Manager’s ’05 Budget Proposal Fails to Deliver on Fundamental Reform

City to Increase Budget by Whopping 9.6% While Continuing Accounting Gimmicks to Mask True Size of City’s Budget Deficit

Performance Institute President Carl DeMaio commented on the Manager’s proposed budget: “The budget proposal submitted today relies on the same accounting gimmicks that the City has used in past years to cover up its structural deficit. It does not honestly reflect the city’s true financial problems and offers little in the way of fundamental reform to a city with soaring operating costs and declining services. What’s worse is the proposal calls for a massive 9.6 percent increase in spending! This explosive growth in spending far outpaces inflation and is irresponsible at a time when the city faces severe fiscal shortfalls in its operating budget and pension fund.”

Dramatic 9.6% Spending Increase Proposed Despite Growing Fiscal Problems

The Manager plans to increase spending by nearly 9.6% from FY 2004 to FY 2005. This is well above a more healthy increase to match population growth and inflation—which is an accepted benchmark other governments are using.

“We were shocked to see how much the city wants to increase spending by. Rule one when you are in a hole: stop digging.” DeMaio noted.

Looking underneath the numbers contained in the Manager’s budget proposal reveals the true driver in the city’s budget problem: rising employee salaries and benefits. In its March 18 analysis, the Institute noted that since 1994 the city’s budget has increased 20%, but during the same time employee costs have risen by 118%. Moreover, in the past five years, city employees have seen a 35% increase while the average increase in CA personal income is up by only 24%. The level of increases for salaries and benefits alone in the FY 2005 budget proposal is startling—totaling $75,000,000.

DeMaio comments: “While city employees themselves are NOT the problem, rising cost of labor is a ‘center of gravity’ that must be overcome if the City is to address its financial woes.”

Continued Use of Accounting Gimmicks and Dishonest Budgeting

The Institute has released analysis using the city’s own financial data to show a $65-100 million plus deficit in the general fund—not including millions in questionable charges being made to Special Funds and Enterprise funds to subsidize General Fund expenses. Even the Institute’s figures do not include the $73 million more in pension fund payments suggested just two weeks ago by the Mayor’s Pension Reform Committee—an increased payment designed merely to keep the pension fund liability from growing this year. Adding the Institute’s figure to the Pension Reform Committee’s suggested increase in pension payment pushes the City’s financial challenge well into the mid-to-high hundred million range. (Detailed justification of these numbers available at www.sandiegobudget.org.) Independent credit rating agencies—most recently Moody’s—have echoed the Institute’s concerns that the city’s structural deficit has been masked and is in effect growing.

Unfortunately, the Manager’s current budget proposal addresses only $26.9 million of the city’s shortfall and neglects to address the concerns voiced by the Institute and the credit rating agencies in today’s proposal. The Manager’s budget fails to address a number of other financial needs, including: intentional underfunding of non-personnel accounts (telephone, office supplies, etc.) at Police, Fire and other city departments. Even some personnel costs are still not fully addressed, including Police overtime. These expenses are routine and are traditionally funded mid-year by holding staff positions vacant and transferring monies around the city budget.

This shell game of adopting a budget that balances on paper but intentionally underfunds expenses that are unavoidable during the year has become common place in the city’s financial management. In addition to neglecting these internal operating expenses, a number of program initiatives are not fully funded, including the National Pollution Discharge Elimination Program, remediation for Underground Storage Tanks, and efforts to meet a 50% recycling mandate. Ignoring these environmental liabilities not only damage our environment but might lead to fines levied against the city.

Finally, the Manager’s budget fails to address a number of financial issues outlined in our last analysis, including:

Public Safety Looks Like a Big Winner—But Look Closer!

The Manager’s proposal calls for a 15.37 percent increase in public-safety related expenditures. This represents an increase of $61.3 million dollars and shifts about 2.8 percent of general fund monies to public safety activities. However, a closer look reveals that very little improvement in service for public safety is planned from this increase—with most monies going into salary and benefit increases for existing police and fire personnel. Of the $61.3 million, only a paltry $7.3 million in discretionary non-personnel investments ($4.8 million for police; $2.5 million for fire) are made—with the remaining $54 million going exclusively to personnel-related expenses. Even with this massive increase in personnel costs, under the budget the Police and Fire Departments will be able to replace officers who retire, but no new police or fire personnel are slated to be deployed into the communities. Each month the Police Department loses 7 officers to attrition—with the hires slated in the Manager’s budget barely keeping up with the existing attrition rate.

The $7.3 million is but a small downpayment on a larger public safety investment need. On March 12, 2004 the Police and Fire Departments released a full accounting of key public safety infrastructure investments needed over the next five years—totaling $478 million. This includes $159 million for the Fire Department, $186 million for the Police Department, and $133 for a joint Public Safety Communications Project (PSCP).

