Crisis and Opportunity in the City Budget

An in-depth view and principles for reform
Article
May 1, 2003

Introduction

As of this writing, the Controller’s Office projected a city General Fund revenue shortfall of $347 million for the 2003/2004 fiscal year that runs from July 1, 2003 through June 30, 2004, due to declines in local and state tax receipts. It represents a little more than 14% of the overall city budget, but more than 25% of the $1.2 billion in discretionary General Fund money. The city is limited in the ways it can address this shortfall due to a range of state laws, described in this article. However, SPUR has come up with several viable ideas worthy of consideration that address the problem of the fiscal shortfall in ways that balance levels of service, efficiency of delivery, cost and systems of payment.

The city has already made a number of personnel cuts and other cost-saving changes in order to end this fiscal year (through June 30, 2003) with a hoped-for $30 million surplus. This surplus has already been applied to next year’s deficit to arrive at the $347 million figure.

The city Charter requires a balanced operating budget. The city is not legally permitted to operate with budget deficits the way the federal government does (although the city can spend future tax receipts for capital projects by issuing bonds). Therefore, the city must either cut expenditures and/or raise new revenues, sufficient to fill the $347 million hole.

Local ordinances and Charter changes, which might help the city operate more efficiently, may be on the ballot this year, but they are not likely to impact the budget until the 2004/2005 fiscal year. State Proposition 218 limits levying new revenues this year. Under Proposition 218, general taxes (those not earmarked for specific purposes, which require only a simple majority vote) cannot be on the ballot until November of 2004 because they can be voted on only in a general election at the same time the local legislature (the supervisors) is up for reelection. Special taxes and assessments (those dedicated for specific purposes) may be on the ballot in November 2003, but they require a two-thirds vote to pass.

Broadly speaking, the city budget expands and contracts in proportion to the economy. Between the beginning of the economic expansion in the mid-1990s and the end of the last fiscal year (June 2002), the total city budget grew from $3 billion to almost $5 billion, an increase of nearly 65%. While at first glance this increase seems extraordinarily high over a period of only eight years, analysis of the data shows that it was actually a relatively moderate rate of growth. After adjusting for inflation and the city’s population increase during the economic boom, the budget grew at a rate of about three percent per year between 1995 and 2002. That increase is roughly in line with the growth of the U.S. economy as a whole during the same period, and is not unexpected during strong economic times. If just the General Fund is considered (i.e., not including major capital expenditures, such as the new terminal at SFO, transfers from the federal government for mandated health care programs, etc.), the budget remained flat as a percentage of the city’s assessed valuation—2.5% (see SPUR Report 413, Feb. 2003 for a more complete analysis of the city budget history).

Just as the city budget grew along with the economy when it was strong, it must also react to difficult economic times. While the immediate problem is straightforward—a decrease in tax receipts tied to an economic recession—the background situation is more complex. The budget crisis takes place in the context of long-term problems of inefficiency in the operations of government and long-term successes of the anti-tax movement in California that have limited the ability of government to levy taxes.

California’s anti-tax movement has won significant victories with passage of Propositions 13 in 1978, 62 in 1986, and 218 in 1996. Proposition 13 froze property tax rates and required voter approval of special-use taxes, which were formerly levied by local legislatures. Proposition 62 greatly expanded the mandatory voter approval of tax increases in most jurisdictions, requiring a majority vote on general taxes. Finally, Proposition 218 added even more limitations on taxation and required voter approval of property-related assessments, fees, and charges. In addition, Proposition 218 extended the limitations on revenue collection to all California jurisdictions, including charter cities such as Los Angeles and San Francisco, which some argued were outside the reach of Proposition 62. Together, these three initiatives placed unprecedented limits on the ability of local governments to levy taxes and generate revenue.

The anti-tax movement and the inefficiency of government are linked together in multiple ways. Years of chronically de-funding the public sector have caused large swaths of the public realm to fall into disrepair. When California ranks 33rd in the country in total yearly spending per pupil in California’s primary and secondary schools, it’s no wonder many parents have lost faith in the public schools.1 Similar trends are visible in the public abandonment of parks and transit systems. This systematic defunding of the public sector has had a devastating effect on business as it becomes harder and harder to hire qualified employees at reasonable salaries who are willing to live in California cities. These dynamics would suggest that one answer must be simply to raise the aggregate level of taxation in the state.

On the other hand, part of the reason the citizenry has been so unwilling to tax itself is the widespread, and often correct, perception that public agencies squander their resources. Labor relations with the San Francisco city government have developed a troubling pattern in which unions fight not just for high pay and good benefits, but for “work rules” that are either codified in memoranda of understanding or “side letters,” or have simply evolved through years of bad management by city departments. Local government has developed a culture in which advancement is based on an antiquated testing system that often has little or no relation to work performance, while seniority determines who keeps jobs during layoffs and who gets the best assignments and work shifts. Far too often, the people who head departments are given their jobs based on their political loyalties rather than their management skills or expertise. All of these organizational problems undermine the public’s faith in government and its willingness to support tax increases.

