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Facing a $9 Million Deficit, Santa Monica Tightens Its Belt

Santa Monica Real Estate Company, Roque and Mark


Rusty's Surf

Harding Larmore Kutcher & Kozal, LLP  law firm
Harding, Larmore Kutcher & Kozal, LLP

By Jason Islas
Staff Writer

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

August 19, 2013 -- With Santa Monica's expenses growing faster than its revenue, how will the prosperous seaside city, known for its robust social service network, generous support for schools and well-paid employees, keep from going into the red?

That's exactly the question facing City Manager Rod Gould and his team at City Hall as Santa Monica faces an impending structural deficit, estimated to reach more than $9 million by 2017.

As pension costs continue to climb and the State's decision in 2012 to kill redevelopment agencies (RDAs) throughout California deprived the City of tens of millions of dollars annually for affordable housing and infrastructure projects, setting Santa Monica's books straight could prove a trying task.

“This city is not going to make any easy cuts,” Gould told The Lookout at a meeting in his office earlier this month. “We are not going to sacrifice our huge support for schools,” nor the support to Santa Monica's many nonprofit partners that work with the homeless.

Gould said that because the pending deficit is “structural” -- meaning that it is the result of an ongoing imbalance between revenue and expenses -- the City must consider strategies that would both cut costs and raise income in the long-term.

With personnel costs being the largest expense to the City -- about $220 million in 2013-2014 going toward salaries and benefits -- that's one of the first places City Hall will look to keep costs down.

As a result, Gould said, that the City's executive team would be taking “little or nothing for salary increases.” This year, that means a one percent “cost of living” increase and no increase at all next year.

The City is also considering streamlining its emergency dispatch system and replacing managerial oversight with civilian staffers instead of uniformed employees, which would cut back on overtime for public safety personnel.

Gould added that the City has already eliminated eight vacant positions in City Hall -- rather than fill them -- that were paid for out of the General Fund.

“We're trimming down on the number of employees,” he said, adding that the City's departments will have to become more adaptable.

In addition to those eight positions, when the City closed the Civic Auditorium at the end of June -- a move that saves the City roughly $2 million a year -- it laid off around 13 employees, the most it has laid off since 1992.

While the City is trying to cut back on personnel expenses, including overtime for its employees, the biggest potential drain on the City's coffers is the ever-increasing cost of retirement benefits for employees.

Santa Monica has seen a dramatic rise in employee retirement costs in recent years as CalPERS -- the State's public employee retirement system -- passed on losses from its investment portfolio to its client cities.

This year alone, Santa Monica has had to fork over $44 million for employee pensions. That number could climb by another $22 million in five years.

But the cost to pull out of the system is exponentially higher, said Gould.

“CalPERS is the 'Hotel California' of pension funds,” he said. “You can never leave.”

The City has negotiated to get police and firefighters to pay more into their pensions. Originally, public safety employees paid nothing into their own retirement funds, but now they are required to pay three percent.

“We have reached tentative agreements that are in line with the budget with most of our labor groups,” said Assistant City Manager Kate Vernez. City officials hope to get public safety employees to pay up to eight percent over the next few years.

For every one percent more police and firefighters contribute to their pensions, the City saves a $420,000.

In addition to that, “new employees hired since January 2013 will be subject to lower pension benefits that were introduced through the States’ pension reform,” Vernez said. “The impact of these reforms has not yet been reflected in the forecast.”

Even as the City tries to square away its pension problem, it faces another multi-million dollar hurdle to a balanced budget: the loss of redevelopment money.

“We will never make up for the loss of the tax increment dedicated to affordable housing,” Gould said, referring to the annual influx of $20 million the City got from its RDA.

Currently, the City -- along with dozens of others -- is locked in a legal battle with the State over how much of the RDA money Santa Monica needs to give back to the County or other taxing agencies as part of the State's dissolution of the agencies.

According to the State's Department of Finance (DOF), Santa Monica owes $19 million of former RDA money to the County, a figure the City has challenged. (“State Reduces Santa Monica's Former RDA Bill by $23 Million,” April 10, 2013)

“There's no precedent for this,” said Gould, adding that it has been a difficult fight. “The State's a three-headed hydra.

“At this point, all we want is for the State to leave us alone,” he said.

Stay tuned for part two of this series which will discuss plans for increasing City revenue.

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