CITY HALL — City officials are projecting that City Hall will run a $4.6 million deficit by June 2016, up from the $100,000 they predicted at the beginning of the year.

The increase mostly comes from the dissolution of the Santa Monica Redevelopment Agency, increases in the amount City Hall must pay for its employees’ retirement and operating costs for new parks and facilities.

Those costs have more than absorbed the $6.3 million in projected extra revenue from the unexpectedly good tax returns and a prepayment on those same retirement accounts.

The projected deficit constitutes 1.4 percent of the overall budget. It’s manageable, but steps will have to be taken to bring spending in line with revenues, said City Manager Rod Gould.

To address the problem, City Hall is looking at fee increases and spending reductions.

“It would be easy to say that it’s a small amount and it can be absorbed in time and we don’t need to worry about it,” Gould said. “I do worry about it. If we don’t take steps now, it will grow and then we’ll be faced with the kinds of decisions that most cities have been facing for five years.”

Overall, Santa Monica has fared better than the rest of the state since the recession hit in 2008.

According to a staff report, a diversified tax base and strong economy has helped City Hall bounce back, something reflected in a report released Wednesday by the Convention & Visitors Bureau that showed a record $1.39 billion spent in Santa Monica by visitors last year.

The biggest hit to the municipal pocketbook was the death of the Redevelopment Agency, a construct that used tax money to pay for big building projects in the city.

Over 400 agencies were dissolved in Feb. 1 when the California Supreme Court ruled two state laws constitutional. One upheld the Legislature’s ability to ax the agencies, while the other invalidated a provision that would have let them stay open if they sent some money to the state.

That burdens City Hall with an approximate $7.2 million in unreimbursed money to 30 administrative and project employees who were previously paid by the agency, an expense that can be paid through money set aside for “economic uncertainty.”

Those employees will be carried through the two-year budget cycle, at which point City Hall will try to find other places for those employees in the existing organization.

“We would like to avoid laying people off at the end of that period,” Gould said.

There will also be approximately $21 million worth of projects that City Hall has decided to fund despite the loss of the Redevelopment Agency, including the Colorado Esplanade, Pico Library, Early Childhood Education Center and synchronization of the traffic signal system.

City Hall has identified $12.5 million in funding over the next two fiscal years to help pay for those projects, but the rest still has to be worked out.

Redevelopment is still very fluid. The oversight agency has not approved the spending plan that City Hall put forward this year, a document that would then have to be approved by the state.

That means things could get much worse if either agency decides that some of the projects officials chose to spend money on do not come up to state standards. That would force city officials to dig deeper into the General Fund, which helps pay for police, fire, street repaving and other basic services.

“It changes every day,” said Gigi Decavalles-Hughes, City Hall’s finance director. “We can’t make any guesses right now.”

City Hall can take a guess at how much it will cost to maintain those facilities snatched from the RDA chopping block, however.

Best estimates say that City Hall will be on the hook for $4 million a year to maintain and operate the Palisades Garden Walk, Pico Library and Colorado Esplanade.

The last big hit came from payments to the California Public Employee Retirement System, commonly called CalPERS.

That agency’s board announced in March that municipalities would have to pay more for their employees’ pensions because of a drop in returns on its investments, which in Santa Monica amounted to a $2.8 million increase overnight.

That picture could get worse as well because the organization did not hit municipalities with the total cost all at once, Gould said.

Solutions to the problem won’t come into effect in the immediate future.

Last year, City Hall chose to adopt a two-year budget that spanned from July 1, 2011 to June 30, 2013.

Very few changes will be made to the 2012-13 half of that budget to address the structural issues, but officials will be looking at ways to pare down the 2014-16 budget, Gould said.

City Hall already took steps to reduce annual payments to CalPERS by $800,000 by putting a big down payment on money owed to the agency. It will try to do that again this year with an $8 million payment that would win another $600,000 per year in ongoing savings.

City Hall will try to raise revenue rather than just avoid spending, however.

Staff proposes an increase in landscape inspection and plan check fees, permit fees and development related fees. Most other fees will keep up with inflation, Gould said.

The City Council is expected to take up the budget discussion at its meeting Tuesday, May 22.

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