A looming post-pandemic budget crisis for San Francisco may finally be here.
It’s likely to mean painful cuts to vital city departments and programs, which will have wide-scale impacts on residents.
The new budget forecast features a massive $728 million general fund deficit over the next two fiscal years, which will likely get much worse. That deficit is out of an approximately $6.8 billion general fund budget.
Federal aid that kept the city running has dried up. Now begins a reckoning of how the pandemic really impacted property and business tax revenue, the city’s two largest sources of funding.
The deficit is split up between a $200 million shortfall for the 2023-24 fiscal year and $527.5 million the following year. The longer-term five-year budget projection paints an even grimmer picture, a deficit that balloons from $745.6 million in the 2025-26 fiscal year to $1.22 billion in the 2027-28 fiscal year.
To put the $728 million figure into context, that’s how much the city’s general fund is currently allocating to the San Francisco Municipal Transportation Agency, the Office of Economic and Workforce Development, and the Department of Public Works combined.
The general fund deficit could see a range of vital city services forced to tighten their belts, including the fire department, child support services, adult probation and the SF Arts Commission.
But even this dire estimate could get even worse. In contrast to a majority of economists the projections don’t assume a recession, one that some experts believe may hit the Bay Area harder than most.
Mayor London Breed’s budget instructions, which help guide city departments in their spending, require a 5% reduction in general fund spending for the 2023 fiscal year and an 8% cut for 2024. Department’s budget submissions are due in February.
According to the mayor’s instructions, city departments should keep filling vacancies for core functions and priorities around economic recovery, clean and safe streets, and homelessness and mental health services. Non-central vacancies and underperforming programs should be cut to reduce costs. Further, in an ominous sign of what’s to come, they “should prepare for (the) outlook to worsen.”
“It's really a direction to reexamine what's working and what's not working,” said Breed spokesman Jeff Cretan. “The reality is that this is going to require tradeoffs. There are going to be some things that are not going to be able to move forward.”
Almost exactly one year ago, the city was hailing its first budget surplus since 1998. Although this abundance was later largely erased amid higher labor costs for city workers, the announcement provided a sunny picture of San Francisco’s finances.
In less rosy times, before a major injection of federal aid (and record returns from a then-booming stock market), the city was previously facing a two-year budget deficit as high as $653 million.
Wade Rose, the president of business advocacy group Advance SF, compared what the city faces today to the Great Recession. The losses during that downturn led to thousands of public sector jobs cut across the Bay Area.
Whereas the Obama administration left local governments largely alone to deal with the impacts of the recession, Rose said the Biden administration provided aid to help stem the pandemic downturn and jumpstart a recovery.
“But that’s come along with its own cost, which is basically at some point, you've got to pay the piper,” Rose said. “That's happening now, and it's really going to come into force next year.”
Reporting from The Standard and a growing of array of analysis have highlighted the connection between empty offices in the city’s downtown, lower building valuations and lower tax revenue to fund city services.
At a November Board of Supervisors committee meeting, commercial property tax revenue losses were projected at nearly $1 billion over the next six years. The impact was described by Supervisor Asha Safaí as “blowing a hole in our budget.” The losses have largely been blamed on private companies’ remote work policies.
But the pain doesn’t end there. As noted by city economist Ted Egan at the committee meeting, office space industries contribute about 72% of San Francisco's GDP meaning “if anything happens to the office sector, it ripples throughout virtually every aspect of the city's economy.”
That means revenue losses from commercial property tax revenue is one domino that includes declines in residential property tax revenue, transfer taxes from the sale of major buildings and business tax losses that have already started to make a dent on funding for programs to combat homelessness.
Data from the city’s Budget Office show $70 million less in property taxes, $178 million less in transfer taxes and $78 million less in business taxes for the 2023 fiscal year than previous estimates. A small bright spot is sales and hotel tax, which is expected to raise $53.3 million more than previous forecasts.
Another silver lining for the current financial situation is the reserve funds put in place to help the city weather an economic downturn, which are at much higher levels than those seen during the Great Recession. However, many of these funds can only be used in specific situations to battle revenue losses in the budget.
City officials have already started to dip into reserves to stem the negative economic impact of the pandemic. Between the 2019-20 and 2020-21 fiscal years, the city’s economic stabilization reserves dropped by around $312M, to $840M.
“Right now we're trying to close this gap with efficiencies because the reserves are for a more severe scenario that could be looming out there,” Cretan said.
Rose said that among the business community there’s a general consensus the true impact of the revenue losses has yet to fully manifest. To kick off a turnaround, he believes the city should take a back-to-basics approach to manage costs, improve public safety and make it cheaper to start and run a company.
“We need to adjust our spending downward because we're going to have less money to spend,” Rose said. “If the city is looking at this evolving impact as a way of arguing for increased taxes to cover existing services, well, you're really just making it worse.”
Kevin Truong can be reached at [email protected]