San Francisco's lowered home values and high unemployment rates have created another unwelcome side effect: far less revenue coming into city coffers than expected.

A report released Monday by the controller's office shows that property tax revenues will likely be $35 million less than anticipated in the 2009-10 fiscal year that began July 1. Payroll tax revenues will probably be $24.8 million less than expected, the report said.

To make matters worse, some city departments are going over budget, including shortfalls of $5.1 million in the Fire Department, $4 million in the Sheriff's Department and $3.2 million in Superior Court.

This year's $6.6 billion budget bridged a $438 million gap and included a $25 million cushion for unexpected revenue loss. But that's proving not enough to make up for the missing dollars, meaning San Francisco is now expected to be in the red by an additional $28.1 million over the course of this year.

"I don't even know if I have words to describe how bad this is," said Steve Kawa, Mayor Gavin Newsom's chief of staff.

Kawa said the mayor's office will send out letters to department heads today outlining how much spending will need to be cut to balance this year's budget. Another round of letters will go out to department heads Thursday describing how much more will have to be cut for the 2010-11 year. City officials will formally begin discussing next year's budget in the next few months.

Gloomier next year

Next year's budget deficit is likely to top $400 million, Kawa said. That forecast could get even worse with federal stimulus money coming to an end next year and the state likely to help balance its own budget woes by cutting money sent to cities and counties.

"It may be the perfect financial storm," Kawa said. "It's going to be incredibly difficult to find a way to balance next year's budget without some severe impacts."

In the near term, the fight over midyear cuts could get ugly. Already, several supervisors are at odds with the mayor over the supervisors' plan to approve spending $7 million to rescind more than 500 layoff notices going into effect this week for city and school district workers.

Seven supervisors voted to approve the plan last Tuesday, falling one vote short of the eight votes required - and sending the plan back to committee for further discussion.

Report criticized

Supervisor John Avalos, a proponent of the $7 million bailout and chairman of the board's budget committee, said the controller's report is disingenuous because it includes the $7 million in its $28.1 million shortfall estimate as if the money had been spent. But at the same time, the controller says he will block the spending of the money even if the supervisors eventually approve it.

Avalos said the controller's report also failed to account for $34 million expected to come into the city from the state later this year that is linked to new hospital fees and Medicaid reimbursements.

"It's a little bit cooked," Avalos said of the report. "They've painted the picture a little darker than it really is."

Avalos added the $35 million in decreased property tax revenue is an estimate based on 4,000 appeals by property owners to have their property tax assessments lowered. Avalos said there's no telling whether those appeals will be approved by the assessor's office.

Supervisor Sean Elsbernd said he expects the $35 million figure to wind up being conservative. He said 350 property owners had filed appeals by this time two years ago, and their properties were worth a total of $2 billion. This year, the 4,000 property owners represent property totaling $25 billion.

Elsbernd said that's why the board needs to get serious about major fiscal reform, including employee health benefits and retirement systems.

"These numbers are dramatic," he said. "We need to go after the big money now. A clip here, a clip there doesn't get it done."

New budget deficits Oakland $19 million shortfall after the first fiscal quarter San Francisco $28.1 million shortfall forecast for entire year