Much at Stake in Bill to Kill ‘Hidden Tax’ : Impact of eliminating utility’s ‘surplus’ transfer to L.A. needs to be scrutinized in Senate

An article on today’s Valley commentary page explores a thorny policy issue with major implications for the city budget. A bill to eliminate a “hidden tax,” despite some obvious merits, could reduce services by millions of dollars. It’s rapidly moving through the state Legislature.

The “tax” is the longstanding practice in which the L.A. Department of Water and Power annually turns 5% of its revenue over to the city general fund. Officially, it is called a “surplus,” and it exceeded $100 million this year.

Assemblyman Richard Katz (D-Sylmar) calls the transfer a concealed tax. His bill to stop it statewide has passed the Assembly.

As our commentary piece points out, the money represents a tiny fraction of the city’s budget. But it is huge when translated into services. It equals the combined library and parks budgets and it would pay for 1,400 police officers.

There are valid arguments for Katz’s bill. Yes, it is more honest for city taxes to be paid openly. Yes, it is a sham to refer to this money as surplus DWP revenue. Yes, the DWP prepares its annual budget, then simply adds the 5% to it.

The historic justification--that the payments are in lieu of property and business taxes paid by private utilities--is also dubious. Should not such savings under municipal ownership be passed on as lower rates?

DWP operations--and customers--may need protection. Who can say the 5% transfer won’t be increased through higher rates or by squeezing DWP spending to the damage point?

But there are also sound arguments against the bill. The city, for example, says spending priorities are a local matter and that Sacramento should not interfere.

More important, perhaps, the revenue loss would come at a terrible time for California cities. The L.A. budget adopted last month averted a $170-million shortfall only through staff reductions and onetime property sales. Services are strained, and the police expansion sought by Mayor Richard Riordan is urgently needed.

Two Assembly amendments could ease or prevent the loss. The bill’s effect would be phased over five years. And, if they chose, city officials could let L.A. voters decide whether to let the transfers continue.

Given the state of the city’s financial affairs, this bill is of immense importance. So why aren’t we hearing more from our local officials about its impacts? This legislation needs the closest scrutiny in the Senate. Too much is at stake to let it pass without a full, critical airing.