City Budget Woes Expected to Worsen

By Mark McGuigan

June 16 -- Santa Monica’s $16.1 million budget shortfall is set to slide further into the red, creating a scenario that is “highly volatile and grim,” according to a memo to the City Council from City Manager Susan McCarthy obtained by The Lookout.

With the state poised to hold back more funds and consumer spending expected to be softer than City officials had initially projected, the budget gap is expected to widen, McCarthy warned in her memo last Thursday.

“The picture is highly volatile and grim,” McCarthy wrote in her opening comment.

“Revenue projections on which our proposed FY 2003/04 budget is based could be too high by about $1.0 M as the economy continues to be ‘bottom dragging’ longer than we anticipated,” McCarthy wrote, referring to the recently- released UCLA Anderson Forecast.

In addition, the State’s plan to issue bonds to help bridge an historic $38 billion shortfall is expected to result in $2.5 billion a year in additional debt service, likely spurring increased cuts to local governments, McCarthy said.

“If no sales tax rate increase is authorized to back up the debt service, there's little question in our opinion that the cuts to local government would be increased,” McCarthy wrote.

“In fact, because the debt service if unsecured by a tax rate increase just adds to the already announced state revenue/expenditure ‘gap’ it is likely that the worst case that we have planned for so far in Santa Monica will be exceeded.”

The city’s budget projection -- which the council will use Tuesday night to hammer out a $353.7 million budget for the upcoming fiscal year -- is unlikely to reflect the projected loss in revenue.

“We just don’t have enough data to make this kind of change tomorrow night,” said Finance director Mike Dennis. “We’re not going to make any recommendations about that (shortfall adjustment) tomorrow night.”

A possible reduction in spending by both state and local government is expected to worsen the City’s budget woes, McCarthy said.

“Word coming out of the ‘Big Five’ discussions, apparently not yet shared with the party caucuses, is that a ‘deal’ would go after a total of $1.1B of permanent, ongoing reductions to local government funding, presumably to help finance what is needed to close the budget gap,” said McCarthy.

City officials estimate that the state cuts could amount to an additional $2.8 million in revenue lost to the City.

“The cities' portion of the $1.1B can't be certainly known but $466M (40 percent) of the total is a likely figure based on past experience and other reasonable bases for hypothesizing,” McCarthy said.

In addition, projected sales tax revenues could be off by as much as $1 million from the number used in the budget document, Dennis said.

The UCLA forecast “indicates that some of our sales tax projections are going to be a bit high,” he said.

The data used to calculate the state budget was “from several months ago,” Dennis noted, implying that subsequent economic influences may not have been considered.

The probability that the Federal Reserve will cut interest rates by a quarter percentage point could also impact the City’s investment income, City officials said.

“It seems likely that the Federal Reserve will again lower interest rates later this month, reducing interest revenue projected,” McCarthy wrote.

“If the Federal Reserve reduces interest rates, the city’s return (on interest) will be less,” Dennis said.