A Former Insider's Perspective on San Francisco's Budget | John Farrell

We want to talk to you about the budget of San Francisco. The city needs another $800 million for two years. There's a deficit. Can you tell us what's going on? Right now, the city budget is $15.9 billion. The city has 35,500 employees. Now, in 2010, there was a budget of $6.4 billion, and the city had 27,000 employees. I mean, there's been a 30% increase in positions. You know, when times are good, nobody looks at this stuff. But when times get difficult, you have to make the tough decisions, and that's the problem we're at today. My guest today is John Farrell, former budget analyst, assistant assessor, and financial director, who has extensive experience with the city of San Francisco's finances. Today, he'll give us the perspective on San Francisco's current budget deficit and offer suggestions for improving the city's financial situation. He'll also address issues like homelessness and public safety, aiming to revitalize the downtown area. When you look at it, with the 30% vacancy, you look at the foreclosures or the defaults on a lot of the loans, you look at all this and you say to yourself, what can we do? I can show where the city can pick up at least a billion or more dollars in revenue and also be able to create housing that would not affect the neighborhoods right now. Will San Francisco come back? Yes, it will. I'm Siamak Kourami. Welcome to California Insider. John, it's great to have you on. Welcome. Siamak, it's great to be here. Thank you for having me. We want to talk to you about the budget of San Francisco. We are hearing some reports that the city needs another around $800 million for two years. For the next two years, there's a deficit. Yes. So, meaning they will have less revenues compared to expenses. And San Francisco, there's been some dilemmas that the city is facing with less businesses being there. Can you tell us what's going on? Well, right now the city, the budget is $15.9 billion. And the city has 35,500 employees. Now, basically, the controller came out and said a lot of it is based on one-time expenses, of one-time funds. It's being balanced based upon $100 million in reserves, $100 million in reimbursement for the health department. The economy is slowing. There are revenues that are expected, or funds from the state and federal that might not come in. So, basically, what the controller is saying about this budget, proposed budget, is that they're just kicking the can down the road. They're not really addressing the issues that they should, which is the fundamental, the structural gap between revenues and expenses. They're not addressing the real issues. Now, if they were to address the real issues, this is what I would propose, is if you go back to, let's say, 2010, when there was a financial crisis in the country, the city and county had to tighten its belt. Now, in 2010, there was a budget of $6.4 billion, and the city had 27,000 employees. Now, in 2024, we have 35,500 employees, and we have a $15.9 billion budget. So, what I would do is I'd go back to 2010. So, everything that was added on from 2010 is on the board to be cut, just should be looked at. Now, you have to prioritize what you do. You have to make sure you're fully funded in your police, your fire, your nurses, and those types of safety. But everything else, I mean, there's been a 30% increase in positions. And I know there are departments that shouldn't even be there anymore that are basically patronage departments, that there's different levels of bureaucracy that could be eliminated. So, they're not addressing the real issue, which is the— when you look at government reform, you look at addressing waste. They're not addressing the waste. Services should be effective and efficient. They're not addressing those the way they should, and that's the key. Now, John, some people may argue that things have gotten a lot more expensive in San Francisco. Why do you think the budget has gone up? Well, you always have cost of living increases. You always have certain mandates that are provided by the federal mandates or state mandates come up. There are all these positions that you really have to go in and look at if they're really needed. And especially when—you know, when times are good, nobody looks at this stuff. But when times get difficult, you've got to really balance. You have to make the tough decisions. And that's the problem we're at today. We've had an economy that's basically because of the pandemic, because of a lot of issues with the economy over the years. I mean, San Francisco had no plan coming out of the pandemic. We were the last ones in the state to really address it. And that's killed us dramatically. Do you think this budget gap will grow because some businesses have— there's not as much retail sale. I don't know how much retail sales or housing or commercial real estate contributes to the budget. What are your thoughts on that? Well, in the comptroller's estimate, the economic recovery is very slow. You're not going to get a lot of the reimbursements from federal and state that we might not get. You look at all the property reductions. A lot of property values have gone down. Like I mentioned, 30 percent vacancy downtown. You have a lot of the major buildings are coming in for property tax reductions. I think there's 7,000 assessment appeals that have been looked at. In regard to what happens in an appeal is when somebody has a property, if it's gone down in value, a property owner has the right to go back in and get his property value reduced. So you're going to be getting hit here. Also, on all your businesses, your gross receipts tax. You have all these areas that are basically slow recovery. And also, one of the most important things the city has to do is have all revenue generating departments audit your revenues. I guarantee you they're not picking up the revenues they should. When I used to work in the assessor's office, I remember I went in there, and we picked up hundreds of millions in revenue that were