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Financial Forecast Cloudy as City Prepares to Unveil New Budget

 

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January 18, 2019 -- After several years of strong economic growth in Santa Monica, the trend could be slowing, due in part to a rise in internet sales and the sharing economy, according to a report released by the City Thursday.

According to the Ten-Year Financial Forecast, average annual growth in Santa Monica has dropped from more than 8 percent in the three years following the 2007-09 recession to 4 percent over the past three years.

While the forecast for the City’s General Fund calls for a "modest revenue growth averaging 2.3 annually," a projected $467 million unfunded pension liability could drive the City into increasing debt, officials warned.

"Not only is the (unfunded liability) the primary factor driving rapidly rising City expenses over the next ten years," staff wrote, "the likelihood of a recession in the years ahead could increase that debt load."

The forecast -- which will be presented to the City Council next week -- lays the framework for a Proposed Biennial Budget for Fiscal Year 2019-21 that will be the subject of two study sessions on June 4 and 5, officials said.

The report's ten-year projections show annual general fund revenues dropping under a "probable case scenario" from a $1.1 million surplus in the 2019-20 Fiscal Year to $31.5 million in the red in 2028-29.

Under the worst case scenarios the revenues would drop over the same period from $3.3 million in the red to $65.3 million in the red.

A Pension Advisory Committee established by the City Manager last year has recommended an accelerated plan to pay down the City’s current unfunded liability over 13 years.

The additional payments would increase the City's projected debt from $6.2 million under the probable case scenario for the upcoming fiscal year to $39.8 million ten years from now.

Under the worst case scenario the debt could rise from $10.5 million to $73.6 million, officials said.

To eliminate the projected shortfalls and also maintain "a fiscally prudent level of General Fund reserves" staff is proposing a short term-budget strategy.

The strategy "identifies services that can be done in a more efficient way, or that may be eliminated," reallocates resources and considers "potential staff attrition, additional staff cost sharing of retirement benefits and new sources of revenue."

Santa Monica's strong economy -- which has resulted in a AAA bond rating from all three national rating agencies -- should continue seeing growth in its major revenue sources, staff said.

These include:

* Property values, which are the third highest in Los Angeles County and are expected to see a moderate increases;

* Sales taxes, which are expected to see only modest growth as on-line sales continue to grow;

* Tourism revenues, which will continue to be strong and become stronger as new hotels come on the line, although the forecast could be tempered by the growth of home-sharing;

* Business license taxes, which should show baseline growth, while utility user taxes are expected to remain "relatively flat," and

* Parking revenues, which saw a drop after the arrival of the Expo line and the rising popularity of ridership services but are back to previous levels after the City Council increased parking rates.

"As with the State and national economies, the threat of a recession could significantly alter revenue projections," the report said.

Almost three-quarters the City's $1.57 billion biennial budget is composed of labor costs, officials said ("Santa Monica City Council Approves Record Budget," June 29, 2017).

"A number of these costs, including retirement, health insurance and workers’ compensation, increase at a rate that is higher than the CPI (Consumer Price Index) and represent significant budgetary challenges in the years to come," staff wrote.

"As in past years where the forecast shows an upcoming shortfall, staff will work as part of the Biennial Budget process to realign spending in order to ensure that the City’s FY 2019?21 budget provides a fiscally sustainable plan," staff said.


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