Los Angeles mayor Antonio Villaraigosa is in a race against the clock. Two years ago, he declared at a press conference that city finances were sound and would stay that way:
“The fact of the matter is this city will never go bankrupt.” Then he hedged a bit, adding, “It will never go bankrupt under my watch.” Villaraigosa’s watch—his second mayoral term, after which the law obliges him to leave office—ends just over a year from now, on July 1, 2013. He may be able to keep his (amended) promise, but perhaps not by much.
Miguel Santana, the city’s top budget officer, has just released a fiscal forecast that confirms what critics of Villaraigosa and the city council have been saying for some time: If Los Angeles continues on its present course, it will go broke. This is not a prediction buried in the charts and footnotes, either. It’s right up front, in a preface titled “A Cautionary Tale: The City of Stockton, California.” Santana notes that Stockton has entered a state-mandated mediation period—in essence, the last chance for the city unions and bondholders to work out a deal—after which it will be officially in default. “Stockton’s story provides a cautionary tale for the City of Los Angeles and other cities struggling to remain solvent,” he says.
Santana is right, and his report offers some compelling numbers to prove it. Over the next four years, he notes, the average annual growth in the city’s general-fund expenditures is expected to top 3.8 percent. The projected increase in salaries, pensions, and health care is even greater—at least 4.7 percent. But the city expects revenue to increase by only 2.3 percent annually over the same period. This is the picture of a structural deficit, which no economic recovery is likely to erase. Santana expects the city’s general-fund deficit to rise from $222 million in the coming fiscal year to $427 million by fiscal year 2015. He suggests raising some taxes, mainly on property sales, to close the gap partly. But Santana also warns that city officials must do more to control spending, especially labor costs, which consume 93 percent of general-fund spending. Layoffs aren’t enough. The real trouble, in Los Angeles as in other cities, is with pensions and health benefits. The city in five years expects to spend $943 million more in labor costs—and that’s without adding a single new employee.
At least some Los Angeles officials are speaking seriously about the city’s fiscal solvency, even if their sense of urgency comes a bit late. Others, most notably former mayor Richard Riordan, have been sounding the alarm for at least two years. In fact, Villaraigosa delivered his May 2010 no-bankruptcy pledge in response to a Wall Street Journal op-ed, coauthored by Riordan and investment advisor Alex Rubalcava, predicting that L.A. would likely declare bankruptcy by 2014. Riordan and Rubalcava argued that the city’s finances were set to collapse under the weight of pensions and retiree health costs. At the time, Santana countered with a point-by-point rebuttal, disputing Riordan’s numbers and the ex-mayor’s charge that the city under Villaraigosa had done a poor job controlling labor costs. Santana also tried to shift the blame to Riordan, who left office four years before Villaraigosa took over. “We’re having to clean up after the lack of pension reform from the [Riordan] administration,” he said. ... continues...