What It Will Take to Close Oakland’s Structural Deficit, Part 1: How We Got Here

This article is the first in a three-part series that will examine how Oakland can close its structural deficit and move toward fiscal solvency and economic growth.

Oakland city leaders are facing a daunting task. They must immediately close a $129 million shortfall in this year’s budget and, by June 30, eliminate an additional $280 million deficit projected over the next two years. Oakland’s leadership shuffle further complicates its challenges. The mayor was recalled in November, and the city is now on its second interim mayor; a special election is scheduled in mid-April, just two weeks before the deadline to present the next two-year budget to the Oakland City Council.

Some deeply rooted structural issues underlie the city’s fiscal distress, but Oakland is known for its creativity and resilience, and it has navigated bigger challenges before. It can do so again with a collaborative effort that unites policymakers, administrators, employee unions, and the community in a creative effort to reduce spending and grow revenues.

 

The Current Shortfall Triggers Spending Cuts

To address the current shortfall of $129 million in this fiscal year (FY), which ends June 30, the city has already committed to making immediate spending cuts: eliminating 92 filled staff positions; postponing two police academies, reducing staffing at three fire stations and potentially another four in February, and tapping Oakland’s emergency reserve.

Those cuts won’t cover the looming $280 million deficit projected over the next two years. So, on a parallel track, the city administration is identifying further reductions that the City Council will consider in May and June as part of the FY 2025–2027 biennial budgeting process. Because savings accrue over time, any delay in addressing the current shortfall would mean that next year’s cuts would have to be even bigger than currently projected.

 

Many Cities Are in the Same Boat

Although Oakland’s budget crisis is severe, many U.S. cities are facing similar challenges, in part because of the lingering effects of the COVID-19 pandemic. Sluggish real estate markets, the shift to hybrid work that has reduced foot traffic and increased office vacancies in downtown centers; declines in business travel, tourism, and retail sales taxes; and other economic factors have dragged down local tax revenues. San Francisco is projecting a budget shortfall of approximately $876 million over the next two years. San José is projecting up to a $35 million deficit in 2025–2026. Richmond, Berkeley, and many other Bay Area cities have all reported deficits as well.

The reality is that even before the pandemic, for many municipalities, revenue growth was not keeping pace with dramatically rising pension and insurance costs, and the tech and real estate boom, fueled by historically low interest rates, was slowing. From 2020 to 2023, many cities used American Rescue Plan Act (ARPA) funds to backfill budget gaps spurred by the pandemic, but these funds have dried up, and revenues haven’t returned at the levels expected.

 

Revenues and Expenditures, 2004–2024 (In Thousands)

Oakland’s revenues started to catch up to expenditures in 2016, but the COVID-19 pandemic halted that trend in 2020. Federal relief funding bridged the gap between 2021 and 2023, but as the lingering economic impacts of the pandemic continue, the gap is widening again.

These more recent challenges have compounded a structural deficit that goes back to the 1970s.

 

The Journey to Today’s Fiscal Crisis Began Decades Ago

Almost 50 years ago, Oakland, like other California cities, took a budget blow from which it still trying to recover. The city made some headway toward fiscal stability from 2015 to 2019, but COVID-19 threw it back off track.

 

Proposition 13 Decimated California Cities’ Revenues and Created a Structural Deficit

In the 1970s, California voters approved Proposition 13, which capped property taxes at 1% and immediately caused local government revenues to plummet by 60%. Budget shortfalls have been a recurring problem for Oakland and many other cities across the state ever since. Prop. 13 forced cities to find alternative revenue streams to make up for the losses as well as to account for the rising costs of labor and materials.

In Oakland, those alternative streams have taken the form of increases to voter-approved special taxes. And while Oaklanders continue to be generous in taxing themselves to pay for their essential needs, it hasn’t been enough to offset rising fixed costs — personnel costs for wages and retirement, insurance premiums, fuel, and utilities — resulting in a structural deficit. Despite annual budget-balancing measures, the underlying gap between revenues and expenditures persists.

