October 2001

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Guest Commentary 

Nathan Nayman is executive director of the Committee on Jobs, a San Francisco business group that commissioned this study. Copies of the study are available at www.sfvotewatch.com, or by calling (415) 956-9966.

SAN FRANCISCO — The state of San Francisco’s economic and fiscal health is a mixture of good and bad news, according to a study commissioned by the Committee on Jobs, a coalition of the City’s largest private employers.

The good news is San Francisco replaced all of the jobs it lost in the last recession, and then some. On average, San Franciscans are better off financially than they were five years ago.  The bad news is the City is at risk for deficits if it continues the habitual spending increases of the last five years.

The new study, San Francisco’s Economic Growth 1995-2000: The Fiscal Health of the City & Implications for the Future, was conducted by Philip King, professor of economics at San Francisco State University.  The study shows the economic boom of the last five years created more than 75,000 new jobs, boosted the average City household’s income by 15 percent and flooded the City treasury with nearly $700 million in new annual revenues.  But it also indicated the boom times are in decline, and revenue collections in some areas, such as the property transfer tax and hotel tax, are already falling.

The City government’s fiscal health also is a mixture of good and bad news.  The study shows that during the last five years, the strong economy provided enough revenue to restore funding cuts to MUNI, bolster the Public Health Department budget and begin to tackle crucial capital projects, such as the repair of the City’s 100-year-old water system and expansion of the City’s International Airport.

But with the economy cooling, the City can’t continue to increase spending at the same rate.  Between 1991 and 1995, General Fund revenues grew by 11 percent, while expenditures only grew by 3.5 percent.  Between 1995 and 2000, however, revenues grew by 41 percent, while expenditures skyrocketed by 39 percent.

During the last 10 years, the City added 4,000 new employees so that San Francisco now has more than one-and-a-half times as many municipal workers per capita as Santa Clara, San Diego or Los Angeles.

Still, City government can pilot San Francisco to a fiscal “soft landing” if it holds the line on new spending and emphasizes efficiency, the report says.

Some of San Francisco’s elected officials have a conflicted attitude toward business and the recent economic boom. They characterized the growth in high-tech jobs in completely negative terms – focusing on high rents and displacement.  At the same time these same officials have spent nearly all of the tax revenues these jobs created, much of it on a ballooning bureaucracy.

The Committee on Jobs’ study attempted to measure the recent economic boom’s impact on job growth, income and tax revenues.  The study found that total City income grew by a staggering 17.3 percent in inflation-adjusted dollars over the last five years.  And while much of the media attention focused on so-called “dot-com millionaires,” the study found that the strong economy and tight labor market pushed mean hourly wages for many service jobs well above the City’s “Living Wage” law for City contractors.

Strong economic growth during the last 10 years – and concentrated mostly in the last five – swelled the City treasury at an unprecedented rate.  Last fiscal year, the City collected about $1.7 billion in taxes, fees, fines and assessments from businesses, residents and visitors, an increase of 62 percent over 10 years ago.

The study shows that, while a strong economy and increased tax revenue helped bridge the City budget deficits of the early 1990s, the City must reign in spending to avoid deficits in the next three years.

Over the past 10 years, San Francisco’s population grew by just 6 percent, the private sector workforce grew by 7 percent, household income grew by 59 percent and tax revenues grew by 62 percent. Yet General Fund spending grew by 52 percent, or 67 percent when key capital projects and debt are factored in. General government expenditures are up almost $1 billion over 10 years.

Adjusting for population growth, San Francisco’s per-capita City government spending grew by 29 percent over five years; a rate greater than both state and federal government spending combined. California’s per-capita spending grew by 18 percent and federal per-capita spending grew by 10 percent.

If San Francisco continues to spend at the same rate as the economy softens, the City can expect a return to the type of projected budget deficits it experienced in the early 1990s.

Other findings about revenue include:

• The largest source of local revenues is property taxes on commercial and residential property. The City collected $544 million in property taxes in 2000.

