Photograph courtesy of Velo City.

What a difference a year makes. 

In 2019, San Francisco’s skyrocketing property-tax haul and stagnant school enrollment led to a surplus of funds; the mayor and supervisors and organized labor quarreled about where a $185 million so-called “windfall” should go before allocating it to teachers, affordable housing, the homeless, and other benevolent destinations. 

In 2020, the state is broke and will be attempting to wrest away these funds — both retroactively, reclaiming money that has long since been spent, and moving forward. 

The city estimates that if the California Department of Finance gets its way, San Francisco will be out $180 million for funds going back to 2018 and then be tagged an additional $60 million every year moving forward. 

The state’s maneuver — which would come to fruition with the pending passage of the innocuous-sounding Education Omnibus Trailer Bill — would also yank scores of millions of dollars from Santa Clara, San Mateo, Marin, and Napa Counties, along with San Francisco. 

This, of course, comes in the midst of the worst financial crisis in a lifetime. 

5 County Letter to Speaker and Pro Tem Opposing Excess ERAF Legislation 6.10.20 by Joe Eskenazi on Scribd

City Controller Ben Rosenfield this week confirmed that this Sacramento proposal “is the single most significant financial implication in the state budget for San Francisco.” 

The mayor’s office confirmed that Mayor London Breed has been in contact with Gov. Gavin Newsom over this. But the state Department of Finance is slated to release the language in its omnibus trailer bill on Friday — and its final content is not yet known. 

San Francisco Supervisors Matt Haney and Hillary Ronen this week introduced a resolution opposing the state’s proposed move,. The resolution was unanimously adopted. 

“We have not yet begun to feel what a $1.7 billion budget hole begins to feel like in real life,” Ronen said, regarding the perilous fiscal situation San Francisco finds itself in, thanks to the pandemic. 

And that was before the state’s planned move. 

“When we do begin to feel that, and people realize the state clawed back $180 million and $60 million every year moving forward, it is going to be dramatic. That translates into cuts to our schools, cuts to pothole-filling, cuts to affordable housing, cuts to homeless services, and layoffs.” 

The money the state is hoping to reallocate to itself (even retroactively) are “Educational Revenue Augmentation Funds,” administered locally and directed toward school and community college districts.

While San Francisco’s situation was in 2019 often referred to as a “windfall,” that term was always a misnomer. Even prudent, cautious fiscal analysts figured that this money would come to the city every year for the near foreseeable future — “barring state action.” 

That action appears to have come, but not in a manner anyone could have entirely predicted. 

San Francisco teachers and their allies advocated for a healthy chunk of San Francisco’s “windfall” funding. But this is no windfall — and many competing priorities are also vying for this ongoing funding. Photo by Jennifer Cortez, January 2019.

The state controller has long been the responsible body for determining each of the 58 counties’ Educational Revenue Augmentation Fund (ERAF) allocations. San Francisco — and the handful of other counties — last year exceeded its state-determined allocation and had funds returned. 

The Department of Finance now aims to take over this duty from the state controller. It aims to use different calculations, going back retroactively to 2018, to determine how much ERAF each county owes. It was the state controller that previously determined when “surplus” ERAF funds could be returned to the counties, as occurred in San Francisco last year. 

But the Department of Finance will be using different calculations, which are less generous to the counties (even retroactively). And, to boot, the Department of Finance would punish counties failing to pay up with civil penalties of 10 percent per year, in addition to 1.5 percent monthly — an annual aggregate interest of 28 percent. 

This has induced loud howls from the affected counties. 

“As far as I can tell, our County has administered the law properly. Their application of the funding allocation methodology has been audited multiple times by the State Controller’s Office and received a ‘clean’ audit each time,” wrote Santa Clara County assessor Larry Stone in a June 10 letter to Assemblyman Phil Ting (D-San Francisco), the chair of the budget committee. 

“The imposition of penalties, including retroactive penalties going back to fiscal year 2018/19, is completely offensive and unwanted and should be rejected. It is particularly egregious in light of the fact that [the Department of Finance’s] guidance is based on new interpretations of laws that have existed since at least 2012. It also creates a dangerous precedent that should be deeply concerning to all jurisdictions across the state.” 

Stone notes that this move would not create any additional funding for schools and refers to it, bluntly, as a “money grab.” 

But, in an Orwellian turn of phrase, the Educational Revenue Augmentation Fund never resulted in augmentation of educational revenue, going back to its initiation in 1992. 

In that year, during lean times, the state of California devised a method to fund its schools even less while, in effect, taking money away from its cities and counties.

Since the state is not permitted to simply yank away county property taxes, it essentially created a shell game to accomplish the same end. It established this “Augmentation Fund” in every county, requiring counties to pay into it and disseminate the money to school districts. Subsequently, state funding of schools was reduced by an equivalent amount. 

In 2019, Ken Kapphahn, a fiscal and policy analyst for the state Legislative Analyst’s Office, told Mission Local that there were significant legal hurdles in place preventing the state from unilaterally wresting away surplus ERAF money from San Francisco and other counties. 

Proposition 1A of 2004, he noted, severely curtailed the state’s ability to redirect the allocations of local property taxes. So, for major changes of the sort now being proposed, Kapphahn surmised, we “might need to go back to a vote of the people.”

