The City Council is considering how to handle projected declines in revenues.

The city of Santa Monica is facing a $2 million budget shortfall this fiscal year as tax revenue from tourism, brick-and-mortar retail and parking erodes more quickly than projected.

Officials said at Tuesday’s City Council meeting that the city needs to diversify its revenue sources to account for a forthcoming recession, ongoing shifts in how people shop and travel and ballooning pension costs. Those trends will result in a $2 million General Fund shortfall through fiscal year 2019-2020 and a deficit that could range from $16 million to $74 million by the end of the decade.

Finance Director Gigi Decavalles-Hughes said this year’s shortfall was driven by falling hotel revenue. She attributed the drop in tourism to geopolitical and economic uncertainties as well as publicity about wildfires, power outages, crime and homelessness.

Decavalles-Hughes said city departments have already started tightening their budgets to close the gap, but the decline in tourism is expected to last for a few years and the city will need to find other long-term revenue sources. The growth of online shopping and ridesharing will also continue to impact the city’s sales and parking tax revenues, she said.

“Obviously, the city will take the necessary steps to live within its means,” Decavalles-Hughes said in a report to City Council. “This will require hard decisions about enacting efficiencies, reductions, restructuring and elimination of programs as well as consideration of new or augmented revenue sources.”

The council discussed bringing up to six measures to local voters in November that would raise existing taxes on hotels, parking and real estate sales and create new taxes to capture revenue from high-earning landlords and businesses. The city will conduct a survey this spring to determine community interest in each proposed measure.

The city currently levies a 14% tax on hotel stays and a 10% tax on parking fees. Real estate sales are taxed at $3 per $1,000 in sales value.

Decavalles-Hughes said increasing hotel and parking taxes by 1% would bring in an additional $5 million and $1.1 million in revenue, respectively. The increased hotel tax would raise the average cost of a hotel room by $4.

Raising the real estate sales tax by $1.50 to align with Los Angeles’ rate would generate $3 to $5 million. The city last attempted to raise the tax in 2014, but 58% of voters opposed the measure.

Decavalles-Hughes said a 2.5% tax on landlords who own buildings with four or more units would result in about $2.6 million in revenue. San Francisco, New York City, East Palo Alto and Berkeley have imposed similar taxes.

A tax on commercial and multifamily residential property left vacant for more than six months would only bring in $150,000, but incentivizing property owners to find tenants for empty storefronts could generate additional sales tax revenue. The city is analyzing the measure based on a vacancy tax Oakland voters approved in 2018.

Decavalles-Hughes recommended overhauling the city’s business license tax system, which hasn’t been updated since 1990.

Modernizing the system could include taxing Santa Monica’s highest-grossing businesses at higher rates and requiring businesses that aren’t located in Santa Monica but generate more than $500,000 in revenue within city limits to pay local taxes.

The latter would follow a San Francisco measure that taxes manufacturers that ship products into the city or software companies that provide services for residents and businesses.

The council said although new revenue sources will help the city weather changes in the local and national economies, but officials said it is inevitable that the city will have to make cuts to services. Councilmembers said public safety should be prioritized as the city prepares to trim its budget.

“Some of the things we do are, quite honestly, more important than others,” said Councilmember Gleam Davis. “What we spend on something like economic development won’t matter a lot if people don’t come to Santa Monica because they don’t feel safe on our streets.”

City Council will discuss the fiscal year 2020-2021 budget in May.

madeleine@smdp.com

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2 Comments

  1. The miss is going to be even bigger….tourism will be down even more this year due to current events, parking tax revenue is down cause it is too expensive to park in Santa Monica…so retail gets a double hit from that and the growth of online shopping..and a 3rd hit..from the fact that the city has the 2nd highest tax rate in the state among 2,100+ cities…why would anyone shop in SM when the tax rate in neighboring places is lower. Re-doing the promenade will not correct retail tax revenue – brick and mortar retail is dying…and one top of that it is too expensive to shop in SM. Added in a beach/bike path area that has become the walking wounded of dangerous homeless people…with drug problems (doing hard core drugs right out in the open)..and it is a ticking time bomb for a horrible incident that will hit tourism even more. The homeless issues the city is facing is part of a larger national/state problem, but the city feels more dangerous that it has in my 18 years of residence. All these factors are going to lead to a much wider budget gap and a lot more problems…….the city council is really lacking in forward thinking.

  2. I grew up in Santa Monica. It used to be a ‘family’ community of wonderful homes, good schools, clean parks, an excellent beachfront, and community based businesses that everyone shopped at. Since, I’d say, the early ’80’s, it’s become nothing more than a liberal, drug infested, homeless prioritized, corrupt, over populated, apartment driven, rent controlled hellhole. Rent control has done EXACTLY what the experts told the city it would do. It’s destroyed Santa Monica and driven out small investors who care about the city. We are now living in the hell that we were warned about, but, all of the non-native residents who now run this city are corrupt, don’t care a out our history and have turned Santa Monica into a city of the have’s and have not’s. It’s the middleclass that keeps a city alive — not spoiled, entitled, leftist, anti-American socialists. There will NEVER be enough tax dollars in this city to support the ‘lifestyle’ in which the cities socialists have become accustomed. I’m a 3rd generation who’s grown up here. I e seen it change, and it now disgusts me. Who can you tax next? That’s all the city cares about.

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