Planning for the next recession should begin now 

Governments in San Francisco and California face immediate fiscal outlooks that are somewhat similar. Increased income has padded their official coffers, allowing for welcome additional spending in certain areas as lawmakers passed their budgets for the coming fiscal year.

But since it was income growth that allowed government officials to balance these budgets, many of the structural problems that underlie the city and state budget processes remain. And they will surely rear their heads again whenever the economy next slows down or fails to grow at its recent pace.

Across the state, much of the new income stems from tax increases, which voters willingly levied upon themselves since a chunk of the money will be dedicated to education. The California economy also has improved, and revenues are doing well enough to stanch some of the bleeding from cuts made in recent years. In San Francisco, tax revenue also is buoying the budget as the economy has bounced back at an incredible, and inevitably unsustainable, rate.

But the cost of government at both levels continues to grow, driven primarily by employee costs. The state capital and San Francisco have tackled pension reform, although both will need to revisit the issue before all the baby boomers retire. Meanwhile, growth in the cost of health care and other benefits could easily outpace future government income, especially whenever the economy slows down again.

A recent report from The City shows that revenues are growing at 13 percent a year while expenses are increasing at 25 percent annually. One contributor to this unhealthy trend is employee fringe benefits, which grew 6.5 percent in this year's city and county budget, according to Budget Analyst Harvey Rose. And hiring growth by San Francisco's government, some of which is needed to help implement the Affordable Care Act, also pushes up the labor costs.

Some of the future unfunded liabilities related to city workers' healthcare costs could be offset by a proposal Supervisor Mark Farrell has that appears likely to make it to the November ballot. But more like this needs to be done.

A well-paid city workforce is not innately a bad thing, especially in a region that is among the country's most-expensive places to live. But when the money needed to pay that workforce starts cutting into vital services for San Francisco residents, it becomes an issue.

The same goes for the state. Balancing the budget this and next year is not the big issue. State budgets likely will remain healthy for as long as the Proposition 30 tax increase is in place.

But even as local and state lawmakers enjoy the comfort of today's balanced budgets, they need to step back and take the long view. It is foolhardy for anyone to believe in unlimited economic growth. No one knows when the next slowdown will occur, but the preparations should begin now. San Francisco's two-year budgeting cycle insulates it a bit from the boom-bust cycle, but it does not protect it fully.

The trend lines that project future government income and future spending should be aligned much more closely. San Francisco and California both face outstanding future debts in the area of employee costs, and ignoring them during the good times won't make them go away.

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