With crime trends and a change in work patterns negatively affecting San Francisco, revenue shortfalls are weighing on city plans, with some outlooks suggesting that the city’s current budget problem will continue to grow.
The city estimates a $245 million deficit in fiscal year 2024–25, expanding to $554 million in the next year and totaling $1.35 billion by fiscal year 2027–28 due to a disconnect between revenue and increased spending.
“We’re in a tough spot,” Anna Duning, budget director for the mayor’s office, said during a Board of Supervisors Budget Committee hearing on Jan. 17. “It gets worse should we take no corrective action in the coming years.”
Mayor London Breed announced in December 2023 a series of cuts to help close the gap, and her office warned on Jan. 17 that city leaders will need to make additional spending reductions to match fiscal reality.
Departments are now asked to cut spending by 10 percent for each of the next two years. Department heads have been asked to identify 5 percent contingency reductions in case the situation worsens.
While city expenses spiked by 18 percent from 2021 to 2023, revenue growth was 2 percent to 3 percent and has since plateaued to “low or no growth,” according to the city controller’s office.
The loss of businesses downtown is partly to blame, according to experts, who point to a change in the nature of work—with more employees working from home since the COVID-19 pandemic—as a major contributing factor.
Office vacancy rates approaching 40 percent have devastated commercial real estate valuations in downtown San Francisco—once a premier shopping and working destination—and empty buildings are affecting property, business, and transfer tax revenues, the controller’s office told supervisors during the hearing.
Others note the rise in open-air drug use and crime as further worsening the cashflow problem by creating a sense of fear and uncertainty, keeping workers and shoppers from returning to the city.
With dozens of retailers fleeing San Francisco over the past year, sales taxes have turned negative too—with expectations for a recovery now pushed back at least five years, according to Carol Lu, citywide revenue manager for the controller’s office.
Residential property value declines—down by about 30 percent from the 2022 highs—are also adding to budget woes, as property tax accounts for a substantial portion of the budget.
Many property owners are petitioning to have their property tax reduced as values are plummeting. Requests to reconsider have tripled, according to the mayor’s office.
“We’re seeing really high levels of assessment appeals,” Ms. Duning said during the hearing. “We’re tracking potential impacts.”
Previously consistent revenue from tourism has also dwindled, according to the controller, as the city’s reputation has soured because of widespread crime and a perception that some parts of the city are unsafe.
Hotel tax collection slumped after partially recovering following the pandemic, and now expectations are for revenues to lag behind historic norms for at least five years.
Real estate transfer taxes are also at lows unseen since the 2011 bottom that officials blamed on the Great Recession.
Officials have said that the change in revenues from such core sources represents a “seismic shift” in the city’s funding baseline.
With discussions underway to bridge the funding gap, Ms. Breed’s budget proposal is not expected until June, but her administration recently advised supervisors that there is no time to wait in identifying potential solutions.
Prioritizing public safety, street conditions, and economic vitality, the mayor is looking at all options to address the challenges, her office advised supervisors.
“It’s about starting to lay a foundation for the future of this city,” Ms. Duning, budget manager for the mayor’s office, said during the hearing. “We’re in a period of structural shifting.”
The chair of the budget committee, Supervisor Connie Chan, said during the hearing that the city needs to maximize efficiency and streamline operations.
“I take this very seriously. Let’s make this decision-making process more objective,” she said. “We need to continue to problem-solve.”
