San Diego is planning to soften the city’s financial reserves policy so it can spend millions on other priorities such as increasing worker salaries and fighting homelessness and climate change.
The policy change would allow the city to avoid quickly increasing its financial reserve fund from $206 million to $259 million but comes as many economists predict a recession that would make healthy reserves crucial.
During a recession, reserves can allow a city to keep functioning without drastic cuts by covering sharp reductions in revenue from sales and hotel taxes.
The policy change also includes amending a rule that requires the city to maintain a separate multimillion-dollar reserve to cover spiked pension payments. The change would delay the requirement by several years — probably until after 2030.
Because a recession typically includes losses in the stock market, it usually increases a city’s annual pension payment.
A crucial part of the city’s long-term payoff plan is significant growth in the value of pension system investments. When those investments shrink in value, the city must contribute more money to make up the difference.
The City Council’s budget committee unanimously approved the softer reserve policies during its Nov. 18 meeting. The full council is expected to finalize the changes early next year.
The changes would postpone by five years the city’s achievement of a longtime goal of having reserves equal to two months of expenses, or 16.7 percent of the city’s nearly $2 billion annual general fund operating budget.
The 16.7 percent figure is recommended by the Government Finance Officers Association. San Diego committed in 2017 to slowly building its reserves up to that level.
Reserves are $205.6 million in the ongoing $1.96 billion budget for fiscal year 2023, which ends next June. That is about 10.5 percent. To meet the 16.7 percent goal this fiscal year, the city would need $326 million in reserves.
In 2017, the city adopted a reserve policy that required slow and steady contributions that would have increased the reserves to 16.7 percent of annual expenditures by fiscal year 2025.
But the COVID-19 pandemic prompted San Diego to cancel scheduled reserve contributions in fiscal years 2021 and 2022 and to make a minimal contribution of $1.5 million during the ongoing fiscal year — leaving the city way behind schedule.
City finance officials stress that $548 million in federal pandemic aid San Diego received prohibited that money from being used for reserve contributions. The theory was that if cities can contribute to reserves, they don’t need federal aid.
Faced with the need to make large reserve contributions to get back on schedule toward the previous goal of 16.7 percent reserved by fiscal 2025, city officials say it makes more sense to delay the goal five years.
The softened policy would require the city to achieve the 16.7 percent goal by 2030 instead of 2025.
And the pension reserve would remain zero until the general fund reserve goal has been achieved. The pension reserve is supposed to be 8 percent of the city’s average pension payment — roughly $30 million.
Matt Vespi, the city’s chief financial officer, told the budget committee that not making reserve contributions during the pandemic didn’t damage San Diego’s credit rating. He also stressed city reserves have remained steady at $205.6 million.
Rolando Charvel, the city’s comptroller, said San Diego must weigh being financially responsible against other priorities, such as meeting state water quality requirements and fighting homelessness and climate change.
“We have a lot of really important priorities on the expenditure side,” he said.
Lisa Byrne, who works for the city’s independent budget analyst, said the slower schedule of boosting reserves is more realistic.
“It makes sense to adjust the reserve policy to something that is achievable,” she said.
Councilmember Vivian Moreno called the softer schedule “reasonable” and a “realistic path.” The other council members who voted in favor of the change are Sean Elo-Rivera, Monica Montgomery Steppe and Chris Cate.
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