☆ Moses: SJ’s massive deficit is “structural,” and not a one-year problem
A recent Spotlight article frames San Jose’s $65 million shortfall as a short-term balancing act, but nobody’s asking how to solve the structural deficit. So says municipal finance guru Mark Moses, author of The Municipal Financial Crisis. An Opportunity Now exclusive Q&A response.
Opportunity Now: The Spotlight article is all about balancing the current budget. Is that the right way to think about the financial problem San Jose is facing?
Mark Moses: It's interesting that the problem is framed in the short term – i.e., balancing the current budget – as if such constitutes success. No one is talking about, in a city as rich as San Jose, why there is a structural deficit and how it can be solved.
ON: What do you mean by structural deficit? How is that different from a temporary budget shortfall?
MM: The $65 million structural budget deficit for fiscal year 2026-27 is the difference between projected revenues and projected expenditures for that year. What makes it structural is that the ongoing revenues are insufficient to cover the ongoing expenditures. For contrast, a temporary budget shortfall might occur when there is a one-time interruption in revenues – as we had during the pandemic with hotel taxes – or the incurrence of a one-time expenditure – as can occur with a legal settlement.
ON: The Spotlight quotes Budget Director Jim Shannon who says, “Our local economy right now is really not conducive to revenue growth.” This seems to implicate lower-than-expected tax revenue as the reason for the shortfall. Is that the whole story?
MM: The measurement of the budget deficit is heavily dependent upon assumptions. Some factors that could result in overstating the deficit are: (1) if personnel costs are budgeted at 100%, since it is unlikely that every position in the organization will be filled all year long; (2) if revenue projections are overly conservative; and (3) if departments that have not historically needed their full budget allocations are not subject to an adjustment downward.
ON: Could it also be the case that the deficit is larger than estimated?
MM: Yes, some factors that could result in understating the deficit are: (1) if the full cost of maintenance and asset replacement are not budgeted; (2) if departments that have historically gone over budget do not have their budgets adjusted upward; and (3) if the full cost of labor agreements is not incorporated into the budget.
In my experience, the first announced budget deficit is painted with a very broad brush by a budget manager who does his or her best to account for all financial commitments and project revenues. This is not the same as a financial prediction. Someone attempting to predict what the city will actually do in 2026-27 would take a very different approach, particularly with respect to personnel costs.
ON: So a financial prediction would be more of a real-world scenario which might show a smaller deficit because fewer people are hired than the budget manager predicts?
MM: Yes. Observers become confused when they expect the budget to track reality. The budget is not designed that way. It is simply the authorization to spend, based on the organization’s budget policies.
ON: The Spotlight article quotes labor and interest groups advocating against spending cuts. In a political environment where spending cuts are constrained, does the way deficits are framed affect how likely leaders are to pursue tax increases?
MM: It’s the fact that spending cuts are politically constrained that makes tax increases appear to be the only solution. In most of these cases, however, the tax increases are portrayed by their advocates as solving the budget problem. This is a short-term framing of the issue. The new tax revenues may cure the budget deficits for a year or two or three. But within a few years, the deficit will reemerge. That’s because the tax increases are scaled to what the voters will accept, not what is needed to resolve the structural deficit.
ON: So at a high level, how can the structural deficit be solved?
MM: To resolve the structural deficit the city needs to address two things (1) the vagueness of its mission, which invites the organization to take on additional activities; and (2) the methods by which services are delivered. An unbounded mission ensures ongoing scope creep; there is no standard by which to declare a proposed activity is inappropriate. Meanwhile, the city, like most municipalities, has made it exceedingly difficult to implement true operational reforms because the methods of service delivery (e.g., work schedules, job descriptions, etc.) are codified in the labor agreements.
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