By Jason Islas
Staff Writer

This is part two in a two-part series that looks at how Santa Monica plans to overcome the pending structural deficit it faces in the next five years.

August 20, 2013 -- While City Hall has already begun tackling Santa Monica's looming structural deficit by cutting back on expenses, officials say that alone won't close the future $9 million gap.

City officials have emphasized that the possible deficit is only a small fraction of Santa Monica's half-a-billion dollar annual operating budget, but trying to close the gap through cuts alone could have a devastating impact on City services, funding for schools and youth programs as well as subsidies for many of the bayside city's nonprofit partners.

As a result, City Manager Rod Gould and his team are attacking the deficit on two fronts, trimming the fat while looking for ways to raise revenue.

Santa Monica's “strong local economy makes budget balancing easier,” Gould said in a meeting with The Lookout earlier this month.

Gould has pointed to Santa Monica's powerful draw on tourists -- despite the recent economic downturn, hotels in the city maintained an occupancy rate of nearly 90 percent -- and a growing number of tech start-ups cropping up around town.

The City levies a 14 percent “bed tax” on hotels, generating more than $40 million a year for Santa Monica.

Taxes on hotels are a major source of revenue for the City, but raising those could have unintended consequences.

Gould said he wouldn't recommend raising taxes on hotels.“If we were to increase (the bed tax) now, we would be higher than Beverly Hills and Los Angeles,” Gould said, which could potentially drive away tourism.

Raising sales and property taxes -- together, they generate around $90 million -- is also a potential sources of increased revenue, one that would require voter approval.

City Hall has much more discretion over what it charges for services and penalities.

The City could look into raising fees for licenses, permits and City services -- combined, they generate about $83 million a year -- as well as fines, which currently generate an additional $15 million a year, Gould said.

City Hall's strategy, at least when it comes to generating new revenue, is defined as much as by what it might do as it is by what it won't do.

“We're not betting on any development,” said Gould.

Santa Monica has around five hotel projects in the pipeline that, if approved, would get built in the next decade and increase City revenue by nearly $15 million.

But Gould said that City Hall will not count on that revenue, since the fates of those projects are ultimately left up to the public process.

Three of those hotel projects, along Ocean Avenue, have become flashpoints for the community mostly due to the scale of the proposed developments, which range from 195 feet to more than 300 feet tall.

City Hall will also not consider “using one-time funds for ongoing costs,” Gould said, adding that some municipalities have backed themselves into corners by trying that.

Still, Gould is optimistic because Santa Monica's economic strength puts it in a “far better position to adapt than most cities.”

And, with a two-pronged approach, he believes the City should have no trouble overcoming the pending deficit with some imagination and a little flexibility.