Cratering Revenues Force Once-Flush Santa Monica to Restructure Budget Priorities: Terry O'Day

Terry, was the resignation this week of your manager a wake-up call to your city’s elected leadership regarding the dire budgetary challenges -the near collapse of your revenues -  currently facing cities across the nation?

Terry O’Day: We have been in the throes of dealing with the closure of our businesses, our parks, and our beaches and have been highly focused on the public health needs of our populous. As we’ve turned to deal with economic needs, we’ve come to realize we have a massive fiscal crisis on our hands as well.

We have a general fund that is annually in the neighborhood of $400 million, and—by the end of the fiscal year in June—we’re looking at around $72 million loss and forecasting another $150 million drop for the next fiscal year. Over the next 24 to 26 months, the shortfall is about $300 million.

Rick Cole, your former city manager, said in his recent resignation letter that no amount of State or Federal aid would solve the problem and that restructuring and staff reductions would have to take place at every level. Could you comment?

There is no question that this crisis will require a significant restructuring in our government.  I agree with Rick that we can’t close this gap with Federal or State funding. In fact, we are more likely to see the State taking money from cities than giving money if what’s past is prologue from previous fiscal crises in our state’s history.

First, we need be taking this seriously to stem the losses immediately. Second, we begin a restructuring that can close this gap. Rick’s reaction was a noble one, because one of our biggest concerns is how to assure that we’re making cuts across the organization that are fair to employees. By stepping aside, he presents us with the opportunity to protect a few jobs lower down in the organization. We’re just beginning to do the hard work of looking at what we can protect, what we have to continue, and how to get the economy moving again—which is the biggest challenge. 

Rick Cole, for context, was hired five years ago by a unanimous vote of the Council and is acclaimed throughout the state, and even the nation, as a champion of a visionary city with a rich tax base that was investing, in visionary ways, to make Santa Monica the most livable city. Now, dramatically, a global pandemic has caused the city to reset its priorities. Is Cole’s resignation letter a ‘canary in a coal mine’ warning for all cities?

I think you’re right on the general premise that we’re a canary in the coal mine. We have handled this as best we can to understand the depth and nature of the fiscal impact from the COVID closures. But, we are also somewhat unique in our exposure to tourism; considering that all of our hotels, restaurants, and retail are closed right now, local tax revenue have cratered.

The shortfalls that we’re forecasting for next year, which begins July 1, include a 60 percent decline in total Room Occupancy taxes from hotels, a 30 percent decline in Sales taxes, and major declines in parking revenue and business fees.

We’re not expecting people to be getting on airplanes and filling our hotels anytime soon, so we have to pivot towards a new reality. So yes, we’re a canary in the coal mine because you’ll see fiscal crises among states and cities across the country, but our exposure to tourism makes us a little bit more susceptible to this problem.

What mandate have you given Rick’s successor to manage through this unprecedented fiscal challenge to the City budget and priorities?

The clear mandate is to provide for public health and safety, engage in economic recovery, and get to a balanced budget; but know that austerity is not the only tool that we have available. We still have the opportunity to invest in a new economy, and if we only rely on austerity, we’re not going to get to the new economy. We need to be smart about what resources we apply to get us into a position to replace the nation-leading programs that we had been investing in and bring our employees back to work.

Given the above instructions to the new City Manager, and the enlightened array of Santa Monica’s discretionary public services, address how the City team will be prioritizing what to sacrifice and what to retain as essential? And, what values guide prioritization?

That’s where this gets difficult. Given the health crisis we’re in right now, we will prioritize public health and safety. When we’re thinking about the cuts we need to make, we’re looking at a 40 percent loss. If you prioritize safety and public health, we’re unlikely to make significant cuts to those programs.

Secondly, in order to close the fiscal gap and get the economy moving, we’re going to have to invest in economic redevelopment and recovery. We don’t have significant staffing or programs in that category right now, because Santa Monica’s location has always been an attraction for business investment its own right.

The third priority are the things we have to keep doing. Services like picking up trash or providing water, you can only cut so much.

That takes us to the fourth category that’s going to take most of the cuts: discretionary investments. That category represents the values of Santa Monica and made us a leader in sustainability and livability.

With a 40 percent overall cut, you can expect those discretionary programs to take more than a 60 percent cut. Our city, like most cities, is a services provider, so 85 percent of our budget is personnel. Unfortunately, this will mean layoffs and furloughs.

The Mayor of Los Angeles, in his State of the City address last week, entitled ‘City Under Attack,’ announced personnel furloughs would be included a much larger budget revision. Address how the council is or will be addressing the pain caused by these staff reductions.

The personnel cuts that are going to be required will involve labor negotiations; almost all of our employees are represented. We will work closely with the labor unions to find ways to make smart cuts that protect jobs and preserve our ability to rehire people once we get our economy moving again. It’s going to be a difficult and painful negotiation.

We have done everything we can over the years to provide the best that we can for our employees, but at this time the only type of federal support that’s coming to a city like ours is through unemployment benefits. Our employee base will have to access some of those unemployment benefits in order for us all to manage through this crisis.

In a second category of federal investment that's coming to cities is through the economic injury disaster loans (EIDL) and payment protection programs (PPP) loans. We’re going to try to create ways for businesses to invest in our community using those stimulus funds, get this economy moving again, and our employees back to work.

Elaborate on the immediate economy recovery strategies being considered by Santa Monica.

