Los Angeles mayor's $10.5 billion budget paints a bleak picture

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Los Angeles Mayor Eric Garcetti's $10.5 billion budget for fiscal 2020-21 painted a bleak picture while acknowledging the unprecedented harm to the city's economy from measures enacted to contain the coronavirus pandemic.

The mayor declared a state of fiscal emergency in the letter attached to his proposed budget unveiled Monday. The budget followed his State of the City speech, during which he had announced furloughs affecting 16,000 city employees.

“The road back to where we were will be long and difficult,” Garcetti said during a Tuesday night press conference. “In light of the economic stresses we will face for the foreseeable future, we need to tighten spending today to prevent more drastic measures tomorrow.”

The emptiness of the usually crowded Walk of Fame in Los Angeles' Hollywood neighborhood earlier this month underscores the impact of the coronavirus.

Projected general fund revenues for the current fiscal year ending June 30 are down 1.7% to $6.46 billion for a $108.5 million loss, according to the mayor’s proposed budget. Garcetti's proposal for the next fiscal year seeks to maintain a balanced budget and preserve public health and safety programs, according to the mayor’s budget letter.

It includes over $230 million in efficiencies and reductions, including $80 million generated through civilian furloughs, according to a budget report that City Administrative Officer Rich Llewellyn provided to the City Council.

The budget document notes that economic forecasts offer bleak predictions for a sharp and extended economic downturn that could equal the impact of the Great Depression.

“The comparison to an event that occurred more than 90 years ago indicates that data from recent recessions may not be used to reliability predict the impact to future year receipts,” according to the budget document.

The “safer at home” order Garcetti issued March 19, which has so far been extended to May 15, has resulted in a steep drop in tax revenues.

Many retail stores are shut, and all entertainment venues. Traffic at Los Angeles World Airports has also fallen by 95%, an absence of traffic that will filter into lost hotel tax revenue in a city that usually draws millions of tourists.

As Angelenos continue to stay “safer at home,” there will be long-term reductions to the city’s economically sensitive revenues, according to the mayor’s budget letter.

Los Angeles County and City health officials have said the May 15 opening date is no “magic number,” and could be extended if the number of cases doesn’t start to decline.

COVID-19 data isn't tracked separately for the city, which represents 40% of Los Angeles County's 10 million residents. The county Department of Public Health, as of noon Wednesday, reported 722 COVID-19 deaths.

The city began the year in a solid financial position after receiving two bond upgrades at the onset of last year’s budget process.

In April 2019, Fitch Ratings and Kroll Bond Rating Agency both upgraded the city’s rating a notch. Kroll lifted the city’s general obligation rating to AA-plus and Fitch Ratings boosted the city to AA.

Los Angeles has AA ratings from S&P Global Ratings and an Aa2 rating from Moody’s Investors Service.

Fitch affirmed Los Angeles at AA with a stable outlook March 30.

“The AA issuer default rating reflects the city’s strong operating performance, resulting from some years of solid revenue growth largely outpacing managed expenditure growth,” Fitch analysts wrote. “The city also benefits from a moderate debt burden and the highest level of gap-closing capacity.”

Furloughs and freeze
To avoid the need to eliminate critical programs and services, the mayor wrote, the proposed budget calls “for continuing our citywide hiring freeze while shifting a majority of city employees to a schedule equivalent to working one fewer day every two weeks.”

The mayor confirmed during a Tuesday night press call that the 10% cut to city employee wages by furloughing them every other Friday is the same tactic the city used following the 2008 Great Recession.

The city is in a much better place fiscally than where it was following the 2008 recession after battling for years to close a $500 million structural budget deficit.

Garcetti, the council president then, said the council and former Mayor Antonio Villaraigosa’s negotiations with city employees during that era, which led to increased pension contributions, has helped.

David Crane, president of Govern for California, responded to Garcetti’s budget with an open letter saying that before the city furloughs workers providing needed city services, it should consider cutting its “unnecessary health insurance subsidy to all retired employees.”

The city provides that subsidy regardless of whether employees have access to Medicare, Medicaid, the Affordable Care Act, or a new state health insurance subsidy enacted into law last year, Crane wrote.

Known as other-post employment benefits, the subsidy costs the city more than $300 million a year, Crane wrote.

He opined that the city should emulate nearby Glendale, which enacted a reform that dramatically cut that city’s OPEB spending while protecting vulnerable retirees by making full use of Medicare and other programs and means-testing support provided by the city.

“The road back to where we were will be long and difficult,” said Los Angeles Mayor Eric Garcetti.

“Those all have to be negotiated by law,” Garcetti said during the Tuesday night media call. “Over 10 years ago, when I was City Council President, we doubled and quadrupled contributions. A dollar is a dollar. Sometimes people fixate on pensions, or OPEB. Anything we can do to reduce expenses is a dollar saved.”

He added that he had a message to the unions that “we are happy to sit down” and negotiate, but the city needs to get through these days first.

“If the federal government makes us whole, it would not only expand needed critical healthcare, but restore lost wages for city employees,” Garcetti said.

Funding coming out of the Trump administration for state and local governments in the initial coronavirus relief bills has been restricted to reimbursements for direct spending on the outbreak, and could not be used to backfill lost revenues.

Garcetti said he hoped that would change as federal lawmakers dicker over what to include in Phase 4 funding. House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Chuck Schumer, D-New York, introduced legislation this week aimed at helping local government. President Donald Trump later tweeted that “we need to help cities,” and to fill the hole, not just reimburse the costs of the crisis.

“Investing in our cities is investing in America,” Garcetti said. “These are investments in our well-being. These are people working on the frontline. We need to make sure Washington realizes that.”

If the federal government should create a program similar to the Build America Bonds or Tiger bonds of 2009, Llewellyn said the city will analyze any stimulus bond program that assists the city in reducing its cost to issue bonds.

“We participated in the three ARRA programs: Build American Bonds, Recovery Zone bonds, and Qualified Energy Conservation bonds programs,” Llewellyn said. “We applied BABs to the Wastewater System bond and General Obligation bond programs, and in the MICLA bond program, we issued Recovery Zone bonds and QECBs.”

These programs had interest subsidies from 35% to 70% that was revenue to offset interest costs, Llewellyn said.

"The interest subsidies were a big help in light of the recession,” he said.

“We are not opposed to these types of programs,” he said. “The [Money Market Mutual Fund Liquidity Facility] loan being offered today (by the Federal Reserve) may be a good option for us too, depending on the terms.”

The city issued $376.7 million in general obligation bonds in two sales in 2011 and $225.9 million in one sale in 2012, according to Refinitiv data. It issued $321.3 million in GOs in 2018, but no long-term debt in 2019, according to Refinitiv.

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