When Mayor Todd Gloria gave his first State of the City address since taking office, he talked about the large budget deficit he and the City Council will have to close but he also dropped a line indicating some very big decisions would have to be made going into the future.
“The pandemic has exacerbated longstanding city budget problems the last administration did too little to address,” Gloria said, making a dig at former Mayor Kevin Faulconer, who’s now running for governor. “Behind the ribbon-cuttings and news conferences, the city faced structural budget deficits.”
When officials and experts use the term “structural budget deficit” it means that any particular budget problem for a year is not the issue. Instead, the organization is set up to spend more money than it is set up to take in. So while the city is dealing with a once-a-century pandemic and resulting financial problem, the new mayor was also saying that it would have been bad regardless.
So what are those structural budget challenges Gloria said Faulconer didn’t do enough to tackle – and what does he plan to do about them? Gloria and his team told Voice of San Diego the city doesn’t bring in enough money to pay for the expanded services and staffing Faulconer oversaw over the past several years.
While they aren’t eager to discuss tax and fee hikes during a pandemic, they also believe the city needs to bring in more money for infrastructure needs and to pay employees more, a compensation program that now lags behind that of other municipalities. They say they are also referring to state mandates to address stormwater issues, a massive share of the city’s infrastructure backlog, and to next year implement a state law requiring organic waste processing that will require additional staffing and trucks, and thus costs that the city can’t pass along to single-family homeowners who now get free trash pickup due to a 1919 ballot measure.
The city’s annual payment to its pension system, to fund retirees and future retirees, is ballooning as well.
Gloria seems likely to want to increase taxes or revenues over the long haul to address these gaps – but he’s isn’t willing to say so as the pandemic continues to hammer the city’s budget and its revenues, and residents struggle to keep paying their existing bills.
Chief Financial Officer Matt Vespi said the pandemic has further underscored the city’s budget challenges.
“Our revenue structure is probably not where it should be for a large city of our size with the requirement to provide services that we provide,” Vespi said.
Indeed, city government grew on Faulconer’s watch. A review of city budgets over the last seven years shows the city’s roster of full-time equivalent employees increased from 10,478 in fiscal year 2015 – Faulconer’s first budget cycle – to 11,727 this year.
“I think we’ve left ourselves here with structural issues because we’ve had these known large-ticket mandates coming at us, and the policy decision has not been to put funding toward those but rather to the new programs,” Vespi said.
Gloria pins some of the blame on the Faulconer administration.
“There was a clear lack of desire from the previous administrations to address these complicated, challenging and incredibly important issues head on,” Gloria wrote in an email to VOSD. “The cost to fix crumbling infrastructure systems and low employee compensation isn’t the stuff of happy headlines even though both are important ways to improve the quality of life for everyday San Diegans.”
But Gloria wasn’t willing to elaborate on any future proposals he might have to raise taxes to support that expansion or make good on the city’s infrastructure, pension and other commitments. When asked to clarify whether he would support tax hikes to address the city’s repair needs, employee compensation or new programs, he would only say that he wouldn’t support them without voter approval and without considering the economic realities at the time.
While Gloria isn’t calling for proposed tax and fee hikes in the immediate future, his past openness to them suggests he may urge that approach when the city’s economic situation improves. He years ago pushed for an infrastructure tax hike that ultimately never happened and has supported tax hikes more than his predecessor.
Gloria said failures to address growing challenges have only added to the city’s woes as it stares down a projected $85 million deficit for the fiscal year that ends in June, and another $154 million gap the city expects for the new year beginning in July.
Adding to the city’s budget headaches is a ballooning annual pension payment that the city and its mayor have little control over. Next year alone, the city’s total pension payment is expected to rise by $52.4 million – and hit $418 million. More than $317 million of that will need to come from the city’s day-to-day fund.
“The pandemic has exacerbated all of the city’s budget problems,” Gloria said.
Gloria said past mayors’ pursuit and implementation of Proposition B, a 2012 measure that ended guaranteed pensions for most city employees hired after it was approved, added to the city’s structural budget challenges and its pension costs.
