supervisor avalos: good afternoon. welcome to the budget and finance committee. this is the full committee of the budget and finance committee. i'm chair john avalos, joined by supervisors ross mirkarimi and david campos, supervisor sean elsbernd. i believe sophie maxwell, i'm not sure if she'll be coming, but let's give her -- let's excuse her if she's going to be absent. can we motion to excuse supervisor maxwell? okay, without objection. [gavel pounded] the clerk of the committee is ms. gail johnson. do we have any announcements? >> yes. all persons attending this meeting are requested to turn off all cellphones and pagers. if you wish to submit speaker cards put them in the container by the rail in front of you to your left.

if you wish to submit copies of material to members of the committee, please submit an extra copy for the file. items sent out of committee today will be considered by the full board tuesday of next week unless another day is indicated. >> we actually have, supervisor maxwell, with us, so we're a full committee in quorum. madame clerk, if you could please call -- let's call all the items on both calendars. we'll do the regular meeting and also the special meeting, please. actually, i apologize, we'll do the regular meeting, and we'll do the -- item number one on the special. [clerk reading item 1 on the regular meeting agenda]

supervisor avalos: thank you, madame clerk. item number one on the regular committee, i'd like to see, colleagues, if we could do it the latter part of our meeting today after we deal with the special committee items. that's if you're okay with that. so we'll go ahead with item number one. is there anyone from the city departments presenting item number one?

>> good afternoon, supervisors. i'm with the controller's office of public finance. the item before you approves the issuance of obligations for national center for international schools in the aggregate amount not to exceed $26.5 million. there's no fiscal impact to the city. the city is not responsible for repayment of the obligations. i believe there's representatives here from the school to discuss the project if you have questions. supervisor avalos: okay. thank you. colleagues, any comments or questions? let's go on to public comment on item number one. any member of the public that would like to comment please come forward. okay, we'll close public comment. move forward with recommendations, without objection, colleagues. [gavel pounded] very good. madame clerk f you could please

call item number two. [clerk reading item number two] supervisor avalos: thank you, madame clerk. this is one of several items that we'll be hearing today. we have these items that are revenue measures, will be -- the plan is to move them to the full board where there we will have the final discussion about if we're going to move them forward to the ballot or not. we will do so next tuesday. this measure is one that i have brought forward. last week we did amendments to make sure that this new increase

in the real estate transfer tax would affect properties above -- sold at a value above $5 million and above $10 million for properties sold above $5 million the proposed increase would be from 1.5% to the 2%. so it's a .5% increase. for properties sold over $10 million, the increase would be a 1% increase for those properties sold with a value over $10 mel. compared to other cities, if we were to go forward with a real estate transfer tax of this size, we would be presenting a progressive tax where other major cities have more of a flat real estate transfer tax. in comparison, there are some

cities that have a tax -- a local tax and a state tax. the city new york city has a 3% combined real estate transfer tax. the city of philadelphia has a 4% real estate transfer tax for commercial property. so we would have a measure that would be less than those places. i do believe this is a measure that is necessary, especially given the uncertainty of revenue and the need for multiple solutions to our budget deficit, including restructuring our government, including the labor concessions that have already been made in labor, but we also have to be looking at revenue. and this one, i believe, could be viable. i'd like to ask that we could move this forward with your support, colleagues. this would also not affect people who are single-family homeowners. the increase would -- their real

estate transfer tax would remain the same. so it's really looking at commercial property property on that end. we have a report from mr. ted eagan, from the controller's office, office of economic impact. he can share with us the record. mr. eagan, thank you for your work. >> thank you, supervisor. good afternoon, supervisors. ted eagan, chief economist in the controller's office of economic analysis. my office has today filed an economic impact report on this item that i'd like to summarize now. as supervisor avalos indicated, the city charges a transfer tax on transfers of real property, equal to a percentage of the property's sales price. the tax is a progressive tax, in that sellers of higher value properties pay a higher tax rate. the proposed legislation would split the highest bracket and tax the -- and raise the tax

rate only in these two highest brackets greater than $5 million. this is a summary of the current and the proposed transfer tax rates. you can see that under the current system there are four brackets, less than $250,000, $250,000 to $1 million, $1 million to $5 million, and $5 million plus. on the right side of this table, the less than $250,000 to stay, the 250,000 to 1 million stays the same, the 1 million to 5 million stays the time. a new bracket from $5 million to $10 million is created, going from 1.5% to 2%, and a new bracket from $10 million above and that goes from 1.5% t 2.5%^ ^. designed in this way, the increase to this tax would almost exclusively go to commercial properties, and in particular office properties in the city.

