LA’s Future Clouded by Budget Unknowns

LA WATCHDOG--The City of Los Angeles is confronting a budget gap next year of “at least $250 million” based on Mayor Eric Garcetti’s comment to Larry Mantle, the host of KPCC’s (89.3) AirTalk.  

But this not very well publicized shortfall of at least $250 million may be optimistic. The City believes that the $245 million Power Revenue Transfer Tax (previously known as the 8% Transfer Fee) from the Department of Water and Power, which is the subject of a class action lawsuit, is legal and does not require voter approval pursuant to Proposition 26 (the Supermajority Vote to Pass New Fees and Taxes) that was approved by California voters in 2010.    

Garcetti did not offer any reasons for this staggering $250 million shortfall that exceeds the previously projected budget gap of $85 million.  Nor did he discuss any specific plans to reduce this gap other than to say that the City will rely on several new sources of revenue. 

But these new revenues are not for deficit reduction.  Rather, they are intended to augment existing programs.  This is certainly true for the $50 million of new “Local Return” money from Metro that is designated for the repair and maintenance of our lunar cratered streets. These kickback funds are the result of the passage of Measure M, the permanent half cent increase in our sales tax to fund Metro’s ambitious expansion plans and its ever-increasing operating deficits. 

He also said that he would not institute any new spending polices other than for the homeless, public safety, and the restoration of services.  But these new initiatives will cost north of $100 million.  So much for austerity.  

Underlying the $250 million budget gap is a significant increase in City’s legal liabilities and even greater shortfall in revenues.  Property and sales taxes are anticipated to be $50 million lower than expected while revenue from taxes on the DWP Ratepayers are off by approximately $75 million. 

There is something very fishy going on with the Power Revenue Transfer Tax because of the class action lawsuits that were filed in 2015. 

This year, the Power Revenue Transfer Tax was budgeted to be $291 million.  However, because DWP overestimated the Power System revenue by 10%, or $300 million, the Transfer Tax was only $264 million, a $27 million shortfall.  

For the upcoming year, the Transfer is projected to be $245 million (6.5% of Power System revenues), down from the previous projection of $300 million (8% of revenues).  This dip, despite DWP’s increase in revenues, gives credence to the scuttlebutt that City Hall has cut itself a sweet deal with the lawyers representing the plaintiffs in the class action lawsuit (Patrick Eck v. City of Los Angeles).    

Of course, the lawyers will make out like bandits. 

And the Ratepayers, rather than being reimbursed for over $1.5 billion in illegally collected taxes (not including interest) and abolishing the illegal Power Revenue Transfer Tax, will once again get the shaft as we will end up paying $245 million a year to the pay-to-play politicians who occupy City Hall. 

But this backroom settlement that was cut over two months ago may not pass legal muster.  Under Proposition 26, this so-called fee that is really a tax must be approved by the voters, a rumble that City Hall wants to avoid.  This may be the reason why the City has not announced this deal because they cannot figure out how to disenfranchise us by not placing this tax on the ballot for our rejection or approval. 

If this crooked deal does not pass the smell test, our friends that occupy City Hall will go ballistic as the projected budget deficit will balloon to $500 million.  

But this sea of red ink is not our fault as the Mayor and the City Council have racked up a $250 million budget gap despite an increase in General Fund revenues of $1 billion.  City Hall has also been on notice for years that the Power Revenue Transfer Tax is illegal, but failed to address the issue in a rational manner. 

City Hall will no doubt ask us to approve this tax.  But what do we get in return?  Maybe it is our turn to ask that in return for approving this new tax, the City will agree to place on the ballot a charter amendment that will finally require our City to go Back to Basics and Live Within Its Means. 

Hold on as we are in for a wild ride.  Budget Madness begins on April 20 when the Mayor presents his new budget to Angelenos. 

 (Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council.  He is a Neighborhood Council Budget Advocate.  Jack is affiliated with Recycler Classifieds --  He can be reached at: