Monday, Feb. 2, 2009 | As the city prepares for major budget cuts in the upcoming year, the size of the shortfall is still far from clear.
City officials believe that expenses will outstrip revenues by about $42 million for the fiscal year that starts July 1. But in public, they'll continue to use the figure of a $54 million gap, which they cited shortly after the council voted in December not to shutter libraries and recreation centers as part of its budget-slashing measures. Other estimates have put the projected gap much higher.
The reason for the difference in the city's calculations is that the city's pension payment in the 2010 fiscal year is $12 million less than expected. Chief Operating Officer Jay Goldstone said he'll mention the lower pension payment during budget talks in front of the public this year, but he will still refer to the $54 million figure to avoid confusion.
Goldstone said that's the official number that's been released by the Mayor's Office and cited in the press, so there's no reason to change the number that's already in people's minds "even though there's a simple explanation."
"I think it's just going to be cleaner to keep that number constant and talk about things that we're looking at that will change that number," Goldstone said.
He added that the number is "moving target" because the city is still receiving information to better forecast revenues by the time they finish up budget in March.
The city's independent budget analyst, Andrea Tevlin, has pegged the projected gap at nearly $51 million, and Councilman Carl DeMaio believes it could be upwards of $60 million. Late last year, an analysis by the think tank created by former mayoral candidate Steve Francis said the gap could be as high as $128 million.
DeMaio's examination of Mayor Jerry Sanders' five-year analysis uses the worst-case revenue projections included in the analysis. The city expects property tax to grow by 1 percent, sales tax to remain flat and hotel tax to increase 4 percent. But if the city's property tax and hotel tax are flat and sales tax revenues dip by 1 percent, the city would have $12 million less in its coffers, according to the five-year outlook.
Even with the city's flagging real estate market, Goldstone noted, the taxable property value on the books doesn't decline unless homeowners sell the property or get it reappraised.
Any potential wrong estimate of the city's revenues could have big effects on the city's budget. For instance, a 1 percent drop in property tax revenue would translate into a nearly $4 million hit on the general fund.
Tevlin's office has flagged the hotel tax revenue projections as potentially overly optimistic, given that the city is projecting a decline of 2 percent in the current budget year, said Tom Haynes, a fiscal and policy analyst with the office.
Haynes said the hotel tax has typically shown strong growth, but said he felt that a forecast from the Convention & Visitors Bureau "represented a gloomier picture than a 4 percent growth rate."
Goldstone said officials are still gaining information — for instance, from the hotel industry — to better gauge the revenue picture for the upcoming budget year. He said the current economic downturn makes estimates difficult because it affects all sectors of the economy.
"You don't want to be so conservative that you're unnecessarily cutting services and programs," he said. "But you don’t want to be so aggressive that you're not faced with a balanced budget partway through the year, so you attempt to be as realistic as possible."
Goldstone said city officials did that with the current year's budget, but ended up having to make drastic midyear budget cuts to close a $43 million gap. City officials drawing up the budget in March 2008 didn't know how serious the downturn would be, Goldstone said.
"The economy deteriorated beyond what we thought it was going to do," Goldstone said.
Since the midyear budget cuts were approved in December, city officials released a new estimate showing a projected $3.4 million decline in revenue for the current budget year. That stemmed from a roughly $1 million increase in sales tax revenue, a $1 million decline in property tax funds and $3.4 million in vehicle license fee revenue.
If revenue continues to decline — and isn't offset by savings from cutting expenditures — Goldstone said city officials could be back before the council before the budget year ends for further reductions.
A big question mark is what the state will do to solve its own budget crisis. If legislators agree to take a portion of property tax revenues from local governments, San Diego could lose up to $35 million in revenue.
But the gap doesn't depend only on the economic crisis and the state's imploding budget. Tevlin, for instance, said the outlook should not have presumed that $8.5 million in hotel tax money would be allocated to the general fund in the upcoming budget year. Much of that money is slated for promotional expenses and is used for things like park improvements and street repairs in high-tourist areas.
That allocation is a policy issue that should not be assumed in the budget outlook, said Tevlin, who has suggested the city clarify what's considered a promotional expense.
Tevlin's office also added back in $11.7 million in operating costs for new facilities slated to open during the 2010 fiscal year, including the Logan Heights library, two fire stations and several park facilities.
"We need to know the costs of operating new facilities that are underway, that are being constructed as we speak. What is that hit to the general fund? What does that add to the deficit?" she said.
Goldstone said those costs should be included in the updated outlook released this spring.
DeMaio believes the city should plan for a $60 million shortfall, even though his projections don't take into account the lower pension payment this year.
He said the mayor has been overly optimistic in projecting revenue before. If there's a surplus, he said, it could be used for expenses like building up the city's reserves, investing in deferred maintenance and saving up for the city's pension payment in the 2010-11 fiscal year, when the city will bear the brunt of its investment losses from the current year.
"I'd rather see the city running a surplus than running a deficit," he said.
Clarification: The original version of this article reported that revenues to the city would outstrip expenses. Of course, it is the other way around and it has been changed.
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