in terms of the fiscal impact of this, the transfer tax is the city's most volatile source of tax revenue, estimating in any given year changes to the tax for the amount of revenue the tax generates always involves a lot of uncertainty. if the tax of these rates had been in effect over the past nine years, in some years the city would have generated as little as $6 million from this increase. in other years, the city would have generated as much as $90 million. because this is a tax on the upper end properties, and there are relatively few of them, and their volume is quite volatile, this is really the most volatile part of our transfer tax base where this new revenue would be coming from. if you average the experience over the past nine years -- and that's a fairly good record, some good years, some bad years -- the average revenue gain for the city is $35 million. and that's the value that we used in estimating the economic impact of the legislation.

as i mentioned, the vast majority of properties affected by this tax increase would be commercial real estate, in particular offices. the effect of the tax increase would be to reduce the value of the property for two reasons. first of all, the current owner of the hospital woul property we higher a payment on transfer, and the buyer would pay less for the property because they would have a higher tax transfer when they sold it. the higher tax rate would effectively get built into the property value in a negative way. for this reason the seller of a property would not be able to pass the tax on to a buyer during a transfer. a buyer would not be willing to pay more for the property, simply because the seller wished to share the cost burden with them. on the contraction a buyer would be willing to pay less. what that means is the direct effects of the tax is to reduce the value of the assets as currently owned, and to reduce, if you look at the -- at a

commercial office building as an asset that has an origin and an ending point, when you buy and sell the property, the overall net income generated by the owner would be reduced by this tax. office owners will respond to that by trying to raise the rents and raise the net income of the assets from their current tenants. we believe that the market would largely be successful, because this does affect almost every office building in san francisco. they would all be similarly situated in terms of facing this additional tax burden. and in the same way that another tax measure that's before you, the progressive payroll measure has a commercial rent tax component that we project leads to higher rents for businesses, we would project this too would lead to commercial property owners to try to raise rents to recover the value of their asset. so the -- supervisor avalos: supervisor maxwell. i apologize. supervisor maxwell: are you saying, then, instead of them recouping, trying to recoup it

on the back end when they sell it, they would recoup it during the time that they own it? >> that's correct, because they can't recoup it at the back end because their buyer would pay less for it actually. supervisor maxwell: they would try to recoup it? >> if you're a tenant, you know, you have two choices -- deal with the landlord who wants to pass a higher tax on to you or move out of san francisco. in the same way that with the commercial rent tax, although the taxes on the commercial property owner we project that the bulk of that tax will be passed on to the tenant, this works the same way. it's because it affects all the property owners at the same time that you really don't have a choice. if you don't like the offer from one landlord who wants to raise your rent, you go across that street. that landlord is in the exact same situation. >> if we're looking at the bay area, i mean, would that person be very successful in finding somebody that doesn't have a transfer tax or doesn't have some kind of tax that's

comparable to this? >> i think the question is, comparing things to the status quo as they are now. they would be successful looking in other jurisdictions, unless those jurisdictions also passed the transfer tax of the same magnitude at the same time. >> but would it be just a transfer tax or is it the value of the property, period? i mean, our land values tend to be higher than, say, other places, lafayette maybe. i mean, i don't know. >> right. >> supervisor maxwell: it seems they could have the same taxes that we do, but because the base is different it would be lower. >> that's certainly true. the way things are right now some businesses elect to be in lafayette for those reasons. some businesses elect to be in san francisco despite the higher costs. but when you're analyzing the effect of a change in cost, you would expect 32 be some change in behavior on the margins. businesses that said -- and again i don't -- as you'll see from the magnitude of the impact we're talking about, it

