ANALYSIS 💰 WeHo’s coffers overfloweth but sales are stagnant

West Hollywood ended Fiscal Year 2023 with an extra $31.3 million in the bank, far surpassing the $22 million budget surplus from the year prior, which at the time was the largest the city had ever seen.

Senior city staffers delivered the good news to City Council at Monday night’s meeting, and Councilmember Sepi Shyne was particularly elated.

“That is absolutely incredible,” Shyne said. “Our city not only recovered from the pandemic, but we have two years of back-to-back surplus in revenue. I don’t know which other city in the region can say that.”

With voters preparing to judge her record as a policymaker at the ballot box next month, Shyne was eager to frame the surplus as vindication for a number of measures unfurled during her term as mayor that critics have accused of hindering the city’s economy.

“That is an absolute success story, and that is with us including the highest minimum wage in the country, with paid time off and sick time for all, and passing a hotel ordinance that protected workers in the city, where we got so much pushback saying that our economy was gonna dive, our economy was gonna tank, the city was gonna lose all of their sales tax revenue, but look at the numbers and numbers, and the data don’t lie,” she said. “This is phenomenal.”

But budget surpluses are not the sole indicator of a city’s economic health, as Councilmember Lauren Meister pointed out.

The surge in funds last fiscal year was driven by unexpectedly high revenue from the Transient Occupancy Tax paid by hotels ($34.7 million total, $3.4 million more than forecast) and property taxes ($32.2 million total, $2.6 million more than forecast), as well as income derived from money and property investments, parking meters, building rents and billboards. 

Sales tax revenue, however, has not kept up.

The amount the city made in sales taxes was $36.3 million in FY2022.  In FY2023, it was only slightly higher — $36.4 million.

PARADOX

A city’s economy can be in trouble even if city revenues are increasing. This seemingly paradoxical situation can occur due to various factors that affect a city’s economic health beyond just its revenue figures. 

When increases in city revenue are driven by rising property values and gentrification, they might not benefit the entire population. Instead, they could lead to a higher cost of living that pushes long-term residents and lower-income families out of cities, exacerbating economic inequality, as has happened in New York and San Francisco. If these increases are passed on to businesses in the form of higher operational costs, it can strain their financial sustainability, leading to closures, especially for small or marginally profitable businesses — like the restaurants and bars that form the backbone of WeHo’s sales tax revenues.

A city might see increased revenues from a booming sector (e.g. tech or automotive manufacturing), but over-reliance on a single industry can be risky. If the sector faces a downturn, the city’s economy could suffer significantly, despite previous revenue increases. A municipal economy can also be affected by consumer behavior changes, as it did in Seattle as Amazon expanded. 

Cities often carry future liabilities, such as pension obligations. Rising revenues may be offset by these liabilities, which can grow at a rate that outpaces revenue growth, leading to long-term financial challenges.

And a city’s revenue growth might not reflect the employment situation. High unemployment or underemployment rates, especially if concentrated in certain demographics or neighborhoods, indicate economic distress that isn’t mitigated by increased city revenues.

BOAST NO BILLS

“What this says to me,” Meister said, “is that we need to be focusing on filling those vacant storefronts. We need to be diversifying our economy. We cannot rely on billboards to be our primary revenue because, at some point, they will start to cannibalize each other, just as we’ve talked about hotels cannibalizing one another.”

The majority of the surplus will be devoted to the city’s myriad capital projects, as well as to the rainy day and emergency funds. 

In light of the extra revenue, Mayor John M. Erickson requested that the amount set aside for savings be increased from 25 to 30 percent.

Erickson, who is running for re-election in November, also took the opportunity to defend the policies he and Shyne helped usher in to West Hollywood. 

“Even though progressive policies ‘spell doom and gloom,'” Erickson said, referencing a commonly perceived notion about the minimum wage and paid-time-off ordinance, “they actually produce quite a bit of money.”