City of Santa Monica

Staff Report

Five-Year Financial Forecast and Fiscal Year (FY) 2016-17 Midyear Budget


Department:Finance Department, Budget DivisionSponsors:Director Donna Peter, Director Susan Cline
Category:08. Administrative Item

Recommended Action

Recommended Action

Staff recommends that the City Council, Housing Authority, and Successor Agency to the Santa Monica Redevelopment Agency:

1.     Appropriate FY 2016-17 midyear expenditure and revenue budget adjustments as detailed in the report.


Staff also recommends that the City Council:

1.     Review and provide policy direction on the FY 2017-18 through FY 2021-22 Five-Year Financial Forecast and direct staff to proceed with developing a fiscally sustainable budget strategy;

2.     Adopt a resolution establishing classification and salary rates for various positions;

3.     Approve the position and classification changes;

4.     Authorize the City Manager to accept a grant award in the amount of $38,000 from the California State Library for the California Library Literacy Services program;

5.     Authorize the City Manager to accept a grant award in the amount of $1,000 from Centro Latino for Literacy for the Leamos (Let’s Read) @ the Library project; and

6.     Receive public comment on federal Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program funds.

Staff Report Body

Executive Summary

The FY 2017-18 through FY 2021-22 Five-Year Financial Forecast informs the Council and community of the City’s current and projected fiscal status as the City enters the FY 2017-19 Biennial Budget preparation process. Every six months, staff updates the five-year forecast to reflect known and potential factors that will have an impact on the City’s financial position. This tool allows Council to understand the level to which revenues can adequately cover new ongoing initiatives, or, more critically, to make course corrections if necessary to avoid a shortfall.  Most cities do not plan beyond the next budget year and very few have utilized as detailed a future forecast of revenues and expenses.  This has been crucial in establishing and maintaining not only the City’s AAA credit rating, but avoiding crisis management through long-term planning.


The forecast reflects the impact of Consumer Price Index (CPI) and labor cost increases without new programs or staffing. Staff has completed a series of best to worst case forecast scenarios to provide a range of impacts that the General Fund may be required to withstand. In the probable scenario, General Fund expenditures slightly exceed projected revenues as early as FY 2017-18 and the structural deficit reaches $16.4 million by FY 2021-22. In the best case, General Fund revenues would exceed expenditures throughout the forecast period, while the worst case shows a shortfall of approximately $7.9 million in FY 2017-18 that increases to approximately $25.1 million in FY 2021-22. To eliminate current and out-year projected shortfalls and also maintain a healthy level of General Fund reserves, staff recommends a budget strategy that seeks to rein in personnel cost growth and focus resources on the City’s Strategic Goals and key priorities.


A discussion of other funds and any potential changes in their financial status is also included in this report. Generally, these funds are projected to have positive fund balances over the course of the next biennial budget period.


Proposed FY 2016-17 midyear adjustments result in a $2.5 million, or a 0.3% increase over the citywide revenue budget, and expenditure adjustments result in a net $24.5 million or a 3.9%% increase over the citywide expenditure budget.


This report also includes a staff recommendation to accept two literacy grants for the Santa Monica Public Library.


Finally, the City must hold two public hearings prior to the adoption of a One-Year Action Plan allocating federal CDBG and HOME Program funds. This public hearing will satisfy one of the two meeting requirements to receive public input and recommendations for the Proposed FY 2017-18 Action Plan. The City will hold another public hearing prior to the adoption of the Proposed FY 2017-18 Action Plan.



On June 14, 2016 (Attachment D), Council adopted the FY 2016-17 Budget as the second year of the FY 2015-17 Biennial Budget; and adopted the first year and approved the second year of the FY 2016-18 Biennial Capital Improvement Program Budget. On October 25, 2016 (Attachment E), Council approved certain revisions to the FY 2016-17 Adopted Budget that adjusted expenditures and staffing. Since October, staff completed a midyear review of all revenues and expenditures and is proposing budget adjustments for programs, activities, and revenues that have changed significantly. These adjustments will align the FY 2016-17 Revised Budget with current operations.



