Budget Facts: Supporting Early Education and Our Economy
San Francisco has undergone a significant expansion of support for early education and childcare in the last year. In April, I provided a one-year update on our Children and Family Recovery Plan. The highlights of that update, which you can read here, included establishing the new San Francisco Department of Early Childhood (DEC), initiating the Early Care and Education Workforce Compensation Initiative, providing financing for dozens of early child care facilities, and distributing additional early child care vouchers to target populations, such as parenting transition-aged youth and low-income families.
With our proposed budget, we are continuing and expanding on this work.
Specifically, this budget:
- Expands the number of childcare vouchers annually from 10,000 to 12,000.
- Funds the expansion and creation of new childcare facilities across the City.
- Invests in pipeline programs that support recruitment and retention of early educators.
- Sustains the recent landmark compensation initiative for more than 2,000 City-funded early educators, who received raises of anywhere from $8,000 to $30,000 last year.
Even in a difficult budget with a $780 million dollar deficit, we are able to sustain and expand on the progress we’ve made.
We are able to do this because of the commercial rent tax that funds these programs and because of a large surplus of funds that have come from the collection of this tax. In addition to funding all of these programs, because of this surplus, I am proposing to temporarily reduce the commercial rent tax to help fill empty office space Downtown.
This is important because if we don’t stabilize our Downtown and fill it with taxpaying businesses, our broader economy is going to hurt. And the long-term stability of this childcare funding will be at risk, too. Businesses that move into our Downtown pay this commercial rent tax for childcare, but they also pay taxes that go toward public transportation, police officers, homeless services, and much more. These businesses bring workers in who can support our struggling small businesses Downtown.
My goal in this budget is to make government more efficient and effective. We have to look at the bigger picture. We need to be a city that delivers services to help people, while still being mindful that we are not sitting on large pots of unused funding.
What is the Commercial Rent Tax and what does it fund?
The Commercial Rent Tax (CRT) was passed by voters in 2018 to fund early education and childcare initiatives. It is a rent tax charged on commercial properties — namely, offices.
The City has used the funds to launch significant programs, including increasing compensation for early educators, expanding and creating childcare facilities across the city, issuing childcare vouchers, and investing in pipeline and recruitment efforts to bolster the early education workforce. These investments have made San Francisco a national leader in early education and childcare.
Right now, the CRT is charged twice on subleased properties — first on the original lease, and then a second time on the sublease. As part of my budget, I’m proposing that this only be charged once on a space, not twice, when it is subleased.
This change makes it significantly more affordable for businesses to sublease space in San Francisco and will help drive San Francisco’s work to bring new business Downtown. With a sublease vacancy rate of over 7%, San Francisco’s sublease market is higher than any other metropolitan area.
The proposed commercial rent tax deduction is meant to revitalize downtown in hopes of ensuring the long-term health of this revenue source that ultimately benefits San Francisco’s youngest children and early educators.
We are also proposing to make one more short-term change. The federal government’s pandemic-era food support is coming to an end. As a result, we are hearing loudly and clearly from San Franciscans that they need immediate food assistance to prevent themselves and their families from going hungry. To respond to this need, we are proposing to use an additional $30 million of the $400 million Proposition C reserve to pay for early care and education services, which frees up $30 million of general fund dollars to use for food support for low-income San Francisco residents. At the end of the day, we are making this change to help ensure that no children, families, or seniors go hungry here in San Francisco.
How Does this affect Early Education and Childcare Programming
Because Proposition C has $400 million in its reserve, neither of these proposed changes affects any current programming. In fact, the City is still expanding programming.
The reduction in the rent on subleased spaces will reduce tax revenues by around $17 million annually, and the baseline change has a $30 million impact on the Proposition C reserve over two years. However, due to a large surplus of funds from CRT collections during previous years, there will be no reductions in current levels of services for young children and early educators. In fact, the Department of Early Childhood will::
- Sustain the recent landmark compensation initiative for more than 2,000 City-funded early educators, who received raises of anywhere from $8,000 to $30,000 last year.
- Expand the number of childcare vouchers that it issues annually from 10,000 to 12,000.
- Invest $70M for childcare facilities and $30M for early educator pipeline programs.
Why is there a Surplus?
There are two main reasons for the surplus in childcare and early education funds.
The first reason is that when the CRT was passed in June 2018, it was subject to a lawsuit that took over two years to be resolved. During the time of the lawsuit, the City collected the tax, but couldn’t spend it. The Controller held it in reserve in case the City lost and had to pay the tax back. That means that once the City was allowed to spend it, we had hundreds of millions of dollars to spend.
The second reason is that the infrastructure had to be put in place once the funds were able to be spent. So much of the challenge around early education and childcare is that we don’t have the spaces or the staffing to provide these critical services. That’s why so much of our focus has been on training new educators and building out new facilities. We have to actually create where these services can be. That takes time and we’ve been doing that work.
So put those two things together — being unable to spend money for over two years and then having to build out infrastructure once we were able to spend it — and you have a significant reserve of hundreds of millions of dollars built up over time.
So with this surplus, we have an opportunity to look down the road several years and see that if we help businesses right now in this difficult moment, we will have a more stable funding source for years to come, all while still delivering the landmark childcare policies.
Next Steps
There are some who disagree with our proposal to stabilize our broader economy while still expanding on the landmark childcare policies we’ve implemented. But it’s important that we acknowledge if we don’t reduce the commercial rent tax, and if we keep our taxes at the level they are at now, businesses will continue to make the decision to lease elsewhere, where it is less expensive. This will hurt the long-term prospects of this funding.
My proposals are currently before the Board of Supervisors as part of the budget. The Budget Committee is in deliberations over the next week and a half when a decision on a final budget will be made. My hope is that we can have a budget that both delivers critical childcare funding and that meaningfully supports our economic recovery. Having both is what will make us a stronger, more resilient city in the long run.
