On May 19, Berkeley City Council met to discuss the city's structural budget deficit and potential revenue measures to address it. Throughout the meeting, city staff reiterated a fundamental reality: Berkeley's structural deficit is driven by rising personnel, pension, and healthcare costs that have grown faster than recurring revenues.
But that is only part of the story.
Between FY2016 and FY2026, Berkeley's revenues grew from approximately $376 million to $765 million—more than doubling over the decade. During that same period, revenues grew at an average annual rate of 7.4%, while expenditures grew at 7.7% annually.
Despite this extraordinary revenue growth, Berkeley continues to face a persistent structural deficit. The city also carries substantial long-term obligations, including approximately $700 million in unfunded pension and retiree healthcare liabilities.
The implication is difficult to ignore: Berkeley's fiscal challenges are not simply the result of inadequate revenue growth. Even during a decade of rapidly expanding revenues, the city was unable to keep pace with its long-term financial commitments.
This outcome was predictable. For years, we have been warning that expenditures growing faster than revenues are producing structural imbalances that compound over time.
More concerning is the possibility that Berkeley is approaching a fiscal critical juncture—one in which one or many factors could significantly worsen the city's financial position.
Potential triggering events include:
A slowdown in new development. New construction is one of the few mechanisms that permanently expands Berkeley's property tax base. Recent city analyses indicate that major development projects generate net positive General Fund impacts, meaning a slowdown could reduce future revenue growth.
A stock market downturn. California's fiscal model depends heavily on financial markets. Capital gains taxes generate a significant share of state revenues, while CalPERS investment returns help fund public employee pensions. A major market decline could simultaneously reduce public revenues and increase Berkeley’s $695 million unfunded pension liabilities.
Persistent inflation. Inflation raises the cost of salaries, healthcare, pensions, and infrastructure while potentially weakening financial markets. The result can be widening budget deficits and higher employer pension contributions.
Given these risks, one might expect a robust discussion of structural reforms designed to address the underlying drivers of the deficit.
Instead, the conversation largely focused on service reductions, revenue measures—most notably a proposed sales tax increase—and the impacts of potential budget cuts.
Notably absent was any meaningful discussion of pension costs, retiree healthcare obligations, employee benefit structures, or other long-term cost drivers that contribute to the city's structural imbalance.
The measures currently under consideration may help Berkeley navigate the next budget cycle. However, they do little to address the underlying forces that continue to generate recurring deficits.
A structural deficit ultimately demands structural solutions. The question Berkeley residents should be asking is whether city leaders are prepared to have that conversation before circumstances force it upon them.
