Fiscal chicanery
City's budget practices alarm Wall Street

As seen from Wall Street – the best vantage point from which to view financial matters – San Diego's deteriorating fiscal situation grows ever more worrisome.

This week Moody's Investors Service placed San Diego on its Watchlist, which amounts to a loud warning that the city's credit rating is about to be downgraded. The reason for the looming drop, according to Moody's, is "heightened uncertainty regarding the city's financial position as it ended last fiscal year, its election to defer addressing its structural imbalance in the current fiscal year, and the daunting challenges it faces doing so in fiscal 2005."

In particular, Moody's decries – and properly so – an accounting gimmick employed by the city manager. To mask deficit spending, the manager has resorted to a $10 million sales tax "accrual adjustment" in this year's budget.

On paper, this inflates the city's revenues by $10 million in 2004, even though in truth the additional tax levies will not be received until fiscal 2005. It's comparable to adding your January 2005 paycheck to your income total for 2004.

This practice, which the city describes as an acceptable "accounting adjustment," conceals the true fiscal picture. It's simply not honest. It's the antithesis of transparent budgeting. What's more, as Moody's points out in a statement, "it compounds the challenging structural deficit faced by the city for fiscal 2005." In short, it's like going on a shopping spree in April with June's rent money.

In a report last month, Carl DeMaio, president of the Performance Institute, a San Diego-based think tank, aptly described the sales tax accrual as "phantom" revenue. At the time, his warning went unheeded by the City Council, and Councilman Michael Zucchet even berated him in a public hearing for his criticism of the city's budget practices. Now that Moody's Investors Service has raised the same alarm, perhaps City Hall will begin to listen.