Today, confronted with the immediate problem of the need to cut $347 million from the San Francisco General Fund, the range of options we have available to us is severely constrained by state laws. A one-third minority of voters has the power to block “special taxes,” the state limits how much sales tax can be charged by local jurisdictions, and the state entirely preempts local jurisdictions from enacting certain revenue sources such as an income tax. It is clear that there will be no increases in taxes in the short term. Likewise, short-term efficiencies and savings are difficult to achieve. SPUR’s historical approach has been to take the long-term view and seek structural reform. Our November 1999 Proposition E Muni reform, overwhelmingly passed by the voters, began phasing in in July 2000, and became fully effective in July 2002. While by any measure wildly successful, what is occurring is a complete cultural change of the organization. Such changes are measured in years, not weeks or months. The simplistic “meat-axe” approach of cutting all departments by an equal percent does not necessarily make government more efficient. Just as likely, services are simply cut, either overtly or covertly, efficiencies are not achieved, and what results is a further diminution of public services, decrease in the quality of life, and more reasons for both businesses and middle class homeowners and workers to flee the city to the suburbs with their wealthier tax bases and more homogeneous populations.

This cycle is not only destructive and wasteful but unnecessary. We believe that a balance can and must be achieved whereby levels of service, efficiency of delivery, cost, and system of payment converge to a socially acceptable norm. This paper attempts to point San Francisco in such a direction. We have divided our recommendations into two sections: short-term proposals that might help the next budget year and longer-term proposals that will make city government more efficient.

2003-2004 Budget Proposals

Improve Collection of Revenue
Existing taxes and fees which have been passed presumably have a level of political and societal agreement behind them. There is no excuse for leaving money on the table. We should have a goal of 100% collection in good times and bad. While estimates of amounts vary widely, if a tax has been legally passed, it should be collected, evenly, equitably and completely. SPUR calls on the city to monitor and audit collections of every type rigorously. Here are a couple of examples:

Centralize Revenue Collection
The Treasurer’s Office is the organization within city government with the core competency to collect revenue. It has staff expertise and management systems to send out bills, follow up, cash checks in a timely manner, and go after delinquent accounts. Because of this expertise, many departments have contracted with the Treasurer’s Office to collect their fees. These include the Water Department, the Department of Building Inspection, the Police, Recreation and Parks, Public Health, and others. This process of centralizing revenue collection should be continued. For example, the Treasurer’s Office should probably be the one to collect development impact fees currently collected by Muni, Planning, and the Department of Building Inspection. Benefits would include a lower overhead on collections, a lower delinquency rate, and faster collection. In any case, better systems need to be developed for tracking and collecting fees that go to departments whose core competencies lie in something other than revenue collection.

Rationalize Hotel Tax Collection

The city charges a transient occupancy tax of 14%. There are two potential issues with the collection of this tax that need to be investigated. First, it appears that when online travel services sell hotel rooms, the tax is being paid only on the wholesale rate (what the travel service pays the hotel operator) instead of the retail rate (what the customer pays). The law requires the tax to be charged on the retail rate, not wholesale.

Second, it appears that certain operators of residential hotels (sometimes called SROs or single-resident occupancy units) are evicting tenants before a residency extends to 30 days, which would bring the resident under rent control protections. If this indeed happens, then the operator of the residential hotel should be paying the transient occupancy tax. They cannot have it both ways.

Finally, the Treasurer’s Office has recently argued that hotels should be paying the city’s parking tax when hotel parking spaces are rented separately from the rooms.
Any of these ideas must, however, only be implemented prospectively, not retroactively. They represent changes to the city’s tax practices, and it would be unfair to the hotels that have operated in good faith to ask them to pay taxes that they have not been collecting from customers in past years.

Labor Reforms
SPUR believes that a major source of discontent with government today, and the consequent resistance to taxes, is the perception of outrageous labor agreements and wasted taxpayer money. The current crisis is an opportunity to clean up poor practices. The right way to do this is, of course, across the bargaining table. However, because our leaders are elected, in part, by city employees, all of whom have both civil service and union protections, as well as campaign contributions from public sector unions, it is widely believed that in San Francisco’s elected leaders will not usually be able to protect the broader public interest in these negotiations. Therefore, some of these measures may have to be passed by Charter revision, as we did in November 1999’s Prop. E Muni reform. And lest anyone charge that these reforms are “anti-union” or “anti-labor,” Muni’s and others’ surveys of Muni employee satisfaction show much more satisfied workers since the reforms have been in place. No one is well-served by egregious labor practices—the vast majority of city workers want to do a good day’s work for a good day’s wage and the vast majority do. Currently city-wide labor negotiations are underway. SPUR calls on these reforms and other similar ones to be negotiated by the city. If they are not, they should be mandated by voter-approved Charter reforms.

