Fiscal Move to Earn L.A. $7.5 Million

For the first time in a decade, Los Angeles city officials are borrowing against future receipts and expecting to make a profit on the $310 million in Tax and Revenue Anticipation Notes the City Council authorized Tuesday.

The council’s unanimous action to go ahead with the notes sale stems from a chance to get a break on police and fire pension fund contributions.

By using the money from the notes to pay its yearly contribution to the pension fund in a lump sum next month, instead of in two payments, the city will save $14 million on the amount it must contribute. The pension fund will make up the difference through the extra interest it will earn by having the money earlier.

The notes sales program is expected to cost around $6.5 million, with the $7.5-million profit helping to balance the $4-billion city budget for the fiscal year starting Monday.

The notes will be repaid with property taxes by the end of the 1996-97 fiscal year.

City Administrative Officer Keith Comrie said he added the pension “prepayment” device to the city’s list of revenue options for the first time this year based on a recommendation from city financial advisors.

“It will be an ongoing savings from year to year,” Comrie said, adding that the mechanism could be applied to the civilian employees’ pension fund as well.

Chris O’Donnell, budget director for Mayor Richard Riordan, said

the new program of borrowing to save fits right in with “the administration’s constantly looking for new ways” to pay for city services without raising taxes.

The program represents just one of several savings the city found in its pension systems this year, O’Donnell said. The biggest help came from the $34 million it saved in getting permission to spread unfunded liability payments to the civilian fund, the Public Employees Retirement System, over 15 years instead of nine, he added.

Moody’s, one of the two major government finance rating agencies, deemed the program launched Tuesday a good risk for investors despite some “uncertainties” in some of the revenues the city has penciled into its budget for the fiscal year.

Moody’s analyst Ken Kurtz cited the city’s “well developed” cash management systems, its relatively conservative use of borrowing to pay for goods and services, the high “credit quality” of its treasurer’s investments of city money and a securities lending program that “appears well managed.” Those factors outweigh the city’s main revenue downsides: still sliding property tax revenues and the uncertain outcome of litigation over airport and harbor contributions to the city’s general fund, especially for short-term borrowing, Kurtz said.

What makes the city’s situation somewhat unusual is its use of the notes to reduce ongoing costs, Kurtz said. Revenue anticipation notes are commonly used by school districts and counties to tide them over until property taxes and other revenues come in. A number of cities throughout California have also used the notes from time to time, sometimes including money to prepay pension funds in the offerings, according to Kurtz, but he cannot recall a situation in which a city turned to notes simply to make cash-saving early payments to pension funds.

The city’s credit rating for short-term borrowing is MIG 1, the highest of four possible rating categories.

“Unlike most municipalities, Los Angeles hasn’t done this ‘borrowed money through notes’ in the last 10 years,” Kurtz said. “That’s an indication of just how strong the city’s cash flow situation is.”