Oakland faces an unprecedented financial crisis that was years in the making

Expanded social services, growing City bureaucracy, and falling revenues have created a $145M (16%) annual operating deficit

The City of Oakland is facing a $267M unresolved shortfall in the last 15 months of its current budget cycle ($122M this year and $145M next year). This deficit is in addition to the $369M shortfall it faced last year at the start of its two-year cycle. The root cause is more than five years of expansion of City bureaucracy, discretionary social services, and staff compensation that was not paid for with ongoing revenues. The City accelerated those expansions during COVID years by utilizing the $225M windfall of federal and state rescue funds, while decreasing the Police budget by 16% in real (inflation-adjusted) dollars. Overall, the City’s revenues have fallen by 5.2% in real dollars since pre-COVID fiscal year 2020, and spending is up 10.7%. Combined, the factors drive the 15.8% ongoing spending deficit now faced. The City has less than 3 months to fix the problem, and has begun making emergency spending cuts while looking for a bail-out from the State or County. Even if a temporary bail-out materializes, it won’t solve the underlying problems of too much spending and too little business growth. 

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At the March 26, 2024 City Finance Committee meeting, Erin Roseman (the City’s Director of Finance) delivered sobering news. The City of Oakland is facing a $177M deficit in its operations for the year ending June 30, 2024 (fiscal year 2024). That's a deficit of 21% of the City’s budget for discretionary spending. And it’s coming due in three months. 

Moreover, it's $63M worse than what was estimated just 4 months ago. And right behind that problem is another one of equal magnitude—the City faces a $175M deficit in its 2025 fiscal year.¹ 

The deficit is in an account called the “General Purpose Fund” (GPF).² It’s the account that pays for all discretionary spending, and funds most of the City’s departments. Last year, the City faced a two-year deficit of $369M in the GPF, which it thought it had solved. Now, 9 months later, it faces an additional $267M deficit in the last 15 months of the two-year budget cycle.³

How did this budget crisis happen again? More importantly, how can the City possibly close a 21% deficit in 3 months? And what will it mean for City services?

A thumbnail sketch of the deficit woes

The problem started in 2019 when the City increased employee compensation by 16.7% in one year (from an average of $161K to $188K total compensation per employee⁴) owing to a new labor contract. That raise wasn’t fully paid for with ongoing revenues, and it immediately opened a 5.6% ongoing deficit in FY 2020 (a.k.a., a “structural deficit” in City parlance⁵). 

Then $225M of COVID emergency funding⁶ saved the day, allowing the City to cover its newly-created deficit. Because the relief funding was so generous, the City further expanded discretionary spending by another 6.2% over the next four years (in inflation-adjusted dollars relative to the 2020 budget). The largest percent increases were in HR, Violence Prevention, Police Commission, City Clerk, Public Ethics, and Race & Equity (40-122% real-dollar increases), and the largest total dollar increases were in Fire, Human Services, and Violence Prevention ($22-46M increases). And the City directed $41M toward new homeless services across multiple departments.

In fact, from FY 2020 to FY 2024 (pre vs. post COVID), every City department, except Police and Economic & Workforce Development, saw a 14.3% spending increase in inflation-adjusted dollars (“real” dollars). In contrast, the Oakland Police Department (OPD) budget declined by 16% since 2020—a $65M real-dollar decrease. OPD’s share of the City’s full $2.1B total annual budget declined from 21% to 17%.⁷

Meanwhile, the City’s GPF revenues fell 5.7% in real-dollars over the same period (relative to the 2020 budget).⁸ The result was a widening the structural deficit to $132M in 2024 dollars (a 17.5% deficit relative to the 2020 budget, equal to a 15.8% deficit relative to the 2024 budget). With the addition of expense carry-overs from 2023, it brings the City to its total deficit of $177M, which is 21% of the FY 2024 adopted budget. 

Table 1: 2024 GPF deficit components. Download spreadsheet for data, calculations and additional views of the budget deficit.

It is worth noting that the growing structural deficit is not a surprise, it was called-out repeatedly by the City itself over the past several years, including in the 2021 and the 2023 5-Year Financial Forecasts, and in most Finance Department budget, revenue, and expense reports since then.