• The City’s Payroll Tax and Business License Fee are the second largest source of revenue, providing $267 million in 2000.

• Businesses pay 63 percent of locally collected taxes, or about $682 million, with resident and tourists paying the rest. Of the total, local businesses pay about 53 percent, or $576 million, with out-of-town businesses and business travelers accounting for 10 percent, or $106 million.

• Taxes levied on local business include property taxes, the payroll tax, business registration fees, utility users fees, property transfer tax, sales tax, franchise fees and several other types of use taxes.

• The average San Francisco job generates about $1,123 in business taxes collected by the City per year.

Other key findings about economic growth:

• San Francisco’s technology boom fueled job and income gains in numerous other industries.  In particular, employment in San Francisco’s high-wage construction industry surged by 25 percent between 1995 and 2000. During the same time, the City issued a staggering $4.5 billion in commercial building permits.

•  While San Francisco firms of all sizes added jobs during the last decade, most of the job growth occurred in mid-size and large companies, which added more than 66,000 jobs during the last six years.

• Employment in San Francisco is fairly evenly distributed among small, medium and large companies.  Small firms with 1 to 49 workers employ 35 percent of the City’s private sector workers, mid-size firms with 50 to 249 workers employ 25 percent and large companies with more than 250 workers employ 40 percent of the City’s private sector workforce.

• The two most common job classifications are salespersons and general office clerks, with 33,000 and 30,000 jobs, respectively.

The reasons for the growth in spending:

• Capital Projects – New capital projects accounted for more than half the growth in city spending during the last 10 years.  Much of this spending focused on the San Francisco International Airport expansion project and voter-approved infrastructure bonds, such as the retrofit of the City’s 100-year-old water system.

• General Fund Subsidies for Priority Services – In the wake of prior service cuts and customer complaints, the mayor and the Board of Supervisors dramatically increased funding for MUNI during the last five years.  The City also doubled overall Health Department spending while increasing the Department’s General Fund subsidy from 18 to 29 percent of its total budget.

• Rich Service Mix – San Francisco chooses to deliver a variety of services that other counties don’t provide and subsidizes them with General Fund dollars when it can’t obtain federal or state reimbursement.  One example is the Laguna Honda Hospital, a county-run long-term care facility.  None of the other 49 California counties operate such a facility.  San Francisco also pays more for many services on a per unit basis, such as public health. As a result, the City spends the equivalent of $100 per month for every man, woman and child in San Francisco on public health and community services.

• More Workers – The City now employs the equivalent of 27,991 full-time employees, up from 23,736 in 1994, an increase of 18 percent. These developments should be viewed two ways:

On one hand, even taking into account San Francisco’s combined city/county structure, the City employs 150 percent more workers per resident than any other large metropolitan area in the state.  San Francisco spends more than twice per capita than both Honolulu and Denver, two of the largest combined city/county governments in the United States.

On the other hand, the City has increased the range and level of services it offers in a variety of areas.  For example, from 1995 to 2001, San Francisco added 565 new police officers, 306 health care workers, 125 Recreation and Parks department workers, 748 employees at the Public Utilities Commission and 425 employees at the San Francisco International Airport.

San Francisco’s economic boom enabled city government to fully fund needed capital projects and undertake an unprecedented restoration and expansion of municipal services.

• Generous Wages – The total compensation package for the average city worker is worth $70,644 per year; next year city worker’s salaries and benefits are budgeted to increase to $74,504, a 5.5 percent increase.  The average wage for a non-City employee in San Francisco, including wages and benefits, is about $62,854.

Adjusting for population growth, San Francisco’s per-capita general government spending has grown by 29 percent over five years; a rate greater than both state and federal government spending combined.  Over the same period, California’s per-capita spending grew by 18 percent and federal per-capita spending grew by 10 percent.

Given the direction the economy is going, San Francisco has to take a much more proactive stance toward keeping businesses in San Francisco. As a city we must look for more efficient ways to provide the services that residents need and expect.