Friday, February 15, 2008

S.F. creates wealth -- and squanders it

San Francisco Business Times - by Arthur Bruzzone

Buried in the stories about San Francisco government's massive budget expansion is another remarkable story -- about wealth creation and squandering. Reminds me of Steve Martin's prophetic line about his fictional book, "How I Turned $1,000,000 Into $1 in One Year."

You can't have a $1 billion dollar increase in San Francisco's government budget without an extraordinary increase in the city's wealth base. A few calculations from the city controller's reports will make that story clearer. Bear with me.

Let's start with taxes. San Francisco property tax revenues have increased from $527 million in 2003 to a projected $952 million this fiscal year. That means the assessed value of San Francisco's real estate base has increased from $46 billion to $83 billion in the same period - that's practically a doubling of assessed real estate value and wealth in the city. (Prop. 13 significantly limits assessed value and property taxes -- so wealth creation for real estate owners in San Francisco was dramatically higher during the period.)

The story is the same when you look at the city's property transfer taxes. These are taxes paid by owners for property sold or transferred. They increased from $71 million in '03 to $123 million last year. Using an average tax rate of $3 per $500 of property sold or transferred, you can see the staggering increase in value of property transferred --from $11 billion in 2003 to $20 billion in the last fiscal year.

The point is, private individuals and institutions have done quite well in the last five years. And so has city government.

You might and should ask, with such an increase tax revenues, why do we have a projected $220 million budget deficit? Give credit to the powerful government workers unions. In recent and very quiet negotiations, the unions were able to ink a 24 percent increase in salaries and benefits over the next four years. That's double the projected rate of inflation and most private sector agreements. Salaries of city workers consume more than 50 percent of the general fund revenues. It's one reason why San Francisco's budget exceeds that of all major cities based on population.

There was a time when negotiations with the government workers unions were filled with high drama. Not this time. The final settlement was reported briefly without fanfare or objections. The supervisors didn't complain; the unions are the most powerful lobbyist at City Hall. The taxpayers didn't squawk. They figure that's the price to live and work in San Francisco.

But in the current environment, with property values crashing elsewhere, sales of existing property down significantly here, and with mega-financing of sales and acquisitions of real estate in a major decline, there's at least sound reason for concern. The city's government has spent nearly every last dollar of the increase in revenues. So any significant shortfall in revenues from real estate values and transfers could create a fiscal crisis in San Francisco that will dwarf the current $220 budget deficit. Then, we'll have some heated union negotiations. And those who we should hold accountable -- the current mayor and board -- may be long gone.

Art Bruzzone is president of BSI Capital Group and hosts Comcast's "San Francisco/ unscripted."