CITY FACES FISCAL CHALLENGES AMID RISING PENSION COSTS AND STRUCTURAL DEFICIT

 


SAN DIEGO BUDGET ANALYSIS: CITY FACES FISCAL CHALLENGES AMID RISING PENSION COSTS AND STRUCTURAL DEFICIT

By Financial News Team
May 11, 2025

San Diego's recently approved $5.82 billion budget for fiscal year 2025 reveals a city navigating significant financial challenges while striving to maintain essential services and address critical issues like homelessness and infrastructure. The budget, unanimously approved by the City Council, represents a 13.7% increase from the previous year's $5.12 billion spending plan.

Budget Breakdown: Where the Money Comes From

The General Fund, which finances core city services, accounts for $2.15 billion of the total budget. San Diego relies heavily on property taxes as its primary revenue source, generating approximately 36% of General Fund revenue. Other major funding sources include sales tax (18%), transient occupancy tax from hotels (11%), and franchise fees (7%).

"This balanced budget includes funding to maintain current services, utilizing a mix of one-time and ongoing resources," said Mayor Todd Gloria in his budget message. "However, these measures are part of a longer-term process to rectify the city's structural budget deficit."

Where the Money Goes

Public safety remains the largest expenditure category, with the Police and Fire-Rescue departments receiving about 40% of the General Fund budget. The budget maintains current staffing levels for these departments with only minimal reductions.

Significantly, pension obligations continue to place enormous pressure on city finances. San Diego will pay approximately $490 million for city pensions in fiscal year 2025, representing about 23% of General Fund expenditures. This pension payment has increased by $48 million from the previous year, largely due to the reinstatement of the traditional pension system following the courts' overturning of the 2012 voter-approved pension reform initiative.

Other major expenditure categories include:

  • Homelessness Programs: $180 million (8% of General Fund), an $18.3 million increase from the previous year
  • Infrastructure & Transportation: $320 million (15%), including $104.6 million for street resurfacing
  • Parks & Recreation: $170 million (8%)
  • Library Services: $110 million (5%)

Per Capita Spending

With San Diego's population at approximately 1.39 million residents, the budget translates to:

  • $4,188 per resident in total budget expenditures
  • $1,547 per resident in General Fund expenditures
  • $353 per resident in pension costs

Budget Challenges and Structural Deficit

San Diego faces a concerning fiscal outlook due to a structural deficit estimated at $258 million for fiscal year 2025. The Department of Finance projects that city budget deficits could total $1.03 billion from 2026 to 2030 if not addressed.

"Three-quarters of San Diego's expenses are inflexible and committed to pension and bond payments, which must be made, and public safety, where politicians and taxpayers usually don't want significant cuts," noted a recent analysis by the Reason Foundation.

To balance the budget, city officials implemented a combination of strategies:

  1. Strategic reductions across various departments, primarily in non-personnel expenses
  2. One-time funding measures that cannot be sustained in future years
  3. Suspended contributions to city reserves for one year
  4. Reabsorption of specific funds, such as the Community Equity Fund, into the general budget

Homelessness and Housing: Key Priorities Despite Budget Constraints

Despite financial challenges, the budget increases funding for homelessness by approximately $28 million, allowing the city to pursue two major projects:

  1. The transformation of H Barracks, city-owned former Navy land, into roughly 200 spaces for the Safe Parking Program
  2. A proposed 1,000-bed shelter at Kettner Boulevard and Vine Street in Middletown, which would become the city's largest homeless shelter and service campus

The budget also supports efforts to accelerate housing development through the "Complete Communities Now" program, which sets a 30-day review standard for housing projects under the Complete Communities framework.

Infrastructure Investment

The budget allocates $104.6 million for street resurfacing, aiming to improve 75 miles of major streets in fiscal year 2025, up from 60 miles in the previous year. Additionally, $85.1 million is designated for flood control and green infrastructure projects.

The budget also includes funding from the Build Better SD initiative, which streamlines the allocation of Development Impact Fees: $9.6 million for parks projects, $11.4 million for mobility projects, and $1.5 million for Fire-Rescue projects.

Looking Forward: The Fiscal Cliff

City officials acknowledge that the budget relies on one-time solutions that cannot be repeated in future years. Without new revenue sources, San Diego may face difficult decisions, including potential service reductions or tax increases.

"We were able to avoid the most dire cuts by using one-time measures we cannot responsibly repeat next year," Mayor Gloria noted. "A major part of this process will be how we reckon with our structural deficit."

The city is considering placing a 1-cent sales tax increase and an enhanced stormwater fee on the November 2024 ballot to address long-term funding challenges.

Conclusion

San Diego's fiscal year 2025 budget demonstrates the city's commitment to maintaining essential services while addressing critical issues like homelessness and infrastructure. However, the growing pension obligations and structural deficit present significant challenges that will require difficult decisions in the coming years.

As Independent Budget Analyst Charles Modica stated, "Revenue from one or both of these [proposed taxes] will be necessary for the city to maintain its current level of programs and services."

The city's ability to navigate these fiscal challenges while continuing to serve its residents effectively will depend on both short-term management and the development of sustainable long-term funding solutions.

Sources:

  1. City of San Diego. (2025). "Fiscal Year 2025 Adopted Budget." Retrieved from https://www.sandiego.gov/finance/annual

  2. City of San Diego. (2025). "2025 Proposed Budget." Retrieved from https://stories.opengov.com/sandiegoca/published/rKuIJ4SUN

  3. City of San Diego. (2025). "City Council Unanimously Approves 'Protecting our Progress' Budget." Retrieved from https://www.sandiego.gov/mayor/city-council-unanimously-approves-protecting-our-progress-budget

  4. Reason Foundation. (2025). "As pension costs rise, San Diego must choose between raising taxes, cutting services, or more debt." Retrieved from https://reason.org/commentary/why-are-so-many-of-san-diegos-needs-going-unmet-extreme-pension-costs/

  5. Times of San Diego. (2024). "Mayor Gloria Presents $5.65 Billion 2025 City Budget to Mixed Reviews." Retrieved from https://timesofsandiego.com/politics/2024/04/22/mayor-gloria-presents-5-65-billion-2025-city-budget-to-mixed-reviews/

  6. World Population Review. (2025). "San Diego, California Population 2025." Retrieved from https://worldpopulationreview.com/us-cities/california/san-diego

  7. NBC San Diego. (2024). "San Diego City Council approves modified version of Mayor Gloria's 2025 budget." Retrieved from https://www.nbcsandiego.com/news/local/san-diego-city-council-to-offer-final-verdict-on-mayor-glorias-2025-budget/3538123/

  8. KPBS. (2024). "Mayor reveals $5.65 billion budget, one-time cuts to prevent service losses." Retrieved from https://www.kpbs.org/news/politics/2024/04/12/san-diego-mayor-todd-gloria-5-65-billion-budget

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