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Councll Meeting: January 19, 1993
Santa Monica, California
TO: Mayor and Clty Councll
FROM: Clty Staff
SUBJECT: BACKGROUND INFORMATION FOR PUBLIC HEARING ON COMMUNITY
INPUT AND CITY COUNCIL PRIORITIES FOR THE FISCAL YEAR
1993-94 CITY BUDGET
Introduction
Each year to inl tlate the annual budget process, the Council
conducts a public hearing concerning the City's current and
proJected financial status and on communlty budget priorities.
Such a hearing is held prior to submittal of departmental budget
requests
to the ci ty Manager and therefore provldes an
opportunlty for publlC lnput earller in the budget preparation
process.
The hearlng also allows time for more thorough staff
and Council conslderatlon and evaluation of suggestions, and
allows more time for public education on budget parameters and
constraints.
It 15 lmportant to notel however, that th1S early hearlng does
not preclude or supplant the publ1C review opportunity and
hearlng process normally scheduled for May and June.
Executive summary
Durlng the last elghteen months, the Clty has taken aggressive
actlon to reduce City expenditures as a result of declining
revenues due to the receSSlon and on-going economic
slowdown.
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Overall, budgeted expenditures for FY1992-93 were reduced
approxlmately 11% from the FY1991-92 budget and about 60
positions were eliminated without layoffs and without
significantly impactlng essential city services. The budget also
provided an enhanced reserve fund to offset anticipated state
revenue cuts to the Clty. In September, the State reduced Clty
revenues by approximately $1.8 million.
Last week, the Governor released his proposed state budget for
FY1993-94. The proposed state budget not only contlnues the
current year $1.8 million revenue cut to the city, but pre-
liminarily increases It to approximately $5.5 milllon. These
property tax funds are belng shifted to the schools. Replacing
thlS state cut will be extraordinarily difficult for the City as
recent economlC prO]ectlons indicate local economic recovery is
not expected to begln untll FY1994-95. ThlS means there wlll be
essentially no City economy-linked revenue growth next fiscal
year. In addltlon, the city will also have to absorb various
consumer price index-driven cost increases such as for fuel and
utllities.
In order to hopefully minlIDlze potentlally severe service
reductions, staff has been reviewlng options for generating
replacement revenues as well as comprehensively reviewing all
Clty serVlces to reduce costs through further operating
effl.ClenCles and restructurlngs. Prelimlnary results of these
reVlews lndlcate that it will not be possible to close the Clty'S
$5.5 million-plus budget gap wlthout either revenue increases or
significant service reductlons. The results of these reVlews
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will be provided to the council later in the City's budget
process.
Economic status
The d1ff1cult budget 1ssues fac1ng the city for FY 1993-94 are
directly Ilnked to the status of the economy.
Wh1le the recent recession began in the third quarter of calendar
year 1990 and techn1cally ended by the second quarter of 1991,
the subsequent economic slowdown has continued nationally until
the last two to three months. Many economic indices now appear
to be indicating that a national economic recovery has begun and
will be well underway later th1S Spr1ng, however, it appears that
growth 1n the Gross Domestic Product (GDP) will st1ll only
average a modest 3%/year over the next few yearsl w1th annual
Consumer Price Index changes of 3% to 4%. While this 1S good
news for the nation, 1t 1S not expected that this rate of GDP
growth w1ll be suffic1ent to spur a quick turnaround in
Cal1forn1a's economy.
The State of California is still 1n the midst of its worst
econom1C downturn Slnce the Great Depress10n of the 1930's.
Since 1990, almost 900,000 Jobs have disappeared, and most
forecasters proj ect the further loss of 60,000 to 801000 jobs
before employment beg1ns to increase. ApproX1mately 20% to 25%
of this Job loss 1S due to defense cutbacks and related
contractions in the aerospace 1ndustry, while the remaining
losses are due to the on-go1ng effects of the recession and to
bus1ness downs1z1ng. At th1s t1me, there appears to be an
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emerging consensus among economists that an economic turnaround
will not begln in the state for at least another twelve months.
