Oakland’s looming spending cuts

While City officials have spent the past months focused on business license taxes, scant attention has been paid to the impacts of unavoidable spending cuts

Today, the Oakland Mayor's Office had intended to release the City’s proposed 2024-2025 budget—two weeks later than normal budget process would dictate. According Council President Bas’ office, the budget proposal is delayed an additional week. It will be published on May 24, cutting short public review by three weeks. 

This comes at a time when tension around the budget is already at a fever pitch. Members of the City Council and labor unions accuse the City of mismanagement of revenue collection—implying that uncollected tax is at root cause of the budget pain. While those attacks gain popular and media coverage, little attention is being paid to the looming spending cuts that will have to be made. 

The necessity of these cuts is primarily due to a five-year expansion of City spending, not incomplete revenue collection. Employee compensation increased faster than inflation since the pre-pandemic Fiscal Year 2020. And the City simultaneously expanded administrative and social services. Overall, spending grew at more than double the pace of revenue growth. 

According to City staff, departments were asked last month to cut 25% of their General Purpose Fund budgets for the forthcoming year (Fiscal Year 2024-2025). For Police and Fire—the hardest hit among the City’s departments—that would mean a combined $129M cut next year. Such potential cuts would represent a 37% inflation-adjusted cut in Police services since 2020, and a 21% inflation-adjusted cut in Fire services.

Though financial options are limited at this very late stage in the process, the cuts noted here are still prospective. The Council and the City Administration cannot avoid large cuts, but they still have control over which City services will bear the brunt of the austerity measures. 

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On May 14, the International Federation of Professional and Technical Engineers (IFPTE), Local 21 held a press conference criticizing the City’s Finance Director for not collecting an estimated maximum of $34M in unpaid business taxes, also indicting multi-billion dollar corporations as primary delinquents. 

But the union did not provide evidence of any tax violations by such corporations. On the contrary, the City Finance Department reported on April 11, 2024 that the uncollected taxes are spread across 6960 and 8662 businesses during FY2022 and FY2023, with an average amount owed of $1,714. Many of those businesses may just be closed for good — data points the city has not collected — which means the total collectable is less than $34M.

But even if all $34M were instantly received, it would address only 9.7% of the City’s $352M two-year budget deficit reported in February. And this year’s shortfall in business license taxes ($9.5M) represents only 5.3% of the ongoing structural deficit that the City faces. Thus, the deficit issue is much more problematic than revenue collections.

The unilateral focus on business taxes didn’t start with the IFPTE, Local 21. It appears to have been initially suggested by the Council Finance Committee at the November 2023 meeting where the pending deficit was first reported. There, Council Member Rebecca Kaplan focused on attracting shoppers to the City, selling City land, and spending non-GPF account balances. Council President Nikki Bas questioned whether the City’s revenue projections were trustworthy, and focused on how to increase revenue generation through long term economic development. No consideration was given to the possible need for spending cuts, nor was it discussed that labor unions needed to be quickly informed regarding potential impacts, as is required by labor law and MOUs. 

Four months later, at the March 26, 2024 Finance Committee meeting where further-increased deficit projects were presented, the Council members Bas, Ramachandran, Kaplan and Jenkins spent 40 minutes discussing the tax shortfalls, and only 5 minutes discussing budget cuts—nearly all of which focused on Oakland Police Department overtime spending. Bas again noted: “We have to absolutely make sure again that we're collecting revenue before we consider workforce impacts.” 

Council Member Ramachandran further intensified the focus on revenue collections in her May 3, 2024 District 4 newsletter suggesting that City left $50M uncollected, and that City staff were unable or unwilling to address her questions on revenue collection. 

Neither Bas nor Ramachandran, nor any other member of the City Council, made any mention of their thinking, plans, or priorities for how to minimize the damage from the inevitable spending cuts. Nor did they indicate any intention to solicit public input on such prioritization.

