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California

L.A.'s next mayor will face stark budget problems

Brad Smith used to consider himself a Los Angeles booster. But lately, the 48-year-old grows melancholy when he drives around the San Fernando Valley where he grew up.

The parks look worn-out. The sidewalks are broken. Street trees go untended. And don’t even get him started on the sorry state of the Granada Hills pool.

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“Every place I used to go as a kid, it’s tired, it’s old, it’s beaten up,” said Smith, a project manager at an engineering firm who made a losing run for City Council two years ago out of frustration. “Other cities manage to maintain older facilities. I’m not really certain why Los Angeles can’t do a better job.”

As Los Angeles voters head to the polls to pick a successor to Mayor Antonio Villaraigosa, Smith’s question, or some version of it, is being asked over and over again in neighborhoods across the city.

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Here’s the short answer: To stay afloat financially, the city cut hundreds of millions of dollars out of everyday services and ongoing maintenance.

But the deeper causes are more complex, and include costly, ill-timed spending commitments at City Hall and a failure to adjust to the region’s weakening economic foundation.

A Times review of the city’s finances found:

• Just before the recession hit, city leaders agreed to add hundreds of police officers to the payroll and give much of the city’s civilian workforce 25% raises over five years. The twin decisions — supported by mayoral candidates Eric Garcetti, Jan Perry and Wendy Greuel — added major stress to the budget as the downturn began.

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• Over the next five years, officials slashed 5,300 positions, or nearly 15% of the city workforce, and scaled back services ranging from sidewalk repairs to 911 rescue units. Despite the cuts and additional concessions by employee unions, the city’s salary costs remain the same as when the economic crisis began: $2.7 billion a year.

• The city faces even more service cuts if it fails to achieve what critics say are optimistic predictions of pension investment returns in coming years.

The next mayor will have to confront how and whether to restore services and keep police staffing at a historic high. Paying for it all will require either new revenues, or new concessions from city employees, or new approaches to running vital city programs.

The top mayoral candidates tend to sidestep specifics on these questions, describing “growing the economy” as their primary solution. Other city leaders are hoping for passage a half-cent sales tax increase. That tax is warranted after so many tough decisions, said Miguel Santana, the top budget official at City Hall.

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“We can see the light at the end of the tunnel,” he said.

Community activists say the next mayor needs to break the cycle of decreasing services and raising fees, fines and taxes to offset rising personnel costs. “What the city has done for the last five years is ... tread water,” said San Pedro resident Doug Epperhart, a city commissioner overseeing Los Angeles’ network of neighborhood councils.

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Underlying Los Angeles’ current troubles, according to many economists, are well-documented, long-term shifts in the region’s economy.

After half a century as one of the nation’s wealthiest and most technologically important cities, the Los Angeles area began to falter after the end of the Cold War. Since 1990, the nation’s total employment has grown 23%, while the number of local jobs has shrunk 7%, according to the UCLA Anderson Forecast, which tracks economic trends.

The situation appears to have worsened recently, UCLA economist William Yu said. The great recession hit Los Angeles especially hard and since then, its recovery has been weaker. “The economy is not healthy at all,” Yu added.

Over the past two decades, Los Angeles lost almost every sector that mattered to the middle class: automobiles, steel, shipbuilding and, of course, aerospace. In all, 56% of manufacturing jobs, or nearly half a million positions, have disappeared.

The change is reflected in income statistics for that period. Nationally, personal income has increased by 2.4% per year, adjusted for inflation. Locally, it grew at half that rate.

As long as the city’s economy was growing strongly, it was a lot easier for City Hall to stay in the black. From 1980 to 1990, the city’s budget, adjusted for inflation, rose 4.8% on a compounded annual basis, according to figures compiled by The Times. But between 1990 and 2010, the budget was increasing by 1.2% annually.

Some city officials and municipal union leaders continue to believe the economy is fundamentally strong. Villaraigosa spokesman Peter Sanders said the decrease in manufacturing in Los Angeles has coincided with similar declines nationwide. One strong spot, he said, is Los Angeles’ fashion and apparel industries. “We’ve focused on developing a diverse economy that will be able to withstand the ebbs and flow of economy,” Sanders added.

 

But with lower income growth, Angelenos are generating comparatively less tax revenue for the city, said Madeline Janis, national policy director for the Los Angeles Alliance for a New Economy, an advocacy group that focuses on the city’s economy and environment.

There were plenty of signals that leaner times were coming. In 1992, an aerospace task force warned that the region would experience an unprecedented economic blow, undercutting the housing market and starving governments of tax revenue, recalled Daniel Flaming, a key author of the report and president of the Economic Roundtable.

