Santa Monica will need to tap into $60.5 million in reserves over the next five years to maintain current service levels as the city grapples with lingering economic impacts from the COVID-19 pandemic and recent wildfires, according to a proposed budget to be discussed at Tuesday’s Council meeting.
The city's proposed $789.9 million budget for fiscal year 2025-26 relies on working capital reserves to balance both years of the biennial budget, highlighting the ongoing financial strain facing the coastal community known for its tourism and retail sectors.
"The city of Santa Monica's Fiscal Year 2025-27 Proposed Biennial Budget is one focused on resiliency," Finance Director Oscar Santiago wrote in a report to the mayor and City Council. The budget aims to withstand economic disruption while preserving city services and programs in the face of dim fiscal news.
The city's challenges stem largely from sluggish recovery in key revenue streams that together account for 46% of General Fund revenues. Transient occupancy tax revenue, a tax paid by tourists that is critical to the city's finances, is recovering more slowly than anticipated despite rate increases approved by voters in 2023.
Hotel occupancy citywide hovers around 70%, while international visits to the U.S. declined approximately 14% in March 2025 compared to the previous year, according to federal data. Each 1% drop in international visitor spending translates to about $1.8 billion in lost national export revenue annually.
Sales tax collections have also declined, impacted by reduced tourism and consumer spending shifts. Revenues through March 2025 are tracking $1.2 million, or 3%, lower than the previous fiscal year. Parking-related revenues show modest 1.75% annual growth, but remain well below pre-pandemic levels due to increased online shopping and remote work trends.
To address the budget gap, the city has implemented several cost-saving strategies while attempting to maintain service levels. The budget caps growth across all departments and continues to defer needed maintenance of streets, parks and public facilities.
The proposed budget includes 11.5 new full-time equivalent permanent positions citywide, though the city remains 162.6 positions, or 7%, below pre-pandemic staffing levels from fiscal year 2019-20.
Capital improvement funding remains severely constrained, with the General Fund allocating just $15.1 million annually for infrastructure projects—far below the $21 million allocated before the pandemic. This underfunding has created a growing maintenance backlog for city infrastructure.
Adding to the financial pressure, potential federal policy changes threaten funding for major projects including the Pier Bridge Replacement Project and federal grants supporting the Big Blue Bus system, affordable housing programs and public safety initiatives.
The city has compiled an inventory of federally funded projects and is working with lobbyists to assess impacts, though staff have not yet halted any projects. However, opportunities for new federal funding are not expected.
The city's financial position has been further weakened by significant legal settlements. Santa Monica has paid over $230 million in settlements related to former employee Eric Uller, with $159.6 million covered from reserves. Additional claims remain pending.
The California Voting Rights Act case has been referred back to trial court with a potential trial date in late 2025, creating additional uncertainty.
The five-year financial forecast paints a challenging picture, with limited growth expected in key revenue streams as global tourism and retail sales recovery remains slow. The city estimates it will need to use approximately $60.5 million in General Fund reserves through fiscal year 2029-30 to maintain existing services.
Finance officials warn that additional budget measures would be required if the regional economic downturn persists, if the city must assume debt through bond issuance to cover legal liabilities, or if federal funding for public safety, transportation and affordable housing disappears.
Despite the constraints, the budget focuses on three council priorities: affordable housing for all, clean streets and safe neighborhoods, and economic opportunity and growth. Limited enhancements are funded through new revenue sources including voter-approved Measure K, which raised parking facility taxes and is expected to generate $6.7 million annually.
Tuesday’s hearing is an update on the budget but its final adoption is scheduled for June.
Council will meet at 5:30 p.m. in City Hall, 1685 Main Street.