Why, Even with a Pension Crisis, LA Won’t Tank Like Detroit

LA WATCHDOG - When Detroit filed for bankruptcy in July with its $18 billion in liabilities, many people predicted that Los Angeles was not far behind.  

But LA is not going to tank as our City’s dynamics are very different, at least for the time being. 

Since 1950, Detroit’s population has decreased 63%, from 1,850,000 to less than 700,000 in 2012.  Los Angeles, on the other hand, has seen its population increase as our diversified economy located on Pacific Rim continues to grow, although a much lower rate than in the past. 

 

Our annual income per capita of $28,000 is almost twice the $15,000 level in Detroit where over 36% of the population lives below the poverty line.  This compares to an unhealthy 20% in LA. 

Detroit, with its 78,000 abandoned buildings and 66,000 blighted and vacant lots, has seen its revenues fall by 20% over the last five years.  Unfortunately, its revenues are expected to decline by an additional 13% over the next four years while pension obligations will gobble up an unsupportable 44% of the budget, up from the current level of 20%. 

Detroit does not even have access to the $500 million that it needs over the next five years to repair its epidemic of urban blight. 

Meanwhile, in the City of Angels, our revenues have increased to record levels and are projected to grow by 13% over the next four years.  Meanwhile, pension contributions will chew up “only” 23% of revenues.   

But this does not mean that LA is out of the woods as our City is facing significant financial issues.  LA is projecting a cumulative deficit of $800 million over the next four years if it is unable to renegotiate its contracts with its civilian unions.  

Our City is also cooking the books.  It is not providing enough cash to meet the $25 to $30 billion that is needed over the next 10 to 15 years to finance the repair and maintenance of our streets, sidewalks, and the rest of our deteriorating infrastructure and to fully fund our seriously underfunded pension plans. 

LA will also be under increased scrutiny as the underfunded public pension plans of Detroit, San Bernardino, and other bankrupt cities in California, along with their beneficiaries and unions, are challenging the priority of General Obligation bonds that are supported by the full taxing power of these cities.   These GO bonds traditionally have had preference over pension fund liabilities. 

These battles between bond holders and pension beneficiaries will be nasty, fought in the federal bankruptcy courts, state courts, and the State House, pitting bond holders, retired and active pension beneficiaries, public sector unions, local governments, and politicians against each other. 

In the meantime, borrowing costs for all municipalities with large unfunded pension liabilities will be significantly higher because of the increase in the perceived risk.   

As a result, our City’s finances will be under increased scrutiny by the rating agencies, accounting firms, bond buyers, and its citizens, especially as the City has to slash services to fund its operating deficits caused by continued increases in salaries, benefits, and pension contributions.   

So now is the time for the City Council and Mayor Garcetti to face reality.  The City needs to LIVE WITHIN ITS MEANS so that it can avoid insolvency or a virtual bankruptcy where it has to slash core services such as public safety to the bone. 

This will require the City to develop and adhere to a Five Year Financial Plan, pass two year balanced budgets based on Generally Accepted Accounting Principles, and over the next 10 to 15 years, fix our streets and the rest of our infrastructure and fully fund our pension plans. 

LA is not Detroit, at least not yet. But Angelenos need to remind our Elected Elite that we expect them to act in a fiscally responsible manner that does not jeopardize our City, its financial health, and its ability to provide core services to its citizens.

 

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee,  the Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at:  lajack@gmail.com. Hear Jack every Tuesday morning at 6:20 on McIntyre in the Morning, KABC Radio 790.) 
-cw
 

 

 

 

CityWatch

Vol 11 Issue 68

Pub: Aug 23, 2013