City Officials Hammer Out Plan to Bridge Shortfall

By Jorge Casuso

Dec. 22 --Faced with a projected $8.5 million budget shortfall -- which, if not immediately addressed, could double the following year -- City officials are crafting ways to trim costs without cutting services.

To bridge the gap -- which is due to a staggering $34.8 billion deficit faced by the State -- City officials have outlined a specific set of strategies they will present to the City Council next month.

The strategies, said City finance director Mike Dennis, are "designed not to adversely impact services or disrupt staff," and instead will focus on "a strong effort to increase efficiencies of operations" while "looking at some revenue options."

But Dennis warned that service cuts could be on the horizon if the economy continues to falter. "We're fortunate we have some flexibility," Dennis said. "If the situation doesn't improve or gets worse, we may have to look at cutting services. That would be the last resort."

The City's financial woes are tied to the ever widening State budget gap and a downturn in tourism, one of the City's major industries.

"The magnitude of the state budget situation is just unprecedented," Dennis said. Santa Monica, he added, faces a "financial management challenge because we're impacted by forces we can't unilaterally control -- the state budget and visitors.

"The impact on the city is not only what the cuts are going to mean," Dennis said, but likely State tax increases "are going to take money out of people's pockets that they would spend and further slow down the economy."

Among the proposed strategies City officials will present to the council at its mid-year budget review January 14 are the following:

• Scaling back, if not halting, transportation projects.
  
  
• Increasing parking meter and parking citation rates.
  
  
• Deferring or cutting capital expenditures. (Officials caution that that only generates one-time savings.)
  
  
• Reducing the amount allocated yearly for capital projects.
  
  
• Changing a long-time practice of not reflecting savings in the budget when a position goes unfilled.

Much of the shortfall is directly tied to the State's economic woes. The City, for instance, will have to pick up the decline of Public Employees Retirement System (PERS) investment portfolios, Dennis said.

In addition to increased health costs, the City will have to start putting more money in its PERS as of July 1, 2003 to make up for the losses incurred by the State-administered system over the past two years.

What's more, the City will face increased workers compensation costs because benefits have been "liberalized" effective January 1, Dennis said. In addition, the State will try to make up its huge shortfall by taking away some of the local revenue streams, Dennis added.

The City, for instance, could lose $3.3 million in motor vehicle in lieu tax revenues that go to the jurisdiction where a vehicle is registered. The State reduced the tax during the economic boom, but municipalities continued to reap their portion from the State general fund.

With the growing budget crisis, that will likely not continue to happen, Dennis said.

The City also could feel the impacts of the State cuts in County Mental Health programs, "which will probably have a negative impact on the number of people on the streets," Dennis said.

The State financial crisis is expected to worsen an ongoing economic downturn reflected in slumping sales taxes, which are $1.5 million short of projections, and bed taxes, which have fallen $300,00 to $500,000 short of where they should be, Dennis said. The taxes, he added, aren't expected to reach 2000-01 fiscal year levels until 2004-05.

"Both key revenue sources are not performing as we expected," Dennis said. "In terms of people spending their money and visitors, we are below our recovery path… The tech sector has simply not recovered. Personal income taxes and tax sales revenues are significantly down."

The Utilities User Tax, one of the top revenue generators for the City, is also down, due to a drop in hard-wired telecommunications use. "Projections indicate for the first time that that revenue source is going to decrease," Dennis said.

In addition, the City is absorbing some of the current economic shock with an increase in car sales boosted by unprecedented deals, which will likely not last. "One of the things that's very worrisome is that a significant number of those (auto sales) would have happened in future years," Dennis said. "So where do we go from here?"

As a result, Dennis said it is not likely that the council will be able to help the School District bridge a projected $11 million budget shortfall next fiscal year by boosting the $3 million it usually gives the district.

"I'm sure it's a priority of the council to maintain the $3 million," Dennis said. "However, there's not enough in the City's budget to give additional money."

The City will likely tap a source that has served as a "shock absorber" for years. As an accounting practice, the City has assumed that every position in the budget has been filled. Taking into account the actual money that is not being spent would bridge the shortfall by $3 to $4 million a year, Dennis said.

"That's been like a shock absorber," he said. " The time has come when we have a shock. We will probably be budgeting that."

Once the City weathers the tough economic times, the future looks good, Dennis said. "The fundamentals are (its) location, visitor industry and policies and programs that make this environment a desirable place to be in," Dennis said. "It has a creative community, two hospitals, a college, a core of entertainment industry and RAND.

"It's not all doom and gloom," Dennis said. The City must be careful "not to damage the fundamentals as we're addressing the challenge so when we turn around, the city remains positioned to benefit."