The budget that ate San Francisco

The Budget That Ate S.F: A Study of San Francisco Taxation and Spending is sponsored by the Committee on Jobs. Thanks to Baha Hariri, the San Francisco Office of the Controller, the members and leadership of the San Francisco Building Owners and Managers Association, and the Mayor's Office of Economic and Workforce Development. A special thanks to Christopher Wright for his tireless efforts in shedding light on excessive city spending and his dedication to a better San Francisco.

July 18, 2006

INTRODUCTION - "Round Up The Usual Suspects"

As Captain Renault in Casablanca, the actor Claude Rains made himself immortal by telling his men to "round up the usual suspects." Years later, the film "Usual Suspects" would borrow the phrase and give birth to another well known character: Kaiser Soze, the unseen crime lord responsible for everything, but seen by no one. Often referred to as conventional wisdom, urban legends or old wives' tales, these half-truth/half-fiction morality tales make for great cinema because of what they say about society. We often believe what we hear, especially if we hear it over and over again.

A good example of urban myth overtaking reality can be found in an Francisco, where the City's ideological government leaders ave misled the public for years into believing that the business ommunity contributes very little financially to help run the City. othing could be further from the truth. The reality is that the an Francisco Board of Supervisors has, for years, leaned on the downtown" to support its runaway municipal spending. Year after year, San Francisco's elected officials struggle to balance the City budget, failing to control spending and continually seeking new revenues from businesses and residents in the form of taxes and fees. Despite the fact that the City is still only slowly recovering from a serious economic downturn, San Francisco's fiscal year (FY) 2005-06 budget reached an all-time high of $5.3 billion. That didn't stop City Hall from proposing a FY 2006-07 budget that calls for even more spending, with a more than 8% increase totaling a massive $5.73 billion.1

All the while, the City has consistently dragged its feet on conducting key audits of departments and economic analyses of pending legislation-even though voters approved Proposition I two years ago requiring just such analyses. The San Francisco Health Department, for example, enjoys a budget in excess of $1.2 billion, but has never been fully audited.2 The Board of Supervisors routinely considers and attempts to impose new fees and taxes on businesses, again, without conducting the economic analysis that Proposition I requires. Though the City has adopted hundreds of pieces of legislation since Prop. I's passage, it has conducted only a handful of economic impact reports.

The dire lack of cost containment, however, doesn't appear to concern the majority of San Francisco's elected leaders and special interests. They simply maintain that the problem is revenue. Falling back on their favorite urban myth, they try to convince us that businesses can pay more, they don't pay enough…they must pay their fair share.

This paper is designed to combat what amounts to nothing more than a damaging urban myth, one that has had far-reaching economic, financial and political ramifications for businesses, residents and taxpayers. This study examines revenue from different taxes collected by the City and County and analyzes the contributions specific to the downtown region, where the majority of the City's retail and commercial businesses operate. The results are troubling.

San Franciscans enjoy a host of expensive city services paid for by local tax dollars that, as the data shows, are generated in large part by the downtown. It is quite astounding that a region making up just 5% of the City's total area provides more than a third of total General Fund revenues-$1.2 million every day to the General Fund from just the major taxes. The downtown pays more in taxes than any other area of San Francisco, with the bulk coming from local businesses already struggling to "make it" in a city known for its notoriously high cost of living and exorbitant cost of doing business.

The amount of taxes actually paid is much more than what is noted above, yet hundreds of millions of dollars in revenue go directly to other funds such as the SF Unified School District and other local government agencies called enterprise departments, including the airport, Public Utilities Commission, and the public transportation system. The above figure only accounts for the portion of taxes that end up in the General Fund, the City's main operating account.

Moreover, this study did not consider downtown's hefty payments into the City's elaborate fee system, which brought in more than $350 million last year alone in governmental charges and more than $1.68 billion in business-type fees.3 For these reasons, this report dramatically understates the total financial contribution that downtown makes to the City. However, it offers a snapshot of the many millions of dollars that a small cross section of the City provides, and how the political rhetoric of "fair share" is being misused to mask City Hall's catastrophic spending problem. The reality is that there can never be enough revenue for a city whose budget grows by more than a billion dollars every few years.

A LOOK AT THE NUMBERS - Locating Downtown

Geographically, the downtown is situated in the northeast corner of the City and comprises about 2.5 square miles of San Francisco's 47 total square miles, or roughly 5% of the City in terms of area.4 This small region contributes more money to City coffers than any other part of the City and, in some cases, more than the rest of the City combined.

