SAN DIEGO — San Diego’s steadily worsening budget picture means city officials will likely need to dip into reserve funds to cover expenses this spring — the first time they’ve needed reserve funds to balance the budget in at least a decade.

City finance officials said Wednesday that they’re facing a new $31 million budget hole thanks to some new expenses and sharp drops in revenue, especially from a profit-sharing deal with San Diego Gas & Electric.

The new financial problems are projected to force San Diego to use $10.1 million from its $207.1 million general fund reserve to balance the city’s $2.1 billion budget for the fiscal year that ends June 30.

Depleting reserves is considered an especially bad idea with the looming possibility of an economic recession that could lower tax revenues and make reserves crucial to covering the city’s ongoing expenses.

The city’s reserves are already far below the best practices recommended by the Government Finance Officers Association, which suggests a reserve equal to 16.7% of annual spending — more than $300 million for San Diego.

The news could also complicate the City Council’s efforts to adopt a balanced budget for the new fiscal year that begins July 1.

Mayor Todd Gloria’s final proposed budget, which was released Wednesday, calls for more than $100 million in cuts. But council members may want $10 million more in cuts so they can immediately replenish the reserves.

The need to use reserves for the first time in many years comes despite a series of emergency actions city officials have taken since voters rejected a sales tax increase in November that was expected to have generated $400 million a year.

Those actions include a partial hiring freeze, doubling parking meter rates, raising the cannabis tax, increasing a wide range of city fees and starting collection of a hotel tax hike before it has been fully cleared by the courts.

City finance officials said they are facing a new $17.9 million drop in revenue coupled with a $12.8 million hike in expenses, which creates a $30.7 million hole in the budget for the ongoing fiscal year.

Key to the problem is a $33 million drop in revenue from SDG&E that no one saw coming, said Matt Vespi, the city’s chief financial officer.

“This is only the second time in the almost 15 years I’ve been around here that I’ve seen something like this,” Vespi said. “Their revenue and the resulting franchise fee to the city is really pretty steady.”

San Diego’s franchise fee from SDG&E is a share of the company’s revenue. But city officials only get told how much they’ll receive once a year in February, and they don’t get told why revenue is up or down, said Rolando Charvel, the city’s finance director.

Charvel and Vespi speculated that the sharp drop is partly the result of Russia’s war in Ukraine pushing worldwide gas prices significantly up in calendar year 2023 and then back down in calendar year 2024, putting the city’s projections off kilter.

“We got caught up in the backswing of natural gas prices,” Vespi said.

Without the increased revenue from parking meters and some other emergency moves the city made to boost revenue, the reduction from SDG&E would have made even more of an impact.

The rise in city expenses this spring is mostly due to firefighters traveling to the Los Angeles area to help fight the Palisades fire, officials say. City officials said they expect to eventually get reimbursed, but not before the fiscal year ends June 30.

Charvel said the budget problems for the ongoing fiscal year can also be blamed partly on the Trump administration, which has made economic moves that city officials say would have been hard to predict when the budget was adopted last summer.

City officials had predicted healthy increases in both sales tax and hotel tax based on expectations the Federal Reserve would continue to lower interest rates. But that hasn’t happened because of concerns about inflation and tariffs, Charvel said.

Critics of City Hall say another key problem is a series of pay raises totaling 23% over three years that nearly all city employees received in 2023. In addition to sharply increasing city expenses, those raises hiked the city’s annual pension payment by tens of millions of dollars.

Vespi said it’s not certain San Diego will need to tap into its reserves this spring despite the new projections, which are formally called the city’s third-quarter budget monitoring report.

City departments typically overestimate how many new people they will hire and their non-personnel expenses, he said.

“From when we’ve done the third-quarter report to when we actually close the books, we usually see lower expenditures,” Vespi said.

Revenues might also come in higher, he said.

“We’ve adjusted to be conservative, so it wouldn’t take much to beat our projections,” he said.

But Vespi said the only responsible move is to project the need for reserves.

“This is just a projection — things could break our way,” Vespi said. “We just wanted to disclose to the council that there is a possibility.”

On the other hand, he said city finance officials have exhausted their usual methods of balancing the budget.

“At this point, we’ve really done all the things that we have at our disposal to try to push up revenue and contain expenditures,” he said.

Vespi stressed that the revenue projections in the mayor’s final budget for the new fiscal year are not at risk for the same kinds of problems.

“We’ve brought our growth rates for sales tax and TOT (hotel tax), which are most responsive to the economy, way down,” he said.

The need to dip into reserves makes it more conspicuous that Gloria and the council have chosen to skip scheduled reserve contributions several times in recent years.

The city has a policy that aims to increase the reserves to the best-practice target of 16.7% — two months of expenses.

In the mayor’s proposed budget for the new fiscal year, he cancels a scheduled $55.6 million contribution to the general fund reserve that would have brought it from $207.1 million to $262.7 million.

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