In City of Santa Monica, Big Plans -- and Big Pension Costs -- Lead to Shaky Times

By Niki Cervantes
Staff Writer

May 23, 2017 -- With pension costs poised to drive it into the red and ambitious capital projects requiring huge chunks of money, the City of Santa Monica is facing a reality seemingly far-fetched for such a popular and prosperous seaside enclave: It is starting to run short of revenue.

The City’s proposed 2017-2019 biennial budget unveiled last week totals a record $1.57 billion, or 25 percent more than its predecessor.

But total revenue in the budget increases at only half that amount, leaving the City with a $134.8 million gap it proposes to fill with an almost $77 million bond and tapping the fund balance and reserves.

The record budget goes to the City Council for study sessions tonight as part of its regular Tuesday meeting, and again on Wednesday.

Both sessions start at 5:30 p.m. and are in City Hall’s council chamber. The council is due to adopt a final budget June 27.

Funding for two major capital projects drove spending beyond what was “brought in” through revenue in the new budget plan, said City Manager Rick Cole.

The projects are a new $33 million fire station and a recently approved City Services Building that staff has estimated will cost between $75 million and $85 million ("Council Rejects Appeal of $75 Million Santa Monica City Hall Annex," January 26, 2017).

“In the first case, we are using money saved up for this purpose over a number of years,” Cole said, “and in the second, we are borrowing the money to pay it back over 30 years.”

The City, he said, has “consistently run a surplus of operating expenses vs. operating revenue and expects to do so in the next two years, although by a much narrower margin.”

Still, the new biennial budget is “sobering,” Cole said.

“Santa Monica’s ‘exceptionally strong economy and tax base’ is nearing a point of diminishing returns,” Cole acknowledged when he released the new two-year spending plan late last week.

“Despite our diverse tax revenue base, all our major sources of revenue are seeing either slowing growth or (in the case of utility taxes) an actual decline,” he said.

The General Fund -- the biggest and most crucial portion of the biennial budget -- jumps 37 percent, to $1.035 billion, from the 2015-2017 budget.

In the 2018-2019 year alone, spending jumps past revenue by 32 percent, leaving it short $128.4 million.

The contrast between spending and revenue wasn’t always so broad. City budgets from 2013 to 2016 showed revenue keeping pace. But by this year, the revenue gap started showing itself by double digits.

An anticipated recession a few years down the road could make the future bleaker.

Governments across California have similar financial worries, but Santa Monica is positioned for some notable fiscal pain for several key reasons.

City employee costs are already -- and have been for many years -- some of the highest among California municipalities ("Santa Monica City Pay and Benefits Climb at Double the Inflation Rate, New Data Shows," May 2, 2017).

The City, which has rebuffed calls for a clamp down in the past, has now agreed to form an ad hoc committee of residents to help the City's Audit Subcommittee look at total compensation, although the panel’s power is extremely limited ("Special Committee on City of Santa Monica Employee Pay and Benefits Approved," May 11, 2017).

The City is years into several major -- and expensive -- capital projects, such as last year’s Colorado Avenue Esplanade, and also is engaging in a sweeping -- and again, costly -- re-design of City streets to make them more people-friendly ("Santa Monica City Council Calls for Safe Streets “Czar,” May 11, 2017).

In presenting the budget last week, Cole wrote that City officials "will need to be exceptionally disciplined in setting priorities” and "focus on the return on taxpayer investment.”

“We must be purposeful, watchful, and strategic about how we spend,” the City manager wrote. “We can no longer start with our existing services and programs and then add staffing and funding to meet new demands and desires.

"We have to prioritize how we spend money."