CLEO News

San Francisco's Financial Crisis

The State of California isn’t the only one scrambling to prepare a budget while staring down a deficit. Several Bay Area municipalities are also struggling with their own budget problems, San Francisco chief among them. 

San Francisco’s 2022-23 budget and next year’s 2023-24 budget total approximately $14 billion each. On March 31, the San Francisco Controller’s Office released a budget update addressed to Mayor London Breed and the San Francisco Board of Supervisors reporting that the “shortfall for the coming fiscal year (FY 2023-24) is forecast to grow to $290.9 million.” The report also forecasts a $779.8 million total deficit for the upcoming two fiscal years, and a staggering $1.3 billion deficit by FY 2027-28.  

Factors accounting for the growing deficits include an increase in city personnel costs (salaries and benefits); companies going remote or leaving the city altogether, resulting in hardship for San Francisco’s economy and lower tax revenues; and undisciplined spending on programs to address San Francisco’s increasingly severe homelessness crisis. 

In the city’s Five-Year Financial Plan released in January this year, the Controller’s Office wrote that “growth in salary and benefits [for city employees] has escalated significantly over recent years…[and is] the second largest expenditure driver of the escalating deficit” behind citywide operating costs (which includes equipment and technology, utilities, real estate costs, and more). Current salary and benefit costs across all city funds amount to over $6 billion annually.

When considering the March update in context of the original salary and benefit projections from January, salary and benefit spending is expected to increase by a total of $768.5 million over five years. To the extent pension investment performance continues to fall short of expectations, San Francisco will bear an additional pension funding burden that will further increase benefit costs.

But while spending is accelerating, conditions for law-abiding San Franciscans of all economic strata are deteriorating. City leaders have for years ignored the residents who keep the city’s culture and economy running, and whose tax dollars pay city leaders’ salaries.

The decision by so many San Francisco companies to shift to remote work or leave San Francisco entirely is having a multi-pronged effect on the city’s budget. First, the Controller foresees an all-time high office vacancy rate of 33 percent by FY 2025-26. Skyrocketing office vacancy rates, which was just 4 percent in 2020, severely impacts the city’s tax base, especially in the form of transfer tax revenue. Transfer taxes paid on real estate deals make up a disproportionately large amount of San Francisco’s revenue, so a struggling downtown corporate sector spells extra trouble for the city’s budget woes.

Additionally, retailers have been closing their San Francisco locations in droves, citing crime, homelessness, and drug use, which threaten employees’ safety and deter patrons. These closures have a direct impact on employment and the city’s GDP. In an attempt to stop the bleeding, Mayor Breed has proposed tax breaks to businesses that relocate to San Francisco, but the Board of Supervisors would need to approve these incentives.

San Francisco’s leaders owe it to their constituents to admit that accelerating spending is not fixing their problems; while the budget continues to balloon, crime, homelessness, and filthy streets are driving people from the city. Although San Francisco’s population decline has slowed since the height of the pandemic, newest figures show the population is at its lowest in over a decade. 

The Controller’s Office further explains that San Francisco’s Department of Homelessness and Supportive Housing is “currently relying on one-time State funds to operate many of its shelters.” These funds will expire in the next few years, leaving the city on the hook and contributing $24 million to the city’s deficit if current shelter capacity is maintained. 

This is a common mistake highlighted by public finance expert Mark Moses in The Municipal Financial Crisis: funding programs with one-time revenue, rather than “stable, reliable revenues” that can support a program for the long term. Despite this already severe budget challenge, the city’s Department of Homelessness and Supportive Housing released a 2023-2028 Strategic Plan last month outlining programs that will cost “more than $607 million in additional funding during the five-year timeframe,” further threatening the ability of the City to effectively provide basic services to residents and businesses.

To her credit, Mayor Breed has called for budget cuts of 5 to 8 percent across all departments (in addition to 5 percent cuts she announced in December). However, this short-term belt-tightening is far from a sufficient solution. Breed’s small departmental budget cuts will not necessarily result in a total budget reduction of 5 to 8 percent, and is not sustainable in the long term. This is due in part to obligations that cannot be cut or reduced, such as debt service costs. 

While Breed’s proposed budget cuts encourage some delayed hiring and spending, they don’t require San Francisco officials to take a step back and seriously reevaluate their priorities and long-term financial difficulties. Without hard choices, San Francisco moves closer to the $1.3 billion deficit projected by the San Francisco Controller by 2027-28. That’s a 347 percent increase in the deficit from 2023-24. 

The city’s corporate real estate freefall, deepening pension crisis, and heedless growth in city programs will continue to drive the city deeper into the fiscal quicksand. Small budget cuts are not enough to address these major financial problems, and are indicative of city officials’ failure to grasp the nature of the problem: their skewed priorities. They continue to shell out huge sums to clean up problems caused by their lenient policies on crime, vagrancy, and drugs.

San Francisco — once one of the most spectacular cities in California and the world — has been driven into the ground by city leaders who allowed these crises to spiral out of control. They coasted along on the high tax revenues of the tech boom and better economic times, but now that the tide is turning, San Francisco is facing a financial reckoning. 

The rest of the US stands to learn much from the spectacle that is San Francisco. If its leaders don’t step up to make the responsible decisions, San Francisco might not ever recover.

 

Sheridan Swanson is the Research Manager at California Policy Center.

California Local Elected Officials (CLEO) is a membership organization that networks, educates, supports and advises local elected officials throughout California’s thousands of cities, counties, school and special districts. CLEO offers policy guidance, detailed financial analyses, legal perspectives and communications assistance to our members on principled governance. Find out more at Calelecteds.org.




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