Issue 486

Making Good Government Better

The city's new budget director talks about his department's role in shaping good policy

Urbanist Article

Gabriel Metcalf: What is the role of the mayor's budget office?

Greg Wagner: The budget office is one of the places where we translate policy into the operational realities of government. The budget is perhaps the most important policy document in City government. It's an expression of the policy goals of the mayor and the Board of Supervisors — and of how we align our resources to achieve those goals.

Metcalf: You worked at SPUR for a long time as the good government policy director. What was it like when you switched from working at a nonprofit policy organization to actually working for the government, where you’re in a position to implement ideas you came up with at SPUR?

Wagner: There’s a big difference between coming up with ideas and actually translating those ideas into the operations of a government agency, in a way that leads to implementation and good results. Ideas are certainly important in guiding the vision for change. But you also need to think about how a department is operating. What are the people inside a department doing everyday? And if you want to achieve a certain result, what do they have to be doing differently? Do you need new positions? Can you redirect people from an existing job to work on something new?

In some circumstances, there’s a lot of inertia, just like there is in any large bureaucracy, where once things are set in motion, it's difficult to redirect them. So I think it takes a lot of vision on the part of management — as well as some careful thought about how to align people and money to achieve a new goal that can often be abstract and hard to measure.

Metcalf: What’s an example of an idea you developed at SPUR that you've been able to help implement?

Wagner: A major example that comes right to mind is the City's Capital Plan. When I was at SPUR, we were involved in doing a lot of the early thinking around what the City's Capital Plan should look like, and what it should be designed to achieve. We’ve come a long way in implementing it. We're now several years into having an annually updated Capital Plan. Voters have approved two general obligation bonds, one for parks and the other for San Francisco General Hospital — both of which were contemplated in the 10-year Capital Plan. And compared to historical levels, we've established a precedent for doing a much higher level of annual spending on capital investments. I think we're both doing a much better job of thinking through what our capital needs are, designing a strategy to meet those needs and actually putting some financial resources behind them.

Metcalf: SPUR was very involved for the last six months in developing a bond to help repave the streets, along with new bike lanes and sidewalk widening projects. It didn’t go forward because it seemed like there was not going to be enough political support. For capital projects that are necessary, but not new or glamorous, and for which there is no obvious social justice motivation (the way there is for building a public hospital), what is it going to take to come up with funding?

The two most volatile sources for the City's General Fund budget during the past decade have been used as ongoing revenue. These include property transfer tax and the use of prior year fund balance.

Wagner: It’s important to acknowledge that over the last few years, we've actually hit some real landmark levels of funding for street repaving, which I'm very proud of. It’s been a focus of this administration to fund street repaving and the whole capital budget at a level that is leaps and bounds higher than what we were paying for similar projects 10 years ago. We have, for three years in a row, actually funded streets at the level required to keep the average pavement condition in the city from declining. And that doesn't sound like much, but compared to where we were a few years ago, it’s a step in the right direction.

Moving forward, I think the 10-year Capital Plan is something that, for the first time, actually creates a blueprint for us to fund these types of projects and explains the consequences of us choosing otherwise. It tells us what the condition of the streets and of our facilities will be if we don't fund them at necessary levels. One of the things that's characteristic of capital budgets in general is that — unlike operational spending (hiring, for instance) — you can flex capital spending up and down when the City budget grows and shrinks. I don’t think there will ever be a time where there isn't pressure to reduce capital spending. But I think what it takes is keeping the evaluation of the condition of streets and other capital facilities in the public eye. There’s an awareness on the part of policymakers to fund these assets — or there will be consequences affecting quality of life in the city. I don't think there is any kind of a magic bullet solution.

Metcalf: Why is there so much hysteria each year around the City budget? Is this just a healthy part of the democratic process? Or is wour process flawed?

Wagner: It's probably a combination of both. In any government, it's natural when you have a limited pool of resources and a huge demand for public services for there to be some fireworks around budgeting decisions. San Francisco is also a city where people are very passionate about government. People are very passionate about specific services. And they're not shy about making their voice heard in budgeting decisions.