Revenue Generated By Dowtown

The City and County of San Francisco's ever-growing budget is funded largely through billions of dollars in taxes and revenue from fees, licenses and fines, among other funding sources. Not all of this revenue goes into the City's main operating account- the General Fund. Portions are appropriated to fund other specific services, such as transportation and education.5 This study looks at the following major taxes, their contribution to the General Fund and the hundreds of millions of dollars the downtown region contributes:

- Payroll Tax

- Commercial Property Tax

- Business Registration Tax

- Hotel Tax

- Franchise Tax

- Sales Tax

- Utility Users Tax

- Parking Tax

1. PAYROLL TAX

Downtown paid $132 million in payroll taxes in FY 2004-05, accounting for nearly half of the City's entire payroll revenue stream.6 San Francisco's General Fund collected $284.41 million in payroll taxes in FY 2004-2005 by levying a 1.5% tax on businesses for all payroll expenditures. The downtown's contribution of $132 million makes it San Francisco's chief source of payroll tax revenue. In other words, 5% of the City's geographic area accounted for roughly 50% of the City's payroll tax. It is important to note that small businesses are exempt from this tax and thus the City's revenue depends solely on local medium- to large-size businesses.

2. BUSINESS REGISTRATION TAX

Downtown contributed more than one quarter of the revenue that the City receives from the business registration tax.7 In addition to payroll taxes, San Francisco companies must also pay an annual business registration tax based on their computed payroll tax liability. In hard dollars, the downtown in FY 2004-05 contributed about $2 million of the total $7.36 million the City collected from the business registration tax.

3. FRANCHISE TAX

Downtown accounted for nearly ALL of the revenue collected.8 The City and County of San Francisco in fiscal year 2004-05 collected $12.79 million in franchise taxes from companies that pay to use the City's streets, or rights-of-way. This fee allows them to provide services to residents, such as cable, phone and Internet service. Of that amount, downtown paid $12.53 million, or nearly all of the revenue the City received from the franchise tax.

4. UTILITY USERS TAX

Downtown businesses paid more than $16 million in utility users tax in FY 2004-05.9 San Francisco's utility users tax, which is collected by PG&E and then paid directly to the City on a monthly basis, is a 7.5% tax levied on all businesses for their use of energy. Residential users are exempt. Last year, the City collected $72.57 million from the utility users tax, with downtown businesses paying $16.1 million.

5. COMMERCIAL PROPERTY TAX

Downtown paid more than $100 million in commercial property tax in FY 2004-05.10 The City's General Fund received roughly $154 million in revenue from commercial property taxes in FY 2004-05, with the downtown region contributing about $101 million. In other words, the downtown generated more than twice the commercial property tax revenue as the rest of the City combined.

6. HOTEL TAX

Downtown generated more than $87 million in hotel tax payments in FY 2004-05, representing 80% of the entire revenue stream.11 The City and County of San Francisco collects a 14% hotel tax, also known as the transient occupancy tax, on all hotel room charges. The tax has grown from an initial rate of 6% to its current level of 14%, making it the highest hotel tax rate of any Bay Area city and the second highest hotel tax rate in the state.

In FY 2004-05, the City's General Fund received $109 million in hotel tax revenue, with the downtown contributing 80%-90%, according to industry experts. Using even the most conservative percentage (80%), the downtown generated more than $87 million of the $109 million in General Fund hotel tax revenue in FY 2004-05.

7. SALES TAX

Downtown generated more than $41 million in General Fund sales tax revenue in FY 2004-05.12 San Francisco's sales tax rate of 8.5% is the highest in the Bay Area. In fact, it is the highest sales tax rate of any major California city. The tax is imposed on the sale of all tangible personal property, including business-tobusiness sales. It is responsible for funding the City's schools, transportation system and general local government.

The downtown is the City's chief generator of sales tax revenue, bringing the General Fund $94.69 million in FY 2004-05. Again, this represents only the portion of tax revenue that goes directly to the City's General Fund. It does not include large portions that are paid to state and local transportation and school funds. Of the $94.69 million General Fund portion, the downtown was responsible for generating $41.66 million, almost as much as the rest of the City combined.

