Federal, state finances add to grim San Diego budget outlook

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The news about the city of San Diego ramping up its hunt for new sources of revenue to respond to looming “structural deficits” in its $2 billion annual budget — caused in part by the increased cost of benefits that mounted maddeningly after the city’s pension “reform” disaster — prompted considerable and understandable grousing. City leaders’ big idea to address a pension underfunding scandal — pushing to end pension benefits for most new city hires in what turned out to be an illegal 2012 ballot measure — only made the problem worse. That remains mind-boggling. Yet the city keeps making costly mistakes, notably the disastrous 2016 acquisition of a decrepit Downtown office building at 101 Ash St. And it makes them while seemingly dismissing the idea that cutting spending is a significant option.

So the recent report on potential revenue from the city’s independent budget analyst is likely to set at least the initial agenda for upcoming policy debates. What new fees will city residents accept? How much can visitors be charged without harming tourism? As leaders contemplate adding parking meters, imposing new taxes on rental car businesses, increasing fees for parking tickets and requiring nonresidents to pay to park at beaches and beloved parks, they will face a difficult political calculus.

Worse, recent federal and state developments make the city’s fiscal picture seem even shakier.

The federal news starts with the pending Republican takeover of the House. No matter what the Senate and President Joe Biden want, the House is unlikely to OK any generous bequests to big cities controlled by Democrats — much less the $548 million San Diego got in 2020 and 2021 as part of pandemic relief. With the U.S. government coming off a shocking, unsustainable month in which it spent $501 billion but only collected $252 billion in revenue, many Democrats are also likely to balk at upping domestic spending. Meanwhile, the Supreme Court’s conservative majority is a lock to void Biden’s order unilaterally wiping out at least $300 billion in student loan debts as an unconstitutional power grab. This will rein in Biden and reinforce the House GOP’s ability to block spending it doesn’t like.

But that’s not the only reason for city gloom and doom. There is an increasing likelihood the state will see a plunge in revenue — potentially as severe as the $20 billion dip in 2008-09 — that could last for years and wipe out its combined $37 billion in budget reserves. A budget deficit much larger than the $25 billion projected by the Legislative Analyst’s Office is possible even if the economy is relatively healthy. That’s because of the state’s extraordinary dependence on capital gains taxes paid by the very wealthy, especially tech executives. In recent years, just 1 percent of people paying personal income taxes paid about half of such taxes. That won’t continue with the stock market on the brink of its worst year since 2008, with the S&P 500 down 20 percent and the tech-heavy Nasdaq Composite Index down 34 percent. The bad news has been unrelenting: Both Bloomberg and The New York Times reported this week that San Francisco’s tech economy appears on the brink of contracting. It’s no wonder that state revenue projections haven’t been met in recent months except for an anomalous October that was skewed by the state issuing fewer tax refunds than expected.

And, no, San Diego won’t be insulated from the state’s distress. In 2011, Gov. Jerry Brown and the Legislature forced local governments to assume responsibility for several criminal justice, health and human services programs. They also scrapped local redevelopment programs, seizing $1.7 billion from local governments in the process. Expect similar power plays next year if revenue plummets again.

The federal and state situations suggest revenue hikes alone aren’t likely to wipe out the city’s red ink. That’s why Mayor Todd Gloria and his nine fellow Democrats on the City Council must control or reduce spending as much as possible. This may be tricky given the power wielded by those with costly wish lists. But whatever they do, a painful era looms for a city whose decisions will be closely scrutinized.

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