When the state economy does turn the corner, the positive
economlC effects will first be experlenced in Northern and
Central California; Southern California will lag the state by
about another twelve months lnto Fiscal Year 1994-95. ThlS is
because more aerospace and related Job losses have occurred in
the southland. As a result, for at least the next twelve months I
Southern California home sales are expected to remain at their
current low levels, office vacancy rates wlll be in the 20%+
range and hotel occupancy rates wlll be ln the 60% to 70% range.
In contrast to the State's and region's troubled economles, the
City's $4.8 billion economy fared relatlvely well this past year.
Hotel occupancy rates, WhlCh exceeded 90% thlS summer, continue
to be the hlghest ln thlS area, the office vacancy rate dropped
to 13% and is expected to drop below 10% later thlS Spring, the
number of businesses ln the Clty remained constant, City
unemployment rates were lower than those for the City and County
of Los Angeles and the State, and median household effective
buying income grew to its highest level everl surpasslng that for
the County, State and natlon for the first time.
However, desplte thlS relatlvely strong econornlC performance, the
rate of growth of economy-llnked General Fund revenues dropped to
the lowest level in over five yearsl primarily due to a real
dollar decllne In Sales Tax receipts. As a result, the City's
expendlture budget was slgnlflcantly reduced as previously
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dlscussed. The status of the City's economy and therefore city
revenues are not expected to lmprove unt~l the regional economy
begins a recovery ln FY1994-95.
Th~s econom~c p~cture is
status of the Federal
further complicated by the unclear
budget. President-elect CI~nton' s
announced economic plan was to ~nsti tute a short-term economic
st~mulus package and a long-term deflcit reduction program. The
stimulus package was to focus on publlC works programs for
infrastructure repair, worker trainingl and efforts to redirect
financial institution resources into local econom~c development,
with approximately one-half of the package dlrected specifically
to cltles. However, ~t has recently come to light that the
Federal def~c~t is projected to be much larger than anticipated,
resulting ~n a growing hesitancy to institute any sizable
economlC stimulus package for fear of further adding to the
Federal deficit. A rapidly increasing Federal deficit could
result in the slow~ng, or even reversal, of the emerging national
economic recovery.
Budget structure
Due to the magnitude of state budget cuts and the likelihood of
essentlally no local econom~c and related revenue growth until
FY1994-95, preparing the city's FY1993-94 budget will be very
diff icul t. To ass~st the Councll and publ~c ~n beginning to
conslder posslble serVlce level reductlons and/or the
implementatlon of replacement revenues, the following is a brief
discussion of the City's budget structure. More detailed
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information can be found in the City's Adopted Budget for
FY1992-93.
For budget purposes, the financial operations of the City are
organized into twenty-three separate funds. The largest fund is
the General Fund WhlCh constitutes about 54% of total city
revenues.
For ease of discussionl these funds can be grouped into three
major categorles:
Enterprise and Internal Service Funds which operate much
like private businesses where the services provided are
flnanced primarily from fees. Examples are the Water
Fund, SOlld Waste Management Fund, and the City
self-insurance funds.
Special Revenue Funds which are used to keep track of
expenditures that can legally only be made for specific
uses and where the revenues come from speclalized
sources. Examples are the Community Development Block
Grant Fund and the Beach Fund.
The General Fund ln which revenues and expenditures
associated wlth providing basic Clty services such as
Police, Fire, and Llbrary are tracked. About 65% of the
General Fund is flnanced from tax revenues such as the
utll1ty Users Tax, the Sales Tax, Property Taxes, the
Business Llcense Tax, the Transient occupancy (or bed)
Tax from hotels and motels and the Real Property Transfer
Tax. Remalnlng revenues primarily come from other
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governmental agencies, various fines and cost offsett1ng
fees and charges.
Attached are a ser1es of p1e charts show1ng the largest funds as
well as the major revenue and expend1 ture components of the
General Fund.
Recommendation
It 1S recommended that the Counc11 conduct the hearing to receive
public input,
and direct staff concerning priorities
for
preparation of the FY 1993-94 city budget.
Prepared by: John Jalili, city Manager
Lynne C. Barrette, Assistant city Manager
M1ke Denn1s, F1nance Director
Attachments
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