Economic Update

The national economy continues to show strength.  The economic growth of 3.5% in the third quarter was the highest quarterly increase in two years.   Most economists are projecting growth in the 2.5% range annually over the 2017-2018 time period.  Unemployment is at its lowest level in eight years. Inflation, while showing some signs of increase, is expected to remain relatively low through at least 2018. The housing market also continues to exhibit strength that is expected to continue for at least the next two years.   The Federal Reserve increased interest rates in December for the first time in a year, and has indicated that two to four additional increases are anticipated in 2017.  The economy is not without risks, however.  The current period of expansion is one of the longest without a recession on record, the world economy is showing signs of strain and the new presidential administration also creates uncertainty.


The State economy recovered strongly from the “Great Recession.”  Growth in household incomes is exceeding the national average. However, during that time, the State budget has also expanded in an attempt to correct long term issues. However, after several years of strong growth, State revenues are beginning to fall short of projections. According to the Governor’s FY 2017-18 Proposed Budget, an operating deficit of nearly $2 billion will occur next fiscal year with on-going deficits in the same range in the future unless corrective action is taken. While the budget does propose corrective actions, the possibility of a recession in the next few years poses additional significant risks to the State Budget. 


Santa Monica’s economy remains relatively strong due in large part to its geographic location and its diversified tax revenue base.  Revenue will be helped by the opening of three new hotels over the next several years.  However, there are signs of moderation in the local economy’s growth rate.   Also, as with the State and national economies, the threat of a recession could significantly alter revenue projections.  More information on some of the City’s key revenue sources is provided below.   


Property values in the City remain the third highest in Los Angeles County for a City with the 19th largest population.  The FY 2016-17 assessed value increase was 6.5% after a 6% gain the previous year.  Moderate increases of 3-4% are projected over the five-year forecast period.


Sales Tax receipts are expected to moderate due to sluggish growth in regional household income, a national shift from buying goods to purchasing services and the growth of online purchases.  Projected annual growth is 3-3.5% for the first two years of the forecast before falling to less than 3% annually for the remainder of the forecast period. 


Tourism, which provides a major stimulus to the local economy by creating jobs and producing revenues, continues to exhibit strength. Transient Occupancy Taxes have increased at an average annual rate of 9.3% over the last six years, and revenues are expected to continue having healthy increases over the forecast period, primarily reflecting the addition of three new hotels during the forecast.  One area of uncertainty over the forecast period is the impact of new registration requirements for home share hosting platforms.


Business License Taxes are expected to show some weakness in FY 2016-17 and FY 2017-18, reflecting the loss of several of the largest taxpayers due to relocations, before resuming a moderate growth rate of just under 3% for the remainder of the forecast period. Utility Users Tax revenues are relatively flat over the forecast period as revenues from telecommunication services continue to drop.  Parking Facility Taxes are expected to grow by approximately 2% per year over the forecast period.  And interest rates, which fell to historically low levels over the last seven years, significantly impacting the City’s investment income, have begun to increase.  While a gradual increase is expected over the forecast period, rates are still expected to remain at relatively low levels.


General Fund Five-Year Financial Forecast

Projected Fund Balance

Staff has completed three forecast scenarios that contemplate Best, Probable, and Worst Case impacts on the General Fund. The chart below shows the three forecast scenarios.



The Probable scenario, which serves as the baseline for the forecast, shows the General Fund experiencing a potential shortfall of $0.2 million in FY 2017-18, that increases to $16.4 million in FY 2021-22. This scenario is most impacted by new developments in the cost of retirement contributions and workers’ compensation costs, which are discussed below.  As in the past, health care costs also play a large role in increasing costs of operations.


In the Best Case scenario, bolstered by higher increases in revenues, the General Fund fiscal condition would be positive throughout the forecast period. In the Worst Case scenario, which shows the effects of a possible recession, the General Fund would experience a shortfall of $7.9 million in FY 2017-18 that would increase significantly to $25.1 million in FY 2021-22.



Factors in all scenarios include midyear changes as noted below, as well as the following assumptions:


Revenue Growth Assumptions

General Fund revenues are projected to increase by an average of 3.6% annually over the next five years.  However, a significant portion of the growth relates to the three new hotels set to open during the period as well as the transaction and use tax increase approved by voters in November 2016 (Measure GSH), which is anticipated to be used for affordable housing and education purposes.  Removing the impact of these items, the projected baseline growth rate is closer to 2.6% annually.  The baseline forecast assumes no recession during the forecast period. In the Best Case scenario, revenues would grow at a slightly higher rate approximating a 1% increase.  In the Worst Case scenario, showing the potential effects of a recession, revenues would experience a 2% decrease. 


