The Secrets Inside LA’s Fiscal Emergency

LA WATCHDOG - If the Budget was balanced on June 1, then why did the City of Los Angeles declare a Fiscal Emergency on June 6?

Very simple: the Budget was never really balanced.

If the City was not “cooking” the books by relying on “creative” accounting and one off gimmicks, the budget deficit would be at least $500 million, an amount equal to 11% of the General Fund’s revenues.  And that, no doubt, is a low ball estimate given the sorry state o  f our streets and infrastructure.

According to the recitals in the resolution declaring the Fiscal Emergency, there are $243 million of gimmicks to “balance” the Budget, consisting of one-time “solutions” to fund ongoing programs ($91 million), uncertain revenues from the State and Federal Government ($72 million), and “savings” resulting from deferring costs that will need to be addressed in the next year or two ($80 million).

The City also “saved” $134 million by lowering its projected contributions to the City’s two massively underfunded pension plans through the stealth manipulation of the assumptions underlying the estimation of the future benefits of the pension plans.    

And finally, the Budget is shortchanging the maintenance and repair of our infrastructure by hundreds of millions as can be witnessed by the deterioration of our streets and alleys, our sidewalks and curbs, our street lights, our parks and trees, the City’s motor vehicle fleet, and its Stone Age computer systems.

The Budget also does not address the City’s Structural Deficit, where expenditures for salaries, benefits, and pensions are increasing faster than revenues, where expenditures for healthcare and pension benefits now represent 32% of the General Fund.    

Over the next four years, the Structural Deficit is projected to exceed $1 billion, an average of over $250 million a year.  And this is based on inflated revenue growth assumptions, an overly optimistic rate of return on its $25 billion of pension fund assets, and inadequate funding for the maintenance and repair of our infrastructure.

The Budget also fails to address the City’s $20 Billion Black Hole, consisting of $10 billion of unfunded pension liabilities and at least $10 billion in deferred infrastructure maintenance.  And this Black Hole is projected to grow faster than the General Fund revenues if the City continues to ignore these off balance sheet liabilities.

Nor does the Budget establish any reserves for the almost $1 billion in potential liabilities, including the $750 million Ardon class action lawsuit challenging the validity of the Telephone Users’ Tax.

The Budget also assumes the validity of the $250 million transfer from our Department of Water and Power to the City’s General Fund even though it may be prohibited by Proposition 26.

No wonder the City declared a Fiscal Emergency.

So what is City Hall doing to truly balance the Budget, eliminate the Structural Deficit, fix our infrastructure, and fund its pension plans?  

And once again, the answer is very simple: not much.

The City has touted that it has eliminated 4,900 positions. However, this has resulted in only 400 to 500 layoffs as 2,400 employees were offered early retirement under the phenomenally generous $355 million Early Retirement Incentive Program (the “E-RIP Off”) while many others were transferred to other special revenue or proprietary departments.

The City employees have also increased their contribution to the Los Angeles City Employee Retirement System (“LACERS”) from 6% to 11% of their salaries.  

However, 1% of the 5% was to fund less than half of the E-RIP-Off, resulting in LACERS having to absorb a $200 million increase in its unfunded pension liability.

The remaining 4% increase pales in comparison to the 24% increase in average salaries during the Villaraigosa era.  And this does not include the 11% contractual bump from July 1, 2012 to January 1, 2014.  

The Mayor has also proposed a very modest Civilian Pension Reform Plan for future employees that will have little impact on the Budget over the next five years.  However, this has met with vehement opposition from the City’s union leadership where they compare our beloved Mayor to Wisconsin Governor Scott Walker.  

Now those are fighting words here in LA!

It is obvious that the current system is not working as the Mayor, Controller Wendy Greuel, and the City Council continue to “kick the can down the road” rather than making the tough decisions that will infuriate the campaign funding union leadership.

That is why we need a charter amendment that requires the City to “Live Within Its Means,” where the City is required to develop and adhere to a Five Year Financial Plan and approve two year balanced budgets based on Generally Accepted Accounting Principles that take into account a ten year plan to repair and maintain our streets and infrastructure and fully fund our pension plans.

Our City’s very solvency is by far and away the most important issue in the upcoming Mayor’s race.

No more Mr. Nice Guy.  We want answers, not a lot of hot air and lies.  

We need to know whether the candidates support a charter amendment and how they intend to balance the Budget, eliminate the Structural Deficit, fix our infrastructure, and fund the pension plans.

And without charter reform, there will be no new taxes or fees approved by cynical and skeptic Angelenos voters who have little to no faith and confidence in fiscally irresponsible scoundrels that occupy City Hall.

Note: Jack Humphreville guests on SoCal Insider, KOCE Channel 50 on Friday (11:30p) and Sunday (11:30a).

(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- He can be reached at: –cw

Tags: Jack Humphreville, LA Watchdog, City Budget, City’s fiscal emergency, Mayor Villaraigosa, Charter reform, City Hall

Vol 10 Issue 50
Pub: June 22, 2012