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City Revenues to Take Five Years to Recover

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By Jorge Casuso

March 7, 2023 -- Santa Monica's economy is "showing signs of softening" and revenues are not expected to fully recover for another five years, according to a recent report to the City Council.

The report issued by the City Manager for a special Council meeting Saturday at the Main Library comes after a strong economic recovery over the past 18 months from the coronavirus shutdown.

The slowdown is the result of both global forces and challenges facing two of Santa Monica's key economic sectors -- high tech and travel and tourism.

"Labor shortages, supply chain issues, historically high inflation and economic volatility continue even as the world shifts from a pandemic state," according to the City Manager's report.

"This is compounded by a continued slowdown in global tourism with political and economic disruptions in Europe and Asia and realization that knowledge workers that once filled our community in the daytime have yet to return to the office in the same numbers."

Santa Monica's General Fund non-restricted reserves -- which were used to provide essential services during the pandemic and to settle a costly sexual abuse lawsuit -- lost 30 percent of their funds between June 30, 2019 and June 30, 2022, according to he report.

"Strong reserves are necessary to cushion the delivery of services from the impact of emergency expenditures, contingent liabilities, and economic uncertainty," the report states.

So far, the City has used $107 million in General Fund reserves to settle sex abuse cases involving former employee Eric Uller, according to the report ("City Seeks to Recoup Nearly $100 Million in Sex Abuse Settlement Costs," January 9, 2023).

And the City is negotiating another set of related claims, as well as fighting a Voting Rights lawsuit that is awaiting a decision by the California Supreme Court ("More Sex Abuse Cases Against the City Filed as Deadline Looms," December 20, 2022).

"If the City loses the (Voting Rights) case," the report warns, "the financial impacts to the City will be high."

In addition, the City "has significant capital liabilities that must be addressed," including the seismic retrofit of Parking Structure 1 Downtown, which could cost as much as $25 million.

"The City has taken many actions to strengthen our organization, but the impacts of these financial liabilities alone will limit our ability to address much needed services, staffing restorations and the budgeting process," the report states.

"This situation is attenuated by the enduring economic volatility for local economies that rely on a strong hospitality and retail sector powered by visitors and office workers.

"As a result, the City must diligently balance program restoration and urgent needs with rebuilding its reserves," according to the report.

The economic slowdown will be in part offset by a number of revenue-generating measures on last November's ballot, but the injection of new funding may not be enough, the report warns.

"While these measures will provide much needed support for specific programs and services, the City continues to operate with extremely limited resources for general services and many services, as well as infrastructure and equipment maintenance, continue to operate at a reduced level," the report states.

The five-year forecast -- which takes into account revenues from a kiosk program expected to generate $14 million a year -- indicates revenues will not fully recover until Fiscal Year 2027-28 ("Council Awards Kiosk Contract to Top Bidder," December 16, 2022).

"While the City has already seen a loss of nearly $170 million since 2020, revenues will still lag behind normal growth by nearly $85 million over the next five years, for a total loss of approximately $255 million over 8 years," the report said.

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