San Francisco, Epitome of the “Everything Bubble,” Faces Fiscal Chaos. Boom-and-Bust, Always. Now is the Bust

Via Wolf Street

“I’ve stopped defining worst-case scenarios because they keep getting worse every week”: San Francisco’s controller.

By Wolf Richter for WOLF STREET.

The lockdowns have created a fiscal nightmare for states and cities. But few major cities have gotten slammed as hard as San Francisco, whose single most important industry – tourism, including travel for leisure, conventions, and business – has essentially shut down and whose tech and unicorn startup sector has been laying off people in large numbers — a trend that started last year.

Uber, one of the largest employers in San Francisco, has been laying off people starting in 2019. Numerous startups have shut down or trimmed down before the lockdowns happened. Charles Schwab has been shedding staff in the City for a while and last November announced that it would move its headquarters to Texas. Macy’s announced at the beginning of February that it would shut down its tech center, the headquarters of macys.com, and lay off 1,080 people who’d been engaged for years making its ecommerce business a success. So the writing was on the wall.

Then in February, tourism plunged as travelers from China disappeared and as conventions were cancelled. The city is aggressive in extracting money from tourists at every twist and turn, including hotel taxes and rental car taxes. Since the lockdowns and travel restrictions came into effect in mid-March, tourism has practically died. The hotel industry alone employed about 25,000 people in the City.

The lockdown has pushed the unemployment rate to 12% when the household survey data was taken in mid-April, the worst level in recorded history, and much higher by now.

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San Francisco, a city of about 883,000 people, has a gigantic budget of $12.2 billion in the fiscal year that is now ending, up a gigantic 11% from a year earlier, and up a gigantic 85% from ten years ago (2009/2010). San Francisco has been swimming in money. It was a boom town with booming business, booming tourism, booming population, booming jobs, booming home prices, booming homeless crisis, booming everything.

San Francisco embodied the Everything Bubble in its ripest form – including the starkest-ever wealth disparity. And the Everything Bubble burst on so many levels it’s hard to keep your sense of humor about it.

The City faces a $1.7 billion hole in its budget over the next 26 months, and “there’s a risk that even that $1.7 billion dollar number is too optimistic,” San Francisco’s controller Ben Rosenfield told the San Francisco Chronicle in an interview.

“I’ve stopped defining worst-case scenarios because they keep getting worse every week,” he said.

That $1.7 billion hole is based on some assumptions that may be too optimistic, including being able to further flatten the curve of the corona virus while re-opening the economy safely and bringing it to some sense of normalcy. Those are the projections baked into the $1.7 billion budget hole.

If revenues come in 5% lower than projected, the City can expect a $2.1 billion hole in its budget, Rosenfield told the Chronicle.

If the recovery is “W-shaped,” tripped up by another major virus outbreak and another economic swoon, the City can expect a hole of $2.5 billion.

The hotel tax alone generates about $100 million a quarter in revenues, but it could be down by 90% this quarter, Rosenfield said.

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Sales taxes have plunged because people aren’t eating out and spending money in stores. And the City’s massively aggravating profit center focused on parking and collecting parking fines has taken a big hit as parking is now easy to find.

Hotel taxes, sales taxes, and parking revenues – “Those are the ones we’ve really seen falling off the cliff immediately,” Rosenfield said.

Other tax revenues will shrink over the long-term, he said. This includes property taxes assessed on office buildings, whose prices are expected to fall, and business taxes as companies are cutting staff, leaving the city, or shutting down.

The whole budget process has been delayed by two months to give people some time to sort through the impact of the crisis. The budget cuts that Mayor London Breed already instructed department heads to implement – 10% for fiscal 2020-21 and another 5% for the following year – cover only 25% of $1.7 billion hole, Rosenfield said.

And the other 75%? “That’s the rub,” he said. Next steps include raiding rainy-day funds and delaying capital projects and equipment purchases. And that won’t suffice either. Then come deeper cuts and raising taxes.

Additional cuts, according to Rosenfield, could include those that have been implemented during the last crisis in 2009, such as reduced street-cleaning, shorter hours at museums and recreation centers; reduced health services, slowing or suspending police academy classes, reducing the number of fire stations in operation at any given time; slowing the (already glacial) pace of repaving streets, etc.

“I’m not the one who will be making the hard choices — that will be the mayor and the Board of Supervisors,” Rosenfield said.

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The economy isn’t expected to recover until 2023 and employment might take even longer to recover, Rosenfield told the Chronicle. And the economic future of the City is unclear, he said. This includes the impact of working from home that would reduce the contribution from the tech industry, which had been such a huge driver in the City. And how long will it take before the conventioneers and tourists come back in large numbers, as people fear packing into venues, hotels, and restaurants?

San Francisco is a boom-and-bust town, always swinging from one to the other. The boom has lasted a decade, the longest boom since 1945, even longer the dotcom boom. And now, there’s inevitable bust.

The interview with Rosenfield was conducted before the looting erupted that led Mayor Breed to impose the 8 p.m. to 5 a.m. curfew that has now been extended “indefinitely.” This adds another dimension to the challenges and “worst-case scenarios” the City faces.

A near-real-time roller-coaster of home sales during the pandemic via charts. Read... From Ice-Cold to Hot: Daily Pending Home Sales in May so Far, 15 Cities Around the US

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