The Mayor’s Office, The Controller’s Office, and the Board of Supervisors’ Budget and Legislative Analyst Office jointly released an update today to the City’s Five Year Financial Plan for Fiscal Years 2017-18 through 2021-22.

This update reflects the most recent information on the City’s fiscal standing. When the Financial Plan was first published in December 2016, it projected continuing economic growth combined with slowing revenue increases over the five year period. This updated projection shows lower projected deficits in the upcoming two years, but higher deficits in later years, along with added insecurity related to federal funding.

“In order to protect and sustain the significant investments our City has made over the past five years, it is essential that we show fiscal discipline during this time of great uncertainty,” said Mayor Edwin M. Lee. “The presidential administration is proposing severe cuts to critical services, and while none of these proposals are concrete, we have to prepare for the future by considering tough tradeoffs. I know that we will work together as a City to protect our residents.”

Since the publication of the Five Year Financial Plan in December 2016, the City’s two year cumulative deficit has fallen by $114.8 million, and now stands at $287.6 million. This improvement is caused by the following factors:

• The Controller’s FY 2016-17 Six Month Budget Status Report identified additional one-time savings and revised the City’s revenue projections based on the most recent information available.
• The City’s debt service program projects savings in the next two years because of recommendations contained in the City’s Capital Plan, released earlier this month.

These short-term gains are offset by long-term issues due to:

• Rising inflationary costs, as projected by the California Department of Finance and the credit rating firm Moody’s.
• Annual growth in health costs for current employees, which increased from 7 percent growth per year to 8 percent growth per year. This assumption has been revised due to several factors, including the rising cost of pharmaceuticals and uncertainty in healthcare markets.

Total General Fund expenditures are projected to grow by $1.4 billion over the next five years, which represents an increase of 30 percent over budgeted spending levels for the current fiscal year. In contrast, General Fund sources are projected to grow by $541.3 million over the same period, resulting in the projected cost of City services outpacing revenue growth. If the City does not take corrective action, the projected gap between revenues and expenditures will rise to $907.4 million from FY 2017-18 to FY 2021-22.

This updated deficit projection does not include the impact of potential state and federal budget cuts, as no potential revenue losses or programmatic cuts are concrete enough to incorporate into the deficit at this time. However, if some of those cuts are finalized, they will have a significant impact on the City’s budget. The City is monitoring potential impacts closely, given the uncertainty surrounding these budgets and policies, particularly at the federal level. 

The Board of Supervisors’ Budget and Finance Federal Select Committee will receive an update today on the federal budget. 

“It’s important to remember that not a single federal dollar has been taken away from San Francisco by the presidential administration yet,” said Supervisor Malia Cohen, Chair of the Budget and Finance Federal Select Committee. “It is the role of this Committee to discuss the impact of potential federal reductions to our City budget and to review all budget information in an open, deliberative, and transparent manner. The presidential administration has made clear its intentions to target San Francisco. We must be prepared to make fiscal decisions that keep our City healthy and working.”

The Financial Plan update stresses the need to be mindful of the projected slowdown in revenue growth. After many years of higher-than-expected growth, revenues have risen only marginally from December projections, and future growth is curbed by housing, transportation, and other infrastructure constraints.

While property-related revenues remain strong, economically sensitive sources, such as hotel, sales and parking taxes, are experiencing slow-to-negative growth. This shift, coupled with great uncertainty from the state and federal budgets, presents real risk to the City’s financial picture. This situation requires careful weighing of tradeoffs, disciplined budgeting, and avoiding long-term ongoing commitments. The City’s budget has grown significantly in recent years, and now it is important to sustain the additional resources that were added to improve public service.

The Mayor is responsible for closing the two year, $287.6 million budget gap by June 1. As required, the City will need to implement strategies to close that shortfall. The Financial Plan proposed a package of solutions, including managing employee wage and benefits costs, capital and debt restructuring, identifying additional revenues, limiting non-personnel inflation, and implementing ongoing department solutions. The fiscal strategy, if implemented, will still allow the City’s budget to grow and public services to be maintained over the next five years.

If an economic slowdown were to occur, or the City experienced a loss of federal funding, the proposed fiscal strategies would be insufficient to close broader gaps between revenues and expenditures. In such an event, the City would be required to take more significant measures to bring budgets back into balance.