Pacific Beach residents heard from City of San Diego finance experts details of the city’s projected $258 million budget deficit for fiscal year 2026.
Charles Modica, the city’s independent budget analyst, and Baku Patel, its senior fiscal and policy analyst, explained the financial situation to a standing-room only audience of about 60 at the Pacific Beach Town Council’s March 19 meeting.
They said the deficit is so large that the City Council and mayor will have to make painful cuts to services in order to adopt a mandatory balanced budget by June 15.
Modica described how the immense deficit was practically inevitable because the city neglected to address structural deficiencies in the city’s fiscal policy for years by depending on infusions of revenues from external sources, even though most were one-time grants.
“I think it’s important to talk about how we got to this point,” Modica said. “The city has lacked the resources that are necessary to fund its operations and its infrastructure, really for decades if you look at how the city was raising revenues and resources compared to our own peer cities in the county and some of the cities in the state and in the country.”
Although the city’s total operating budget is $5.8 billion, the majority of it originates from fixed sources dedicated to exclusive programs. This is best illustrated by water and sewer fees on property tax bills, which must legally be spent only on the water and sewage systems.
When the media and general public discuss the budget, they are referring to the discretionary general fund, which comprises 37% — or $2.2 billion — of the total operating budget, he said. This portion of the budget funds services such as police, fire, parks, libraries and infrastructure. The latter includes the construction and maintenance of the stormwater system, city roads, streetlights, sidewalks and bridges.
With $2.333 billion in proposed expenditures in the 2026 budget, it is the general fund that is running the projected $258 million deficit.
The two analysts explained how the city’s tax rates are often several points lower in contrast to Los Angeles, San Francisco, San Jose and other comparable cities, thereby reducing revenue.
For example, San Diego’s sales tax rate of 7.75% and its transient occupancy tax (TOT or hotel tax) rate of 10.5% generate much less income than Los Angeles’ 9.5% sales tax and 14% TOT.
Last November, the proposed Measure E to raise the sales tax to 8.75% was narrowly beaten at the polls, with 50.3% of voters rejecting the increase.
“So we don’t have as much money coming into the city as many other cities do,” Modica said.
Sales tax s for 19% of the general fund and TOT contributes 8%, but the largest portion of general funds (39%) derives from property taxes.
Patel said the majority of property and sales taxes go to other entities, such as the state, county and special districts, primarily schools and universities, with the city receiving only 18 cents and 13 cents respectively of every property and sales tax dollar raised in San Diego.
“There’s no doubt that people are paying a significant amount of taxes, but the amount that goes to the city to provide core services — again, police, fire, parks, libraries, etc. — that share is relatively small,” Patel said.
To balance the budget in recent years, the city tapped federal dollars, such as those provided during the pandemic and subsequent economic downturn under the CARES (Coronavirus Aid, Relief and Economic Security) Act and ARPA (American Rescue Plan Act), Modica said. Those programs are now gone, while the expenditures remain and keep rising.
“We have needs that we have year over year over year and we started using one-time sources of money that we won’t have after their use to maintain those ongoing services,” he said. “That has created a structural imbalance; something that my office has been clamoring about for several years.
“That money has run out. That money will not be available in FY 2026. So we’re at the point where we really do need to restructure our operations so that they are more in line with our actual revenues going forward.”
Yet any belt tightening will exacerbate the city’s problem with hiring and keeping qualified personnel, Modica said. To offset insufficient revenues from 2010 to 2018, the city did not increase wages with the cost of living.
“You could go and work for Oceanside and make more money for the same thing you would be doing in San Diego,” he said. “This puts us in a difficult place for recruiting. This is what puts us in a difficult place in retaining folks. We have a lot of folks here who get their start in San Diego, for three years we invest a lot in training and then they go out into other jurisdictions. It’s an issue that starts coming to a head now.”
Similarly, in order to save money, the city has neglected to invest in its roads and other infrastructure over the years, preferring to make minor repairs that Modica called “band-aids” which last for a year or two. The deficit has arrived just as major overhauls are needed to prevent ruinous breakdowns in infrastructure.
“If you have a leaky roof, you just put a bucket under it,” Modica said. “That takes care of the problem today, not tomorrow. If you put a tarp over the roof, it takes care of the problem for the next week. But eventually, if you don’t actually address the leaky roof itself, the roof will cave in and you have a much more expensive problem on your hands.”
Aside from water and sewer, San Diego has few dedicated sources of funding for capital improvement projects (CIPs). Modica said hundreds of proposed projects must sometimes wait for years until general fund appropriations become available.
In the five-year budget forecast, the gap between funding required for necessary CIPs to maintain the infrastructure and actual money secured is $6.5 billion. For example, of the more than $4.1 billion needed in essential stormwater infrastructure CIPs over the next five years, only $394 million has been funded. The greatest shortfall in of ratio is in streetlights, where $2.2 million has been set aside over the next five years for $489 million in needs, more than 222 times the amount allocated.
“With general fund objects, (CIPs) do not have a regular funding source, but are competing against each other for the limited amount of capital dollars that we have,” Modica said. “But they are also competing against police and fire; police officers pulling their salaries from the same pot of money that goes to properties. Same for a park ranger. So that is somewhat a bleak outlook. But that’s also what we’re facing.”
According to Modica, recent and measures will tamp some of the deficit. The implementation of trash collection fees for single family homes — borne by the city for more than a century — will eliminate almost $80 million from the budget.
Litigation against an increase in the TOT approved by voters in 2020 was recently resolved and will yield an additional $34 million. A higher cannabis tax and parking meter rates will contribute smaller amounts. Modica said the city is likely to forego putting $63 million in the city’s reserves this year.
With recent data adjusting expenditures upwards, Modica said increased revenues mean about $100 million in spending will need to be cut.
“For context, year-to-year, we spend less than $100 million on the library,” Modica observed. “We spend around $70 million on libraries. We spend less than that on all of our stormwater operation; about $65 million a year. We’re talking about $100 million in cuts that are going to be real; that are going to be significant. As much as the city will try to make sure that they have limited pain, the city is really forced with making the least bad choices at this point.”
