LA WATCHDOG--The City of Los Angeles is considering the issuance of $60 million in Judgment Obligation Bonds to replenish the City’s Reserve Fund. This rainy-day fund has been depleted to pay for legal settlements that were significantly more than the budgeted liability of $68 million, a level considerably below the amount recommended by the City Administrative Officer last year.
Per the CAO, the Reserve Fund is slightly below the targeted policy level of $279 million, an amount equal to 5% of the budgeted General Fund revenue. The infusion of $60 million would increase the balance in this account to over 6% of the General Fund, giving the Reserve Fund additional flexibility to meet unexpected expenditures or emergencies.
Of course, the issuance of Judgment Obligations Bonds would not have been necessary if the Mayor and the Budget and Finance Committee led by Paul Krekorian had not siphoned off $213 million over the last three up-revenue years from this emergency fund to pay for every day operating expenses. If these funds had not been diverted, we would have had a very healthy Reserve Fund with a balance of $490 million, or 8.8% of General Fund revenue.
On March 2, the City Administrative Officer recommended that the City Council, subject to approval by the Mayor, authorize the issuance of up to $60 million in bonds.
You can almost see the City Hall gang rubbing their hands together in anticipation of this infusion of cash.
But on March 23, Controller Ron Galperin threw a wet blanket on the City Council’s plans as he delivered a two-page letter where he recommended that the City NOT proceed with the Judgment Obligation Bond at this time.
His logic was very simple. Galperin stated that “debt financing of liability claims should only be used in extraordinary circumstances and in times of great need. This year does not meet those criteria, and the City should live within its means instead of borrowing unnecessarily.” He also added that the City should “avoid short term solutions to long term problems.”
In addition, the City would avoid paying $20 million in interest expense over the next ten years by not issuing the bonds.
Galperin also stated that the Reserve Fund will benefit from unspent departmental funds at year end that will be swept into the fund, allowing it to exceed its minimum policy levels by $10 million.
More than likely, the City will NOT follow Galperin’s recommendation as the infusion of new cash is just too tempting for our politicians.
The City Administrative Officer will support the issuance of the bonds to bolster the depleted Reserve Fund, especially if this year’s revenues are lower than budgeted (which may well be the case). This is a reasonable request and strategy.
However, we cannot trust Garcetti and the City Council as once they smell the cash, they will want to raid the Reserve Fund, once again, to pay for every day operating expenses.
The City Council will consider the issuance of the Judgment Obligation Bonds on Tuesday, April 4. We will need to be prepared for the members of the City Council to demonstrate their financial acumen as they tell us how they are willing to make the tough decision to issue the bonds, recognizing that the bonds are a necessary evil. But do not expect the City Council to put any restrictions on its ability to tap into this new honey pot of cash.
Bring your hip boots as the sewer known as City Hall will be overflowing.
And a genuine thank you to Controller Ron Galperin for his willingness to speak the truth and be … the skunk at the garden party.
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council. He is a Neighborhood Council Budget Advocate. Jack is affiliated with Recycler Classifieds -- www.recycler.com. He can be reached at: firstname.lastname@example.org.)