Expenditure Growth Assumptions

All scenarios assume cost increases at the anticipated rate of the Consumer Price Index (CPI), which is anticipated to be 2.2% in FY 2017-18 and 2.4% in FYs 2018-22. The overall rate of growth for expenditures is 4.7%. Almost three-quarters of the General Fund operating budget is composed of labor costs, and a number of these costs, including retirement, health insurance and workers’ compensation, increase at a rate that is higher than the CPI and represent significant budgetary challenges in the years to come.  As in past years where the forecast shows an upcoming structural deficit, staff will work as part of the Biennial Budget process to realign spending in order ensure that the City’s FY 2017-19 budget provides a financially sustainable plan. 


Retirement Costs

The cost of pension contributions represents an ever-increasing share of local government costs, and the City has taken actions over the past several years to counteract these increases. Among these actions has been an increase in the amount that employees are required to pay towards their future benefits. At this time, Miscellaneous employees contribute up to 30% of the total contribution rate towards the cost of their retirement benefits, while Police Officers Association employees contribute up to 20% and Firefighters Local 1109 IAFF employees contribute up to 29%. Also, the City has used savings to pay down $31.4 million of its unfunded liability, and follows a policy to pay down approximately $1.3 million of its unfunded liability each year. These payments lower the City’s annual contribution costs over time. In addition, the City takes advantage of a program offered by CalPERS that allows cities prepaying a portion of their total contribution at the beginning of the fiscal year to receive a discount on the amount owed. The net savings to the City of these discounts has been approximately $10.6 million through the current fiscal year.

Despite these measures, the cost of retirement continues to rise. In December 2016, the California Public Employees’ Retirement System (CalPERS) announced that it would lower its investment portfolio growth assumptions from 7.5% to 7.0% over three years. For public agencies like the City of Santa Monica, the new discount rate of 7.375% would take effect July 1, 2018. The discount rate would decrease to 7.25% effective July 1, 2019 and 7.0% effective July 1, 2020. Based on information from CalPERS, staff estimates that the adjustment would result in an additional increase of $1.8 million to General Fund retirement costs in FY 2018-19, increasing to $12.6 million in FY 202122.  This change has had a severe impact on the five year projections.  The City’s unfunded pension liability of $387 million, along with the ratcheting down of investment earning projections, represents the most serious long-term threat to fiscal sustainability, not just in Santa Monica, but for public agencies in California.  It will require the City to make adjustments, including realigning staffing needs by examining the need for positions that have been vacant for long periods of time, and seeking additional employee cost sharing contributions during future labor negotiations.


Workers’ Compensation Costs

Under the Probable Case scenario, workers’ compensation costs are anticipated to increase by 10% beginning in FY 2017-18. This increase represents another severe and unanticipated impact on the City’s operating expenses as previous forecasts projected a 5% annual rate of increase.  The change is due to continued increases in the number of claims filed and higher permanent and temporary disability expenses.  These increases are due to the City’s aging workforce and increases in State-mandated permanent disability rates. The City continues to implement programs to contain workers’ compensation costs, yet these projects will take some years to yield results.  An Information Item published on December 12, 2016 discusses these programs. The actuarial study conducted for the Citywide Workers’ Compensation Self-Insurance Fund for FY 2017-18 shows that the City will need to increase its contribution from $13.4 million to $20.5 million to maintain a responsible funding level to cover prior and current claims.  The General Fund is responsible for absorbing roughly half of the $7.1 million increase, and the balance will be apportioned amongst the City’s non-General Funds. The forecast includes $7.2 million from FY 2014-15 savings reserved in the General Fund fund balance to offset increased workers’ compensation costs over four years ($1.8 million a year) starting in FY 201516. The impact of the costs with no offset is reflected beginning in FY 2019-20.


