City’s finances flexible but cuts may still be necessary
Council members sat in stunned silence after being told the city’s future economic outlook continues to spiral downward.
Finance Director Mike Dennis reported to the city council Tuesday that next year’s budget deficit has grown to nearly $8 million and the budget deficit for the following year may reach $18 million.
Sales tax revenues from automobile dealers, restaurants, hotels and retail stores — the top generators of local tax revenues — reported a 3.5 percent decline from the same period last year, when the country was already in the depths of a recession.
Overall, city wide sales tax revenues plunged $300,000 in the first quarter of this year, forcing officials to lower the amount the city is projected to make this year by at least $1.5 million and leaving city council members with more tough budget decisions.
But the main reason the city is facing such dire economic conditions is because of skyrocketing health insurance costs and higher premiums the city must pay into CALPERS, the state municipal employee retirement system.
Due to catastrophic loses on its investments in the past two years, CALPERS officials believe the city’s payments into the system will rise by 30 percent by 2004.
“And that assumes that we are going to have a gradual recovery,” Dennis said. “The issue is the rate of recovery is not at the same rate as our costs are increasing, so even though things are getting better we have this gap between revenues being made and expenses that need to be paid.”
Dennis warned that if recovery from the recession takes longer, if economic activity doesn’t pick up, or if there is another shock to the economy, the deficits would only swell to greater sizes.
Councilman Ken Genser said officials are uncertain just how bad the economic state will get.
Officials found the city has $3.2 million left over from last year’s municipal budget. The extra money — which is attributed to budget reductions, a state refund and several late payments — will be used to offset projected sales tax loses this year.
“We have to engage the public on what needs to be done. This is a very important issue.”
“We don’t know how things will be in a year or two, but the trends are not good. We have to engage the public on what needs to be done. This is a very important issue.” — he said. — KEN GENSER Santa Monica City Councilman
“We don’t know how things will be in a year or two, but the trends are not good,”
The city council voted Tuesday to raise many fees charged for building permits and for city inspectors to review construction projects so that the city is no longer subsidizing the work.
The increased fees are predicted to bring in $600,000 for the rest of this year, but it cannot be used to cover the looming budget shortfalls.
Even before the economic fallout after the Sept. 11 terrorist attacks, Santa Monica officials began a series of budget cut backs and holding expensive capital improvements to keep the city’s spending proportional to the amount it was taking in on sales and hotel room taxes.
However, sharp declines in Santa Monica’s tourism industry deeply eroded much of the city’s tax revenues, leaving officials with a $20 million budget deficit.
To make up for the loss in funds, each city department was required to cut 2.5 percent of its budget, a hiring freeze was put into effect and more than $20 million capital improvements were put on hold.
Genser said there are only so many capital improvement projects the city can put on hold before real cuts will be required.
“It’s one way to conserve, but I don’t know what we can do at this point,” he said. “Some of the things we have postponed will become necessary and there will become fewer and fewer things to postpone.”
“Clearly we are going to have some issues to deal with no matter what,” he said.
While Santa Monica’s tourism industry appears to be rebounding, consumer confidence is being eroded by worsening economic trends and a possible war with Iraq, officials said.
And with an already lean budget this year, officials believe any further cuts may require discontinuing some services and increasing fees and taxes.
“The city’s financial system and position has flexibility in it to close these budget gaps through various strategies, however the selection of the strategies is going to involve difficult decisions,” Dennis said. “Further expenditure reductions — which will probably impact services and service levels — and revenue increases that will have folks paying more may be needed.”
Originally published in the Santa Monica Daily Press print edition on October 24, 2002. Read the original PDF.