CITY HALL — While Santa Monica city officials were worried last year that they may have to tap into a “rainy day” fund to help close a projected $13 million budget deficit, it turns out they had nothing to fear after all, ending up with a budget surplus of $7.9 million at the end of 2009-10, City Manager Rod Gould said.
The rainy day fund of $8.2 million will remain fully intact at the end of the current fiscal year as well, as City Hall expects to have another budget surplus of $1.7 million, Gould told the City Council Tuesday during a mid-year budget review and five-year forecast.
Gould said the unexpected surplus was due to a “multi-faceted financial strategy” that included reductions in spending, some fee increases, eliminating waste, the use of one-time funds and some city employees agreeing to pay 5 percent of their healthcare costs and forgo bonuses.
“These strategies, taken together, have strengthened the city’s financial position,” Gould said.
Revenues were also greater than anticipated as the economy showed signs of improvement, but still remains fragile, he said.
City staff plans to use the surplus to pay down pension costs for employees, which are projected to rise considerably given the poor performance of the stock market. That reduced the value of CalPERS’ investment portfolio, triggering higher contribution rates for cities. CalPERS stands for the California Public Employee’s Retirement System, which provides retirement and health benefits to more than 1.6 million people. City Hall is required under labor agreements to pay into CalPERS, which invests the money in domestic and international markets. As of Oct. 31, 2010, it had assets totaling $218.8 billion.
Gould also said there is some encouraging news. Hotel taxes are rebounding faster than anticipated with tourists “coming back in droves and faster than any place in the southland,” he said. Gould also mentioned the passage in November of Measure Y, a half percent sales tax increase expected to generate $12 million annually, half of which is expected to go to local public schools.
Consumer confidence is rebounding, which could translate into more sales tax revenue, and the local housing market has been relatively stable with only a slight decline in property values of 2.1 percent, according to City Hall’s finance director, Carol Swindell. It was only the second year since the passage of Proposition 13 that property values in Santa Monica dropped.
Gould said local tax revenues are not expected to recover to peak levels until at least 2013.
“We expect to see slow revenue growth,” said Gould, who has been preaching “flat is the new up.”
What is of particular concern to Gould is the state’s fiscal health and the governor’s proposal to eliminate redevelopment agencies, which could mean a loss of $350 million in projects Santa Monica’s Redevelopment Agency have asked City Hall to complete. There are proposed cuts to library funding totaling roughly $200,000 a year, and cuts to education and child care services, which could increase demand on city programs.
To better manage finances, Gould recommended and the council approved changing the way City Hall drafts its budgets. Instead of creating a budget every year, city staff will now develop a two-year budget, with council having the ability to review it every six months to make course corrections. Gould said it will save staff time and provide better financial footing. The budgets are also expected to be more easy to digest.
Another change that was approved is moving to an “expenditure control budget,” where city departments will be able to keep a portion of their budget that is not spent over the course of a fiscal year. Gould said typically departments at all levels of government will ramp up spending close to the end of the fiscal year out of fear that they will have their budgets reduced if they do not use all of their cash. With expenditure control, departments will be able to retain some of the left-over cash, which he said creates the incentive to save.
Swindell presented three scenarios as part of the five-year forecast, the most dramatic showing a budget deficit of $26.3 million. The baseline showed a deficit of $12.3 million while the best-case scenario projected a budget surplus of over $8 million.
A key factor is the rising health insurance costs and CalPERS rates. In five years, City Hall could be spending as much as $45.6 million on CalPERS and $31.4 million on health insurance for employees.
In May, Swindell will lead two budget study sessions with the council and a budget is expected to be adopted by June 21.
Councilman Bobby Shriver once again called on the council to tackle the “800-pound gorilla” in the room, which he said was the rising pension and healthcare costs provided to city employees, in particular the Santa Monica Police Department. Benefit compensation costs for police officers is projected to rise 86 percent in five years, meaning that for every dollar paid in salary the actual cost to City Hall will be $1.86.
Shriver made his comments following a discussion on raising fees for recreation programs and permits for the use of city-owned facilities. He warned his council colleagues that they should be prepared for the worst-case scenario because “there is a lot of uncertainty out there.”
“In an era of declining or flat revenue with … escalating expenses, what has to happen at some point is choosing between an additional police officer or senior services,” Shriver said.
Mayor Richard Bloom and Councilwoman Pam O’Connor defended the police department and said it wasn’t fair for Shriver to single out any one group.
“We provide services, and services are done by people,” O’Connor said. “It’s always a balance of priorities, but the biggest chunk of the budget will always be staff.”
Bloom said public safety is a top priority for residents.
Matt Rice, a detective with the SMPD and the chair of the Police Officers Association, the union representing the rank and file, spoke with the Daily Press Wednesday and said he strongly disagrees with the premise that the police department should be singled out for budget cuts.
“The department has already made numerous cuts over the last several years in order to assist with the city budget issues,” Rice said. “Further budget cuts to the Santa Monica Police Department would negatively impact the quality of service the citizens of Santa Monica have come to expect.”
Police officers, along with other city employees, will be meeting with the city manager in the coming months to discuss terms of new labor agreements. It is expected that Gould will push hard for employees, including police and fire, to contribute more toward their health benefits and pensions.