The Oakland City Council’s Finance & Management Committee will hear a report from City staff this afternoon that contains a stark warning: without timely action to curb spending and bring expenditures in line with projected revenues, the City of Oakland could face a $62 million shortfall by the end of this fiscal year on June 30.

The informational report details the financial results of the fourth quarter of the previous fiscal year (through June 30, 2020) and projects General Fund revenues and expenditures for the current fiscal year 2020-21 based on first quarter trends. The report does not address projections for the next two-year budget cycle (FY 2021-23), which will be presented in early 2021.

The report shows that the City ended the last fiscal year (FY 2019-21) with a General Purpose Fund shortfall of $30 million. This significant shortfall puts the City at risk for severe fiscal stress if not addressed. In addition, preliminary FY 2020-21 first quarter data indicates this shortfall is widening. If no fiscal corrective action is taken, by the end of FY 2020-21, analysts project a shortfall of $62 million in the General Purpose Fund, an amount that represents nearly ten percent of the City’s core expenditure fund.

The FY 2020-21 year-end forecast is based on three months of economic data, which will be revised and revisited as more data is received. Though the data is preliminary, and the report paints the “do-nothing” scenario, staff warn that the growing and significant projected shortfall points to the urgency and necessity of acting quickly and aggressively to mitigate a growing fiscal crisis.

The primary reason for this unprecedented shortfall is the devastating impact of COVID-19 and the shelter-in-place orders largely in effect since March 2020. These necessary actions to curb the transmission of the virus reversed the State of California’s robust pre-COVID growth, sending unemployment rates to levels not seen since the Great Depression. Like cities and counties across the country, the impact of COVID-19 severely weakened Oakland’s economy and City revenues in FY 2019-20, and appears likely to have continued impacts through FY 2020-21 and beyond.

Between February and June 2020, the unemployment rate in Oakland increased nearly five-fold, from 3.4% to 15.7%. By September 2020, the City’s unemployment rate had improved to 11.5% but remained well above levels seen in recent years. Tourism and business activity declined in parallel with employment losses. The City’s real estate markets have also been challenged in the wake of COVID-19. Gross sales of properties under $100 million of value dropped by 10% in FY 2019-20 relative to FY 2018-19. Construction activity from projects begun in prior years continued through the pandemic but some significant proposed projects were paused, most notably a $900 million, 29-story headquarters for Kaiser Permanente intended to house 7,200 employees.

These broad declines in economic activity have had substantial impacts on the City’s revenues and near-term fiscal outlook. Real Estate Transfer Taxes, Sales Taxes, and Transient Occupancy Taxes (hotel taxes), among other revenue sources, have been impacted by sharp declines in the broader economy. Simultaneously, Oakland’s residents’ need for City services have dramatically increased in the face of income and job losses. In addition, heightened levels of gun violence, civil protests, and fire-related emergencies have strained the City’s public safety capacity and contributed to increased overtime expenditures.

As the report details, the most significant source of increased spending is attributed to Police Department non-reimbursable overtime, which was $35 million at the end of the last fiscal year. OPD issued a separate Information Memo detailing the reasons that OPD exceeded its overtime budget last year. As the City Auditor concluded in her 2019 Report on Police Overtime, the Police overtime budget continues to be underfunded and has not taken historical spending patterns into consideration when the balanced budget is developed.

The City budget has two funds that are designed to shield the City from periodic economic downturns and to be used in case of an emergency (such as an earthquake or firestorm): the Vital Services Stabilization Fund and the mandated 7.5% General Fund Emergency Reserve Fund. Last spring the entire balance of the Vital Services Stabilization Fund ($14.65 million) was appropriated to plug a budget shortfall caused from the COVID-19 crisis. The General Fund Emergency Reserve Fund currently has a balance of $48.31 million, which is equivalent to one month of General Purpose Fund budget. The Government Finance Officers Association (“GFOA”) recommends maintaining unrestricted budgetary fund balance in the general fund of no less than two months of operating expenditures (16.7%).

Like local governments across the nation, Oakland faces unprecedented challenges to its economic condition and fiscal outlook from the global COVID-19 pandemic. The decline in economic output that accompanied the pandemic was swift, in contrast with the more gradual downward trends associated with past recessions, and the City had little time to prepare for revenue losses. In addition, the time frame for recovery of the City’s revenues remains uncertain, as actual revenues continue to fall short of projections made in earlier periods. Much uncertainty remains on the trajectory and timing of this public health crisis.

One thing is certain: City leaders must act quickly—in partnership with labor and our community—to address the unprecedented, looming $62 million shortfall. The informational report being heard today is intended to communicate the scope and severity of the potential shortfall and does not propose specific recommendations. Significant cost-cutting measures are inevitable and will be presented to the City Council for consideration and authorization in the upcoming weeks; these could include significant service reductions.