But spending cuts are coming, and they will be severe.

Major spending cuts are necessary and long overdue

The City’s own finance department has been warning for years that spending was far out of balance with revenues. Spending has grown 32% since 2020, while revenues only increased 14%, leading to a $145M ongoing structural deficit.  

It’s an issue that was patched over with one-time COVID emergency funding (ARPA funds), as the City’s Finance Director has specifically noted in her quarterly financial reports and five year forecast. Neither the Council nor the City Administration took any proactive measures to reverse the unsustainable spending. Last year when faced with a $369M deficit, the City cut vacant positions, spent against reserves, cut the police overtime budget, and even elevated the February 2023 revenue projections by $80M. Reductions in historical spending or compensation increases were not considered.

Also as noted by the Finance Director, and in our previous reporting, the spending increases are due to wage and pension increases (a 32% increase in average compensation since 2019, equal to a 7.8% real dollar increase after accounting for inflation), expanded violence prevention, homeless and housing services, and City administrative functions (35% increase since 2019). In comparison, the Fire budget increased 26% and Police budget increased 1% over the same period. 

Under extreme fiscal distress, the City would normally begin negotiations with labor unions for wage, pension or other concessions. Such concessions would help reduce the scale of layoffs and service cuts that will be otherwise needed. But the City must start those conversations at least six months in advance of a budget resolution, by law and practice. They have not done so, as confirmed both by multiple members of the City staff, and a complaint filed by IFPTE, Local 21 with the State’s Public Employee Relations Board.

The City wants a flat 25% GPF cut that will disproportionately impact public safety

According to four independent sources inside the City, the Administration asked its departments to cut ~25% of their General Purpose Fund (GPF) spending. Of particular note, Police and Fire have been ordered to cut $129M from their budget. If done, this will represent a 37% inflation-adjusted cut in Police services since 2020, and a 21% inflation-adjusted cut in Fire services. The only other departments with similar cuts since 2020 would be Animal Services and City Council with 22% and 24% inflation-adjusted reductions in their budgets. 

The GPF is the City’s discretionary spending fund, and only one third of the City’s total budget is funded by it. Many departments get funding from sources other than the GPF, including local ballot measures, County, State and Federal funds. But Police and Fire get nearly all of their funding from the GPF. Thus the flat 25% GPF budget cut will proportionally impact Police and Fire more than other departments that do not receive the majority of their funds from GPF. 

Moreover, many department budgets have been greatly expanded since 2020. For example, HR, City Clerk, City Administrator have seen a 75-119% 5-year increase. And the Violence Prevention budget has more than doubled since its inception from the Oakland Unite program. Cuts to these departments after their large 5-year budgetary expansions will have a lesser impact on their service levels compared to FY 2019-2020. By contrast, Fire funding increased 26%, Parks, Recreation & Youth increased 24%, and Police funding increased only 1% during the same 5-year period. Hence they will see a reduction of service to levels below that provided in FY 2019-2020.

The net effect of the flat 25% GPF cut will be to prioritize administrative, violence prevention, and employee compensation increases while diverting funding from services that voters have specifically prioritized through ballot measures: Public Safety, Parks, Library, Public Ethics, and the City Auditor (Measures Z, Q, D, C, W, and, X). 

After such cuts, the police budget will have been reduced from 21% to 14% of the total City budget over 5 years. Fire will have been reduced from 11% to 9% of the total budget. Administrative functions (Clerk, Administrator, HR, Police Commission) and Violence Prevention will have increased from 2% to 4% of the total budget. Housing and Community Development increased from 2% to 8%. And other capital-projects-focused departments (DOT, Planning, Capital Improvement Program) will have increased from 10% to 14% of the total budget.

