NEWS ANALYSIS : Feinstein’s Budget ‘Deficit’ Creation of an Accountant : Finances: San Francisco shortfall was calculated with assumption of spiraling costs and flat revenues. Van de Kamp made use of issue during gubernatorial candidates’ debate.

At first glance, the situation seems like political dynamite: San Francisco Mayor Dianne Feinstein is handed a $152.6-million budget surplus in 1982 and six years later leaves office with a $174.2-million deficit.

Is this the kind of manager Californians want for governor? Atty. Gen. John Van de Kamp, running against Feinstein for the Democratic gubernatorial nomination, thinks not--and made the point forcefully in Sunday’s televised debate.

“There is a word Mrs. Feinstein just can’t use. . . . Say the word ‘deficit,’ the ‘D’ word,” Van de Kamp told Feinstein during the debate. “It’s easy, and I think you’ll feel better. All of us make mistakes.”

The facts about Feinstein’s Administration, however, are far murkier than campaign polemics.

In fact, Feinstein never produced a deficit budget during her tenure as San Francisco mayor. As with all San Francisco mayors, she was forbidden by law to run a deficit. Her final budget in 1987-88 actually ended with a $16.2-million surplus.

The next year--1988-89, the year in which the massive deficit was predicted--the new mayor, Art Agnos, worked with the city Board of Supervisors to shape a budget that ended with a $40.9-million surplus.

Where did the “deficit” go? Nowhere. It never actually existed. It was not a real deficit but only a projected budget shortfall--an over-cautious accountant’s paper nightmare that assumed spiraling costs and flat revenues.

City Budget Analyst Harvey Rose said San Francisco has projected a deficit every year since the surplus--it is pegged at $23 million in 1990-91--and every year the city deals with it by scaling back spending and raising revenues until a small surplus is left to carry ahead to the next year.

But while the 1988 shortfall--and, to a lesser extent, the 1982 surplus--was the creation of an accountant’s pen, it nevertheless can give some insight into Feinstein’s administrative skill, which is critical to her sales pitch in the June primary for governor.

The surplus--really more like a one-time windfall than a carefully husbanded municipal savings account--gave Feinstein the opportunity to set her own agenda while demonstrating her ability to manage political pressures to spend.

The shortfall--a yearly phenomenon ballooned to politically damaging size by events largely beyond her control--illustrated how she dealt with a hungry bureaucracy and how she approached necessary but unpopular tax hikes and service cuts.

The 1982 surplus was the product of a happy confluence of two events: heavy rains and a favorable state Supreme Court decision. The rain filled the city’s Hetch Hetchy Reservoir near Yosemite, letting the city generate a lot of cheap hydroelectricity at a healthy profit. The court let the city keep business tax hikes made to compensate for the property-tax-cutting Proposition 13 in 1978.

Feinstein, with the consent of the Board of Supervisors, spent most of that money in the next two years, said Rose, mainly on items that had been deferred because of fears of the effects of Proposition 13. Buses were bought, potholes patched, police officers hired and the city’s permanent payroll expanded.

Most of the surplus went to these areas, assisting white-collar and service workers and downtown business interests.

Meanwhile, new social problems were taking more of the city’s attention--and resources. A growing homeless population pushed up welfare costs, for example, while AIDS was starting to nibble away at public-health funds. A smaller share of the surplus was spent on those programs.

Critics have chided Feinstein for using the surplus to balloon the city’s 24,000-person payroll, which already was unusually large because of the wide range of public-transit and other services provided directly by the city rather than by the independent public agencies used elsewhere.

Rose said the city had 2,777 more permanent full-time employees at the end of Feinstein’s tenure than when she entered office. But, the budget analyst noted, many of those people already were long-term city workers at the time they were formally added to the payroll; they had just been hidden in the books as “temporary” workers or outside contractors.

Rose said relatively few additional jobs were created. He noted that Agnos, a Feinstein rival who blamed her for wrecking the city’s finances, has expanded the city payroll this fiscal year alone by 1,150 positions, including a controversial team of highly paid deputy mayors.

Agnos spokesman Scott Shafer said the mayor is not interested in discussing Feinstein’s record. City Controller Samuel D. Yockey, an Agnos nominee who had been critical of Feinstein in the past, also declined to comment.

“I think she did extraordinarily well, considering the tremendous pressure to spend,” said Rudolf Nothenberg, the city’s Chief Administrative Officer, a Feinstein appointee.

At the time, Nothenberg said, conservatives urged her to cut taxes or invest the surplus in capital improvements--roads, buildings and buses. About half the surplus eventually was spent that way. Nothenberg said some surplus was used for expanded services, which eventually would have to be withdrawn or supported by taxes or fees.

“Can you imagine denying all those needs, all those requests while sitting on this pile of money? That clearly is impossible,” he said. “It is not even clear to me that to do that would have been good public policy.”

“This is a very generous city,” said a private consultant to the city who asked not to be named. “People want, and expect, certain services, and do not want to be told we can’t afford it when the city has a surplus.”

Feinstein critics in San Francisco counter that saying no is a crucial part of being the city’s chief executive. They contend she sometimes could not deny bureaucrats and legislators, as when she chose not to veto a generous Board of Supervisors’ pay package even though she objected to its cost.

“The mayor has the budget team and the mayor knows the budget so the mayor should be able to keep things under control,” said veteran Supervisor Richard Hongisto, who vocally needled Feinstein in 1985 for overcommitting the surplus and setting the city up for fiscal problems.

The problem, Hongisto and others said, was that after four years of tighter budgets after Proposition 13 property-tax cuts, city department heads hungrily grabbed for a slice of surplus to make up for earlier cuts and to cushion potential future budget cuts.

“Department heads all collected in her office like little birds in a nest, constantly chirping for more, more, more,” Hongisto said. “The mayor of San Francisco can control those urges, but in this case just didn’t.”

But did spending launched by a surplus-rich Feinstein push San Francisco to the brink of bankruptcy, as Van de Kamp’s ads imply? Not according to Rose and Yockey.

In a joint report presented to an alarmed Board of Supervisors in February, 1989, at the height of the did-Dianne-or-didn’t-she frenzy, the city’s top two budget-watchers concluded that blame for their projected $172.4-million budget shortfall lay outside the mayor’s suite.

About a third of it, $53 million, was because of city worker pay hikes mandated by the city charter. Another $48.4 million was lost to lower than expected tax revenues, in part because the October, 1987, stock market tumble had inhibited consumer spending. This meant lower city revenue for everything from sales tax to real estate transfer fees.

To cover a possible settlement of a back-pay lawsuit by city employees, the city had to set aside $40 million. Drought, another surprise, cut Hetch-Hetchy power sales by $15 million. Voters contributed to the shortfall by repealing a city utility tax that had raised $10 million a year.

Agnos remedied the problem by deferring worker pay hikes for a year, paying off legal liabilities over several years rather than at once, shaving down reserve funds and hiking a variety of fees and business taxes.

Feinstein urged many of those measures herself--though she left them for the more liberal Agnos to actually implement--after the large size of the projected shortfall became public.

“It was my impression when she left (City Hall) that more was made of that ‘deficit’ than there really was,” said San Francisco political consultant Sam Singer, who is not involved in the gubernatorial campaign. “I personally find it hard to believe she’d leave the city in a bind, knowing her . . . spending habits.

“Besides,” he added, “she knew she was going to run for higher office in the near future. So why would she let it happen? Why would she open herself up for that kind of criticism?”