Clean Up Overtime Practices
Contrary to popular belief, overtime is not always a sign of inefficiency. Given the rising cost of health care and retirement benefits, often it is cheaper to use an employee on overtime than to hire an additional employee. However, the city’s practices for determining when overtime is to be paid are erratic and inefficient. For example, the city continues in many cases to pay overtime on hours paid, rather than hours worked. This means that in determining employee eligibility for OT, in some cases the city counts paid time off such as sick, vacation and legal holidays in determining when overtime is owed. Moreover, in many of its crafts contracts, the city is required to pay overtime for any work outside normal daytime, weekday shifts. These practices not only run up overtime costs unnecessarily, but require work best done in off-hours to be done at a time when it is most disruptive. For crafts, overtime should be paid after either eight hours in a day or 40 hours in a week worked. The limit on Monday through Friday work schedules should be eliminated.

The use of compensatory time off in exchange for overtime—a common practice in public agencies before the Fair Labor Standards Act applied to local governments—was intended to save taxpayer money by offering time off in lieu of paying overtime rates. However, the practice has become widely abused, with large accumulations of “comp. time” being “cashed out” upon resignation or retirement. This practice is especially serious among police officers, who account for about half of the “comp time” accrued in the city. In addition, high level police managers are inappropriately permitted to accumulate “comp. time.” Although the city’s miscellaneous managers have laudably agreed to do away with “comp. time,” many professional employees also receive “comp. time” even though they are FLSA exempt. These practices should be cleaned-up immediately.

Eliminate Redundant and Outmoded Premiums
When it moved to full collective bargaining, the city did a good job of eliminating a number of redundant, even silly premiums. For example, it eliminated the infamous “outdoor premium” paid to parking control officers working outdoors (think about it). But the prosperity of the last few boom years took the pressure off, and many outmoded premiums survive. The poster child in this regard is the “word processing premium” paid to clerical workers to do their work on computers rather than typewriters. This premium is nearly $1/hr. for clerical workers who have been with the city for a number of years. Another example is standby premiums. While such premiums may be required in some cases where employees must stay in touch by phone or agree to be on-call at a moment’s notice, as a practical matter, in the modern era, wearing a pager is not a sufficient encumbrance to justify widespread misuse of this premium. Other examples abound.

Require city Employees to Pay into Their Retirement Fund
The San Francisco Charter requires city employees to pay a portion of their retirement costs. However, during the early 1990s, in compensation for repeated wage freezes, the city agreed to “pick up” the employees’ mandatory share of retirement costs—generally 7.5% of wage. At the time, this “pick-up” appeared to make sense because the cost to the city was slightly less than the cost of a similar wage increase—because of “roll-ups” and retirement expenses. (This so-called EPMC, which stands for employer payment (pickup) of the mandatory (employee) contribution (to retirement), is not calculated as wage for the purposes of final compensation on which retirement benefits are based.) It also made sense because the employer’s contribution to retirement benefits—which is not fixed in the Charter and depends on the funding status of the plans—declined to zero as a result of the bull stock market. Thus, the city was reaping the benefit of growth of the pension trust, but, had it not been for the pick-up, employees would not have shared in the benefit. Finally, the EPMC made sense because San Francisco employees had relatively poor pension benefits, a relic of the post-strike era of 1975-1976.

Now, however, markets are down, the voters have recently passed improvements to both miscellaneous employee and public safety employee retirements, the surplus in the retirement plans is shrinking to nothing, and the city will soon be required to pay significant sums into the retirement system. Moreover, because tax laws permit contribution to the retirement system on a pre-tax basis, the actual value of the pick-up to employees is equivalent to about 4-5% of wage—even though it costs the city 7.5% of wage. Accordingly, it is time for the EPMC to sunset. Although sunsetting the EPMC will result in additional costs to employees, it will have no effect on their pensions, and have a far less devastating effect than salary reductions or layoffs. It will help to reduce budget demands on the retirement portfolio, which is projected to require renewed employer contributions by 2004/05. This one change would save the city up to $90 million for General Fund-supported departments in the next fiscal year. SPUR believes this should be given top priority, as this change alone constitutes one-quarter of the anticipated shortfall next year.

Eliminate Health Plan One
In this age, insurance is a highly specialized and risky business. Yet, the city continues to maintain the Health Plan One—its very own, self-administered, self-funded health insurance plan. In recent years, Plan One has become so expensive that, even with massive city subsidies, most employees have moved to other plans. However, the plan lingers on with ever-increasing adverse selection. By all accounts, it is a poorly administered anachronism. The city must have an “indemnity insurance plan” because many retirees and even some employees (for example, Hetch Hetchy employees) live in areas not served by HMOs. In addition, the Charter continues to require that employees have a choice in the selection of doctors. However, it would be far cheaper and more efficient for the city to select an existing indemnity plan and eliminate its health service system bureaucracy.

Extend the Firefighter Work Week
Almost without exception in California, firefighters work an average 56 hours per week comprised of staggered 24-hour shifts. However, in San Francisco, firefighters work a 48-hour week, although they are among the best paid in the state. The Charter allows a longer work week to be negotiated, but such proposals have repeatedly died for political lack of will. During the upcoming round of labor negotiations, the Mayor should propose a 56-hour work week for firefighters. This change would save the city $10-$12 million in the next fiscal year.

