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.