After years of economic growth that produced a healthy budget surplus, Santa Monica economists are warning the City Council tough decisions may be on the horizon. While a healthy economy has boosted City revenue and allowed for a robust City payroll, the future looks much more bleak.

For the next year, the City finance director predicts an $8 million surplus. In the most likely scenario, that surplus will quickly reverse, with staff predicting a structural deficit of $16.4 million by 2021.

For now, the current economic picture still looks good. The third quarter of 2016 produced growth of 3.5 percent, the highest quarterly increase in two years, according to a City staff report. However, this current period of expansion is one of the longest without a recession on record, leaving economists worried the party may soon be over.

While the City Council contemplates future budget cuts, the City is still trying to hire about 150 new employees who will continue to add to the biggest burden on Santa Monica’s budget: it’s sizable workforce. The City’s 2,300 employees account for nearly 75 percent of the General Fund operating budget.

“The majority of our ongoing costs are related to staffing, so changes to staffing have a significant impact on the city’s overall financial position,” Finance Director Gigi Decavalles-Hughes said at Tuesday’s City Council meeting.

The news comes amid rising concern over public safety. Crime in Santa Monica increased 5.5 percent last year. Meanwhile, the City has struggled to recruit new officers at a pace fast enough to replace retiring officers. As of Jan. 19, there were 15 officer vacancies on the force.

“It’s my understanding the Chief of Police is going to ask for some additional positions but my concern is … we fund these additional positions and then attrition tends to wipe out the gains we’ve made,” Council member Gleam Davis said. “We hire three and then we lose two to retirement.”

City Manager Rick Cole said filling those vacancies is a priority. He noted that despite public concern over high employee compensation in Santa Monica, they’ve had difficulty recruiting police officers.

“I’m not going to present a budget to add additional staff when we can’t fill positions we’ve already created,” Cole said.

Employee compensation has been a controversial topic in Santa Monica for years. Critics have argued the city is too generous in total compensation and spends too much on overtime costs for public safety.

According to the data from Transparency California, the City’s second highest paid employee in 2015 was a police sergeant who made nearly half a million dollars after overtime pay.

During Tuesday’s City Council meeting, Cole said the vacancies on the police force combined with the number of officers out on paid leave, results in too much overtime. However, overtime costs pale in comparison to the budget’s biggest liability: the cost of employees who no longer work at all.

Pension costs continue to balloon and threaten the fiscal health of many cities as well as the state of California. Last month, CalPERS announced it will lower its investment portfolio growth assumptions from 7.5 percent to 7 percent over three years. For Santa Monica, the adjustment means an increase of $1.8 million in 2018, ballooning to $12.6 million in 2021. The City’s unfunded pension liability of $387 million, along with decreased investment earning projections, represents the most serious threat to Santa Monica’s budget, according to the midyear staff report.

The City can tackle that money by eliminating vacant positions or renegotiating retirement benefits during future labor negotiations. The City Council did not openly discuss how they plan to deal with the upcoming fiscal issues at Tuesday’s meeting. Staff members will report back with their ideas for cuts in June this year.

kate@smdp.com

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