 

Revenue Growth Since 2004

Property taxes, voter-approved local taxes, business license taxes, and real estate transfer taxes (RETT) have seen the largest growth – though property taxes and RETT fluctuate based on the strength of the housing and real estate markets.

 

Expenditure Growth Since 2004

Expenditures for public safety and general government have seen the most growth, while those for economic development have declined.

 

The Great Recession and the Dissolution of Redevelopment Created Additional Shortfalls

The global recession and real estate crash in 2008 had a devastating impact on local governments, including Oakland. Along with housing values, the city’s revenues collapsed, creating budget shortfalls totaling $318 million over six years. Making matters worse, in 2012, California dissolved redevelopment agencies statewide, resulting in a loss of $28 million per year in funds that the City of Oakland had used to pay for affordable housing, infrastructure and façade improvements, graffiti abatement, and illegal dumping programs in the city.

Compounding the challenge, the city has discretion only over some 40% of its total budget. The remaining 60% is restricted to specific uses. Grants, fees, or voter-approved ballot measures provide dedicated funding for things like street and sewer repair, libraries, and violence prevention, but these funds cannot be used for other purposes. Closing those shortfalls required significant reductions. Over a five-year period (2008–2013), the city:

• Made significant staffing cuts. Oakland eliminated 720 full-time positions, including 80 police officers. Elected officials took a voluntary pay cut, and employees temporarily contributed 10% of their compensation as well as increased their retirement contribution. The city required mandatory furlough days, initiated a new two-tier retirement system, reduced police overtime spending, froze overtime for non-sworn staff, and curtailed training and travel.
• Dramatically reduced services. The city closed its offices 12 days per year, deferred maintenance of city facilities and streets, closed two fire engine companies and rotated closures at other companies, closed branch libraries one day a week, reduced hours at recreation and senior centers, cut funding for Public Ethics and the Oaklanders Assistance Center, reduced grants and subsidies to community organizations, raised hourly parking fees, significantly reduced tree trimming, and eliminated façade improvement grants as well as graffiti abatement and illegal dumping programs.
• Sold assets. The city eliminated 239 vehicles in its fleet and sold surplus property and land.

 

Full-Time Employees by Function, 2004–2024

Despite increases in both revenues and expenditures and growth in services and needs, staffing levels have not grown over the last 20 years. There are about the same number of full-time positions within the city in 2024 as there were in 2004.

 

Policy Changes Stabilized the City’s Financial Outlook

Coming out of the Great Recession, Oakland developed strong fiscal controls and strengthened financial policies to guard against the impact of future economic downturns.

For example, in December 2014, the City Council created the Rainy Day Policy and organized all the city’s fiscal policies into a single Consolidated Fiscal Policy (CFP). Under this policy, the city established a reserve fund (Vital Services Stabilization Reserve) to stabilize vital services, protect against service reductions, and prevent layoffs, furloughs, and similar measures in times of economic hardship.

The policy was also adopted to help reduce the city’s reliance on a volatile revenue source — the Real Estate Transfer Tax (RETT) — by requiring the city to use excess RETT revenues in good years to shore up reserves, accelerate debt repayment, and pay down unfunded long-term obligations like health care for retired employees. The CFP adopted best-practice policies on budgeting, use of one-time revenue for ongoing expenditures, the budget process, fiscal planning, and public participation.

In May 2018, the City Council further amended provisions related to the use of excess RETT, which is defined as any amount exceeding 15% of General Fund revenues, and it added new requirements intended to enhance good financial practices.

By FY 2015–2016, the city’s fiscal position showed signs of stabilizing. A booming real estate market and strong economic rebound, coupled with disciplined adherence to sound fiscal policies and financial best practices, began to address chronic operating deficits.

 

Oakland’s Operating Deficit or Surplus, 2004–2024

Coming out of the recession, the city made significant strides in stabilizing its finances by developing strong fiscal controls and strengthened financial policies. In 2014, the City Council amended the city’s Financial Policy to add the Rainy Day Policy and merged all the city’s fiscal policies into the Consolidated Fiscal Policy (CFP).

