L.A. expects big budget shortfall

Los Angeles Mayor Antonio Villaraigosa on Friday warned that the city could face a $400-million budget shortfall this year, predicting a severe drop in tax revenue because of the nationwide economic downturn. As a result, he told city department heads to plan for cutting jobs and services.

The turmoil on Wall Street and the state government’s dire financial situation are expected to add more misery to what already was expected to be a tough financial year for Los Angeles, Villaraigosa said. The city is being socked by an 8.2% unemployment rate, 2 percentage points above the national average, and a worsening home foreclosure crisis that is curtailing revenue from property taxes and home sales.

“This is an extraordinary time, which requires extraordinary action by city leaders in order to protect taxpayer dollars and deliver the critical services to our residents,” Villaraigosa said in a letter to department managers Friday.

In the letter, an annual missive that kicks off the planning process for the city’s upcoming budget year -- in this case, 2009-10, which starts in July -- the mayor told department heads to submit two proposals: one that freezes spending at current-year levels and a second that includes a 9% across-the-board cut for agencies with budgets that exceed $20 million and a 6% cut for smaller agencies.

Interim City Administrative Officer Raymond P. Ciranna, the city’s lead budget analyst, had predicted a budget gap of $282 million this year, a more optimistic forecast that included some expected growth in sales and business tax revenue.

However, Villaraigosa said the “economic upheaval on Wall Street” may dampen those potential revenues as well. He expressed concern that the state, which continues to face a severe budget crunch, may raid funds devoted to local governments and programs to close its own shortfall.

The city also expects to take a major financial hit because of the steep rise in gasoline prices; the $42.3 million budgeted this year for gassing up city cars and trucks was based on fuel being $2.89 a gallon, far below current prices. Labor contracts for city police officers and firefighters also expire in June, and both groups will probably negotiate continued cost-of-living increases and other benefits.

In his letter, Villaraigosa said he would work with the city’s labor unions to explore ways to cut costs and increase revenue through “workforce reductions and other service- delivery efficiencies.”

City Council President Eric Garcetti said the tight finances would force the city to focus on its core missions, especially public safety and transportation. Some of the upcoming ballot measures in November may provide additional funding for anti-gang efforts and transit, but those will be the exceptions.

“This is not going to be a year for new programs,” Garcetti said. “We’re going to have to squeeze more efficiency out of what we have.”

The forecast comes after the mayor and City Council addressed a $405-million budget shortfall in May, when council members unanimously raised fees by at least $98 million, forcing the public to pay more for trash removal, parking and other city services.

The city also tapped money that had been set aside to pay for 750 employee positions -- although most of those jobs were vacant, and only one city employee was ultimately laid off. All other city workers whose positions were eliminated were given other city jobs, according to city personnel officials.

Unless the regional economy rebounds, severe budget shortfalls will be the norm in the years ahead. The city administrative officer predicts a budget gap of $353 million in 2010-11, $313 million in 2011-12 and $266 million in 2012-13.

Edward E. Leamer, director of the UCLA Anderson Forecast, which monitors the regional economy, said a “mild recession” is expected, and it’s wise for cities to prepare.

“We all need to recognize that there’s some potential for troubled times ahead,” Leamer said. “There’s very little reason to be optimistic. So it seems to me that the mayor is doing a good job asking them to be prepared.”

Still, he criticized President Bush and Treasury Secretary Henry M. Paulson for using “scare tactics” about a potential financial meltdown to push Congress to approve the $700-billion financial rescue package this week.

Unlike the state, Los Angeles is not facing any immediate problems paying its day-to-day bills.

On Thursday, Gov. Arnold Schwarzenegger warned Paulson that California might need an emergency loan of as much as $7 billion from the federal government. Because of the global credit crunch, the state has been unable to secure routine short-term private loans from lenders it typically relies on to remain solvent.

Los Angeles, which has a strong credit rating, secured its short-term financing in July.

“That’s one of the advantages of passing a budget on time,” said Janelle Erickson, deputy mayor for communications. The governor and Legislature, by comparison, were a record 85 days late in approving the state budget.

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phil.willon@latimes.com