Facing $650M Deficit, SF Mayor London Breed Asks Departments to Slash Costs

Updated: Dec 17, 2020

  • San Francisco officials announced a new $650 million budget shortfall over the next two fiscal years

  • The deficit is tied to a slow economic recovery, higher-than-expected COVID expenses, and new payroll costs tied to raises for City employees, which kick in later this month and total $250 million over the next two fiscal years

  • Mayor London Breed called on City departments to slash budgets by 7.5% and to prioritize core services and efficiency with the goal of avoiding layoffs

In response to a worse-than-expected budget outlook, San Francisco Mayor London Breed instructed departments to tighten their belts for the next two fiscal years.


The City is expecting a shortfall of $653.2 million over the upcoming two budget cycles, out of an annual general fund budget of approximately $6 billion, according to new projections released this week.


In a letter this week, Breed asked City departments to propose ongoing reductions equivalent to 7.5% of their support from the City's General Fund, along with an additional 2.5% as a buffer should the budget outlook worsen. Breed asked departments to prioritize core services and operational efficiency, and requested details on the trade-offs in proposed cost reductions.


“The challenges facing our City in the months and years ahead are significant, and we have a lot of hard choices to make to get our City back on the road to recovery,” said Mayor Breed. “Closing this deficit will not be easy, and it’s going to require tough choices and real tradeoffs."


The $650 million shortfall reflects a significantly worse picture compared to earlier forecasts. A sluggish economic recovery, higher-than-expected COVID emergency costs, and new expenses related to the CIty's payroll are the cause of the shortfall, according to the new projections.


In addition to the projected $650 million shortfall in the upcoming two cycles, the City is facing a $116 million deficit in the current fiscal year, which ends in June. That deficit is tied to "weakness in key tax and fee revenues driven by a slower economic recovery than was anticipated," said San Francisco Controller Ben Rosenfield.


On the cost side, San Francisco's payroll costswhich account for roughly 43% of total General Fund spendingare due to increase this month.


Two months ago, the Board of Supervisors voted to push through raises for a majority of roughly 37,000 City employees, despite warnings from the Mayor's Office that granting raises could make layoffs more likely at a later time. The scheduled raises are worth $250 million over the next two years, with Supervisors voting 10-1 to raid $36.9 million of the City's emergency reserves to pay for a 3% raise scheduled to kick in at the end of December. Another round of 3% raises would kick in July 2021, followed by another half percent six months later.


San Francisco is also grappling with other costs tied to the pandemic, such as a shelter-in-place hotel program currently serving around 2,000 otherwise unsheltered individuals.


The program, which pays for hotel rooms and other services for individuals, will cost $179 million in the current fiscal year, according to the Controller's Office. The City expects FEMA to reimburse $114 million of that expense, and most of the rest has been paid for through CARES Act funding disbursed earlier this year.


Looking ahead, more federal reimbursements for the hotels program are far from assured. If FEMA reimbursements aren't renewed in the coming months, San Francisco could be on the hook for tens of millions in additional costs. Depending on the timeline of exits from the hotels, the program could cost the City between $72.7 million and $126.3 million according to the Controller.


Breed, along with a some members of the Board of Supervisors, have contended that the City needs to begin the process of rehousing individuals in the hotels program rather than waiting until FEMA pulls federal support, which could come with as little as 30 days' notice. Supervisors passed a 60-day extension to an ordinance requiring the City to continue moving unsheltered people into hotels, but has yet to reach a consensus on a precise timeline for winding down the hotel program.


"If we wait until FEMA cuts off funding, we will either create a huge deficit in our budget that will result in funding cuts to services or potential layoffs, or we will have a rushed process that almost certainly will result in people being turned away from the hotels with no plan to re-house them, which means we are putting people back on the street," said Breed in a statement on Wednesday.


Meanwhile, a dramatic rise in COVID cases over the past month, and an ensuing lockdown order tied to dwindling hospital capacity, underscores the City's tenuous revenue outlook.


Revenues from tourism and business taxes have been hit especially hard by the pandemic, with hotel taxes, gross receipts, business and sales taxes all trending far lower than 2019, and also looking progressively worse compared to prior forecasts issued by the Controller's office earlier this year.


City departments must submit budget proposals by February 22, 2021, which will then be evaluated by the Mayor and sent to the Board of Supervisors.

Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup
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