Clearly, that is not happening right now. 

“We believe that if we challenge this in court, we will prevail,” said David Campos, a former Mission District supervisor who is now Santa Clara’s deputy county executive. “But that’s not the point.” 

As his San Francisco successor, Ronen, notes, “Litigation will take years. We’re trying to head this off at the pass.”

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Joe Eskenazi

Joe was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. “Your humble narrator” was a writer and columnist for SF Weekly from 2007 to 2015, and a senior...

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15 Comments

  1. Cant we just take the pensions away from the police and allocate them to ending homelessness and wealth inequality?

      1. And the public sector unions are smart enough to realize that changing the terms of the police pensions opens them up to having their own pensions changed. Never underestimate pocketbook solidarity.

  2. Good thing we spend that surplus paying off businesses who’ve ended up closing anyways, instead of, say, improving Muni.

    1. That’s not what the funds were spent on because we didn’t have a COVID crisis in early 2019.

      Rather, the money went to:

      $111.4 million for “affordable housing,” including $40 million for small-site acquisitions; nearly $50 million for affordable housing development; $9 million for upgrades at Sunnydale and Potrero Public Housing; and $14 million for affordable housing site acquisition.

      $46 million for “homelessness and behavioral health,” including $15.2 million for new master-leasing of rooms for the formerly homeless; $15 million for a new emergency homeless shelter; $6.4 million for expansion of navigation centers; $4.4 million for “healing center” beds; and $5 million for “substance use recovery beds.”

      $10 million for early-care educator “wage adjustments and reimbursements”; and $14.5 million for acquisition of “public power and energy efficiency” projects.

        1. Yes, those are them. They were expended on the items I noted to you earlier, not on “businesses.”

          JE

  3. I guess the only good news about this is that the city didn’t make the right decision to begin with and decide to spend all the money on education – you know, where a person might reasonably expect Educational Revenue Augmentation Fund money to go – so the “claw back” won’t be as detrimental to public school kids as it could be.

  4. This city can operate on $9 billion dollars a year….stop whining and make it work That’s a huge amount of money! Damn! This site chose to put quotations around the word windfall, because you felt it was going to be an ongoing revenue stream, not a one-time panacea to temporarily address the cities problems. Now that the excess funds are going to be applied to what they were intended – education – you are up in arms

    1. Troy — 

      We put the quotes around the term “windfall” because that was the common phrase applied to these funds — but it was inaccurate. When you receive hundreds of millions of dollars and are predicted to do so on a yearly basis, it’s not a “windfall.” Even if the state gobbles up $60 million yearly moving forward, that will still leave money for San Francisco through excess ERAF.

      Excess ERAF funds were not intended to be used for education. They are, by law, returned to the counties to be used as those counties determine. San Mateo County in 2011 actually codified how to spend these funds. This is not unexplored territory nor is there any argument here.

      The state’s action will not result in one dime more for education. The “Augmentation” — the “A” in “ERAF” — is an Orwellian misnomer. This is a system designed to lower state funding of education and raise county funding. Nothing is augmented.

      And if this money is appropriated by the state, the educational system in San Francisco and elsewhere will suffer.

      Best,

      JE

  5. Here’s a crazy thought – how about returning some of the property taxes in the ERAF funds back to middle/lower class home “owners” (using quotes since the bank is usually the one that owns the home). My family and I took out a loan to buy an average priced home in the city and it’s nearly breaking us. The property taxes are a massive yearly expense. If you want to have a city populated by more than the very rich and the very poor, please find ways to reduce the burden on those left in between.

  6. Two missing facts from your detailed exposition, plus one update:
    (1) The cause of the sudden appearance of ‘excess’ ERAF in 2016 was the flat statewide school funding formula, introduced in 2013. By ignoring whether a student is in high-cost San Francisco — or elsewhere, say Turlock or Tracy or Redlands — the new formula significantly underfunds students with respect to the high local cost of living. That high cost of living is reflected in real estate values – housing prices – property tax assessments, hence property tax collections. Thus monies intended to provide school funding become, instead (in an SF public official’s word), the city’s ‘windfall’ … at the cost of local education.
    (2) Before Proposition 13 (and for the first year after its passage), 35% of San Francisco’s property tax was allocated to education. Then, in 1979, the legislature cut that to less than 10%, handing another 25% slice to the city — assuming the state could make up the schools’ loss. After California school funding collapsed over the following decade, the legislation creating the ‘Educational Revenue Augmentation Fund’ clawed the 25% back for the joint benefit of San Francisco’s community colleges and public schools. For over 20 years they at least received their historical due, until ‘excess’ ERAF again began clawing away school funding to fill the city’s rainy day fund (50%) and other projects (as you outlined) .
    (Update) Yesterday, the California Department of Education published this year’s numbers — ‘excess ERAF’ in San Francisco is up to $287,494,397 this year (after the new modified regulations), from zero five years ago. Thus, $4,800 of historical revenue for every school child in the city is, instead, under city control. Mayor Breed has, apparently, dropped her suit to force the schools back into session — with their flat statewide funding. Meanwhile, the regular property tax the city continues to get (65% of the total) represents about 240% of the statewide average … 198% if you add net inbound commuters as residents.

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