Budget and Appropriation Committee continues hearing after six‑month report shows $115M shortfall and $98M departmental surplus

The Budget and Appropriation Committee of San Francisco County on March 5, 2025 received an update from the Controller’s Office on the city’s six‑month budget status showing an estimated current‑year net revenue shortfall of about $115 million, a department operating surplus of about $98 million and a two‑year projected shortfall reduced by roughly $36 million to about $840 million. After discussion, the committee voted 4‑0, with one member absent, to continue the hearing to the call of the chair.

Michelle Eller Smith of the Controller’s Office summarized the report and its drivers. “We are improved from our prior projection by about $36,000,000 which reduces our 2 year projected shortfall by a like amount, so to $840,000,000,” she said. She told supervisors the report updates revenue projections and midyear department operating results and incorporates the full population of assessment appeals filed for tax year 2024.

The report separates a revenue story and an expenditure story. On the revenue side, the Controller’s Office flagged assessment‑appeal refunds, weakness in business tax related to the passage of Proposition M in November, a continued soft hotel tax after a slow summer, and weakness in sales tax receipts. The office also noted offsetting positive items, including an estimated $18 million gain from stronger interest income and stronger real property transfer tax activity. For hotel tax, staff reported a cash decline of about 11 percent in the first half of the fiscal year and said staff are assuming the year will close around down 5 percent, reflecting stronger January–February collections.

On the department side, the Controller’s Office reported about $98 million in net operating surplus citywide driven largely by higher revenue at the Department of Public Health and by salary savings across departments. Eller Smith said hiring freezes and earlier mayoral midyear actions to hold certain expenditures in reserve contributed to those savings. She noted Laguna Honda Hospital remains below budget in admissions as staffing refills are paced after a prior decertification issue.

Supervisors sought clarifying context about why the city could show an improved fund balance even as some revenues are down. “Revenue is down, but we have a net surplus and an improved fund balance,” Supervisor Walton said. Eller Smith explained the six‑month report examines current‑year departmental actions and one‑time revenues and savings that were not captured in the earlier multi‑year forecast.

Committee members also discussed federal uncertainty and litigation risk. Vice Chair Matt Dorsey said the report’s baseline assumption that federal revenues remain unchanged could be risky. “I note that your presentation says that we’re assuming no changes from the federal government,” Dorsey said, and asked whether a closed session or further advice from the city attorney would be appropriate given pending litigation. Deputy City Attorney Brad Russsey replied that closed sessions on pending or anticipated litigation require identification of the litigation under the Brown Act and that staff would need to advise the committee on whether closed‑session rules apply.

The Controller’s Office reviewed reserves and contingency balances. The report shows the city spending about $75 million of reserves in the current fiscal year plus a $0.5 million use of general reserve, and a planned use of about $63 million of reserves in the budget year. Eller Smith described existing sector‑specific reserves, including a Public Health revenue management reserve set at 5 percent of net patient revenue to help manage entitlement and reimbursement volatility.

No members of the public spoke during the public‑comment period for this item. Chair Connie Chan moved to continue the hearing to the call of the chair; the motion was seconded by Member Walton and passed on a roll call vote: Dorsey, aye; Engardio, aye; Walton, aye; Mandelman absent; Chan, aye. The committee did not take additional formal action on budget policy at the March 5 meeting; members indicated they expect the mayor to introduce a proposed budget and may return to these items in subsequent hearings.

The six‑month report and accompanying slides are part of the official file and were submitted by the Controller’s Office. The committee indicated it will coordinate with the Controller’s Office and the city attorney on follow‑up briefings about federal funding risks and litigation implications that could affect revenue assumptions and reserves.