The economy is doing well and tax revenues are rising – so why are three of San Diego’s largest government agencies facing massive hits to their bottom lines?

The city of San Diego estimates it must slash $47 million to $67 million in spending, San Diego County may have to cope with $100 million in new costs and San Diego Unified is staring down at least $124 million in cuts – an especially dire challenge because the reserve fund has nothing to spare.

Some of their troubles are common.

First, all three agencies are dealing with rising pension costs. State and local pension fund leaders are reducing long-term earning expectations, which increases the amount of money employers must contribute to fulfill retirement promises for current and former employees.

Traditionally, when things don’t pencil out it’s the employer – also known as the government or taxpayers – that are ultimately on the hook to cover losses. In contrast, city of San Diego employees hired after 401(k)-style pension reforms were enacted in late July 2012, except for police, just get less in retirement.

Lowering expected returns also increases each agency’s unfunded pension liability, or the gap between the cost of what’s been promised and what’s in the bank.


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Longer life expectancies are having the same negative effect. People are living longer, and drawing pension checks longer than once anticipated. This increases employer costs and needed contributions.

Other factors contributing to the budget crunch are more unique to each agency.

Here is a closer look:

City of San Diego

In November, the city was projecting a $37 million shortfall next year. The city’s independent budget analyst more recently put the deficit at $57 million, which included “critical strategic expenditures” inexplicably left out of the earlier forecast in a departure from previous practice.

Since then, the city’s pension payment grew by another $10 million annually, so the deficit now stands at $47 million to $67 million, or nearly 5 percent of the city’s $1.4 billion general fund next year.

More than anything else, rising pension costs are hurting the city’s bottom line.

In total, annual pension costs will increase by $63.4 million next year to $324.5 million. Most of the increase – about $47 million – will come from the city’s general fund. To put the impact in perspective, without the pension increase, the city’s general fund deficit next year would be $20 million at most.

Current city officials have pledged to never again deliberately underfund pensions – a practice that once made the city infamous nationwide – so the higher costs will be paid and the money to do so must come from somewhere else.

Though the city’s tax revenues are rising, they’re not rising fast enough to cover the added costs.

Property tax revenues are expected to exceed estimates this year by nearly $1.3 million, but sales tax revenues are lagging behind by more than $1.3 million, according to the Mid-Year Budget Monitoring Report released last month.

Hotel tax revenue growth is also lagging, with officials now expecting nearly $900,000 less this year than what was included in the budget.

It’s unclear if this year’s tax trends could impact next year’s expectations.

Property tax revenues were previously forecast to bring in $532 million next year, nearly $29 million higher than newly revised estimates for this year. Sales tax revenues were expected to total less than $271 million next year, $700,000 lower than current year estimates and hotel tax revenues were anticipated to total $120 million next year, $7.6 million higher than current year estimates, city records show.

What tax revenue gains do exist are not all up for grabs, either.

A portion of the city’s tax revenue increases are now restricted for infrastructure needs, thanks to a measure approved by voters in June 2016.

Proposition H is expected to render $17 million untouchable for other budget needs next year, city records show, but it’s possible some city maintenance costs currently paid by the general fund could be shifted to the infrastructure fund.

To help close next year’s $47 million to $67 million budget gap, all city departments were asked to identify cuts totaling 3.5 percent for next year. If all suggested cuts were enacted, savings could total $45 million, per the independent budget analyst.

On Monday, the City Council will vote on whether to slow down plans to reach minimum 16.7 percent general fund reserve levels recommended by the Government Finance Officers Association. The move could free up $3 million annually over the next five years.

More will be known about what will get cut when Mayor Kevin Faulconer releases his proposed city budget by April 15 and a revised budget in May. The budget will be sent to the Council for approval in June.

San Diego County

County leaders have long touted a healthy reserve fund and stellar bond ratings as signs of financial health. That hasn’t changed, but state and federal actions outside of their control could bring new costs to the county budget.

Supervisor Dianne Jacob said in her State of the County address Feb. 1 that the county “may be looking at a $100 million hit to our budget.”

Jacob’s office said the $100 million figure referred to a possible $75 million cost increase if the Affordable Care Act is repealed and local residents lose insurance. The expectation is that the county will have to provide medical care to masses of newly uninsured residents.

“An early estimate is the county, who has responsibility for indigent health care costs, could be faced with $75+ million in increased medical costs for people who lose their health coverage under the Medicaid expansion of ACA,” county spokesman Michael Workman said in an email.

The remaining $25 million cited by Jacob refers to Gov. Jerry Brown’s proposed decrease in state funding for in-home support services, which provides home help to low-income residents who are elderly or disabled.

Whether either impact becomes reality next year remains to be seen, but Jacob seems to think there’s a real chance supervisors will have to come up with $100 million more than anticipated.

That may result in cuts to other services, or using money in the reserve fund.

