San Diego's new Mayor aims to steady
the city’s finances with his first budget
By Andrew Donohue, Voice of San Diego

18 April 2006: Releasing a budget that he says will begin to stabilize San Diego's financial doldrums but not solve them, San Diego’s new Mayor Jerry Sanders capped off a week of budget announcements that sketch the route the mayor will follow the next three years as he attempts to be the sentinel of the city's financial recovery. The new mayor also used his announcement to combat specific criticisms and concerns surrounding the US$674 million borrowing proposal announced in early April as the mayor's pension fix.

Mayor Sanders, who promised tough budget love as a candidate last year, has provided a rather optimistic budget for fiscal year 2007, buoyed by the borrowing plan and $50 million in new revenues created by strong returns on property taxes and hotel-room taxes. Those factors provided the mayor with the breathing room to avoid the cuts in jobs and services that have dogged recent budgets and to begin addressing long-neglected but basic needs.

"It is important for our citizens to know and understand that no budget can solve, in 12 months, the problems that were created as a result of decades' worth of neglect," Sanders said. "But now, we take an important first step."

The mayor portrayed his budget as one that will begin to rebuild the trust lost between City Hall and its constituents in recent years as a result of a fiscal and political crisis brought about by the city's pension problems and federal investigations into the city's political and financial dealings.

Among the most prominent details of the mayors' proposed budget are the following: a $38 million boost to police and fire budgets to fill positions and purchase equipment, $20 million to catch up on a backlog of such thing as street and roof repairs, $41 million to replenish parched emergency funds, and no cuts in library and parks for the first time in years.

He also promised to eliminate a number of the budget tricks often cited by budget hawks of a ‘smoke and mirrors’ approach utilized by prior city leaders, such as failing to properly account for millions of dollars in public safety overtime.

The new administration pointed out what they believe to be the needs that are not addressed in the budget: infrastructure to accommodate San Diego's growth, a $1 billion deficit in retiree healthcare benefits and several needs in the Fire Department.

And in a preview of what's to come, the budget outlines issues the administration wants to address in 2008, such as funding efforts to meet storm water permit requirements and infrastructure to accommodate the smart-growth City of Villages concept.

In total, the city operation will run on a $3 billion budget in 2007. The general fund, the day-to-day fund that covers such expenses as police, libraries and parks, is slated to be $1.3 billion. The figure marks a significant jump from last years' $865 million budget.

However, the city budget only experienced a ‘modest growth’ of 3.7 per cent, said Chief Financial Officer Jay Goldstone. The rest of the growth is reflective of a new accounting of the city's budget implemented by Goldstone.

The mayor was also forced to dedicate a portion of his announcement to address concerns surrounding his complex borrowing plan for the pension system, which is saddled by a deficit that's estimated to be at least $1.4 billion.

The mayor wants to borrow a total of $674 million by fiscal year 2008 to plug into the pension system and is forced to do so by labor contracts. However, in a departure from the plans of past city leaders, Sanders plans to use a portion of those bond proceeds to pay about half of the city's annual pension bill. Previous plans envisioned putting the loans into the system on top of the city paying its full annual pension bill.

Because of that wrinkle, some concerns have been raised as to the legality of the manoeuvre. City Attorney Mike Aguirre has promised an opinion on the issue. "We have been told it is legal," Sanders said.

Supporters of pension obligations bonds argue that the city can take advantage of borrowed money by using it to stabilize the troubled pension fund and reap investment earnings. Such bonds can prove advantageous when borrowers earn more on investments than they pay on the loans' interest.

Critics of borrowing plans such as the mayor's say that pension obligation bonds don't address the heart of pension debt problems, but merely rearrange the debt onto a different part of the balance sheet. They argue that such activity unfairly continues to push the costs of today's government to tomorrow's taxpayers.

"I would respectfully respond to that the imposition on our children was created in 1996 and 2002 when the pension benefits were agreed to," Sanders said, referring to the years in which pension agreements at the heart of the problems were created. "What we're talking about now is how we pay for those decisions."

There are generally three other accepted options aside from pension obligations for attempting to manage the city's pension debts: bankruptcy, increased taxes or a legal challenge to the pension benefits.

Sanders has supported Aguirre's challenge to the benefits, something that will likely take years to resolve in court. The mayor campaigned on the promise that he would use the threat of bankruptcy to exact concessions from labor unions to quell the pension problems. Sanders now discounts bankruptcy as an option, though negotiations with unions have just begun.

The mayor ruled out a tax increase during his campaign. "We could raise taxes, but I won't do that. I don't believe it's necessary," Sanders said. "You'll see no tax or fee increases this year because I don't think we need that." He said there are no easy answers to "the set of problems that we face."

Sanders walked a fine line in the last two weeks, portraying the city's problems as easily manageable only to return days later to using the word ‘crisis’. He's described his term as a clean break with the past, but adopted a pension-funding plan that contributes less annually to the pension system than the resigned former mayor he was elected to replace.

Goldstone has brushed off bankruptcy concerns by saying the city is able to pay all its bills, while the mayor's plan uses borrowed money to free up cash for other areas.

But one theme has been consistent: calm. The mayor and his chief financial officer have maintained a calm, measured demeanour in their budget announcements and sought to put the public and credit rating agencies at ease in their first major financial moves in office. "I believe that my budget proposal will get the city moving again in the right direction and will bring fundamental change to City Hall," Sanders said.