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Santa Monica’s Billion Dollar Budget Reflects Sluggish Uptick

Santa Monica Real Estate Company, Roque and Mark

Pacific Park, Santa Monica Pier

Harding Larmore Kutcher & Kozal, LLP  law firm
Harding, Larmore
Kutcher & Kozal, LLP

By Hector Gonzalez
Staff Writer

June 5, 2015 -- Santa Monica's economy weathered the recession and its outlook appears bright in the short term, but the long-view forecast calls for modest growth ahead, according to an overview of the City's $1.1 billion proposed biennial budget.

The projection is part of a two-year fiscal planning process scheduled to culminate June 23, when the City Council is scheduled to adopt a budget for the 2015-16 fiscal year. At their May 28 meeting, Council members received and heard reports from staff and department heads and voted to “receive and file” the information pending their June 23 meeting.

Planning out a biennial budget allows Council members a view of future finances, said Mayor Kevin McKeown. Staff also provided budget projections through 2019-20 and used data from various economic studies to determine state and national trends and their possible impacts on the beach city's economic future.

“The U.S. economy continues to grow, but at a mild pace,” said the staff overview of City finances. “Economic growth as measured by GDP was positive for the fifth consecutive year, but the recovery continues to be one of the slowest on record.”

According to the report, economic growth over the past five years has averaged 2.2 percent annually, including 2.4 percent in 2014.

Likewise, Santa Monica's General Fund revenues, which pay for most City services and capital improvements, are “projected to be moderate, averaging 2-3 percent annual growth over the next five years,” staff said.

General fund revenues are projected to top $757 million over the next two years. Most of it will go toward employee compensation, including salaries, City pension contributions, healthcare benefits and workers compensation costs-- accounting for about 72 percent of General Fund spending.

Housing markets both nationally and locally experienced a rebound toward the end of last year after a rough 2013, the City staff report said. It cited National Association of Realtors' figures showing a 10.7 percent jump in existing home sales nationally this past March from a year earlier.

Although the recession negatively impacted the real estate market across California, “Santa Monica did not realize the same level of price depreciation as other areas,” the report said.

Instead property values in Santa Monica “have shown strong increases” over the past three years and are the third-highest in L.A. County.

Increased property values “translate into tax gains” for Santa Monica, staff said.

In addition, City sales tax revenue “recovered over the last five years after declining sharply during the recession,” according to the report. Similarly consumer spending at the national level “has been strong, driven by an improving labor market, easier credit conditions as interest rates remain at historic lows” and other factors, staff wrote.

But the growth that has followed the recession could slow in coming years across the nation and locally, although for different reasons, staff projected.

In the U.S. “the pace of economic growth is still relatively slow, job growth has slowed in recent months, and the lackluster European economy continues to be a threat to sustained economic recovery.”

As of April, the nation's unemployment rate was 5.5 percent, down slightly from 5.6 percent in March. Santa Monica's unemployment rate for April stood at 6.1 percent, just below the state's rate of 6.3 percent in April.

In Santa Monica, a slowdown in the growth of sales tax revenues over the next five years as more shoppers buy merchandise online and “the departure of several large retailers” from Santa Monica will decrease sales tax revenue in future years, according to staff's budget overview.

City finance officials did not return a call Wednesday seeking comment on the projected departure of retailers.

Three scenarios -- “probable,” “best,” and “worst” cases -- emerged during staff's budget preparation process this year, two of which project slow to moderate growth in the short term and a deficit within five years.

In staff’s “worst case scenario,” revenues fall below spending, “reflecting the effects of a potential recession,” as well as increases in workers compensation claims and other potential cost increases. That scenario shows a potential General Fund deficit of about $3.3 million next year, increasing to $13.2 million in 2019-20, the summary said.

In the “probable case scenario,” officials expect the General Fund budget will be balanced through 2019-20, when officials project a $1.9 million deficit

A “best case scenario” envisions slightly higher revenues than are included in the proposed biennial budget, as well as lower health benefits costs. In that scenario, the General Fund would be in the black for the next five years, with a positive balance of $7 million in five years.

Other highlights of Santa Monica's biennial budget include new staffing and buses to integrate Big Blue Bus (BBB) services with the Expo Light Rail and increasing Police and Fire Department staffing to respond to increased service calls and more visitors when the new trains arrive later this year.

The budget also sets aside $1.2 million in “residual tax increment revenue each year for affordable housing production,” the staff's summary said. (“Santa Monica’s Proposed Budget Includes Little for Affordable Housing,” May 22, 2015)

Integrating BBB service with light rail “will result in 56,000 additional revenue service hours, 10 new buses, 18 new drivers, “eight additional staff dedicated to the expanded operation, and two additional positions to align with the workload,” the summary said.

Three City funds will require continued subsidies from the General Fund. The Cemetery Fund will need $200,000 a year to stay viable, while the Housing Authority Fund has a projected deficit of $500,000 a year from the loss of state and federal funding, the summary said.

In addition, the City’s Pier Fund “is not able to sustain an adequate balance” to cover operating and capital expenditures and will require $900,000 a year from the General Fund, said staff in the budget summary.

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