S.F. and Oakland are eyeing big deficits. Why not San Jose?

The South Bay city may be in a better position to avoid the "doom loop" looming over San Francisco and Oakland.

Some of the Bay Area’s largest cities are facing truly eye-popping budget deficits.

San Francisco is projecting a $290 million shortfall. Oakland, short by $177 million, isn’t faring much better. But down south, the outlook is a bit sunnier. San Jose is reporting a $35.3 million surplus.

Why such a divergence?

Economists and budget officials attribute the disparity to San Francisco and Oakland’s heavy reliance on tax revenues that are still recovering sluggishly from the pandemic’s economic gut punch. The cities blame the down year on a mixture of poorly performing key revenue streams and the drying up of federal pandemic-related funding.

San Jose, on the other hand, has come away generally unscathed by leaning on a tax base that’s largely weathered negative financial forces. Worth noting: The surplus in the FY2023-24 budget remains small when compared to its $5.2 billion total budget — less than 1%.

“We’re in a positive position,” city budget director Jim Shannon said. “It’s not like we’ve got money to burn, by any means.”

Key to the large discrepancy between the cities is the real estate transfer tax, levied when a property changes hands.

That tax pool for Oakland peaked during FY2021-22 at $138.4 million but is expected to only reach $110.4 million for the coming FY2023-24. In San Francisco, the difference is starker. In 2021, the city brought in over $500 million from the tax, while this upcoming year it’s expecting less than half of that figure.

Both cities have blamed high-interest rates and work-from-home trends as the reason for these gloomy outlooks — part of what some are fearing could result in a “doom loop” for the downtown cores, where a dwindling tax base could spur serious cuts to essential services and spark an existential economic crisis.

But in San Jose, the city only collects a small amount of this tax and is projected to receive $22 million this coming year. That’s an increase of $2 million compared to 2021.

Sales tax is also playing a role. San Francisco is expecting a meager $14 million increase compared to 2021, bringing the city to $202 million this coming year. Oakland is experiencing a similarly small bump over the same time period, a $5 million increase totaling $104 million.

But San Jose — somewhat of an outlier — is projected to receive a whopping $50 million more in sales tax than it did in 2021, a total of $336 million.

Jeff Bellisario, executive director of the Bay Area Council Economic Institute, said the geographic makeup of the three cities’ economies may play a role.

“San Jose’s economy is not nearly as concentrated in the downtown area when compared to San Francisco and Oakland,” Bellisario wrote in an email. “With a slow return to the office and higher commercial vacancy rates in S.F. and Oakland, we’ve seen sales tax revenues decline in those areas along with business-related taxes.”

Oakland officials also say the transient occupancy tax, which hotel guests pay, still hasn’t made a full recovery since before the pandemic. Revenues are expected to increase this coming year by about $6 million from 2021 — totaling $22 million. But that’s still behind a high of $25.9 million in 2018.

All three of the cities have experienced nearly identical population decreases — around 0.5% and 0.6% between 2021 and 2022 — according to California’s Finance Department. And, even with its nearly one million residents, San Jose has dropped out of the top 10 most populous cities in the country.

As for pandemic-related funding infusions — which includes the American Rescue Plan Act (ARPA) — Oakland has already used all of the $188 million it received from the federal government to plug up previous shortfalls it was facing since 2020.

In San Francisco, nearly $250 million in reimbursements for COVID-19 expenses was expected from the Federal Emergency Management Agency. But now, the city said it will likely only get $23.4 million because of delays.

In San Jose, the picture is a bit more hazy.

The city had over $100 million in ARPA money on hand last year. In its latest projections, that figure has now dwindled to $13 million but will likely grow as the budget gets revised before a council vote in June. That presents the possibility that a handful of programs — such as food delivery services that started during the pandemic — will cease after this year.