City officials say they may also propose raising parking rates and other fees to close the unusually large deficits, which are being blamed on rising expenses, sluggish revenues and voters rejecting a sales tax hike last month.
San Diego hasn’t considered making budget cuts in the middle of an ongoing fiscal year in more than a decade, but officials had warned that was likely without the $400 million per year the sales tax would have generated.
The city avoided arguably needed cuts in the ongoing fiscal year by adopting a budget last spring that relied on a wide range of gimmicks, including delays in reserve payments and other unsustainable moves.
Mayor Todd Gloria and City Council members said at the time that the failure of the sales tax hike, which was narrowly rejected by voters 50.3 percent to 49.7 percent, would likely lead to deep budget cuts.
It’s uncertain the city will make emergency mid-year cuts, and no specific actions have been finalized except the immediate hiring freeze, said Matt Vespi , the city’s chief financial officer.
Vespi said finance officials plan to propose closing a nearly $330 million deficit projected for the fiscal year that begins next July with fee increases and cuts to community services like libraries and recreation centers.
Increasing parking revenue could be part of that, he said. City officials have previously considered new fees to park at city beaches, Balboa Park and Mission Bay Park .
The city will also likely suspend all non-essential expenditures and try to reduce how much it pays out to contractors like engineers and consultants by conducting an in-depth analysis of all existing contracts.
“All of those steps are now in motion,” said Vespi, stressing that whatever moves the city ultimately makes will be policy decisions by the mayor and council.
Vespi and the mayor are scheduled to discuss potential cuts at a 9 a.m. news conference Wednesday.
The projected deficits, which are part of a long-term budgeting document called a five-year outlook, are partly the result of sharply rising costs for homelessness programs and large pay raises awarded to city employees last year.
The five-year outlook projects a $329.3 million deficit in fiscal 2026, a $302.6 million gap in fiscal 2027, a $307.4 million gap in fiscal 2028, a $273.9 million gap in fiscal 2029 and a $276.3 million gap in fiscal 2030. The projected deficits total $1.49 billion.
The $329.3 million deficit projected for the fiscal year beginning July 1, 2025 includes $61 million attributed to the pay raises and $55.8 million in increased costs for homelessness.
The hike would nearly double homelessness spending to $122 million. The new money includes $33 million for a 1,000-bed shelter proposed by Gloria, $6 million to replace lost shelter beds and $1.8 million for safe parking lots.
The pay raises can’t be avoided because they’re part of three-year labor contracts most city workers got that include incremental raises totaling about 25 percent. City labor costs have jumped more than $170 million per year since 2021.
City officials say other factors in the projected deficits are higher costs for utilities, more lawsuit payouts and higher interest payments because the city has been borrowing more to pay for stormwater projects and road repairs.
In addition, the city expects to open new fire stations in Otay Mesa and Black Mountain Ranch , a new library in Oak Park , an expanded library in Ocean Beach and 28 new parks.
City officials say a structural gap between ongoing revenue and expenses was partly masked by $550 million in federal pandemic aid the city received, which will run out in the first half of 2025.
The projected deficits would have been much smaller if finance officials had been successful last spring when they tried to persuade the city’s pension board to consider reducing the city’s annual pension payment.
The board ultimately rejected the proposal to shrink the city’s $450 million annual payment by as much as $100 million by recalculating how quickly $3 billion in pension debt should be paid off. The board approved a smaller reduction instead.
The budget deficit may end up being lower than currently projected. Officials said two new revenue streams the city is likely to receive that could total $120 million per year.
Officials expect to start collecting this summer about $80 million per year from single-family homes that must start paying the city for trash pickup thanks to a successful 2022 ballot measure.
That money is not included in the financial outlook because the precise amount of revenue won’t be determined until after a consultant finishes an ongoing study.
The city would also get another $35 million to $40 million per year for homelessness programs if the courts validate Measure C, a hotel-tax increase that’s been mired in litigation for years. An appeals courts ruling is expected next summer.
City finance officials say the deficit could further be reduced by delaying $63 million in overdue reserve contributions — a move that would veer from best practices and longtime city policies.
The new revenue streams and delayed reserve payments would total about $180 million, still leaving a projected deficit for the new fiscal year of roughly $150 million.
It’s unclear how much the possible emergency cuts and fee increases could shrink that number.
If more cuts are needed, city finance officials say options include reducing street-repair efforts, delaying building maintenance or slowing implementation of the city’s climate action plan.
In particular, officials could delay plans to shift the city’s entire vehicle fleet to electric and to retrofit buildings to reduce their carbon footprints.
The deficits can’t be blamed on dipping revenues, because sales- and hotel-tax revenues are expected to remain steady during the five-year period covered by the outlook — fiscal years 2026 through 2030. Property-tax revenue is expected to rise.
But city finance officials say the projected $35.5 million revenue increase for fiscal 2026 is lower than in typical years, when revenue increases $60 million or more.
During the five-year outlook, annual revenue is expected to rise from $2.16 billion to about $2.38 billion. But expenses are expected to rise more sharply, from $2.16 billion to about $2.6 billion.
An economic recession, even a mild one, could significantly widen the deficits because it would sharply lower expected revenues.
The City Council’s budget committee is scheduled to discuss the deficits at its Dec. 11 meeting, which starts at 9 a.m.
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