San Diego Independent Budget Analyst Predicts City Deficits
CAVANAUGH: As mayor Jerry Sanders prepares to leave office, his rosy financial legacy is looking a little cloudier. An analysis from the city's independent budget analyst finds quite a few uncertainties in San Diego's financial future. Costs surrounding the switch to 401Ks, unpaid redevelopment costs, and other fluctuations could turn next year's projected $5 million surplus into a deficit of up $284 million. My guests, Katie Orr, welcome. ORR: Thanks, Maureen. CAVANAUGH: San Diego City Council member Todd Gloria, welcome. GLORIA: Thanks for having me. CAVANAUGH: And Jay Goldstone, chief operating for the City of San Diego. GOLDSTONE: Thank you. CAVANAUGH: Katie, first of all remind us of the mayor’s projections for San Diego’s budget looking out over the next five years. ORR: The mayor announced a little while back that for the first time in seven years, the city had a structurally balanced budget, and not only that, but his office was projecting surpluses for the next five years. About $5 million in fiscal year 2014, up to $94 million in fiscal year 2018. So definitely a different picture than what the city has been dealing with. CAVANAUGH: And what are some of the reforms the mayor pointed to that are leading to the surpluses? ORR: Certainly just the fact that the economy overall is getting better, and so tax revenue is up. But also he pointed to things like managed competition, which is basically outsourcing some city services in an attempt to bring down the price of those services. Things like reduction in personnel. The amount of city positions has been reduced pretty drastically under Sanders' administration. And the general recovery of the economy all contributed to a better financial picture. CAVANAUGH: Now, the independent budget unless released yesterday praises the progress made in recent years to achieve a balanced budget, but it identifies what it calls risks to the mayor's 5-year budget outlook. What are those risks? ORR: Well, we have the redevelopment impact. As listeners may or may not be aware, I believe it was last year, the state eliminated redevelopment agencies, and those had allowed cities like San Diego to designate taxes in the area for redevelopment. And that was used for a lot of projects, like the north embarcadero visionary project, building hotels and improving the areas down there. Since then, we've been going through a process of trying to get those payments continued, allowing redevelopment funds to continue going toward those projects. And the state has statements saying whether those payments can go forward. And the IDA says there's up to about $14 million next year might not be covered, and that's something that the city would have to cover. That's one thing. Also the pension costs. Nobody really knows until January or so what the pension costs will be, and that's an annual thing, that's how they do the final evaluation. But there's also the implementation of prop B, which switches new employees from the pension to the 401K, the IBA is estimating that could cost about $22 million. So things like that, and how the city chooses to defer capital projects, all of that adds up to what the IBA is saying could be an $84 million deficit. CAVANAUGH: So that's the difference. The mayor's budget analysis for next year is a $5 million surplus, and the independent budget analyst's projection or possibility would be an $84 million deficit. ORR: Right, yes. CAVANAUGH: So Jay, the mayor's office is reportedly not too pleased with this analysis. What are your main complaints? GOLDSTONE: Well, first of all, I'm a little surprise that there is surprise among your listeners and maybe the media that this is new news. Even as recent as October when the mayor released his outlook, there was a lot of discussion about the threats of redevelopment, and the Los of the tax increment. There was discussions about the fact that the pension system did not perform its earns as high as the assumed rates, and there's been a lot of discussion at the time the fiscal analysis was done for prop B that there is the exposure should the pension board decide to implement the impacts of prop B one year early, that these numbers were out there, and we set money aside to address those. So when you read through the IBA's report, she starts out clear that she does not dispute the mayor's projections. It's just that these other areas that the City Council and the new administration needs to be sensitive to as we go forward. CAVANAUGH: Do you have reserves of $114 million, is that other? For the city, if those costs actually were to come about and about as bad as the IBA's projections? GOLDSTONE: June of 2012, our reserve balances were $166 million, which is about 14%. And on top of that, there was other money set aside for the 2013 budget in anticipation of what the state might do, in terms of not allowing tax increment for that to be paid for the debt service that the general fund would otherwise have to pick up. CAVANAUGH: But this analysis projects deficits for the next five years. So are reserves certainly enough to cover all that? GOLDSTONE: Well, no, I believe they are. First of all, there are discretionary decisions to be made, and nondiscretionary. When we talk about the debt service -- or the payments for debt service that normally was redevelopment and the pension payments, those are nondiscretionary. They're out of the city's control should the state or the pension system decide to implement those. We have enough money set aside to cover any short-term deficits that could be generated because of that. The other areas in her report are all discretionary. Do you want to spend more money on