Economic Update andFive Year Forecast

A presentation to the City Council

--Carol Swindell, Finance Director

October 13, 2007

2

Presentation Outline

Preliminary FY 2006-07 Year End Results

Economic Update Five Year Forecast Update Fiscal Policies

3

Preliminary Year End Results

General Fund Summary (in Millions)UnauditedFY2006-07

Revenues $243.9Operating Expenditures $205.0Total Revenues over (under) Operating Exp. $38.9

Capital Expenditures $32.2Operating & Capital Expenditures $237.2Total Revenues over (under) Total Exp. $6.7

Other Financing Sources/(Uses) ($4.0)Net Change in Fund Balance $2.7

Ending Fund BalanceReserved $91.8Unreserved - Designated $54.4Unreserved - Undesignated $9.4

4

2007-08Revised Revenue Estimates

Total Additional$0.3M

$0.0

$10.0

$20.0

$30.0

$40.0

Proper

ty T

ax

Sales

Tax

Transi

ent O

ccupan

cy T

ax

Utility

Use

rs T

ax

Busines

s Lic

ense

Tax

Real P

roper

ty T

ransf

er T

ax

Parki

ng F

acili

ty T

ax

Parki

ng C

itatio

ns

Struct

ure P

arki

ng

Fees

and C

harges

Budget Projected

Economic Update

Preparation forFY2008/09 Budget

6

National Economy

Economy uncertain

Stocks Are on the Rise Even as the Economy Loses Steam

Holiday retail: More chill than cheer

Job-growth numbers allay fears of recession

Rising Foreclosures in L.A. — The Canary in the Coal Mine

7

Trends

Unemployment low Current inflation

easing Stock market

booming Federal deficit sliding

Weak GDP growth Housing market

slump and subprime fallout

Weak dollar Future inflation

concern Recession?

POSITIVE NEGATIVE

Source: UCLA Forecast for the Nation and California, September 2007

8

U.S. Economic Growth (2000 – 2009)

Real GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2000 2001 2002 2003 2004 2005 2006 2007(f)

2008(f)

2009(f)

Source: UCLA Forecast for the Nation and California, September 2007

9

U.S. Unemployment (2000-2009)

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000 2001 2002 2003 2004 2005 2006 2007(f)

2008(f)

2009(f)

Source: UCLA Forecast for the Nation and California, September 2007

10

U.S. Consumer Price Index (2000-2009)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2000 2001 2002 2003 2004 2005 2006 2007(f)

2008(f)

2009(f)

Source: www.djindexes.com 11

Stock Market Increase

DJI Closing Averages

10.0

11.0

12.0

13.0

14.0

15.0

2004 2005 2006 Jan Feb Mar Apr May June July Aug Sep

2007

Source: National Association of Realtors, September 2007

12

National Housing Market

Housing Starts/New Home Prices

0.0

0.5

1.0

1.5

2.0

2.5

2004 2005 2006 2007 2008

$0

$50

$100

$150

$200

$250

$300

Housing Starts (Millions) New Home Price (Thousands)

13

State Economy

Another year of economic doldrums –unemployment ticking upward, overall job growth of less than 1%

Slower growth in taxable sales and personal income

Housing slump and subprime fallout Budget deficit

Many of same issues as national economy

Source: UCLA Forecast for the Nation and California, September 2007

14

CA Taxable Sales/Personal Income Growth

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2002 2003 2004 2005 2006 2007(f)

2008(f)

2009(f)

Taxable Sales Personal Income

Local Economy

Positive and Negative

16

Unemployment is Consistently Low

City unemployment rates have historically remained well below the County of Los Angeles and the State of California

Comparative Unemployment Rates

YearCity of

Santa MonicaCounty of

Los AngelesState of

California2000 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% 5.3% 5.4%2006 3.8% 4.7% 4.9%

8/2007 4.2% 5.2% 5.5%Average 4.7% 5.8% 5.7%

Source: State of California Employment Development Department.

17

Expanding Job Center

Source: State of California Employment Development Department.

Attractive location for employers City continues to add jobs, growing by approximately

2,000 since 2004

18

High Demand for Office Space

Office Vacancy Rates: (March 2007)

5.3%

10.0%

5.0%

8.1%

5.9%

14.3%

13.5%

8.6%

8.2%

0% 5% 10% 15%

Hollywood

Beverly Hills

Santa Monica

Marina/Culver City

Westwood

West LA

Miracle/Park Mile

L.A. Central Business Dist.*

Century City

Source: Grubb & Ellis Research. * As of 2Q07.

Asking Rent per sq. ft. - Class A Office Space (March 2007)

$2.9

$3.3

$3.6

$3.8

$4.1

$5.2

$3.2

$3.2

$2.9

$0 $2 $4 $6

L.A. Central Business Dist.*

Miracle/Park Mile

West LA

Hollywood

Marina/Culver City

Century City

Beverly Hills

Westwood

Santa Monica

Office vacancy rate is below the 9.5% average for the Los Angeles market area

Asking rents far exceed rents in other areas

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CSM Building Permits/Valuation

$0

$50

$100

$150

$200

$250

$300

2003/04 2004/05 2005/06 2006/07

Mil

lio

ns

2,300

2,400

2,500

2,600

2,700

2,800

Valuation Number of Permits

Source: City of Santa Monica Building and Safety Division

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Property Tax Revenue Growth Based on Strong AV Growth

Source: Los Angeles County Auditor-Controller.

1.3%

1.6%

7.0%

11.1% 8.4%

9.8%

8.2%

7.6%

5.3%

9.4%

8.8%

7.1%

% Growth from year prior

21

Property Tax:

How much goes to Santa Monica?

