City projects $258M FY26 shortfall; officials urge immediate revenue steps and cuts

San Diego officials told the City Council on Jan. 14 that the city faces a structural general‑fund shortfall of roughly $258 million in fiscal year 2026, driven by rising employee compensation, pension payments, homelessness spending and nondiscretionary costs such as insurance and deferred infrastructure needs.

Fiscal officers explained baseline assumptions and stressed that FY25 was balanced in large part by one‑time resources that are no longer available. Department of Finance staff said the city could close some of the gap with one‑time options and policy changes but warned that even after a set of mitigations the city likely faces an ongoing shortfall of tens of millions.

The independent budget analyst's office offered its own review and recommended immediate actions that together could generate about $198 million of mitigation (parking meter rate increases, a full‑cost trash fee under Measure B authority, limited use of excess equity and reserve suspensions), while emphasizing that a remaining gap would require structural reductions. Charles Modica and Jordan Moore with the IBA urged quick action to minimize service cuts next year: "Any resources that we can generate now or savings that we can generate now will help to minimize the amount of cuts that we will need to experience as we go forward into FY '26," the IBA said.

Key numbers and proposed mitigations cited by staff and IBA: - Baseline FY26 shortfall: approximately $258,200,000. - Expanded shortfall with planned commitments: roughly $329,300,000. - Updated pension valuation increases general‑fund pension payment by about $27,300,000. - Candidate mitigations identified by the IBA: parking meter rate adjustments (estimated ~$9.6M/year if meter rates doubled this year), a full trash collection fee (estimated ~$78.6M/year if adopted), suspension of some reserve contributions (about $63.2M), and potential Measure C revenues if legally resolved.

Council members sharply questioned the timetable and urged both immediate steps (some called for administrative parking increases now) and careful evaluation of equity and the distributional effects of cuts. Several council members emphasized protecting frontline city workers and avoiding across‑the‑board cuts that would disproportionately burden underserved neighborhoods.

Next steps: City staff will publish a midyear budget monitoring report (Feb. 3) with options for amendments and proposed mitigations; the mayor is required to present a balanced FY26 budget by April 15, 2025. Council members signaled they will press for both revenue and targeted expenditure reductions while prioritizing equity.