8. PARKING TAX

Downtown generated $26 million in General Fund parking tax revenue in FY 2004-05, or 78% of total revenue.13 The City and County of San Francisco charges the highest parking tax rate in the country, almost triple that of the City of Los Angeles and outpacing even downtown Manhattan. Most cities do not charge a parking tax, including the cities of San Jose, Sacramento and San Diego. In addition, San Francisco's enormous tax rate of 25% is five times the state's average 5% parking tax rate.

The City collected $55.15 million in parking tax revenue in FY 2004-05, of which $33.09 million went to the General Fund and $22.06 million went directly to the Municipal Transportation Agency (MTA). Considering just the General Fund portion and not the millions paid to the MTA, the downtown accounts for almost 80%, or about $26 million, of General Fund parking tax revenue.

SAN FRANCISCO'S EXPLODING BUDGET - A Trend That Must Stop

From a policy perspective, the Board of Supervisors and special interests have continually turned a blind eye to the inefficiencies in municipal services delivery and the lack of cost containment in City government. Instead of addressing these major issues as taxpayers expect, some elected officials prefer to blame the City's perennial budget deficit on the downtown not paying its alleged "fair share." The graph below reaffirms the serious spending problem in San Francisco as budgets rise year to year.

Even with the City's continued decline in population, San Francisco's budget continues to grow-the City's rate of spending in FY 2004-05 equated to more than $10,000 every minute.14 In fact, San Francisco's spending surpasses that of many states. The City and County of San Francisco outspent the states of Mississippi and Vermont by more than $1 billion and spent more than double the budgets of Alaska and Idaho, respectively.15 Yet, the City's budget is set to grow once again with the Mayor's proposed $5.73 billion FY 06 07 budget, a boost of more than 8%, or $400 million, over the previous fiscal year's record-breaking budget.16

Figure 1 City Budget Increases

Meanwhile, as cities across the Bay Area and the state continue to grow, San Francisco continues to lose residents. According to the Census Bureau, San Francisco's population has now dipped to roughly 739,000, as residents continue their flight to neighboring cities and counties. All the while, San Francisco's government spending has reached all-time highs.

Common sense tells us that with such a steady drop in population, the City's spending should also fall. Unfortunately, even with increasing spending and declining population, the City still received only a C+ rating of its ability to provide needed services, as documented in the annual City Survey of residents conducted by the Controller's Office.18

Residents and businesses have become frustrated as they dig deeper into their pockets to pay for more expensive services, while inefficiency and waste slowly devour the City's coffers. According to the Controller, overtime costs for FY 2005-06 are projected to reach $122 million, which would again set a new City record. Moreover, the overtime problem is widespread. The City's "Big Six" departments are all projected to significantly outspend their overtime budgets in the 2005-06 fiscal year, including Muni ($13.7 million), the Department of Public Health ($8.5 million), and the Public Utilities Commission ($4.3 million).

There are also major departments in San Francisco's local government that have never been fully audited. Even after a request by Mayor Newsom for an audit of the City's largest department-the Department of Public Health-with more than 6,000 employees and a budget of more than $1.2 billion, one has not yet been completed.20 Also, a growing rate of absenteeism, particularly unexcused absences at MUNI and the Department of Parking and Traffic, should cause additional concern among all taxpayers.21

All of this reinforces the fact that San Francisco does not have a revenue problem. It has a spending problem. In fact, tax revenue has grown significantly (Figure 2). However, without better spending controls and stricter enforcement of minimal workplace productivity standards, there will never be enough. Residents and businesses paying for these bloated budgets should be asking if the City and County of San Francisco is doing its fair share.

So, as city leaders maintain their perennial stance that the City must continue to impose new taxes and fees on the usual suspects to feed their spending habit, San Franciscans must demand that their elected leaders impose greater cost and efficiency controls.

Figure 2: Will There Ever Be Enough?

CONCLUSION - Misaligned priorities mean a misaligned economy

Despite its usefulness for fueling poor public policy and runaway spending, the myth that businesses don't pay their fair share is no longer sustainable as a political excuse. For one thing, San Francisco is in danger of losing its so-called "goose that laid the golden egg" by creating a climate that is unsustainable for businesses at all levels.

For example, when looking at job growth, the number of jobs in San Francisco has actually increased only marginally since 1969 (see Appendix A).22 Even worse, the fastest growing job sector in San Francisco is now referred to as "non-employers," or independent contractors. Currently representing 18% of all private sector unrealistic expectations about the cost of service delivery combined with a total disregard for how much is available to spend.

