Sat, Apr

Is It a Good Idea for LA to Borrow Billions of Dollars?


THE CITY--Is it a good idea for the City of Los Angeles to borrow so many billions of dollars that the Federal government will have no choice but to bail out the city five, ten or fifteen years from now?

From a Keynesian macro-economic point-of-view, deficit spending at the right time and in the right place can be beneficial -- spending of billions of dollars can stimulate a sluggish economy. 

Traditionally, deficit financing has been done by the Federal government during the bust phase of the business cycle. We are currently in the boom phase of the business cycle. 

Los Angeles, however, is facing an economic disaster that is not shared by other portions of the country. What was once the nation’s premier destination city has become an “exodus city,” meaning that more people are moving away than are coming here. The gross numbers of this exodus, however, can be too simplistic. We need to look at who is coming and who is not coming to LA, as well as what part of the population is leaving. 

Due to the economic down turn after 2008, the number of illegal “Mexican” immigrants declined. (People use the term “Mexican” in common parlance without regard to national origin to refer to any persons who come illegally or legally from south of the border.) People who were drawn to the US to work naturally lost their economic incentive to come here during the Great Recession. Illegal “Mexican” immigration was primarily the result of a strong economy. When our economy turned south, so too did the “Mexicans” – they went home and stopped spending money locally. And their absence made recovery much slower in Los Angeles. 

Another reason LA is becoming an exodus city is that educated Millennials who have reached child rearing age are leaving. Unlike the “Mexicans” who are easily re-attracted to Los Angeles by an improved economy, when the Millennials move away, they are unlikely to return. 

These younger people are moving to Texas, Arizona, Nevada and the Carolinas in order to have the kind of lifestyle that is being killed in Los Angeles. They’re seeking single family homes with yards in cities with new infrastructure and decent schools. If they wanted to raise their families in a small high rise near a freeway and use slow dirty mass transit, they could move to NYC or Chicago or simply stay in Hollywood. 

Back during the period of time that former Mayor Villaraigosa and Council President Garcetti were declaring war on the middle class and the single family home, other parts of the nation were creating “new Los Angeleses.” Decades ago people flocked to Los Angeles primarily for our endless single family homes and our great weather. We also had job opportunities galore. 

Families like the ones that moved to Los Angeles in the 1920's, the 50’s and the 80’s now see a different Los Angeles -- a crowded, dirty urban area dominated by a pathologically corrupt City Hall that is waging war on the very things Millennials desire the most: a single family home and a decent job. Employers see the same situation; they realize that the high cost of doing business in LA is more than the escalating taxes. 

In order to attract an upwardly mobile, family-oriented work force, there must be a decent school system. But LAUSD is one of the worst school districts in the industrialized world. It costs between $11,000 and $32,000 per year per children to send a kid to private school in Los Angeles. Employers know that they have to pay that extra cost since the only place their employees receive income is from their employers. Why would an upwardly mobile family want to penalize their children by sending them to LAUSD schools when they can move to a smaller city with decent public schools? Why would employers want to absorb the overhead of paying employees enough to cover the cost of private schools for their children? 

If, however, someone comes along and gives away billions of dollars to a particular LA business whose projects can only be done by people who live, work and spend their money in Los Angeles, the City can economically survive. One thing about a huge mixed-use project in Hollywood with 30% occupancy -- it cannot be built in China by Chinese laborers. The same is true of the Subway to the Sea that goes from DTLA to the ocean. There’s no way to export those jobs. 

As we learned from the Chinese, an economy can be kept afloat by constructing entire cities…where, incidentally, no one will live. So, is there any reason that the same game plan cannot be used in Los Angeles? Answer: No, there isn’t. It can be done here -- provided we Angelenos don’t have to pay the bill. 

Federalizing local debt so that LA can deficit finance its way out of economic disaster is much better than the old CRA system. Before we abolished the corrupt Community Redevelopment Agency (CRA,) Angelenos bore the brunt of the corruption. CRA projects paid no incremental property taxes to the city and that seriously reduced the City’s operating revenues. Although LA had the legal right to spend CRA money on streets, paramedics, parks, pension contributions, etc. while Villaraigosa was Mayor and Eric Garcetti was City Council President, it chose to give the money to real estate developers. That decision to give hundreds of millions of dollars annually to real estate developers is why Los Angeles now has a crumbling infrastructure whose deterioration is far beyond our financial means to repair without tax increases. 

Under this new system to Federalize debt, the Federal government will bear the economic losses. People still think that Federal money is free and there are no economic or social costs in opening the Federal bank vaults and letting the money spill out. One thing is clear though – the more the City borrows and spends, the better the economy becomes in the short run. 

Every dollar spent by a construction worker has the same multiplier effect as the dollar spent by an aerospace engineer. NASA, however, is not located in LA, but construction workers on The Subway to the Sea have to stay and spend their wages in LA. From an economic stimulus standpoint, there is no reason that federalizing local debt will not work. 

Here are the steps: 

(1)   Borrow Billions of dollars and spend it locally. 

(2)   Have the Feds bail out Los Angeles. 

What could go wrong? 

The November 17, 2015 the HCIDLA report to the Mayor warned what can go wrong – the voters might not approve the necessary bonds or tax increases that require a 2/3 vote in order to prevail on the November 2016 ballot. 

As the HICDLA report said, it will be a massive sales job and its outcome is questionable. Thus, two advertising campaigns are under way: 

The first ad campaign pleads the plight of the homeless – who will remain homeless despite the fact that Los Angeles has plenty of empty apartments to house them. It will be important between now and the November election not to let anything reduce the scope of the homeless crisis. If people realize that there are better ways to help the homeless than giving billions of dollars to real estate developers, they won’t approve the sale of bonds. 

If ballot measures fail, the City could borrow funds from the Federal government or through smaller bond offerings and then give those funds to developers to construct apartments were a portion of the projects are for affordable housing. For example, on May 13, 2016, the City Housing Committee approved $27.6 million in bonds to provide money to give to developers for affordable housing. 

The second ad campaign is designed to convince us that we need more subways despite the fact that Angelenos shun subways and basically, the only people who use mass transit are people who have no other choice. The fact that the subways were constructed for the poor is shown by the lack of parking near the subway stations. Just take a look at the Metro Stop at Western Avenue and Hollywood Boulevard. If people living in The Oaks wanted to use the subway, the nearest place to park their cars would be their own home since there is no parking anywhere near the subway station. 

Thus, the crucial first step for Los Angeles to “deficit finance” its way to financial success is to convince voters to incur billions of dollars’ worth of debt that will then force the Feds to pay our bills starting five, ten or fifteen years from now.


(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.) Edited for CityWatch by Linda Abrams.

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