What was, will no longer be: San Francisco’s $1B budget deficit will shape San Francisco for a generation
Equity, Equality, and Empathy must be our watchwords to build a San Francisco for everyone in a new economy.
On March 31st, the City quietly released an economic bombshell projecting a billion dollar budget deficit as a result of COVID-19. San Francisco lawmakers will be forced to make soul searching budget cuts during an unforgiving economy. No one will be immune from these service cuts; everything will be on the table, from public safety, to health and human services, and public works. To move forward, San Francisco will need to break free of the political games that have failed us for the last 20 years. We might be writing chapters as we read the book, but together we can write the next chapter that’s equitable, brings the City together, and makes San Francisco a home for all of us.
The Report released by San Francisco’s Office of the Controller (budget office), projects a billion dollar budget deficit as a result of COVID-19 economic impact. To put that in context, it’s essentially 20% of the City’s current discretionary budget. A better understanding of the Report, however, highlights the values we will need to rely on in the coming years. Only then can we identify where opportunities exist to break free of some of our past bad habits and build a San Francisco for everyone.
Let’s face the tough decisions together
In 2019, City Hall announced a budget shortfall of $420M for the upcoming two-year budget.* At that time the unemployment rate averaged under 2% for the previous six months. For San Francisco, this budgetary yo-yo is not uncommon. COVID19, however, removed any thought of skipping over the next two fiscal years as normal.
The immediate cost is fairly clear: The City expects a loss in tax revenue from $167M-$288M for the current fiscal year alone. Much of the loss in tax revenue comes from the closure of hotels and loss of property transfer tax revenue. On top of this, the City still doesn’t have a final bill from dealing with COVID19, e.g. extra healthcare services, renting hotel rooms, etc. These costs are well worth it to save lives. But these costs will be ongoing for the next couple months at least. Mission Local has a good article breaking down the budget projections.
It’s the next step, projecting into the future, that gets more complicated. But we need to understand the details because they illustrate what parts of the local economy are going to suffer massive changes. Changes that impact government, businesses, communities, families, and people.
Bridging SF values w/solutions to rebuild will be the challenge for 2020–24.
Economic projections are expected to be worse than 2008
The Controller based the Report’s financial projections on two scenarios: Limited and Extended. The scenarios imagine a bad economy with a severe shock and return to normal (Limited) or a very bad economy with a severe shock and delayed return to normal (Extended). Either scenario, however, is punishing for our most vulnerable communities.
The revenue stream to watch is the decrease in hotel tax revenue. Hotel tax revenue for the next two fiscal years 2020/2021 and 2021/2022 is expected to decrease from $300M to $400M. The City isn’t facing the revenue crunch alone: The loss in tax revenue implies that the hotel industry’s booking losses will be in the range of $2.2 — $2.8 billion in annual revenue (hotel tax rate in San Francisco is 14.5%). Consequently, the industry will be forced to layoff and cut back staff, catering, event support, etc., and hotels may even be forced to close.
The hospitality and travel industry in San Francisco employs 80,000 people.
Another major decrease in revenue is the decrease in property transfer tax, i.e. taxes paid on commercial real estate sales. The Controller expects a shortfall of approximately $88M to $117M from the loss of commercial real estate sales. Additional revenue streams that will experience considerable decreases include Property Tax, Business Tax, Sales Tax, Interest & Investment Income, Airport Transfer In & Department Revenue. Again, the final amounts will depend on the economy.
So what’s this all mean?
It depends on the scenario but the City projections can be broken down to the following key takeaways:
- Lost revenue of $324M-$575M (FY20/21) and $225M-$417M (FY21/22).
- A budget shortfall of $528M-$779M (FY20/21) and $444M-$612M (FY21/22), and
- An expected budget deficit between $1.1B to $1.7B.
$1.1B to $1.7B is equal to 20% to 30% of the City’s discretionary budget when the economy had less than 2% unemployment rate.
Lawmakers need to help our communities prepare for the new economy
No one knows how the economy will change, but we can be certain that it will change. Many large tech companies, for example, are doing well right now. But our small and medium size businesses are suffering. The entrepreneur scene that has driven San Francisco, both tech and non-tech –remember those small cafes and food trucks — might not return at all, let alone as they once were.
