Los Angeles on Verge of Bankruptcy

Los Angeles on Verge of Bankruptcy
April 19, 2010

The nation’s second-largest city teeters on the brink of bankruptcy, largely because of lavish pay and benefits packages for a bloated government workforce, according to tax and budget watchdogs—and former Los Angeles Mayor Richard Riordan.

The California city of 3.8 million people nearly went into bankruptcy in April, with Mayor Antonio Villaraigosa (D) threatening to shut down most city government services two days a week to save money and avert bankruptcy. Money withheld by the city-owned utility nearly forced bankruptcy.

Nation’s Highest-Paid Employees
The city budget has been a fiscal shambles for years, said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, from his Los Angeles office.

“The city’s problems are the result of mismanagement, pensions, and high pay,” he said. “We have the highest-paid municipal employees in the nation, and the highest-paid city council at $178,000 a year [per member]. Only two groups need apply for the ear of the city council—developers and public employee union reps—and the priority is not necessarily in that order. Mayor Villaraigosa was at one time a union organizer. Unions elect the council, so when they negotiate, they have reps on both sides of the table.”

Electricity Rate Hike Sought
The straw that nearly broke the city’s financial back resulted from a dispute between the city council and the city’s Department of Water and Power.

The Los Angeles DWP is the largest municipally owned utility in the nation. The DWP held back a scheduled $73.5 million payment to the city’s General Fund because the council rejected an electricity rate hike request.

The city entered April with a budget shortfall of $222.4 million, but in early April City Administrative Officer Ray Ciranna announced the city had collected $26 million more than expected in property taxes. On April 14 the council voted 8-5 for a temporary 4.8 percent electricity rate increase.

Two days later the DWP board accepted the increase even though two weeks earlier board members appointed by the mayor had rejected it. They wanted a 5.7 percent increase supported by the mayor but rejected by the council.

Killer Pension Costs
The unexpected property tax receipts, and the DWP’s acceptance of the electricity rate increase and expected release of the $73.5 million payment, have given the city a little breathing room.

But it’s not enough for budget watchdogs or former Los Angeles Mayor Riordan, who served from 1993 to 2001.

In an interview with The Los Angeles Times, Riordan argued bankruptcy might be the only way to address pension costs. Riordan noted the city assumes an 8 percent return on pension investments when the average return over the past decade has been just 4 percent. The city could be looking at $1.5 billion in pension obligations it can't meet, he said.

"We need some adults to come alive in the city and to talk through how to meet that liability," Riordan told the Times. "If that doesn't happen, we shouldn't rule out bankruptcy."

More City Workers Added
Vosburgh agrees bankruptcy might be the only solution. He said Riordan cut city staff by about one-third during his two terms in office but that his two successors “have been layering on” new workers and increasing pension obligations.

“One big thing that has been a constant but growing problem is the pension liability,” he said. “The shortfall this year was about $400 million. So that’s additional money that must be made up. One of the things that might have to happen is for the city to literally go bankrupt. Then a judge could rewrite contracts.”

The problems started in the 1970s, Vosburgh said, when lawmakers allowed collective bargaining for government unions. Then in the 1990s they fattened pension benefits. Public safety workers can retire after 30 years and receive 90 percent of their final year’s salary, which can include years of rolled over unused sick days and other means to boost the final salary. Many retirees are barely 50 years old, Vosburgh said.

Outsourcing Suggested
Marcia Fritz, president of California Foundation for Fiscal Responsibility, agrees the city’s pension situation is a crisis compounded by basing benefits on the nation’s highest salaries. She said one solution might be for Los Angeles to contract out services to private businesses.

“If they can find the service in the Yellow Pages, they should contract it out,” she said.

“For police we have the biggest police contractor in the nation right here, and that’s the county of Los Angeles, which contracts with many cities. They must be competitive; otherwise the cities would have their own police departments. Los Angeles could fire the police and rehire them through the county.”

This could save huge amounts of money, she said, because the county police force has a different pension schedule. The county awards 2 percent of salary for every year served for retirees in their fifties. A police officer with 30 years on the job would receive 60 percent of final year salary instead of the 90 percent Los Angeles city police receive. Fritz said the city could also do this with firefighters.

“Fire and rescue, sanitation . . . for all services the city should just send out RFPs [requests for proposals],” Fritz said.

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.