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Credit Rating Agencies: Is LA Insolvent?

LA WATCHDOG-The City Council adopted the “kick the can down the road” Budget, even though it does little to address the City’s perennial Structural Deficit or its $20 billion Black Hole.

But this fiscally irresponsible Budget will be subject to increased scrutiny by the three major credit rating agencies as well as property owners who will need to approve the County’s $270 million Storm Water Abatement Charge.

In late June, the City anticipates issuing $1.24 billion in short term Tax and Revenue Anticipations Notes.  The net proceeds will be used to prepay the City’s annual required contributions to its two pension plans and to finance its working capital requirements and budget shortfalls during the first 11 months of the fiscal year.

As part of this process, the three major national credit rating agencies, Moody’s, Standard & Poor’s, and Fitch, will analyze the City’s finances to determine the City’s credit rating based on its ability to pay its obligations on a timely basis.  

But will the politically sensitive rating agencies be an objective judge of the City’s precarious financial condition that borders on insolvency?  Or will they succumb to political pressures as a result of their role in the mortgage debacle and credit crisis?

How will the credit rating agencies view the City’s Structural Deficit, where budget deficits are projected to be $200 million and $325 million over the following two years, with a cumulative four year deficit exceeding a mere $1 billion, all based on not so conservative assumptions.    

And what about the City’s inability during the profligate Villaraigosa era to live within its means, where the $850 million, 23% increase in General Fund revenues was dwarfed by a $1.3 billion increase in salaries, benefits, and pensions?

And how will the credit rating agencies view the Budget that does very little to address the City’s $20 billion Black Hole, the financial abyss that consists of an understated $10 billion in unfunded pension liabilities and over $10 billion in deferred maintenance needed for our lunar cratered streets and the rest of our failing infrastructure.

Rather than address the pension issue, the City has gamed the underlying assumptions to lower the City’s annual required pension contributions, another short term solution that will cost Angelenos considerably more in the future.

And while the Mayor has proposed a Civilian Pension Reform Plan, this political trial balloon will have little impact on the Budget over the next five years.  And besides, this so called reform plan is bottled up in the Executive Employee Relations Committee, the same cabal that meets behind closed doors and that has approved billions in unaffordable increases in salaries, benefits, and pensions.  

Our infrastructure will also continue to be neglected and underfunded as the City refuses to address the need for over $10 billion over the next ten years to restore our infrastructure to a reasonable and acceptable level of workability.  

Exhibit Number One is our lunar cratered streets, where the City has basically trashed the recommendations of the 2008 Street Infrastructure Condition Assessment report that called for an investment of $285 million a year for the next ten years.  Not only has the City underfunded our streets by billions, it has failed to update the report, despite repeated promises, because of its explosive political ramifications.

And how will the credit rating agencies view the Enron like accounting gimmicks in the Budget where civilian raises and banked police overtime are not recognized as legitimate expenses, contrary to Generally Accepted Accounting Principles?

And how will the credit rating agencies view the 2014 time bomb when the City is required to fund the deferred portion of the civilian pay raises and the police overtime?  

And how will the credit rating agencies view the Budget’s inflated revenue estimates that exceed Controller Wendy Greuel’s estimates by over $100 million?    

And how will the credit rating agencies view the impact of Proposition 26 on legality of the $250 million Transfer Fee from the Department of Water and Power?

And what about the contingent liability associated with the $750 million Ardon class action law suit concerning the illegal Telephone Utility Tax?

And how will the credit rating agencies view the City’s credit rating where its financial flexibility is severely limited because Angelenos will not vote to increase taxes since they do not trust our Elected Elite and the campaign funding unions who are responsible for the City’s precarious financial condition?

But credit rating agencies and ultimately, the bond investors, are not the only ones who are able to express an opinion on the City’s Budget and finances.  

Within the next ten months, if not before, property owners will have the opportunity to express their absolute disdain for this Budget and the occupiers of City Hall.  

Over the last two or three years, the downtown wizards have cooked up a scheme where the County will take responsibility for the City’s $8 billion Storm Water / Urban Runoff Master Plan because our Elected Elite realized that the likelihood of Angelenos approving a parcel tax was remote at best, especially after voters rejected Measure B, the Mayor’s Solar Initiative, in March of 2009.

As a result, the County will be proposing a $54 parcel tax designed to raise $270 million a year, subject to a majority of the property owners approving this levy through a vote conducted by mail, not the two-thirds necessary if the vote were conducted in a general election.

But property owners in the City are savvy enough to see through this scam, especially since it involves the fiscally irresponsible wise guys who occupy City Hall who once again are trying to pick our pockets in a down economy.

The Mayor and the City Council need to realize that they can only “kick the can down the road” for only so long.  

So as part of its Budget process, the City Council needs to prepare a charter amendment for the March ballot that requires the City of Los Angeles to “Live Within Its Means,” where two year budgets are balanced based on Generally Accepted Accounting Principles, where our infrastructure is repaired and maintained, where our pension plans are funded, and where no new spending is authorized unless there is actual funding.

City Hall and their cronies may be able to intimidate or fool the rating agencies and bond investors, but we are the ones footing the bill.  

So the message from Angelenos is very simple.  No Reform.  No New Revenues.  

(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- He can be reached at: –cw

Tags: Jack Humphreville, LA Watchdog, City Budget, Los Angeles, Credit Ratings, Credit Rating Agencies, solvent, Is LA Solvent, kick the can, short term solutions

Vol 10 Issue 41
Pub: May 22, 2012