San Francisco Projects a Budget Surplus This Year, Mostly from Federal and State Sources
Updated: Feb 17, 2021
The San Francisco Controller's Office is projecting a balance of $125.2 million in the City's general fund for the current fiscal year, which ends in June
The surplus is largely due to higher-than-expected revenues from federal and state sources, including an extension of health reimbursements and a state decision regarding the use of "excess ERAF," or property tax revenue otherwise allocated to schools
The budget update reflects significant uncertainty in local business, sales and hotel taxes, which are all expected to come in lower than prior estimates
The budget update does not account for potential federal funding that may arrive by way of a new COVID relief bill currently under negotiations in Congress
The San Francisco Controller’s Office is projecting a modest budget surplus in the current fiscal year, underscoring rapidly changing budget realities as the city mounts a recovery from COVID.
For the year ending in June, San Francisco expects a balance of $125.2 million in its general fund — an improvement compared to a $116 million shortfall it projected three months ago.
Revenue increases from federal and state sources are the primary drivers of the surplus, according to the Controller. Those include changes to California’s collection and allocation of property tax revenue, and extensions of federal reimbursements for health expenses.
Locally, the City is expecting higher-than-expected property tax revenues compared to the last budget projection. The increase is largely due to a surge in commercial real estate sales in recent months, which is expected to boost property transfer taxes to $253.8 million.
Transfer taxes are highly volatile, and “dependent on several factors, including interest rates, credit availability, foreign capital availability, and the relative attractiveness of San Francisco real estate compared to other investment options,” the report noted.
Another revenue boost came from what’s known as “excess ERAF”, which refers to a state-controlled Educational Revenue Augmentation Fund. Under California regulations, if local property tax revenues are sufficient to support the local school system, school funding that would otherwise be coming from the state is meant to be deposited into ERAF.
San Francisco, along with a handful of other property tax-rich California counties, opted to earmark the excess ERAF funds instead. Following a period of disagreement with the California legislature, those counties were permitted to retain most of the funding for this budget cycle, CalMatters reported. For San Francisco, that funding amounts to $293 million this fiscal year.
Excess ERAF amounts to a recurring revenue source for San Francisco under current law, but California's Department of Finance and others appear highly motivated to change the laws dictating excess ERAF funds.
"I would be surprised if we don’t see legislative proposals in time for the FY22 budget aimed at reducing the amount of excess ERAF going to the counties who are currently receiving it," said Michelle Allersma, San Francisco director of budget and analysis, in an email. "So, while it is an ongoing revenue source, it’s one that (from my viewpoint) the Department of Finance and others are very motivated to change."
The picture looks less rosy for other revenue streams.
The ERAF and property tax increases are offset by “serious weakness” in business, sales and hotel taxes, with all three of those categories expected to come in lower compared to the Controller’s last budget update, which was issued in November 2020. Business taxes are projected at $668 million, 19% below budget and subject to high uncertainty due to remote work.
Likewise, the decrease in the City’s daytime population has pummeled sales tax collections, which are now projected at $140.2 million, or 24% below budget. Hotel taxes, typically one of the City’s largest sources of revenue, are expected to bring in $36 total, or 77% below budget.
The budget update does not account for any federal relief that may be coming from a new COVID relief bill currently under negotiations in Congress.
If rolled over to the next two budget cycles, the expected surplus narrows San Francisco's deficit in fiscal years 2021 to 2023 to about $528 million according to the revised projections. Longer-term, the City is facing a persistent “structural deficit” that sees expenditures, driven largely by employee costs, outpacing revenues by a growing margin.
In a five-year forecast, the Controller estimated that the gap between revenues and expenditures will reach $503.3 million by the fiscal year ending in 2026, even assuming a steady recovery from the COVID-19 crisis.
