Budget woes mean widespread cuts
(Editor’s note: This is the second article in an on-going series that examines City Hall’s current financial crisis. Monday’s article will focus on proposed tax increases and other budget cuts.) As officials grapple with how to close a $12 million budget gap in the next two months, city employees worry about whether they’ll have a job by the end of the year.
Department heads throughout City Hall, with the exception of police and fire, have been asked to cut 5 percent of their budgets this year and another 5 percent next year, which will include employees.
The reductions will save City Hall between $4-$4.5 million this year, said City Manager Susan McCarthy.
City officials released their latest projections on Thursday, which will result in cuts in services, employees and capital improvement projects. Increased taxes also are part of the proposal which will be presented to the Santa Monica City Council in June, when the city’s budget is expected to be adopted.
The economic realities are so severe that even with cuts and increased tax proposals, lay-offs are inevitable. But officials hope they can stave off eliminating some positions by not filling vacant jobs.
Not only can residents expect to see some services and projects disappear, City Hall may not be in a position to deliver a high level of customer service as a result of the cuts.
“As they have less resources and fewer colleagues to work side by side with, their work becomes more challenging,” McCarthy said, adding even more reductions will be made in the department’s expense budgets.
Facing an $8 million revenue shortfall last year, departments in City Hall last summer cut between 3.5 and 5 percent of their budgets, which accounted for nearly $2 million in departmental operating budgets. And millions of dollars in capital improvements were cut from what was budgeted two years ago.
In the past few weeks, City Human Resources Director Karen Bancroft has met with the nine collective bargaining unit leaders, who represent various municipal employees, to explain the proposed cuts. Discussions also center around negotiations of employees’ salaries and benefits.
The reaction from the employees’ union representatives indicate that they are frustrated because the city continues to spend millions of dollars on capital improvement projects like the $60 million New Main Library and a $13 million parking garage underneath it — instead of protecting their jobs.
“In a city like this, it’s inexcusable,” said a city employee familiar with the union talks, who asked not be named for fear of retribution. “Tell me Santa Monica is broke, give me a break.”
McCarthy and City Finance Director Mike Dennis point out that the money used to pay for major capital improvement projects are “one time funds.” If those funds are used for the deficit, it’s nothing more than a short-term solution to a larger problem. Officials say it’s bad fiscal policy to use one-time monies to pay for ongoing needs.
“It’s very rare to use one-time sources of money to shore up ongoing operating expenses,” she said. “All you are doing is postponing the inevitable.”
McCarthy said the state of California has done that in the past, which is one reason it now faces a $35 billion deficit. Dennis said New York City’s budget in the 1970s was a complete disaster for the same reason. Taking money from projects to pay for ongoing operating expenses will not address future financial situations, he said.
Others suggest that the city dip into its reserve funds, which is about $16.7 million, or 10 percent of its expenditures, to cover the deficit.
But McCarthy said dipping into reserves could not only be risky if something tragic happened, it would only cover two months of City Hall’s operating expenses.
“The purpose of the reserves is that it’s not the rainy day fund, it’s the 100-year storm fund,” she said. “It’s a terrible thing to use to keep basic services going.”
There are a variety of factors contributing to City Hall’s financial woes, including increased expenditures in the city employee’s retirement funds, increased costs in health insurance premiums, higher worker compensation costs and increased spending last year by the City Council for capital improvement projects.
At the same time, revenue projections in user utility taxes, sales taxes and bed taxes throughout the city are off substantially because of effects of the recession, the Sept. 11 terrorist attacks and the war with Iraq.
City officials also predict that the state will take back $4.1 million to help close its deficit, which is not yet calculated in Santa Monica’s $12 million deficit because the state has not yet proposed how it will fill its gap.
The state is supposed to adopt its budget in June, but city officials predict it could be months before the state gets its act together. So instead of waiting for the state to pass its budget, city officials plan to present a proposed budget to the Santa Monica City Council and then have a strategy in place to address the negative effects of the state’s cuts.
“There is no point in passing a budget based on what the state may do,” McCarthy said. “When the state legislature can’t get their act together, it could negatively impact cities and that’s why it’s important to have a credible plan.
“We will have a strategy in place for dealing with it,” she added.
The state could take away revenue from Santa Monica in the form of property taxes and motor vehicle registration fees, both of which the city receives a portion of from the state. City officials anticipate the state will dip into those revenue streams, as well as others.
City officials plan to give the City Council two years of budget information because Santa Monica’s tumultuous economic times are expected to last until at least 2006. If there is any good news, it’s that the city has a little room in its budget to be flexible.
“We can buy a little time without borrowing,” McCarthy said. “The benefit of a two-year projection is that we know what the anticipated cuts will be for the next year.”
She added that the city does a five-year financial forecast using various resources including Cal State’s economic department. Based on that information, city officials project what its revenue will be and is then gauged in the upcoming budget. But because of the already mentioned factors, that forecast is off dramatically.
“We use that five-year forecast as the basis to realize if we can stay in balance with revenues and expenditures,” McCarthy said.
This year’s cuts are the most severe the city has experienced in decades. The city made deep cuts in 1992, but recovered quickly because of a decade of unprecedented fiscal expansion. Just like now, the 1992 cuts were a result of an economic recession but it appears the current economy won’t bounce back anytime soon.
“There is nothing on a state or national economic level that indicates a better picture,” Dennis said.
During the late 1990s, Santa Monica enjoyed a strong local economy and saw a growth rate in revenues between 6 and 7 percent.
But city officials also knew in the back of their minds that the good economic times wouldn’t last forever so they were careful in not becoming dependent on one-time monies to pay for ongoing needs.
“We are not Shangri La,” McCarthy said. “But now we have less certainty this year than any year. We always felt that we had the resilience to deal with factors from the state.”
The goal now is to get expenditures to match the city’s revenues, which will take at least three years.
“Then we’ll get to a 2 to 3 percent, normal growth rate again,” Dennis said. “For two to three years we are going to crank down on expenditures and increase revenues.”
Originally published in the Santa Monica Daily Press print edition on April 12, 2003. Read the original PDF.