OAKLAND — City officials may have resolved a historic budget deficit last summer without layoffs, but the core problems involved haven’t gone away.
Oakland is forecasting a $177 million operating shortfall by the end of the current fiscal year in June, with officials warning in a report that “most of the City’s revenue sources are trending downward” and won’t come near the projections laid out in the current two-year $4.2 billion budget.
Of all the revenue sources currently falling short of expectations, the most significant stream identified by officials is from a tax on property sales — a consequence of fewer homes changing hands in Oakland, likely due to high interest rates.
This is nothing new, given that a lag in real-estate transfer tax revenue compared to projections was the major component behind last year’s $360 million deficit.
It is yet another fiscal challenge for Mayor Sheng Thao, whose current budget plan — approved last June by the City Council — merged some departments and left numerous city staff positions unfilled, avoiding layoffs in the process.
And it continues a series of structural financial struggles within Oakland, as well as the city’s embattled school district, as they adjust to life without federal COVID-19 relief funds that kept many local governments afloat during the pandemic.
The new report — finalized by City Administrator Jestin Johnson and set to be presented next Tuesday to a committee of City Council members — is based on revenue totals from this fiscal year’s second quarter, which spanned October through January.
The Oakland Police Department, which historically has accounted for a significant chunk of the city’s budget, is this budget season’s biggest over spender, expected to exceed its budget by $28 million.
Much of the excess comes from officer overtime, especially in OPD’s special operations division, which the report attributes to a heavy investigative workload for sergeants and the time it takes to fill out paperwork to document deployments of military equipment and use of force by officers.
“Overall, the department remains committed to addressing violent crime while managing overtime expenditures and administrative burdens across different areas and units,” the report states.
But a bigger problem is revenue. The city’s sales tax is now expected to fall short of earlier projections by nearly $5 million, the business license tax by by $9.5 million, and miscellaneous revenues by almost $6 million.
Those pale in comparison, however, to the real-estate transfer tax, where revenue has plummeted so low that the latest forecast indicate returns being $57 million short of what was budgeted — enough to account for 68% of the current projected deficit.
“The last time that (the tax) had a comparable drop to the one experienced over the past couple years was during the great recession of 2008,” the city report states.
The first two years of the pandemic appeared to have little negative impact on surging home sales, leading to a peak in July 2021 when real-estate transfer tax revenue was higher than at any other point in the 21st century.
City officials in 2021 projected relatively high revenues from real estate transfer tax revenue, not anticipating how rapidly it would fall off after the Federal Reserve sharply raised interest rates to combat sky-high inflation. The misfire contributed to last year’s historic deficit.
They appear to have made the same mistake again, projecting last June that the tax on home sales would yield $110 million in revenue this year — only to be off by 51%.
“The reality is it should’ve been forecasted properly,” said Spencer Hsu, a Bay Area real-estate expert. “It was not unexpected that there would be significantly less transactions (the past two years) than in 2021.”
The city projects the coming 2024-25 fiscal year to bring $124 million in revenue from the tax, a prediction that once more bets on a rebound in the housing market. Bay Area home sales did tick up in the first two months of the year, but they’ve largely struggled since mid-2022.
Staff writer Kate Talerico and the Associated Press contributed to this story.