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The Structural Deficit Leads to a Service Deficit/Bankruptcy and Intergenerational Theft

LA WATCHDOG--The following is a summary of my remarks on Budget Day, Saturday, June 29, at City Hall to more than 250 Angelenos that packed the Council Chambers at City Hall. 

There are three concepts that will help you understand the City’s budget and finances.  They are Structural DeficitService Deficit/Bankruptcy, and Intergenerational Theft. 

The Structural Deficit is when expenditures (primarily salaries, benefits, and pension contributions) increase faster than revenues, resulting a river of red ink for many years.  

The Service Deficit/Bankruptcy is when the City is forced to cut back on basic services such as road maintenance and repair to fund the projected deficit caused by the increase in personnel expenditures. 

Intergenerational Theft is when current obligations are dumped on future generations.  This includes unfunded pension liabilities ($15 billion) and the Deferred Maintenance Backlog (estimated to be north of $10 billion). 

Before proceeding, the City Administrative Officer and the Mayor’s budget team have done an excellent job in developing the budget, sifting through over 14,000 pages of departmental budget memos.  The problem lies with Mayor Eric Garcetti, City Council President Herb Wesson, and the other Councilmembers who are unwilling to make the tough decisions and say NO to the campaign funding leaders of the City’s unions.   

While Los Angeles is the second largest city in the country, our city government is not as complex as other big cities.  

LAUSD is responsible for education. 

Metro is responsible for transportation. 

The County is responsible for public health, hospitals, social services and welfare. 

The Sheriff is responsible for the jails. 

The District Attorney is responsible for criminal justice. 

The City of Los Angeles is basically responsible for public safety and our infrastructure.  

Our City is benefitting from record revenues. 

For the fiscal year beginning on July 1, General Fund revenues are expected to be $6.6 billion, an increase of over 6% from the previous year. The City claims to have a balanced budget.  But this does not include raises for the police and firefighters whose contracts expired on June 30.  Unaccounted for raises are expected to be at least $25 million this year.  So much for the balanced budget. 

Since Eric Garcetti became mayor in 2013, General Fund revenues have increased by over $2 billion, a 44% bump.  

Yet we still have a Structural Deficit! 

The City claims to have solved the Structural Deficit.  I disagree. 

For the first time in recent memory, the City’s Four Year Budget Outlook shows that the City will have a surplus for each of the next four years, thanks to record revenues.  But this omits a few inconvenient items such as raises for the city employees; the need to build-up of our rainy day funds; the required care of our streets, parks, urban forest, and the rest of the City’s infrastructure; and adequate funding of the City’s two underfunded pension plans. 

Rather than barrage you with too many numbers, let’s analyze the budget surplus of $78 million for the fiscal year 2023-24, where revenues of $7.3 billion are $700 million more than the current year’s revenue of $6.6 billion, an 11% increase.  

This surplus turns into a deficit of over $200 million when you factor in modest raises for City employees of $300 million over the next four years. 

The City does not fund the build-up of its rainy day funds to a level equal to 10% of General Fund revenues as recommended by the Government Officers Finance Association and the City Administrative Officer.  This will require an additional $50 million a year. 

The City is underfunding the repair and maintenance of our streets and the rest of our infrastructure by at least $250 million a year. 

And then there is the elephant in the room: pensions.   If the City used a lower investment assumption of 6¼% instead of the overly optimistic rate of 7¼%, the annual required contribution would increase by at least another $500 million a year.  

The net result is that a $78 million surplus turns into a Structural Deficit of more than $1 BILLION. 

To finance the Structural Deficit, the City will need to cut back on basic services, resulting in a Service Deficit/Bankruptcy.  The City will also continue to underfund its two pension plans and the repair and maintenance of our streets and the rest of our infrastructure., dumping these obligations on the next generations of Angelenos.  

This is Intergenerational Theft.      

What to do? 

For openers, the City can implement two of the recommendations of the LA 2020 Commission that were actually endorsed by City Council President Herb Wesson, the same Councilman that refused to schedule hearings to discuss them.   

The first is to establish a commission to analyze the City’s two pension plans and develop solutions to slow the growth of pension contributions and eliminate the $15 billion unfunded liability.  

The second recommendation is to create an independent, well financed Office of Transparency and Accountability to oversee the City’s budget and finances and to increase transparency into the City’s complicated finances. 

The City also needs to develop a long range financial plan in an open and transparent manner, where Angelenos can have meaningful input. This includes creating a comprehensive plan to repair and maintain our streets, some of the worst in the nation, and address our parks, urban forest, street lights, and rest of the City’s infrastructure. 

The City needs to develop a policy to increase its rainy day funds to a level equal to 10% of General Fund revenues and a plan to cope with a downturn in the economy. 

The City also needs to benchmark the efficiency of its operations, similar to what the Department of Water and Power is doing. 

The Mayor should also consider presenting his budget on February 1 instead of April 20 as required by the Charter.  This would give us an extra 80 days to review and analyze the budget and provide meaningful comments and suggestions. 

We also need to get our Neighborhood Councils to make the City’s budget and finances a priority and to pound on the Mayor and the City Council to eliminate the Structural Deficit. 

Mayor Garcetti and Council President Herb Wesson have not endorsed these common sense recommendations.  We have tried.  The LA 2020 Commission tried.  We need to tell the Mayor Garcetti, the Herb Wesson led City Council, and the campaign funding leaders of the City’s unions that they work for us, not the other way around. 

It is time to make our voices heard. 

(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.  He can be reached at:  lajack@gmail.com.)

-cw