The Mercury News: San Jose to explore using its $2 billion investment portfolio to address budget shortfalls

By Maggie Angst
May 20, 2020

Despite pushback from its finance analysts, San Jose will explore more funding options, including using portions of its $2 billion investment portfolio, to avoid some significant cuts proposed to city services next year.

Anticipating a $71.6 million deficit next year, the city’s 2020-2021 proposed budget — released by City Manager David Sykes last week — calls for a slew of cuts from library programs to public safety services to park maintenance.

Meanwhile, the city is sitting on a $2 billion investment portfolio, which some city council members and local union leaders believe could be used as a short-term solution to some of the funding cuts proposed in the city manager’s spending plan.

In a memo penned by council members Sylvia Arenas, Sergio Jimenez and Maya Esparza, they asked city staff to explore taking out a loan on a portion of the city’s investments and transferring some of the money to the general fund — also known as an interfund loan.

“We believe an opportunity exists to use our strong cash position to solve our short-term fiscal problems, without any financial impact to our overall long-term fiscal health,” the trio wrote in their memo.

The city’s finance analysts, however, disagreed.

“The caution we have with these short term loans is that we don’t know what this recession will look like and how deep we will be — and how we identify the source of general fund money to pay back the loans,” Julia Cooper, the city’s director of finance, said during Tuesday night’s council meeting.

After the analysts explained their objections to the proposal, the city council voted for staff to return to the council at the beginning of next month with a list of other city funds that the city can tap into for a potential one-time loan to meet the budget needs in the coming years.

“I would really like to see what is it that we can do and what are the tools that are available versus ‘this is something that’s off-limits’ even though other cities in our state and California are doing this,” Arenas said during the meeting. “I’d like to see more options available to us.”

The city’s total proposed budget next year — including operating, capital and all of its special funds — is $4.14 billion. While waiting to make certain payments with those funds, the city invests its money and builds up interest. Those investments come in the form of bonds from other local governments, corporate loans and investments in mortgage programs from the federal government.

Under California law and city policies, the city has the ability to loan a portion of that investment portfolio to its general fund, which is used to pay for city services such as public safety operations, library programs and general maintenance needs. These loans must identify how it will be repaid, and must be immediately due and payable if needed by the fund that provided the loan.

The city manager and finance officials argue that type of funding mechanism would not be appropriate to address the current shortfall projections because they are not to be used for situations that could last for multiple years and it is still unclear what this current recession might entail.

“It would be different if we received the benefits of the economic cycle where we could count on surpluses in the future to help us get through the valley. But it seems like we never see the mountains, we only see the lower valleys,” Sykes said.

Without a clear repayment source identified in the general fund to repay the loans, Mayor Sam Liccardo urged his colleagues against the proposal and putting an additional task on “overworked” city staff.

“There’s a lot of work to do in finance and budget right now — not to mention the fact that we’ve got to go approve a budget with a $71 million hole in it — so I believe that the most important thing for us right now is to focus,” Liccardo said.

Nevertheless, the council voted to require that staff come back to them by the end of the month with a list of city funding source options to meet the budget needs in the coming years and to cover some of the one-time cuts proposed.

Local union leaders spoke out and strongly urged the council to pursue the option.

“We are in a temporary crisis, but if not addressed properly it could have long-term devastating impacts,” said Brenda Rodríguez, organizing director of the South Bay Labor Council. “You have the opportunity to explore a short-term solution that does not harm our community like excessive cuts to services.”

Paul Kelly, president of the San Jose Police Officer Association, commended the council’s decision to pursue the additional funding option to avoid cuts to the city’s public safety sectors.

“As a result of today’s vote, there will be more city budget funding options available tomorrow than were available today,” Kelly said in a statement after the meeting. “Our goal has always been to convince the council to responsibly utilize taxpayer dollars, wherever they may be, to protect police and other critical city services and today’s outcome is a step in the right direction and we are grateful.”