the second quarter cut that bill by two-thirds - a extremely generous and optimistic assumption - it would add $30 million to the hole the City needs to fill.

So $30 million in additional pension expenses plus $15 million in one time savings plus $15 million in revenue shortfalls. All told the City is looking at a 2011 deficit that could approach AT LEAST $60 million. Some, including the City’s Independent Budget Analyst, have argued that the shortfall could approach a staggering $100 million. Anyway one adds things up, we are talking about serious money.

Closing that gap isn’t going to be easy. It isn’t going to allow for “legacy” building. It isn’t going to overcome by San Diego’s standard “politics as usual” of kicking the can to future taxpayers or promising to build grand civic structures financed through a spit and a promise.

Instead, what it will require, and something I have been advocating for a long time, is hard and frank discussions about what the City can afford, what it can’t, and how we have to fundamentally change how the City delivers certain services to save money. It isn’t just a conversation with insiders and the people that have long paid attention to civic affairs. It is a conversation that has to be engaged in hundreds of times - even if the venue has just a few people. Political leaders need to be out NOW at community meetings, street fairs, BBQs, and picnics bringing our citizens into a frank, honest, and factually grounded discussion about the long-term problems our city faces. Getting people to buy into change is always hard. It is especially so when for too long citizens have been told “trust us, we can painlessly fix things” by city leaders.

Starting such a dialogue requires disclosing financials. That is why the forecast needed to be out months ago. Delay is so extremely damaging to efforts to reach the consensus that is that is going to be required. Only by forging community-wide agreement will everyone know how big the hole is and what we truly face as a community. Only then we can start fundamentally rethinking how the City works, what we want for the future of our community, and the tradeoffs that are going to be required.