infrastructure repairs? We've already increased the spending on that dramatically. You could always add more money. But there's other areas that the city could look at as well. So I don't look at those areas as driving a deficit. Those are decision points that are going to make the council and the next administration sensitive to how you set priorities. ORR: Right. And you could reduce the number of police recruits. The penny for the arts, that's a plan to get more arts funding by taking some of the hotel tax revenue and putting it toward arts. That isn't something that you have to do. That's discretionary. So there is wiggle room in the budget that would impact the deficit. CAVANAUGH: Even so, a $5 million surplus is substantially different than a potentially double-digit deficit that could be ameliorated by going into our reserve funds. I'm wondering where the difference is in the idea of projecting how much we're going to have to pay next year. GOLDSTONE: The 5-year outlook that we submitted to the budget and finance committee is the same format and it's consistently prepared year after year, and what we built into the outlook from a model standpoint are the known activities. So we knew based on last year's pension projections what our future year pension payments would be. We know what we budgeted and what the state up to this point has authorized the use of tax increment for these services. So we built those into the models just like when pension payments were going down, we did not build those lower numbers into the model until they became official. We did build into the narrative and the discussion of the 5-year outlook an acknowledgement that there are these threats out there. CAVANAUGH: Councilmember Todd Gloria, as a City Council member, how concerned are you with the potential deficits outlined in the analyst's report? GLORIA: Well, let me start by saying that I think this has to happen within a context. And what we know from where we were to where we are today is infinitely better. What jay is saying is correct. Many of these things, we were made aware of. The difficulty is, we have had some extraordinary circumstances happen. The ending of redevelopment was nothing that folks would have anticipated perhaps more than a year ago. The voter approval of prop B is also an extraordinary event. I think what is the challenge for us of course is to maintain the fiscal discipline on a go-forward basis so we do not end up back in deficit positions, and it's going to pose a challenge for the council and the new mayor without question. But it is still a far better position than where we were in 2005. CAVANAUGH: You were one of the people that warned against potential costs involved in transferring from one form of city worker pension to another. The IBA is now projecting next year that transition might cost us $21 million. Is that sort of your big evaluate fear realized? GLORIA: Well, it wasn't a fear, it was a fact. And I think that's troubling about that is that this was known in advance of the vote. But I would argue that any person who voted for Proposition B, and I did not vote for it, did not know that it was cause our pension bill to increase in the short-term. And the proponents of this measure argue in the long run, it's better. Well, that's true, we'll just be paying into 401Ks. But as we're coming out of the worst economy we've seen in 70 years where our revenues have been down, was it the best thing possible to go ahead and plow another potentially $22 million into our pension system? I think when people were out campaigning for prop B, they rarely told anyone it would increase our pension bill, and the average voter thought it would reduce it. The truth is that it's not that case, and we're having to pay it down now. GOLDSTONE: That $22 million, it's an acceleration of our pension payment. It didn't increase the overall pension liability. They just changed the methodology. It's almost like going from a 30-year mortgage down to a 20-year mortgage, you're paying it off faster. Over the long run it will save money. But the short-term, it calls for greater resources. CAVANAUGH: Do you think that would adequately explained -- the mayor was a supporter of prop B. Do you think that was adequately explained to voters? GOLDSTONE: Well, it was in the fiscal analysis that was done. That short-term it was going to change the methodology. But there's even discussion among the SD suspect sers board that there may be other alternatives. So that number could even be zero. We just don't know yet. Different governmental accounting standard rules are changing which may change the picture. It's a lot of uncertainty, which is another reason why we didn't build it into the 5-year outlook. GLORIA: And if I could, one of the things about the fiscal analysis, that was in the voter pamphlet. And one could argue if voters read that closely or not or understand it. But our city auditor chose not to sign off on that analysis because he did not feel that it adequately explained the costs that were involved. And if you ask the average citizen when they voted for Proposition B, did they know in the short-term that would increase our pension bill, the fact is it's a $22 million hit, $22 million that I do not have to do road repairs or expand library hours, are now back into the pension system. And it's ironic because this was done by people who vilified public employees and the pension system, and it's exacerbating the problem in the short-term. We will deal with it. We have built a culture at the City Council that is fiscally disciplined and will work to solve this issue. ORR: Another thing that adds to the uncertainty is trying to figure out what projects we can keep using former