Administration outlines five municipal fund deficits, warns fixes may require real cash transfers

Administration officials presented a detailed account of municipal fund deficits and told the Assembly Budget & Finance Committee the issues are a mix of accounting timing and real funding shortfalls that will require policy choices in upcoming budgets.

Mr. Falsy, introduced by the chair to present the ACFR note on deficit fund balances, said the workers' compensation/general liability fund shows a fund deficit of $16,600,000, an increase of roughly $15 million from the prior year. He attributed much of that growth to a rise in the IBNR (incurred‑but‑not‑reported) claims reserve and to a period when annual true‑ups of rates were not performed. "We pay all of our claims," he said, but added that "clearing this deficit is gonna require real money," meaning future cash would be needed to fully correct the accounting shortfall.

The IT/internal services technology fund, Mr. Falsy said, reports a net position of -$14,700,000. He explained this is largely a noncash accounting issue tied to capital asset depreciation for SAP and the timing of departmental intergovernmental charges that repay those capital costs. "This net deficit position is not a cash deficit," he said, but cautioned that when departments do not recover costs on the same timeline as depreciation, internal borrowing and higher IGCs (intergovernmental charges) land on department budgets.

The presentation also flagged problems in several other funds. The "other restricted resources" fund — described as the downtown improvement district account — is now showing what the presenter referred to in the packet as "an over half $1,000,000 fund deficit," up from a prior deficit near $350,000; the administration said it is still investigating the shortfall and expects solutions that do not rely on general government tax dollars because the district is a special assessment area. The federal grants fund was shown as a small deficit (reported as $1,100,000), which administration staff tied to pending FEMA disaster recovery accounting related to past earthquakes.

The building safety service area (BSSA) was discussed as a long‑standing fee‑revenue mismatch following a 2010 policy decision to move to fee‑supported operations; the presenter noted that the BSSA total fund deficit appears in detailed statements and that the administration aims to clear the deficit in the next budget cycle, when FEMA accounting corrections and realized recoveries are fully reflected.

On remedies, the administration described a mix of approaches: annual rate true‑ups for internal service funds, improved recovery via IGC adjustments to departmental budgets, targeted transfers or budget entries to operationalize existing fund balances, and, where necessary, direct cash infusions that could displace other services. The presenter cautioned that some fixes — for example, direct cash to cover under‑recovery — "will require real tradeoffs" because money put into these funds would otherwise have supported services.

Assembly members asked about the archives interfund loan (explained as roughly $5.8 million owed to the workers' comp fund for an archives property purchase) and whether deficits mean claims cannot be paid; the administration replied that claims continue to be paid but that the deficits represent an ongoing funding and accounting problem that the 2027 budget process will need to address.

The administration said more detailed work on service areas and options for fund recovery will be presented next month, and that the ACFR is expected to be finalized soon and shared with the audit committee for deeper review.

The committee took no formal vote on the presentation; members requested follow‑up information and scheduled further discussion in committee.