In this recession, rich cities are like the others

There are million-dollar mansions in foreclosure, layoffs on Rodeo Drive. And reservations are no longer a must at all but the most exclusive restaurants.

As recently as the summer, many wealthy Southern California enclaves appeared beyond the reach of the worst recession in decades. But rich cities, it turns out, aren’t always so different from the rest.

City officials in Beverly Hills -- a place insulated from most economic downturns -- now project a $24-million drop in tax revenues over the next 16 months. The loss represents about 15% of the general fund budget, said Beverly Hills City Manager Roderick Wood.

“This will be the largest percentage budget reduction, as far as we can tell, during the city’s history,” Wood said. “Even for a community as well-funded as Beverly Hills, you absolutely feel a 15% reduction in the budget.”


A formal hiring freeze is expected as soon as March, though police officers and firefighters would continue to be replaced, he said. Among other options on the table: reducing police overtime and charging clubs to use city sporting facilities, which would be a first.

Santa Monica officials blame falling hotel occupancy rates, tanking car sales and a sluggish housing market for across-the-board reductions needed to close a budget gap that could swell to $10 million next year. Although the city still has excess revenue from last fiscal year to subsidize this year’s budget, City Manager P. Lamont Ewell said he is asking departments for proposals to reduce spending by at least 3% now and 5% next year.

In Newport Beach, a precipitous drop in luxury car sales has left the city with an anticipated $3.5-million budget gap. City Manager Homer Bludau plans to reduce spending on capital improvement projects, including the beautification of street medians, by about $1.4 million. He is also asking departments to trim their budgets by about $1.4 million. Most city job vacancies will be filled internally or not at all.

Sales tax proceeds have declined in more than two-thirds of Southern California cities, according to a Times analysis of municipal revenues collected in the last half of 2008 compared with the same period the year before. Among those affected were some of the wealthiest, including Bradbury, Indian Wells and San Marino.

Even in cities such as Malibu, where sales tax revenues appear to be holding up, officials are bracing for lean days ahead. Administrative services director Reva Feldman said Malibu relies more heavily on property taxes, which she said won’t show the effect of the downturn until the next budget cycle. There has also been a decline in building-permit and planning fees as homeowners put off costly remodeling jobs, she said.

The fact that famous revenue generators such as Beverly Hills, Santa Monica and Newport Beach are trimming their expenditures and considering service cutbacks underscores the extent of the meltdown in California municipal finances.

Such places are usually shielded from downturns because they cater to the very rich, have diversified their economies and draw high-spending foreign visitors, even when Americans start watching their wallets.

But with property values, incomes and spending plunging across the country -- and the global economy in serious trouble as well -- few places remain unscathed, said Christopher Hoene, director of policy and research at the National League of Cities in Washington, D.C.

A survey of city finance officers conducted by the league in December and January found that 83% were cutting services and expenditures, and 80% expected to make further cutbacks in the 12 months beginning in July.

The effect of the recession is clear in Beverly Hills’ destination shopping district where, for the first time anyone can remember, shops are advertising discounts of up to 80%.

The number of vacant storefronts on Rodeo and Beverly drives has multiplied, with big names such as Lisa Kline and Rock & Republic looking for retailers to take over expensive leases. And jittery sales assistants confide that at least two luxury brand boutiques have handed out pink slips in recent months.

More and more of those accustomed to paying for luxury services are tightening their belts, in some cases because they have lost their high-paying jobs.

Katie Ittner, a hairstylist at Awilda Salon on Robertson Boulevard, said she had a client who called in tears because she could no longer afford to spend $95 to $250 to get her hair colored and had no idea how to do the job herself.

Those who still can spend thousands on a handbag are increasingly reluctant to do so.

After receiving a selection of accessories by mail to choose from, one regular client told a designer boutique on Rodeo Drive that she felt it was wrong to spend that kind of money when so many were losing their homes and jobs. When the store’s assistant manager sent her an e-mail saying: “We need you to spend. . . . Stimulate the economy!” the client selected a $3,000 bag and returned the $6,000 one she preferred, he said.

The assistant manager repeated the exchange on condition that the store not be identified. On streets where image is essential, few would talk openly about the new reality. At other high-end stores, clerks refused to speak at all, referring questions to corporate headquarters.

Requests for comment from retailers such as Gucci and Escada were declined or the calls not returned.

Beverly Hills’ luxury retailers, five-star hotels and restaurants could previously count on well-heeled foreign visitors to see them through any serious downturns. This time, however, even the tourists are staying away, and shoppers in general are sparse.

On a recent weekday at Gallery Michael, where the Picasso prints run from about $2,000 to $700,000, fine art consultant Robert Avellano said he opened at 10 a.m. and did not see a customer until 2 p.m.

With less spending comes less tax revenue. Beverly Hills officials say that business activity accounts for 78% of city revenues, leaving them no choice but to trim the fat. At more than $173 million, Wood concedes, the city’s operating budget may appear exorbitant for a place with fewer than 36,000 residents.

He noted, however, that most of the people who work, shop and eat in Beverly Hills do not live there, and the daytime population can swell to nearly 300,000. High-profile visitors and events such as the Golden Globes awards ceremony also require levels of policing unusual for a city this size, he said.

Beverly Hills has staked its economic future on its identity as a center of luxury, which brings an expectation of a higher level of service. So city officials said they are looking at other ways to cut costs.

They plan to curtail travel and entertainment expenses and delay filling vacancies and replacing equipment. But such steps won’t close the budget gap, Wood said.

Beverly Hills has about $54 million in reserve that it could tap to meet its commitments -- funds the city would need to respond to a major disaster such as an earthquake.

Wood said that in an ordinary market downturn, he would advise the City Council to use those reserves more aggressively.

“This one, I think you have to be a little more cautious on that,” he said, “because it’s a structural recession, where the core economy itself is crumbling.”

The city admittedly remains far from the poorhouse, and analysts predict that Beverly Hills and others like it will be among the first to recover. As Wood notes, the city’s name itself remains a strong draw for those who still have money to invest.

“If you want to have a high-end address,” he said, “Beverly Hills is where you want to put it.”


Times staff writer Doug Smith and Times data analyst Sandra Poindexter contributed to this report.