This week, the San Diego City Council began deliberating the Mayor’s proposed 2008 budget, wrestling with some of the most extraordinary fiscal challenges in the City’s history. Unless local lawmakers want to put taxpayers through the kind of grief that ultimately resulted in the recall of a sitting California Governor, they must plan for the future, fixing past mistakes and enacting fundamental fiscal reforms.
The good news is that in 2008 the City will enjoy an economic windfall that will soften the fallout from irresponsible spending sprees of past Councils and the unconscionable decision to under fund our public employee pension system. San Diego’s General Fund revenues for Fiscal Year 2008 are estimated at $1.104 billion, a hefty sum that speaks to our recent period of private-sector growth and prosperity. Only four years ago, General Fund revenues weighed in at $743 million. This $361 million dollar increase reflects an average 10.5% annual rate increase in municipal receipts.
Similarly, in recent years the United States stock market has also performed extraordinarily well. Since 2004, the S&P 500 has seen an annual average growth rate of 15%. This is important, for when the market performs well it reduces the amount the City has to pay into the City’s employee pension plans.
But these good times can not go on forever. According to the City’s Comprehensive Annual Financial Reports and Annual Budgets, since 1985 the City’s General Fund revenue has grown on average 7.1%. The S&P 500 has an annual growth rate of only 13.4% over the last twenty years.
Even with a bullish advance on Wall Street and robust collection of taxes, local elected officials have created an unstable fiscal house of cards. To meet basic obligations and build prudent fund reserves, the proposed budget has to make painful salary freezes and cuts in the public labor force, including the elimination of more than 650 positions this year. Worse yet, with the U.S. economy now showing signs of a slow down, high gasoline prices, and speculation of a recession next year, it is very possible that San Diego could see a quick reversal of its fiscal fortune.
That is why it is critical for San Diego’s City Council to avoid making the kinds of mistakes that were made during the waning months of the Gray Davis administration. In a spending spree of unprecedented magnitude, after inheriting a $12 billion surplus, and with Silicon Valley roaring through the late 90’s, Governor Davis and the Democratic-led state legislature ratcheted up the state’s General Fund spending by more than $20 billion to finance a wish list of pet projects, pork programs and other new items. However, as revenues dried up with the dot-com bust at the turn of the new millennium, Governor Davis presented state residents with a $38 billion budget deficit. He tripled the car tax, raised more than $900 million through increased state fees, and employed numerous accounting tricks to give the veneer of a balanced budget. The people of California responded to this kind of irresponsible leadership quickly and decisively, recalling the Governor from office.
The lesson to take from Governor Davis’s abbreviated tenure is that markets and revenue will fluctuate over time. Good times do not last forever. It is imperative that San Diego lawmakers maintain fiscal discipline and show backbone to outside interests who, during the rest of May, will ramp up pressure for the City to take on new spending obligations. We will start to hear about delaying payments to certain funds, or that the reserve-build up is too aggressive. Rather than give into the special interests, prudence demands that the Council remain disciplined and consider even deeper cuts and broader structural reforms. Making perhaps painful adjustments in these fiscally good times will cushion the blow to the City when equity markets inevitably revert to traditional rates of return and revenues fall to historical norms or, worse yet, fall to the levels seen during the recession of the early 1990’s. Let us not forget that between 1992 and 1994 revenue in the City of San Diego’s General Fund grew by less than 1.1%. If tax collections shrunk to those levels, it would mean catastrophic readjustments would need to be made to the City’s budget. Making smart decisions today so that blow would not be as severe is prudent and smart policy making.
When local government leaders work to set sound public policy and provide taxpayer protections, residents will give them the trust and support they need to get the job done. But spending irresponsibly and putting future taxpayers at peril means elected officials risk the same fate that befell FORMER Governor Gray Davis.
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