Wed, Oct

Federal Cash Stabilizes City’s Finances - For Now

LA WATCHDOG--The infusion of $1.35 billion of cash to the City’s coffers pursuant to Washington’s American Rescue Plan will allow the City to stabilize its finances, eliminate budget deficits, fund numerous one time projects, and establish a sizeable Reserve Fund. 

But the City still has significant financial issues that are being swept under the rug, including the following year’s budget gap, its Structural Deficit (where expenditures increase faster than revenue), unfunded pension liabilities of more than $15 billion, and a $10 billion deferred maintenance budget.  

On April 20, Mayor Garcetti submitted his Proposed Budget to the City Council.  It calls for a General Fund budget of $7.3 billion, an increase of $650 (almost 10%) from last year’s Adopted Budget, in large part because of the second installment of $677 million from the Federal Government.  This allowed the City to increase departmental funding by $175 million (3.4%), more than offsetting the impact of the virus on City revenues, and to provide funding for over $580 million of one time expenditures. 

This balanced budget assumes that the Federal government will not restrict the use of Federal Funds.  

It also assumes a “robust recovery” of the local economy, fueling increases in the sales and hotel taxes.  As a result, the budget is projecting that the City’s seven economically sensitive taxes* will exceed this year’s adopted budget by over $100 million. This is an aggressive assumption because it projects increases of 77% and 18% in the hotel and sales taxes, respectively. 

[*Property, Business, Sales, Utility, Hotel, Documentary Transfer, and Parking Occupancy taxes.] 

Fortunately, the City has a heathy Reserve Fund to offset any shortfalls.  

At the beginning of the new fiscal year on July 1, the City expects its Reserve Fund to be $700 million, thanks to the City following the excellent recommendations of the City Administrative Officer. This Reserve Fund is equal to over 10% of the normalized (excluding infusions from Washington) General Fund revenue, the City’s stated goal.  In addition, the Budget Stabilization Fund was replenished and now has $118 million.  In total, the City’s reserves will exceed $800 million, an amount equal to over 12% of normalized General Fund revenues. 

The Reserve Fund may also be tapped in the 2022-23 fiscal year (July 1, 2022- June 30, 2023) because the City is projecting an overly aggressive 7% increase in revenues, or almost $500 million.  This excludes the impact of infusions from Washington.  If the increase is “only” 5%, the swing would be around $150 million. 

The upcoming budget is also using one time revenues from the Federal government to fund on-going operations to the tune of $134 million.  Furthermore, this is probably understated by over $100 million since one time funds are being used to fund homeless services and other initiatives.  This implies that one time revenues are funding approximately $250 million of operational expenses, an amount that will most likely be covered by the Reserve Fund.  

Finally, the City’s Four Year Budget Outlook is projecting a $138 million shortfall in 2022-23. 

Overall, this implies that the Reserve Fund will be hit up for over $500 million in the following fiscal year (2022-23), depleting the Reserve Fund to unacceptable levels.  Rather than waiting a year to face this shortfall, the City needs to tackle this issue now and not kick another can down the road. 

 (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.)