missed. How were they missed? They're missed. Because what happens is now when people think of the assessor's office, you think of, OK, here's a property. I sell it. Prop 13. I put the value on what I purchased it for. Here's a permit. You know, whatever the permit is, you add to it. Now, there's areas in an assessment, one called possessory interest, where if the government leases property to a private entity, they're subject to tax. Now, when I was there, we were picking up concessions. We were picking up naming rights. We were picking up management contracts. We were picking up all these things that were missed before. And I'll give you an example of things that are missed. Now you have Mark Zuckerberg. Let's give an example. Mark Zuckerberg paid $72 million for the naming rights at San Francisco General Hospital. That's subject to tax. That's like a big billboard, OK, on General Hospital. So they paid $72 million. Now, you can go back eight years per code. So $72 million, let's say that's $800,000 a year. $800,000 a year times, what, eight years? That's $6 million, $7 million. The same thing with Transbay Terminal. Salesforce has the naming for the garden up top. They put $200 million in there. That's subject to tax. That's $2 million a year. You could go back. You know, there's hundreds and hundreds of these missed assessments. OK, that are not picking up that can be picked up. So, and then, you know, I'll give you another. This is an example I always think is kind of funny. When I was there, I went to the State Board of Equalization. Now, the State Board of Equalization, they appraise all the utility companies in the state. So I was up there talking to one of their top people about PG&E. I said, how do you appraise utility? Let's say PG&E. He said, well, we take the historic cost, less depreciation, and some revenues. And I looked at him and I said, what's the franchise fee? And he looked at me and he says, it's not there. OK. And I said, well, you know, that's the land value. The land value is the franchise fee. And what does that, that comes out to about $10 million a year to the city. And I guarantee you they're still not doing it. I think after I did that, I think they plug in a number now for the land value. But they're not doing the land value right, because what they should be doing is the land value at fair market value. Now, there's all these, like I said, there's all these properties that were missed. I remember I walked from Pier 96 down to Aquatic Park when I, you know, I analyzed the port. I mean, we were picking up, like I said, we were picking up stevedoring services, management contracts. We were picking up concessions that were missed. So those are the type of things that can be picked up that need to be audited, you know, that could bring in a lot of revenue. There's at least several hundred million dollars that are not being picked up. In those areas based on your experience. In this area, in my experience. And I would even be comfortable to say, I know where there's even probably you could get up to over a billion in revenue. And when you talk to a billion in revenue, a billion in revenue is a hundred billion in assessed value. OK, to put that in perspective, folks, you're probably been hearing me talk about verify for a while now. Verify has been getting a ton of phone calls from you. And I thank you for supporting an investment that actually helps people. A lot of people are talking about this investment. And I like to review the basics with you. First off. Yes, it's true. You can earn up to 10.25 percent fixed rate of return. That's not correlated to the stock market or to the Fed. 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We were more efficient. We got it didn't affect us. And here we have these high costs of office space. So you have companies who are going to lower leases or getting smaller spaces. And you have all these owners of the buildings with the 30 percent vacancy. They're all coming in with their property reductions. They're not going to get the high rents, the high lease rents they were getting before. They're going to have to cut, cut, cut down in order to get people back in. But the city has to make decisions on we have to give incentives back to get businesses back. Is it a big contribution from commercial real estate to the cities? When you look at, let's say, One Market Plaza, let's say $1 billion assessment. $1 billion is $10 million. That's $10 million in revenue. Now the downtown, how many buildings are like that? That goes to the city. That pays for all your, that portion goes to the schools, portion goes for the fire and our general fund. So, I mean, it's very important. That's a big hit on the city. And also with the way that with real estate is right now, you're not having people buy property. See? So what you're doing is you're not getting the transfer taxes in. So right now the city is not getting the transfer tax in. They're getting reduction in their property values with about 7,000 appeals right now. So 7,000 properties want to appeal their value. They're appealing their value. What about when buildings, so we heard this building got sold for, there was a $60 million building that got sold for $6 million. And does it mean the tax will almost drop? Well, it's justified. That's why they go for an appeal. They go in. I mean, you're justifying if it's down to six, you're going to look at whatever your cap rate, whatever your, you look at your market indicators on what it is. You have to look at what else is entailed in the sale. I mean, what type of building, it was a class A, what work needs to be done. When the price, when we see a report like that, when the price has dropped, does it mean that the city's tax on that will drop to that proportion? If there is foreclosures in the city. Well, foreclosures, a foreclosure is you still in the assessor's office. What you do is you value the property at fair market value. If it's an arm's length transaction, then you pretty much put it on what it's sold for. But when you see foreclosure, you know, there's