City Reliance on Profitable Departments Threatened

For much of his first two years in office, Los Angeles Mayor Richard Riordan managed to pull financial rabbits out of a hat at budget-writing time: He closed deficits without raising taxes and found money to add officers to the LAPD, give businesses a modest tax break and increase some other services.

He did it in part by tapping deeper into funds generated by the city’s three so-called “proprietary” departments--airports, harbor, and water and power. But this year, with the city facing an even tougher fiscal picture, the doors to those departments’ treasuries are proving hard to open.

The three money-generating departments have expressed willingness to pay the city more. But for various and complicated reasons, some serious obstacles have popped up to stymie the Riordan administration’s goal, supported by the City Council, of having these three semi-independent departments provide substantially more for city coffers.

To start with, the state is planning to sue the city--as early as Wednesday, should negotiations fail--if the city doesn’t hand over $20 million it already has collected from the Harbor Department.

At issue is how much the city is entitled to recoup from the Harbor Department for providing fire protection and other services. An outside analysis sought by the Riordan administration put the costs at more than double what the city had been charging the harbor, bumping the annual tab from $13.5 million to almost $34 million for each of the last two budget years. As a result, the city not only started charging more money, but also took millions more retroactively. The state Lands Commission, siding with port tenants who believe the funds should go toward badly needed facilities expansion, is disputing some of the calculations and demanding a $20-million repayment of the retroactive funds.

“We wish to advise you that, on March 20, 1996, we intend to file a complaint . . . against the city in the Superior Court of Los Angeles County,” said a March 15 letter from Atty. Gen. Dan Lungren. Last week, the city received a one-week extension before the state intends to file, until Wednesday. “We do not believe the public interest is well served when different governmental entities, all of which are mandated to serve the public, become engaged in litigation against each other.”

Controversies along similar lines have been raging over the Airport Department, while an obstacle of a different sort is forcing city budget writers to rethink their expectations--at least in the short run--with regard to the Department of Water and Power.

The obstacles hold serious implications for the city, making it harder to balance this fiscal year’s $3.9-billion budget, which is falling short by $55 million. (The City Council on Friday approved and sent to the mayor a $34.4-million package of deferred spending and funds transfers that closes some of the gap.) Riordan’s staff also must come up with ways to fill an even bigger hole--an estimated $220 million--in the budget that the mayor will propose to the council on April 19. By law, the mayor and the council must agree on a balanced revenue and spending program before the next fiscal year starts on July 1.

Even more important, however, is how questions about the three departments’ role in the city treasury will play out in the long run. The city has been patching its budget for the past few years with Band-Aids, such as the proceeds from the sale of airport land, that no long are unavailable. Even with the economy improving, Riordan will be sorely pressed to mend the city fiscally with an infusion from the three departments.

“The city has gotten by in the past with the use of a lot of one-time monies, and there will have to be some of that again this year, but we’re also spending a lot of time trying to address a structural deficit,” said Christopher O’Donnell, the mayor’s budget director.

His comments echo the findings of a 1994 task force assembled by Riordan to study the city’s overall fiscal health. Among the recommendations of the Mayor’s Special Advisory Committee on Fiscal Administration were methods to add to city revenues without raising taxes--with special emphasis on ways to get more from DWP, the airport and the harbor.

These were not new ideas. The city-owned utility for years had been routinely transferring up to 5% of its surplus funds to the city. Mayor Tom Bradley had initiated research aimed at getting more money from the booming Los Angeles International Airport, and in 1992, Councilwoman Ruth Galanter, whose district includes the airport, led a successful campaign to win city voter approval to raise landing fees there.

Over the vehement objections of the airline industry, the city won its fight to raise fees. But so far, it has been thwarted in its attempts to switch a penny of the increase to city coffers by federal regulations that limit the uses of airport fees. The U.S. Department of Transportation is trying to resolve a dispute between the airlines and the city over what the regulations allow the city to take.

The city has had to be content with funds generated by its recalculation of what it is owed for providing services to the airport, more than $20 million a year. Not unlike the case with the harbor, even those reimbursement amounts are under dispute.

The increases in the DWP transfers, which were roughly doubled for 1994-95, also are in doubt, albeit for different reasons. The giant department is gearing up for the loss of its monopoly, when deregulation will force it to compete with private utilities for commercial and industrial users. As a result, the DWP is undergoing downsizing and reorganization to improve efficiencies and looking for funds to make needed improvements in its water facilities.

Part of this year’s $55-million budget problem stemmed from the fact that the DWP is going to fall roughly $30 million short of the $136.7 million it had agreed to funnel into city coffers this year.

It’s not that the DWP doesn’t want to do its part, says the department’s finance chief, Phyllis Currie. But its obligations to cut costs and make improvements come first.

“Our ability to be competitive will have strong implications for all our residential-rate users” if the DWP cannot keep its commercial and industrial users from jumping ship, Currie said.

City Administrative Officer Keith Comrie said officials of all three semiautonomous departments have been cooperative and helpful as the city struggles with ways to enhance its revenues. So too have the heads of the city’s other departments in seeking ways to balance the coming budget and overhaul operations for better efficiencies.

But, given the size of the projected deficit and the uncertainties about how much can be expected from the three proprietary departments, the coming budget deliberations will not be easy.

“There are many options available” for keeping the city in the black, Comrie said. “But it’s almost impossible to overstate the seriousness of the problem.”

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Help From the Departments

For the last two budget years, Los Angeles city officials have tried to find ways to recoup more costs or increase fund transfers from three semi-independent departments. Although they have been successful to some degree, there are continuing obstacles and challenges to some of the city’s recent changes in calculating the amounts owed. The city has yet to determine how much it can count on from the three departments for the coming budget year.

The first column shows what the city could have expected from each department using its traditional formulas for calculations. The second shows what it budgeted under the new formulas and the third shows what it actually received or will receive.

1994-95

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Old Formula Budgeted Actual (millions) (millions) (millions) DWP transfer 99.1 197.1 179.4 Harbor reimbursements 13.5 33.5 33.6 Airports reimbursements 6.0 26.9 29.6 Total 118.6 257.5 242.6

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1995-96

*--*

Old Formula Budgeted Actual (millions) (millions) (millions) DWP transfer 112.7 136.7 95.4 Harbor reimbursements 13.5 33.5 33.3 Airports reimbursements 6.0 20.6 24.4 Total 132.2 190.8 153.1

*--*

Source: Los Angeles city administrative office