But other governments have much larger structural problems than San Francisco does. If you compare us to state government, we pass a budget on time every year. We've been able to maintain our bond rating at relatively stable levels, which is a measure of our overall financial condition. And we've been able to do that even while we were facing some significant deficits — whereas at the state level, I think the hysteria happening there is a sign of some much more fundamental process issues. I think we could probably do some things better in San Francisco. But when you do step back and look at the big picture, even though we have big budget deficits, and fights and screaming and difficult decisions about the budget, we actually do a fairly good job of managing our budget collectively.

San Francisco's per capita spending on public health services is more than double the average of our surveyed peer counties, in part due to grants and federal funding. This allows San Francisco's cost per patient visit to be comparable to the survey average and well below that of Los Angeles County.

Metcalf: If you could change anything about the budget process, what would it be?

Wagner: The main thing I think we could do better is taking a longer-term view of our City's finances and our financial condition. It's a natural feature of most governments to have a short-term time horizon when we make budget decisions. Most governments are looking one year in advance at the most. And they're making short-term decisions to help them balance the budget for that year. And then, they deal with future problems — well, in the future. I think we’re doing a better job these days of identifying some of the fundamental cost drivers coming down the road that will impact our budget in five, 10 and even 20 years and looking at how we're going to be able to provide services — or not provide services — in the long run.

Metcalf: Tell us about the budget reform measure on this November's ballot (Proposition A). What does it do? Does it get us closer to the right process?

Wagner: A little over a year ago, the City had just finished closing a $338 million budget deficit — which now, in retrospect, doesn't look so bad compared to what we've dealt with in the last year. We had just finished a very difficult budget year. So the Mayor asked the Controller to prepare a report looking at our financial practices – including what we spend money on compared to other jurisdictions —along with some recommendations about what we could be doing better. That report, the Budget Improvement Project (available at, came out this past winter. And several of the recommendations from that report were folded into a charter amendment, which was placed on this November’s ballot.

Number one, the charter amendment would give us the authority to adopt a two-year budget, which means we would adopt a budget that's balanced both in the year immediately ahead and in the following year. We would subsequently be able to adjust that budget. But the good thing about a two-year budget is that it forces us to look further down the road at the impacts of the short-term financial decisions that we're making. And it forces us to think — further in advance — about how costs and revenues are changing.

Second, it would require the Controller to propose financial policies to the mayor and the Board of Supervisors, which the Board could then approve and which would be binding during the budget process. The charter amendment also suggests we look at the level of reserves that the City carries as a contingency against unexpected events in its budget as well as things like volatile revenue policy, which essentially means we can look at some revenues, which tend to fluctuate dramatically year to year depending on the economy (the property transfer tax, for example) and make some policies about how to use those funds to limit some of that volatility. It doesn’t solve the whole problem. We could have probably been more aggressive. But I think this is probably the most significant financial process reform I've seen in local government in San Francisco in recent years.

Metcalf: Does San Francisco overspend on anything or waste money in any major ways?

Wagner: There are a couple of answers to that question. There is the issue of whether we spend more than other cities on specific types of services. And in a lot of cases, we do. The Controller studied other cities in California and found that we are, on a per-capita basis, significantly higher than a lot of other jurisdictions in areas like substance abuse and mental health, supportive housing and street cleaning. It’s true we are spending at higher levels than other California cities. But is that wasteful? Not necessarily. For example, our expenditures on supportive housing are higher than pretty much anywhere in the rest of the country. However, it's been a conscious policy decision to do so. And there's a lot of evidence that supportive housing is a service that produces great results for people, while diverting costs from other parts of City government. There are a number of cases where people in supportive housing have fewer incidents that cause them to visit the emergency room or access other more costly City services.

San Francisco has had an explicit policy over the last several years of trying to direct services towards the people who are frequent emergency-room users and try to give them treatment and services up front for whatever their conditions are — so they're both having a better quality of life, and we're engaging them in a way that helps them solve their problems instead of treating them at the tail end after they've already gotten into trouble. We may be spending more than our peers on these services, but it’s not wasteful.

Metcalf: Even in San Francisco, a progressive city that believes in having a well-funded government, we have the same debate every year as the rest of America over whether we should raise taxes or cut costs. How do we know when taxes are finally too high? We know that there is essentially an infinite set of needs for public services. There will never be a point where we say we don't need more. So how do we know when it's time to stop raising taxes?

