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City’s Know-It-All Economic Plan: LA will Deficit Finance Its Way to Prosperity

THE CITY-Los Angeles is facing an economic disaster. The 2020 Commission’s December 2013 report, A Time for Truth, set forth our tale of woe, and two years later, our situation is more precarious. When the time came for the illustrious and clueless 2020 Commission to set forth some remedies in its 2104 report, “A Time for Action,” it came up dry. The centerpiece seemed to be a huge political gift to BNSF Railway, a client of Mickey Kantor, a senior partner at Mayer Brown Law Firm who was the major force behind the 2020 Commission. The City of Los Angeles would simply take over the port of Long Beach like Wall Street raiders take over and destroy smaller companies, and then make Kantor’s client the only freight railroad for the port. 

For a while, some people thought that building a football stadium in DTLA would financially save Los Angeles. That idea fell through when the voters refused to increase the sales taxes so that the city could give the NFL the $1 Billions it wanted. The financial theory behind the football stadium was that it would employ a lot of people to build and then a lot of hotdog venders on game days. Not only do football stadiums not benefit the local economy, the $1 billion was not going to CIM Group, federal felon Juri Ripinksy or other developer friends of Garcetti. 

As the City’s own HCIDLA department wrote in its November 17, 2015 report, Los Angeles has a glut of apartments constructed within the last ten years. There is a 12% vacancy rate and 5% vacancy is equilibrium. In 2013, the City construct 150% of the housing needed for people who had above moderate income.   

Wall Street has become reluctant to loan developers money to construct into a glut, and poor people cannot afford to pay the rents which will create the revenue stream to repay the Wall Street loans for mixed-use projects. Projects in TODs are more expensive as the land costs more and construction costs escalate as building heights soar. The City has demolished over 20,000 rent controlled units since 2001. Thus, we have a significant homeless crisis due to the City’s allowing poor people’s homes to be demolished and thrown on to the streets. 

Basta! Enough with the Doom and Gloom already. What’s the solution? 

The Know-it-Alls have decided that the City of Los Angeles will Deficit Finance its way to prosperity. Here’s the plan. 

(1) The City will issue bonds for several billion dollars more than it can repay. The City must deficit finance on a huge scale in order to make this scheme work. The City has to borrow billions of dollars more than it can possibly repay. The City has make certain that its debt will be so enormous that a bankruptcy reorganization will be infeasible, leaving a quick and complete bail out as the solution. 

(2) The City (Metro and the County) will give these billions of dollars to those multi-millionaires and billionaires who finance the various political campaigns aka real estate developers. 

(3) These developers will construct massive projects which Los Angeles does not need and Angelenos for the most part do not want... 

(4) By spending billions of dollars which otherwise would not be spent, the entire economy will be stimulated. 

(5) When the time comes to pay off the bond holders and repay the banks, the City won’t have the money. The City will be billions of dollars short and then it will run to Washington DC, screaming: “Bankruptcy, Bankruptcy, Bankruptcy.” As everyone knows, no federal government can allow Los Angeles to go bankrupt. Wall Street will not tolerate it? Who, do you think, bought all the bonds and loaned LA all those billions of dollars? If LA went BK, they would lose billions of dollars. Deja vu 2008. 

(6) Thus, LA plans to issue a series of billion dollar bonds and it will also borrow up the ying yang. The City knows now – right now in 2016 – that it has no intention of paying off the bonds or repaying the loans. The Feds will step in and pay whatever it takes – $1 trillion, $4 trillion, more. It does not matter! The Feds will pay off the debt to avoid a Los Angeles Bankruptcy. 

Will federalizing Los Angeles debt work? 

Yes and No. 

Answer #1: Yes, it will work. 

No matter how much LA borrows, the Feds will pay off the debt. There is no number too high. In fact, the higher the debt, the more pressure on the Feds to pay off the debt outright rather than allow Los Angeles to re-organize. Organization takes time and some lenders may have to take a financial “hair cut.” Wall Street will want is $1.75 on the dollar and the surest way to get all its money is to have a gigantic crisis. 

It’s the same as the game play where the City destroyed thousands of rent-controlled apartments in order to manufacture a huge homeless crisis so that people will vote to issue $1 billion in bonds. Then developers will BK their LLCs and LLPs, causing the City in turn to scream bankruptcy so that the Feds will bail out Los Angeles. The poor will still be poor, but the billionaires will become wealthier. Kind of like the last 30 years! 

Answer #2: No, it will not work. 

The things which LA is buying range between worthless and detrimental. Los Angeles is investing in 19th Century choo-choo trains and dense residential construction which the overwhelming majority of Angelenos and Americans shun. 

Meanwhile, other areas of the country are busily re-creating old Los Angeles in places like Texas and the Carolinas. If people take the time to look at what Austin is doing and at what is happening outside Dallas and what could happen in North Carolina if it stopped its run-away bigotry, one sees that it is what made Los Angeles a destination city. We offered a combination of job opportunities, a decent climate and virtually endless single family homes. 

Garcetti has declared war on the single family home. The lack of single family homes and the atrocious school district are the largest factors driving out the productive middle class. Employers are shunning Los Angeles and the type of highly dense housing which Garcetti loves will quicken the departure of both educated workers and employers to other states. The exodus is already under way. 

Some very short term events are likely: 

(1) CEQA will be gutted so that more high density housing can be constructed faster to pump more money into the economy faster. 

(2) Billions more in bonds will be issued. 

(3) The courts will rule against all or almost all challenges to any construction project with no regard to whether it is legal or illegal. 

Leading up to 2012, many State leaders saw that the Community Redevelopment Agencies were pushing cities and the State into insolvency due the billions of tax dollars which the CRAs were sucking away from incremental property taxes. Effective February 1, 2012, all the CRAs were abolished and massive insolvency was avoided. At that time, there was no plan to bail out the cities or the State. 

After 2008, the public was extraordinarily hostile to bailouts so the CRA’s had to be killed off and killed quickly. In that climate, many politicos saw the need to force the developers and city to hold back on development. The orders went out to the judges to uphold the challenges to these projects until the economy could correct itself. 

Now in 2016, there is a plan to bail-out the Cities but there is no need to resurrect the elaborate CRA structure. Each councilman says what he wants, and the LA City Council passes it unanimously. Don’t worry about Penal Code 86 which criminalized the vote trading agreement. The judges have their new marching orders to kill any lawsuit which questions the propriety of the City’s being run by a criminal vote trading pact. 

With the bailout plan in place, the priorities have shifted to stop all citizen challenges to the massive spending which is being launched. Most likely the trial courts will rule that citizens have no right to question the decisions of the City leaders and that will throw the cases into the appellate process for several years. Meanwhile, billions of dollars will be borrowed and given to the developers. 

The construction industry will keep Los Angeles’s economy afloat, and ironically, as City devolves it probably will become less crowded as an increasing number of people move away. That will leave LA with more elderly, until they start dying off. A city without modern jobs will lose young of working age. 

Starting after 2026, what we currently call “corporate welfare” will morph into “municipal welfare,” in that city will perpetually need the Feds to prop up the economy. Who knows if LA will continue to have the political clout to keep the Deficit Spending Plan going after 2040. In a culture where only the short term matters, only fools ask such questions.

 

(Richard Lee Abrams is a Los Angeles attorney. He can be reached at: [email protected]. Abrams views are his own and do not necessarily reflect the views of CityWatch.)