The City of Santa Monica may have avoided being in the red in the previous two fiscal years, but that did not prevent Council members from wearily looking into the crystal ball and worrying about the municipality’s financial health.
In a proactive attempt to ensure Santa Monica maintains solid financial footing, the City Council took action at its Feb. 8 meeting to jolt its current budgeting practices forward with the staff’s recommendation to adopt a biennial budget, while also receiving the Finance Department’s five-year economic forecast.
As part of the biennial budgets, the City’s staff would regularly revisit the financial plan with the Council in at least six months increments.
“We’re … suggesting some changes to the way we build the budget for the next year, and we ask your concurrence this evening to do that,” City Manager Rod Gould said to Council members. “We’d like to present for you a two-year budget for the next two fiscal years. This way we would present 24 months of allocations and service commitments (and) save considerable staff time … but allow the Council to adjust the budget every six months to make course corrections.”
With its five-year forecast, staff urged the Council to consider three potential outcomes of Santa Monica’s financial health by Fiscal Year 2015-16: baseline, “worst” case, and “best” case.
Under a baseline outlook, the City would face a $12.3 million deficit by 2016 despite showing $1.7 million in surplus for Fiscal Year 2010-11. The worst-case scenario has Santa Monica on pace for a $26.3 million deficit, while a best-case outlook estimates the City will start with a $1.9 million surplus for 2010-11 and finish in the green with $8.4 million by 2015-16.
By raising fees on services, relying upon reserve funds, and controlling costs, the City seemed to survive the recent recession and managed to avoid the red in consecutive years, with the Finance Department anticipating a $1.7 million surplus for the fiscal year ending on June 30. Even more, the Finance Department also reported for Fiscal Year 2009-2010 an undesignated fund balance of $7.9 million, ongoing revenues outpacing itself by 1.9 percent, and operating expenditures savings exceeding projections by 1.7 percent.
Still, past results did not guarantee future results, hence the staff’s recommendations to incorporate the five-year financial forecast, biennial budgets, and expenditure controls.
With the Council’s action on Feb. 8, the Finance Department will now develop its first two-year budget for the fiscal years 2011-2013. The new approach is a stark departure from the current practice of staff annually preparing one-year budgets followed by a one-year spending plan.
Council member Kevin McKeown said it was essential for both staff and the Council to pay close attention to the possible “worst-case” forecast featuring a widening gulf between the City’s revenues and its ability (or lack thereof) to cover its expenses.
“I think what we have here is a curveball coming at us,” McKeown stated. “If we don’t realize that, in a few years, those numbers (reflecting revenues and the ability to cover costs) are moving farther apart, and be prepared for that, we will be in a situation where we won’t be able to sustain these wonderful programs. We’ll find ourselves cutting programs, laying people off, and disappointing members of the community.”
The Council also approved fee increases of various City recreational activities in an attempt to prevent future service cuts and raise revenues. In agreeing to raise fees, Council members said such an action was necessary to both preserve the programs and to prevent significant long-term strain on the budget.
“If we don’t start raising fees, we either have to start cutting back services or we have to start not offering programs,” Mayor Pro Tem Gleam Davis said, adding the City has not raised fees, for the most part, since July 2002. “It is not as if we kept the fees the same or even reduced the amount of the proposed increases that we can go one continuing to subsidize at the level we are subsidizing at. It’s just not sustainable.
“We need to take a multi-pronged approach to solving what looks to be a budget deficit five years down the road.”
As part of the discussion, both staff and Council indicated the City subsidizes roughly 75 percent of recreational activities, including aquatics and after-school programs.
Just the same, while Council members debated the impact of raising fees, a greater concern was the strain the City anticipated experiencing in light of Gov. Jerry Brown’s plans to eliminate redevelopment agencies (RDA).
“I am very nervous about some macro trends… that make the next couple years extremely dangerous financially,” Council member Bobby Shriver stated. “In that environment, I think our policy as a Council ought to be we should be prepared for the worst.”
Shriver added the ultimate strain on the City’s budget is not so much costs to maintain recreational services, but instead CalPERS programs providing benefits to the City’s law enforcement and fire officials.
“The 800-pound gorilla … is the 86 percent benefit compensation on our friends in the police department, that’s where all the money is,” he said. “It’s a choice game. In an era of declining or flat revenue with strongly escalating expenses, what has to happen at some point is the people have to choose between the additional police officer and senior services. Some harsher choices are going to have to be made, even in the (baseline outlook).”
The Council also provided future budgets would be influenced, in part, by “emerging issues” such as mobility/connectivity, public safety and violence prevention, livable neighborhoods, youth services, pedestrian safety, fiscal stability, and water self sufficiency.
With the new directive, the Council will not only consider biennial budgets and five-year financial outlooks, but City departments will be able to carry over unused budgets from one year to the next. Prior to the Feb. 8 council meeting, if a department failed to exhaust its funding prior to the end of the fiscal year, it would essentially lose out on that money for good.
After a lengthy discussion, McKeown believes the Council’s decision to move forward with its far-reaching plans to cut costs and alter budgetary planning practices were necessary for the long-run benefit of the City.
“Just as we protected our redevelopment funds from state raids, we are pre-paying certain obligations to make sure we have control on possible future cost increases, and can in some cases enjoy a discount,” McKeown stated. “Internally, we plan to go to a ‘rollover’ budgeting process where departments have greater incentive to realize cost savings. By cutting costs and increasing savings, we will be able to continue providing residents with the excellent level of City services we expect in Santa Monica.”
The Feb. 8 council meeting featured all seven elected officials in attendance for the first time in 2011; Holbrook had missed previous meetings due to international travel plans and the birth of his first grandchild, while Shriver took leave to mourn his father’s passing.