Before coronavirus hit, the city of Santa Monica was already facing a projected $2 million budget shortfall this year and an annual deficit of up to $74 million by the end of the decade, mostly due to rising pension costs and flattening revenues.
With most businesses shut down through at least the end of April and economists predicting a months-long recession, the city’s General Fund could suffer deeper losses.
The city owes $448 million to CalPERS, the state pension fund. More than 20 years ago, local governments retroactively increased worker pensions based on the assumption that CalPERS’ assets would continue to grow at the same rate it did during the 1990s. But the fund’s value tanked during the Great Recession and is still too low to cover pension costs — so cities across California, including Santa Monica, have to make up the shortfall.
Seeking to balance the budget, city officials eliminated 29 vacant jobs, cut pensions, raised parking fees and trimmed city programs. City Council was also considering putting initiatives on the November ballot to raise taxes on hotels, parking and real estate sales and create taxes to capture revenue from high-earning landlords and businesses.
Now, General Fund revenue from sales, hotel and parking taxes have evaporated as residents self-isolate at home and would-be visitors refrain from travel, forcing at least 18 of the city’s hotels to close. Big Blue Bus fare revenues have zeroed out since the agency eliminated fares to facilitate contactless boarding. At the state level, the collapse of the stock market has delivered another shock to CalPERS.
“Like every other business and institution and nonprofit, we’re looking at our sources of revenue, and frankly, it looks bleak across the board,” City Manager Rick Cole said in an interview last month. “The economic impacts are going to hit the city of Santa Monica, but … we will do everything we can with the business community and residents to work our way through it together.”
Ed King, director transit services, said BBB typically takes in $1.1 to $1.2 million in fare revenue each month. That funds about 20% of its operating budget, which is separate from the city’s General Fund.
King said while the loss of fare revenue is significant, BBB has cash reserves and he expects CARES Act funding allocated to transportation agencies to offset some of the lost revenue. BBB has also cut three routes and reduced service frequency, but is still carrying more than 10,500 passengers each day, he said.
In the long term, King said he is concerned about the recession’s impacts on the funding BBB receives from L.A. Metro and the state, which is generated from sales tax.
“I think the biggest hit for us won’t come until next year at this time, when sales tax revenue will give us a better idea of what impact this has had on the larger economy,” King said.
Deputy City Manager Anuj Gupta said the $2 trillion CARES Act President Trump signed into law last week includes $139 billion in financial assistance for cities and counties, but only jurisdictions with a population larger than 500,000 residents will receive a direct allocation. Santa Monica will get a cut of the funding set aside for smaller cities that will be distributed by state governments.
However, the funding can only be used to cover costs directly related to COVID-19 from March to the end of 2020 and can’t replace the lost revenue used to fund regular city services.
“We have already worked through our state lobbyist team to be well-positioned to receive that state emergency funding and reimbursement, because we, like any local government, are going to be facing significant challenges in the weeks and months to come,” he said.
The city’s finance department has planned for how different economic scenarios could impact the General Fund, Gupta added. A baseline scenario would put the fund $12 million in the red by fiscal year 2022-2023 and a worst-case scenario would result in a deficit of $40 million by that fiscal year, according to forecasts released in February.
“While this sudden and significant hit at this particular moment in time was not something we expected, the long-range planning the (finance department) has been doing makes us a little more prepared for something like this,” Gupta said.
Gupta said the city is developing an economic recovery effort that will connect businesses and residents to resources, technical assistance and emergency funding and programs, and may modify some local policies to help get businesses back up and running as quickly as possible.
He said the city will also focus recovery efforts on vulnerable communities, including seniors, people experiencing homelessness and undocumented residents.
“Our most urgent task is to get through this public health crisis and keep our community safe, but at same time, we need to stand up and plan for a broad economic and community recovery,” Gupta said.
madeleine@smdp.com