Move Away from Police/Fire Wage Parity
In other jurisdictions, police officers are paid better than firefighters. This is not surprising because the minimum qualifications for the jobs are quite different. However, in San Francisco, there has been historical parity between police and firefighters—resulting in unnecessary expense to the fire department. The city should drop the assumption of wage parity between policy and fire employees.

Cuts
There are two kinds of cuts which always come up in belt-tightening times—the meat axe approach and the surgical scalpel approach. The former mandates “X%” across the board cuts, which does the most damage to the city services we all depend on to make San Francisco livable. The latter goes in and finds problems areas and cuts them out. SPUR calls on the Mayor’s Office, the Supervisors, every department head and every commission to take this harder, but far better approach. Certainly city workers in every department know what works and what doesn’t and where there is inefficiency. Moreover, the truth is that some departments are much more efficient than others—a reality that is not acknowledged by the meat axe approach. In some cases, cuts will actually decrease overall city revenues in the long run, as when the Planning Department loses its ability to permit new development. Ideally reforms such as those listed below can be instituted immediately by the departments running those services. If they are not, the citizens again should go to the ballot box with Charter reforms that cannot easily be reversed when times are flush again.

Reduce Police Staffing Levels to the Charter Minimums
The San Francisco Charter requires a minimum staffing of the police force of a set number of positions. More than 300 uniformed officers are holding down desks at the police department—in large part on “light duty.” Last year, the fire department successfully addressed a similar problem by negotiating a rule limiting light duty positions to one year’s duration. The police department should immediately negotiate a similar rule. Many of the jobs now filled by uniformed officers could be filled by better-skilled civilian employees at far lower cost.

Close Redundant Fire Houses
San Francisco has 42 firehouses (plus three at the Airport). This translates to 0.96 stations per square mile and 0.06 stations per 1,000 people (0.04 stations per 1,000 daytime population, which includes workers). These numbers are out of line with comparable jurisdictions—especially the stations per square mile figure.2 The Fire Department could provide more efficient fire protection, with just as fast of a response time, by consolidating stations. We currently have equipment that is being used less than 30 minutes a day. Yet, each piece of equipment requires four or five firefighters on duty 24 hours a day. Last November, voters approved a greatly improved retirement benefit for police and firefighters. As a result, a large number of firefighters are expected to retire on their own. This affords the opportunity to look at reducing the number of fire stations or pieces of equipment without layoffs. Subject to analysis of how many firefighters will retire and after conducting an analysis of response time to emergency calls, it is estimated that the city should close five fire stations or reduce the number of trucks operating in the city by five (annual labor savings are approximately $2 million per truck) and reduce the number of engines operating in the city by 10 (annual labor savings are approximately $1.5 million per engine). During the Feinstein administration, a study was done that demonstrated the level of service would actually increase by reducing the number of stations, many of which were located during the nineteenth century, and consolidating services into fewer, better equipped facilities.

Reduce the Size of the city’s Vehicle Fleet

The city owns thousands of cars; many of them are given out as de-facto “perks” to employees who take them home each night. This represents an enormous unnecessary expense for the city—and, incidentally, is taking up a lot of the valuable parking spaces in the Civic Center area. The city should take steps to reduce its fleet. In some cases, departments, or better yet, the city as a whole, can set up more efficient vehicle pools. In other cases, they can use city CarShare vehicles, as Muni and Rec & Park have have recently decided to do. By relying on City CarShare for occasional vehicle needs, city employees will be using a pool of cars that other people will use on weekends, making this the most efficient option.

Fee Increases
In this post Prop. 13 era, local governments in California have to run government by fees—charges to the service-user wherever possible. While there are serious equity concerns with a fee-based funding approach to government, there are also some efficiencies by asking people who use more of a certain public service to pay a little more. But regardless of the philosophical pros and cons of fees, the reality is that the State of California has enacted so many measures to restrict the ability of citizens to levy general purpose taxes that we sometimes face a choice of raising fees or not providing the service at all. Like taxes, increasing service fees is always controversial and difficult for elected politicians to enact. But if we believe in having well-funded public services, fee increases must be part of the solution to the budget crisis. Here are just a few examples.

Raise Muni Fares
Muni has a projected budget shortfall of $52 million. Currently, Muni raises an estimated $100 million each year from fares out of a $462 million budget. If Muni raised fares from $1 to $1.25, it would bring in an additional $15 to $18 million per year. Raising fares from $1 to $1.50 would bring in an additional $30 to $36 million per year. It is far better to raise fares than cut transit service, especially given that Muni’s fares are among the lowest in the country.

Increase Vehicle-Related Fines
Currently, a very large proportion of the costs of private individuals driving private automobiles are externalized, meaning that the true costs are not reflected in the prices paid by drivers. Therefore, for society as a whole, it is economically efficient to try to find ways to make prices more accurately reflect true costs. One easy way to start to do this is to raise the fines on violations like blocking street cleaners or staying in a metered parking place longer than the time limit on the meter. DPT proposed a set of fine increases that would generate an additional $20 million a year, which would effectively be split between Muni and the General Fund.