We should also expect fundamental shifts to the workforce as well. Especially jobs in restaurants, retail, and hospitality. Consider, for example, the difficulties San Francisco restaurants had hiring before COVID19. A 10 week shutdown means people have to find other jobs and some people will move. It follows that a substantially different business and labor environment is likely to emerge. Policymakers will need to consider what this means in a range of areas, from payroll tax reform to ensuring that historically discriminated against communities have access to capital.
How San Francisco responds to the new economy will dictate whether we build a San Francisco for everyone.
What does this mean for you and me?
The City can’t tax what no longer exists. The City budget is based on revenue sources that might decrease over time. Even if the City’s total economic growth does return to 2019 numbers quickly, the City’s conference industry was already under significant pressure, and recently lost long time events like Oracle’s Open World. Now the conference industry might lose a substantial amount of businesses overnight and not return to pre-2019 levels for many years. As a result, City hotel tax revenues will substantially decline, which will lead to more budget cuts to City services.
If San Francisco’s conference industry moved to Las Vegas or the tech industry moved to Austin, U.S. macroeconomic measurements wouldn’t change. But the San Francisco economy would be decimated.
And for workers, the change in the economy puts more pressure on the most economically insecure workers. The loss of traditional hospitality jobs means people that relied on those jobs –those that are often already struggling to survive in a City that’s incredibly expensive — are completely pushed out of the City.
City policies will need to find revenue from large corporations while in hyper competition with other cities, without driving away the jobs that many in San Francisco still rely on.
San Francisco needs leadership that can bring us together in order to move forward
Rebuilding San Francisco’s economy with San Francisco values means remembering who we are. San Francisco is a home for everyone. We protect those that are discriminated against. We care about those that are vulnerable. We offer community to those that are different. Impactful policies must reflect those values by creating opportunities for everyone. Equity, Equality, and Empathy should be our watchwords for small and medium sized businesses, especially for businesses owned by people of color, women, and members of the LGBTQ+ community.
Progressive values means creating opportunity for everyone.
Policies that marry progressive values with practical solutions begin by thinking about how to empower individuals.
Everyone an Entrepreneur. City policies must promote everyone as an entrepreneur. Lawmakers must always ask: How does the policy help those with the least amount of resources starting a business? The process to set up (and shut down) a small business must be simplified, affordable, and accessible. Any hindrance to opportunity — whether language, capital, or education — must be highly scrutinized because the more obstacles that exist, the more inequity will persist.
Policies should promote One-Click capital. City policy should focus on putting capital in the hands of small businesses. We know what happens when special interests dictate policy: Bailouts for Big Banks and Big Corporations. While workers, small businesses, and the self-employed, are shunted aside. The City should begin immediately organizing a variety of public-private partnerships to accelerate the means to move private capital into our communities immediately and equitably.
Government Reform. Before COVID-19 and shelter-in-place, the budget deficit was projected to be $420M and the City carried an astronomical $1.6B annual debt service, that’s nearly 30% of the discretionary budget spent just on debt. The collapse of the budget and economy should be used as an opportunity to fix City operations, to update the City’s technical infrastructure for the twenty-first century, and think deeply about the effectiveness of existing City services for those that need them the most. It’s a prime opportunity to bring in a revolution in open source, open data, and SMART City systems.
I love San Francisco
I still live in North Beach on the street where I grew up. My wife and I are raising our three year old daughter here. San Francisco is our home and we want it to be a vibrant, equitable, home for everyone. But the City faces huge challenges that require leadership that can bring us together as a community. Leadership prepared to rebuild the heart of San Francisco and bring accountability back to our elected officials. I hope you’ll join me in building a San Francisco for everyone. Please join my newsletter to learn more at charlesbelle2020.com.
*In 2009, voters passed Proposition A, which amended the City Charter to require the City to operate on to a two-year budget cycle. As a result, the budget projections are described in multi-year increments, even though each fiscal year is calculated.
