Mayor Warns of Major Budget Gap in 1996-97 : Finances: A deficit of up to $250 million is projected. Riordan tells city officials they should continue belt-tightening.

Just three months into the fiscal year, Los Angeles officials are projecting a gap in next year’s city budget of $220 million to $250 million, posing what the mayor described as the city’s toughest financial challenge in years.

Blaming the region’s still-sluggish economy for much of the budget crunch, Mayor Richard Riordan, in a five-page letter to most department heads last week, outlined a rigorous regimen for putting together a balanced spending plan for 1996-97.

Last spring, city officials were able to head off a $170-million deficit in the current year’s budget in part with transfers from the city’s three independent departments--Water and Power, Airports and Harbor. Some one-time infusions of cash, including a $58-million reimbursement for property condemned for the Century Freeway, also helped the mayor and City Council craft a $3.9-billion budget that added 600 more police officers without raising taxes.

This time around, however, the budget-writers must factor in $60 million to cover pay raises, while other expenses, including elections costs and loan payments, are expected to require another $60 million in spending.

And Michael Keeley, the mayor’s chief operating officer, said disputes over future General Fund contributions from the departments of Water and Power, Airports and Harbor lend another element of uncertainty.

Riordan in his Sept. 21 letter directed department heads to continue the belt-tightening measures already in place, including delaying nonessential purchases and not filling most job vacancies.

“Closing next year’s budget gap is the most difficult fiscal challenge our city has had to face in many years,” Riordan said in the letter, which also was distributed to council members.

The ominous news came as Los Angeles County was trying to avert collapse of its massive public health system and to resolve its own fiscal crisis. While county officials have sought--so far unsuccessfully--to raise taxes, Riordan said he will not do that.

“New taxes are not an option,” Riordan said, despite continuing declines in property tax revenues and the end of earthquake recovery aid and other one-time sources of cash.

Adding to the challenge is Riordan’s determination to find ways to pay for the next phase of his plan to beef up the Police Department and his drive to further reduce business taxes to spur the economy.

Riordan’s solution? Squeeze still more efficiencies out of City Hall.

And this year there’s a new carrot--the ability to give department heads raises based on performance. Under a recently approved merit pay plan, department heads will be compensated based on performance, including whether they met agreed-upon goals during the current fiscal year. For the Riordan Administration, it also means how well each manager does in meeting budget objectives.

“There is no question that a manager’s performance goals are linked to the department’s budget,” Riordan wrote. “I cannot overemphasize the importance of operational improvement goals as a threshold requirement for merit pay increases.”

Before department heads submit their initial budget requests, due Dec. 1, they will receive a specific list of issues they are to address in developing their proposals, Riordan said. Among the general requirements cited in the letter is an edict that departments “must contribute financial support to the General Fund.”

Riordan said he is “interested in considering innovative revenue-generating proposals which do not require a tax increase.” He also wants managers to consider whether their fees are sufficient and comparable to those charged by other providers.

Additionally, the City Administrative Office will evaluate how well each department did in meeting the goals set for this fiscal year. As part of the budget-writing process last spring, managers were asked for the first time to come up with goals, subject to approval by the mayor and council. The technique was seen as part of businessman-lawyer Riordan’s attempts to make the city run more like a successful private enterprise.