This $400 Million Double Whammy Will Crush LA’s Budget

LA WATCHDOG-The City of Los Angeles and our Elected Elite are addicted to the 8% Transfer Fee from our Department of Water and Power to the City’s General Fund.  However, the City may be forced to quit – cold turkey - its dependence on Ratepayer cash as a result of a class action lawsuit that was filed on January 29 in Superior Court for the County of Los Angeles. 

This lawsuit alleges the Transfer violates the State Constitution and that it is not based on the actual cost of electric service and is  therefore a tax that requires voter approval.  

But this litigation did not stop the City from passing an ordinance in early February directing the Department’s Power Revenue Fund to transfer “surplus” funds of $266 million to the City’s General Fund.  But these funds are hardly surplus. 

Since the passage of Proposition 26 (The Supermajority Vote to Pass New Taxes and Fees Act) in November of 2010, DWP has transferred almost $1.3 billion to the City’s General Fund, an average of over $250 million a year.  During this same time, Power System debt has soared 50% ($2.7 billion) to almost $8 billion, almost four times the increase in equity.  As a result, the Power System’s debt ratio deteriorated from 53% to 60%, thereby endangering its credit rating. 

During this same period, the Power System’s infrastructure continued to deteriorate, raising the question of where the hell is our money going. 

At the same time, the City is not using the DWP Transfer to repair and maintain our lunar cratered streets and broken sidewalks.  Rather, our hard earned money is helping to close the Structural Deficit, where the growth in salaries, pensions, and benefits have exceeded the growth in revenues by more than $500 million over the past decade. 

The City will contest this class action lawsuit as the Transfer represents over 5% of the City’s General Fund budget.  Our City Attorney will use every possible argument to defeat this lawsuit, hoping beyond hope that at least one of them sticks.  

Interestingly, the City has never tried to justify the amount of the Transfer, even when it increased the rate from 5% of Power System revenues to 7% in 2005 and finally to 8% in 2009.  

But recent appellate court decisions in Redding and Santa Barbara that reversed lower court findings are working against the City as these two courts have determined that the transfers, surcharges, and/or payments in lieu of taxes are indeed taxes and subject to voter approval. 

In Redding, after working through all the legal mumbo jumbo involving Propositions 13, 218, 62, and 26 and numerous arguments of the City of Redding, the appellate court ruled that the payment by the municipally owned utility had to be based on Redding’s reasonable cost to provide electric service. 

In Santa Barbara, the appellate court concluded that the City’s “1% surcharge is an illegal tax masquerading as a franchise fee.” 

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LA City Hall will argue that the Transfer has been in place for years prior to the passage of Proposition 26 in 2010.  While true, the payment was not made pursuant to an ordinance and is therefore not grandfathered in.  

If the 8% Transfer Fee is deemed illegal, the City may be required to reimburse DWP for the $1.3 billion that has been transferred to the City since the passage of Proposition 26 in 2010.  This would require an annual payment in excess of $150 million over the next ten years. 

Overall, the loss of the Transfer and the repayment of $1.3 billion is a $400 million a year double whammy to the City’s budget. This represents 8% of General Fund revenues. 

The lack of action by Mayor Eric Garcetti and Council President Herb Wesson implies that they are trying to create a crisis so they can jam a massive tax increase down our throats without addressing real budgetary reform. 

But rather than precipitating a crisis, our elected officials need to address our City’s precarious finances in a direct, open, and transparent manner if they want to earn our votes. 

On a positive note, if the Transfer is ruled to be illegal and DWP decides not to return the $400 million savings to the Ratepayers (like it did when the Water Transfer Fee was discontinued), it can defer any increase in our power rates.

 

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, The Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at:  [email protected]) 
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CityWatch

Vol 13 Issue 22

Pub: Mar 13, 2015