We have restaurants, retail, and hotels that are struggling right now, and they’re taking in some of the federal dollars from the stimulus program. We want to create a strategy to encourage those restaurants, retail, and hotels to invest in our community and keep their workforce employed. Once this economy reopens, we want Santa Monica to be a model for the rest of the region and state for how to be a safe community that rebuilds its economy.

Here’s an example of a strategy. We have a parklets program, which is the build out from the curb into a parking space in front of a restaurant or retail area. It acts as a mini park, but is programmed and maintained by the restaurant. We’ve done a pilot of about a half dozen of these parklets. I’d like to see us go further with 200 parklets that could be built throughout the city. The restaurant or retail establishment could apply with the city, we already have existing guidelines for what we’d like to see on those parklets.

Having a safe and clean community is going to require us to reduce the maximum interior capacity for our restaurants going forward—this parklet strategy provides some mitigation, because they’ll capture some outdoor seating. It’s an offset to the restrictions that will be required to be a safe community, and with retail and restaurants getting federal stimulus dollars, they can invest to build these parklets and present a new way forward for a safe, clean, and successful economy.

This positive, constructive notion of how to begin to work the city out of a budgetary crisis stands in stark contrast to what Senate Majority Leader Mitch McConnell said this week, which is that states, and implicitly cities, financially squeezed by the coronavirus pandemic, should consider declaring bankruptcy, because extending aid would just further the deficit spending that Congress is now engaged in. What’s your reaction to bankruptcy as a work-out strategy?

It’s a curious one since it’s not the position the Majority Leader took for major corporations like airlines. When he says that, what I hear is that he’s trying to bankrupt cities in order to eviscerate public employee unions and pensions. That’s not the position we intend to take; we want to work with our employee base to rebuild the city and get people back to work. We see them as partners in this struggle.

With Santa Monica, we’re just under 100,000 people. We don’t expect any support from the federal government, like some of the cities have gotten. We certainly intend to chart our own path forward.

Senator McConnell’s expressed displeasure with public employees this week, triggers a request for comment from you on the local campaign by some of your employee unions this month to rally the public to ask for your city manager’s resignation in response to fears over what the cuts to jobs and public pension contributions would or would not be. Could you address the labor relations dynamic that all cities are currently facing?

 When this public health crisis hit, we all had a Day Zero—the day we realized that things were going to have to change. We were going to have to stay home, find different ways to buy groceries for our families, and address work in a different way than we had before. That Day Zero happened at different moments across the country and across the globe.

Similarly, as we address this fiscal crisis, I’m seeing a different Day Zero for folks. When the city announced that we were beginning to look at the impact of COVID on our fiscal health, many of the employee groups and constituents thought this might be like any other budget cutting exercise. They began to activate supporters and utilized protest tools they've used in the past to protect their programs.

Soon more people will realize that this is not like any other budget cutting exercise. This is a very deep and serious fiscal crisis. With a 40 percent projected declines in revenues next year, we’re all going to have to make choices and work together. I appreciate the activism - those first steps get people engaged, but they are not how we’re going to approach this crisis. We’re all going to have to tighten and make sacrifices. 

In an interview just published by The Planning Report, with former chief admin officer of the City of LA Miguel Santana, he said, “This is creating a seismic shift in everything. It creates an opportunity, as well, to rethink the role of government. No one ever thought civil service would become a call center distributed across the region. Now, education, health care, and even this conversation, is being delivered through technology, Zoom, that we’d not used before. What lessons are we learning about how the ‘new normal’ will redefine the nature of work?

We, as a city, were underprepared for teleworking. In a small city with operations distributed in just our city, if you want to have a meeting, you just gather people together. This crisis has demonstrated a new way of working together and has focused the priorities of public health in our community. We’re going to have to be smarter about how we deploy our resources to get ourselves back on our feet. The seismic shift that Miguel suggests is one that’s going to happen across the economy, so as we restructure the economy, we must restructure our government.

We need to create, for example, more sidewalk space because people will need more space for physical distancing. We’ll need to create more outdoor seating and open-air environments for our restaurants and retail. We’re going to need to reposition our hotels from the international marketing of attracting airline travelers since they’re not likely to be getting on airplanes anytime soon. We’ll be repositioning to regional-driven traffic and tourism. We’ll need to find ways to assure the food supply in our community, as folks will still be dealing with severe personal economic crises.

As a government, we really need to reposition ourselves and partner with our business community to rebuild what will look like a very new economy. One that’s rooted more in teleworking, has physical changes to accommodate physical distancing requirements, and attracting a different kind of economic activity throughout the community while protecting for the most vulnerable. 

Miguel also commented that, “Inequities in our community existed prior to the crisis. These inequities will get significantly worse.” Can you comment on his prediction?

There’s no question, we’re seeing that already. The old expression When White America catches a cold, Black America catches pneumonia is so apt today, because what we’re facing is a public health crisis that has instigated this economic crisis. We have folks in our community who are struggling to feed themselves or pay rent, and we have to find ways to provide a strong safety net.  We know that our work today to help keep people out of homelessness and fight off hunger is going to have long-term benefits for public health in our community and enable people to be productive going forward.

While we are tightening our belts, we are also increasing our commitments to supporting our neighbors. That’s going to include finding ways to engage the public who wants to help. We get emails and calls from people at home trying to find ways to engage and help neighbors who are facing more desperate circumstances than themselves. An important role of government will be to try to provide the connections to enable people to volunteer in ways that pull their neighbors out of an economic crisis and into a stronger community of support.