There is a showdown coming. It might turn into a gunfight. Or at least a fistfight. There is a huge City budget deficit. To close the gap, the current council only wants to talk about cuts in services. It doesn’t want to discuss excessive labor costs, which are the major source of the financial affliction. And few are willing to talk tax increases. The incoming council, which will be even more in Big Labor’s pockets, will almost certainly be less inclined to address the real cancer.
At a special meeting of the council’s Budget and Finance Committee November 12, “We heard nothing about the biggest cost of operating the City: labor,” says Councilmember-elect Carl DeMaio. “We heard nothing about what we are going to do to trim labor costs. Instead, they [councilmembers] talked about cutting services. It’s mind-boggling. They are discussing library and rec center cuts and delaying water, sewer, and road-repair projects, but they are not willing to talk about excessive salaries and benefits that have become the third rail of San Diego politics.”
He predicts that taxpayers won’t put up with this very long: infrastructure is rotting as services lag. The economy is quite sick, and the general-fund budget deficit, pegged at $43 million in the current fiscal year (2009), could easily grow. Indeed, under an optimistic scenario, the City predicts it will pay $207 million to the pension fund in 2012 and, under a pessimistic forecast, pay a whopping $256 million that year. And deficits in years beyond could also balloon as the labor market and retail sales falter and the beleaguered state takes a bigger bite out of San Diego’s budget. Councilmembers “must cut services or face the labor unions that put them in office,” says DeMaio. Taxpayers, irate at potholes, library closures, and the like, “at some point won’t want more service cuts and won’t approve tax increases, so they will have to look into the issue of taking on the labor contract.”
It won’t be easy. The San Diego and Imperial Counties Labor Council boasts that in the new city council, “the one vote they don’t have is mine,” says DeMaio, though Donna Frye, with whom he works closely, has consistently opposed labor excesses.
Libertarian Richard Rider, chairman of San Diego Tax Fighters, has the same gripe about that November 12 session. Councilmembers “only talked about eliminating services but didn’t talk about how to better deliver services,” he says. Rider is a champion of managed competition, in which a government entity must prove it can do its job better than a private-sector enterprise could do it. There must be competitive bidding for government services — something DeMaio has long preached. Mayor Sanders wants to close some libraries and recreation centers. “We could put city-library services out to bid,” says Rider. “Riverside County did it years ago and saved 30 percent.” Such savings for San Diego would now be up to 50 percent, he believes.
“We should be putting out for bid vehicle maintenance, print shop, landscaping — any service for which competitors can be found in the Yellow Pages,” says Rider.
Like DeMaio, Rider proselytizes for labor reform. “City employees should make no more in pay and benefits than their private-sector counterparts,” he says. “The most obvious area for reform is pensions. The City of San Diego has two full pensions: full defined benefit and full defined contribution plans.” (A defined benefit plan promises to pay a specified amount to a retiree after a set number of years of service. A defined contribution plan provides a separate account for each person. Future benefits are based on the amount contributed. Private-sector companies are increasingly offering only defined contribution plans.) In San Diego, the combination of both “can give a general City employee a combined pension payout of 140 percent of their highest pay.”
Says Rider, “Most public-sector jobs pay 20 to 30 percent higher salaries than comparable private-sector jobs, and pensions are two to five times higher in the public sector.” City bureaucrats and municipal labor representatives argue that these outrageous payouts cannot be changed because they are baked into the contracts. Rider says they can be changed when the next contract comes up, “or employees can unilaterally offer to give up these advantages when faced with a loss of a job.” And he believes the monstrous deficits may persuade “even union hacks” that concessions are essential. Outgoing City Attorney Mike Aguirre thinks the City may have to consider tax increases; Rider points to polls showing San Diegans won’t approve them.
Aguirre says the City should study filing for Chapter 9 bankruptcy. Rider disagrees: “Bankruptcy is a crapshoot,” he says. “A bankruptcy judge has all kinds of options — might negate labor contracts, but might tell the City to sell property to pay obligations and might try to impose higher taxes.”
In its new five-year outlook, distributed to councilmembers at the November 12 meeting, the City might be making some optimistic revenue forecasts. For example, it expects property tax receipts to rise 3.2 percent in the current fiscal year, then rise 1 percent in each of the next three years. The City concedes sales taxes will drop 4 percent this year and be flat in 2010, but then it expects them to begin rising again in 2011, going up 4 percent in each year from 2012 through 2014. Transient occupancy (hotel) tax receipts will fall 1.8 percent this year but then rise between 4 and 6 percent until 2014. In each case, there is a high and low estimate.
Erik Bruvold, president of the San Diego Institute for Policy Research, worries that some of these estimates are Pollyannaish. If many people opt for property-tax reassessments, as is their right under the law, “These reassessments can dramatically reduce [property tax] receipts,” says Bruvold. Then there are sales taxes. “Ford’s October sales were down 30 percent. Circuit City filed for Chapter 11 bankruptcy. If durable goods sales keep taking it on the chin, the City may have to reanalyze sales tax estimates.” As to the hotel tax, “A quarter of our room nights are business travel. As companies look at a pretty significant recession, they won’t be sending people to conventions and meetings if they can avoid it.” Those transient occupancy tax estimates may be on the high side; indeed, tourism is already slowing sharply.
Hotel-tax receipts fell between 2001 and 2004, and the property-tax take trended down from 1994 through 1996.
Bruvold thinks there can be some other savings. For example, Andrea Tevlin, the independent budget analyst, pointed out that if nonunionized City employees take a voluntary 10 percent pay haircut, there could be a savings of $1.4 million. “That isn’t much,” says Bruvold, but it might substitute for library and recreation-center slashes that voters hate.
All told, three things are clear: (1) The downturn will be worse than the City has planned for, (2) revenue estimates are too rosy, and (3) one way or another, labor costs must go to the guillotine, but politicians are afraid that if they dare tell the truth, they will get their own heads chopped.