Mayor Ed Lee has instructed departments to trim their spending by 5 percent over the next two fiscal years for his budget proposal that’s expected to include no service cuts or layoffs — a continuation of the past several years thanks to a booming tech sector-fueled local economy.
The mayor met with department heads Wednesday to discuss The City’s economic outlook and provide them with their annual budget instructions for the fiscal year that begins July 1, 2018, as well as the following fiscal year.
Department heads must submit their budget proposals to the Mayor’s Office by Feb. 21. They are told to come up with 2.5 percent in cuts or revenue increases next fiscal year and an additional 2.5 percent cut in the subsequent fiscal. The City operates on a two-year budget.
Department heads were also told not to add additional employees. There are about 30,000 government employees.
The requested cuts come as The City faces a $88.2 million budget deficit next fiscal year, and a cumulative deficit over the next two fiscal years of $262 million. The City’s growth of spending is outpacing revenue growth, which is driven largely by employee costs, pensions being the largest factor.
But there remains concerns about changes to the financial picture, most immediately as a result of a tax plan wending its way through the U.S. Congress.
“Our city’s economy is still strong; however, we have growing risk and uncertainty from the economy and the federal government,” Mayor Ed Lee’s budget director Melissa Whitehouse said in a statement provided to the San Francisco Examiner.
“We do not know yet how tax reform or changes to the Affordable Care Act will impact our budget and our city, but we do know they will have an impact,” Whitehouse continued. “That is why our instructions prioritize continued responsible fiscal practices such as funding our reserves, infrastructure investments and limiting on-going spending growth.”
There could be other unforeseen costs from the ongoing labor negotiations with police and fire unions. The deficit projections assumes a wage growth based on the consumer price index.
The deficit projection also assumes no economic downturn and that revenues grow at a slower rate than previous years. There are no revenues assumed from local tax measures, which are being proposed for the ballot next year.
The City is in a similar position heading into next fiscal year as it was for the current fiscal year’s $10.1 billion budget. There was a deficit that needed closing, but that was achieved without service cuts.
Similar to last year, there is uncertainty on the federal level under President Donald Trump.
Federal tax changes wending their way through Congress could deal a significant blow to local revenue, particularly related to affordable housing, with the reduction or elimination of low-income tax credits and private activity bonds.
These proposals could jeopardize 6,000 housing units that are in the pipeline, according to the Mayor’s Office of Housing.
As for current housing construction projects, the Mayor’s Office of Housing must drawdown bond proceeds to preserve their tax-exempt status by putting $900 million in escrow accounts by Dec. 31, which “will likely cost the [Mayor’s Office of Housing] and affordable housing developers $10 to $20 million in additional interest,” according to the City Controller’s Office.
Another increasing expense concerning The City is the shift in costs from the state to counties of In-Home Supportive Services, a program that provides home care to some 22,000 San Francisco residents who are elderly or disabled. There are about 19,000 employees who provide the care, of which about 80 percent are the patients’ family members.
The City is paying $94.6 million of the total program cost of $188 million in the current fiscal year, according to a Budget Analyst report. A proposal pending approval by the Board of Supervisors would increase the minimum compensation of these workers by $1.86, for a total of $15.86 an hour. That would add $49 million to the program’s costs next fiscal year.
The mayor must submit a balanced budget by June 1 to the Board of Supervisors.