May 29, 2013 -- Santa Monica will see a balanced budget for the next two years, but a daunting $13 million deficit looms on the horizon. So does a key question: should the City encourage development to help get it out of the financial hole?

The projected deficit -- largely due to the loss of Redevelopment funds and quickly rising retirement and employee benefit costs -- doesn't take into account the revenue-generating impact of two proposed hotel redevelopment projects and a third, new hotel along Ocean Avenue.

The redeveloped Fairmont Miramar and Wyndham hotels, and the Frank Gehry-designed hotel on Santa Monica Boulevard are estimated to generate $12 million a year in bed taxes if they are approved and built as proposed.

“We are likely to experience budget deficits in the years after this two-year budget expires,” City Manager Rod Gould told The Lookout. “We must be thinking in terms of budget adjustments in the next two years to avoid this outcome.

“This will include expenditure reductions, cost recovery and yes, economic development could be part of the solution,” he said.

Cutting back City personnel -- and with them, City services -- without seeking additional revenue is not an option for most of the decision makers.

“We have to find new revenue sources or reduce City services,” said Council member Bob Holbrook. “There's no middle ground.”

Holbrook isn't alone. Council member Gleam Davis agrees that budget cuts alone would be an undesirable way to balance the bottom line.

“If we were to try to address the projected budget shortfall solely with cuts, people would be very unhappy with the depth of cuts we'd have to make,” Davis said. “If we made $15 million in discretionary cuts, people would be shocked at the level of service decreases we would have to undergo.”

The City, Davis noted, gives roughly $14 million a year alone to the Santa Monica-Malibu Unified School District (SMMUSD) to help pay for programs and personnel, which might have to be cut unless new revenue streams are generated.

Even so, Davis added that no development should be considered solely because it would generate new revenue streams and that such developments should have to reach a “high bar”

Council member Ted Winterer agreed. “Given current budget constraints, hotel development is one option for generating needed revenues,” he said. “However, revenue generation is just one criterion for evaluating proposed hotels.

“Equally important factors are inspired design, community benefits, labor peace and a living wage, sustainability, traffic reduction strategies and the impacts on residents' quality of life,” he said.

For some community leaders, the proposed developments -- which would alter the beachside city’s skyline with buildings that would stand some 20 stories tall -- isn't worth it.

“If development paid for all the essential city services, we'd be in great shape with all the development that's been going on already in an essentially built-out city with a stable population,” said Diana Gordon, founder of the anti-growth group Santa Monica Coalition for a Liveable City (SMCLC).

“We've had millions or square feet of development over the last 20 years,” Gordon said. “Why hasn't that paid for City services? Is it because the increased costs in infrastructure and City services from all that mainly commercial development outstrips the revenue?

“Hotels, especially massive high rise ones like the three proposed are the Humvees of environment impacts, including water, electricity, sewage, and traffic,” she said.

One of those “massive high rise” projects is the Fairmont Mirmar Hotel's extensive redevelopment, which proponents say would double the amount of money it pays the City in taxes to almost $10 million.

Owners of the Wyndham Hotel at Second Street and Colorado Avenue -- formerly the Holiday Inn – have yet to submit plans for its redevelopment, but City officials estimate that preliminary plans would raise the amount it pays in taxes from $1 million a year to about $4 million.

A new Gehry-designed hotel, proposed for Santa Monica Boulevard and Ocean Avenue could generate as much as $5 million a year in taxes for the City, officials estimate.

“It's clear that the hotel bed taxes are a huge part of our total budget and it's probably the easiest and most painless way to raise revenue to support the City because the tax payers aren't paying for it,” said Holbrook.

“We could raise money by doubling parking tickets, but they are so high right now and that puts the burden on residents,” he said.

Currently, the hotel bed tax -- or transient occupancy tax (TOT) -- accounts for 14 percent of the City's $306 million General Fund, which pays for salaries and services and is bankrolled by taxes, grants and services charges. The sales tax accounts for 16 percent.

However, the City is maintaining a strict policy of not including the new revenues the projects are expected to generate in the budget until they are approved.

“We will not be budgeting on land use decisions that could be, but have not been made,” said Gould. “To do so would be reckless and second-guess the public process.”