City Finances

For years the City of Santa Monica has enjoyed robust revenues which enabled us to provide discretionary services above and beyond what is offered at other municipalities in Los Angeles County: subsidies for residents’ use of recreational facilities; after school programs; services for at risk youth; senior programs including rental assistance for those with the lowest incomes and discounted transportation to doctors and grocers; etc. At the same time for many years the City has enjoyed a AAA bond rating, meaning we maintained low debt and more than adequate reserves for a recession and were able to borrow at the lowest rate possible for projects such as the recently completed Fire Station #1 downtown.

A couple of years ago we began to see some weakness in a few of our traditional revenue sources: downtown parking revenues decreased 7% in one year as more visitors arrived by mass transit or Uber/Lyft; sales tax declined as more shopped online; and international tourism softened as the Federal government was perceived as not welcoming to foreigners. In the meantime, certain City costs continued to increase beyond the rate of inflation.

So we did two things:

1. Trimmed our expenditures as we are required to maintain a balanced budget;

2. Started a Santa Monica 2050 planning process to envision how to continue to provide services given the economic changes ahead.

The COVID-19 hit and many City revenues collapsed overnight as businesses, which provide 65% of tax payments, were forced to shut down. It was a fiscal hit the like of which the City had not seen since the 1930s. For example, during the Great Recession a little over a decade ago, our hotel occupancy rate bottomed out at 60%, meaning we were still collecting reasonable amounts of income from the room tax. Last spring the vast majority of hotels closed and the few remaining open had occupancy rates of 5%. Simply put, a critical revenue source evaporated overnight. Likewise, we saw a precipitous decrease in sales tax and parking revenue.

Nor were we alone in confronting such a harsh fiscal reality, as cities in California are projected to lose $6.7 billion over two years:

https://www.latimes.com/world-nation/story/2020-04-24/california-cities-project-2-year-losses-of-6-7-billion

So we did the right thing almost immediately and balanced our budget last spring using a painful combination of dipping into our reserves, delays to capital improvement spending, pay cuts to upper management of as much as 20%, elimination of certain departments and divisions, layoffs of staff, and cuts to services and programs. It was excruciating for both the Council and the community to temporarily curtail cherished programs, but necessary to staunch the bleeding of cash. Only now have some of our neighboring cities begun to look at furloughs and other tools to reduce spending while in the interim they kept spending. Santa Monica, on the other hand, once again had its prudent fiscal management reaffirmed in April:

https://www.fitchratings.com/research/us-public-finance/fitch-takes-rating-actions-on-tourism-sales-tax-dependent-california-city-idrs-23-04-2020

Going forward we expect a full economic recovery to take several years, but as revenues increase my priority would be to restore the cuts which have been most painful for our community: library hours, after school and at-risk youth programs, homelessness reduction strategies, services for seniors, mobility enhancements, and environmental protections. Voters can increase City funding to restore services by approving Measure M this fall, which will increase the transfer tax on the sale of properties of $5M or more.

Some have complained over the years about the size of the City budget and note that per capita spending exceeds that of peer cities. That’s because no other city in LA County operates a pier, beach, airport, cemetery and bus line, all of which are run in discrete Enterprise Funds relying on source revenue for costs -- in addition to per capita spending on General Fund services such as police, fire and libraries. However, taxpayers do not pay for those extra operations unless they use them. For instance, the Beach Fund maintains the beach with revenue from beach parking lots. The Big Blue Bus relies on fare box revenue and grants. The Airport Fund runs on landing/takeoff fees and lease payments from aviation and non-aviation tenants. Consequently, if one divides total City spending by the resident population the resulting figure seems high. However, unless you park at the beach or ride the BBB you are not paying for those expenditures.

Others have expressed concerns about the City’s pension liability and rightly so. First, let me explain how the system works: employees and the City both pay into CalPERS, the state’s public employee retirement system. When a public employee retires, who may have worked only in Santa Monica or in a number of CA cities, CalPERS and not Santa Monica pays a pension based of years worked, income and other factors. So both the taxpayers and City workers contribute to that benefit. Ideally, those payments and the investment returns generated by CalPERS from its portfolio are calibrated to assure no extra funds are required to pay pension benefits.

In fact, prior to the Great Recession, Santa Monica’s pension obligations were fully funded. Then the CalPERS portfolio tanked during the recession and has never recovered from those losses. In addition, CalPERS has also revised its actuarial analyses to account for longer lifespans and a decreased expectation of its rate of return on its investments. Consequently, all cities in California which use CalPERS (some larger cities manage their own pension funds) have been required to increased their annual payments to CalPERS.

Consequently, the bad news is we now have a very large pension liability. The good news is that we have a plan to pay down that debt and are only one of two cities in SoCal to address the issue (the other is Newport Beach). Based on recommendations from a Pension Advisory Committee, the Council adopted an aggressive plan to make payments to retire the pension debt within 13 years.

The policy wonks among you may wish to peruse these two blogs from our former City Manager:

https://www.santamonica.gov/blog/not-waiting-for-sacramento-to-tackle-pension-liability

https://www.santamonica.gov/blog/rick-cole-while-fiscally-strong-santa-monica-must-continue-to-prepare-for-the-recession-that-s-coming"

Some argue that City employees are overpaid. I would first posit that the real issue is that those in low and middle income jobs in the private sector are underpaid due to the gross income inequality in our country. That said, the City Council is cognizant of the need to reign in employee compensation and other expenditures. I serve on the City Audit Subcommittee which oversees municipal finances and seeks to control costs and find efficiencies:

https://www.smgov.net/departments/council/content.aspx?id=53159

You’ll see that we commissioned a Compensation Study comparing our employee pay for various positions against that of peer cities in the region. It’s a long report but here’s the key finding: “In relation to peer cities, Santa Monica exhibits the same distribution of personnel costs as peers across wages, health benefits, and retirement.”

Nonetheless, the Council has taken various actions in recent years to reduce costs. Most significantly, after a difficult 18 months of negotiations we eliminated an extra retirement benefit known as “PERS on PERS,” saving tens of millions of dollars of future spending. We have also negotiated annual cost of living adjustments with bargaining groups which are either at the rate of inflation or below it, so that effectively no raises have been granted. And even before last spring’s layoffs, we had been working to reduce the number of City employees.

Finally, some argue we should do more with less. However, City services are necessarily driven by human capital – you can’t staff a skate park, help someone find a library book or coach after school basketball with a computer or robot – at least not yet. And it was very clear during last spring’s budget cuts that every City service or program has a constituent group which values that function above all others – where do you draw the line? That said, we are implementing technology to make various processes more streamlined.

So in conclusion, it’s my assertion that City finances have been well-managed over the years and, despite the headwinds of the COVID recession and our pension liability, we maintain a balanced budget which during these dire times continues to provide essential services. I look forward to emerging from the recession and responsibly restoring what we have temporarily lost.