San Diego is facing more than $1 billion in projected budget deficits over the next five years that city officials are blaming on higher worker salaries, larger pension payments and more spending on homelessness.
Other contributing factors to the deficits, which are part of a long-term budgeting document unveiled Thursday, include rising costs for vehicles, fuel, rent and lawsuit payouts.
The 84-page document, called a five-year outlook, also blame the expiration of federal pandemic aid and the city’s need to fund the operation of new facilities slated to open: five fire stations, three libraries and 34 parks.
But the main driver is salaries. Most city workers recently got raises of around 25 percent over three years. City labor costs have jumped more than $111 million per year since 2021.
Also, city spending on homelessness surged during the ongoing fiscal year from $29 million to $47 million.
The deficits can’t be blamed on dipping revenues, because property, sales and hotel taxes are all expected to keep rising during the five-year period covered by the outlook — fiscal years 2025 through 2029.
Annual city revenue is projected to increase from $1.95 billion to more than $2.31 billion over those five fiscal years, an 18.4 percent rise. Inflation is playing a key role in both rising revenues and expenses, city finance officials said.
City department heads will be asked this winter to propose moderate spending cuts, but finance officials said Thursday that bolder changes will likely be needed to balance future budgets.
The outlook projects a $115.4 million deficit in fiscal 2025, a $233.4 million gap in fiscal 2026, a $243.5 million gap in fiscal 2027, a $258.3 million gap in fiscal 2028 and a $227.3 million gap in fiscal 2029. The projected deficits total $1.08 billion.
And an economic recession, even a mild one, could significantly widen them, officials said.
Finance officials stress the city could save about $50 million annually by canceling plans to spend $25 million per year on infrastructure projects and to spend $25 million per year raising city reserves to recommended levels.
The city is also expected to start collecting about $80 million per year in fiscal year 2026 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 outlook because the precise amount of revenue won’t be determined until after a consultant studies the issue.
San Diego officials are also lobbying the city’s pension board to consider reducing its roughly $450 million annual pension payment by as much as $100 million by recalculating how quickly its $3 billion in pension debt should be paid off.
Other potential boosts include a new ambulance model the city is launching that could yield millions in revenue, and Measure C, a hotel tax increase — now tied up in the courts — that could yield $35 million per year for homelessness efforts.
In addition, city officials have begun exploring a ballot measure that could allow the city to enact a local one-cent sales tax surcharge that could generate $400 million per year.
While those potential revenues aren’t calculated into the numbers, city finance officials warn that many potential costs are also absent.
Those include plans to convert the city’s vehicle fleet to electric-only, implement a new library master plan that calls for more branches and efforts to boost street paving.
In addition, the outlook doesn’t include any additional spending on the city’s plans to boost climate resiliency, rebuild City Hall or upgrade the city’s aging sidewalks and streetlights.
And while spending on homelessness has been on the rise, the severity of the problem makes it likely even more money will be spent in coming years, officials said.
The outlook does, however, include additional 3.05 percent pay raises for city employees when their existing labor contracts expire.
It also includes annual savings of $10.8 million, thanks to a reduction in how much the city must pay to cover health care for workers who retired before 2005.
While the outlook projects that city revenue will keep rising, the growth ofsome revenue streams is expected to slow.
Sales tax revenue has surged since the height of the pandemic because of pent-up demand and inflation, but city officials say many consumers have slowed their spending in recent months. City sales tax revenue is projected to increase by only 3.4 percent in fiscal 2025.
Property tax, which surged earlier in the pandemic due to high sales volume and rising prices, is also slowing down as higher interest rates discourage sales and make it harder for buyers to obtain financing.
And some city revenue streams are actually shrinking. Cannabis tax revenue continues to drop as other cities open dispensaries to compete with the two dozen in San Diego. And cable franchise fees continue to fall as more people shift to online streaming services.
The City Council’s budget committee is scheduled to discuss the five-year outlook at its next meeting at 9 a.m. on Nov. 17.
