City faces loom­ing bud­get chal­lenges

Even in a healthy econ­omy, pro­jec­tions show L.A. lead­ers’ hands could be tied by surg­ing costs, deficits.

Los Angeles Times - - FRONT PAGE - By David Zah­niser

Stand­ing out­side City Hall, Mayor Eric Garcetti launched his sec­ond term by of­fer­ing an au­di­ence a cel­e­bra­tory mes­sage: Los An­ge­les has clawed its way back from cri­sis.

Garcetti de­scribed the city’s emer­gence from a re­ces­sion that, in his words, sapped the pub­lic’s morale and “gut­ted” ba­sic ser­vices. “We … got back to work one street tree, one side­walk, one pot­hole at a time,” he told the au­di­ence last month.

Los An­ge­les is in­deed spend­ing more on its streets, side­walks and other in­fras­truc­ture. Yet even in a boom­ing econ­omy, Garcetti faces a daunt­ing set of bud­get chal­lenges — in­clud­ing a pro­jected gap of more than $200 mil­lion in two years, bud­get es­ti­mates show.

The city con­tin­ues to face a “struc­tural deficit,” with pro­jec­tions show­ing ex­penses ex­ceed­ing the money that comes in. Re­tire­ment costs are poised to jump sig­nif­i­cantly, con­sum­ing funds that would other­wise pay for pub­lic ser­vices. And if an­other down­turn hits, Garcetti will have less room to ma­neu­ver than in the last re­ces­sion — thanks to de­ci­sions he and the City Coun­cil have made.

In re­cent years, the mayor and city law­mak­ers have signed off on le­gal set­tle­ments that dic­tate how much the city must spend on side­walk re­pairs and on af­ford­able hous­ing for dis­abled renters.

Garcetti and the coun­cil also en­dorsed a le­gal agree­ment that, if ap­proved by a judge, would limit the amount of money sent to the city bud­get by the Depart­ment of Wa­ter and Power. And they have re­duced business taxes in a way that would be dif­fi­cult to re­verse dur­ing a cri­sis.

Those bud­get con­straints rep­re­sent more than $100 mil­lion per year in lost rev­enue and ad­di­tional fi­nan­cial com­mit­ments, a Times anal­y­sis found. And they will tie the hands of city lead­ers for years to come, said City Con­troller Ron Galperin.

“In the next down­turn, that means there is go­ing to be very, very lit­tle wig­gle room” to bal­ance the bud­get, he said.

Garcetti, in an in­ter­view, ar­gued that the city’s fi­nances are “quite strong.” Since the re­ces­sion, he said, city lead­ers have built up more than $400 mil­lion in re­serves, dou­ble the amount avail­able a decade ago.

“There’s no ques­tion we’re in a bet­ter po­si­tion than we were in 2008,” he said. “We’re more ef­fi­cient. We have more in re­serves. We’ve been much bet­ter at in­creas­ing the staff in a pru­dent way.”

Garcetti de­fended the side­walk spend­ing agree­ment, say­ing he would have pushed for the re­pairs any­way, and de­scribed the DWP set­tle­ment as “one we can live with.” But he also ar­gued that city lead­ers are work­ing to bring in new

sources of fund­ing, in­clud­ing taxes on mar­i­juana, bill­boards and short-term rental sites such as Airbnb.

“There are rev­enues that make this not a one-sided story,” he added.

Still, that money might not be enough. An anal­y­sis re­leased by the city in April in­di­cated that the gen­eral fund bud­get, which pays for po­lice pa­trols, fire­fighter re­sponse and other ba­sic ser­vices, could see a nearly 20% jump in pen­sion and re­tiree health­care costs by 2019.

That would push the city’s re­tire­ment costs up to $1.3 bil­lion. Coun­cil­man Paul Koretz, who heads a com­mit­tee on per­son­nel is­sues, voiced fears about the city’s abil­ity to ab­sorb such an in­crease in hard times.

“If we had a big eco­nomic down­turn,” he said, “we’d have to fill [the gap] by re­duc­ing ser­vices and prob­a­bly lay­ing peo­ple off.”

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The last time Los An­ge­les faced a re­ces­sion, the city’s elected of­fi­cials were caught off guard.

When the down­turn hit in 2008, they had just ap­proved five years of em­ployee raises to­tal­ing nearly 25% for most civil­ian city work­ers. They also had hired hun­dreds of new po­lice of­fi­cers.

What fol­lowed were ser­vice roll­backs in li­braries, parks, the Fire Depart­ment and other agen­cies — and the de­par­ture of thou­sands of city em­ploy­ees. The cri­sis was ex­ac­er­bated by ma­jor in­vest­ment losses for the city’s pen­sion funds, which made the bud­get pic­ture worse.

The city’s pen­sion agen­cies have seen stronger re­turns since the re­ces­sion. But elected of­fi­cials are about to con­front a new round of chal­lenges.

