By Lookout Staff
January 11 – The City could face a $2.7 million budget deficit this year that could grow to $16.4 during the upcoming fiscal year and reach $28.1 million in five years, according to a “worst” case scenario presented to the City Council Tuesday night.
The scenario assumes that the State – which already has taken some $4.3 million in redevelopment agency funds and $3.5 million in transportation funds from Santa Monica -- will continue to transfer local funds.
It also assumes that the current recession will plunge Santa Monica into its deepest economic downturn in decades, finance officials said.
“The economic downturn, which now appears to be the worst in decades creates difficulties and challenges in revenue estimating and fiscal planning for the future,” Chuck McBride, the City’s assistant director of finance wrote in his staff report.
“The level of uncertainty regarding the length and severity of the recession is unprecedented,” he warned.
The steep recession – which has seen local sales, property and hotel bed taxes fall – began last summer when credits markets froze, consumer spending dropped and more and more workers began losing their jobs, finance officials said.
While the worst case scenario projects a continuing erosion of tax revenues, the best case scenario assumes the city will weather the recession and “major tax revenues will return to historical growth rates within one to two years.”
While all three scenarios assume using the $8.2 million “economic uncertainty designation” the council is expected to approve as part of the Mid-year Budget, in every scenario, general fund spending will outstrip revenues over the next few years, finance officials said.
All scenarios studied by finance officials also assume that the City’s contribution to CalPERS, the state retirement fund, will increase dramatically in the upcoming fiscal year that starts July 1. In the best case scenario, the City will need to boost payroll for its 1,900 employees by 2 percent and by 4 percent in the worst case scenario.
“Additional growth in programs, enhanced labor benefits, increased funding for deferred maintenance, and the replacement of basic infrastructure will require additional resources,” officials warned.
Although Santa Monica’s economy has long counted on its diverse income streams to weather downturns, the current recession, considered the worst since World War II, is being felt at home, officials said.
The city’s unemployment rate for November increased from 4.3 percent to 7.2 percent over the course of one year. And while property values increased by some 10 percent, one of the highest increases in the county, “there are troubling signs,” officials said.
Property sales reached the lowest level in 15 years, with the number of property transfers in December reaching the lowest monthly level since the City implemented its own real property transfer tax 16 years ago.
Furthermore, taxes from auto sales and leases -- which account for more than 20 percent of Santa Monica’s sales tax revenues – have been declining in recent quarters.
In general, City sales taxes in the third quarter of last year – the most recent figures available -- were lower than the prior year in six of the seven major tax categories.
Tourism, which along with auto sales is one of the city’s driving economic engines, fell sharply last fall, and the global economic slowdown will likely only result in further declines, officials said.
“Significant decreases in sales taxes and transient occupancy taxes now appear likely,” McBride wrote.
In addition, the commercial real estate market, which has remained “relatively healthy,” is weakening. The asking price for prime commercial space has recently dropped from $6.02 per square foot to $5.82, although that remains the highest in the county, and vacancy rates have increased to 11.2 percent.
These decreases in sales and hotel bed taxes will be “partially offset by higher than anticipated business license taxes, property taxes, and utility users taxes,” McBride wrote.
“However, the prolonged economic slump will lead to less than previously projected revenues” in the next fiscal year and in future years.
