Yahoo Finance

(Bloomberg) — San Francisco is projecting a $876 million budget shortfall over the next two fiscal years, prompting Mayor London Breed to instruct city departments to plan for 15% across-the-board spending cuts.

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The deficit, which will define much of Mayor-elect Daniel Lurie’s tenure, comes as San Francisco is contending with a sluggish recovery of its hotel and business tax base, with rising expenses that outpace revenue.

The incoming administration of President Donald Trump and a Republican-controlled Congress have also cast a cloud over the city, which is waiting on $244 million in outstanding federal disaster-relief funds that could be withheld, according to budget documents released on Tuesday.

Trump’s policies will have “unknown future impacts” on the city, a budget summary released by the mayor’s office said.

Lurie — a nonprofit founder, Levi Strauss & Co. heir and political outsider who takes office in January — said in a social media post that the budget deficit is “a crisis that we must face head-on, and it will require us to make difficult decisions.”

San Francisco’s forecasts include an estimated $40 million reduction in hotel tax receipts for fiscal year 2025-26. Additionally, the city is expecting a $705 million jump in expenditures in the fiscal year ending in 2027, driven largely by increased salary and benefit costs.

Budget Drivers

The two-year deficit is driven by a projected increase in expenditures of $1.7 billion over the next five years while revenue is only expected to grow by $520 million.

Voter-approved ballot initiatives, including Proposition M, a measure that delayed tax increases on small businesses, are also weighing on San Francisco’s revenues in the short-term. Meanwhile, other recently approved ballot measures affecting education, housing and child services are contributing to spending increases.

The city has seen persistent budget deficits since the pandemic as work-from-home trends left office buildings vacant. San Francisco had its top-tier credit rating downgraded by Moody’s Ratings in October. Moody’s dropped its rating on the city and county by one notch to Aa1, citing a weaker economy and depressed commercial real estate in the technology hub after the pandemic drove out workers.

Both S&P Global Ratings and Fitch Ratings maintain AAA grades.

Tourism has nearly rebounded to pre-pandemic levels and artificial intelligence is breathing new life into San Francisco’s tech scene but municipal revenues remain sluggish. In recent years, the city has used one-time funding sources and federal pandemic aid to buoy the $15.9 billion budget and prevent deeper cuts to core city services.