The loom­ing pen­sion threat

In June, the agency that over­sees pen­sions for re­tired po­lice of­fi­cers and fire­fight­ers cut its “as­sumed rate of re­turn” — its yearly earn­ings pro­jec­tion — from 7.5% to 7.25%. The Fire and Po­lice Pen­sions board con­cluded that its in­vest­ments would not pro­duce re­turns as strong as pre­vi­ously fore­cast.

When the pen­sion board re­duces its in­vest­ment pro­jec­tions, tax­pay­ers — and the city bud­get — fre­quently make up the dif­fer­ence. But the board also up­dated its long-range fore­cast to re­flect the re­al­ity that its re­tirees are liv­ing longer and will need pen­sions for a greater num­ber of years.

Those ac­tions are ex­pected to in­crease the city’s em­ployee re­tire­ment costs by $84 mil­lion next year, ac­cord­ing to re­cent es­ti­mates.

A sec­ond pen­sion board, which serves civil­ian city work­ers, is set to con­sider a sim­i­lar set of costly changes. If it fol­lows the lead of Fire and Po­lice Pen­sions, the city could see at least $38 mil­lion in added costs, of­fi­cials say.

The in­creased re­tire­ment costs are set to hit the city bud­get next year, when Garcetti and the coun­cil are slated to fi­nal­ize new con­tracts with two big em­ployee groups: the Po­lice Pro­tec­tive League, which rep­re­sents rank-and-file po­lice of­fi­cers, and the Coali­tion of L.A. City Unions, which rep­re­sents civil­ian work­ers.

Art Sweat­man, a tree sur­geon su­per­vi­sor with the Bu­reau of Street Ser­vices, said many city work­ers are strug­gling to keep up with ris­ing rents and home prices.

“We need to keep up with the cost of liv­ing,” he said.

For every 1% pay in­crease given to po­lice of­fi­cers and coali­tion work­ers, the city will need to spend an ad­di­tional $22 mil­lion, ac­cord­ing to city es­ti­mates. And be­cause pen­sion ben­e­fits are based on salaries, those raises will ul­ti­mately add to the over­all re­tire­ment bur­den.

City bud­get an­a­lysts say their pen­sion cost pro­jec­tions could change sig­nif­i­cantly de­pend­ing on hir­ing de­ci­sions, the size of raises and the eco­nomic per­for­mance of the two funds. But if their fig­ures prove to be ac­cu­rate and re­tire­ment costs grow by nearly 20%, the city would have to cut spend­ing, bring in more money or tap re­serve funds.

Scarred by the ex­pe­ri­ences of the last re­ces­sion, city lead­ers steadily built up the re­serve over the last decade. But they have also chipped away at it in re­cent years, us­ing it to bal­ance the bud­get and pay for home­less­ness pro­grams.

Cut­ting costs in the next re­ces­sion

Faced with a cri­sis, city lead­ers could do what they did last time — scale back pub­lic ser­vices. But some of those re­duc­tions won’t be as easy next time.

Take side­walks. When the global re­ces­sion hit in 2008, city lead­ers halted fund­ing for re­pairs, adding to an al­ready siz­able back­log of buck­led pave­ment.

Soon af­ter that de­ci­sion, ad­vo­cates for the dis­abled filed a law­suit ar­gu­ing that L.A.’s net­work of bro­ken side­walks vi­o­lated the civil rights of wheel­chair users. They de­manded a city­wide com­mit­ment to re­pairs.

Garcetti and the coun­cil set­tled the case once the econ­omy re­cov­ered, promis­ing to spend at least $31 mil­lion a year on re­pairs. That jumps to nearly $36 mil­lion af­ter five years and to $41 mil­lion af­ter a decade.

Even if a down­turn hits, the city must spend no less than $25 mil­lion per year to re­main in com­pli­ance with the set­tle­ment agree­ment, ac­cord­ing to Garcetti aides. That means they likely would have to look else­where for cuts.

They won’t have much suc­cess re­duc­ing li­brary hours, an­other area hit dur­ing the last re­ces­sion. That’s be­cause vot­ers passed a 2011 bal­lot mea­sure in­creas­ing the min­i­mum fund­ing for li­braries — an ini­tia­tive placed on the bal­lot by Garcetti and other city elected of­fi­cials.

Cuts at the Recre­ation and Parks Depart­ment also wouldn’t make much of a dent, since that agency is also guar­an­teed a spe­cific share of fund­ing.

The city also has new spend­ing obli­ga­tions on hous­ing.

Last sum­mer, Garcetti and the coun­cil signed off on a le­gal set­tle­ment that re­quires city of­fi­cials to spend at least $200 mil­lion on hous­ing for dis­abled renters over the next 10 years. This year, in the first year of that agree­ment, $11 mil­lion is com­ing from the bud­get for ba­sic ser­vices.

City funds could soon be lim­ited in other ways, thanks to yet an­other le­gal fight.

