Oakland balanced a $360 million deficit last year without any layoffs—a significant feat for a cash-strapped city. But in less than a year, the city is already rushing toward another massive shortfall, and officials are preparing for tough choices.
On Tuesday, city budget staff informed councilmembers at their Finance and Management Committee meeting that Oakland is projected to end the current fiscal year with a $177 million deficit in the general purpose fund—a pot of money the city can spend at its discretion. There are also projected deficits in several restricted funds, city accounts that can only be used for specific purposes such as public safety programs or the planning department.
The shortfall, which is estimated based on the revenues the city collected and the money it spent over the last few months of 2023, is mainly due to big drops in tax revenue. Oakland officials now anticipate the city will reach the end of the fiscal year in a few months with $169 million fewer dollars than they assumed it would when they approved the current two-year budget last June.
The most significant revenue drop is from real estate transfer tax—a levy imposed on the sale of residential and commercial properties. The city received a record amount of this tax revenue in fiscal year 2021-2022 and city staff correctly predicted there would be a drop off when crafting last year’s biennial budget. But staff didn’t foresee just how big the decline would be. The city’s 2023-2025 budget assumed a 25% decrease in revenue from this fund compared to the previous budget cycle, bringing in over $110 million in fiscal year 2023-2024. Now, officials are projecting the city will only collect $53 million, a nearly 52% drop.
“We’re at a lower volume of [real estate] transactions than in the Great Recession,” said Bradley Johnson, Oakland’s budget administrator. This trend is driven by people waiting for the Federal Reserve to lower interest rates before selling or purchasing homes. Even if this change happens in the coming months, Johnson said it would be optimistic to expect the market to “unstick” before December 2024.
Oakland is also facing shortfalls in revenue from sales tax and business licenses, the latter bringing in $9.53 million fewer dollars than the city hoped for. Business license tax revenue would have been even lower if not for Measure T, the progressive business tax approved by voters in 2022. According to the Finance Department, the city’s projected deficit would have increased by $17.8 million without Measure T.
All but one city department are spending on or under budget. The Oakland Police Department is projected to overspend its 2023-2024 budget by $25.6 million. This is primarily due to overtime shifts worked by officers.
All of this is ominous news for Oakland. In June, the City Council is scheduled to review the budget and make necessary adjustments for the next fiscal year. By law, the city must balance its budget, which means either cutting spending or finding new sources of revenue such as grants. City officials who spoke with reporters after Tuesday’s meeting weren’t prepared to discuss what options are on the table. They said the city is reviewing its services to figure out which ones are critical versus just “nice to have.”
“At the end of the day this is a huge budget gap,” said City Administrator Jestin Johnson. “We have to be honest with ourselves, to make sure the services our citizens are demanding, that we’re required to provide, those are the priority.”
Oakland departments will start tightening belts “very quickly”
Johnson has asked departments to come back with proposed service reductions to help Oakland balance its budget. None of these plans are public yet, and city staff wouldn’t share what programs or services are being eyed for the chopping block.
The city penciled out a $360 million deficit last year thanks in large part to savings from budgeted vacant positions in multiple departments. Johnson said the city still has a high number of vacancies in many departments, which could be another source of money for the city to offset the deficit. He couldn’t say whether the city will be able to achieve a balanced budget without layoffs.
Johnson added that he’s going to have departments start tightening their belts while these discussions play out.
“To be blunt, it’s going to happen very quickly,” Johnson said. “As in they may get word from me within the next few days.”
On Wednesday, Johnson sent a memo to city departments about the budget shortfall.
“The City will not be able to preserve basic and critical services absent immediate actions to reduce expenditures, preserve fund balance, reduce ongoing commitments, and increase flexibility in addressing next year’s projected deficit,” Johnson wrote.
The city is implementing a hiring freeze on non-sworn positions funded through the general purpose fund and restricted funds that have shortfalls. And the city is pumping the brakes on professional training and conference requests. Johnson said he will issue more guidance to department directors on spending in the coming weeks.
“Specifically, I will request scrutiny of all services provided by contract or grant agreement funded in the General Purpose Fund and other affected funds, to assess whether reductions to services are possible,” Johnson wrote.
Staff underscored the importance of focusing Oakland’s limited resources on core municipal services. As in most cities, Oakland spends a disproportionate amount of its general fund on police and fire services. During the last budget cycle, police received an increase in funding while some departments cut their budgets. OPD was supposed to reduce its overtime, however, as in previous years the department spent significantly more than it should have.
The pandemic also forced Oakland to take on responsibilities that are normally handled by the county government, such as healthcare outreach, expanded nutrition programs, and more homelessness services. Oakland received $188 million in COVID relief dollars to help, but that money is long gone.
Now, the city wants to scale programs back to what Oakland can sustainably fund. As an example, Johnson said there were grants to community-based organizations that supported city services during the pandemic on healthcare-related issues.
“Those are necessary and critical CBO partners, but we no longer are in a public health emergency, and while they may do good work broadly, we need to come back to, again, the core services the city would be doing,” said Johnson.
An open question is whether Alameda County can help Oakland weather the fiscal storm. The county received over $324 million from the federal government, which distributed cash to cities, counties, and states during the peak of the COVID-19 pandemic. It’s unclear how much COVID relief money the county still has, or whether it could use any to support Oakland through the deficit.
“That’s a conversation we’re always welcome to have with the county,” Johnson said.
Councilmembers and unions caution against layoffs
Council President Nikki Fortunato Bas said there are “opportunities and challenges” as the city prepares to adjust the budget. Bas, who played a pivotal role in balancing the biennial budget last year, said she believes it is important for Oakland to find ways to raise funds before considering cuts that would lead to layoffs
“I want to make sure as we move forward we focus first on revenue,” Bas said during Tuesday’s committee meeting. “That has to come first and foremost before we consider any impact on our workforce.”
Felipe Cuevas, a heavy equipment mechanic and Oakland chapter president for SEIU 1021, said layoffs would worsen understaffing that is already hindering some city departments that perform critical services. He said the city is still recovering from service cuts that happened during the Great Recession in 2008, which left a lasting mark on city infrastructure.
“Nobody wants to have to go buy a new rim and tire because they drove into a pothole,” Cuevas said.