certainly isn't most businesses or many businesses, but some businesses will say with the additional rent that i'm getting that decision of san francisco versus another place tips the other direction. supervisor maxwell: all right. but it's a modest group that would do that, because they're probably on the margin anyway? >> that's correct. supervisor maxwell: okay. thank you. supervisor avalos: let's take a building that's $333 million. $500 million transfer tax. there are 100 offices in that building. how does that $5 million get translated into higher rents and higher leases for those offices? how is that spread out over, you know, the lifetime of that lease? what with amount would that be and how significant is that

increase on the tenant? how would that range in terms of a building of that size? >> the property owner would like to recoup the $5 million they would eventually pay in additional rent over the life of the building. that's what a competitive real estate market would tend to want to do. i won't try to do the math on the fly. i would certainly say, based on the employment changes that we're projecting, that rents will rise enough for some businesses to leave, but certainly not most businesses to leave. the main point i'm trying to make here is that every potential landlord that a business would go to in san francisco is going to all be looking to ship their piece of the transfer tax on. and so that is the way in which we would project that the bulk of the tax would eventually be paid by business tenants in the city i'd have to spend time with a spreadsheet to figure out your

exact example. supervisor avalos: and at the same time commercial landlord who purchased the building -- could be purchase a value that's at a higher value than the previous landlord, so there's already kind than of a -- on the assumption that the market landlord will be purchasing the building that there could be additional costs on to tenants because of the new purchase price. >> that's possible, too. although that's not, you know, not directly covered by the policy, so that's not part of our analysis. it's worth pointing out that a seller, despite a higher transfer tax, may be well selling a building at more than what they paid for it. so that income would sort of come out of their property of the income. but it's -- supervisor avalos: that's often the case. >> that's often the case. it's less often the case now, but during good times it certainly is the case. but everything is relative to sort of -- supervisor avalos: people buying

buildings now, we expect that will be the case, because they're buying at the trough in our -- >> if they're buying right now, yes. but if you look over the past two years, there have been a number of buildings that have sold at a loss. in any event, it's all relevant on what the expected return on equity was when the building was purchased. when there's a sudden negative surprise on that, the reaction of the building manager is to say i need to try to recoup that income. if all of them are facing the same situation, there's going to be wide special to raise that money from someplace. it not the totality of the fund paid by the tenant, but the significant share. in our analysis, based on work we did during our business tax reform research, we think about 80% of the commercial real estate that would be affected by this legislation is occupied by renters, and 20% that would also be custody by this legislation

is owner occupied. when those owner occupied buildings sell, that just has to be swallowed by the business. there's no one to pass that on to. but of the 80%, again, keeping with our research on the other item, we think that about 90% of that tax responsibility will go on to the tenant. and so the analysis that i'll present on the next page is basically the consequences on one hand an additional $35 million for the city a year, and, on the other hand, an additional $35 million of expense coming out of the private sector with roughly a third coming from the commercial real estate sector, and the rest coming from industries that are major occupiers of downtown office real estate, professional financial services and corporate headquarters. supervisor avalos: supervisor elsbernd has a question. supervisor elsbernd: thank you. just listening to the comments about how this tax could lead to increased commercial rents i had a thought about posing this question to you about. the analysis you've presented on

each of the individual tax analyzes potential job creation, job loss, if that individual tax passes. does the analysis change in any way if this tax and the commercial property tax measure passes? so you'll have two measures that will result in commercial property taxes -- or commercial property rents going up. do i take a look at how many jobs are created by one, how many are deleted by the other? i would imagine the analysis a little more complicated than that. >> the model that we used to make these estimates i think is more sensitive than that. i could certainly offline run what a combination would look like. i don't think it would be wildly different, but i don't think it would be exactly the same. supervisor elsbernd: thank you. >> so as i was saying, what this

impact analysis, which shows the impact we're projecting each year over the next 20 years on public sector employment, on private sector employment, and on the two together, is based on a scenario in which the city's revenue increases by $35 million a year, and $35 million of higher costs is shared between the real estate sector and sectors which are major consumers of downtown real estate. the impact of the legislation throughout the 20 years, i think it's fair to say in the context of the san francisco economy, is very small. there are about 550,000, maybe slightly fewer now, wage and salary jobs in san francisco. we're talking about between 0 and 250 private sector jobs being reduced in any given year over the lifetime of this analysis. so it's, you know, considerably less than .1% of employment that's at stake here.

