By Jorge Casuso

February 21, 2024 -- While Santa Monica's economy continues to recover, it faces local challenges and national uncertainty that will hamstring efforts to enhance programs and services, according to the the Midyear Budget Review released Wednesday.

During flush years, the budget review -- which the City Council will take up Tuesday -- offers an opportunity for community and special interest groups to lobby for available funding.

This year, investments in the current biennial budget "have positioned us to maintain our progress towards addressing community needs, and revenues are projected to marginally exceed previously budgeted amounts," according to the report.

But the report notes that the City so far has balanced its slowly expanding budget by relying on new voter-approved taxes and budget reserves that have rapidly dwindled.

Non-restricted reserves are about half of what they were in 2019 after the loss of $170 in revenues during the coronavirus shutdown and $159.6 million in legal settlement payments related to allegations of sexual abuse by former City employee Eric Uller.

"Drawing on reserves and borrowing from other funds has limited the City’s ability to bring forward programs, services and capital projects that meet current council priorities and community and organizational needs," the report said.

Meanwhile, the City "continues to navigate various challenges" that range "from economic uncertainty resulting from inflation and high interest rates" to additional sexual abuse claims and a voting rights lawsuit the City has been fighting for nearly eight years.

In addition, the City faces "volatility of the insurance market and increased medical costs, consumer and work behavior changes, (and) the need to address deferred infrastructure and equipment maintenance."

"Therefore, while there are positive signals in the City’s revenue streams, the combined impact of these challenges limits the City’s ability to bring forward enhancements to programs and services beyond what was approved in the FY 2023-25 budget," staff wrote.

As of June 30, the City’s audited financial statements confirm there are sufficient revenues in the General Fund to "help maintain service levels in the short term while revenues continue to recover."

There are also enough funds to enable the City to increase the General Fund operating contingency reserve to $52 million, according to the report.

The City's budget is forecast to remain balanced "with the help of working capital reserves" until FY 2027-28 "when revenues are anticipated to exceed expenditures," staff wrote.

"Santa Monica’s economy continues to show recovery in consumer spending and the tourism sector," which generates bed tax revenue, and a rise in Business License Tax revenue, according to the report.

Property values -- which remain the third highest in LA County -- will be boosted by an increase in home sales as interest rates "moderate or are reduced."

The resulting increase in assessed property values, "will have a positive impact on the City’s property tax and real estate transfer tax revenues."

Still, General Fund revenues are not anticipated to recover to the level projected prior to the pandemic until FY 2026-27, staff wrote.

"While the City has already experienced a loss of nearly $170 million since 2020, revenues will lag behind pre-pandemic projected growth by nearly $34 million more over the next five years."

That results in "a total revenue loss of approximately $204 million over 7 years," staff wrote.