Despite dire budget warnings, Los Angeles’ payroll continued to grow

Threats this week by Los Angeles’ powerful municipal utility to withhold $73 million from the treasury helped reveal a city that has become increasingly dependent on indirect and onetime sources of revenue to pay its bills.

Combined with the worst economic decline since the Depression, those dwindling sources of cash have forced city officials to confront a problem they have long tried to ignore -- a steady growth of the city payroll for the last decade.

The city’s core 35,000-member workforce increased by at least 3,000 between 2000 and 2009. During the same time, Los Angeles’ yearly pension contributions more than tripled to $723 million, fueled by investment losses but also by the larger payroll.

When the effects of the failing economy surfaced in late 2007, Mayor Antonio Villaraigosa and the City Council approved significant raises for union workers and pressed ahead with a police force expansion even as they talked openly of a need for cutbacks and threatened layoffs.

“It’s a head-scratcher,” said Jack Kyser, a Los Angeles County Economic Development Corp. economist. “If you know that tough times are coming, you should be ultra-cautious. You’ve had ongoing warnings about the magnitude of the downturn and they haven’t been listening.”

Now, the city’s $4.4-billion general fund -- which pays for police, libraries, parks and other city services -- has a $212-million budget deficit that could grow to $1 billion in four years without drastic cuts. Publicly, city officials have blamed the steep drop in tax revenue, but concede that the payroll increases have played a major role as well.

When he took office in 2005, Villaraigosa promised to erase the city’s long-recognized “structural deficit” -- the gap between revenue and spending. He weeded out budget gimmicks used for years, yet, according to the city’s chief legislative analyst, in his first budget the mayor proposed the creation of 805 positions.

Villaraigosa now acknowledges that his efforts were undermined not only by rapidly declining tax revenues but by salary increases and his vow to expand the LAPD.

“It’s a crisis of spending and it’s also a revenue crisis. It’s a crisis of both,” Villaraigosa said. “I take responsibility. It predates my administration, but there’s no question that it also occurred during my administration.”

City Administrative Officer Miguel Santana said officials for years have relied on finding one-time pots of money to cover up to $200-million annual budget gaps created by a growing workforce, expanded services and generous pay packages.

“If you look in the context of our $4-billion budget, this year’s drop in revenue is not unsurmountable -- $184 million,” Santana, Los Angeles’ top financial analyst, said in a March interview. “But it is significant if you’re living by the skin of your teeth.”

To help cover the city’s bills, elected leaders have reached beyond staple tax revenue collections; liquidating city property, increasing parking meter and trash fees, and diverting revenue from the Department of Water and Power.

Since 1992, the DWP has provided the city budget $2.7 billion collected from electric bills.

On Thursday, Controller Wendy Greuel warned that the city could run out of money by June 30 if the DWP withheld a promised $73-million payment to the general fund. Acting DWP General Manager Raman Raj favored rejecting the transfer after the council turned down a proposed increase in electric bills, which Raj said put the DWP’s “financial outlook in significant jeopardy.”

Now Villaraigosa and the council have few options, with Los Angeles voters in no mood to approve a tax increase and with few other sources of revenue left.

The mayor and council already have authorized the elimination of up to 4,000 city jobs, on top of the 2,400 workers who were allowed to retire early.

Former City Controller Laura Chick said officials waited until things were so bad that they had no choice but to act. “That’s an insane way of governing. We don’t have political leadership today that is strong, courageous and thoughtful enough to look into the future.”

What makes things worse is that the mayor and council members had been put on notice, Chick said.

As city controller, she warned in 2007 that the reserve fund was depleted. That same year, then-City Administrative Officer Karen Sisson projected a $215-million shortfall.

Council member Bernard C. Parks urged colleagues to prepare layoff lists because of a potential “drastic reduction” in revenues. Despite those warnings, the mayor and council signed off on raises for the Coalition of L.A. City Unions, which represents 22,000 civilian employees.

The projected cost of the labor contracts, which have been renegotiated as a result of the crisis, was $255 million over five years. One union hailed its agreement as the “best contract in 40 years.”

Villaraigosa said later that he never would have supported the contracts had he known that a fiscal meltdown was on the horizon. At the time, however, it appeared affordable: UCLA economic experts were predicting a 4% increase in revenue.

“They told us it was going to be bright and rosy,” the mayor said. Villaraigosa added that the 2007 contracts included a provision to bring the unions back to the table in the event of a fiscal crisis.

Still, those concessions took more than a year to negotiate. That delay was, in part, because the mayor failed to promptly replace Sisson, the city’s lead labor negotiator, after she resigned in July 2008. At the time, Villaraigosa also was campaigning for reelection and weighing a run for governor.

The mayor said he was not distracted. His first choice to replace Sisson withdrew amid questions from council members about his salary demands and ties to lobbying firms.

Union leaders said, however, that the delay froze discussions over cuts to the workforce, preventing the city from saving millions of dollars much sooner.

“In 2007, we recognized, together with Karen Sisson, that there was a serious problem,” said Victor Gordo, an attorney for the union coalition. The unions started lobbying in 2007 for early retirement, saying it could take thousands of workers off the books. Villaraigosa said labor leaders refused to consider increasing workers’ pension contributions to cover the costs.

“The unions weren’t ready to negotiate,” he said. “Yeah, they were talking about it, but they didn’t want to pay for it.”

A deal was not reached until six months ago. In return, union coalition members were exempted from layoffs and furloughs until July 1. That provision severely limited the city’s ability to balance the books when tax revenues recently fell more sharply than expected.

Now the mayor and council plan to tap the city’s reserve fund, which has triggered a downgrade of the city’s credit rating on Wall Street.

Parks, who heads the council’s budget committee, said that even amid the current crisis, it has been difficult to persuade city leaders to find the political will to make cuts.

“Every time there’s a discussion about reducing the workforce, like there is now, we have elected officials looking for money to make it go away,” he said.