For­feit­ing rev­enue

Like many may­ors be­fore him, Garcetti has re­lied on the DWP to send the city bud­get what is billed as a yearly “sur­plus.” But that prac­tice has be­come the tar­get of le­gal chal­lenges, with ratepayer ac­tivists call­ing the money an il­le­gal tax.

In an ef­fort to set­tle those cases, Garcetti and the coun­cil cut the size of the pay­ment to $242 mil­lion, down roughly $25 mil­lion from the pre­vi­ous year.

As part of the pro­posed set­tle­ment, city lead­ers agreed to limit the amount the DWP can trans­fer in fu­ture years. That would im­pede the city’s abil­ity to in­crease the funds taken from the DWP dur­ing a cri­sis, some­thing pre­vi­ous may­ors have done.

The city is also scal­ing back the business taxes it col­lects from key com­pa­nies — lawyers, fi­nan­cial plan­ners and other pro­fes­sional ser­vice firms. Garcetti se­cured pas­sage of the re­duc­tion, which is be­ing phased in over three years and is ex­pected to re­move $45 mil­lion an­nu­ally from the bud­get.

Garcetti con­tends that business tax cuts, pur­sued strate­gi­cally, stim­u­late the econ­omy and ul­ti­mately pro­duce more money for the bud­get. Still, if he changes his mind, he and the coun­cil would have a dif­fi­cult time un­do­ing their de­ci­sion.

Un­der state law, any in­crease in the business tax would re­quire a bal­lot mea­sure and a city­wide elec­tion, ac­cord­ing to pol­icy an­a­lysts.

A search for more sources of money

De­spite the loom­ing bud­get pres­sures, Garcetti and the coun­cil man­aged to boost spend­ing in two ma­jor ar­eas this year: trans­porta­tion and pro­grams to ad­dress home­less­ness. Both were pos­si­ble be­cause vot­ers agreed to tax them­selves in the Novem­ber elec­tion.

Garcetti and city law­mak­ers have been eye­ing other sources of ad­di­tional money.

In the mayor’s lat­est bud­get, the city is ex­pect­ing a $36-mil­lion in­crease in lodg­ing taxes, al­most all of it from Airbnb and other short-term rental ser­vices. That as­sump­tion has in­fu­ri­ated some hous­ing ad­vo­cates, who con­tend that Airbnb dis­rupts neigh­bor­hoods and drives up rents.

The mayor is also look­ing to gen­er­ate $12 mil­lion this year from plac­ing dig­i­tal bill­boards on city prop­erty. But that strat­egy has not yet been ap­proved by the coun­cil — and could face op­po­si­tion from neigh­bor­hood groups.

Then there is the big­gest wind­fall of all: an es­ti­mated $50 mil­lion per year from mar­i­juana re­tail­ers, who are look­ing to op­er­ate legally in the wake of re­cent bal­lot mea­sures on pot sales.

The city’s strat­egy drew crit­i­cism from Laura Lake, a West­wood res­i­dent who fought one of the city’s last big money-mak­ing strate­gies — 50-year leases of mu­nic­i­pal park­ing garages. The city is “des­per­ate” for funds, she said, and is turn­ing to so­lu­tions that will se­ri­ously af­fect neigh­bor­hoods.

Lake de­scribed dig­i­tal bill­boards as a form of blight and ar­gued that Airbnb is de­priv­ing An­ge­lenos of rent­con­trolled hous­ing. Mar­i­juana re­tail­ers, be­cause they deal in cash, may place an ad­di­tional bur­den on po­lice, she ar­gued.

“I’m sur­prised the City Coun­cil isn’t li­cens­ing broth­els and casi­nos,” Lake added. “I mean, why not?”

Garcetti con­tends the city’s work on mar­i­juana, bill­board and home-shar­ing reg­u­la­tions is based on good pol­icy, not a hunt for rev­enue. At the same time, he made clear he wants those funds to flow into the city bud­get.

“The vot­ers passed mar­i­juana [sales] and I’ll be damned if the city isn’t go­ing to get some money from those in­creased sales, pe­riod,” he said.

Gary Coron­ado Los An­ge­les Times

IF AN­OTHER ECO­NOMIC down­turn hits, L.A. Mayor Eric Garcetti will have less room to ma­neu­ver than in the last one, thanks to de­ci­sions he and the City Coun­cil made on is­sues such as side­walk re­pairs and hous­ing.

Al Seib Los An­ge­les Times

THE L.A. Fire and Po­lice Pen­sions board low­ered its yearly earn­ings pro­jec­tion in June, which could add $84 mil­lion to the city’s re­tire­ment costs next year as it’s slated to fi­nal­ize a new po­lice union con­tract.

Pa­trick T. Fal­lon For The Times

IF RE­TIRE­MENT costs for LAPD and LAFD em­ploy­ees along with other city work­ers rise as ex­pected, L.A. may have to cut spend­ing or find ad­di­tional money.

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