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San Luis Obispo faces budget shortfall from rising pension costs, lower tax revenue

City Hall in San Luis Obispo.
City Hall in San Luis Obispo. jjohnston@thetribunenews.com

Faced with sharply rising pension costs and an unanticipated drop in tax revenue, the city of San Luis Obispo is considering budget-cutting measures that may include limiting hiring and dropping some capital projects.

The city’s recently released five-year fiscal forecast projects a budget shortfall of more than $5 million by the 2021-22 fiscal year if no changes are made in current spending patterns.

Without spending changes, the fiscal year 2021-22 general fund budget is anticipated to be $84.3 million. The city plans to find ways to address the shortfall in advance to balance its budget.

“The five-year forecast shows that we have both near-term impacts and a long-term structural problem,” City Manager Katie Lichtig said. “That requires us to look at all options to achieve a structurally balanced budget, which will happen over the next year.”

The Five-Year Forecast shows that we have both near-term impacts and a long-term structural problem. That requires us to look at all options to achieve a structurally balanced budget, which will happen over the next year.

Katie Lichtig, San Luis Obispo city manager

Last week, the City Council voted unanimously to activate its Fiscal Health Contingency Plan that provides a framework to address adverse financial circumstances.

In the short term, the city will limit hiring to personnel deemed essential to its operations, restrict travel and/or defer discretionary training. The city also will review capital improvement projects and other one-time projects that can be deferred or dropped. The city isn’t planning any immediate cuts to department spending or staffing.

But at an April 18 meeting that is scheduled to offer budget direction for the city’s upcoming two-year financial plan, staff will take a more comprehensive look at expenditures, gathering input from residents, businesses, employees and other stakeholders.

The California Public Employees’ Retirement System, which manages the retirement investments for state government agencies, announced in December that it would lower its expected average rate of return on pension investments from 7.5 percent to 7 percent over a three-year period. That rate is referred to as a discount rate.

CalPERS made the decision after extensive review of “the current funding status of the (investment) fund, projected investment return rates over the next decade, an overview of CalPERS assets and liabilities, and discussions with stakeholders,” it announced.

In the last five-year forecast, we expected sales tax to grow by about 3 percent, but now we’re expecting it to grow by 2 percent.

Katie Lichtig, San Luis Obispo city manager

The lower rate of return on investments means pension expenses will increase for cities. San Luis Obispo’s costs are expected to jump from $10.7 million this fiscal year to $19.1 million in 2021-22.

In addition, the city has reported lower-than-expected sales tax revenues over the first six months of the fiscal year, and bed taxes are also slowing. Together, sales and bed taxes account for about half of the city’s revenue share.

“In the last five-year forecast, we expected sales tax to grow by about 3 percent, but now we’re expecting it to grow by 2 percent,” Lichtig said.

In the first six months of the fiscal year that began July 1, city sales taxes have been affected by gas prices, which haven’t increased, and a slowed growth of consumer goods from retail stores, Lichtig said. The city had expected higher revenues in both.

Bed taxes grew by 5 percent last year — a strong year for hotels. But this fiscal year, that growth is 1 percent. An increase in average room rates has led to lowered occupancy and reduced growth, Lichtig said.

An independent actuary will perform further analysis of the impacts of the CalPERS discount rate reduction based on the city’s pension plan demographics.

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