San Diego’s budget crisis is prompting city officials to consider softening their policy on minimum financial reserves despite a new comparison study showing most similar cities already have more money socked away.
City finance officials say San Diego must abandon a plan to quickly increase its reserves to national standards because the city faces a $120 million deficit for the upcoming fiscal year and additional deficits in future years.
They contend there’s no point in having a policy the city has essentially disregarded by canceling scheduled reserve contributions every year since the COVID-19 pandemic began.
During the most recent six fiscal years — fiscal year 2021 through fiscal year 2026 — San Diego has made one reserve contribution of $1.5 million, instead of more than $150 million as required by the existing policy.
That has left the city with $207.1 million in reserves instead of the $362 million it should have under the policy — leaving the city much more vulnerable should there be a significant economic downturn.
Finance officials are tentatively proposing the city scrap the existing policy and make no contributions during the next two fiscal years — fiscal 2027, which starts in July, and fiscal 2028 — and start making contributions in fiscal 2029.
They also want the new policy to determine a realistic amount of reserves — possibly below national standards — and decide what criteria that amount should be based on.
The city has been using the recommendations by the Government Finance Officers Association, which suggests a reserve equal to 16.7% of annual spending — the equivalent of two months of operating expenses in the city’s nearly $2.2 billion annual general fund budget.
Finance officials also want to strengthen the policy by locking in how the city will build its reserves to whatever target is chosen, when reserves can specifically be used and how quickly they must be replenished after use.
The tentative proposal, which was discussed Wednesday by the City Council’s budget committee, will come back to the committee in June with much more detail and then be presented later to the full council for approval.
Wednesday’s presentation included a comparison study of 10 other cities that showed San Diego’s reserves were in the middle of the pack when each city’s finances from fiscal year 2024 were analyzed.
But when excess cash not formally declared “reserves” was added into the analysis, San Diego fell to seventh place among the 10 cities, with barely more than half the cash socked away as Dallas, Jacksonville and Seattle.
Rolando Charvel, who presented the study, said it’s possible things have changed since 2024, the fiscal year the comparison is based on.
“If you look at the headlines across the nation, many cities — especially large cities — are facing structural issues,” he told the committee. “So I wouldn’t be surprised if some of these fund balances were used as part of budget mitigation measures over the last couple of years.”
Councilmember Vivian Moreno said another factor is San Diego’s history, including a pension scandal two decades ago and the purchase of an unusable downtown skyscraper a decade ago.
“I don’t think those cities had the financial scandals that the city of San Diego had in the past,” Moreno said.
Moreno said she agrees that reserve contributions aren’t possible during the current crisis.
“As painful as it is, I do understand why we’re not adding to the reserves right now, although I think we should always strive for that,” Moreno said.
But she stressed that she wouldn’t support abandoning the national standard for the amount of reserves of two months of operating expenses.
Councilmember Kent Lee said he supports healthy reserves, but not if it means depriving city residents.
“I don’t want to just have reserve funds sitting in an account for the sake of a positive percentage, if residents and the city are losing out on the actual services they depend on,” Lee said.
Councilmember Henry Foster said amending the city’s reserve policy must come along with a comprehensive plan to solve future deficits, which he called a “structural” problem where long-term revenues don’t keep pace with long-term expenses.
“Until we actually sit down and resolve the structural deficit, we’re just applying Band-Aids,” Foster said.
The city’s independent budget analyst, Charles Modica, agreed with Foster.
“We want to stress that changes to the reserve policy should be paired with a clear and time-bound commitment to resolving the city’s structural budget deficit,” Modica said. “Without that commitment, there is a real risk the city will remain in a cycle where reserve contributions are consistently deferred because they compete with the expenditures that are needed just to maintain current service levels.”
Modica also said it makes sense to change a policy that is so unrealistic about building up reserves that it has lost credibility.
But he warned that the tentative plan presented by finance officials raises some concerns.
“At the proposed contribution levels, it could take 10 to 20 years to fully fund reserves to the 16.7% target,” he said. “This will ultimately be a really long-term effort.”
The proposal comes a week before Mayor Todd Gloria is scheduled to release his proposed budget next Wednesday for the fiscal year that begins July 1.