SF's Budget Surplus Grows, But Big Risks Remain
San Francisco's expected revenues from "excess ERAF" and property transfer taxes are higher than expected, boosting the City's surplus to $157.3 million this fiscal year
Forecasts for business, hotel and sales taxes are lower than three months ago, reflecting continued uncertainty around the City's economic recovery and a risk to future budgets
San Francisco is set to receive about $630 million in federal stimulus, largely erasing the deficit for the upcoming two fiscal years
Compared to a few months ago, San Francisco's budget outlook is looking rosy—at least for now.
In a recent update, the Controller's office reported that San Francisco's budget surplus for the current year, which ends in June, has swelled to $157.3 million. Talk about a turnaround from late last year, when the City was staring down a $650 million deficit over the next two fiscal years and a likelihood of painful cuts and layoffs.
"The City, by virtue largely of assistance from excess ERAF, transfer tax and now the federal stimulus, finds itself in a significantly better situation," Ben Rosenfield, San Francisco's Controller, told a Board of Supervisors budget committee this week. "But there are challenges looking ahead."
The increased surplus comes from better-than-expected revenue from "excess ERAF," a state education fund that divvies up property tax revenue for schools. Last year, San Francisco found itself in a tug-of-war with the state's finance department over how that figure should be calculated.
Property transfer taxes are also coming in higher than expected due to sales of a few valuable commercial properties changing hands in recent months, according to the budget update. The City enacted higher transfer taxes in January with the passage of Proposition I last November.
San Francisco's government is also expecting a cash infusion of about $630 million from the federal government, which will be paid out by the U.S. Department of Treasury in two large chunks this year and next, said Rosenfield. That will virtually eliminate the City's deficits over the next two fiscal years.
The bad news? Key lines of local revenue—namely business, hotel and sales taxes—are looking even shakier compared to prior forecasts. When federal stimulus funds run out, San Francisco will again rely more heavily on those economically-sensitive revenue sources, and no one knows quite how fast they will rebound.
Based on activity over the past three months, the Controller cut forecasts for business, hotel and sales taxes. For the current year, those are expected to come in at $632.4 million, $20.6 million and $132.2 million, respectively. Forecasts for business and sales taxes were about 5% lower than the last budget update, and hotel taxes were about 25% lower.
"While the world is improving, the pace at which out local economy recovers will be a significant uncertainty...in particular, taxes that are dependent on office workers and taxes that are dependent on hospitality workers," added Rosenfield.
The return of tourism and downtown office work are two of the biggest unknowns facing San Francisco's tax collections.
Enplanements at San Francisco International Airport have ticked up modestly this year, but were still down 79% compared to pre-pandemic levels as of March 2021. Leisure and business travel are not expected to fully rebound until 2025.
With vaccinations picking up, California is expected to fully reopen on June 15. But office workers in San Francisco have been slow to return in-person than other cities, with offices at just 13% of total capacity in April according to card-swipe data. The City's major private employers have shown mixed views on returning to in-person work, with some pledging to return workers after Labor Day and others making remote work a permanent option.
In the meantime, local business leaders and members of the San Francisco Board of Supervisors are mulling ways to lure people back downtown more often. Possibilities include filling out ground-floor retail space with local nonprofits and closing off downtown alleys to to host arts, music or other attractions.
“We need to create a downtown as a neighborhood,” said Rodney Fong, CEO of the San Francisco Chamber of Commerce, at a hearing last month.
Mayor London Breed and the Board of Supervisors are due to finalize the City's budget in June.
