Business closures in Berkeley could affect some 30,000 jobs, with unemployment reaching 27% or more, the city auditor estimated in a new report released this week about local economic impacts from COVID-19.
“The pandemic is disproportionately impacting low income workers and vulnerable populations,” according to the report from Berkeley Auditor Jenny Wong’s office, which was published Tuesday. “This economic downturn is severe and may last for years.”
Fortunately, the city’s finances are “relatively strong,” with $36 million in reserves and investments that are “sufficiently liquid,” according to the report.
The city’s finance director told the auditor’s office that Berkeley should be all right if the city makes the right choices: “If the City manages its revenues and expenditures prudently, which will require making some difficult decisions about tradeoffs, it should be able to weather the impacts of the economic downturn.”
In the short term, sales tax and hotel occupancy tax revenues are set to decline. Taxes related to property ownership and business licenses are expected to see a “moderate impact” in the next fiscal year or two.
Meanwhile, however, costs related to the pandemic response are increasing, and employee health insurance and retirement contributions are expected to go up, according to the report. Health insurance premiums may increase nationwide by up to 40% in the next fiscal year, the auditor wrote. Berkeley has budgeted for a 12% increase. Money from state and federal agencies is likely to help the city cover some of its expenses related to COVID-19, “but will not make up for all lost revenues.”
According to one estimate, 31,000 of the city’s 70,000 jobs — 44% — could be affected by COVID-19. Jobs in tourism, hospitality and retail are expected to be those hardest hit. In the region, these areas make up about 23% of private-sector jobs, according to the report.
UC Berkeley’s closure will also have an impact, according to the report, particularly given that 86% of the Cal students who were living in residence halls, numbering 6,000 people, have moved out.
“More students in non-university housing have also left Berkeley,” the auditor’s office wrote. “If the pandemic requires closures to continue into the next academic year, businesses that count on income from university students and staff could suffer and sales and use tax revenue will decrease.”
As of this week, the city has not publicly shared any figures related to how much Berkeley revenues are expected to decline. The auditor’s office was also unable to review those numbers, which were still being calculated this week.
“The economic shock will affect many of Berkeley’s revenue streams, but the total impact is uncertain,” the auditor’s office wrote. Berkeley had anticipated revenues of about $489 million in the current fiscal year, and revenues of $496 million in the fiscal year that starts in July.
“Many businesses, especially restaurants, are at risk of closing permanently, which would affect sales and use tax revenue over time,” according to the report. “Berkeley may feel this impact more deeply than other California cities because restaurants make up 25 percent of the sales and use tax base compared to 16 percent statewide.”
Money the city has available to help unsheltered individuals is expected to decline over time, the auditor’s office wrote. In part that’s because some of the city’s funding in this area is tied to property taxes and property sales.
The report looked at how the Great Recession, which began in December 2007, affected Berkeley and the state. The pandemic is “more volatile,” according to the report, because the public health situation is ongoing and the end is unknown. Revenue reductions at the state level may be 1.5 times greater than they were during the Great Recession. More people have already filed for unemployment in California since mid-March “than the total number of jobs created since the Great Recession, and these numbers will most surely continue to increase.”
Certain taxes in Berkeley are linked to the consumer price index (CPI), the auditor wrote. Those include taxes used to pay for emergency services and disaster preparedness, as well as the library and parks. The city had anticipated a CPI increase of more than 3% annually during this fiscal year and the next. In 2009, during the Great Recession, that number fell to less than 0.8%.
One area of significant concern is the Berkeley Marina, according to the report. There has been an ongoing deficit in the marina fund, and the pandemic is expected to add to the pressure. Costs to run the marina have exceeded revenues by about $1 million in recent years, and the fund could exhaust its reserves by 2021 if steps aren’t taken.
The audit, which was intended as a framework for officials and staff to use to consider the budget going forward, includes no formal recommendations. But there are some suggestions.
The city should look at all areas of need together, rather than in a piecemeal way, to ensure it’s taking all aspects of the situation into account. The city should also plan to review its projections and actual budget figures regularly because these numbers will change. When it comes to any needed adjustments to city finances, the focus should be on public health and safety “rather than applying cuts across the board,” according to the report. The city needs to have both short- and long-term plans in place to weather the storm.
It will also be important for the city to look at multiple scenarios related to how it will use its reserves, to what extent and over what period of time, to make sure the approach is a responsible one, the auditor’s office said.
The city may need to consider a hiring freeze and the possibility of deferring wage increases if revenues fall far enough, according to the report. The city should also look at putting off large purchases and delaying new capital projects to the extent possible.
City staff and officials credited Wong’s office with publishing the report in such a timely manner.
“I really commend her,” said Councilwoman Lori Droste. “It just shows that the voters of Berkeley made a terrific decision. We’re so lucky to have the caliber of auditor we have in our system. She is not afraid to make bold statements for the benefit of the city.”
Wong told Berkeleyside this week that her office had put some of its other audits on hold to tackle this subject and make the information available so quickly. She said Berkeley appears to be in a much better place financially than some other jurisdictions, but noted that there are certainly challenges ahead.
“These are all estimates,” Wong said, “but it’s pretty dire.”
Learn more about the budget
Wong is expected to discuss the audit Saturday during a virtual town hall organized by Mayor Jesse Arreguín’s office from noon to 1 p.m. The video will be broadcast live on the mayor’s website. City Manager Dee Williams-Ridley and Health Officer Dr. Lisa Hernandez will also be on the call. Have questions? Share them with the mayor’s office by 9 a.m. Saturday.
The City Council’s budget committee will also discuss city finances, including the audit, Monday at 10 a.m. Meeting details are in the agenda packet.