Figure reproduced from the 2021 City Finance Department 5-Year Financial Forecast

COVID relief money allowed the City to kick its deficit “can” down the road. But it reached the end of that road in FY 2023 when the relief money burned out. And now the City’s long-standing structural deficits are fully exposed. 

These fiscal realities first bubbled up last year when the City faced a $369M projected GPF deficit. Officials thought they had patched this up through one-time use of reserve funds, net cuts to unfilled positions (though some departments actually grew while others were cut), under-budgeting of OPD overtime⁹ to a level much lower than prior year’s actual expenditures, and raising expectations of revenue growth. 

But those expectations were far too optimistic. Revenues fell far short of the elevated expectations (-14.7%), and spending was slightly (1%) over budget. Thus, the deficit has ballooned by a further $267M over the next 15 months. 

The City’s consistent failure to rein-in spending has not only intensified the inevitable deficit reckoning, it has also forced the City to spend down all of its remaining reserves, leaving it in a precarious financial position for the foreseeable future.

That’s the basic story. Below are additional details, and some thoughts on what can be done about it.

Why is the City facing a huge deficit again this year?

Last June, the City said it had solved the $369M deficit on its preliminary $1,897M two-year GPF budget. The revised two-year budget was reduced to $1,677M and included an upward revision in forecasted revenues. Spending cuts amounted to $220M over the two-year budget, while projected revenues were increased by $80M. And $73M of reserve funds were used to plug the remaining gap. 

According to the City’s Consolidated Fiscal Policy the City is directed to use reserves only for unusual one-time expenses, not ongoing operating deficits. But the Council created that Policy, so they have the authority to override it. And they did override it with Council Resolution 89803, passed just before the Biennial budget was approved last June.

As for the revenues, it is unclear what assumptions justified the $80M increase in projections last year.

For the spending cuts, the City (1) eliminated a net 66 open positions, (2) overrode voter-mandated minimum spending on libraries, park maintenance, campaign financing, and the independent City Auditor, and (3) reduced allocations for certain programs like Kids First, homelessness shelters and housing assistance services, and homelessness prevention research. The City also transferred a few expenses to recent one-time grants such as moving funding for 35 firefighters to the two-year SAFER grant from FEMA—which will leave it with a problem 2 years from now when those expenses have to be transferred back to the GPF. That problem is not accounted for in the new headline deficits.

When the dust settled, some departments lost headcount while others actually saw staff increases. For example, 93 sworn positions were frozen in Police, while staff were expanded in Violence Prevention (+12), MACRO (+3), Fire (+16), Human Resources (+3), Human Services (+24), City Attorney (+3), Information Technology (+6), and the Police Commission (+16). 

But the City’s budget plan did not work as predicted. Most significantly, the hoped-for revenue increases did not materialize. FY 2024 revenues fell to $711M,¹⁰ which is $123M below the adopted budget.¹¹ That drop is so severe that it brings the City 5.7% below 2020 revenues in real-dollars. The biggest drivers of revenue loss were drops in the Real-Estate Transfer Tax (68.3% of the GPF revenue shortfall), the Business License Tax (11.4% of the shortfall), and a delay in selling City property (18.4% of the shortfall). The loss of Real-Estate Transfer Tax is explained in part by high interest rates slowing home sales, but it’s not the whole story. Home sales in Oakland are slower than in neighboring cities, and both home values and apartment rental prices are dropping. Those issues, and the drop in business licenses and sales tax, likely reflect a depressed local commerce due to elevated crime concerns and fewer in-office workers.

Table 2: Comparison of budgeted and forecasted revenues. Data from City’s Q2 FY 2023-2024 Revenue and Expenditures Report

The City’s reserve fund spending plan did not work out either. The $73M use-of-funds relied on monies in the City’s GPF balance ($30M planned in 2024 and another $33M planned in 2025) and the last remaining $10.3M of the Vital Services Stabilization Fund (VSSF). But the City ended the 2023 fiscal year with only $48M of unencumbered monies in the GPF and VSSF balances, not $73M.¹² This problem was realized only in November 2023, five months after the budget was adopted. 

