Proposition A - Budget Process

What it does

Proposition A is a proposed amendment to the San Francisco City Charter that would establish a new budgeting process. It would make three major changes:

• Two-Year rolling budget cycle. Beginning in 2010 for some departments and in 2012 for the City as a whole, the measure would require the City to adopt a two-year rolling budget. A “rolling” budget means that the City will adopt a new two-year budget each year, but still will appropriate funds annually.

• Five-Year financial plan. The measure would set a procedure for the City to establish a five-year financial plan for all departments by 2011 and to update that plan every other year. The five-year financial plan would include five-year projections for all revenue sources (local, state and federal) and projected expenditures for all departments – including enterprise departments with their own revenue streams, such as the airport. The financial plan also would include a set of long-range financial tools and policies that, if adopted by a two-thirds vote of the Board of Supervisors, would constrain future budget deliberations between the mayor and Board of Supervisors. The policies would be proposed by the Controller’s Office and would address issues including the use of volatile sources of revenue. This charter amendment would not affect voter-approved set asides such as the Library and Children’s Fund and General Fund contributions to Muni.

• Imposes a May 15 deadline for all labor contracts. The proposal would align the submission deadline of all labor contracts with the budget cycle by imposing a deadline of May 15 for any salaries to be paid in the following fiscal year starting July 1, allowing the City to anticipate the costs of all labor contracts at the beginning of the budget process.

Why it is on the ballot

Proposition A was put on the ballot by the vote of seven supervisors with the support of the mayor. It is the result of a collaborative effort among the Mayor’s Office, the City Controller’s Office, and the Board of Supervisors to improve the budget process in light of the recent history of large budget deficits that must be eliminated to meet the requirement for a balanced budget in each budget year. The budget reform approach of this charter amendment also comes out of a 2009 Controller’s Office report on how to improve the City’s budget process. SPUR has been deeply involved with this reform from the start.

Several factors contribute to the City’s budget shortfalls. First, San Franciscans have ambitious goals for public services. We want expensive improvements such as universal health care, Parisian-quality public spaces and rapid adoption of renewable energy to power the city. Often, voters’ willingness to accept tax increases to pay for services and labor costs does not match the height of these ambitions.

Second, the City has experienced large unanticipated fluctuations in a number of its sources of tax revenues. Over the past several years, most major City tax revenues have shown a relatively high rate of growth by historical standards, primarily because of the property transfer taxes during the real-estate boom. But when the real-estate-driven economic downturn took effect, real estate transfer tax revenues dropped accordingly. The recent economic climate has led to significant reductions in business tax, sales tax, hotel tax revenues and, with reassessed property values, property taxes. This revenue volatility has made it difficult for the City to anticipate a year in advance what changes should be made to balance the budget.

Third, labor costs are an increasing share of the City’s budget. In the past 10 years, wages and benefits of City employees account for 54 percent of the growth in total expenditures. Although this increase in wage expenditures is actually lower than the other cities and counties surveyed in the controller’s report, it has still been difficult to match expenditure growth to fluctuating revenues – a situation that has contributed to budget shortfalls.

Fourth, the City’s budget deficits routinely are closed in part with one-time solutions that defer the problem to subsequent years.

Given the chronic budget deficit, the Controller’s Office commissioned a review of the budget process. Their report identified a number of unsustainable actions the City has taken to remedy chronic budget deficits, including:
 

• Creating budgets that have not taken into account deficits from the previous budget year. Thus, every year, the City already knew a portion of the budget shortfall was coming, and this shortfall was not the result of unanticipated spending or unexpected declines in revenue.
• Made mid-year reductions in planned expenditures to balance unexpected revenue shortfalls in four of 10 years.
• Asked voters to increase taxes in eight of the past 10 years.
• Renegotiated labor contracts that already had been closed in seven of 10 years.

To slow the growth of structural deficits in coming years and to improve revenue forecasting, capital planning, cash management and the administration of employee benefits, the Controller’s report recommended the City establish a two-year budget cycle and a five-year financial plan. It also presented some policies that could be a part of such a five-year financial plan:

• Increase the General Fund reserve for contingencies, emergencies and infrastructure.
• Replenish reserves using prior-year fund balance.
• Restrict the use of one-time funding for ongoing operations.
• Restrict new set-asides until existing unfunded liabilities are funded.
• Restrict partial use of volatile revenue sources for one-time use
• Require that annualized labor costs covered by contracts be funded with revenues identified in the five-year projections.

All such proposed policies would be subject to approval by the mayor and two-thirds of the Board of Supervisors.