Increase Recreation and Park Fees
The Department of Recreation and Park has proposed a series of fee increases that can help offset a small portion of the staff and program cuts it is contemplating. These include raising the prices on reservations of park facilities, charging for parking in city parks, and other ideas. Some of these fees have not been raised for 40 years. In general, these should be pursued vigorously.

Create a Fund for Master Environmental Reviews
Normally, developers must pay the costs of conducting environmental review for proposed projects. These fees typically cost several hundred thousand dollars for a large residential project. A more equitable and efficient way to do planning and environmental analysis is to look at the neighborhood scale rather than the single parcel scale. When the Planning Department does a neighborhood plan, such as the current “Better Neighborhoods” plans, and then conducts a programmatic Environmental Impact Review (EIR) on the entire plan, projects which fit within the plan are partially “pre-approved,” requiring less site-specific environmental review. The Department is under-charging for use permits to develop within areas that have a programmatic EIR. It should ask developers to “buy-in” to the neighborhood plan and EIR, by charging significantly more for permits to develop within these planning areas. These fees would need to be set aside into a separate neighborhood planning fund to pay for future neighborhood planning efforts and neighborhood-wide EIRs.3

Hire a Collection Agency to Go After Library Materials
The public library loses materials because they are stolen from the shelves or because they are checked out, but not returned. In fiscal year 2001/2002, the cost to the San Francisco Public Library of non-returned materials was $622,613. The Library should employ a collection agency to pursue users who do not return library materials. The goal of such a program is less to obtain fines but to force the return of missing books, which are very expensive to replace. This proposal was rejected by the supervisors several years ago, essentially making it official city policy to support theft of public assets and penalize honest library users. Hopefully this year we can institute this obvious policy win.

Longer Term Proposals
The ideas discussed so far could be enacted quickly enough to have an impact on the 2003/2004 fiscal year. There are obviously many more short-term ideas that should be pursued. However, it’s important that we don’t only focus on the short-term. The reason we are in this mess is because of a series of long-standing fiscal and managerial problems within city government. The current budget crisis should serve as a wake up call to deal with some of the longer-term, structural issues.

Efficiencies
Most citizens willingly contribute taxes to fund local government. But what makes us resentful is when we believe our money is not being used wisely. In the long-run, the way to build public support for the work of local government is to build a culture of excellence—to run city departments so that they are responsive to citizens, have high staff morale, foster innovation, and make productive use of the tax dollars we are investing in them. This is the vision at the core of SPUR’s good government agenda. In a time when people are deeply cynical about government, those who believe that government can be a tool for good—especially leaders of public sector labor unions—have an obligation to be open to management reforms that will make government more efficient. The ideas listed below would be a starting point.

Invest in the Planning Function to Restart the Economy

The way to be “penny wise, but pound foolish” is to cut funding for the Planning Department. The Department’s total General Fund support is just $4 million a year, representing 0.2% of the General Fund. But that small amount of money is absolutely essential for moving the city forward to make progress on the long-term problems. We will not get new housing, new jobs, or new infrastructure and consequently new tax ratables without adequately funding the planning function. During times of budget crisis, the Department’s work plan should be targeted to those things that will enable projects to move forward. Completion of the Better Neighborhoods programs, environmental review of housing legislation, re-zoning of vacant and underutilized industrial lands for critically needed residential use, approval of major commercial proposals that will produce sales tax—these are the sorts of projects that will help “prime the economic pump” by enabling new rounds of private investment in the city.

Rapid Transit Techniques
Transit systems around the world have discovered that there are a set of improvements to the routes that surface transit vehicles travel—both buses and light rail—that allow the transit to operate much more efficiently. In essence, the idea is to remove sources of delay along the route with the goal of shortening trip time. Many of the techniques are relatively inexpensive such as bus stops every other block instead of every block or building “bus bulbs” that widen the sidewalk at bus stops so the busses don’t have to pull out of traffic to load passengers. Other techniques cost a little more, such as signal control that allows Muni to override the traffic lights. The importance of these street design techniques, which are designed to speed up transit, is that they allow a given service level to be provided at less cost. Because each transit vehicle can finish its route faster, a schedule can be met with fewer vehicles and drivers. And of course, this will allow riders to get where they want to be faster.

Use Crime Mapping to Increase the Productivity of the Police Force

In the last ten years, computer crime mapping has emerged as one of the most important and popular innovations in American policing. Advancements in computer technology and Geographic Information Systems (GIS) have coincided with theoretical and practical innovations in crime analysis, investigation, and crime prevention. New York city gained great acclaim with its Comstat policing system in the 1990s. Today, the costs of these systems are manageable for even budget-constrained police departments. The innovations demanded by community- and problem-oriented policing require that departments incorporate a geographic, spatial, or local focus, and emphasize the importance of integrating crime mapping techniques into departmental management, analysis, and enforcement practices. San Francisco needs to join the 21st century.

