Mayor's budget office warns of $876 million two‑year deficit; Lurie orders 15% cuts, hiring freeze

SAN FRANCISCO — The mayor’s budget office told the Board of Supervisors’ Budget and Finance Committee on Feb. 5 that the city faces an $876 million shortfall across the next two budget years and ordered departments to propose permanent spending reductions.

Benjamin McCloskey, interim director of the Mayor’s Budget Office, told the committee that projected expenditure growth far outpaces general fund revenue growth, producing an estimated $253 million deficit in fiscal 2025–26 and $623 million in fiscal 2026–27 — a two‑year shortfall of about $876 million.

The mayor’s instructions, McCloskey said, ask departments to propose ongoing, permanent reductions in general fund spending of 15% starting in FY 2025–26. The instructions also include a citywide hiring freeze announced Jan. 9 and a pause on new contracts or programs that have not yet been signed or implemented, with case‑by‑case exceptions for critical public‑facing roles.

Why it matters: the city’s five‑year forecast shows $1.7 billion in expenditure growth over five years versus $520 million of projected revenue growth. The shortfall is driven by rising labor and benefit costs tied to recently negotiated labor agreements, ongoing inflation in contracts and materials, and new recurring costs from ballot measures approved in November 2024 — which the budget office estimates add roughly $50 million annually.

McCloskey said the projection assumes modest economic growth and a 7.2% long‑term assumed return on pension investments, and it includes an assumption that FEMA reimbursements of roughly $234 million for recent disasters will be received — an outcome the city has not yet confirmed.

The mayor’s supplemental instructions, issued by Mayor London N. Lurie after the initial guidance, direct departments to fully meet reduction targets with “reasonable” proposals, said McCloskey, and to work with the mayor’s budget office on reorganizations to reduce redundancy. Departments must submit their budget proposals by Feb. 21; the controller’s six‑month report is expected later this month and will update available fund balance assumptions.

Committee members pressed staff on specifics. Greg Wagner, city controller, told the committee the six‑month report will update current‑year revenue and spending projections and alter the fund balance assumptions that feed into the five‑year plan. McCloskey and Wagner emphasized major risks: possible state or federal revenue changes, the uncertain timing and amount of FEMA reimbursements, and the effects of property‑ and business‑tax appeals.

McCloskey said the budget office will ask departments to examine community‑based organization grants and contracts, to eliminate lower‑performing programs, and to identify hiring needs that warrant exceptions to the freeze. He also repeated the calendar: department submissions are due Feb. 21 and the formal budget season begins in June.

The committee voted to continue the hearing to the call of the chair for follow‑up after the controller’s six‑month report. Supervisor Connie Chan moved the continuation; the roll call recorded Supervisors Matt Dorsey, Joe Engardio and Chan voting aye.