As the Santa Monica City Council last week endured consecutive days of budgetary hearings as part of its study session reviewing the fiscal outlook of the coastal municipality, one theme was readily apparent from the outset: troubled times might be around the bend and healthcare, pensions, and redevelopment are the culprits.
“The loss of redevelopment plus rapid increases in health care, pensions, and worker compensation costs outstrip the increase in revenues we are seeing as a result of the economic recovery,” City Manager Rod Gould told Council members and the public May 28 at the outset of the Biennial Budget study session.
“Clarity over the short- and long-term impacts of the loss of redevelopment in Santa Monica should be achieved in the two-year period. Further, the impacts of recent and likely future decisions by the California Public Employee Retirement System to strengthen pension funding means strikingly higher costs in 2015 and beyond,” Gould continued.
Gould added the loss of redevelopment “is a heavy blow” for the City, resulting in a loss of $20 million from the State and another $22 million “up for negotiation each year with the state.”
Adding insult to injury, the loss of redevelopment has also had a very real impact on Santa Monica’s culture and economy. Because redevelopment, or RDA, funds dried up last year, City Hall can no longer support the Santa Monica Civic Auditorium and the former home of the Academy Awards will close its doors indefinitely.
Just the same, City Hall, thanks to the loss of RDA funds, had to lay off more than a dozen employees who worked at the Civic Auditorium. Gould pointed out it is the first time since 1992 City Hall has had to make such layoffs.
“It’s a shock to the system,” Gould said.
Looking ahead, Gould indicated hard decisions must be made.
“The basic strategy is to limit growth and total compensation in the face of soaring benefit costs,” Gould said. “We are paid well to serve this public. We are grateful for our positions in the City of Santa Monica, but our benefit costs are rising far more rapidly than the revenue … and we must make adjustments accordingly.”
So what kinds of costs are associated with healthcare, pensions, and redevelopment? Below is a brief overview of each category.
Retirement/Pensions
According to City staff, the California Public Employee Retirement System, or CalPERS, board approved recent adjustments to the way it determines retirement contribution rates employees and employers pay. The changes are expected to take effect by the 2015-16 Fiscal Year.
Based on the approved adjustments, City Hall estimates a 50 percent increase in contribution rates in a five-year stretch.
Practically speaking, City staff “estimates a $5.8 million annual increase to the General Fund contribution rate in FY 2015-16, that will ultimately reach an $18.1 million annual contribution in FY 2019-20.”
Citywide, the contribution increase begins at $7.4 million and reaches $22.7 million in FY 2019-20,” City staff stated. “Staff will be forced to look at General Fund priorities over the next two years to find ways to absorb these costs. This is an unprecedented increase that has the ability to cripple municipalities that have already suffered severe losses due to the recession and the dissolution of redevelopment.”
Healthcare
The Patient Protection and Affordable Care Act (PPACA), commonly referred to as “Obamacare,” will be fully implemented by Jan. 1, 2014, resulting in new taxes for Santa Monica.
“At this point, the City’s health insurance consultants have advised that new taxes will be levied on (Santa Monica) and health insurance companies. These taxes … are anticipated to total at least $1 million annually,” City staff stated. “These costs were not included in the January 2013 forecast but have been incorporated in the Proposed Budget.”
In addition to the annual tax assessment, healthcare premiums are also expected to increase – as much as 14 percent per year for the next two years, according to City Staff.
Pending new agreements with insurers may also negatively affect healthcare premiums.
Redevelopment Funds
Thanks to Sacramento cutting off redevelopment funds to Santa Monica last year, the City’s General Fund “absorbed approximately $2 million in costs previously funded” by the Redevelopment Agency, or RDA, according to City staff.
In addition to the closure of the Santa Monica Civic Auditorium, the loss of redevelopment funds also impacted debt service payments on the Civic Center Parking Structure, senior housing voucher costs, and compliance monitoring of affordability covenants for housing, City staff stated.
The City Council will revisit the Biennial Budget at its June 25 meeting and vote on its adoption.