Source: HdL

City(Non-RDA)14 ¢

County39 ¢

Schools39 ¢

College/Other8 ¢

Source:County of Los Angeles Registrar Recorder

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Property Transfers

0

500

1,000

1,500

2,000

92/9

393

/9494

/9595

/9696

/9797

/9898

/9999

/0000

/0101

/0202

/0303

/0404

/0505

/0606

/07

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Number of Transfers Average per Transfer

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Transient Occupancy

Tax13.9%

Utility Users Tax

13.0%

Property Tax13.6%

Business License Tax

9.2%

Other Taxes5.2%

Sales and Use Tax

13.7%

All Other Non Tax

31.4%

Diversified Tax Base

Source: City of Santa Monica FY2007-08 Adopted Budget

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Status of Key Revenues – Sales Tax

* Adjustments associated with implementation of Triple Flip resulted in lower reported sales tax revenues in FY2004-05.Sources: 2003-2006 Taxable Sales data from California State Board of Equalization. 2007 Taxable Sales, Sales Tax data from City.

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Key Retail SectorsYear Ended 6/30/07

Fuel and Service Stations

5%

Business and Industry

10%

Restaurants and Hotels

17%

Food and Drugs

5%

Building and Construction

5%

General Consumer

Goods33%

Autos and Transportation

25%

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Retail Sales GrowthFY 2007 Compared to FY 2006

0%

3%

6%

9%

12%

15%

Gener

al C

onsu

mer

Autos

/Tra

nsport.

Resta

uran

ts/H

otels

Busin

ess/

Indu

stry

Fuel/S

vc S

tatio

ns

Food a

nd Dru

gs

Bldg/C

onst

ruct

.

Total

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Strong Retail Sales Per Capita

FY 2006-07 (Per Capita)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$32,663

$13,286

Source: PKF Consulting 28

Santa Monica TourismLodging Rental/Occupancy Rates

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

2000 2001 2002 2003 2004 2005 2006 2007

$150.00$170.00

$190.00$210.00

$230.00$250.00

$270.00$290.00

$310.00$330.00

Occupancy Rate Average Room Rate

Source: PKF Consulting 29

Average Room Rates-Various Cities

$413

$321

$298

$202 $200

$160

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

J uly 2007

Beverly Hills Santa Monica West L.A.

Marina del Rey West Hollywood L.A. Average

Source: City of Santa Monica Finance Department

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Gross Receipts-Santa Monica Businesses

$6.5

$7.0

$7.5

$8.0

$8.5

$9.0

$9.5

2002 2003 2004 2005Billions

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Utility Users Tax

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

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Managing Revenue Vulnerabilities

Real Estate Transfer Activity

Budget assumes no growth from FY2006-07 level; FY2007-08 tax of $4.6 million is low as a % of Budget

Transient Occupancy Tax

High room rates and demand provide cushion and provide hotels with ability to manage occupancy levels

6.4% growth assumed in Budget

Property Reassessments

More volatile office buildings still showing high demand and rents

Residential prices not declining as sales activity slows

Utility Users Tax Five-year forecast is built on assumption of an eventual $7 million revenue loss

Economic Downturn

Impact of an economic downturn could be mitigated with a designated reserve. Approx. 47% of general fund revenue is elastic

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Economic Summary

Slower economic growth expected Small chance of a recession Housing weakness expected to continue

through 2009 Interest rates could drop further Tightening credit may impact local economy

Fund Forecasting

General Fund

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General Fund Revenues

$246.1

$247.9

$255.9

$263.4

$272.8

$230.0

$235.0

$240.0

$245.0

$250.0

$255.0

$260.0

$265.0

$270.0

$275.0

FY07/ 08Revised

FY08/ 09 FY09/ 10 FY10/ 11 FY11/ 12

Millions

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Forecast Assumptions

Revenues: Reflects FY06/07 unaudited results Adjusted FY07/08 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. (FY08/09), $7.0 m. (FY09/10 and beyond)

Sales Tax average annual growth 5.5% adjusted for Santa Monica Place redevelopment (Total $1.2 m. over 18 months)

37

Forecast Assumptions

Revenues: Property Tax average annual growth 4.1% Business License Tax annual growth 4.5% Transient Occupancy Tax growth range from

5.5% (FY07/08) to 3% (FY11/12)

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Forecast Assumptions

Expenditures: Labor costs inflated by MOU upper limit: CPI

plus 0.5% Supply & Expenses increase by CPI Capital programs limited to $10 million in one-

time projects

39

Forecast Assumptions

Expenditures: 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

40

General Fund Expenditures

Driven by labor costs

Labor $160.6 m

73%

Supplies & Expense $59.9 m

27%

41

General Fund Expenditures/Uses

$248.3 $248.0 $256.5 $269.7

$282.3

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

FY07/ 08 FY08/ 09 FY09/ 10 FY10/ 11 FY11/ 12

42

Budget Gaps

Forecast

$230.0

$240.0

$250.0

$260.0

$270.0

$280.0

$290.0

$300.0

FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12

Millions

Revenues & Resources Expenditures & Uses

$10.7M Projected Shortfall

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Expanded Fiscal Policies

Policies are key to ensuring the City’s long-term 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”

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Fiscal PoliciesExamples of Areas to Cover

General Maintain sound financial

practices Assure long-term fiscal

viability Operating Budget

Ongoing revenue sufficient to cover ongoing expenditures

Periodic budget review Revenue

Maintain diversified and stable revenue base

Expenditures Debt

Target ratios Use of pay as you go

vs. when to issue debt

Reserves Minimum target of

20-25% in total Consider targeted

reserve for economic uncertainties

45

Capital Improvements 10-year plan 5-year CIP Future operating cost impact

Accounting, Auditing and Financial Reporting Investments

Annual policy review

Fiscal PoliciesExamples of Areas to Cover

46

Budget Milestones

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