Already anticipated in the $4 billion budget are rising county pension contributions, expected to increase from $394 million this year to nearly $469 million next year. The county spends another $81 million annually to pay off pension obligation bonds, loans the county obtained a decade ago to make pension contributions.

San Diego Unified School District

The amount of budget cuts needed at San Diego Unified is rising, with the latest staff estimates after the governor’s state budget topping $124 million.

Budget documents show school officials plan to outspend general fund revenues this year by about $100 million – more than any other year in recent history. In recent years, the district relied on its reserve fund to help cover funding gaps, causing it to dwindle to minimum 2 percent levels required by the state.

The district must grapple with cuts to its $1.3 billion general fund budget even as costs for pensions and other employee benefits are rising.

Contributions for teacher pensions totaled nearly $125.5 million this year and will increase by $10 million next year. Contributions for non-teaching staff pensions totaled nearly $37.5 million and will increase by $3.2 million. Even steeper increases are needed in future years.

Revenue increases from the state are slowing a bit faster than expected after years of large cash infusions following implementation of the new Local Control Funding Formula. The formula sent more money to districts like San Diego Unified that have large populations of English-learners, students from low-income families and other vulnerable students.

Exactly what will get cut next year will be approved by the school board Feb. 21, but school sites have begun circulating notices indicating the district plans to cut nearly all vice principals at elementary schools. The school district declined to confirm or deny whether that was true earlier this week.

For some, like Ellen Browning Scripps Elementary, lunch and recess supervision is being reduced from 44 hours to 16 hours a week, while the school’s library position will be reduced to one day a week, according to a message from the school’s principal. Counselor hours will also be trimmed.

scrippselementary

In a message sent out on social media Tuesday, Superintendent Cindy Marten pledged to “not increase core class sizes,” and to “cut from the top first.”

Marten

“Where layoffs are necessary, we will work to make their transition smooth,” Marten wrote, adding that the district is also exploring early retirement incentives for long-time educators.

    This article relates to: Education, Government, Must Reads, San Diego City Finances, School Finances

    Written by Ashly McGlone

    Ashly is an investigative reporter for Voice of San Diego. She can be reached at ashly.mcglone@voiceofsandiego.org or 619.550.5669.

    12 comments
    Ronald Stein
    Ronald Stein

    It’s the inmates running the pension Asylum that are loading up system with lucrative "defined benefits" packages for themselves.


    The international business world is intelligent enough to know that DEFINED BENEFITS are financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.


    Stealing from the young who silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans. 


    The inmates know that debt for our future generations buys votes.  Over the decades, the proven “concept’ practiced by voters is to defer as much financial responsibilities as possible from our current financial responsibilities to future generations, that have no votes on the subject. 


    Currently, it’s the future generations that will have the responsibilities to pay for the unsustainable pension programs, other boondoggle projects, and added inefficiencies built into our government.  Simply stated, if we cannot afford it today, pass it off to the future generations to minimize any impact on our current lifestyles. 


    Virtually all elected officials are heavily financed by unions which are focused on entitlements for their current members.  Thus, no changes can be expected in the foreseeable future for elected officials to ever abandon their source of votes. 


    It’s unfortunate that those future generations, unable to vote today, will bear the costs of many enacted entitlements and boondoggle projects.

    Dean Cunliffe
    Dean Cunliffe

    Doom and gloom have been the annual message of local governments as far back as I can remember. Priming the taxpayer pump for the next round of alms for the poor government agencies.

    All this while many local residents struggle to make enough to meet this months needs, San Diego must rank up there as one of the least affordable places to live, and it's getting worse as costs increase and compensation remains stagnant.

    The projected shortfall in revenue is self explanatory as once again we (taxpayers) have got to tighten our belts and spend less. Something SANDAG figured out when measure A failed, is we are tired of throwing our hard earned money into the bottomless pit of promises.

    At the County level I'm confused about how the Supervisors seriously believes that ACA is going to be repealed and leave millions of people without any type of health care but county funded indigent relief. I don't see that happening.

    At what point, is enough Enough?

    Eddie Barnett
    Eddie Barnett

    Agreed! Also, I saw in the news that hundreds of refugees are being resettled here in San Diego.

    Why in the world are these poor people being sent to one of the most expensive cities to live in, in the entire United States!?!?!?

    It's bad enough that they have absolutely nothing and can't even speak the language (English), why burden them with an astronomical cost of living!?

    SDResident
    SDResident subscriber

    Why is there no mention in the article of the fact that the County of SD is sitting on $2 Billion in managment reserves?  This is well beyond a reasonable cash reserve for emergencies.  The City of SD is sitting on over 16% of it's budget for reserves.

    How can you project a deficit when you have this much money squirreled away.  You use your rainy day fund when it rains!

    Sean M
    Sean M subscriber

    Maybe the budget problems will motivate the sdusd to reconsider the status of the principals they pay $100k+ to be on "special assignment" for falsifying credentials and sexually harassing students.

