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City Finance: Los Angeles Is Misleading Investors (and Angelenos)

LA WATCHDOG--The City of Los Angeles has the legal obligation to ensure that its financial statements are “true and complete in all material respects.” 

But given the recent disclosures by the City Administrative Officer (the “CAO”) of the City’s massive budget deficits for the current year and the next four years, the City is misleading investors and is not in compliance with the law. 

On April 18, Mayor Eric Garcetti submitted his Proposed Budget to the City Council.  After minor adjustments, the City Council approved the Adopted Budget on May 29.  The Mayor approved the Adopted Budget on May 30.  We were assured that the Budget was balanced.  

On June 26, the City issued $1,655,030.000 of Tax and Revenue Participation Notes.  In its Official Statement, a legal document, the City claimed to have a balanced budget.  Its Four Year Budget Outlook showed surpluses for the next four years, topping out at $78 million for the 2023-24 fiscal year. And over the next four years, the cumulative surplus totaled $200 million. 

This fraudulent fairy tale of a balanced budget blew up on October 24 when the CAO’s First Financial Status Report revealed significant “overspending.”  This resulted in an estimated $200 million deficit for this fiscal year.  

Furthermore, the CAO indicated that that the projected surpluses for the next four years have turned into a river of red ink with deficits ranging from $200 to $400 million per year.  The four year cumulative shortfall is expected to be an estimated $1.2 billion, a swing of $1.4 billion.  

Underlying these deficits are the new budget busting labor agreements with the City’s public sector unions that were negotiated behind closed doors and ramrodded through the City Council without any discussion or input from the public.  

The City will argue that it made adequate disclosures about the impact of new labor agreements since it was the City’s policy not to provide funding for new labor agreements even though it was a “significant area of concern.”  But when the impact results in a $200 million deficit and a $1.2 billion river of red ink, that is a material change that should have been disclosed in June Official Statement. 

The City will claim that it did not know the exact amount of the salary increases and other benefits.  But it had a very good idea of the cost because there had been a series of negotiations with the City’s labor unions which would have allowed the City to make some reasonable assumptions for the budget and projections. 

And if the City and the CAO did not have a reasonable estimate of the cost of upcoming labor agreements, then there are a bunch of knuckleheads occupying City Hall who ought to be shown the door. 

In any case, the Mayor Garcetti, the herb Wesson led City Council, and the CAO have conspired to cover up the impact of the new labor agreements and the massive budget deficits in a calculated effort to appease the City’s campaign funding unions.  

What’s next? 

The CAO must update the City’s Official Statement so that it is true and complete in all material respects.  This includes disclosing the overspending in the current fiscal year and revising the Four Year Budget Outlook to reflect the projected deficits of between $200 and $400 million a year. 

At the same time, the Mayor, the City Council, and the CAO need to come clean on the recent labor agreements and hold public hearings on their impact on this year’s Budget and the Four Year Budget Outlook. 

This budget fiasco and the following coverup demonstrate that Angelenos cannot trust City Hall, especially Mayor Eric Garcetti and City Council President Herb Wesson, with our money and why we need an Office of Transparency and Accountability (or Inspector General) to oversee the City Budget and finances in real time. 

  • Need to Know 

Los Angeles Times Editorial

What do you know, L.A. is in financial peril again

November 10, 2019

  

First Financial Status Report

City Administrative Officer

October 24, 2019

 

 

 (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.  He can be reached at:  lajack@gmail.com.)

-cw