City Council approves midyear budget reallocations after midyear report shows near‑term improvement to $1.8M projected deficit

The San Diego City Council on Feb. 23 approved staff recommendations tied to the fiscal year 2026 midyear budget monitoring report after finance department staff and the independent budget analyst outlined a tightening fiscal picture.

Ben Battaglia, director of finance, and Chris Purcell, financial operations manager, told the council the midyear report initially projected a $16.8 million deficit driven by a $13.6 million revenue decline and about a $3.2 million rise in expenditures, largely personnel costs and overtime. Finance officials said new information — including an anticipated $8 million insurance reimbursement tied to flooding at the old Central Library, a revised SDG&E franchise‑fee payment expected to add about $6 million, and an additional sales tax distribution of roughly $2.6 million — reduced the projected shortfall to about $1.8 million.

“Since the release of the report, there have been a few recent positive developments,” Purcell said, summarizing the revenue updates and their impact on the bottom line.

The presentation identified continued pressure from decreased transient occupancy tax (TOT) receipts, lower interest earnings and a decline in certain departmental revenues. Finance staff also attributed part of the general fund improvement to franchise‑fee adjustments and a sales‑tax cleanup payment. The presentation noted the mayor’s changes to Balboa Park paid parking — including expanded free parking for verified city residents and restricted enforcement hours — will further reduce anticipated parking revenue by about $1.2 million this year.

Charles Monica of the Office of the Independent Budget Analyst (IBA) said the IBA’s review showed major general‑fund revenues projected to end the year roughly $7.2 million below the adopted budget and departmental revenues about $2.7 million below. He cautioned that some of the recent improvements are one‑time and that ongoing structural challenges — including higher pension payments and persistent overtime in public safety and transportation — will complicate FY2027.

“Some items contributing to [the FY27 shortfall] are the removal of $5.8 million of property tax associated with the sale of Tailgate Park, a $5.6 million reduction in TOT based on recent receipts, and a $16.4 million increase in pension payment based on the updated actuarial valuation,” the IBA noted.

Councilmembers questioned which revenue changes are ongoing and which are one‑time. Finance staff said the central library insurance proceeds are one‑time, while the SDG&E franchise fee revision and certain sales‑tax increases are ongoing.

Councilmember Foster moved to adopt staff’s recommendations to reallocate appropriations between general fund departments — actions staff said do not change the bottom line but align spending with midyear projections — and the council approved the motion by roll call as recorded by the clerk.

The presentation and debate underscored that while recent updates substantially improved the midyear picture, the city still faces a near‑term deficit and will need mitigation actions, department savings and close monitoring as FY2027 budget development continues.

The council also received a police department update on overtime reductions and a report by the IBA; no specific tax increases or service eliminations were adopted at this meeting. The Department of Finance said it will release a third quarter monitoring report on May 13.

The council adjourned and scheduled further budget deliberations and public hearings as part of the FY2027 process.