While businesses continue to struggle and unemployment exceeds 6 percent, The City got some good news Friday from the City Controller. A budget surplus of $125 million is expected for this fiscal year.
The City had been projecting a deficit of $115 million for the current fiscal year, but the outlook became rosier in part due to higher than anticipated revenue from property taxes and from the levy on the sale of properties, known as the real estate transfer tax.
The City is also seeing unexpected revenue from federal legislation adopted in December 2020 delaying the end of federal funding for the care of uninsured patients, helping out the Department of Public Health.
“Real property transfer taxes are projected to exceed budgeted levels due to a greater number of commercial sales than anticipated, offsetting additional weakness in hotel, sales and business taxes,” said the City Controller’s six-month budget report released Friday afternoon.
One boost in real estate transfer tax stems from last year’s voter approved Proposition I, which increased the tax on the sale of properties valued at $10 million or more. The City previously estimated this measure would generate $14.4 million this fiscal year, but the latest update shows it will generate $26.1 million.
The hotel room tax projections worsened.
“General Fund Hotel tax revenues are projected to be $27.9 million for the fiscal year, $54.9 million below prior projections, assuming the beginning of a recovery of leisure tourism by the end of the fiscal year,” the report said. “Our projections of growth later this fiscal year in other economically sensitive revenues are similarly dependent on a gradual recovery beginning in coming months.”
The report said that sales taxes are coming in at about $140 million, which is nearly 24 percent less than what was budgeted.
“The decline is primarily due to decreases in the City’s daytime population, which affects businesses who rely on workers and visitors to shop and dine out,” the report said. “In addition, there is evidence that the City’s residential population has declined since the onset of the pandemic. Unlike other California counties, sales tax collected from online retailers did not offset losses at brick-and-mortar stores.”
The latest budget projection does not take into account potential funding from the federal stimulus package, which is advancing its way through Congress.
It’s not clear how these fiscal trends will impact the previously projected budget deficits for the next two fiscal years. The City Controller will issue an updated budget projection for the subsequent years next month.
The City had previously projected a $650 million deficit over the next two fiscal years. Mayor London Breed has asked city departments to submit budget proposals of 7.5 percent in ongoing spending cuts for the next two years and a 2.5 percent contingency.
Departments must submit their budget proposals to her office by Feb. 22.
But Breed’s deliberations will be informed by the upcoming projections before she submits a balanced two-year city budget to the board for review and adoption by June 1.
There is already talk about using the new surplus funds right away.
Supervisor Matt Haney, the chair of the Board of Supervisors Budget and Finance Committee, issued a statement on the heels of the report announcing he wants The City to use the surplus to help out small businesses and residents struggling from the impacts of the COVID-19 pandemic.
“I’m committed to investing these funds immediately in residents and small businesses that have lost so much over the last year,” Haney said in the statement.
Haney said he plans to “work immediately” with board president Shamann Walton and Breed to develop “a spending plan for these surplus dollars.”
“Too many of our residents and small businesses have been told over the last year that despite their suffering, our City didn’t have the resources to support them,” Haney said. “Now, we have a chance to begin recovering now.”
But the report noted there are a number of pending proposals that could significantly draw down the surplus, including Supervisor Dean Preston’s proposal to use Prop. I funding for paying off owed rent and for affordable housing and “potential legislation to appropriate funds to backfill some or all of the projected $22 million shortfall in hotel tax revenues to arts organizations.”
Haney told the San Francisco Examiner that the pending proposals “will be considered, along with others” and said that the one’s referenced in the report “don’t add up to $125 million” in the current fiscal year.