Reform the Human Resources Function
The city’s hiring and promotion procedures are cumbersome and costly. The city also continues to test for more than 1,000 separate classifications. This “classification” system is outmoded because it pigeonholes employees in rather narrow job classes. Modern practice allows greater flexibility in using job classes. The city did take an enormous step forward last year by approving the “MCCP”—a system that will eliminate the need for most management job classifications—simplifying classes into a series of Manager 1, Manager 2, etc. Similar reforms should be extended to professional and mid-management classes represented by unions other than the Municipal Employment Association. In general, more responsibility must be vested in departmental managers in both the selection of employees and the management of their budgets.

Modify Funding of the city’s Health Service System
The city’s contributions to its health service system on behalf of employees are based on a complex maze of rules overlaying modern collective bargaining agreements on existing Charter funding guarantees. The result is that employees receive automatic increases in city health contributions, on top of collectively bargained contributions. Now that health costs are so high, this system should be abandoned. SPUR recognizes the importance of providing high-quality, affordable health coverage to all employees, including city workers. However, the cost of such benefits should be reflected in the give and take at the bargaining table—if only to encourage the efficient use of health benefits.

In addition, vesting rules should be altered. Presently, city employees with five or more years of service are entitled to leave their money in the retirement system and collect lifetime health benefits after age 50—regardless of when they left city employment. The city should adopt the limitation similar to that in the state’s PERS (Public Employee Retirement System) plans, which requires that health benefits be activated within 180 days of leaving state employment or be forfeited. In addition, a mandatory contribution for retiree health, like the mandatory retirement contribution, could be initiated to fund current and future retiree health benefits. This would relieve the general fund of a growing, potentially ruinous, burden, while protecting retiree health benefits into the future.

Take the Size of the Police Force Out of the Charter

The city Charter’s requirement of minimum staffing levels for police is poor public policy and should be revisited. It is absurd to have this kind of detailed personnel provision in the city Charter. Moreover, the number is unrelated to any analysis of operational needs, ability to pay, or alternative approaches. A study recently done by the City of Berkeley shows that the SFPD is staffed at about double the average of most large cities in the Bay Area. However, as a result of the 300 officers on “light duty” (that is, officers on disability or on partial disability leave, performing clerical chores), the department is now more than 300 officers above the charter minimum.

Create a Revenue Stabilization Fund
Because it is inevitable that the economy has ups and downs, tax receipts are highly variable. In order to protect the city from extreme swings in the size of the budget, an ordinance or Charter Amendment should be adopted that requires the city to set aside funds during the boom years and to spend down these reserves in the lean times. SPUR has been proposing such a step for years. One mechanism is to project forward into the future a calculation of expected revenues based on an averaging of the past 20 years. In years when receipts are above the line, money would be set aside; in years when receipts are below the line, the fund could be drawn down. This will not help in the next few years, but if it is in place before the next economic upswing it will provide fiscal discipline to set aside some of the money from the “good times” to smooth the boom-bust cycle of the market.

New Revenues
In general, the best way to increase city revenues is to increase economic activity and the value of activities that are conducted within in San Francisco. For instance, developments like Pacific Bell Park, Mission Bay, and retail and office developments all generate millions of dollars in net new tax revenue each year. The proposed Home Depot would generate scores of millions of dollars a year in revenues to San Francisco that presently go to Daly City. Development of new housing increases property tax receipts—sometimes by a hundred times what the pre-development property tax on an under-utilized parcel was. The Planning Commission and the supervisors need to consider this important benefit/cost relationship when reviewing potential new developments in San Francisco.

It is proper to think about increasing city revenues as part of the solution to the budget crisis. However, in general, we as voters and taxpayers expect that new revenues will result in increased levels of public service; in the long run, we will not agree to pay higher taxes and fees, above inflation levels, just to maintain the old levels of service. So city officials need to be extremely careful about when and how they raise revenues.

The city has a variety of tools at its disposal to raise money. These include fees charged to use a given service, impact fees on certain kinds of development, entrepreneurial activity such as developing in the air rights above public facilities and, last, taxes.

It is the last idea, consideration of raising taxes, that will generate the most controversy. The taxation system in the whole State of California has been subject to decades of narrow, self-interested political shenanigans by populist politicians, anti-tax zealots, and various economic lobbying entities. The common sense approach of we, the citizenry, deciding what levels of public services we want and levying taxes on ourselves to fund a general purpose government, is not how it works anymore. In response to the various state-imposed rules on taxation, cities and counties have gotten creative and have invented all sorts of new ways to fund public services. The result is that we are left with a tax system that satisfies no one.

SPUR has been calling for an examination of the city’s tax structure for more than two years. Recent experience would indicate that there will not be any reassessment of the city’s tax structure unless there is widespread public agreement that:

1. The taxes are equitable and not unduly burdensome on one sub-group or another.
2. They are reasonably in line with comparable urban areas.
3. They are not expected to have unintended consequences of driving jobs out of the city.

Such an agreement will take place only if all the affected parties are at the table and agree together what changes should be made. Recently, Supervisor Fiona Ma declared that she will convene a group to study the tax structure; we applaud this measure. Los Angeles recently went through such a multi-year study and consensus-building process, with successful results.