Wagner: I think the other interesting point about this discussion is it's not always a question of how high your tax level is. It's a question of what are you taxing. This is something that SPUR has spent a lot of time thinking about — there is a big difference between the impact of different types of taxes on economic growth and on people's behavior. If you tax something, people will do it less. If you reduce taxes on something, people will do it more. So for example, a sales tax might suppress retail activity, a payroll tax might suppresses a company’s interest in taking on payroll, and so on.

You have to look at what types of behavior your tax system is incentivizing. We’ve started to do some thinking about this over the last several years. One of the big issues is not so much about the business tax level but about the form of the business tax. Should we have a payroll tax? Or a gross receipts tax? Is there another type of tax we could implement on businesses that would have a smaller impact on employment in the city? It’s probably more productive to look at specific types of taxes and whether our tax system should be implemented differently. Metcalf: But at some point, you've set taxes so high that people are doing the taxed activity so infrequently that you are seeing revenues decrease. Are there any taxes in San Francisco where we would collect more money if we reduced the rate?

Wagner: When the economy is down, maybe we could get a short-term boost in economic productivity if we made reductions to certain tax rates. The Mayor has talked about giving a payroll tax credit for new jobs to try and incentivize people to locate jobs here. The problem in California is that we are so rigid in our ability to make adjustments to our tax rates that if you try to constantly adjust them to match the economic cycle, you may be increasing taxes at a point where there is economic recession or reducing taxes at a point where there's economic growth. Because we have rules in place at the state level that restrict our ability to adjust tax rates, you're almost certain to be too slow to catch up to the economic cycle. By the point that you actually are able to pass a new tax rate and implement it, you may already be behind the next cycle of the economy.

Metcalf: There has been a proposal to remove the budget director from the mayor's office, presumably to support both the mayor and the Board of Supervisors. What do you think of that idea?

Wagner: That is a standard model that works well in a lot of cities. It’s a worthy policy discussion, but most often, it works well in cities that have a strong City administrator, where the mayor is not legally in charge of the administrative functions of City government. And often, in those cases, the mayor is one of the members of the local legislature as somebody who both sits on the city council and also is elected mayor. In San Francisco, because of the way our charter is set up, the mayor is responsible for all the administrative functions of the city. The mayor is responsible for proposing and ultimately executing the budget.

I have a hard time imagining the proposal would work well for us here. I think, if you want to make a fundamental change to the basic structure of our government, you’d probably want to start with the bigger questions before you change the budget office structure to reflect a form of government we don't have.

Metcalf: I know some Supervisors feel frustrated because they want to be more active policymakers. And as you say, the budget is possibly the most important policy document adopted every year. What are some ways to make the experience of being a supervisor more satisfying?

Wagner: Again, I think that part of the problem is that we often operate with a very short-term time horizon in mind. The supervisors have a critical role in budget decisions, but they are often forced to make specific budget decisions each year over a compressed period, when they're working all hours of the day during this very short period when the budget's in front of them. They do an admirable job but sometimes have limited time to engage with budgeting decisions on a high policy level during those months -- instead they're forced to focus on figuring out ways to simply restore particular city services that have been cut.

One way we might deepen that policy discussion [would be] to spend more time looking at some of the city’s more long-term financial questions so that in the budget off-season, maybe we're starting to think at a high level about what the budget will look like a couple of years down the road. Maybe we're starting to think about year two of the budget that we just passed and starting to have the higher level policy discussions at a point in the year when we're not compressed into a one-month set of budget hearings.

Metcalf: What should SPUR be focused on with regard to the city's finances?

Wagner: The main things that come to mind are variations on the core ideas that SPUR has already been focused on. And those are, number one, trying to generate ideas about how we can be more efficient as a government — trying to produce a higher output per dollar of government spending. I think the opportunities for coming up with ideas like that are endless, and I think there's a real hunger for those ideas in city government. The other thing would be to look at some of the fundamental cost drivers for the City and think about how we can be viewing those from a long-term perspective. For instance, what are the systems in place surrounding our personnel system and our compensation policies? Are there solutions for some of the underlying cost increases that every local government is going to have to face in the next 10 years — related to pensions, retiree health and other huge financial obligations — that are going to have a large impact on our ability to be financially sustainable over the next couple of decades?

Metcalf: Thank you very much, Greg.

Gabriel Metcalf is the executive director of SPUR

Greg Wagner is the Director of the Mayor's Office of Public Policy and Finance.