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LA WATCHDOG - An October 18th editorial in the Los Angeles Times said that LA was broke, teetering on the edge of a financial emergency, was not living within its means, and needed to develop a plan to stabilize its finances. As it turns out, the situation is far worse based on a review of the 128 page First Financial Status (“FSR”) issued by the City Administrative Officer on October 25th.
One of the key measures of the financial health of the City of Los Angeles is the cash balance of the Reserve Fund. The City’s goal is to have the Reserve Fund balance equal to 10% of General Fund revenues, or $800 million. The minimum level is 5%, or $400 million.
In June of 2023, the balance of the Reserve Fund was $650 million, or over 8% of General Fund revenues. But today, the balance is $313 million (3.9%), in large part because of the need to cover the deficits in fiscal year 2023-24 caused overly optimistic revenue projections, budget busing labor agreements, and other over expenditures, including fire and police overtime, and to pay current year liability claims.
But the negligence of raiding the Reserve Fund for $337 million is just the beginning, or as Monty Hall would say, “There’s more!”
The Reserve Fund will also be on the hook to fund $124 million of over expenditure in the first two months of this fiscal year as well as $92 million for liability claims. Overall, these two expenditures will reduce the Reserve Fund balance to less than $100 million (1.2% of General Fund revenues).
But there’s even more possible dings to the unbalanced budget and the Reserve Fund.
There is the likelihood that revenues will be lower because of the impact of the softer than expected economy on the seven economically sensitive taxes (especially the sales, hotel, and business taxes).
There is also the possibility of over expenditures in the normal course of operations (e.g. police and fire department over time) as well as for new labor agreements, even more liability claims, expenditures for interim and permanent supportive housing for the homeless, the Olympics, and the Mayor’s ambitions infrastructure plans for our streets and parks.
While it will be a multiyear effort to restore the Reserve Fund, a partial solution would be for the City to issue Judgement Obligation Bonds to cover liability claims, possibly in the range of $150-200 million.
The City may also increase the Solid Waste Recovery Fee by $150 million, or about 50%, to eliminate the General Fund subsidy of this operation. But this would not be effective until the later part of this fiscal year or the following year.
There are some short-term solutions to balance the budget, including raiding Special Fund balances, furloughs and layoffs, and a serious reduction in service levels.
But we need real reform, beginning with the development of Four-Year General Fund Budget Outlook that takes into consideration future labor agreements. This would show that the projected $160 million surplus in 2028-29 would turn into a deficit of over $200 million.
We need also open and transparent labor negotiations and a charter amendment that would prohibit the City from entering into labor agreements if they created a current or future deficit.
See LA is Broke. So, What’s Next, Mayor Bass? for additional details.
Will Mayor Bass be willing to use her political capital to implement open and transparent labor negotiations and a charter amendment to end budget busting labor agreements? Or will she continue to kiss the rings of the politically powerful union bosses of the City’s public sector unions?
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, the Budget and DWP representative for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. He can be reached at: [email protected].)
