Our City’s budget of almost $6 billion, serving fewer than 750,000 people, dwarfs the budgets of twenty-two states in this country. We already know the City doesn’t spend nearly enough of its $6 billion to smooth streets, pristine parks, or assure a functional infrastructure. You’ve heard this before, so it seems almost immaterial to once again mention common sense government efficiency and best practices during budget time. We go down that road each and every year and by now even the most stubborn fiscal watchdog must abdicate a reasonable approach to spending tax dollars. Perhaps it is more relevant to take a closer look at the political theater that raises its curtains every budget season at City Hall.
On with the show — somehow every year around budget time, we read that San Francisco faces yet another budget deficit. In the same breath, we hear that the City has collected record tax revenue! How can we be running consistent annual budget deficits while also taking in record revenues? What kind of mathematical theorems are used to explain this phenomenon?
Act I of this theatrical production is set within City Hall where the San Francisco Board of Supervisors have perfected ways to feed their special interests, pet projects, and ideological preferences with the unfortunate consequence of mortgaging the fiscal health of the City.
According to the Controller’s projections, the City will end the current fiscal year (FY) 2006-2007 with a $126.6 million “surplus,” largely driven by local tax revenue like the property transfer tax that has tripled since 2003 and brought the City nearly $150 million last year alone. But despite significant boosts in revenue (by the way, total tax revenue has doubled in the past 10 years) the City still faces a perennial, systemic budget deficit which at last estimate will total at least $25 and $85 million for the next two years. So what happened to that record tax revenue – that “surplus?” The reality is that there never was a surplus. This production spends money faster than it can be counted.
The use of the word “surplus” is a bit misleading. Most of us view a surplus as revenue that should be used with discretion since it is not usually counted on appearing again. In this City, however, it is typically relied upon to balance budgets in future deficit years. In fact, when the Controller’s Office projects future budget numbers, it assumes that every dollar of any “surplus,” this year totalling $126.6 million, will be available in its entirety to fund future budgets. There is no guarantee that the money will be there and even assuming none of this year’s projected “surplus” is spent and is instead made available to fund future budgets, the City still expects to be $25 million in the red in FY 2007-08 and $85 million in the red for FY 2008-09. So, every dollar of the “surplus” that they spend now will mean larger future deficits beyond the $25 and $85 million figures! Did someone say surplus?
The Controller’s projections also assume no wage increases beyond inflation for police, fire, and nurses—all of whom are currently in contract negotiations. When was the last time wage negotiations resulted in salary increases at or below inflation? Be mindful that every salary increase of only 1% adds $6.1 million to the deficit per year for FY 2007-08 and FY 2008-09, and $16.3 million in FY 2009-10. As these harsh fiscal realities come to bear in the final act of the show, the money is already spent and the City’s residents and businesses are left to pick up the tab.
Act II begins just days after the Controller announces mid-year budget projections, including any projected year-end “surplus.” City Supervisors rush like fare evaders through the back door of a Muni bus to spend the money on pet projects and “needs” that have been agreed upon in back rooms. These budget enhancements, whether legitimate or not, often have money appropriated with no sustainable funding streams. So when a Supervisor says that we now have the money to expand a program, the question remains, how will the added costs be sustained when the money is not there? If fiscal watchdogs cry foul, they are dubbed evil and told to “pay their fair share” only to hear the City announce the good news of a surplus (and future deficits).
In FY ’04-’05 Supervisors spent $8.3 million of “surplus.” In FY ’05-’06 they spent $60 million in “surplus” funds. In FY ’06-’07, hold onto your wallets and purses because once again the Chair of the Budget Committee, Supervisor Chris Daly has already proposed spending $38 million of this year’s $126.6 million projected “surplus” with other Supervisors said to be following suit in the coming days with their own spending proposals. It is only April.
In 2003 the Committee on Jobs called for the establishment of a “rainy day reserve fund” to take the city through rough economic times. With some leadership at the Board of Supervisors, the fund became a reality. When City revenue exceeds 5% from the preceding year, fifty cents out of every dollar is locked away in this fund only to be used in poor economic times when revenues fall. So as we watch the budget debate this year, perhaps our elected officials should entertain the idea that ALL “surplus” revenue be held in abeyance, in a special temporary account, prohibiting its use until the Mayor submits a budget to the Board on June 1. This way we will know how much money we actually have as a surplus and perhaps be able to make intelligent holistic decisions on its use as opposed to haphazard decisions from pressure groups and idealogues.
When leaders from both large and small businesses hear the words “surplus” and “deficit” in the same breath by politicians, we are bewildered. Unfortunately, it seems that everytime we suggest a more thoughtful and long-term approach to government spending amidst annual budget deficits, we are assigned the role of villain in this grand production. Financial ignorance or political strategy? You decide.
Nathan Nayman is a veteran observer of San Francisco, her governance, and governance impact on San Francisco business climate.