Faulconer did in 2016 create a pension reserve fund meant to help shield the city’s budget when its pension bill spiked.
“Previous leaders relied on a misguided pension reform plan to balance the budget through a five-year freeze on employee compensation increases that in the end has only furthered our employee compensation disparity, limited our ability to recruit and retain employees and driven years of litigation expenses,” Gloria wrote.
In recent weeks, a judge has ruled the city must remove Prop. B language from the city charter. If the supporters of the initiative don’t appeal, the city will have to begin negotiations to figure out what to do – and it’s not entirely clear how much that will cost.
For now, Gloria plans to ask the City Council to allow him to hold off on making cuts for the current budget year as he assesses the prospect of federal coronavirus aid and continues to monitor the state of vaccination efforts and the health crisis. His team has said he will weigh potential service cuts along with options such as dipping into city reserve funds and deferring capital projects.
Like the tough decisions ahead, the budget challenges that pre-dated the pandemic don’t have quick and easy solutions.
The city’s independent budget analyst has long urged city officials to consider how the city might address its major infrastructure gap that spans everything from stormwater projects to road repairs.
During his time as mayor, Faulconer threw more city resources at addressing the city’s infrastructure problems and touted the fact that the city repaired more than half of its 3,000-mile street network on his watch.
Faulconer has said that Proposition H, a 2016 ballot measure that directed more tax revenue and pension bill savings toward infrastructure repairs, bolstered those efforts.
But Independent Budget Analyst Andrea Tevlin has said a new revenue source is needed to meet a five-year infrastructure funding gap that the Union-Tribune recently reported now totals $3.02 billion – up from $1.27 billion four years ago.
Because of state regulations, the city must make major upgrades to how it handles water from rainstorms to limit ocean pollution. Those stormwater upgrades make up $1.28 billion of the projects that are for now unfunded over the next five years.
The budget analyst, city auditor and an outside reviewer have in recent years recommended that the city consider increasing its existing 95-cent storm drain fee to something closer to what other cities charge to more aggressively address those growing flood-prevention infrastructure needs.
Last week, a City Council committee signed off on a plan presented by city staff to explore a possible 2022 ballot measure to increase fees or taxes to help address the problem.
City budget analysts have also for years urged the city to consider going to voters to repeal the People’s Ordinance, which subsidizes trash pickup for single-family homeowners at a cost of more than $30 million annually that the city could instead use for other city services.
Changing that doesn’t seem to be on Gloria’s immediate agenda.
The mayor noted that any tax hikes or fee increases would need to be approved by voters – and said he has no plans to ask voters to increase taxes to try to balance the budget in the near future.
“We have a structural budget deficit coupled with enormous infrastructure needs with no identified funding sources but any attempts to rectify that must take into account the economic environment and financial priorities of the city,” Gloria said.
For now, Gloria is stuck mulling where cuts – and investments – are feasible.
At the top of the list for consideration: Gloria and nearly all City Council members have said they want to improve city employee compensation following multiple surveys and an audit that emphasized disparities with other cities – and spurred discussions about recruitment, retention and vacancy challenges that gap fuels.
The city’s finance department has estimated even a 1 percent salary increase for city employees would cost the city’s day-to-day fund about $6.1 million.
Meanwhile, some City Council members are pushing for new programs and expenses such as a study on the feasibility of creating a public bank for the city, bolstering the urban forestry budget and the creation of a new Office of Child and Youth Success.
Chris Cate, the City Council’s sole Republican and chair of its budget committee, said he expects tough conversations ahead – and like Gloria, hopes they might inspire reflection on longstanding issues.
The reality, Cate said, is that the city can’t afford to do everything its residents and leaders would like, and already struggled to keep up with existing infrastructure needs and the demands of city employees. He doesn’t believe tax hikes are the appropriate solution.
“There’s no doubt that we have a lot of need as a city, and I think what we haven’t had is a real conversation about what are we in the business of providing, in terms of services,” Cate said.
Correction: An earlier version of this post included an outdated projected city budget deficit for next fiscal year. It is $154 million.