The reality is that San Francisco has a systemic budget problem that necessitates more revenue every year to fund an insatiable appetite for creating new programs and hiring more workers without a sustainable income stream.

While the political rhetoric has focused for years on faulty assertions that the downtown does not pay its fair share, the quantitative evidence is incontrovertible that the downtown and the business community, in general, is indeed a major contributor to the City's tax revenue stream upon which city services rely. The employment in the City, independent contractor positions have increased significantly, while employment has remained virtually stagnant for more than 35 years. Put simply, the City's tax base is eroding as the economy shifts from traditional corporate employment to an economy comprised of "non employers." 23 The future of San Francisco's economic well-being is in serious jeopardy given the manner in which the City has chosen to fund its bloated budgets. By finding new ways to tax, and imposing increasingly onerous fees on those businesses and residents that remain here, this erosion will only escalate.

Employment in the City, independent contractor positions have increased significantly, while employment has remained virtually stagnant for more than 35 years. Put simply, the City's tax base is eroding as the economy shifts from traditional corporate employment to an economy comprised of "non-employers." The future of San Francisco's economic well being is in serious jeopardy given the manner in which the City has chosen to fund its bloated budgets. By finding new ways to tax, and imposing increasingly onerous fees on those businesses and residents that remain here, this erosion will only escalate.

If such a trend continues, the City will be left without an adequate employer tax base to fund services.

As the Board of Supervisors continually passes legislation calling for the expansion of services, they are creating a crisis in public trust for our government. Policy and legislation based on ideology rather than sound planning and management will always require more revenue. This perpetual need, rather than the real problem of overspending, has become the focus of discussion-creating downtown makes up only 5% of San Francisco's total geographic area, but provides much of the City's critical tax revenue, in some cases double the amount of revenue collected from the rest of the City combined.

Although many elected officials are confident that residents and businesses will stay preferring to dismiss concerns using a take-it-or-leave-it attitude-this type of governance has a disturbing impact on the local economy and demographic makeup of the City. The severe economic swings of boom and bust that San Francisco has faced over the decades, coupled with the dangerous approach by policy makers of assuming they can rely on the usual suspects to supply a never-ending revenue stream, is not in the best interest of San Francisco and the frustrated taxpayers that call this city home.

As a result, residents and businesses are leaving and will continue to leave until San Francisco can provide the quality of life and services expected from a major metropolitan city with a budget larger than that of 20 states in the union.

In the end, San Francisco's elected and appointed leaders must learn to live within their means and stop their over-reliance on local businesses to support their addiction to spending. The core business infrastructure of the City should be seen as an opportunity for economic growth and vitality as opposed to simply a source of funding for unfettered government spending. San Franciscans must demand that their elected officials set enforceable standards to contain costs and that they become more efficient rather than continuing to seek new and greater revenue through taxes and fees.

The question should not be whether downtown is paying its fair share, but whether San Francisco, as a city, can better manage its budget and provide services to its residents and businesses without increasing taxes annually to pay for it. San Francisco deserves better.

APPENDIX A

APPENDIX B

END NOTES

1 City and County of San Francisco; Mayor's FY 2006-07 Budget Proposal

2 City and County of San Francisco; Office of the Controller

3 City and County of San Francisco; 2005 Comprehensive Annual Financial Report

4 U.S. Census Bureau; www.census.gov

5 City and County of San Francisco; 2005 Comprehensive Annual Financial Report

6 SF Prospector business data

7 SF Prospector business data and Economagic economic data, www.economagic.com

8 City and County of San Francisco; Office of the Controller

9 PG&E Tax Records

10 Real Quest Database

11 PKF Consulting

12 City and County of San Francisco; Office of the Controller

13 City and County of San Francisco; Office of the Controller & Data From Local Parking Lot Operators

14 City and County of San Francisco; 2005 Comprehensive Annual Financial Report

15 FY 2004-05 State Budgets

16 City and County of San Francisco; Mayor's Proposed FY 2006-2007 Budget

17 US Census Bureau; www.census.gov

18 City and County of San Francisco; Office of the Controller

19 San Francisco Examiner (5/27/06); "City overtime costs soar to $122 million"

20 City and County of San Francisco; Office of the Controller

21 City and County of San Francisco; SF Stat

22 San Francisco recently conducted an Economic Performance Review to assess current economic and demographic trends.

23 City and County of San Francisco; Economic Performance Review

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