LOS ANGELES — There were few surprises in Los Angeles’ primary election Tuesday night.
Voters rejected a proposed sales tax increase and sent City Controller Wendy Greuel and City Councilman Eric Garcetti, both Democrats, into a May 21 runoff for the mayor’s office.
Greuel and Garcetti got 32.9% and 29.2% of the vote, respectively, falling well short of the 50% majority needed to win outright in the primaries, conducted with a non-partisan structure. Councilwoman Jan Perry and radio host Kevin James were eliminated.
Measure A, a half-cent sales tax that would have nearly closed the $216 million budget gap for fiscal 2012-13, failed with only 45% of the vote, meaning the new mayor will start with a deficit.
The sales tax was projected to bring in $215 million annually, just $1 million shy of this year’s projected deficit.
Had the sales tax passed it would have taken a lot of steam out of discussions about the city budget, because it would have nearly closed this year’s budget gap, said Raphael Sonenshein, executive director of the Pat Brown Institute for Public Affairs at California State University, Los Angeles.
“People are concerned, because it would not have made the long term budget problems, like the pension liability go away,” Sonenshein said.
Passage may have taken away the sense of urgency needed to solve the city’s budget problems, particularly with most city employee contracts expiring in mid-2014, he said.
The defeat of the sales tax could be a bellwether in California, Naomi Richman, a managing director at Moody’s Investors Service, said in an email.
“Los Angeles voters have for years been willing to vote for higher local taxes and their rejection may indicate that voters in the state may be unwilling to raise local taxes further, given the statewide increases in sales and income taxes under Proposition 30,” Richman said.
That’s a credit negative for California local governments as they will likely need to manage their finances and address spending pressures within their current tax structures, she said.
Moody’s upgraded Los Angeles’ general obligation bond rating to Aa2 from Aa3 on January 23 while affirming lower ratings on the city’s general fund-backed bonds, and assigning all of the city’s bonds a stable outlook.
Moody’s analysts had placed the city’s GO rating on review for upgrade on Oct. 9, 2012 as part of their review of 56 California credits. At the time the agency also downgraded the city’s $70 million in judgment obligation bonds to A2 from A1. The rating agency affirmed at A2 the city’s unsecured, general fund-backed obligation bonds, lease revenue bonds and certificates of participation. The city’s equipment lease-backed LRBs and COPs were affirmed at A3.
Moody’s said last year it plans to draw more of a distinction between local California GO debt, which is backed by voter-approved property taxes, and obligations that are paid from general fund revenues.
Despite significant general fund budget cuts in recent years, Los Angeles continues to have a substantial structural deficit, the report said.
Sonenshein pointed out, however, that the city has already made some difficult decisions including cutting an estimated 5,000 city positions over the past several years.
“I don’t think anyone thinks the budget crisis is as bad as it was — things have improved,” Sonenshein said.
Despite the improvements, city finances will remain the key issue for whoever is elected mayor, he said, as well as for a city council that will see substantial turnover.
In the run-off, voters will not only select a new mayor to replace termed-out Mayor Antonio Villaraigosa, but three new council members. Five council candidates — Bob Blumenfeld, Paul Koretz, Felipe Fuentes, Mike Bonin, and Joe Buscaino — garnered enough votes to win outright in the primary.
Because Los Angeles is a double-A credit, Daniel Genter, president and chief executive officer of Los Angeles-based RND Genter Capital Management, said he doesn’t think failure of the sales tax will have that much of an impact on investor interest in the city’s bonds.
“We don’t think it will have that much impact on pricing,” Genter said. “Demand is very high for California paper.”
In addition to the boost from Moody’s ratings bump of the city’s GO bonds in January, Genter said that passage of Proposition 30, the statewide increase in sales tax and in income taxes on the wealthy is helping the city, as well as the state’s bonds.
“If you look at who the two leading candidates for mayor are, I think it will be status quo,” Genter said. “No candidate is really in a position to do anything revolutionary.”