Janis said city leaders did too little to address that long-term transformation. “We’ve had ... an enormous loss of good-paying jobs. Without a substantive program to take us on another path, we’re going to continue on a spiral downward.”

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The structural economic problems were in some ways masked by the region’s booming real estate market, and Los Angeles leaders focused on other policy priorities.

Shortly after he became mayor, Villaraigosa announced plans to hire 1,000 officers, a key promise of his 2005 campaign. He vowed to achieve that goal by hiking the fee for trash collection charged on homes and small apartment buildings. After council members tripled the fee, Villaraigosa pledged not to roll back LAPD staffing in the future.

The higher trash fee would have been more than enough to pay for salaries and benefits of 1,000 new officers. But overall growth in public safety expenses, most notably retirement outlays, outstripped the added income.

In Villaraigosa’s first year as mayor, the Police and Fire Departments had $2.3 billion in salaries, pensions and other related general fund costs, according to the Chief Legislative Analyst’s Office, which advises the council. This year, that figure reached $3.1 billion. Public safety now consumes 69% of the city’s general fund revenue, compared to 59% in 2005, those analysts said.

When the recession hit, city elected officials chopped thousands of positions in other city departments as they expanded the LAPD. Even the 311 phone service residents are urged to use to obtain services saw its hours cut by two-thirds.

Villaraigosa has steadfastly defended the LAPD buildup, attributing record low crime rates to a larger police force. “Even though we continue to face a tough economic climate, I will not waver on this commitment,” Villaraigosa said in an online opinion article two years ago.

Ian Thompson, spokesman for a union representing 10,000 civilian city workers, said hiring about 800 additional police officers was a “financially irresponsible decision.” “The main driver of pension costs in this city is not the civilian workforce. It’s the sworn workforce.”

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If the city’s promises on public safety put it on the precipice, a new contract with other employees helped send it deeper into crisis.

In 2007, Villaraigosa and the City Council’s top leadership —Garcetti, Greuel and Perry — negotiated a new contract with the Coalition of LA City Unions that promised more than 20,000 workers a 25% pay raise over five years. The city expected to pay for those raises with four years of 4.4% economic growth. Amid a recession, revenues actually dropped.

Santana, the budget analyst, arrived in 2009 and concluded that the city couldn’t afford the raises. The city renegotiated the contract twice, delaying some raises and securing cost-saving concessions. Villaraigosa said that in hindsight he would not have approved the original pay package.

With salary costs on the rise, Villaraigosa and the council signed off on an expensive plan to let 2,400 workers retire up to five years early. They sent nearly 1,000 employees into agencies untouched by the budget crisis. An additional 360 were laid off. Unlike Garcetti and Perry, Greuel did not participate in the 2010 job cuts.

Former Villaraigosa jobs czar Austin Beutner questioned the wisdom of relying so heavily on cutting city staff. “That’s not reform,” he said. “That’s amputation.”

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By 2010, Villaraigosa and the council were confronting an even thornier problem: rapidly growing retirement costs. In the wake of the recession, double-digit losses at two city pension funds forced city leaders to increase contributions from the general fund, which pays for basic services, to make up the difference.

City officials persuaded voters to trim the pension benefits for newly hired police and firefighters. Last fall, the council did the same for new civilian city workers.

Still, the city’s pension plans have only a portion of the assets needed to cover their commitments to current and retired employees. The fire and police pension system has 72% of projected future benefits costs, according to a recent report. The civilian plan has 63%.

Critics say the shortfalls could grow significantly, due to unrealistically rosy assumptions of the annual gains the pension fund investments will make. The city lowered it from 8% to 7.75% after the stock market meltdown.

Caltech financial economics professor Brad Cornell, who has written extensively on investment returns, suggests a 5% to 6% return would be more appropriate. But that would force the city to increase its pension contributions dramatically, leaving the city with even bigger deficits.

By staying with the higher figure, “you are really saying we are going to burden our children with extra taxes and less services,” Cornell said.

Alex Rubalcava, who runs a Los Angeles-based investment firm, expects contributions to the city’s pension funds to jump 50% by 2017 even if the 7.75% return is achieved, siphoning hundreds of millions of dollars from the general fund. If financial markets are flat, let alone negative, the city could face a meltdown, he said. “The city is engaged in Enron-type accounting,” he said.

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For many residents, the details of City Hall budget math are less important than the results they see around them: a decline in services.

“You used to be able to call up and maybe get something done, but now you call that 311 number, and they put you on a list,” said Dorothy Napoleon, 69, of South Los Angeles. “And you just don’t get it done.”

“Somewhere down the line,” she added, “they should be able to trim trees.”

david.zahniser@latimes.com

jessica.garrison@latimes.com

ralph.vartabedian@latimes.com


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