Healthcare Costs

Under the Probable Case scenario, healthcare costs for employees are anticipated to increase by 7.8-9% in FY 2017-18 depending on the healthcare plans used by employees.  While the rate of increase continues to exceed Consumer Price Index changes, the projected annual growth rates of healthcare costs have held relatively steady over the past 5 years of the forecast.  Staff has eliminated the Cadillac Tax associated with the Affordable Care Act pending anticipated legislative changes impacting the Act.


Pension costs, workers comp costs and healthcare costs are all directly related to the City’s long-standing policies of providing a broad range of high-quality services using City personnel.  In the future, choices will need to be made about how to achieve community outcomes in ways that are fiscally sustainable.  The next two-year budget cycle represents the opportunity to begin this shift in ways that minimize disruption and provide the maximum opportunity to continue to improve the efficiency of services without continuing to expand the size of City staff.


Other Funds

Other major funds included in the Five-Year Financial Forecast fall into two categories: 1) funds that operate with sufficient revenues to sustain necessary operating and capital needs; and 2) funds that have a structural deficit where ongoing revenues are not sufficient to cover ongoing expenditures.


Self-Sustaining Enterprise Funds

Enterprise funds that historically rely on sufficient revenues to support necessary operations include the Water, Wastewater, Resource Recovery and Recycling (RRR) and Big Blue Bus (BBB) funds.


The Water and Wastewater Funds have sufficient revenues to cover current operations, due to rate increases in Water Fund that will allow the implementation of the Sustainable Water Master Plan while also maintaining reserve levels. The Wastewater Fund continues to have adequate revenues and reserves to meet current operational and capital expenditures.


The Resource Recovery and Recycling (RRR) Fund will maintain a positive fund balance until FY 2019-20 as expenditure projections continue to outpace revenues. There are several upcoming proposals that may potentially have a substantial impact on the financial stability of the fund, including the piloting of a residential wet/dry collection system, expanding the commercial “rot or not” program, the Fund’s share of costs to complete the Corporate Yards project, and the displacement of the recycling contractor at the Corporate Yards that will result in additional costs for transporting the City-collected recycling material to an offsite location. Staff will continue to monitor fund performance and consider the need for a rate increase in the future.


The BBB Fund will maintain a positive fund balance over the next five years. While expenditures continue to rise, BBB, like most transit agencies in the country, continues to be confronted with reduced ridership. BBB staff continues to develop strategies to improve ridership. The additional revenue from the voter-approved Measure M, which allocates an additional ½ cent sales tax to transportation agencies in order to improve traffic congestion, keep fares affordable and improve bus systems, will help offset the reduction in farebox revenue, the reduction of more than 1/3 of the annual revenue that BBB historically receives from the State Transit Assistance (STA) program due to the reduction in diesel fuel sales in the State, and the increase in operating costs associated with new service and new programs to offset Workers’ Compensation and liability costs. BBB will continue to monitor the fund balance as these funds are additionally used to fund BBB’s capital improvement plan.


The Beach Fund will also generate adequate revenues to sustain their operations throughout the next five years. With the implementation of the green burial program, the Cemetery Fund will maintain a positive fund balance over the next five years.


With the new Airport City Owned Fixed Based Operation (FBO), the Airport Fund is currently showing a shortfall as early as FY 2017-18 pending the completion of staff work to establish FBO revenue projections.  Additional revenues from the elimination of Master Leases and the escalation of rental rates to match market conditions are anticipated to contribute additional revenues to the fund. If additional revenue targets are not met, capital improvement projects will need to be evaluated to ensure self-sufficiency of the fund. Necessary adjustments will be made during the budget process to insure that the fund will have a positive balance in FY 2017-18.


Staff projects the Pier Fund to be self-sustaining through the end of FY 2016-17. Capital needs that are unable to be funded by the Pier Fund during the forecast period must compete with capital needs addressed through the General Fund.


Funds Requiring General Fund Subsidies

The Housing Authority Fund has a projected operating structural deficit of $600,000 - $850,000 annually throughout the forecast period. This assumes a continuation of the current funding levels and that HUD funding to the housing authorities will not be reduced.


Midyear Budget Adjustments

At midyear, staff recommends revenue budget changes based on actual performance and new information, and proposes adjustments to the expenditure budget as necessary to most effectively maintain operations.