Examples of new revenue sources that should be on the table for discussion include:

Develop in the “Air Rights” Above Public Facilities
The city owns some valuable property that it could earn revenue from if it acted more entrepreneurially. Muni, for example, will earn lease payments of more than $4 million each year for allowing a hotel to be built on the former bus parking lot at the Embarcadero, a left-over from when this was an industrial port area. There are dozens of similar opportunities to earn revenue by allowing housing and other uses to be built above bus yards, police stations, libraries, and other public facilities. As the city is currently structured, General Fund departments have something of a disincentive to go through the headache of joint development: any new revenue they generate will go back to the General Fund, not to their own department. This can be solved by finding ways to guarantee that departments will be able to plow new revenues back into enhanced service and by giving a department with real estate competence like the Redevelopment Agency the mandate to help other departments use their air rights. In the meantime, revenue departments like the PUC and Muni, which already can keep any development revenues they generate, should be become much more aware of the opportunity costs of not developing their real estate.

Create Neighborhood Improvement Funds with Residential Parking Permits

Currently, the Department of Parking and Traffic charges a flat fee of $27 per year for a residential parking permit. Curb space is a scarce, valuable commodity in San Francisco and the city is radically under-pricing residential parking permits. If the city raised prices to something more reasonable and limited the number of permits to ensure that the number of permits doesn’t exceed available curb spaces, the permits could be a major potential source of revenue. Citizens in small geographic areas could vote to impose these higher fees on their district, and then dedicate the funds to quality of life improvements such as street trees, traffic calming, and parks improvements in that neighborhood.

Establish a Residential Utility Tax
Currently the city charges a 7.5% utility users tax on commercial (not residential) consumers of electricity, natural gas, water, and land-line telephone service. In addition, the utility users tax is levied on cellular telephone base charges for all consumers, both residential and commercial. If residential customers were to be charged at the same rate as commercial customers on water, natural gas, and electricity—making it function as a true natural resource tax—the city would raise an additional $24.2 million a year. The important idea behind resource taxes like this is that they help correct distortions in the price system, by internalizing some of the long-term environmental costs of resource consumption and providing an incentive to conserve. Such a tax can be structured to provide added incentives to conserve resources (a “reverse block tariff” that charges more as people consume more) and to provide “life line” rates to protect low-income households. Most other jurisdictions in California already have a residential utility tax.

Revise the Business Tax Structure
In 2000, the city put Prop. I on the November ballot to revise the business tax and protect the city from an $800 million liability in a lawsuit filed by several businesses declaring the city’s tax structure illegal. Although it was intended to be revenue-neutral, Prop. I lost, and the city settled the lawsuit, resulting in a major reduction in business taxes paid to the city. Our hope is that Supervisor Ma’s tax restructuring panel will be able to build some consensus about how to approach business taxes, based on careful comparison with business taxes in other California jurisdictions and in other, comparable regions of the country. However, we would point out that taxes need to be established in part based on the incentives and disincentives they create. It may be that in the case of San Francisco we may want to create major incentives to create jobs by eliminating the payroll tax altogether. Many environmentalists have proposed that the United States shift away from taxes on income, pay, and profit towards taxes on pollution and resource consumption as a way to encourage wealth creation while discouraging environmental destruction.5 It may be that we should begin to shift taxes to waterconsumption, energy consumption and car use, and away from business activity.

Establish a Vehicle Impact Fee
Currently, many—possibly most—of the true costs of driving are externalized, meaning they are not paid by drivers in proportion to the costs they impose, but by society as a whole. When externalities of this magnitude exist, the price mechanism is providing faulty information to consumers, and all sorts of economic inefficiencies arise. Therefore, one of the best places to look for generating new revenue is a vehicle impact fee that underwrites the costs of providing the infrastructure for driving. At a minimum, such a fee would need to pay for street repaving, estimated at $30 million a year. It would be logical to also consider funding some of the public health, public safety, and congestion mitigation costs that driving imposes. As of this writing, Assemblyman Yee has introduced a bill in Sacramento that would allow the San Francisco Board of Supervisors to impose a modest version of this idea in the form of a vehicle registration fee dedicated to street repaving. Under Yee’s proposal, the state’s Department of Motor Vehicles would collect the fee for the city and County of San Francisco.

Increase the Real Estate Transfer Tax
In November 2002, a property transfer tax increase was on the ballot, but failed to gain voter approval by a large margin. The measure would have increased the transfer tax on properties worth more than $1 million from 0.75% to 1.5%. It was estimated that the increase would have resulted in an average increase in revenue of around $30 million annually, depending on the amount of activity in the real estate market. SPUR supported the increase because the real estate transfer tax is an economically efficient means of increasing revenue because it does not create disincentives to create jobs (perhaps in contrast to the payroll tax). In addition, a transfer tax acknowledges that some portion of the increase in property values is due to public investments in infrastructure. SPUR believed that the increase proposed in 2002 would not have been large enough to reduce the number of real estate transactions—it would amount to only $7500 on the sale of a $1 million property. This tax should be one of the sources discussed as part of Supervisor Ma’s consensus-building effort.

