City Budget Gap Widens

By Erica Williams

Jan. 16 -- A looming $9.1 million gap in the City's upcoming fiscal budget will likely widen by between $7 million and $12 million under a series of proposals Gov. Gray Davis unveiled last week to fill an historic multi-billion-dollar State budget deficit.

The grim news was delivered to the City Council by Finance Director Mike Dennis Tuesday shortly after some 1,000 parents and students filed past the dais demanding that the council double the City's annual $3.5 million contribution to the cash-strapped School District.

"It's not a pretty picture," Dennis said. "The bottom line is we have quite a formidable budget gap facing the City in the next two years with a possible third jump in (fiscal year) 2005-06 which will require some very difficult budget priority decisions."

Dennis attributed the growing shortfall to revenues the City will lose as the State grapples to fill a $34.8 billion deficit. The Governor's proposal -- which must be approved by the State Legislature -- would eliminate a projected $2.5 to $3 million in motor vehicle in lieu tax revenues that go to the jurisdiction where a vehicle is registered. The State reduced the tax during the economic boom, but municipalities continued to reap their portion from the State general fund.

The City is projected to lose an additional $3.5 million in Redevelopment Agency funds that would be shifted to the school districts, although the increase would be offset when the equivalent amount in the general fund normally used for education is used to close the general budget gap. By shifting the funds directly to the school districts, the Governor would avert Prop 98, which mandates that half of the revenues that go into the general fund be used for education.

City Manager Susan McCarthy warned that staff is now grappling with "a new paradigm of less" and that "the community is just beginning to experience what this will mean."

"The sad fact is schools won't be receiving any more money" from the City, McCarthy said.

"We are all going to be struggling with this," the city manager added. "We've been used to having a lot and adjusting upwards, to adding, to taking on the world, to risking a lot and to helping many. That is municipal life as it used to be."

Contributing to the decline in local revenues, among other indicators, are significant drops in the Transient Occupancy Tax (TOT), or hotel "bed" tax, as well as in sales taxes, a loss Dennis estimates totals about $1.4 million this year. A rise in office vacancies could make matters worse.

Costs associated with rising medical insurance premiums and retirement contributions also are expected to significantly outstrip revenues, according to staff.

In addition, "discretionary" costs associated with capital projects funded during the boom years, such as the new Main Library and Airport Parks, as well as an expanded Virginia Avenue Park, will contribute an additional $3 million in operating costs annually when they come on line within the next two years.

To bridge the initial projected deficit of $9.1 million, staff recommended $4.5 million in expenditure cuts -- including a hiring and salary freeze -- and $4.6 million in revenue increases, which include an increase in fines and fees.

The belt-tightening measures come after a decade of extraordinary revenue growth in the City's General Fund fueled by the dot.com boom, a surge in the popularity of the Third Street Promenade and the City's appeal to the entertainment industry and tourists worldwide.

But a national economic downturn, spurred by the dot.com bust and exacerbated by 9/11, is expected to continue, keeping the local economy "at a rate well below the average for the last decade."

Mayor Pro Tem Kevin McKeown agreed that Santa Monica is facing an unusual crisis. "Most years we're sitting here thinking what would we like to do, and this year we're thinking what can't we afford to lose, because it's inevitable there will be cutbacks."

McKeown recommended that City staff take a look at prioritizing services "by their irreplaceablility," explaining that in tough times local government must be able to support and nurture those most in need and most at risk.

Councilman Bob Holbrook agreed and asked staff to take a look at "core services," such as public safety and waste collection that a city must provide, and to come back with recommendations on what to reduce.

Councilman Ken Genser further suggested that staff present the Council with a study on the effects of either cutting specific programs or reducing the level of service of some programs which could be realized by making personnel cuts.

The council agreed with McCarthy that the City should stay the prudent financial course and not dip into reserves or use one-time funds to cover ongoing expenses, a mistake she suggested the Governor made last year.

"One has only to look at the sink hole on Ocean Boulevard or the recent fire our friends in Malibu experienced to know how quickly multi-million-dollar problems can develop," said McCarthy, referring to the use of reserves.

Several council members responded to criticism from some of the 34 speakers who testified at Tuesday's mid-year budget review. Many criticized the council's continued commitment to major capital projects in the face the developing budget crisis.

Council members countered by repeatedly pointing out that most funding for such projects comes from outside sources and can only be used for the purpose awarded.

"It's almost easier not to accept those grants than take all the criticism for having gotten them and spent the money," Holbrook said in frustration. "We couldn't have spent the money for something else -- it was really free money for Santa Monica."

Many who addressed the Council on the budget were there to advocate for issues other than increased funding for the school district, which faces a budget shortfall that is expected to grow from $3.5 million in the current school year to $11 million next year.

Christopher Arroyo, who serves on the City's Disability Commission, said that state cuts are disproportionately affecting the disabled, with Medi-Cal and other agencies already making large cuts.

"It appears the governor is balancing the budget on the backs of the people who are poor, people who are homeless and people with disabilities," Arroyo said.

Arroyo told the Council that state cuts to social services make services the City offers "even more critical" and urged the Council to continue funding at current levels.

Barrie Levy, head of the Westside Domestic Violence Network, made the same plea.

"Families affected by domestic violence interact with multiple services," she said, and the community's ability to prevent continued trauma to children "depends on how well all of these services are supported with public funds and how well all of us work together."

Jorge Casuso conributed to this report