Economic Update and Five Year Forecast A presentation

Economic Update and Five Year Forecast A presentation to the City Council -Carol Swindell, Finance Director October 13, 2007

Presentation Outline § Preliminary FY 2006 -07 Year End Results § Economic Update § Five Year Forecast Update § Fiscal Policies 2

Preliminary Year End Results 3

2007 -08 Revised Revenue Estimates Total Additional $0. 3 M 4

Economic Update Preparation for FY 2008/09 Budget

National Economy uncertain Job-growth numbers allay fears of recession Stocks Are on the Rise Even as the Economy Loses Steam Holiday retail: More chill than cheer Rising Foreclosures in L. A. — The Canary in the Coal Mine 6

Trends POSITIVE o o Unemployment low Current inflation easing Stock market booming Federal deficit sliding NEGATIVE o o o Weak GDP growth Housing market slump and subprime fallout Weak dollar Future inflation concern Recession? 7

U. S. Economic Growth (2000 – 2009) Source: UCLA Forecast for the Nation and California, September 2007 8

U. S. Unemployment (2000 -2009) Source: UCLA Forecast for the Nation and California, September 2007 9

U. S. Consumer Price Index (2000 -2009) Source: UCLA Forecast for the Nation and California, September 2007 10

Stock Market Increase Source: www. djindexes. com 11

National Housing Market Source: National Association of Realtors, September 2007 12

State Economy Many of same issues as national economy o o Another year of economic doldrums – unemployment ticking upward, overall job growth of less than 1% Slower growth in taxable sales and personal income o Housing slump and subprime fallout o Budget deficit 13

CA Taxable Sales/Personal Income Growth Source: UCLA Forecast for the Nation and California, September 2007 14

Local Economy Positive and Negative

Unemployment is Consistently Low o City unemployment rates have historically remained well below the County of Los Angeles and the State of California Comparative Unemployment Rates City of County of State of Year Santa Monica Los Angeles California 2000 4. 4% 5. 4% 4. 9% 2001 4. 6% 5. 7% 5. 4% 2002 5. 5% 6. 8% 6. 7% 2003 5. 7% 7. 0% 6. 8% 2004 5. 3% 6. 5% 6. 2% 2005 4. 3% 5. 4% 2006 3. 8% 4. 7% 4. 9% 8/2007 4. 2% 5. 5% Average 4. 7% 5. 8% 5. 7% Source: State of California Employment Development Department. 16

Expanding Job Center o o Attractive location for employers City continues to add jobs, growing by approximately 2, 000 since 2004 Source: State of California Employment Development Department. 17

High Demand for Office Space o Office vacancy rate is below the 9. 5% average for the Los Angeles market area o Asking rents far exceed rents in other areas Source: Grubb & Ellis Research. * As of 2 Q 07. 18

CSM Building Permits/Valuation Source: City of Santa Monica Building and Safety Division 19

Property Tax Revenue Growth Based on Strong AV Growth % Growth from year prior 1. 3 % 1. 6 % 7. 0 % 11. 1% 8. 4 % 9. 8 % 8. 2 % 7. 6 % 5. 3 % Source: Los Angeles County Auditor-Controller. 9. 4 % 8. 8 % 7. 1 % 20

Property Tax: How much goes to Santa Monica? City (Non-RDA) 14 ¢ Source: Hd. L County 39 ¢ Schools 39 ¢ College/ Other 8¢ 21

Property Transfers Source: County of Los Angeles Registrar Recorder 22

Diversified Tax Base Source: City of Santa Monica FY 2007 -08 Adopted Budget 23

Status of Key Revenues – Sales Tax * Adjustments associated with implementation of Triple Flip resulted in lower reported sales tax revenues in FY 2004 -05. Sources: 2003 -2006 Taxable Sales data from California State Board of Equalization. 2007 Taxable Sales, Sales Tax data from City. 24

