The Case for Real Accountability, Efficiency and Transparency Reforms in San Diego City Government

Before proposing a solution, it is imperative that the problem be clearly defined. As such, the San Diego Citizens' Budget Project had to begin its efforts to improve governance in our city government by reviewing the financial management of the city with an eye toward documenting any deficiencies and problems.

When the Project was launched in November 2003, the City of San Diego's finances were already rocky at best. The city was in the middle of a third straight year where the budget fell apart mid-year producing a multi-million dollar operating deficit. Yet, if one were to listen to the Council and City Manager at the time, the city's budget woes were not its own doing-but resulting from state raids on local finances.

In the course of the "performance audit" of the city's budget conducted by the Citizens' Budget project, the full extent of the city's financial problems emerged in stark detail. The resulting conclusion is the city suffers not only from a budget deficit, but from transparency, efficiency and accountability deficits as well.

Structural Deficit of $65-100 Million
After examining the city's financials for the past few budget cycles, the Project concluded that the City had been incurring and carrying a "structural" deficit of $15 million in FY 2003, $30 million in FY 2004, and faced a $65-100 million deficit in FY 2005. During both of the preceding two budget years, the city's budget would be written and voted on to balance on paper-only to fall apart mid-year as expenditures exceeded revenues.

Lack of Transparency and Honesty in the Budget
To hide the fact that the city faced ongoing deficits year-to-year, the City has used accounting gimmicks and excessive mid-year transfers between city departments to paper over the deficit. Indeed, hundreds of positions in the city were intentionally held vacant, with funds diverted to cover "deficit accounts" in various city departments-most notably Police and Fire. Because the public likes to hear that popular positions such as police and firemen are being hired, the Council maintains or even increases these positions on paper during its budget deliberations-and then under-funds operating expenses. Once the fiscal year starts, however, the Manager holds the positions vacant during the budget year and transfers the monies back into operating expenses to cover the intentional deficits in each of these accounts. These transfers are made by the City Manager without prior approval from the City Council-and without formal public notice and comment.

Inability to Issue Accurate Financial Statements
In a shocking development during the project, the city failed to issues its FY 2003 Consolidated Audited Financial Report (CAFR) on time-revealing that it had "discovered errors" in its financials. To correct for the mistakes in its financial management system, the City had to hire a second auditor to re-do the preparation of the statements-with a cost of $800,000 and counting as of the drafting of this plan. As the City is unable to account for its monies through a complete and timely financial statement as of this writing, the City cannot issue bonds. As a result, the City took the unprecedented step of securing a private line-of-credit for $150 million from Bank of America to pay its bills through the summer.

Massive Increase in City Spending
Instead of holding city spending to a reasonable increase this year, the Manager proposed and the Council passed a FY 2005 budget that increased spending by a whopping 9.6 percent – spending over $70 million more in FY 2005 over FY 2004. This out-of-control spending behavior-in the face of a huge budget deficit and ballooning pension fund liability--underscores the city has not yet come to terms with its financial problems.

Draconian Cuts to Key City Services
In an affront to the citizens of San Diego, the City proposed and implemented significant cuts in Park and Recreation programs, as well as reduced library hours and book purchases. By threatening these popular and key programs, the City places the burden of the budget deficit on those who rely most on city services. Of course, as noted in Reform 10, had the Mayor and Council reduced their own staff sizes to the same size as Phoenix, no cuts in these important programs would have been necessary.

Rejection of Cost Saving Ideas
Into this sad state of fiscal affairs, the Citizens' Budget project called on city elected leaders to enact reforms. Those calls went unheeded. Indeed, of the 226 separate "Options" for cost savings that were presented before the City Council not one was implemented. Not one.

An Over-Emphasis on Tax and Fee Increases
At the same time that services are reduced, the Manager proposed and the Council approved over $10 million in new fees-including a questionable $3.9 million "fee on a tax" under the guise of the Small Business Tax License Processing Fee. Moreover, members of the Council focused much of their comments during the budget process on their desire to raise taxes-illustrating their belief that the problem is a lack of revenue. This, despite the fact that revenue in FY 2005 is growing by a healthy 9 percent. The Council has now requested the Manager prepare a list of tax and fee increases for their consideration – and is currently debating a measure for the November ballot to increase the Transient Occupancy Tax. By raising fees and taxes while cutting services, the city is pursuing an approach of charging more but offering less to its residents.

Skyrocketing Pension Liability Due to Intentional Under-Funding
Looking long-term, the city faces a staggering $2.3 billion liability in its Pension Fund – $1.2 billion for pension payments and $1.1 billion for health care expenses. This is due to the decision by the Mayor and Council to increase pension benefits by 20% in FY 2002, while at the same time intentionally under-funding the pension system. After being forced to settle a civil lawsuit for failing to provide adequate pension funding, the City is now under federal investigation for securities fraud.

A Broken Budget Process
The poor budget decisions outlined above would draw public attention and ire if they were made in a transparent system. Unfortunately, the City has not been transparent nor open with its financial condition and budget process. First, it was virtually impossible to get meaningful data from the city-with much of our data coming from formal public records requests and city employee whistleblowers. Second, the City bureaucracy repeatedly misrepresented information-preferring to "shoot the messenger" each time the project raised concerns with the city's finances.

Finally, and most telling, on June 21-as the budget was finalized-the Council made over $20 million in spending decisions on the basis of two Memos circulated to the City Council by the City Manager and the Mayor. Each memo contained detailed and elaborate budget cuts and transfers-citing revenue sources and proposing increases in fees. These two memos-which formed the basis for the agreement on the budget-were not provided to the public and many of the issues voted on in those memos (such as the Small Business Tax License Processing Fee) did not receive proper public notice and docketing on the Council's agenda. In a closed budget process, bad decisions can be made without public input.

There is an Alternative to the Status Quo: REAL REFORM
Though not all are willing to publicly admit it, virtually everyone recognizes that San Diego deserves a better budget plan than the one proposed by the City bureaucracy-one that addresses the underlying problems that created the budget crisis in the first place and will put the city back of a firm path to financial solvency. One that makes the tough decisions-and takes on the politically powerful labor unions and business trade groups alike. A budget plan that starts with full disclosure of the real size of the city's deficit-and an open and transparent accounting of all city funds. One that emphasizes quality citizen services at the most efficient cost.

To provide San Diego with an alternative solution to the city's budget problems, our project advances this "San Diego Citizens' Budget Plan"-which contains ten key reforms that mix short term cost saving measures with long term structural reforms. By enacting the short term reforms, San Diego's budget can be brought into balance this year and next year. More importantly, the longer-term structural reforms will provide protections against a crisis as severe as this from ever happening again.

If San Diego misses this opportunity to ask the right questions of its leaders and candidates and allows a continuation of the same pattern of deferral and denial, the problem will only worsen and next year's budget crisis will make this one look like a picnic. At that point it will matter little who sits in the Mayor's office, who occupies Council seats, and who is named City Manager. The debate over a Strong Mayor or Strong Manager will also be irrelevant.

Though simple on paper, the set of reforms that the City of San Diego must pursue is a significant departure from status quo operations and will be a great challenge of political will and leadership. Nevertheless, these reforms must be adopted if San Diego is to address its fiscal challenges today and in the future.