L.A.’s financial quagmire

Los Angeles is suddenly back in a deep and immediate financial crisis, and this time it’s not a result of recession, the mortgage meltdown or a persistent structural deficit. All those things pushed the city to the brink, but officials had begun dealing with the problem by making painful yet necessary program and job cuts. Now, just as the city was backing away from the edge, Mayor Antonio Villaraigosa and the Department of Water and Power are trying to see just how far over it the city can hang without falling. It’s an arrogant and irresponsible approach that leaves the city short of cash to pay its bills and compelled to imprudently empty its reserve fund, shut down city services or lay off more people.

At issue is the DWP’s breach of its commitment to transfer cash, as it does each year, from its account to the city’s general fund. As a municipally owned utility, it makes the transfers in lieu of the taxes that privately owned utilities must pay to the state or the dividends they must pay their investors. The DWP promised $220 million in the current fiscal year, and city leaders planned, budgeted and slashed accordingly. But the money comes in installments, and the utility had yet to pay the final $73 million. DWP officials now claim they never had any intention of making the final payment -- unless the City Council agreed to increase power rates.

The council did agree to raise rates -- enough to cover, for the coming three months, the rising cost of the coal and natural gas that the utility burns to produce electricity. But Villaraigosa wanted an even bigger increase so there would be money to pay for moving the city out of dirty coal and to secure more renewable power. That’s the right goal, and ratepayers will have to pay for it sooner or later. But the mayor’s demand came without a clear plan for how he wanted to invest the new money and without an integrated resources plan showing the roles of traditional and renewable energy in the DWP’s portfolio. The council wisely agreed to increase rates enough to cover coal and gas costs, but held off additional increases until the utility is able to show what ratepayers will get for their money.

The mayor balked, as did his appointees on the Board of Water and Power Commissioners, and they ended up with no increase and no prospect of getting one before July. Now, in a display of brinkmanship disguised as a supposed exercise of fiduciary duty, the DWP claims it can no longer afford to pay and will renege on its commitment; Villaraigosa is threatening to bring government to a halt and to drain a reserve fund that exists to pay for unforeseen contingencies -- not man-made crises like this one. No wonder credit agencies are expressing a loss of confidence in City Hall.