Measures to Improve City Finances

By Carl DeMaio

This week brought yet another reminder that the city of San Diego needs to take immediate action to fix its troubling finances. On Wednesday Moody’s Investment Service downgraded the city of San Diego’s credit rating for the second time this year—citing concerns over irregularities in the city’s accounting, rising debt levels, continued structural imbalance in the city’s budget, and a failure by city leaders to adequately address a $2 billion unfunded pension liability.

What’s worse, Moody’s warned that a further downgrade in the credit rating is possible if the city continues to delay the release of its FY 2003 financial audit or if federal investigators looking into possible fraud by City officials uncover additional financial problems.

Unfortunately, both the mayor and City Council members have been repeatedly warned about the problems that prompted this week’s credit rating downgrade—and have steadfastly refused to take serious action on necessary reforms.

Throughout the recent budget process, the Performance Institute raised numerous red flags regarding the city’s finances and presented the Mayor and Council with a ten-point Citizens’ Budget Plan to implement accountability, transparency and efficiency reforms citywide. We watched in astonishment as the ideas were rejected en masse by the mayor and council who claimed we were being overly critical of the city.

Fortunately, there is still time for the city to turn the situation around—but only if city leaders acknowledge the severity of the city’s problems and act on some of the reforms offered to them during the recent budget debate.

The first place to begin is with leadership. In its justification for the credit downgrade, Moody’s notes that when it comes to balancing the budget, “the city’s policy makers do not appear to have made this a priority.” To send a clear signal that the City’s leadership “gets the message,” the Mayor should articulate a bold budget reform plan and use his power over the Council’s agenda to focus elected leaders on enacting real reforms over the next six weeks.

A second key step would be to reopen the City’s current budget and achieve real balance without the accounting gimmicks used by elected leaders in the past to achieve balance on paper. To accomplish this, City leaders should look at the 226 cost saving ideas collected from city employees and the general public by our project—which could trim between $45-120 million from the budget annually.

The cost saving ideas reflect many of the commonsense management practices from cities across the nation. They include reorganizing the city bureaucracy to streamline operations; reducing overhead and administrative costs by centralizing purchasing, technology and financial management; creating a “311” citizen service center; and opening city operations up to a competitive bid process between city workers and non-governmental providers. The mayor and council should also lead by example by reducing the size of their personal office staff—which would save a whopping $5 million a year if they accepted the same size staff as their counterparts in Phoenix.

While these cost saving measures would balance the current budget, the city must take action to address the looming $2 billion unfunded pension liability—one of the major issues raised by Moody’s. City employee benefits spiked by 20 percent in 2002, while city leaders intentionally underfunded the pension plan. After creating an independent Pension Reform Committee to provide advice on reforms, city leaders have severely watered down the panel’s recommendations.

To implement real pension reforms, the city should immediately roll back benefits for new hires to their original levels. In addition, the city should end the practice of employees buying credits toward years of service, end the subsidization of the employees’ individual pension contributions, and eliminate the “Deferred Retirement Option Program” where over 750 city employees are in essence receiving two salaries a year.

Providing retirement security for city workers should come before salary hikes. Until the pension fund liability is addressed, the city must refrain from granting across-the-board pay increases to city workers such as the 7 percent increase given this year.

By mixing staff reductions with a moderate staff furlough program, some $30 million in taxpayer funds this year can still be diverted to help close the pension shortfall. Freezing salaries at current levels next year and providing a modest 1.5 percent increase the year after will free up over $120 million for the Pension Fund. Combined with the anticipated sale of Pension Obligation Bonds, these reforms would put the pension fund back on firm footing.

Wall Street analysts such as Moody’s watch what the mayor and council do very carefully—and often reward elected leaders with praise and improved ratings when they take action. And with an election coming up in November, so do taxpayers.

DeMaio is president of the Performance Institute and author of the San Diego Citizens’ Budget Plan.