Additionally, there is $8M of overspending forecasted for 2024, mainly due to Fire and Police department overtime costs. Fire ran 168% over their overtime budget, and Police ran 120% over their overtime budget for a total of $82M spent on overtime ($47M over budget). Note that both Police and Fire run these overtime costs because they are insufficiently staffed to meet the growing demands for their essential services. In the case of Fire, this was mainly due to 92 unfilled positions. In the case of Police, all budgeted sworn officer positions are filled (712 officers) but crime fighting demands continue to increase, including crime suppression activities, aerial units that substitute for prohibited car chases, investigations, human trafficking ops, increased documentation and administrative burdens associated with policy and law changes (UoF reporting, AB481) and elevated training requirements—while budgeted staff has declined by 132 positions¹³ since 2019.

But Police and Fire spending alone cannot account for the large deficit. As noted previously, Police spending declined 16% in real dollars since 2020 and Fire and Workforce Development spending is flat, while all other City Departments expanded their spending by a combined 14.3% in real dollars. 

Table 3: Budget changes for all City Departments from FY2020 to FY2024 (all funds). Download spreadsheet for data and calculations.

The increased departmental spending generally focused on expanding social services that were established using COVID emergency funding. Examples include funding for the Beautification Council for homeless encampment cleaning which started with a $175K CARES Act grant and grew into funding totaling $3.4M through successive City Council allocations, a nutrition program¹⁴ operated out of Human Services Department, and an $11M expansion of the Department of Violence Prevention. These services were delivered through City headcount growth and increased contracting with private non-governmental organizations. These expansions were not subsequently withdrawn after exhaustion of COVID funding.

In addition, employee compensation changes (increases for many departments, decreases for others) contributed to a large overall increase in employee average compensation.¹⁵ Specifically:

• Large (>10% real dollar) average compensation increases were given to the City Admin, City Attorney, City Clerk, HR, Library, Planning & Building, Police Commission, Violence Prevention. The departments receiving the largest average compensation increases were: 56% for City Admin, 139% for DVP, 72% for City Clerk, 30% for Police Commission, 24% for HR.

• Large (>10% real dollar) average compensation decreases in Auditor, Workforce Dev, Fire, IT, Parks & Youth, Police, Public Works, Race & Equity. The departments receiving the largest average compensation decreases were: -34% for Workforce Development, -21% for Fire, -17% for Police, -15% for IT.

In aggregate, after increases in employee pay in FY 2020, 2023 and 2024, the average compensation for city employees is 7.8% higher (inflation-adjusted) than in 2019. And another raise is budgeted for 2025, which will bring the real-dollar increase 9.6% higher than 2019 (a 38.3% increase in absolute dollars).

Table 4: Average compensation (salary, fringe, pension) for City employees 2018 - 2025. Download spreadsheet for data and calculations.

Altogether, this results in the $132M structural deficit in FY 2024. As noted above, $40M of the 2024 structural deficit was anticipated in the adopted budget, and paid for with spend-down of reserves. But that still leaves the City with $92M more to cover in the next 3 months.

These problems propagate forward to 2025 as a $145M structural deficit in that year.

How do we get out of this mess?

The first problem to solve is the $92M of unresolved deficit that comes due in the next 3 months.  Time is so short that the City has extremely few options. The Council indicated at its March 26, 2024 Finance Committee meeting that it has begun to plead for a bail-out from the County and State. But absent a rescue, what can be done?

There is basically no feasible way to cover the entire 2024 deficit through spending freezes or layoffs/furloughs alone. They would, at best, save only ¼ of the full-year savings of those cuts because there are only three months left in the fiscal year. For example, $368M of headcount reductions would be required to relieve $92M of overspending. There is no way that can be done. Difficult headcount reductions will be necessary, but in practice they are only an option for mending the 2025 deficit, not 2024.

There are $8M of unallocated reserves in the GPF balance. In principle those could be used to plug part of the gap, but it is unclear that the City can run with a zero balance in the account. Some of those funds may be needed to ensure cash flow for fiscal operations.

There is really only one source of unencumbered cash available to the City Council—the $65M balance in a fund called the General Purpose Fund Emergency Reserve. This is a distinct account from the General Purpose Fund balance mentioned above. It is intended strictly for extreme unanticipated emergencies such as natural disasters. But the City Council made that policy, so they can also override it, which would unfortunately put the city at risk for not being able to survive a natural disaster if it occurs before accounts can be replenished.

