City Council
Report
City Council Meeting: September 9, 2025
Agenda Item: 4.S
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To: Mayor and City Council
From: Heidi Von Tongeln, Acting City Attorney, City Attorney's Office, Administration Subject: Adoption of Resolution Outlining the City's Current Fiscal Distress Recommended Action
Staff recommends that the City Council:
1. Adopt a finding of no possibility of significant effect pursuant to Section 15061(b)(3) (Common Sense Exemption) of the California Environmental Quality Act (CEQA) Guidelines; and
2. Adopt the attached Resolution of the City Council of the City of Santa Monica Identifying Local Fiscal Distress Based on Decreased Revenue and Increased Liabilities.
Executive Summary
The City has faced many fiscal challenges achieving its revenue, expenditures, and General Fund reserve targets during the past several years. The City’s current financial situation has been exacerbated by uncertain revenues and increasing costs and liabilities. Since adoption of the FY 2025-27 Budget earlier this year, staff has been working to develop an overarching strategy to stabilize the City’s ongoing fiscal position.
In an effort to better articulate the current fiscal distress faced by the City, and to provide staff with an additional tool as we continue to pursue various budgetary and legislative strategies to address the City’s current financial situation, the attached Resolution has been prepared for City Council consideration. The Resolution outlines the City’s current fiscal circumstances, as articulated during our FY 2025-27 Budget Process, and would further direct the City Manager to take all necessary steps to address, alleviate, and mitigate the existing circumstances. In addition, adoption of this resolution would provide the City with an official document to articulate and strengthen 2 of 4
future arguments and applications related to various interactions we have with grant funding, regulatory, and other governmental entities.
Discussion
The City of Santa Monica is a full-service city that provides residents with a police department, fire department, a regional transportation network, water, refuse and recycling, street maintenance, parking services, free public wi-fi, a high speed fiber optic network, parks, affordable housing, economic development, library services, rent control, and recreational, cultural, and educational services. The City has historically relied on tax revenue from tourism and travel to support the City’s extensive services.
The COVID-19 pandemic resulted in a sudden 26.8% decline in General Fund revenue in FY 2020-21. The City Council responded to the COVID-19 pandemic by reducing the City’s budget by 23.9% and eliminating 299 permanent and 122 temporary positions.
City services have not been restored to the level before the COVID-19 pandemic, and numerous capital projects have remained unfunded in light of the financial challenges faced by the City.
On June 24, 2025, the City Council adopted a General Fund Budget for Fiscal Year 2025-26 with adjusted expenditures of $484.3 million and $473.5 million in expected revenue. Since its adoption, the City has faced challenges achieving its revenue, expenditures, and General Fund reserve targets set forth in the FY 2025-26 Adopted Budget. The recent financial forecasts anticipate that the City will continue to operate a structural deficit for several years, and the City faces ongoing uncertainty that revenue projections may come in lower than expected.
The problem of uncertain revenue is exacerbated by the possibility of increased liabilities. AB 218 and AB 452 effectively eliminated the statute of limitations for sexual abuse claims. The City has paid over $229 million in settlements relating to alleged sexual abuse purportedly committed 20 to 30 years ago by a former City employee (the “Settlements”). The Settlements have been funded largely by reserves in the general fund and by borrowing over $52 million from various City funds. Currently, the City faces additional abuse claims relating to the former employee from over 180 claimants that 3 of 4
are seeking several million dollars for their alleged damages, the payment of which will be due in full upon order of the court and/or approval of the settlement.
Due to the effects of the downturn in revenue since the COVID-19 pandemic and the need to pay the Settlements from the City’s general fund reserves, the reserves are only at 61% of their pre-pandemic levels.
On June 24, 2025, along with the FY 2025-26 Budget, the City Council adopted an updated fiscal policy, which includes a provision first adopted in May 2020—in response to the COVID-19 pandemic—to reduce the City’s longstanding policy requiring the General Fund to maintain an operating contingency reserve of at least 15% to 12.5% of the following year’s operating and capital budget and subsidies to other funds. The updated fiscal policy further commits the General Fund to increase the reserve level by
0.5% annually until it once again reaches 15%, provided that revenues recover.
In addition, the federal government has discussed or implemented several economic policies, including tariffs, mass deportations, tax cuts, and deregulation, which may impact the national and local economy. Some economists predict that the national economy will continue to be an inflationary economic environment with rising costs of goods and labor.
The attached Resolution highlights these factors in identifying local fiscal distress in Santa Monica, and would further direct the City Manager to take all necessary steps to address, alleviate, and mitigate the current financial exigency that exists in the City. Of note, the attached Resolution would not obligate the City to take any specific actions to address the fiscal emergency, nor would it grant the City Manager powers that exceed those set forth in the City Charter and Municipal Code. Rather, the proposed resolution is intended to serve as a tool to help strengthen the City’s arguments and various applications for funding and / or fiscal relief when interfacing with various grant funding, regulatory, and other governmental entities.
Environmental Review
The proposed Resolution Declaring a Fiscal Emergency Based on Decreased Revenues and Increased Liabilities is administrative in nature and would have no effect on the environment, and therefore, is categorically exempt from CEQA pursuant to 4 of 4
Section 15061(b)(3) (Common Sense Exemption) of the CEQA Guidelines, which states that CEQA does not apply, “where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment.” Fiscal Impacts
None.
Prepared By: Heidi Von Tongeln, Acting City Attorney
Approved Forwarded to Council
Attachments:
A. RESO Identifying Local Fiscal Distress 09.09.2025
B. Written Comments
C. PowerPoint Presentation