kind of, there's duress and there's something. So you still got to do your analysis on what's the cap rate, what's the vacancy in the area, various things like that. Now, based on your experience, do you know where this $15 billion comes from? I don't know offhand. The assessor brings in about $4 billion in revenue. From real estate. Right. But the downtown is a major portion. A big part of the $4 billion is downtown. Yeah, that's it. And a lot of times is when it comes down, this is where the appraisers are so important because they're defending the value that's on the roll. Because people are coming in wanting those values dropped. And they're there to defend. Okay, now let's look at what indicators am I using now. So what is the vacancy? What are the current cap rates of other ones that recently sold? So they're analyzing to try to get the highest value they can with market value conditions without dropping it any further. Because most people when they come in, where they're appealing, they're dropping it. It's a lot lower than it should be. So there's been ideas that they want to convert these commercial towers to residential. What are your thoughts on that? Where we are in the economy right now, it's construction costs are through the roof. It's really not feasible. There's also in San Francisco, the state requires San Francisco to build 83,000 homes. Like the housing requirement. Housing requirement. Now what I hear is there's 70,000 in the pipeline. And that doesn't mean where they are in the process. They could have just got the permit started. I don't know if they broke ground. Some have, some haven't. But all of a sudden, they're stalled because now it's not feasible. It's not cost effective to a lot of developers to build these things with where we are in the economy. Because of the costs that have gone up dramatically over the last couple of years. Now you say to yourself, okay, now you can't really make them into residential. It's going to be very expensive. But a lot of times you have all these people on the streets. You need treatment centers. Why couldn't you turn one of these buildings into a, help people get off the streets, get them off the streets and treatment center? We've had 800 people die of fentanyl over the last year. You have all these poor people on the streets. You think you can't get them off, put them in a place, get them cleaned up. I mean there's all these things you can do. John, you're saying that people that have done the budget, they are using one-time items. Yes. Probably what they're thinking is San Francisco is going to come back. Do you think it will? San Francisco always comes back. But what we need, we need the leadership. We need the vision. We need the direction. We need to make the hard decisions. We need to run San Francisco like a business. We need to make the hard decisions on looking at departments that, you know, we don't need all these departments. We don't need all these commissions. We have all these things that are not needed in order to get our budget structurally sound. So will San Francisco come back? Yes, it will. When you look over the years when we had the assassination of Harvey Milk and George Moscone, how difficult, how could we get back? And what got us back was the San Francisco 49ers winning the Super Bowl in 1981. That got us back. And then you have all the things like in the 90s where all of a sudden we had another type of recession. But then you got the dot-com come in. And then all of a sudden you had the dot-com, you know, have the issue. Then you had the financial crisis where they used to give loans. I mean, they were giving loans out right and left and everything collapsed. But then we had, we did the Twitter. We've got Twitter to come in and we started getting people to come in. We had all this, the boom here. Now what they're hoping to do is you hear about AI. AI is supposed to be the big push. You've got to give the incentives to get people back into these offices. And we have to forego some of our current revenues in order to get those revenues in the future, in order to make San Francisco the great city it is. Why do you think San Francisco comes back? There has to be something in the characteristics of the city or the people. Why do you think it's able to come back? They're fabulous neighborhoods in the city. You have Westport, you've got the Richmond, you've got the Castro. You've got all these vibrant neighborhoods where people love their communities. This is what makes San Francisco, the communities. What we've got to focus in on is we've got to focus in on, like you say, the downtown. Now here we are. It's pretty much a disaster when you look at it. With the 30% vacancy, you look at the foreclosures or the defaults on a lot of the loans, you look at all this and you say to yourself, what can we do? Well, the first thing we've got to do is we've got to clean the streets. If the taxpayers see this, businesses are going to see this. When you get clean streets, people want to go to the stores. If you have restaurants and people are out front sleeping, people don't want to go back. We want to tell people, hey, we're back. We're cleaning our streets. We clean it for our taxpayers. We clean it for our visitors because we're proud of our city. What that shows is you're proud of your city. John, you were mentioning some neighborhoods are doing much better. Yes. Neighborhoods are doing pretty well. Yes. But the downtown situation, have you heard from you guys? Do you guys not want to go to downtown because of the way it is? Over the years, it's like when they did Union Square. They took away a lot of the traffic, a lot of the parking. You couldn't drive down there. Slowly, things were happening there. Now, when you go down, people are stealing from the stores right and left. People are coming in. Imagine going to a store, you're going to buy something. All of a sudden, people come in and rush in and start stealing stuff. It got to the point where people know when the trucks are being delivered with the goods. Once it's