Revenue Adjustments – General Fund

The FY 2016-17 Midyear Review includes a number of recommended revenue adjustments, resulting in a net increase of $5.5 million.  However, only $2.1 million of the increase is expected to be on-going.  Significant increases include:

·         $3.6 million in property taxes

·         $1.8 million in Documentary Transfer Taxes

·         $1.8 million in Transaction and Use taxes from Measure GSH

·         $1.2 million in Transient Occupancy Taxes

·         $1.5 million from various miscellaneous fees and parking revenues

·         $0.8 million in indirect overhead charges to other funds

Partially offsetting the increases are decreases in Utility Users Taxes (-$2.0 million); Sales Taxes (-$1.3 million); Investment Income (-$1.2 million); and Parking Facility Taxes (-$0.7 million).


Revenue Adjustments – Other Funds

A full listing of revenue adjustments is included in Attachment A. Significant revenue adjustments in other funds include:

·         Special Revenue Source (04) Fund - decrease of $2.0 million primarily due to timing changes in developer agreement payments. 


·         Water (25) Fund – increase of $1.2 million primarily from water sales due to increased water usage as the State eased mandatory conservation restrictions, and an increase in meter service installations.


·         Wastewater (31) Fund – increase of $1.2 million primarily due to increase in sewer service charges due to increased water usage.

·         Airport (33) Fund - decrease of $1.5 million due to an adjustment in the calculation of new land leases. 


·         Stormwater Management (34) Fund – increase of $1.2 million due to an increase to Stormwater In-Lieu Fees, partially offset by a decrease in Sale of Recycled Water revenues.


·         Big Blue Bus (41) Fund – decrease of $3.5 million primarily due to decrease in passenger revenues as ridership patterns continue to fluctuate since the opening of Expo.



Operating Expenditure and Staffing Adjustments – General Fund

Proposed General Fund operating expenditure appropriations total $2.9 million. Significant appropriations include:

·         $1.9 million to reflect the transfer of voter-approved Measure GSH funds to the Santa Monica-Malibu Unified School District and for the affordable housing program;

·         $0.1 million to reflect an increase of 2.25 FTE due to operational changes.  Net changes include the addition of a 0.25 FTE Fire Equipment Specialist in the Fire Department to create a full-time position for the administration of the vehicle maintenance program, the addition of a 1.0 FTE Family Victim Advocate position in the City Attorney’s Office, and the addition of 1.0 FTE Executive Administrative Assistant position in the Information Systems Department;

·         $0.3 million to increase the overtime budget for the Office of Emergency Management; and

·         $0.2 million to reflect an increase in the subsidy to the Housing Authority Fund.


Operating Expenditure and Staffing Adjustments – Other Funds

Proposed midyear appropriations include a net $0.1 million decrease in other funds. Significant changes reflected in the request including the following:

·         $0.9 million to reflect the transfer of voter-approved Measure GSH funds to the Special Revenue Fund for affordable housing;

·         $0.2 million to reflect an increase of 1.0 FTE Senior Development Analyst in the Housing and Economic Development Department (paid using dedicated affordable housing funding in the Special Revenue Fund) to assist with the administration of housing production and preservation projects, an increase of 1.0 FTE Civil Engineer in the Water Fund to oversee water main replacement projects, and an increase of 1.0 FTE Custodian in the Pier Fund to accommodate additional workload;

·         Other funds will increase by $0.8 million to reimburse the General Fund for indirect costs based on the revised cost allocation plan;

·         The Miscellaneous Grants Fund expenditures will increase by $0.6 million to reflect two new literacy grants and adjustments to the Household Hazardous Waste Grant and Los Angeles County Prop A O&M reimbursement programs.


Capital Improvement Program Budget Adjustments

The Midyear changes to the FY 2016-17 Capital Improvement Program (CIP) budget are largely non-General Fund affordable housing budget appropriations and other minor changes, which result in a total net increase to the CIP budget of approximately $22.2 million. The changes do not include any major new projects, as the FY 2016-18 Biennial Capital Improvement Program was recently adopted in June 2016.  Budget changes are detailed in Attachment A, and the most significant changes are summarized below.


