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Los Angeles Nears Edge of Fiscal Cliff

SAN FRANCISCO — Los Angeles Controller Wendy Greuel said the nation’s second-biggest city will run out of money within a month without action from elected officials, who are stuck in a acrimonious standoff over electricity rates.

The confrontation escalated Tuesday as Mayor Antonio Villaraigosa ordered the acting city administrator to prepare a plan to shut non-public safety general fund departments down two days a week to conserve cash beginning next week.

“There are no easy decisions or simple ways to solve this budget crisis,” the mayor said. “It is my responsibility to make these difficult but necessary decisions to steer the city out of this crisis and onto solid financial ground.”

Villaraigosa and the Los Angeles Department of Water and Power last month tried to push through the first leg of a 22% electricity rate increase over the next year to fund the utility’s push into renewable energy and allow it to continue subsidizing the city’s general fund.

The City Council has thus far blocked the rate hikes, suggesting a smaller first step in the rate plan. LADWP says the stalemate leaves it with too little money to make a scheduled $73 million transfer to the general fund.

“Without the full power revenue transfer, I now project that if the city remains on its current path, the city’s general fund will be out of money — in fact it will be negative $10 million — on May 5, 2010,” Greuel wrote in a letter to Villaraigosa and the City Council Monday afternoon.

Interim administrative officer Raymond Ciranna said the city’s budget situation is bad, but Los Angeles is not about to default on its obligations because it has reserves that it can transfer to the general fund to avoid running out of cash.

The government earlier this year projected a $212 million budget shortfall for fiscal 2009-10. Ciranna said cost-cutting and revenue gains have whittled the deficit down to $160 million. Officials planned to use reserves and the LADWP transfer to fill the gap. He said the reserves, which are currently about $199 million, can cover the entire shortfall. The current deficit would leave the city with just $39 million of reserves at year end.

Ciranna said he expects to continue to reduce the deficit and to use other available funds to build the reserve fund up to $254 million by the end of the fiscal year on June 30. The result is that Ciranna expects Los Angeles to finish the year with reserves of about $90 million. He said he’s “not optimistic” about the LADWP transfer and isn’t planning on it.

City Council President Eric Garcetti said the council proposed a rate increase that would give the utility just $6 million less this quarter than it requested.

The LADWP hike included two parts: an increase to cover the utility’s electricity costs and a smaller increase for a new fund that would pay for environmental projects championed by Villaraigosa. The fund would finance new renewable-energy development, subsidies for solar power, and energy-efficiency programs.

The council approved part of the increase that covers electricity costs, but it reduced the portion for the renewable energy fund. Council members said they’re committed to keeping the utility solvent, but they think the city should go slow on new environmental initiatives while ratepayers are struggling with a recession that’s pushed the local unemployment rate to almost 15%.

“The Department of Water and Power has sufficient net income from last year to fully fund this year’s transfer,” said council president Jan Perry.

The council Tuesday unanimously passed a resolution asking the department to make the $73 million transfer.

The mayor and the LADWP board, which he appoints, have thus far rejected the smaller rate increase. Interim LADWP general manager David Freeman said the utility simply can’t afford to subsidize the city’s general fund if the mayor and the council can’t agree on the first part of a multi-step rate increase that both sides say is necessary.

“We can’t transfer money on the basis of having a surplus when we’re running a deficit,” Freeman said in council testimony Tuesday. “One way or the other, this city has managed not to grant us any rate increase at all.”

The standoff delayed the department’s sale of $720 million of revenue bonds this week, when Fitch Ratings withdrew its AA-minus rating on the deal, citing a failure to implement the utility’s rate plan, which the credit rating was predicated upon. Villaraigosa said Fitch’s action shows the council is endangering Los Angeles’ fiscal health.

“We are facing the consequences of the city’s failure to enact the necessary rate increases,” he said.

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