A Budget That Pays Today’s Bills With L.A.’s Future Growth

Mayor Richard Riordan’s $4-billion budget, which goes to the full City Council on Monday for public discussion, continues the dubious, possibly illegal practice of tapping into the funds of Los Angeles’ “crown jewels”--its proprietary airports, harbor, and water and power departments--to pay for more police and close a $240-million shortfall.

The Riordan administration’s strategy of milking the cash cows has netted nearly $400 million since 1994, and promises to yield another $170 million for 1996-97. This brainchild of Michael Keeley, the city’s former chief operating officer, is dangerously shortsighted and needs to be halted by the City Council. Despite such laudable projects as more police, a balanced budget and no new taxes, this financing strategy’s long-term price is an uncompetitive infrastructure unable to meet the challenges of a global and deregulated marketplace. Realizing these changed realities, the city’s airports, harbor, and water and power departments are striving to implement development and restructuring programs. Their plans, however, are being thwarted by City Hall’s money demands.

For a metropolitan area whose unemployment rate stubbornly remains 50% above the national average, the costs of hefty revenue diversions will be borne in the form of higher service charges and reduced growth potential. Consider Los Angeles International Airport, the world’s fifth-busiest airport and third-largest air-cargo facility.

LAX supports $43 billion in regional economic activity, representing 10% of the world’s 11th-largest economy. As the state’s only international airport south of the Bay Area, an overcrowded LAX desperately needs to expand to meet a doubling of Southern California passenger and air-cargo demand, mostly international, by the year 2015. The long-delayed multibillion-dollar LAX Master Plan attempts to address these needs. Airport expansion promises to create up to 400,000 new jobs in transportation, manufacturing, export services and tourism.

Yet, City Hall’s attempted revenue diversions threaten all this. The mayor’s controversial quadrupling of LAX aircraft-landing fees--the subject of a bitter legal dispute with the airlines and a planned first step in revenue diversion--makes the international airport cash-rich but uncompetitive. The fees are now twice as high as those at rival airports in San Francisco, Las Vegas, Phoenix and Seattle; LAX passenger charges are 50% higher. Thwarted by federal regulators from diverting the landing fees and passenger charges, the mayor now wants an additional $30 million--in aircraft fuel taxes or repayment of ancient loans--from the airport.

Riordan’s airport policies are beginning to take their toll. The airlines view LAX as expensive, overcrowded, adversarial and inconvenient. In 1995, the Bay Area--with three international airports, lower fees, limited revenue diversion and the Silicon Valley benefits of a semiconductor agreement with Japan--surpassed Los Angeles, for the first time ever, in global air-cargo value.

Things are worse at the Port of Los Angeles, the nation’s second-largest container facility (behind Long Beach) and site of a rancorous truckers’ strike. The port’s ambitious $2-billion expansion program is threatened by a 150% increase in city service charges. Based upon the Nexus study, which examined port contributions to the general fund, the port is being billed an additional $68 million for putative service underpayments dating back to 1977.

Hefty revenue transfers result in higher port-development costs by reducing pay-as-you-go financing and forcing greater reliance upon debt. If inflated reimbursements continue, the ocean carriers, fearing fee hikes, may divert discretionary cargo to rival West Coast ports. Already, the Port of Los Angeles is losing market share to the Port of Long Beach. In 1995, Long Beach’s container business grew by 11%, compared with Los Angeles’ 2%. More ominously, for the first two months of 1996, L.A.’s container shipments have been declining.

Most at risk is the Department of Water and Power, whose high bills anger Valleyites and help fuel the secession movement. Faced with the prospect of competing with investor-owned utilities like Southern California Edison under the California Public Utilities Commission’s new electricity-deregulation plan, DWP has been unable to pay down its massive debt or lower its high industrial and commercial rates.

Why? Look to City Hall’s revenue-diversion policies. For the past three years, every penny of DWP net income and cost savings has been transferred as a “surplus” to the city’s general fund. If an uncompetitive DWP is exposed to market forces, it could result in a “death spiral,” as business customers flee and residential users are forced to pay sharply higher power bills.

Thankfully, these misguided City Hall fiscal policies have attracted the attention of federal and state regulators. In response to Riordan’s budget schemes, the Federal Aviation Administration has issued stringent new guidelines concerning airport-revenue diversion. If the city continues to siphon LAX revenue, Congress threatens to reduce regional transportation funding, which could affect job-creating projects like the Alameda Corridor. Also, the State Lands Commission has sued Los Angeles on the ground the city violated the State Tidelands Trust when it retroactively billed the port for past city services.

Riordan defends his policies by contending that citizens deserve a fair return on their investment. Fair enough. But how should these returns be used? The mayor needs to understand, as have previous mayors, that the city’s crown jewels are citizen-owned public enterprises whose bottom line is creating jobs and growth, not budget balancers. Returns need to be plowed back into public businesses to ensure future growth.

As the City Council debates next year’s budget, it needs to treat the city’s crown jewels as vital engines of economic development, not merely as convenient ATM machines to pay for more police.*