Signs of an Upswing for SF Economy in 2012

by Corey Marshall, Good Government Policy Director
February 24, 2012
Morning in San Francisco. Photo courtesy flickr user pml2008

As the economy struggles to recover in the Bay Area, what are the prospects for city revenues in San Francisco? City budget staffers and experts on the local economy gathered at the 2012 Annual Economic Briefing, hosted by SPUR's Municipal Fiscal Advisory Committee, to discuss regional trends and projections for the city’s major revenue streams. The upshot: Our experts are starting to see some good news on the horizon. The city trailed the state into this recession and though it is also trailing it out, unemployment has finally begun to decline, and San Francisco appears to be poised for revenue growth.

The value of these annual gatherings is in the cross-sector interaction; experts in Bay Area real estate, employment and economic activity gather to help to ensure that the city’s forecasts are reasonable and reflect the latest trends on the ground. Here's what they reported:

•       Property tax revenues are stabilizing. While the city has for the second consecutive year projected a year-over-year decline in property tax revenues, prices have started to stabilize and even to recover. The volume of transactions has started to increase across both residential and commercial sectors. And while property transfer taxes can be a volatile revenue stream, major commercial transactions forecast for the coming year could bring significant revenue to the city’s coffers.

•       Sales tax revenues have seen a dramatic increase. In the first quarter of the current fiscal year, revenues were up nearly 13 percent. Revenues resulting from the governor’s plan to realign state services may actually increase the city’s share of local sales tax revenues. Voluntary reporting of sales tax — where individuals voluntarily report the tax due on their online transactions — is on the rise. With the impending collection of all online sales taxes, revenues are projected to increase further.

•       Hotel room rates are on the rise, which is good news for hotel tax revenues. While room rates have not yet reached the record levels seen before the recession, they are approaching the peak values seen during the last technology boom in 2001. With healthy projections for convention bookings, hotel tax revenue is projected to increase by at least 7 percent in the coming year.

It’s important to keep in mind that these are preliminary projections and are always subject to change. And, as with any good news story, there are also some outstanding questions:

•       How will the heating up of the technology sector affect housing prices in the city? We have all witnessed the dramatic increase of rental prices — the rental market is the hottest it has been in years — but will the combination of historically low interest rates and an influx of technology wealth translate into a recovery in housing prices?

•       Can public pension costs be contained? The city’s investment returns and revenue assumptions ultimately impact its ability to provide services. But how will the pension reform approved at the ballot and recent market fluctuations impact the city’s pension expenses? How will the San Francisco Health Service System’s recent investment return reductions — phased in over time — impact the city’s expenses?

•       What is the potential impact of a European recession? With continued efforts to structure an austerity program for Greece and others, the implications on public bond markets around the world are still largely unknown. Will a deal ultimately be adopted? How will this instability impact public bond markets and the cost of borrowing for governments?

It’s clear from watching the daily news that local governments have not yet emerged from this recession. In fact, government employment loss may actually be dragging down employment growth overall. It is also true that a number of unknowns remain in European markets and not clear whether recent employment growth can be sustained in the coming year.

However, the Bay Area does appear to be showing signs of life: technology investment and employment are both trending up, tourism and hotel room rates are likewise on the upswing, property tax revenues appear to be stabilizing. And for the first time since the onset of the recession, many of our experts are surprisingly optimistic.