nevertheless, in the early years, the legislation has a net positive impact as a number of local tax measures do, because the stimulated impact of supporting public sector employment kicks in immediately, it takes a while for the contractionary impact of higher taxes and higher rents to have an impact on public/private sector employment. so for the first three or four years of the legislation we see a net employment effect that's positive because it sustains public employment in public sector spend, but in time the effect of higher rents on sectors like professional financial services, corporate headquarters, reduces -- basically results in those businesses that we were talking about shifting in the neighborhood of 100 to 200 private sector jobs out of the city. i should also point out, this is not, in no particular year, will san francisco see a drop in jobs of 200 jobs. for example, we've lost about

50,000 jobs in the city since the recession started in late 2008. if the job recovery begins to be robust, we could see 20,000 jobs come back in a year. even if it's not robust, we could see 5,000 to 10,000 jobs come back in a slow year. in the context of that we're not talking about an enormous number of jobs, but in terms of moving the needle in one direction or another, this is going to cost jobs for the city's economy after 2014. it also has an impact on overall g.d.p. in the city that we estimate is $30 million over a year over the next 20 years. the city's g.d.p. is around $85 million a year, a small fraction of that, but a negative number. that concludes my report. i'd be happy to take further questions. supervisor avalos: supervisor maxwell. supervisor maxwell: thank you. this is somewhat related, but have you done any studies that show what services that cities

can do, or that they do, that make people feel or think that this is a part of why they pay taxes? and is there something that we don't do that they don't feel they're getting the value? >> i mean, i think to answer your question directly, i haven't done that kind of study here. but if i can build on your point, one of the things that we don't consider in our economic impact analysis of tax legislation is what specifically the city does with the additional money that's a budget decision outside of the context of how you get $35 million. than the discussion of how that's spent becomes a different matter. in general it's certainly true that you can't have a healthy private sector unless the public sector is doing things that are -- you know, that a high-performing economy needs. and our economy hinges on the

public sector in lots of different ways. so i never mean to minimize that. it's just we can never go into any more specificity than saying in general what's $35 million mean in terms of city employment based on the average salary of a city worker. in general, what's $35 million mean in terms of the city spending on contractors and the city government as an economic engine. and so the city is a piece -- as it's not the same thing as the investing in a park or infrastructure which might catalyze economic development. supervisor maxwell: dune of any municipalities that do that, some that have a robust public sector? new york that is a whole agency that deals with thei businesses^ . do you know if they do something that gives people an idea of where that money is going?

>> candidly, i don't know of cities that do rigorous cost/benefit analysis of what they do. every city has an economic function that's responsive to business, but i don't think that's the same question you're asking. supervisor maxwell: do you think that's something we should consider, even though businesses don't do it -- i mean, people don't do? is it something we should consider and would it benefit us any? >> it would help the city overall in terms of what are the high impacts. supervisor maxwell: give me an example. >> what's the impact of spending on -- well, i think a park is an interesting example, because it's not a direct business benefit, but it does increase the amenity value.

it makes it easier to attract and retain workers, improve the quality of life, and directly is an ingredient to business recruiting. that would be an interesting thing to try to quantify versus investment in expanding bugs transit, for example, which also has business benefits in terms of shortening commutes and reducing the cost of transporting workers to work, things like that. almost everything that the government does benefits business directly, or indirectly, because it benefits people directly, which are the labor force that drives that business. but i'm not aware of sort of systemic studies. my office doesn't get into the economic impact of specific appropriation decisions. i do think it would be an interesting exercise to sort of look at potential high impact things the city could do. like, what are the things that the city spends money on to have, you know, greater employment benefit than others?

supervisor maxwell: thank you. >> okay. supervisor avalos: colleagues, any other comments or questions? we can go into public comment. thank you, mr. eagan. public comment is open on item number two related to the real estate transfer tax on our special meeting. >> good afternoon, budget and finance committee. i'm walter paulson. ♪ property tax you know it's not new ♪ come on board we're expecting to transfer to you ♪ and property tax won't hurt anymore ♪ and you know there's no tax on a water boat tax shore ♪ and tax money. ♪ want to take it all away ♪ we're gonna see you ♪ you're going to have transfer

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