Airport Revenue Dispute May Imperil Subway Funds

Sharply escalating their pressure on Los Angeles transit administrators, U.S. officials on Thursday said they have determined that the city, in defiance of Congress, continued to improperly divert funds from its airports to its municipal coffers.

That jeopardizes $70 million in critically needed subway construction money, raising the prospect of significant delays in completion of the Red Line route being built under the Santa Monica Mountains to connect downtown to North Hollywood. The city-federal clash also casts another cloud over the proposed rail line across the San Fernando Valley between North Hollywood and Woodland Hills.

Joyce N. Fleischman, acting inspector general of the U.S. Department of Transportation, said in an interview that her audit of the airports has found that the city had made “prohibited diversions” from the airport to the city’s general fund since September.

“These funds should not have been removed from the airport,” Fleischman said. “They are prohibited. They are not allowed. The city should not have taken them.”

At issue is a relatively small amount, about $1.1 million, that was shifted after Congress--troubled by reports that the city had already improperly diverted millions--put the city on notice that such diversions would no longer be tolerated. In a provision of last year’s transportation appropriation bill, Congress established a severe financial penalty for the Metropolitan Transportation Authority, should any more money be taken from the airports.

That provision--which now has MTA officials running scared--says that the agency cannot receive this year’s $70-million check for federal subway funding if the city is found to have continued the diversion practice.

Fleischman’s conclusions--contained in a nine-page memo dated March 7 and amplified in the interview Thursday--leave the MTA uncertain whether it will see any federal money come its way this year. The $70 million has been frozen while federal authorities complete their audit. If the money is not released, it could mean significant delays in construction of the North Hollywood subway as well as in a planned route to the edge of Boyle Heights.

City officials were quick to characterize Fleischman’s comment as part of the war of nerves the federal agency has been waging with Los Angeles over the diversion of funds from the airport.

“I find it peculiar that this finding by the inspector general has not been communicated to any official of this city,” said one top Los Angeles official. “I find it even more peculiar that this was said on a day when city officials were cooperating with the federal government in an ongoing audit of the airport’s operation.”

The official, who has been part of the negotiations over the airport diversion--but who asked not to be identified--said federal officials’ comments were designed to “turn up the heat” on the city and force it into capitulating on the point. This, the source said, would solve the Department of Transportation’s ongoing problems with the powerful airline lobby, which has bitterly opposed any effort to spend airport revenues anywhere but in the airport.

For his part, Mayor Richard Riordan, who has championed such revenue transfers, sought to downplay the significance of Fleischman’s finding, saying that only a preliminary determination has been reached so far. “There is a dispute over three minor items,” Riordan said. “We think they can be worked out, but we’ll find out. It’s a fairly minor amount.”

But, in a sign that the mayor was prepared to back down if he must, Riordan added: “We’ll work out something to put the money back in and then argue about the issue after if that’s necessary. You’re not talking about much. And then we’ll argue about it in due process.”

Despite Riordan’s assurances, other MTA officials were in a near-panic; they predicted that the federal funding cutoff would delay the ongoing construction of the transit agency’s Red Line subway to North Hollywood and cost the agency millions of dollars by forcing it to borrow money to keep construction going. It also could slow down plans for the construction of the subway into East Los Angeles and another leg of the troubled project into Mid-City Los Angeles, MTA officials predicted.

Acting MTA Chief Executive Officer Linda Bohlinger said the MTA may have to borrow money to keep the subway project going but that it would cost as much as $3 million a year in interest.

As word of the threatened cutoff started to circulate this week, MTA Board Chairman Larry Zarian said he is especially worried because his agency already has budgeted and spent at least some of the $70 million, and because he and his fellow board members can’t do much of anything to free up the federal funds because of the city of Los Angeles’ involvement.

“I am incensed. . . . I feel helpless, the board feels helpless. This is the first time in my political life that I have had to get involved in an issue as serious as this is for the MTA where I cannot make a move to be part of the solution, and the board can’t either.”

County Supervisor Yvonne Brathwaite Burke blamed Riordan, the most powerful MTA board member, and some federal officials for dragging the transit agency--and the county’s 87 other cities--into a conflict they have nothing to do with.

“If there is a problem with the city and the [Federal Transit Administration], why should they hold the MTA hostage?” asked Burke, who chairs the MTA’s planning and program committee. “This needs to be stopped. . . . This will hold up everything.”

The latest developments follow a decision Monday by the Federal Aviation Administration to demand the return of almost $31 million in money the Riordan administration had transferred from the airport to the city’s general revenue fund prior to Congress’ imposition of harsh financial consequences.

But the city kept on diverting money even after Congress cracked down, according to Fleischman’s memo. “We identified three areas where prohibited airport revenue diversions to the city occurred after enactment of the Act,” the inspector general wrote. Those diversions involved the city keeping airport traffic and parking citation revenue, imposing excessive service charges and using airport property rent-free.

Riordan has long sought to transfer as much money as possible from the city’s airports to its general fund in order to bolster police and other services. He said the city controller and the county grand jury approve of such transfers, but the airline industry has been fiercely opposed to the practice.

Fleischman’s comments come as FAA chief Gordon Linton has been escalating his demands for radical improvements at the troubled transit agency.

On Thursday, Linton signaled that the federal government may be unwilling to pay for any expansion of the subway until the Red Line is finished.

“We’re not interested in discussing future extensions” with the MTA, Linton said. “Demonstrate you can complete what you have on your plate before you ask for dessert. Finish the dinner.”

The $5.9-billion Red Line project would take the subway through the Santa Monica mountains to North Hollywood, from Union Station east to the edge of Boyle Heights and to the Mid-City area. Rival factions are also seeking long-term commitments of federal funds to extend the subway across the San Fernando Valley, deep into the Eastside and farther out toward the Westside.

But Linton said the federal transit agency is concerned about how the MTA can afford to pay for and complete the Red Line subway, an extension of the Blue Line to Pasadena and abide by a federal consent decree to dramatically improve bus service.

And, he said, the federal agency will respond harshly to the MTA’s recent request for more time in completing the Red Line. “It’s going to be some tough medicine,” Linton said, adding that the agency continues to “have concerns about the plan.”

“I still see some major gaps” in the MTA’s blueprint for the subway, he said.

The so-called “recovery plan” submitted by the MTA in mid-January is intended to get the Red Line back on schedule and within budget.

Linton made similar comments Wednesday. At a hearing of the House Appropriations Subcommittee on Transportation, the transit chief told lawmakers he was concerned about the very public disagreement among state and local officials on such substantive issues as whether the subway should even be built and regarding the safety of the project.

Contributing to this story were Times staff writers Jean Merl in Los Angeles and Faye Fiore in Washington.