redevelopment money to pay, and I've tried to do some stories on it, and it's an incredibly complicated process. San Diego has to refer some projects to a county -- remind me? GLORIA: Oversight board. ORR: Yeah, and they have to decide if those projects are good, and they forward them to the financial office of the state. And the state has come back and said that we can't use money for the north embarcadero visionary plan, we can't use money to pay off the Convention Center or the ball park loans. Big-ticket items in San Diego, but apparently they're going back and forth, and who knows if any of this will even end up in court, and it's a huge long process, and that just adds to the uncertainty of what we're going to have to pay next year. CAVANAUGH: We're getting close to time. Jay, I just wanted to ask, to address the thing that you said first, and that is you don't know why people are surprised by this. And one of the things I think is that the mayor's projections have been sort of criticized ever since they came out, the budget projections, as being sort of shaky. Carl DeMaio publicly said that he really didn't believe them while he was campaigning. I'm wondering, are we going to see the mayor's budget projections really be Taylored in the months to come as more of these unknowns become known as time goes on? GOLDSTONE: Well, there's no question. Every roughly October or November, the mayor has released a 5-year financial outlook, and that becomes the basis for preparing the next year's budget. But between November and April 15th when the budget gets released, there's a lot of new information that comes out. We will know the actual pension number. That will have to be built into the budget. The city will pay the full pension payment for the coming year. And priorities will have to shift. The use of reserves may be considered. If you read the IBA's report, she's not criticizing the revenue forecasts that were used or even the expenditures that are being proposed based on past experience. She's identifying some additional areas that the city has to consider. And I think when council member DeMaio came out and he would criticize it, he's saying well, because there's a service deficit. So if you increase services, you're not going to have enough money. Those are all discretionary decisions that the City Council and the administration can make. They're not mandatory.
San Diego's Independent Budget Analyst projects deficits for the city over the next several years, conflicting with figures from Mayor Jerry Sanders that sees nothing but surpluses ahead.
Sanders' five-year budget outlook, released last month, called for a $4.9 million surplus for the next fiscal year, growing annually to $94.2 million by the 2018 fiscal year. It did not include general wage hikes for employees or increases in service levels, but financial officials acknowledged that uncertainties could unravel their estimates.
The IBA report listed several concerns that cut into the projected surpluses, including: Changes to redevelopment that could put the city's general fund on the hook for Petco Park and Convention Center debt service; investment losses by the San Diego City Employees Retirement System; initial costs of implementing voter-approved changes to retirement benefits; doubling of support for arts and culture; and more moderate growth of sales and property tax revenues.
According to city officials, it is unknown whether the state will stick San Diego with the redevelopment costs, but the retirement system losses and Proposition B implementation expenses were expected. Also, the City Council agreed to increase arts and culture support over the next several years, with Sanders' blessing.
"While the city's financial position has improved substantially over the past several years due to numerous reforms, it is far too early to celebrate," the authors of the report said.
They said city officials still needed to be "fiscally cautious." The worst case scenario from the IBA turns next year's surplus into a deficit of as much as $84.2 million.
The city’s chief operating officer Jay Goldstone said on KPBS Midday that he’s “surprised there is surprise” about this news. Goldstone said the mayor’s rosy picture in October was merely a projection, and he expected all along that other factors like redevelopment and pension costs could change things.
“There’s a lot of new information that comes out, we will know the actual pension number, that will have to be built into the budget, the city will pay the full pension payment for the coming year, and priorities will have to shift, the use of reserves may have to be considered,” Goldstone said.
The biggest bites would be from spending an extra $30.1 million on capital maintenance and $21.6 million to implement Proposition B, passed by voters in June.
City Councilman Todd Gloria told KPBS Midday the city knew about Prop B's cost and said it’s troubling this information was downplayed before the vote.
“I would argue that any person who voted for Proposition B, and I did not vote for it, did not know that it would actually cause our pension bill to increase, at least in the short term,” he said.
Instead of a huge surplus in five years, there would be a deficit of $43.1 million, according to the report.
"The mayor has said all along that these issues, which are largely out of the city's control, could pose financial challenges in the future," said Darren Pudgil, a spokesman for Sanders.
"That's why he has built up the city's reserves to $166 million, which is 14 percent of the city's budget -- well above the city's 8 percent reserve policy."
Mayor-elect Bob Filner and the City Council will be able to tap these funds should they need to, Pudgil said.