Mayor Eric Garcetti was Mr. Optimism last week. In both his State of the City speech and the release of his $9.2-billion budget, the mayor portrayed Los Angeles as a city being transformed by the big, ambitious projects it has pursued.
He’s got good reason to be upbeat. The economy has been humming along, bringing more revenue to city coffers, and now L.A. is about to receive a monumental infusion of public dollars. In the last year voters in Los Angeles city and county, as well as lawmakers in L.A. and Sacramento, have chosen to significantly increase taxes and fees to pay for vital public services — from housing the homeless and building more public transit to fixing the worst pot-holed streets and creating more parks.
But there is a cloud hanging over City Hall that cannot be ignored. Even with the boost in revenue, the city is still stuck with an ongoing $200-million-plus structural deficit. This is the annual gap between what the city takes in through taxes and fees and what it pays out, mostly in salaries. The size of the shortfall rises or falls, depending on the economy and city spending priorities. Either way, there’s a gap that has to be closed each year with all kinds of budget gymnastics, such as leaving vacancies unfilled, postponing repairs and dipping into the city’s reserve fund.
The annual shortfall leaves the city unable to make wise long-term investments, such as modernizing aging public facilities, replacing ancient computer systems or reducing the city’s business unfriendly gross receipts tax.
In a memo to city staff in 2013, Garcetti said that over the next four years, the city would need to “eliminate the structural deficit and strengthen our financial foundation to weather adversity.” Four years later the structural deficit is nearly as large as it was then due to actions taken before and after his tenure began, including employee raises, pension obligations and legal settlements that committed the city to spending more on sidewalks and housing.
Why does it matter? Because the city is facing serious financial headwinds. In addition to threatening to withhold federal dollars from so-called sanctuary cities, President Trump has proposed slashing grants that the city relies on to provide homeless services, day laborer centers and meals on wheels for elderly residents. If the federal money is cut, the City Council and mayor may feel obligated to continue those services with millions of city dollars.
There are financial pressures close to home, too. Several lawsuits have called the annual transfer of Department of Water and Power revenue to the city budget an illegal tax on ratepayers. In response to the suits, Garcetti’s budget slashed the transfer payment by $49 million this coming year, which is about how much the city spends on the Planning Department.
L.A. already spends $1.1 billion, or about 20% of its general fund budget, on pensions and healthcare benefits for retired employees. This summer, the city’s pension systems are expected to recalculate their too-rosy estimates of how much they will earn in the years ahead — meaning the city may have to spend, at minimum, an additional $90 million a year to shore up its pension funds to offset the lower expected earnings. And there will soon be another round of labor negotiations, which could hike city payroll and pension costs. These are big expenses. If another recession happens — and there’s always another downturn on the horizon — Los Angeles could be plunged back into the bad old days of dramatic service cuts and layoffs.
There are new sources of revenue that could help. Garcetti’s budget anticipates raising more money from hotel taxes charged to Airbnb and other short-term rental operations, as well as $12 million from a yet-to-be-approved billboard fee. The city is also expected to generate lots of new tax revenue in 2018 when recreational pot shops are allowed to open in California; City Controller Ron Galperin estimated the first-year tax revenue could top $50 million. But these can be controversial businesses and city leaders will have to weigh community opposition to flashy digital billboards, pot shops and Airbnb rentals against the need for revenue to fund basic city services.
Los Angeles cannot be a progressive, transformed city if it can’t pay the bills. The mayor and City Council need to get real on the city’s finances.