San Diego finance officials said Friday that a steep jump in the city’s annual pension payment will worsen an already ugly budget situation and make it harder to avoid hundreds of employee layoffs.
The pension payment, which will soar to a record $533 million, widens the city’s projected budget gap for the upcoming fiscal year to more than $350 million.
City finance officials said they will find the money to make the pension payment when it’s due July 1, but that deep cuts to cherished programs are almost a certainty.
“I can assure you that we are not a credit risk — we will make our payment each year,” Matt Vespi, the city’s chief financial officer, told the city’s pension board Friday. “But it’s a significant obligation. It’s going to be a tough run.”
The $350 million deficit translates to roughly 1,500 layoffs from the city’s staff of about 12,000. But Vespi and finance director Rolando Charvel said that number could shrink to about 750 if the city gets some expected financial relief.
That would include $60 to $70 million from a new fee the city expects to charge every single-family homes for trash pick-up because voters approved Measure B in 2022, and another $30 million to $40 million the city expects to get for homeless services because voters approved Measure C in 2020.
“We think that with the mitigations that we identified — especially Measure C and Measure B — we are probably going to bring that down to about half,” Charvel said Friday. “So if we translate that — just basically pro-rate it to what our personnel budget is — that would result in about 750 positions.”
Mayor Todd Gloria has also ordered a hiring freeze and asked most city departments to propose 20% cuts. The only departments asked for smaller cuts were transportation, at 10%, and police, fire and homeless services at 5%.
Gloria said he’s also exploring new ways to raise new revenue, including possibly by raising city parking fees. He’s also ordered a comprehensive analysis of city contracts, which account for $258 million of the city’s $2.2 billion annual budget.
But even the most optimistic scenarios leave the city with a big enough deficit to require somewhere between 250 and 500 layoffs.
“We are going to do everything we can to minimize the impact to employees, but there is no doubt there will be impact,” Charvel said. “There’s really no way to close this large of a gap without impacting employees.”
And he said the layoffs will likely have an outsized impact on a narrow portion of the budget, because about three-quarters of the budget is tough to cut or unlikely to be cut.
Those three-quarters includes the pension payment, debt payments on bonds and spending on public safety — police, firefighters and lifeguards.
“It’s going to be really difficult to make reductions on the public safety side,” Charvel said.
That leaves departments like libraries, parks, planning, development services and several others vulnerable to especially deep cuts.
Vespi and Charvel said deep cuts are necessary partly because voters narrowly rejected in November a sales tax increase that would have generated about $400 million a year.
Hoping the sales tax measure would pass, the city adopted a budget last spring that avoided arguably needed cuts by relying on a wide range of one-time moves, including delays in reserve payments.
Without the new revenue, the city must sharply reduce spending or continue to have what city officials describe as a “structural budget deficit,” where ongoing revenues are much lower than ongoing expenses.
“We really need to go back to having a structurally balanced budget — that’s the priority of the mayor,” Charvel said. “We can’t continue to provide the same levels of service that we have been providing in the past. It’s simply not sustainable.”
Vespi blamed past city leaders for not being transparent about the city’s financial needs.
“We got here because this organization underprojected what its true personnel expenses are, and underprojected what its infrastructure expenses are, and really kind of hid the ball on what the revenue needs of this organization are,” he said.
He said the goal is to move significantly toward structural balance with this next budget, which the mayor will propose in April and the City Council is scheduled to finalize in June.
“It’s going to be a high hurdle for this year to get to structurally balanced, but that’s what the mayor wants to achieve,” Vespi said.
But getting there may not be as simple as just closing the projected deficit in the general fund, because the city also faces a nearly $5 billion infrastructure deficit that must be funded mostly with general fund money, he added.
“In order to create space within general fund revenue to fund capital needs, you need to further reduce your expenditures on day-to-day operations in order to have the money to pay for those infrastructure improvements,” Vespi said.
That means the city may need to cut even further on day-to-day operations, forcing more layoffs.
But Vespi said the plan is to find other jobs elsewhere at the city for many workers whose positions get eliminated.
“We have a robust reduction-in-force process, which requires us to find other positions within the organization that are vacant,” said Vespi, explaining that he expected many employees to get displaced but not laid off. “That’s part of the strategy with the hiring freeze. As regular attrition occurs, it creates other vacancies as landing spots.”
