The city of Santa Barbara is expected to lose close to $30 million in revenue over the next two years, according to a budget report presented to the City Council Tuesday by City Administrator Paul Casey.
Although Mr. Casey was scheduled to give a rosey report on a balanced budget, which staff had spent six months preparing, the coronavirus pandemic made their carefully laid plans “dead on arrival,” Mr. Casey told the council.
“We’re going to have to make adjustments immediately,” said Mr. Casey.
Mr. Casey said city staff have used the best information that is currently available to forecast for the 2020-21 fiscal year, but the little data available has made predictions extremely difficult.
“We get our revenue information slowly except for bed tax. It’s just the way we get processed on sales tax and other items, and most of us don’t know what the future is going to hold. When does the stay at home order get eased and how do we move forward? How long does it take for the economy to come back? We’ve got some serious challenges going forward,” said Mr. Casey.
For the general fund, prior to the COVID-19 crisis the city was forecasting a $1.8 million surplus in revenues.
After reassessing, the general fund is expected to lose $12.3 million in 2020 and $9.7 million in 2021.
“Those equate to about a 9% cut in 2020 and a 7% cut in ‘21,” said Jennifer Tomaszewski, interim finance director.
The situation is unlike other financial crises due to the catalyst being a public health emergency. Staff anticipates that even when the economy reopens, it will be progressive. In a typical recession you can expect a four to eight percent decline in revenues, but the situation facing the city is on a much bigger scale, said Ms. Tomaszewski.
“For example restaurants. We have in our assumptions been building in 65-70% decline, which is just unheard of up until this point,” said Ms. Tomaszewski.
The hardest hit revenue stream will be the Transient Occupancy Tax, as the tourism industry, the backbone of Santa Barbara’s economy, grinds to a standstill. The city is expecting $8.4 million in TOT revenue losses in the next two years.
Out of 66 hotel operators in the city, two-thirds have opted to defer TOT payments until July.
“To put a point of reference there, when we had the Great Recession we offered that to operators as well and we had less than 15 I think that actually took part in that,” said Ms. Tomaszewski. “We’re seeing three times that now.”
As tourism declines in the city, sales tax revenue will also be heavily affected.
Restaurants, general retail, and transportation, mainly car sales, are Santa Barbara’s three biggest sources of sales tax. As those businesses suffer, the city estimates a loss of $7 million in revenue in the next two years.
Although some have hoped that taxes from the growing cannabis industry may offset some of these losses, the industry is too young to know if it will be robust enough to fill the gap. Currently the city collects taxes on two retail operations with a third on the way, and some manufacturing and distribution.
“It’s still really unknown and we don’t know when we’re going to hit that saturation point and how much those distribution and manufacturing revenues are going to be,” said Ms. Tomaszewski.
Mr. Casey laid out several steps that he recommended the city take immediately to make up for the losses.
The city will hold all vacant positions open, unless it is deemed critical such as the city’s Finance Director. The city will also defer capital expenditures on any projects that can be delayed, will slow non-essential spending, and will dip into the city’s considerable reserves, saved up for just a crisis like this, although only a temporary solution.
Going into 2021, Mr. Casey recommended the city continue to hold vacant positions open and defer capital expenditures when possible. In addition, reduction in services for various departments will have to occur. This may prove difficult, as the city already downsized significantly 10 years ago, warned Mr. Casey
“I think the low-hanging fruit we took out in the late 2000’s, and we never came back from that. I think it’s going to be harder this time and the decisions and choices are going to be more challenging,” said Mr. Casey.
“They’re emotional conversations to have. We take great pride in the services we provide to the community and I think the community likes living in Santa Barbara because we provide good recreational services, library services, and a whole bunch of other types of stuff. Talking about reducing those services is hard, disappointing, and difficult.”
Up to 80% of the general fund is dedicated to labor costs, making the need for negotiations with labor unions a must for any solution.
“Either through the reduction of services and eliminating positions or looking at concessions from our labor unions, that has to be part of the picture,” said Mr. Casey.
As the city looks to make cuts where it can, the new police station and Community Choice Energy are two projects that will continue as planned.
The Council accepted the recommendations in a unanimous vote, and set the agenda for departmental presentations and public meetings to develop the city’s budget over the next two months.
Because more information is needed and the full impact from the coronavirus remains to be seen, traditional budget timelines will have to be adjusted.
“I can really see us having to adjust the budget throughout the fiscal year. I don’t think we’re going to nail it the first time June 16 because I think we’ll just be starting to come out of the stay at home order, so we’re going to have to see how the economy rebounds throughout the fiscal year. I could see us coming back and revisiting this on a quarterly basis,” said Mr. Casey.