‘Whoa, this doesn’t make sense’: Why is Oakland’s budget in such bad shape?
OAKLAND — For the past month, Oakland’s leaders have been entrenched in a budget process mired in tough choices, facing what officials have described as the largest deficit in its history.
How large? The estimated shortfall, as presented by Mayor Sheng Thao in her budget proposal for the next two fiscal years, is $360 million — an amount inherited, as Thao puts it, from the previous administration, though the mayor was a councilmember when the last budget was approved.
Thao’s strategy for combatting the shortfall and reaching a balanced budget of $4.2 billion manages to avoid layoffs, but it consolidates some departments and leaves unfilled a large number of jobs at the city, which is struggling with a 25% vacancy rate.
The actual factors driving the shortfall are hard to understand without considering the complex web of past and current projections on which it’s based. Here’s how we got here:
Q: What led Oakland to a historic $360 million deficit?
A: Off the bat, the most significant answer is COVID-19 relief money that ended, creating a $188 million hole across the next two fiscal years.
That was one-time funding, and Oakland officials always knew that it would go away, raising questions about why more hasn’t been done to address the city’s longer-term structural deficit. Voters in last year’s election approved Measure T, a business tax, which is expected to raise about $20 million in annual revenue.
“Once the (COVID) money ran out, the assumption was that the revenues would be close to what they were before,” Erin Roseman, the city’s finance director, said in a recent interview. “We haven’t quite rebounded from the pandemic the way we thought we would.”
The mayor has pointed to the loss of revenue from a pair of taxes — one on property sales, another on hotel-room bookings — as also contributing to the deficit.
And in interviews, officials have also blamed a very high cost-of-living adjustment for city employees that took effect last summer, intended to combat inflation. More on that in a moment.
Q: So a little more than half the $360 million deficit comes from the disappearing COVID money. What about the other half?
A: The precise dollar-figure breakdown of these other factors — once the lost COVID relief is accounted for — has been surprisingly hard for the city to explain.
Officials have said the shortfall created by the real-estate transfer tax, for instance, comes from there being only $88 million in revenue this year compared to an expected $112 million.
You might think, then, that the difference between those two figures — $24 million — would be what goes into the $360 million shortfall estimation.
But it’s more abstract than that. The city includes a baseline projection of the next two years of tax revenue when it calculates the shortfall. But how much that baseline number is altered by factors such as the real-estate transfer tax is not articulated in the budget.
Several attempts to reach the city’s budget director, Bradley Johnson, went unanswered, and other city officials said the calculations are too complex to describe plainly.
Dan Lindehim, a professor of finance at UC Berkeley and Oakland’s former city manager, said it isn’t uncommon for budgeting to appear unnecessarily byzantine.
“There always are games that are being played with the numbers,” Lindheim said in an interview. “I don’t mean that in a pejorative sense, but you have to spend a little time saying, ‘Whoa, this doesn’t make sense.’”
Q: Why did the taxes come up short at all?
The shortfall is generated by the city’s spending outpacing its revenues, but it also has to do with how officials projected future revenue a couple of years ago and then planned their spending based on that projection.
Officials admit the revenue projection from the real-estate transfer tax was too optimistic — it was made when people still were buying homes during the pandemic’s first year, but before inflation kicked in.
“The unexpected sort of snag would be the federal reserve and it raising its interest rates,” Roseman said. “The fact that they’re pursuing their goal to reduce inflation as quickly as they have is unprecedented.”
The transient occupancy tax, meanwhile, also fell short of expectations, which happens to be a ripple effect from a problem across the Bay. Tourism in San Francisco hasn’t rebounded after the pandemic, which means business travelers have an easier time finding cheap hotel rooms there instead of commuting from Oakland. That has dealt a blow to revenue from a tax on hotel-room bookings.
Q: What about the cost-of-living adjustment?
A: The city approved a new labor agreement with its employee unions that took effect last summer.
It was much higher than expected, raising the city’s total salary obligations by 11% between last fiscal year and this one. That’s largely because the City Council was under pressure to cushion Oakland’s workers through a period of sky-high inflation.
But with the Fed’s interest rates rising, inflation is coming down, and fast. Now, that increase is driving up the city’s fixed expenditures beyond revenues, though, as with the taxes, officials have not articulated exactly how much.
Q: Why didn’t City Council members see this coming?
It depends on who you ask. But the shortfall has justified the mayor’s proposal to leave numerous city positions unfilled — including the equivalent of 120 full-time officers in the city’s police force — plus services carried out by the Department of Violence Prevention.
The mayor, for her part, said the proposal would avert past budget crises by not “resorting to government closures or layoffs, which disrupt critical services to residents.”
Correction: June 5, 2023 An earlier version of this article incorrectly stated the amount in yearly revenue expected to be raised by Oakland’s new business tax, Measure T. The correct amount is about $20 million.
View more on Silicon Valley