San Diego faces new budget crisis amid disappointing tax revenue, rising costs

Lower-than-expected revenues and growing expenses have created a new budget crisis for San Diego that is prompting stricter policies on hiring, overtime, use of contractors and other spending.

The city posted a $22.9 million deficit during the first quarter of the fiscal year that began July 1. More than one-third of the gap was $8.8 million from delaying new parking fees in Balboa Park from October to January.

The city’s independent budget analyst said the gap was particularly troubling because a separate deficit of $110 million is projected for the upcoming fiscal year and the city has relatively low financial reserves of $207 million.

In response, Mayor Todd Gloria has prohibited any hiring without his permission, suspended most overtime and asked department heads to limit training expenses and explore canceling or curtailing outside contracts.

“Your cooperation and strict adherence to these measures are vital for our collective success in navigating these financial challenges,” the mayor said in a recent memo to department heads.

Gloria is also asking them to propose specific cuts and potential sources of new revenue by Dec. 18 so those proposals can be included in potential mid-year budget adjustments next month.

“As each department reviews the programs and functions under their oversight, only the most critical programs and functions should remain in their budget,” Gloria wrote. “Any program or function deemed non-critical, in the context of the city’s limited resources, must be entered into the city’s budget system as a budget reduction proposal.”

Charles Modica, who leads the IBA office, agreed with the mayor’s approach. “It will be important to implement mitigations in the current year,” he said.

The crisis comes less than a year after city officials made deep cuts to library hours and other services to close a projected budget deficit of more than $300 million in the budget for the ongoing fiscal year.

That budget, adopted last June, appears so far to have been overly optimistic about revenues and some expenses.

Hotel tax revenue — for which the city had already given a conservative estimate because of softening international tourism — has been revised downward for the fiscal year by $2.9 million based on results from the first quarter.

Sales tax revenue has also been revised downward $400,000. Those adjustments are mitigated by property taxes being revised upward $1.5 million.

Another revenue problem is cannabis tax, which has been revised downward by $1.5 million based on the first-quarter results. And projected revenue from parking meters is being adjusted downward by $2.1 million.

Meanwhile, some key expenses are being revised upward. Public safety overtime is rising by $4.9 million, costs for water are going up $4.1 million and costs for city vehicles are up $3.1 million.

“Seeing a net projected shortfall of $23 million in the first quarter is certainly very concerning,” Councilmember Vivian Moreno told her colleagues on the council’s budget committee Wednesday.

She blamed the problem in part on the mayor’s refusal to follow through on job cuts the council approved as part of the budget.

An aide to the mayor, Matt Yagyagan, said Gloria declined to follow through on some cuts because the jobs were deemed to perform critical functions.

Moreno said she was frustrated, calling the mayor’s refusal an insult to the general public.

“The mayor is not the king in San Diego — he’s not omnipotent,” she said. “I would urge this administration to implement the budget passed by the City Council.”

Deputy City Attorney Bret Bartolotta said the council has limited options for how to respond when the mayor doesn’t follow through on approved cuts.

The council can summon the mayor to answer why he didn’t follow through, or it can take the much more drastic step of trying to prove in court that he should be removed from office for dereliction of duty, Bartolotta said.

Councilmember Henry Foster reiterated his concerns that the city has too many middle managers, singling out the position of deputy director.

“If we have a deputy director that has only one direct report, I would question whether we need that deputy director,” Foster said.

Rolando Charvel, the city’s chief financial officer, said the mayor’s stricter policy on filling vacancies is likely to shrink middle management by focusing on filling only jobs that are essential to core city services.