If the GPF Emergency Reserve is used, the City will still need to find $27M of real spending cuts in the next 3 months. And those will be painful—for example, the City Administration has asked some departments for 27% cuts in ongoing expenses before year end.

After those $27M of spending cuts are somehow addressed, the challenge becomes how to cut $145M from the budget for FY 2025 (that’s 17% of the 2025 adopted budget). The City also needs to cut a little bit more than that in order to run a structural surplus that would allow replenishment of the emergency reserve funds. In principle, the same cuts that deliver $27M of savings in the last quarter of 2024 will also deliver up to four times those savings over the full four quarters of 2025 (if they are ongoing savings like headcount reductions). That would imply mitigation of about $108M of the $145M deficit.  

Another $11.5M might be addressed if the deferred sale of the Raiders Practice Facility is transacted. Of course, this is a one-time source of funds, so it may leave unresolved problems for the next budget. Nonetheless, it is safe to assume that the City will use these funds to help plug the deficit, leaving $26M left to close.

For that last $26M, even more ongoing expense cuts will be needed through labor concessions or headcount reductions. Or some departments, like Human services or Parks and Recreation, may be able to push their GPF operating expenses to restricted funds like Measure Q, because portions of department activities align with goals of the measure. Of course, that is not a ‘victimless’ action; direct or improved services intended by those ballot measures would be supplanted to maintain status-quo operations. Finally, if dreams come true, the City will extract $97M in concessions from the Oakland A’s to play here for another 5 years, covering some of that gap in the short term.

Beyond that, there is only the prospect for a major rebound in the City’s economy—roughly a doubling of real-estate transactions and a 15% jump in business activity overall. But with trends as they are, such a rebound is likely to take a lot longer than just a few months. 

Fixing this will be hard

The City has demonstrated a history of overly optimistic forecasts, and ignored repeated structural deficits, while tapping one-time sources of revenue to plug financial gaps. It may have been emotionally and politically easier to take this approach, but it was not fiscally sensible. It was not sensible to forecast Real Estate Transfer Tax revenues at near all-time highs when interest rates have climbed higher than they’ve been in 22 years, and when the City’s Finance Department projected falling transfer taxes. It was not sensible to expect rapid business growth when property crime rates skyrocketed to the highest levels in decades (a problem that predated the 2023-2025 budget cycle).

Moreover, the City’s decision to reduce OPD overtime was made without any evidence that OPD overtime could be lowered. And because of that decision, OPD is frequently and inappropriately targeted in City discussions and communications as the primary cause of the budget problems. Historical spending, as well as increased service and policy demands, indicated that we needed a higher OPD overtime budget, or increased staff—which the City’s finance department pointed out last week¹⁶ and as is noted in the budget report. Demanding overtime reductions in essential services by legislative fiat is not credible when the City simultaneously increases burdens on these same services, and when Public Safety issues have not abated. 

Though it is the hallmark of human nature to try to defy reality, the laws of nature (economics included) eventually demand that we pay attention. To solve this fiscal crisis, it will be necessary both to meaningfully increase recurring revenue by stimulating business growth and private investment, and to reign in the large expansion of less critical social services, expanded City bureaucracy, and staff compensation increases that started before and during the COVID era.  

Last year, City officials had the opportunity to make those hard choices. But they did not. It cost the City its hard-won emergency reserve funds, and it will make this year's cuts even more painful. 

It’s time to do the hard thing.

1. The deficit isn’t quite as bad as the City’s stated $177M gap suggests because $55M of it is caused by carry-overs from last year.  Carry-overs are expenses that the City approved to pay last year, but got delayed in spending or in settling. Thus, if the prior year budget was balanced (which it has to be by law), the money to pay those expenses are sitting in the fund balance. Deducting the carry-over expenses and excluding the use of fund balances, leaves the City with the ongoing deficit of $132M for FY 2024, and about $145M for FY 2025. That’s the structural deficit the City really needs to worry about.

2. The “General Purpose Fund” (GPF) is one fund among dozens of funds maintained by the City.  Each fund is a distinct financial account that independently tracks revenues and expenses (credits and debits) and balances. The General Purpose Fund is the only discretionary spending account in the City and it is managed by the City Council. It is the account where base property, business, and sales taxes accrue. Ballot measure taxes accrue to restricted funds outside of the GPF. The GPF funds 92% of the Police budget, 88% of Fire and most of the City administrative departments. See “FY20 v 24 Total Expense Summary” tab of budget spreadsheet for details (download for best viewing).