Key Retail Sectors Year Ended 6/30/07 25

Retail Sales Growth FY 2007 Compared to FY 2006 26

Strong Retail Sales Per Capita FY 2006 -07 (Per Capita) $32, 663 $13, 286 27

Santa Monica Tourism Lodging Rental/Occupancy Rates Source: PKF Consulting 28

Average Room Rates-Various Cities Source: PKF Consulting 29

Gross Receipts-Santa Monica Businesses Billions Source: City of Santa Monica Finance Department 30

Utility Users Tax o o Legal challenges may reduce or eliminate telecommunication portion of UUT Loss from telecommunication services could result in lower ongoing revenues of $8 -12 million per year 31

Managing Revenue Vulnerabilities Real Estate Transfer Activity § Budget assumes no growth from FY 2006 -07 Transient Occupancy Tax § High room rates and demand provide cushion level; FY 2007 -08 tax of $4. 6 million is low as a % of Budget § Property Reassessments and provide hotels with ability to manage occupancy levels 6. 4% growth assumed in Budget § More volatile office buildings still showing high § demand rents Residential prices not declining as sales activity slows Utility Users Tax § Five-year forecast is built on assumption of an Economic Downturn § Impact of an economic downturn could be eventual $7 million revenue loss mitigated with a designated reserve. Approx. 47% of general fund revenue is elastic 32

Economic Summary o Slower economic growth expected o Small chance of a recession o Housing weakness expected to continue through 2009 o Interest rates could drop further o Tightening credit may impact local economy 33

Fund Forecasting General Fund

General Fund Revenues 35

Forecast Assumptions Revenues: o o Reflects FY 06/07 unaudited results Adjusted FY 07/08 revenues to reflect changes in projected ongoing revenues Utility User Tax annual growth at 1. 8% adjusted for ongoing revenue losses of $4. 8 m. (FY 08/09), $7. 0 m. (FY 09/10 and beyond) Sales Tax average annual growth 5. 5% adjusted for Santa Monica Place redevelopment (Total $1. 2 m. over 18 months) 36

Forecast Assumptions Revenues: o Property Tax average annual growth 4. 1% o Business License Tax annual growth 4. 5% o Transient Occupancy Tax growth range from 5. 5% (FY 07/08) to 3% (FY 11/12) 37

Forecast Assumptions Expenditures: o o o Labor costs inflated by MOU upper limit: CPI plus 0. 5% Supply & Expenses increase by CPI Capital programs limited to $10 million in onetime projects 38

Forecast Assumptions Expenditures: o o o MOU changes incorporated Program growth limited to current programs plus 415 PCH and operation of the PDC/Permit Center Includes subsidies for the Civic Auditorium, Beach, Cemetery and Pier funds 39

General Fund Expenditures o Driven by labor costs 40

General Fund Expenditures/Uses 41

Budget Gaps $10. 7 M Projected Shortfall 42

Expanded Fiscal Policies are key to ensuring the City’s longterm fiscal health Local economy is important But not the most critical feature…. financial management counts!! Not just for the “good times” --- may be more important in the “bad times” 43

Fiscal Policies Examples of Areas to Cover o General n n o o Expenditures Debt n n Operating Budget n n o Maintain sound financial practices Assure long-term fiscal viability o Ongoing revenue sufficient to cover ongoing expenditures Periodic budget review Revenue n Maintain diversified and stable revenue base o Target ratios Use of pay as you go vs. when to issue debt Reserves n n Minimum target of 20 -25% in total Consider targeted reserve for economic uncertainties 44

Fiscal Policies Examples of Areas to Cover o Capital Improvements n n n o o 10 -year plan 5 -year CIP Future operating cost impact Accounting, Auditing and Financial Reporting Investments n Annual policy review 45

Budget Milestones o o o Community Outreach – November 2007 Mid-Year Update – January 2008 Council Priorities – January 2008 Budget Development – Jan - April 2008 Budget Study Sessions – May 2008 Budget Adoption – June 2008 46