Pros

• The requirement for a five-year financial plan reviewed and finalized ahead of the budget would illuminate trade offs among competing City policy priorities. The five-year plan and the resulting discussions would force the mayor and Board of Supervisors to understand the long-term financial impacts of new or existing programs, and the likely revenues to pay for such programs.
• This measure could reduce the perennial “camel’s nose under the tent” phenomenon, in which policy-makers provide initial funding for a program that is small at first but balloons in later years. This measure would force an understanding of the longer term cost effects in subsequent years.
• This measure could result in an improvement to policies governing budget reserves. For example, the five-year financial plan could propose a policy to establish a consistent source for the reserve and set a more rigorous requirement for use of the reserve funds. These actions would make San Franciscans better prepared to deal with the aftermath of a major disaster such as an earthquake and could improve its credit ratings, resulting in lower interest rates paid on City debt.
• The early deadline for submitting all labor contracts would force policymakers to confront the financial consequences of labor contract negotiations and ease the budget balancing for the following year. Currently, labor contracts may be renewed at any time during the fiscal year as they expire. There are several recent examples of public safety unions failing to finalize their contracts before the start of the budget cycle. When contracts are negotiated after the budget is finalized, the unanticipated increased labor costs can require a mid-cycle reallocation of funds and program adjustments.
• Setting appropriations with a two-year time horizon instead of one year may facilitate more consistent levels of service and encourage departments to pursue programming with longer-term benefits or service improvements.
• Multiyear budgets and long-term financial planning could provide increased funding reliability for City contractors and departments, and allow more time to focus on implementation and program improvement – and less time on reformatting and adjusting current year budgets.

Cons

• Proposition A proposes a change in the budgeting process, but does not provide any certainty that it will result in fewer budget deficits or a more rational allocation of scarce resources. It is a process change only, not a restructuring of our budget and spending priorities.
• The two-year budget requirement sounds good, but in practical terms means very little. The rolling budget process still requires annual reevaluation and allows annual reappropriations as long as they are in conformity with the five-year financial plan, so this measure does not significantly change the budget process.
• This measure relaxes the requirements regarding the availability of City funds to make outstanding payments. Currently, the charter requires that sufficient money not required for another purpose exist to meet the obligations of proposed contracts or agreements, but this amendment revises that standard. Proposition A would allow mere projections of revenue – not real existing funds – to be considered a sufficient provision to cover obligations. While this may provide greater flexibility to enter agreements for important City services and to make payments for services, it also could create severe economic impacts and constrain the City’s cash reserves if those projections are wrong because of a sudden or unexpected economic downturn.
• The measure has no impact on the current budget deficit and will not eliminate personnel or program cuts this year. Clearly, the impetus for this measure is to promote better fiscal planning and to address shortcomings and potential negative impacts during recessions. However, this measure will not reverse these effects or require action to address short-term impacts on the current fiscal year.
• Undoubtedly, revisions to the required time lines for collective bargaining agreements in advance of each fiscal cycle will have a positive impact on the City’s ability to project costs in advance of the budget process. However, the proposed language does not require reductions to overall costs in the event of revisions to the terms of an existing memorandum of understanding. The proposed measure stipulates only that mid-term revisions result in a net reduction in costs or no net increase in costs for the current fiscal year, with no mention of the biennial cycle or term of the agreement.

SPUR’s analysis

Although changes to the budget process do not guarantee lower budget deficits or decreased volatility in revenues and expenditures, Proposition A would put in place a new framework for establishing the City’s long-term spending priorities. SPUR hopes that these changes will encourage more thoughtful and rational consideration of priorities in the budget process and help streamline the somewhat chaotic annual budget process in practice in the City.

The measure also allows the Controller’s Office to propose a framework to improve the City’s financial planning and stability, incorporating strategic planning and performance measurement in a way that has been lacking in the past. The proposed measure also will instigate a conversation among the City’s policy makers about long-term priorities and the accompanying implications of their budgetary decisions.

This proposal still has a number of drawbacks. It will not directly eliminate budget shortfalls, nor is it a panacea for rational labor relations and contracts, and the provision of optimal public services.

But in spite of some shortcomings, we think these changes are a significant step in the right direction and certainly won’t make anything worse. By empowering the controller to engage the mayor and Board of Supervisors in a conversation about financial stability and sustainability, we hope this measure will lead to both greater sensitivity to the financial impacts of policy decisions and promotion of a long-term, results-oriented approach to fiscal governance and policymaking.

SPUR recommends a “Yes” vote on Proposition A.