The San Francisco Controller's Office identified a "persistent structural deficit" that sees the City's expenditures well exceeding revenue over the next five years
Expenditures are projected to grow by 23.7%, while revenues are expected to grow by only 15.5% over the same period
The biggest driver of the projected deficit is ballooning payroll and benefit costs for the City's employees, accounting for 39% of overall spending growth
The City's revenue recovery hinges in large part on whether workers will return to offices in-person, with remote work driving down multiple lines of revenue and leading to downstream economic effects
Absent a course correction, San Francisco's spending growth is expected to well outpace revenue growth over the next five years, resulting in a gaping shortfall.
In a five-year budget forecast, the SF Controller's Office estimated that the gap between revenues and expenditures will reach $503.3 million by fiscal 2025-2026, even assuming a steady recovery from the COVID-19 crisis.
Expenditures are expected to grow 23.7% to $1.47 billion over the next five years, while revenues are expected to grow by only 15.5% over the same period.
"Even with the assumed recovery of the City's revenues over the five-year period, the City is facing a persistent structural deficit over the next five years, due in part to rising employee costs, increased voted mandated commitments through baselines and set-asides, growing required contributions to support existing entitlement programs, and growing citywide operating costs," the Controller wrote.
On the cost side, the greatest share of the spending growth was driven by rising payroll and benefits costs for the City's employees. Those costs accounted for 39% of the spending growth, and were "by far" the biggest driver of the projected deficit, according to the report.
San Francisco "will need to set goals for labor contract agreements that reduce costs [relative to projections]," the Controller wrote.
Last year, the San Francisco Board of Supervisors and Mayor London Breed signed a budget that included raises for the majority of the City's roughly 31,000 full-time employees. Those raise agreements recently kicked in, and will amount to $250 million over the next two years.
The memoranda of understanding between the City and its employees include provisions allowing for the delay of raises in the event of a shortfall of $200 million or more in a given fiscal year. Currently, the Controller projects a $116 million shortfall in current fiscal year, which ends in July, and a $653 million shortfall in the subsequent two years.
On the revenue side, San Francisco is facing significant uncertainty regarding when, and if, the economy will rebound to its pre-COVID state.
The staying power of remote work may be the biggest unknown, according to the Controller.
Office activities generated about 75% of San Francisco's GDP prior to the pandemic, and about half of the City's employment base commuted in from other parts of the Bay Area. The absence of those commuters has seriously impacted businesses, with sales tax losses hovering around 70% in the heart of downtown. Low-wage hospitality industries "absorbed most of those losses," according to the Controller.
Falling sales tax receipts, dramatic drops in median rent and postal service data point to a significant outmigration from San Francisco, and it remains to be seen how quickly people return, either to live or to work in-person.
Tourism, the City's largest industry, is also heavily reliant on business travel to conventions, meetings and other events.
"While San Francisco's office industries have been spared most of the pain of the recession, in many ways, the city's near-term economic outlook relies mostly on the decisions they make about the value of their downtown office space," the Controller wrote.
With many office-based businesses extending remote work allowances for the foreseeable future, some are downsizing their San Francisco footprints.
According to Cushman & Wakefield, San Francisco's office vacancy rate was 16% in the fourth quarter of 2020, up from roughly 5% in the prior year.
