SAN FRANCISCO — Los Angeles Mayor Antonio Villaraigosa proposed a $4.34 billion fiscal 2010-11 general fund budget that would cut spending by 2.2% to rein in the deficit and rebuild reserves amid continued declines in most major tax revenue.

Villaraigosa would close a $485 million gap forecast in January with one-time revenues, furloughs of workers, cuts in capital and other spending, 800 layoffs, and the use of higher-than-expected revenue.

The mayor of the second-largest U.S. city estimated that 68% of the proposed budget fixes are ongoing changes that will reduce the city’s structural budget deficit, and 32% are one-time measures.

“L.A.’s long-term fiscal sustainability goes beyond just one budget year. One year of cost-cutting won’t solve this crisis,” Villaraigosa said in his state of the city address Tuesday. “We must make lasting, structural changes that not only balance this year’s bottom line, but puts us back into the black for future forecasts.”

Los Angeles has experienced downgrades in recent months because it failed to balance its budget for fiscal 2009-10, which ends June 30. The city plans to spend $148.9 million of reserves to cover this year’s gap, but has pledged to use the proceeds of privatizing its parking garages to rebuild the reserves.

Fitch Ratings dropped the city’s general obligation bonds to A-plus from AA-minus earlier this week, citing depletion of reserves. It was the agency’s second downgrade of the credit in six months.

Moody’s Investors Service downgraded the city’s GO rating to Aa3 from Aa2 earlier this month and kept the negative outlook. Standard & Poor’s put its AA-minus GO rating on negative CreditWatch.

Villaraigosa’s plan would build the reserve fund to $284 million, or 6.5% of general fund expenditures, from a projected $115 million balance at year end.

The biggest structural budget adjustment the city can make is reducing payrolls, which account for about 80% of spending. Villaraigosa’s proposal calls for cutting the number of authorized positions in non-proprietary departments by 3,301, or 9%, to 34,091 workers. About 800 of those jobs are filled and will require layoffs. Many of the jobs are vacant due to an early retirement plan negotiated with public employee unions this year.

The City Council earlier this year approved plans to cut 4,000 jobs from city payrolls, but they remain contentious. Villaraigosa proposes tempering the number of permanent job cuts with temporary furloughs of a broad range of non-public safety workers to save $63 million.

“We must all share in the sacrifice to stop the cuts in services and prevent further lay-offs,” the mayor said. “We must all be willing to take cuts in our pay, increase our pension contribution, and contribute more to our health care plans.”

The city continues to face mounting pension costs, due to losses in its pension trust funds during the recession. While investment returns have improved with the stock market, Los Angeles’ pension contribution will rise 11.7% to $730.1 million next year from $653.4 million this year.

On the revenue side, Villaraigosa projected a $154 million improvement from January’s revenue estimate, reflecting the moderation of a sharp decline in tax revenues but no improvement in most categories. His budget assumes a 1% drop in general revenues. That includes a 4% decline in sales and business tax revenues and a 1% drop in property tax collections.

The forecast also includes an 11% increase to $254 million in the Los Angeles Department of Water and Power’s annual transfer to the general fund. The department threatened not to make the final $73.5 million of this year’s $220.5 million transfer after a dispute over electricity rates, which has since been resolved.

The mayor is also betting the general fund will get a one-time infusion of $53 million from privatization of the city’s parking garages. The city says it hopes to have final proposals from bidders on the concession by this summer.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.