San Diego budget troubles loom as pandemic aid dries up, pension costs rise and state mandates kick in

The city of San Diego is facing more than $360 million in projected budget deficits over the next five years as federal pandemic aid runs out, pension costs rise and the city catches up on millions of skipped contributions to its reserves.

The deficits, part of a long-term budgeting document called a five-year outlook, are projected despite expectations by city officials that revenue from taxes and other sources will keep rising and surpass $2 billion a year for the first time.

The deficits would be larger if the city hadn’t delayed spending the last $52 million of $300 million in federal pandemic aid it received in spring 2021, and if officials hadn’t held on to $75 million in cash left over from recent budget surpluses.

The numbers in the five-year outlook could be sharply off target if there is a significant economic recession or if inflation continues to rise. The outlook does not account for a recession and assumes inflation will ease.

The outlook projects a balanced budget in fiscal 2024, a $47.3 million deficit in fiscal 2025, a $107.3 million deficit in fiscal 2026, a $94 million deficit in fiscal 2027 and a $112.6 million deficit in fiscal 2028. The projected deficits total $361.2 million.

A key factor in the deficits is projections that annual pension costs will rise by about $30 million, thanks to stock market losses and more than $100 million the city must pay slowly over several years to cover costs of Proposition B pension cuts that courts overturned.

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But millions in long-term savings for the city will come from no longer funding 401(k)-style retirement accounts that thousands of employees had been receiving in place of pensions.

The outlook also assumes the city will resume contributing to its reserve fund, which remains just over $200 million because contributions were skipped during the pandemic.

The outlook includes $88.4 million in reserve contributions, but even that amount won’t get the city to its target reserves of just under $300 million unless there are additional contributions after fiscal 2028 — the final year the outlook covers.

The outlook also includes increased costs to comply with state mandates on organics recycling and clean water — formally called stormwater. The green recycling is projected to cost $13 million per year, with stormwater projected to rise to $30 million.

The green recycling costs could be covered in coming years by new trash and recycling fees from single-family homes if Measure B on the Nov. 8 ballot wins approval, or if a similar measure is approved in 2024.

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But the outlook conservatively assumes that no new trash policies will be approved, leaving the city with an annual bill for trash pickup of roughly $70 million.

The projected expenses for stormwater projects might be mitigated by a parcel tax that city officials say could be on the 2024 ballot.

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The outlook assumes the City Council won’t vote to waive a requirement to spend a certain percentage of tax revenue on infrastructure. The council waived the requirement, typically about $25 million a year, in fiscal years 2021 and 2022.

Expenses for city contracts, supplies and energy are projected to rise with inflation. And the outlook includes $25 million annually to staff new libraries and fire stations expected to open in coming years.

But the outlook does not assume that service levels will rise, even though Mayor Todd Gloria has said that’s a high priority, especially quality-of-life efforts focused on graffiti, potholes and trash in parks and neighborhoods.

The outlook also doesn’t include any cost increases for compliance with an aggressive revision to the city’s Climate Action Plan approved this year. Those estimated costs, which will be available next spring when officials reveal an implementation plan for new city climate mandates, are expected to be in the tens of millions of dollars.

The outlook projects 3 percent annual pay raises for all city workers, but it doesn’t include any money to fulfill a city priority of closing roughly 30 percent pay gaps between the city’s workers and their counterparts in other cities.

Revenues are projected to continue their steep rebound since sharp dips during the early months of the pandemic. But property taxes are expected to plateau as rising interest rates slow the housing market — both prices and the number of sales.

Annual property tax revenue is projected to rise from $706 million to $892 million over the five years the outlook covers. Annual sales tax revenue, partly fueled by inflation, is projected to rise from $380 million to $449 million.

Hotel tax revenue — the money stream most affected by the pandemic — is projected to surpass pre-pandemic levels in fiscal 2024. The outlook estimates it will climb from $135 million annually to $182 million a year.

Fees from cable operators are projected to continue a long and steady decline fueled mostly by residents’ cord-cutting. But fees paid by San Diego Gas & Electric are projected to rise steadily.

The outlook is scheduled to be presented to the City Council’s budget committee at 9 a.m. Friday, Nov. 18. ◆