Transit Impact Development Fee

Currently, the city charges a one-time transit impact development fee for new office development in downtown San Francisco. The Planning Department commissioned a study which recommended that the city to update this fee in several ways: 1) apply it citywide, not just in downtown; 2) apply it to all non-residential development, not just office; and 3) develop a better nexus argument that gives Muni greater flexibility in what the fee can be spent on. This idea will not bring significant results until the next upswing in the development cycle, but it is a sound practice that should be put in place now and is a logical counterpart to Muni’s fare increase.

Conclusion

The immediate budget crisis stems from the collapse of the last economic boom. But what should be clear to everyone is that the real causes are much more long-term, rooted in the state’s requirement to take every tax to the ballot, often with a two-thirds vote requirement, and rooted in the widespread organizational malaise of many public agencies. To solve the budget problem without destroying the public services that make San Francisco a livable place we will have to address the underlying, structural causes of the budget problem.

By June 1 of this year, the Mayor must submit a balanced budget to the Board of Supervisors. The supervisors must adopt a final budget by August 1. We hope this paper will provide a useful contribution to the public debate. There will be no easy concurrence among the different interest groups about what to do. Every single proposal in this paper will have some friend of SPUR who is upset with it. But we believe all of these ideas are worth at least discussing as we face our hard choices as a city.

The complete version of this paper, which includes the legal “points of entry” to implement each proposal, can be found on the SPUR web site (www.spur.org). SPUR’s volunteers and staff have worked with individuals in the Mayor’s Office, various supervisors’ offices, and various department heads to develop these proposals. This paper does not represent official SPUR policy. The SPUR Board reviewed and commented on the paper twice, and decided to publish the paper as an “ideas” piece, while continuing to work in greater depth on certain of the most important recommendations.Spur logo

Sidebar Principles for Budget Reform


Before delving into the specific proposals for balancing the budget, we propose that the following principles should inform the city’s thinking:

Look for efficiencies first. What government does is important. The goal should be to try to preserve as much capacity of local government as possible to provide health care, public safety, parks, transit, and all the other essential services. We do not want the budget crisis to lead to cuts in public service that are so drastic that they erode the long-term livability, business climate, and economic viability of the community.

Honestly reflect service levels in the budget. The easy answer for politicians is to make across the board cuts in funding for city departments, but then to claim that service will not be cut. This is dishonest. We should be suspicious of any proposal to cut funds without cutting service unless someone can give us a reasonable explanation of how this is going to be accomplished. Promising more than can be delivered (as was chronically done with Muni schedules during the 1980s and early 1990s, for example) just breeds cynicism among the voters. We should be making decisions about cuts with our eyes open about what will be lost in terms of service delivery.

Implement long-range solutions, not just short-term fixes. Given the severity of this year’s budget crisis, it is often tempting to sweep aside proposals that offer only longer-term efficiencies in favor of quick fixes. While this may be necessary to a certain extent, budget crises are a catalyst to reform. San Francisco must not put off exploring and implementing more fundamental efficiencies until another day. Experience has shown that, as the economy improves, the drive to implement such reforms wanes.

Short-term solutions are valuable to the extent that they “smooth” the transition from good times to bad. SPUR also recognizes the value of short-term solutions as a means of easing transitions and buffering the delivery of services. Sharp service reductions are bad for the stability of San Francisco’s economy. Short-term solutions are often necessary because longer-term efficiencies may take months or years to implement. However, short-term solutions must not substitute for more fundamental structural change.
Ensure that new revenue sources are economically efficient. Our long-term ability to fund public services depends on the underlying strength of the private economy to generate taxes. This means that any revenue increases that are proposed to fill the budget hole should be selected carefully with an eye toward not unintentionally creating disincentives to invest and create jobs in the city.

Link new taxes to specific new efficiencies. The reality of labor relations within city government today is that many proposals that would make government more efficient are going to be opposed by public sector unions. But in a time when the alternative is layoffs,we hope that labor leaders might grow more flexible. Taxpayers will only be willing to consider increasing revenues to offset shortfalls contingent on reform of government that makes it more accountable and more able to spend our tax dollars wisely.

Raise fees before cutting services. For departments that have the ability to generate revenue through charging fees for services, if the choice is between raising fees or reducing service, it is often better for the community to raise fees – even though many fees are regressive. This principle applies to “enterprise departments” such as the Public Utilities Commission, the Airport, and the Port, which receive no General Fund money. But many agencies that do receive General Fund money, including Recreations and Park, Muni, and the Planning Department, have the ability to increase the amount of funding they take in from fees, as a way to continue to provide higher levels of public service.

Learn from other cities. San Francisco has a lot to learn from the experiences of other cities that have struggled to reinvent their own governments. When our practices are out of line with what other cities are doing, we should take a close look to see if we should make a change.

About the Authors: 

This paper does not represent official SPUR policy. The SPUR Board reviewed and commented on the paper twice, and decided to publish the paper as an “ideas” piece, while continuing to work in greater depth on certain of the most important recommendations.