Bay Area Financial Crisis: Oakland
Like San Francisco, the Bay Area City of Oakland is facing major budget woes. Mayor Sheng Thao’s proposed budget for 2023-25 released last month reveals the city is facing a $360 million shortfall, the largest budget deficit in Oakland’s history.
The proposed budget for FY 2023-24 and 2024-25 plans for total expenditures of over $2.1 billion each year. This is a roughly 120 percent increase in total spending compared to ten years ago when FY 2013-14 total expenditures amounted to $958.4 million, according to audited financial statements.
The Mayor and City Council are trying to juggle cost-saving moves, like department cuts and consolidations, with costly expansions of certain programs. For example, Mayor Thao plans to combine the Housing and Community Development Department with the city’s Community Homelessness Services program, and merge the Planning and Building Department with the Economic and Workforce Development Department, among other consolidations. Furthermore, the budget says the city plans to freeze hiring for 300 city positions that have remained vacant for “sustained periods of time,” as well as delay the rollout of a new fire engine. The Oakland Fire Department is relying on a $27.4 million grant from the Federal Emergency Management Agency to cover staffing costs.
A budget outlook report released by the city’s finance director last month says that departments were given “balancing targets” for their funds, with instructions for increasing service fees and decreasing ongoing expenditures where possible. Departments were also “asked to propose their lowest priority services for reduction or elimination.”
At the same time, the proposed budget allocates $200 million of new spending for affordable housing in the form of bonds (meaning debt) approved by voters. It also calls for a major expansion of Head Start programming, upgraded cybersecurity protections, and a new Department of Children, Youth & Families.
In addition, the budget allocates $213 million to build, repair and upgrade parks, recreation facilities, libraries, storm drains and non-road infrastructure, and $73.9 million over the next two fiscal years for citywide street resurfacing.
The budget crisis has compelled Oakland’s leaders to put one of their new city programs on hold, forcing them to reckon with the results of their financial mismanagement. In November 2022, Oakland voters approved an outlandish city program called “Democracy Dollars.” The second U.S. city to introduce this program behind Seattle, the Democracy Dollars program distributes public funds to residents in the form of vouchers they can use to support a candidate running for local office. But the recent Oakland budget proposal states: “The City at this juncture due to the fiscal emergency cannot fully implement the Democracy Dollars program, and as such has delayed full implementation until the following Biennial Budget cycle.”
Oakland’s largest expenditure category is “Personnel & Overhead,” which comprises salaries, fringe benefits, and retirement funds and accounts for more than half of total spending. Oakland’s current budget proposal allocates Personnel & Overhead spending of $1.08 billion for FY 2023-24 and nearly $1.14 billion for FY 2024-25. These cost projections are based on current memoranda of understanding (MOUs) with the various public sector unions representing Oakland’s employees. When new contracts are negotiated between unions and Oakland’s public agencies in the future, it will change — and undoubtedly increase — the city’s obligations for employee compensation and benefits.
When it comes to swelling state and municipal budgets, salary and benefit growth is almost always a major driver, and public employee unions are the primary actors contributing to these financial predicaments. Employee union contract agreements can impose significant challenges for a city’s year-to-year budgeting process. Oakland is obligated to add $1.6 million to the FY 2024-25 budget to fund the conversion of some part-time positions to full-time; This requirement comes from the MOU between the city and SEIU Local 1021. Yearly cost-of-living salary increases, also dictated by MOUs, must also be accounted for each budget cycle.
While the city’s leaders may be able to juggle revenues and expenses in the short term, Oakland will continue to face major deficit dilemmas every budget cycle unless major reforms are instituted. The question is whether Oakland’s officials are willing to design and enact such reform.
Public finance expert Mark Moses writes in The Municipal Financial Crisis that, despite the writing on the wall, “the municipal financial crisis will not inspire, scare, or shock municipalities into achieving financial stability.” Moses warns that city leaders must confront the mindset that got them into trouble in the first place. To do this, they must “challenge mistaken assumptions, acknowledge what local government is, respect residents’ individual need for autonomy, curtail vague decision-making standards… and take responsibility for all consequences of their decisions.”
Whether Oakland’s officials have the tenacity to ask these hard questions is doubtful. Until the government employee unions are reined in, the city will likely have many more years of fiscal hardship.
Sheridan Swanson is the Research Manager at California Policy Center.