“This budget pretends to invest in expanding public safety services, but only a fraction of money actually goes into police and fire equipment and NO actual increase in the police or fire force is planned. It reflects the sad fact that the cost of service is going up without an actual expansion in the level of service. The simple standard must be how many more police officers and firemen are we deploying to our communities and this budget fails to deliver on that important issue.” DeMaio cautioned.

“Tinker at the Edges” Approach to Reforming City Government

The City Manager’s proposal suggests several important reorganization ideas, but falls far short of the kind of transformation and reorganization needed to reign in the city’s operating costs. Among the positive steps taken by the City Manager:

• Assumes the dissolution of the SD Data Processing Corp.
• Purchasing Division will be merged into the Financial Management Division
• General Services and Transportation Departments consolidated into a new “Department of Public Works”
• Storm Water Pollution Prevention Division merged into Metro Wastewater (this represents a shift of expenses from General Fund to Enterprise Fund)
• BiNational Affairs Division will be merged into Governmental Affairs Department

“The proposed reorganization offered in the budget proposal is a good first step, but it addresses just the tip of the iceberg of the inefficiencies in our city. San Diego city government needs to consolidate several other divisions, and more importantly must streamline internal processes within each division,” commented DeMaio.

Citizen Services Take Big Hit

Even though the budget is increasing by 9.6% this year, services will actually be cut. Translation: the cost of government is increasing while the services provided are decreasing. The Manager’s proposal makes the following service reductions:

• Eliminates Sunday service hours at seven branch libraries
• Reduces service hours at the Central Library
• Eliminates free youth programs previously offered by the Dept. of Parks and Recreation
• Limits use of city pools during winter months
• Eliminates maintenance support program for all coastal and shoreline parks
• Reduces recreation center operating hours from 48 to 40 hours per week
• Reduces support for environmental impact studies at the Dept. of Planning
• Increases the land development and zoning case backlog
• Reduces citizen service and increases processing time for Neighborhood Code Compliance
• Cuts support for 2300 children in the “6-to-6” Extended School Day Program
• Eliminates Community Service Center stores in the city
• Reduces arts and culture events
• Reduces “slurry seal” projects on city roads from 325 miles to a mere 14 miles

“These services need not be cut if the city takes a creative approach to redesigning its internal operations to reduce its cost-of-operating. If the city does not hold itself accountable for improving efficiency, the loser in this budget process will be the taxpayer. Services will be cut while fees are being raised.” DeMaio concludes.

Tax and Fee Increases Proposed

The City Manager’s proposal includes $6 million in new fees, including a $1.9 million hike in the fees charged by the “6-to-6” Program which provides day care services particularly during the “critical hours” between 2-6pm where studies have shown youth can get into the most trouble if left unattended. Moreover, the Manager is preparing a host of “revenue enhancement options” that would propose raising among other items business license taxes; parking lot taxes; property transfer taxes; transient occupancy taxes (TOT) and imposing fees on residential trash collection. A similar effort last year resulted in over $250 million in tax and fee increase “options” presented for Council to consider.

Need for Fundamental Reform Now Greater than Ever!

While the City Manager’s proposal contains a few good ideas on reorganization of a handful of divisions, the overall budget proposal fails to deliver on fundamental reform in city government. It raises fees, cuts services and continues to hide the structural deficit faced by the city. In contrast, the Performance Institute will be delivering a report as part of the San Diego Citizen’s Budget Project that boldly reorganizes San Diego city government in a detailed way. Options will be presented on a department-by-department basis, complete with estimated cost savings and service improvements to be achieved by each option. A complete “Options” report will be released May 18 at a public Town Hall Dialogue at the US Grant Hotel. At the moment the Mayor and Council do not plan extensive community forums on the budget issue and have announced that they will not entertain public comment during the final two Council sessions on the budget (June 21 and June 28). Council should change this closed-to-public comment policy. The public deserves to be heard on what might be the most challenging budget ever adopted by San Diego. The Mayor and Council should use its hearings on the budget for each city Department to consider fundamental overhaul and reforms in each division. To aid in this process, the San Diego Citizens’ Budget Project will provide a case study to Council at each public session and encourages the Mayor and Council to give the options presented by the project ample time and consideration during the budget process.

Based here in San Diego, the Institute is a national government reform think tank that promotes the principles of performance, transparency, competition and accountability in government. It is conducting a “performance audit” of the entire City of San Diego and will release a plan in May for balancing the city’s budget through fundamental reforms, streamlining and reorganization in each city Department. Information on the San Diego Citizen’s Budget Project can be found at www.sandiegobudget.org.

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