$300M in total deficits expected in next 5 years

nues, which city officials now expect to rise past $2 billion a year for the first time in fiscal 2026, San Diego is still projected to face deficits totaling more than $300 million over the next five fiscal years.

Officials blame those projected deficits on rising pension costs, the city’s need to catch up on skipped contributions to its reserves and its nearing depletion of more than $500 million in federal COVID-19 pandemic aid.

San Diego relied on that aid to avoid budget cuts despite shrinking revenues during the pandemic, but the city is projected to have only $52 million in aid left this summer.

Annual city revenue dropped $38 million in fiscal year 2020, when many businesses shut down and worldwide tourism ground to a halt — falling from $1.492 billion in fiscal 2019 to $1.454 in fiscal 2020.

Revenue stayed relatively flat in fiscal 2021, climbing $4 million to $1.458 billion — still $34 million below fiscal 2019.

While drops of $38 million and $34 million may seem relatively small in such a large budget, revenue had previously been projected to rise sharply during both of those fiscal years.

In fall 2019, before the pandemic hit, city officials had been predicting revenue would climb $57 million in fiscal 2020 to $1.549 billion and then would climb $47 million in fiscal 2021 to $1.596 billion.

That means the pandemic shrank revenues $95 million below pre-pandemic projections in fiscal 2020 and $138 million below those projections in fiscal 2021.

Those drops were primarily due to sharp decreases in hotel taxes and moderate dips in sales taxes during the first part of the pandemic, when many businesses were ordered to shut down and travel was heavily restricted.

The hotel tax, formally called transient occupancy tax, plummeted from $131 million in fiscal 2019 to $95 million in fiscal 2020 and $68 million in fiscal 2021 — a drop of more than 48 percent.

But hotel taxes surged back in fiscal 2022 to $136 million, more than the city had collected before the pandemic in fiscal 2019. And it is projected to climb to $156 million during the ongoing fiscal year.

“A lot of it is being driven by elevated room prices, which we believe is being driven by inflation,” Chavrel said.

Occupancy rates, while a smaller driver of the surge, have also been strong, even though international travel and business travel to San Diego remain below prepandemic levels.

“It seems like the leisure travel has been sustained,” said Chavrel, referring to vacation getaways to San Diego by people living elsewhere in California and the U.S.

Chavrel said there is some concern among city officials that the elevated room rates might be temporary and that they will drop when inflation cools.

Sales taxes were affected less severely by the pandemic, falling from $304 million in fiscal 2019 to $283 million in fiscal 2020 and then bouncing back to $304 million in fiscal 2021.

Since then, inflation has helped boost sales taxes to $376 million in fiscal 2022 and a projected $386 million in the ongoing fiscal year. Inflation, which was typically about 2 percent annually before the pandemic, has hovered around 7 percent in recent months.

The city’s property tax revenue has followed a much different trajectory, rising sharply during the first two years of the pandemic as home prices and home sales surged, from $571 million in fiscal 2019 to $609 million in fiscal 2020 and $641 million in fiscal 2021.

Higher prices increase how much property tax the city receives, and more sales raise the number of properties that get re-assessed at higher values, boosting the city’s revenue further.

Local home prices dipped sharply during 2022, but property tax revenue doesn’t yet reflect those drops because of the 18month lag in re-assessments and tax billings, Chavrel said.

Property tax revenue climbed to $663 million in fiscal 2022 and is projected to be $716 million in the ongoing fiscal year — up 34 percent since before the pandemic in fiscal 2019.

The revenue surges have been so strong that all three leading sources now exceed city projections from before the pandemic in fall 2019.

The $156 million in hotel taxes projected during the ongoing fiscal year is $4 million more than the $152 million predicted back then. The $385 million in sales taxes is $54 million more than predicted in fall 2019. And the $716 million in property taxes is $20 million more than predicted back then.

But those predictions from 2019 were made by city finance officials who had no indication that a pandemic would help fuel rising housing prices and inflation.