California just experienced its third longest state budget delay in history. The major reason Senate Republicans refused to pass the budget in June was their concern that a slowing economy could exacerbate California’s multi-billion dollar structural deficit. In San Diego, elected officials should think hard about why Senate Republicans felt compelled to hold the line on spending. Such an examination should lead City leaders to redouble their efforts to restructure municipal activities so that, if a recession hits, the City can successfully weather the downturn.
Concerns about a recession are not alarmist. Most economists agree California and San Diego are experiencing an economic slowdown in some sectors, with a potentially adverse impact on tax revenues. Most taxes are in some way tied to economic growth and activity, such as sales, property values, and personal/corporate income growth.
San Diego has some unique fiscal vulnerabilities. Taxes paid by visitors in the form of the City’s transient occupancy tax (TOT), have become an increasingly important part of funding San Diego’s day-to-day operations. Last year, for example, the City collected more than $160 million from hotel guests. Budget hawks should worry because hotel occupancy and room rates, which determine the level of TOT collection, are especially sensitive to national economic conditions. A prolonged recession could hurt San Diego’s TOT receipts, forcing budget makers to continue to defer maintenance, or, even worse, lengthen the time the City will take to pay off its billion dollar pension debt.
Although vitally important, preparing for municipal rainy days is neither fun nor politically gratifying. Politicians consistently receive far more pressure to spend than to save or reduce taxes. That pressure to spend is why, even in good times, we so often hear about public sector budget deficits. When economic activity keeps pace with politicians’ desire to spend, elected officials can avoid hard choices and still balance their budgets. But when economic growth slows, the difference between well-prepared governments and those that have avoided tough choices becomes starkly apparent.
One step the City could take would be to accelerate progress in implementing new “managed competition” rules to allow the private sector to do work that is currently performed – at higher cost – by the City itself. Since cost savings in this area can take several quarters to show up on San Diego’s balance sheets, putting managed competition on the fast track is especially important now.
In addition, the City could also prepare for possible mid-year spending reductions by identifying well in advance those items which can be included in the budget when times are good, but are not high enough of a priority to be sustained when things get tight. Prioritizing spending is one of the least desirable functions in government because it requires telling some special interests that their pet projects are less important than others, something no one wants to hear. Yet, such prioritization is healthy and forces government to measure whether expenditures truly serve the common good or only a few. Without identifying low priority items early or making full use of the managed competition tools voters gave the Mayor in 2004, the City could be forced into “burning the furniture for firewood,” using mechanisms to balance the budget that provide short term revenue but reduce assets that are necessary over the long term.
Another tool for prioritizing San Diego spending can be borrowed from the growing “transparency movement” we’ve seen in state capitols. Missouri Governor Matt Blunt recently signed an executive order to put all state government expenditures up on the web, covering thousands payments made by the state. Governor Rick Perry is doing the same in Texas.
To take just one example of how increased transparency can help, San Diego provides no detail about the “supply and services” line item in its yearly budget. If this line item was shown in detail, the media and blogosphere would have the raw materials they need to pour over this area of the budget. Out of that examination we should expect watchdogs to ferret out questionable expenditures and to show how San Diego could save taxpayers money by doing things differently. That one simple change to the upcoming FY 2009 budget could make a tremendous difference as the City positions itself to deal with economic uncertainty.
The time to act is now. Waiting until spring will make the choices much harder and more difficult. By recognizing the imminent challenges posed by current economic conditions and exerting the necessary political will, San Diego leaders can help ensure that the City is better prepared and ready to successfully manage uncertainty.
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