As a result, in February 2020, just one month before widespread pandemic-related shutdowns, rating agencies upgraded Oakland’s credit ratings to the highest level in the city’s history and the second-highest rating available.

Rating agency S&P stated that factors in the decision to upgrade Oakland’s credit rating included the city’s approach to distinguishing between one-time and ongoing revenue, use of RETT to fund a vital services reserve, rainy day funding, moderated spending, and efforts to address retiree health care costs.

 

COVID Reversed Oakland’s Forward Fiscal Momentum

Then the pandemic hit. The global health emergency created a local financial emergency.

COVID-related impacts created a $121 million hole in the city’s budget — the largest shortfall in the city’s history. To balance the budget, in June 2020, the city exhausted the Rainy Day Fund, laid off temporary and part-time employees, used new ballot measure revenue, and temporarily suspended its financial policies.

A year later, in March 2021, the federal government passed the American Rescue Plan Act, which guaranteed direct funding that cities could use to make up for lost revenue. Oakland received $188 million in ARPA funds, which expired at the end of 2024.

To avoid layoffs, Oakland has relied on one-time revenue sources such as ARPA and other COVID-relief funds as well as freezing of positions to close its budget deficits — waiving its own fiscal policies to do so.

 

COVID-Era Reductions and Spending Increases, 2020–2024

 

This Year, the Gaping Shortfall Grew

Several other factors have contributed to Oakland’s current financial crisis: lower-than-projected tax revenue; an overreliance on one-time funds, including those from the sale of the Oakland Coliseum, which has not been realized; and under budgeting of overtime pay to the police and fire departments.

The city’s finance department has been warning for a while that, without major strategy changes to increase revenues and lower expenditures, layoffs and service reductions are guaranteed.

 

Five-Year Financial Forecast Projected Revenues and Expenditures

The last five-year forecast that the city produced in 2023 shows that, absent corrective measures, shortfalls will persist throughout the forecast period.

 

There’s a Path to Fiscal Solvency

Fiscal solvency must be the first goal. And it is achievable. The strategies Oakland employed to emerge from the Great Recession demonstrate a viable path toward meeting the city’s immediate challenges. They include collaboration between decision makers and labor, adherence to sound financial practices, willingness to implement cost-cutting measures, and avoidance of use of one-time revenue to pay for ongoing expenditures.

Solving the structural deficit will require lasting changes to ensure that Oakland can deliver excellent services and meet the growing needs of its residents. Oakland’s current governance structure — a hybrid of “strong mayor” and “council-manager” forms of government — as well as Oakland's lack of an independent, trusted voice on financial and budgeting matters contribute to the city’s challenges. SPUR outlined those challenges and recommended ways to address them in Making Government Work.

Finally, Oakland needs to play to its strengths and engage the community both inside and outside of City Hall to develop a vision for how it can reduce expenditures and increase revenues while updating its land use policies to grow businesses and attract more private investment. Solutions to the city’s structural deficit may come from examining how past budget priorities and decisions led to current challenges.

 

Oaklanders Can Weigh In on What the City Should Do

Oakland’s Budget Advisory Commission (BAC) is gathering community feedback on options to shift spending. The BAC is an advisory body chartered by the City of Oakland that advises the City Council on budgetary challenges and solutions. The findings will be made public and presented to the City Council in the spring. If you are an Oakland resident, please take the survey and share it with your networks.

The survey is available in English, Spanish, and Mandarin:

• Oakland FY 25-27 Budget Resident Survey (English)
• Oakland FY 25-27 Budget Resident Survey (Spanish)
• Oakland FY25-27 Budget Resident Survey (Chinese)

This spring, SPUR will convene community leaders, policy experts, advocates, city staff, and decision makers to engage in important conversations regarding Oakland’s budget. Our first event, on February 20, will provide an overview of how the city’s budget works and which budget fixes are being considered.

Register for the event

 

Part 2 of our coverage of Oakland’s budget crisis will focus on Oakland’s budget-setting policies, processes, and structure. Part 3 will examine Oakland’s revenue sources and expenditures and how they have changed to support service delivery over time.