Table 1: Comparison of FY2020, 2024 and potential 2025 budget. Capital-intensive and non-departmental expenses are separated into the lower portion of the tables. Left table: City Department Total budgets inclusive of GPF and Non-GPF expenditures. The FY2025 column shows cuts under a potential 25% GPF budget cut to all City Departments. Middle table: the change in 2024 and potential 2025 budgets relative to 2020. Shading indicates changes greater or less than +/- 5%. Right table: the proportion of the Total budget consumed by each department. Green shading indicates an increased share since 2020, red shading is a decrease.

Is there any alternative path?

Due to the Council and Administration’s refusal to proactively address overspending, and the failure to engage labor unions, small business community, and residents as partners in problem solving, there is little that can be done at this late stage to reduce the severity of inevitable layoffs and service cuts.

But the cuts need not be disproportionately applied to the detriment of Public Safety, Parks, Library, Ethics, Audit and other services that have been consistently prioritized by the Residents. 

Given these recent three years of exceptional crime, and the public’s calls for prioritization of public safety, it would be sensible to retain Police and Fire budgets as much as possible. And given the recent taxpayer passage of Measure Q for Parks, and Measure C for Libraries, Measure X for Audit, and Measure W for Ethics, it is clear that residents want those services prioritized too. The City and Council have the power to protect these services by reverting other departments to their pre-pandemic spending levels.

But it is unlikely that Oakland’s residents will see such actions from Oakland’s City Council. As Council President Bas notes in her letter on April 11:

"We must continue our work toward shifting our budget towards greater equity and addressing systemic disinvestment in vulnerable and marginalized communities"

The ‘continued work’ seems to reaffirm longstanding efforts to shift funding from police, which were accelerated with the Reimagining Public Safety Taskforce of 2020. This suggests the Council priority will remain on addressing deficits through tax increases, while preserving outsized increases in City administration, employee compensation, and the violence prevention. Such priorities will likely continue to come at the expense of public safety, parks, libraries, audit and ethics.

Appendix

The data below were compiled from verbal communications with four senior City staff members over the past month on how the City plans to address its $177M deficit. 

Each statement has been cross checked by at least two sources. But we reinforce that it may or may not be reflected in the proposed budget that the Mayor eventually publishes this month. Nonetheless, these are items of interest to look for in the eventually-published budget proposal.

- The City has directed OPD to cut $82.6M from its current $354M budget. A 25% YoY cut. This new cut, combined with prior police cuts, will result in a 5-year inflation-adjusted cut (real-dollars) of 37% in Police services. 

- The City cannot cut sworn officers. (Both Measure Z and the police union MOU prevent this). Thus such a cut would necessarily mean cutting civilian staff dramatically, and demand that sworn officers pick up the office administrative duties of civilian staff. This will mean dramatic reductions in police services. Internal discussions have suggested reduced patrols, cutting the burglary crime units, eliminating sideshow enforcement, eliminating all traffic enforcement, and more.

- The City has directed OFD (Fire) to cut at least $47M.  This would mean closing fire stations, and increasing the response time for medical and fire emergencies. Presently this is 4 minutes or less. It could rise multiple minutes higher. 80% of OFD responses are for medical, where 2 minutes can mean life or death.

- The City plans to override spending directives and restrictions on ballot measures and use those special purpose funds to plug the operating gaps. This includes, for example, the direction of Measure Q funds to pay Human Services back office staff salaries rather than using it to support the parks, litter and homeless shelter service programs it was intended to support.

- The City has looked at shifting money between funds. Some of those proposals are prohibited by the requirements of the funding sources. One example proposal: use last year's unspent federal monies as cost-share for this year's federal funds. This is not allowed, and would likely invoke a federal audit, followed by revocation of federal funding. Thus we expect that the City will reject such ideas in their proposed budget.

- The City is trying to merge more departments. It's not clear how this will save any money or improve services. It could even have the opposite impact in practice, and reduce transparency on use of funds and City performance.

- The cash management situation is not clear. Some vendors claim they have not been paid in months for services. And raises the question of solvency. More transparency on the City’s cash flow is warranted.