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Federal Funds Shrink SF's 2-Year Budget Deficit to $23M, But Long-Term Shortfalls Loom

Updated: Apr 1, 2021

  • Funds from the American Rescue Plan, a massive federal stimulus package signed into law earlier this month, will largely wipe away San Francisco's budget shortfalls over the next two fiscal years

  • San Francisco is expected to receive $636 million in direct financial aid from the bill, in addition to other funds for transit agencies, education, and support for individuals and businesses

  • The funds will reduce the City's deficit to $23 million in the upcoming two fiscal years, but assumptions about local tax revenue remain relatively unchanged from the last budget update

  • As the federal funding runs out, San Francisco policymakers must grapple with a long-term structural deficit that could reach $500 million in five years

An infusion of federal stimulus money will nearly wipe away San Francisco's two-year budget deficit, according to a new report from the Controller's office.

The City is expected to receive $636 million in direct aid from the American Rescue Plan, which President Biden signed into law earlier this month, along with other lines of support for individuals, businesses, transit agencies, education and other programs. The direct funds to the City will be applied evenly over the next two fiscal years, shrinking San Francisco's budget shortfall over that period to $23 million. As of December 2020, the City's projected deficit was $650 million.

"I can't even begin to tell you how amazing this is going to be for San Francisco, even though our recovery is going to be long," said Mayor London Breed on call on Wednesday. "The deficit we thought we were going to have to close, which would have resulted in layoffs, a lack of support for business, artists, nightlife...those things are not going to be as problematic. So I'm excited about what this is going to mean for the City, at least over the next two years."

For the current fiscal year, which ends in June, San Francisco wound up with a surplus of $125 million in the City's general fund, owing largely to higher-than-expected state and federal support as well as a boost in expected property tax revenue. That surplus has been earmarked for small business grants and loans, arts and culture funding, rent relief and other programs.

Funding from the American Rescue Plan is a one-time source of revenue, and in the budget update released Wednesday, the forecast for local revenues was broadly unchanged versus prior projections.

The Controller is expecting hotel tax revenue to increase as tourism picks up, but said that line of revenue may not fully recover to pre-pandemic levels for another five years.

Business taxes, which are determined by the number of workers who physically work in San Francisco, are a significant unknown as well. The Controller's office assumes a gradual pickup in office work, but that 25% of workers could telecommute on a permanent basis. Some major downtown employers in the City have said they will begin bringing employees back in the next few months, while others have reduced their physical footprints in the City and plan to offer permanent flexible work.

Even if local revenues fully recover from COVID, San Francisco still faces a longer-term "structural" deficit with expenditures growing faster than revenue over time.

As federal funding is depleted, the gap between expenditures and revenue is projected to reach $350 million by fiscal 2024, and steadily grow in subsequent years to $500 million by fiscal 2026.

The City's structural deficit "persists and grows each year as expenditure growth projections outpace revenue growth projections," wrote the Controller's report. "Closing these shortfalls will require some combination of expenditure reductions and additional revenues, and will likely pose difficult choices for policymakers."

Given the temporary nature of the federal aid, the Government Finance Officers Association, which represents public finance officials, urged recipients of American Rescue Plan funds to avoid introducing new spending programs that require ongoing local support.

"I think it's important that we don't just take in whatever surplus we get, or stimulus money we get and spend it all at once," said Mayor London Breed last week. "We need to be very responsible with how we designate those resources, and also how we put more money away so that we don't have to make those hard decisions around layoffs and...other things that will definitely have an impact on services."

"Ultimately it's not completely my decision," she added. "The Board of Supervisors also plays a role in helping to shape the budget, and my hope is that we will continue to work together to make concrete decisions for the long-term financial stability of the City."


Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup

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