By Olin Ericksen
Staff Writer

February 6 -- While Santa Monica will likely continue operating in the black, a deficit could be looming if millions of dollars in telecommunications taxes are lost, according to a five-year budget forecast released by the City.

While the tourism and commercial real estate markets are keeping the local economy "positive" during uncertain times, Santa Monica could struggle to maintain a balanced budget by year three, City finance officials warn.

"In reviewing the impact of the economy on revenues and the projected growth of existing service costs, the City can balance its budget for the next two to three years," the officials wrote in a report they will present to the City Council Tuesday night.

The City, however, could face the possible loss of as much as $12 million in annual revenues after Federal courts ruled last year that telecommunications giants, such as Verizon, are no longer mandated to pay cities a "Utility Users Tax.”

"The City can balance its budget...but only because funds have been set-aside in this fiscal year to buttress against a loss in Utility User Tax revenue," the report stated.

"Additional resources," the report warned, "will be needed to basic infrastructure replacement and deferred maintenance or to grow programs beyond their existing service levels."

Santa Monica will continue to benefit from Federal and State economies that appear "fairly healthy," finance officials said. Tax collections are high, unemployment low, and personal income and retail sales are expected to continue to grow, although more slowly, officials noted.

Consumer spending is also expected to remain "strong," and inflation -- after creeping up during the last few years -- appears to be returning to lower levels due to a reduction in energy costs across the country.

Yet nationally, the Gross Domestic Product or (GDP) appears to be falling to between 2 and 2.5 percent – down from more than 3 percent, City officials noted.

More seriously, perhaps, is the slowdown in the national, state and local housing markets, according to the report.

Already, local revenues are down in Building and Safety-related permits and the number of property transfers in Santa Monica has decreased a full quarter from last year "reflecting the slump in the housing market," the report stated.

Home prices and sales predicted to decrease nationally through 2007, City officials said. The "continued softening of the housing market threatens the economy if it impacts consumer spending," the report warned.

Further, the City will lose an estimated $1 million in revenues in the current year, "resulting in declining property tax growth rates over the next few years," the report said.

Housing and the Utility User Taxes are not the only factors that could put a dent in local revenues, City officials warned.

Vehicle sales and leases -- which account for as much as 20 percent, or $8 million of Santa Monica's annual sales tax receipts -- have declined in recent quarters, the report said.

"This was anticipated in the current year's budget and is expected to result in a slower growth rate in sales taxes over the next several year," officials noted.

Uncertainty at the State level could impact local coffers, City officials said.

California could face a deficit of $5.5 billion in Fiscal Year 2007-08, possibly requiring tax increases or program cuts, according to a State Legislative Analyst report quoted by City officials.

In addition to threats to revenue, City finance officials noted that expenditures could play a part in the local economic forecast.

Labor remains the largest expense, comprising 60 percent of the current municipal operating budget, officials said.

"Increases in these costs above the growth in revenues can lead to an imbalance in ongoing revenues versus ongoing expenditures," said the report.

"It is essential to maintain controls on the growth of the cost of labor while ensuring that labor rates and fringe benefits offered by the City of Santa Monica continue to draw quality job applicants and ensure retention of existing employees."

Still, there are bright spots shining in the five-year forecast.

Revenue adjustments show nearly $2.5 million more in city coffers than anticipated, of which the City will be able to spend $1.9 million, the report states.

Tax revenues also are expected to grow, particularly the "Transient Occupancy Taxes (TOT or Hotel taxes), Business License Taxes and Sales Taxes, but at lower rates of growth than the last few years," said the report.

Hotel occupancy rates rose 10 percent in 2006, and commercial real estate remains "quite healthy," as rents rose 20 percent over the past year and vacancy rates dropped to 6 percent, City officials said.