Just six months ago, Los Angeles Mayor Eric Garcetti and the City Council celebrated as they passed a record $10.6-billion spending plan. One city leader call it “easily the best budget we’ve seen in 10 years,” and, after a decade of belt tightening, the city forecast surpluses ranging from $33 million to $77 million per year over the next four years.
But the good times don’t last long in Los Angeles.
Today, those surpluses have been replaced by huge deficits. Instead of having more cash to spend on sidewalks, trees and police, L.A. is now facing a $200-million to $400-million shortfall in each of the next four years, and city departments have been instructed to begin looking for places where they can cut.
Yet, the reversal of L.A.’s financial fortunes should have come as no surprise. Even as the mayor and council members touted their “fiscally responsible” budget and the years of surpluses they were supposedly expecting, they knew deficits were looming. They were about to sign off on half a dozen labor contracts with firefighters, police officers and civilian employees. The pay raises and healthcare benefits they endorsed will cost the city at least $750 million and probably more over the three years the contracts cover. But city officials said their policy is not to include anticipated pay hikes in the budget, and so now the city must scramble to balance its finances.
There are a number of problems here.
For years, Garcetti and the City Council have pledged to eliminate L.A.'s structural budget deficit. This is the recurring, annual gap between what the city takes in through taxes and fees and what it pays out, mostly in salaries. The gap has to be closed every year with all manner of budget gymnastics, such as leaving jobs unfilled, postponing infrastructure repairs and dipping into the city’s reserve fund. The ongoing deficit makes it harder to make long-term investments, such as modernizing aging city facilities, fixing broken sidewalks and replacing ancient computer systems to make the city run more efficiently.
If there’s ever been a time to get the city’s financial house in order, this should be it. Thanks to a booming national economy, along with higher local property, sales and business taxes, Los Angeles has been taking in revenue at record levels. Voters and state lawmakers have raised taxes to pay for street repairs and to house homeless people. Yet the city is still in the red. What’s going to happen when the economy slows, as it inevitably will, or if there’s a deep recession? Good luck.
The new deficit projections are almost entirely the result of the new labor agreements. Certainly L.A. needs to offer competitive pay and benefits to attract and retain talent. The cost of living in Southern California has gone up and the contracts need to reflect that. But labor contracts have to reflect the city’s fiscal realities too, which is why it’s alarming that the new deals threaten to put L.A. into a deep hole for years to come.
So what can the city reasonably afford? What’s the total cost of the contracts? What will be the impact on pension spending, which already consumes 20% of the general fund, and on services, which may have to be cut in the face of higher labor costs?
There’s virtually no public discussion of those questions. Rather, labor contracts are negotiated in secret, ratified by union members and quickly rubber-stamped by elected officials. Public employee unions are major donors to City Hall political campaigns, so perhaps it should be no surprise if elected officials are reluctant to drive a hard bargain or unwilling to question the deals in public.
The lack of transparency and public accounting is no idle concern. In 2007, city leaders approved raises of nearly 25% over five years for some 20,000 workers. Then, as now, city officials approved the raises even as they warned of financial troubles ahead. They were prescient: When a severe recession hit in 2008, the city had to defer some of the raises, eliminate thousands of jobs and eviscerate basic city services to avoid bankruptcy.
Yes, L.A. is better prepared for an economic downturn today. City leaders have put more money away for a rainy day than in previous years, though they still haven’t reached their goal of having a 10% reserve fund. Nevertheless, it’s hard to see how L.A. could plug a large and recurring deficit without either spending reserves it should be saving for a recession or slashing services or both.
When Garcetti became mayor in 2013, he pledged to get “back to basics.” There should be nothing more basic than balancing the budget.