Bay Area Braces for Budget Deficits as Coronavirus Dries Up Local Tax Dollars

As the statewide stay-at-home order extends into May, cities and counties across the Bay Area are beginning to see millions of dollars in lost economic activity.

“Cities and their leaders are on the front lines of the coronavirus because they are the ones issuing stay-at-home orders and shuttering businesses,” said Brooks Rainwater, director of the advocacy group National League of Cities’ Center for City Solutions.

But because local governments took early action to slow the spread of COVID-19, they’re facing steep drops in sales and property transfer taxes. Now they’re planning budget cuts in the coming months — and years — as they forecast for an economic recession.

Here’s a snapshot of what city governments around the Bay Area are doing.

Oakland

The city of Oakland has already laid off several hundred part-time employees at recreational centers and libraries and has implemented a citywide hiring freeze, according to Assistant City Administrator Ed Reiskin. 

A new memo projects an $80 million budget shortfall over the next 14 months. 

At a virtual city council meeting this week, Reiskin said the city needs to start making “challenging decisions” as revenues from sales and property tax continue to fall. 

“None of us have ever seen such a precipitous drop in revenues in such a short time. … And the sooner we make those decisions, the better. Because delaying the budget adjustments means cutting deeper,” he told city council members. 

During the meeting, Councilmember Dan Kalb urged his colleagues to begin assessing what city services are “truly vital” as they begin to discuss layoffs. 

Councilmember Sheng Thao added, “It’s crucial that we include our city employees and the local unions in the conversation as we move forward.”

Reiskin and the city’s director of finance, Adam Benson, said they will continue to work with Mayor Libby Schaaf on balancing the proposed budget for the next fiscal year, which is expected to be released in mid-May.

San Francisco

In San Francisco, new projections predict the city’s deficit will double, growing to between $1.1 and $1.7 billion over the next two fiscal years, according to San Francisco Controller Ben Rosenfield.

Those deficit calculations only reflect anticipated lost revenue from hotel and property transfer taxes due to the shelter-in-place order, said Rosenfield. Expenditures related to the public health crisis — such as acquiring hotel rooms for healthcare workers and homeless people — are not included.

San Francisco Supervisor Rafael Mandelman of District 8 said the city is prepared to start tapping into its reserves.

“We will also need to make changes to this current year’s budget to get us through to the end [of the year],” said Mandelman. “None of that is going to be pleasant, but the really hard part is going to be putting together the budget for next year.”

At a budget committee meeting held remotely in early April, Mayor London Breed’s budget director Kelly Kirkpatrick presented a plan to curb current year spending by placing a hiring freeze on non-essential workers, prioritizing essential capital projects and halting other new programs.

Breed plans to introduce a balanced budget for the next fiscal year in early August. 

Santa Clara

In the South Bay, Santa Clara City Manager Deanna Santana said  the city has a one-time $80 million reserve to draw from as emergency response costs continue to rise.

The city has rallied to the national call to provide more hospital space, setting aside sites like the Santa Clara Convention Center to serve as medical facilities.

Santana said her office estimates that the city’s deficit will quadruple to between $8 and $10 million in the coming fiscal year, due to loss of revenue from the use of public transit as well as sales and property taxes. To maintain essential services, Santa Clara has implemented a hiring freeze.

San Mateo

On the Peninsula, San Mateo City Manager Drew Corbett said the city has lost $10 million in sales, hotel and property transfer tax revenue since the county’s shelter-in-place order was issued on March 16.

Still, he said approximately $88 million in general fund reserves will likely shield the city from immediate budget cuts and government layoffs.

The real issue, said Corbett, is how San Mateo will recover from the economic impact after the pandemic ends.

“It’s going to take a few years for our revenues to get back to their baseline amount,” he told council members at a city council meeting at the end of March.

San Mateo city council members are also looking into using general fund reserves to support the California Public Employees’ Retirement System (CalPERS) which manages health and retirement benefits for employees in the public sector. It is largely funded by outside investors but given the current economic situation, Corbett said the city might have to start absorbing costs.

Palo Alto

Similarly in Palo Alto, city officials are calculating a $15 to $20 million loss to the city’s general fund in the current fiscal year. City Hall has already trimmed down its staff of about 1,100 employees to 600 essential workers, with roughly 100 of them working reduced hours. Council members are planning to continue paying all city employees to the end of June.

The economic impacts of the pandemic have been “very stark and very immediate,” especially as downtown areas have turned into ghost towns, said the city’s Chief Financial Officer Kiely Nose at an early April meeting.

The council voted to look into “life support” programs for small businesses, including grants and discounts on utility bills.

More Federal Help Needed

Across California, city officials are calling on the state and federal government to provide more funding as they project a collective $7 billion dollar revenue shortfall in the next two fiscal years.

A new report from the advocacy group League of California Cities forecasts that 9 out of 10 cities in the state will need to cut services and lay workers off to make up the shortfall.

The league said currently only six out of 482 cities statewide qualify for relief funds from the federal coronavirus aid bill, which benefits local municipalities with over 500,000 residents.

San Jose is one of those cities, but Vice Mayor Charles Jones said that with an expected $45 million dollar shortfall, the city council will still have to make difficult budget cuts.

He said “a lot of the hard work” the city has done to improve the quality of life, such as trash collection and street maintenance, will have to be “reduced or eliminated” if the city can’t receive additional financial support.

“We need the support of the state and the federal government to close that gap,” he said.