No Sweat Yet, but City Debt Is Nearing the Prudent Limit

Attitudes toward debt are often a very personal thing. People who grew up with the specter of the Depression generally have a very different attitude toward debt than a generation taught to use credit as “leverage.” Nevertheless, the reality is the same for everyone, and excessive debt can be an oppressive burden that severely limits future options. It is for this reason that a generally accepted principle for public debt by governmental entities is that it is used primarily for capital improvements such as new buildings, the purchase of land or other long-lasting investments.

Until the late 1980s, Los Angeles was cautious about incurring public debt; it ranked below the national average for borrowing by city governments. But even then, some of the city’s semiautonomous agencies--most notably the Department of Water and Power--had already funded major construction and development programs through debt financing. This financing was off the city’s books; the loans were backed by pledges of payment from ratepayers who, at the time the loans were issued, were captives of the city’s utility system.

In recent months, there has been some public attention to the debt burden facing the DWP, and it is now better understood that this debt hampers the agency’s ability to respond to the new competition in the electric utility industry. There is perhaps no better object lesson than this situation to demonstrate that borrowing by any of the city’s component parts affects the entire city.

Before the city finds itself with other situations equally challenging, it should adopt a comprehensive and restrictive debt policy. The city should require impact statements about proposed new borrowing to help the public and policymakers understand what it means to incur more debt.

From 1989 to 1995, the city more than doubled its net debt, yet still more borrowing would be necessary in the future. After years of deferred maintenance and postponing capital improvement programs, the city could wait no longer and the voters were willing in the late 1980s to pass a series of city bond proposals.

Another, less defensible reason for the growth in debt was the expansive use of a city-created borrowing device, the Municipal Improvement Corp. of Los Angeles, which issues bonds to pay for equipment that the city is obligated to repay out of the general fund. Roughly two-thirds of this new municipal debt was not voter approved. This money was primarily used for police vehicles and equipment, computers and other valid and needed purposes. In the past, the city had paid for these expenses out of its budget, rather than borrowing.

It can be argued that the recession that hit Los Angeles in the early 1990s gave the city no alternative but to defer current expenses to future budget years. The debt still needs to be repaid, which is one reason the city has a budget shortfall although the recession is over.

Because of my growing concern about the continued reliance on borrowing to finance new programs, I have for several years advocated the adoption of a formal debt policy by the city that would cover general fund debt, lease payments, overlapping debt with other government entities in Los Angeles such as the Los Angeles Unified School District, and revenue-bonded debt, such as the DWP’s.

I regret to report that while the general concept is widely accepted, no formal debt policy exists yet.

The generally accepted rule is that public debt payments should not exceed 10% of general fund revenues. Today, the city’s debt payments exceed 9.5%, which puts us very close to where we should stop borrowing until older debt is repaid. Depending on interest rates and how the debt is structured, we are probably within $400 million of new borrowing on top of the $1.8 billion in outstanding bonded indebtedness before we would reach that limit. Much more than $400 million is needed for capital improvements identified by city departments; it would cost more than $400 million for the proposed new police stations alone.

Los Angeles, fortunately, is not at a crisis point as it relates to debt, except for the DWP’s situation. But other debt-laden city entities, such as the Community Redevelopment Agency, have found their ability to perform their missions impaired by their heavy debts. Each act of borrowing needs to be examined separately, since the bond markets require that. But they also need to be looked at as part of a whole, since all of us who live here are, in one way or another, responsible for these obligations.