    Mark Giffin
    Mark Giffin subscribermember

    An oldie but a goodie.........around 2013

    Mr. Morgan  was  President of the Board of Administration of the San Diego City Employees’ Retirement System

    To quote Mr. Morgan .........“Anytime I see a proposal in a system that’s 68 percent funded and here’s the proposal: let’s lower the plan sponsor’s contribution and let’s lower the participant contributions and let’s all ride unicorns and eat lollipops,” 



    Chris Brewster
    Chris Brewster subscribermember

    To place the pension issue in perspective, pension costs appear to be a little under 8% of the City of San Diego budget. For people in the pension system, San Diego did not contribute to Social Security. In the private sector, a contribution of 6.2% of payroll for most workers is paid to Social Security, plus varying contributions to 401(k) and other benefits. 


    Qualcomm, as an example, pays for Social Security, of course, and a company match of employee 401(k) contribution of 100% on first $1,500, 50% on the next $1,500, 33% on next $7,500, and 10% thereafter, 50% vested after 1 year, 100% after 2 years. They also offer a stock purchase plan that allows employees to purchase company stock at 85% of the fair market value, along with various other benefits. 

    Mark Giffin
    Mark Giffin subscribermember

    The "mission" of government has changed. The mission of government is to pay pensions. Same can be said for schools.

    I, and many others, have been beating this dead horse for years but our arguments have have been dismissed and ignored.

    I wish I would of been wrong about it but yes........there has been a tsunami approaching and it is now right off the shore.

    Unfortunately this year will only be the first wave to hit budgets and the response will be to extend the payment period over many more years and  yet another generation will be indebted. this generation wasn't even born when these golden parachute benefits were started.

    I've said it before. It is fiscal pedophilia. You should not abuse kids futures in this way.

    Quite frankly its disgusting

    Bill Bradshaw
    Bill Bradshaw subscribermember

    Just say it, "It's the pensions, stupid!"  Trace the budgets back 20 years or so and check the percentage of the budgets of the city, the county, the state and, yes, SDUSD devoted to pension expenses.  They are simply eating most California public agencies alive, and the primary culprit is the retirement ages.  Why do public employees retire at 50 or 55 years of age with a full pension while private sector employees, those that still enjoy a defined benefit plan, wait until age 65?  If they retire earlier, they get an "actuarial reduction", an offset in the monthly amount of the pension because they'll be drawing it longer.


    Another important factor is the COLAs, guarantees against inflation, again something that few private sector employees enjoy.  This can add 10-50% to retiree costs, depending on longevity.


    And the third factor is that, around the year 2000, most public agencies, playing follow the leader, increased their pension formulas retroactively, so that earned pension credits increased an average of about 25%, which instantly created massive unfunded liabilities covering everyone on the payrolls.  


    In order to avoid unmasking the extent of the problems created by these actions, pension boards, largely made up of pension plan participants, kept the fund earnings assumptions at unrealistically high levels, so the unfunded liabilities appeared smaller.  Now, after a number of years of modest economic growth, these assumptions must be cut, increasing the deficits and upping required agency pension contributions.


    I went to my local town council meeting last night and listened to why city services, things like code enforcement, are so lacking.  Every department claims to need more people.  Well, they aren't going to get them, and communities are going to find themselves self-funding services cities and counties used to routinely provide in order to pay for unnecessarily generous public employee pensions.


    Welcome to California 2017.  It's not going to get better in the near term.



    shawn fox
    shawn fox subscriber

    The issue at the county level smells very fishy.  Did health care costs decrease by $100 million after ACA was passed?  I certainly don't remember reading such an article.  If all of those people becoming insured reduced costs by so much then why were county officials recently pedaling a sales tax increase for roads?  They should have been rolling in money.  I will never understand why we keep electing the same types of people over and over.  Unfortunately the lesson learned here is to stop trusting government with your money.  Even after substantial tax increases the fact that the schools are dealing with the same catastrophic budget issues as before just proves that there is serious mismanagement going on, and there has been for years.  The people that pedaled these tax increases ought to be shunned, but they won't be.  They'll just ask for more money.

    JohnRileyPoway
    JohnRileyPoway subscriber

    Indeed excessive employee compensation are burying these govt agencies.  Consider Poway Unified School District.  When Sacramento was able to offer a 1x gift of additional cash in 2015 the unions demanded raises for their employees which created obligations well into the future.  This is an unsustainable model.  It is largely why PUSD had a $10.8M structural deficit last budget year and a projected $18.4M structural deficit this budget year.  Pension obligations for CalPERS and CalSTRS are about to hockey stick up in the next few years, so the problem is only going to get worse.  It's a math problem.

    Govt employee compensation is doled out largely for political purposes as a quid pro quo to employee unions for their campaign endorsements and funding for their elections.  The unions have perfected this messaging during election season that if you oppose these excessive costs purely on fiscal responsibility grounds you therefore want crime to increase, homes to burn down and children to starve in schools.  

    Thank you Ashly for shedding light on this problem.