On the other hand, some City departments, such as Public Works, are funded almost entirely by funds other than the GPF. Such departments generally supervise capital projects, or are mostly self-supported by their business activities, such as Planning and Building. Spending in those funds is restricted to specific purposes mandated by their source of funding. Those sources include voter-approved ballot measures, state or federal grants, pension plans, debt service, capital projects and other dedicated and specialized activities. Altogether, the General Purpose Fund plus the other funds are called Government Funds. (See City Auditor Report for further explanation.)

The Fiscal Year (FY) for the City runs from July 1 of the previous year to June 30 of the present year. Each year, the Mayor proposes a budget to the City Council, which they modify and approve before June 30. The approved budget is called an “adopted” budget. For FY 2023-2024 the total City approved budget (all funds including the GPF) was $2.137B. The GPF subset of that budget was $834M (39% of the City’s total budget).

The City writes its budgets in two-year blocks called the biennial budget. Prior to starting the second year of the biennial budget, the City reviews its finances and approves revisions to the previously adopted second year budget. This is called the “midcycle” budget. This midcycle budget process is now underway for FY 2025 (a.k.a., FY 2024-2025), which is the second year of the biennial budget running from July 1, 2023 to June 30, 2025.

In addition, after each annual budget approval, the City issues an “adjusted budget.” This adds carry-over expenses and encumbrances from the prior year the Council-approved Fiscal Year budget. Carry-over expenses should, in principle, be funded with the balance of funds left in the City’s discretionary account. That balance would result from not spending those monies in the prior year.

3. The City has already committed $85M of the General Purpose Fund balance to pay part of the present 2024 and 2025 combined deficits of $352M, which leaves a forecasted $267M unresolved.

4. Compensation and total FTE data were obtained from the City’s online budget data portal from the 2023-2025 adopted budget views. Compensation increases were estimated by calculating the average employee compensation from year to year as total compensation divided by total FTEs for each year. Spreadsheet with calculations is available here (download for best viewing).

5. A ‘structural deficit’ is the gap between ongoing revenues and ongoing expenses, excluding one-time revenues and expenses. For example, the costs of carry-over expenses from prior years is not part of the structural deficit. Costs for natural disasters would also be excluded.

6. The American Rescue Plan Act (ARPA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act awards to Oakland add up to $225M. See page 13 of of Fiscal Year 2022-23 Fourth Quarter (Q4) and Fiscal Year 2023-24 First Quarter (Q1) Revenue and Expenditures (R&E) Report.

7. See “FY20 v 24 Total Expense Summary” tab of budget spreadsheet for calculations (download for best viewing).

8. See “Real Dollars” section of “GPF Revenue” tab of budget spreadsheet for calculations (download for best viewing).

9. From March 26, 2024 Finance Committee Meeting discussion.

10. City documents forecast the revenue at $721M, but this includes a $10M use of the Vital Services Stabilization Fund reserves. This is a one-time source of funds that does not address the City’s structural deficit and therefore is not included in the tally of ongoing revenues received in FY 2023-2024.

11. Taxes (real-estate transfer, sales, business licenses, and miscellaneous other small sources) were below the June 2023 forecast by about $100M. A few other taxes were up slightly (principally property and utilities tax) resulting in a net $84 decrease in projected FY 2024 revenues compared to the June 30, 2024 adopted budget.

12. There was $93M in the GPF Fund Balance and $10M in the VSSF at the end of FY 2023, but $55M was already assigned to pay for carry-over expenses, leaving only $48M.

13. See ‘All Funds Adopted FTE’ tab of personnel spreadsheet for department historical budgeted headcount (download for best viewing).

14. From March 26, 2024 Finance Committee Meeting discussion.

15. Note that estimates of departmental average compensation were calculated based on departmental staff counts and total budgets. For this calculation, departmental budgets were also corrected using the city-wide proportion of budgets dedicated to compensation, because we do not have data on what proportion of each department budget are compensation costs. Use of city-wide proportions may introduce some error in per-department estimates.

16. From March 26, 2024 Finance Committee Meeting discussion.