Approximately $20.3 million in recent revenues related to affordable housing are being budgeted in various CIP accounts to be utilized for the preservation and production of affordable housing as opportunities become available. The most significant source is approximately $14.5 million in profit participation payments from the sales of Civic Center Village condos. Remaining funds include $4.7 million in repayments received from City-Redevelopment Agency loans, which Council committed to be set aside for the production and preservation of affordable housing, as well as smaller amounts of affordable housing commercial linkage fees, affordable housing production program in-lieu developer fees, and TORCA loan repayments.


Other CIP budget increases include budgeting water demand mitigation fee revenues for water conservation measures; augmenting the project budget for a water systems software application to provide a mobile version for staff to use in the field; budgeting Metro grant funds to supplement bus replacement funding; and programming local return funds for BBB to complete a comprehensive post-study of the Expo Light Rail Integration and to fund bus stop improvements. In addition, sales tax Prop C local return funds will be budgeted to create peak hour dedicated bus lanes on Lincoln Boulevard, per Council’s direction on November 24, 2015 (Attachment D).  Budget reductions include deferring and therefore eliminating the current-year budget for 17th Street bike and pedestrian projects because the projects will be completed in FY 2018-19 when additional grant funds are available.


Acceptance of Literacy Grants

California Library Literacy Services (CLLS), a program of the California State Library, supports Californians by providing services to low literacy adults and their families through California public libraries. The Santa Monica Public Library recently received a grant of $38,000 to support its adult literacy program. These funds would help the Library address the community’s need for basic adult literacy programs by hiring a Literacy Library Program Assistant who will coordinate and train volunteer literacy coaches and purchase program supplies. Staff is requesting authorization to accept funds for this grant.


Centro Latino for Literacy, a non-profit organization, provides a pre-literacy program to non-literate, Spanish speaking adults. The Santa Monica Public Library recently received a grant of $1,000 to support its Leamos (Let’s Read) @ the Library project. These funds allow the Library to provide a web-based course, test vouchers and program materials to support adult learners. Staff is requesting authorization to accept funds for this grant.


Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program

To receive federal Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Program grant funds, the City must prepare and submit a Council-approved One-Year Action Plan to HUD by May 15, 2017. The Action Plan outlines how the funds will be expended and confirms that the funded activities are consistent with the City’s Five-Year Consolidated Plan adopted by Council on May 12, 2015. The City must hold two public hearings prior to the adoption of a One-Year Action Plan allocating federal CDBG and HOME Program funds. This public hearing will satisfy one of the two meeting requirements to receive public input and recommendations for the Proposed FY 2017-18 Action Plan. The City will hold another public hearing prior to the adoption of the Proposed FY 2017-18 Action Plan.


Building the FY 2017-19 Biennial Budget

Over the next several months, staff will prepare the FY 2017-19 Proposed Biennial Budget, as well as the FY 2017-18 exception-based CIP Budget (this will be the second year of the FY 2016-18 Biennial CIP Budget).  Staff plans to present City spending in the FY 2017-19 Biennial Budget in the context of the Civic Wellbeing Framework, which will connect how the City’s programs and projects aim to improve the experience of living in Santa Monica.  The Budget will introduce a cohesive framework that brings together the elements of the wellbeing dimensions, strategic goals, and sustainability, and will lay the groundwork for performance measurement.  Council will devote more time to the Civic Wellbeing Framework at its upcoming Retreat on January 28, 2017. 


The Proposed Biennial Budget will be submitted to Council and available for public review prior to the Budget Study Sessions on May 23-24, 2017 at which point staff will present department budget presentations to the Council. Council will convene a public hearing on June 27, 2017 to consider, receive public comment, make revisions to, and adopt the first year and approve the second year of the Biennial Budget. Staff seeks community input on the Biennial Budget. Members of the public can provide comments for consideration during the budgeting process by sending an email to or by giving public testimony at the May study sessions and June 27 public hearing. Boards, Commissions, and Task Forces historically make their recommendations and priorities known through written communication to the Council, and staff encourages these groups to continue this practice.


Financial Impacts and Budget Actions

Recommended FY 2016-17 midyear budget adjustments result in a $2.5 million, or a 0.3% increase over the citywide revenue budget, and expenditure adjustments results in a net $24.5 million or a 3.9% increase over the citywide expenditure budget. Detail for FY 2016-17 midyear adjustments is in Attachment A.


Meeting History

Jan 24, 2017 5:30 PM  City Council Regular and Special Joint Meeting
draft Draft