delivered, they rush in and get it. People don't want to be around that. They want to go somewhere where they feel secure. They don't want to be hassled. In terms of the people in San Francisco supporting the Union Square, do you think San Franciscans do enough to support their own center or is it relying on tourism and the government? A lot of it, you had the Brookfield Mall that was down there with Nordstrom and all this, which was doing very well until all of a sudden people got turned off by the dirty streets. It's like our tourism. A lot of the major corporations decided not to come to San Francisco because they don't want to be in the dirty streets. See, if we show that we clean streets and we've got public safety, you get the tourism back here. You get people to come back in. You get the word of mouth. If the leaders of San Francisco came to you today and told you how would you fix the city's problems, what would you do? If I was to fix the city's problems, first what I would do is I would do the zero base budget going back to 2010. And with what I know, there's so many things I would do. One in particular, let's say you have Treasure Island out in the bay. Now Treasure Island, the only way to get there is by car or a bike. Now you have BART that goes right by Treasure Island. The only reason they don't have a station there is because of the security of the Navy at the time. What you do is you get the station out there. Then you have a viable development, not like you have right now where you've got to come in with a bus. You have a viable development which takes you to Heggenberger and the East Bay down to SFO. These are the things you look at for a vision. I also have another vision where I know where you could build in the city without affecting all the neighborhoods. I have a vision on that. When the next mayor comes in, I'm going to show them where I know over the years there's been a lot of political people who've made decisions that were not in the best interest of the city, and I know what they are. I can show where the city can pick up at least a billion or more dollars in revenue and also be able to create housing that would not affect the neighborhoods right now. If the right person gets in... You will share with them? Yeah, because I've tried to share in the past. I've gone to a lot of these over the past years. I've gone to... Like I said, there's hundreds of millions that aren't being brought in, so I've told Mayor Breed that. I've told mayors in the past. I've told supervisors that. Nobody ever says, well, John, where is it? Oh, yeah, we know where to run, right? No. I gave you examples on where they are. They're not bringing in the revenues. You would think that if you're in a position running a city and somebody says you're not bringing in the revenues, you'd say, okay, tell me, show me where it is. Okay? If I'm missing revenue, let me know where it is. You think somebody in business, if you went to a business person and said, you know, we're missing revenues over here. Oh, let's go get them. What do we need to expedite? What do we need to streamline? If we're not picking up revenues, show us where so we can get them. And now, John, a question for you. You know, we have been covering a lot of California, different California cities and the whole state, and we have really beautiful places in California. Why do you think San Francisco has become, with only 800,000 people, this financial hub? What are your thoughts? Why do you think San Francisco is such a strategic place? Well, it's the connection with the Pacific Rim, the connection with the East. You have all the connections here. When you see San Francisco, everybody in their heart, you know, when you say, I left my heart in San Francisco, it's a city where you come to and it's just, you fall in love with everything that's here. It's 49 square miles. But when you look at all it provides, it's a melting pot of the world. I mean, everybody's welcomed here. I mean, it's just fabulous. When you look at all the history, when you go to the Victorians, you have all these welcoming neighborhoods where people come in where you've still got the corner grocery stores or you've got just the shops that, you know, it's such a welcoming place. John, you seem very passionate about your city. Where does it come from? I'm passionate about my city because, you know, I'm a fifth generation. I have my two daughters here. San Francisco is the most beautiful city in the world. I've been to many places. I've been to many countries all over the world. I've been all through Europe. I've been through Mexico. I've been through Canada. And, you know, when you come home and when you look at just the beauty, when you look at that Golden Gate Bridge with the magic, when you come around, when you come to the Presidio, when you come to the Fisherman's Wharf, I mean, it's just a magic in the air. It's just a magic when you walk around and you just, you see some of the beautiful architecture. And you meet some of the most wonderful people here. And I know you meet wonderful people all over the world. But I mean, I think if you ask most people in the world where they'd like to go, you know, one of their destinations would be San Francisco. If it wasn't for what they've heard over the news, you know, over all the negativity because of… We have to do a good job covering the positive side too. Yeah, you do. You do. You've got wonderful restaurants. You've got wonderful people. You've got wonderful neighborhoods. Every mile in the city, there's a city park. You know, you have, I mean, we're so blessed. We've got the beach. We've got the beautiful architecture. We've got the Golden Gate Park. I mean, it's just absolutely fabulous you go through there. I mean, you have everything you want. If you thought of a magical city in the world, I would say San Francisco. John Farrell, former budget analyst and assistant assessor and real estate expert. It was great to have you on California Insider. Thank you for giving me the opportunity, and it's been an absolute pleasure. Thank you.