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Forecast Predicts Slowing in Santa Monica Economy  

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Kutcher & Kozal, LLP

By Niki Cervantes
Staff Writer

January 26, 2017 -- The City of Santa Monica is forecasting the first significant economic slowdown in years and is preparing, like the rest of California, for a possible recession.

Santa Monica’s economy remains strong, thanks in large part to its location and diverse tax revenue base, according to a report by the City Finance Department on the City Council’s Tuesday agenda.

With a biennial budget that tops $1 billion, the City is nonetheless seeing “moderation” in the local economy’s growth rate, the report said.

It noted the state is already predicting a fiscal shortfall of nearly $2 billion deficit in the $122.5 billion budget Governor Jerry Brown unveiled earlier this month. He blamed the shortfall on falling tax revenues.

Cities often feel the ripple effect when state and federal levels of government tighten their fiscal reins due to recessions or other reasons for cutting funding.

For the City of Santa Monica, the “probable” scenario shows the General Fund experiencing a potential shortfall of $0.2 million in the 2017-2018 fiscal year that rockets to $16.4 million by the fiscal year of 2021-2022.

The usual suspects are cited for the sharp rise in City spending: Retirement contributions, workers’ compensation costs and health care, which are categories that continue rising well above inflation.

In the worst case scenario, a recession has kicked in and the General Fund -– the biggest part of the City’s budget –- starts facing almost $8 million in red ink by the next budget cycle, which starts in July, before reaching $25.1 million in fiscal year 2021-2022, the finance report said.

Meanwhile, the fiscal picture in the best scenario is “bolstered by higher increases in revenues,” the report said. The forecast does not detail what causes the revenue bump, but does say the outcome is no red ink at all in the General Fund throughout the five-year forecast.

Santa Monica’s population, which now stands at about 93,640, makes it the 19th largest municipality in Los Angeles County. But property values remain the third-highest and are expected to keep increasing.

Assessed value rose 6 percent last fiscal year and inched up again this fiscal year by a half point. It is expected to slow to an increase of three to four percent over the coming five years, the report said.

Among other anticipated fiscal trends:

  • Sales tax receipts are expected to moderate “due to sluggish growth in regional household income, a national shift from buying goods to purchasing services and the growth of online purchases,” the report said. Projected annual growth is 3 percent to 3.5 percent for the first two years of the forecast before falling to less than 3 percent annually for the remainder.

  • Tourism, a major driver in the local economy by creating jobs and producing revenues, remains strong, with the hotel tax alone growing an average rate of slightly more than 9 percent over the last six years. The industry remains healthy with three new hotels expected to open in the next five years, although the impact of short-term vacation rentals remains unclear.
  • Tax revenue from business licenses, utility users and parking facilities are flat or dropping slightly, the report said. General Fund revenues are projected to increase by an average of 3.6 percent annually over the next five years. The rate of inflation is pegged at about 2 percent or slightly higher in the forecast, but City spending will grow by 4.7 percent, the report said.

As is the case with most public budgets, almost three-quarters of the City’s General Fund is tied to labor costs, which will pose “significant budgetary challenges in the years to come,” the forecast said.

The report focuses on actions the City has taken to curb costs that are galloping past the rate of inflation. The City’s cost of contributing to pensions has left it with an unfunded liability of $387 million.

In reaction, the City has increased the amount employees pay towards their future benefits. At this time, miscellaneous employees contribute up to 30 percent of the total contribution, while Police Officers Association employees contribute up to 20 percent and Firefighters Local 1109 IAFF employees contribute up to 29 percent.

Also, the City has used savings to pay down $31.4 million of its unfunded liability, and follows a policy to pay down approximately $1.3 million of its unfunded liability each year.

New lower assumptions on investment returns announced in December by California Public Employees’ Retirement System (CalPERS), means Santa Monica will need to kick in an additional $1.8 million for employee retirement in the 2018-2019 fiscal year, increasing to $12.6 million by the 2021/2022 fiscal year, finance officials said.

“This change has had a severe impact on the five year projections,” the report said.

“The City’s unfunded pension liability of $387 million, along with the ratcheting down of investment earnings projections, represents the most serious long-term threat to fiscal sustainability, not just in Santa Monica, but for public agencies in California,” the report said.

“It will require the City to make adjustments, including realigning staffing needs by examining the need for positions that have been vacant for long periods of time, and seeking additional employee cost sharing contributions during future labor negotiations.”

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