LA WATCHDOG--Despite the infusion of $1.35 billion from the Federal government, the City of Los Angeles still has a Structural Deficit that it is unwilling to attack.
According the Four Year Budget Outlook, the City is projecting a budget surplus of $309 million for the 2025-26 fiscal year. But when this projection is adjusted for increases from new labor agreements with the police, firefighters, and civilian employees (an estimated $220 million) and lower revenues based on more realistic growth rates (an estimated $400 million), the surplus turns into a $300 million deficit.
The erosion of the City’s finances is already underway. For the upcoming year, the City is using $134 million of one-time revenues to finance on-going operations. This is contrary to the City’s Financial Polices because these services will need to be funded in the following fiscal year (2022-23) from existing on-going revenues.
The City is projecting a budget gap of $138 million for the 2022-23 fiscal year. But this short fall is likely to increase to at least $250 million because there are a number of other one-time expenditures that will need to be continued, such as services to the homeless community.
The City is also relying on overly optimistic growth rates in revenues for the next two years. If more realistic growth rates were used, the shortfall for 2022-23 would increase by $250 million, creating a total budget gap of almost $500 million.
But this $500 million shortfall has been anticipated by the City Legislative Analyst and will be covered by raiding the Reserve Fund that is expected to be $700 million thanks to the recommendations of the City Administrative Officer on how to use the first installment of $677 million from Washington. But this will result in an underfunded Reserve Fund.
Disappearing surpluses are nothing new for Mayor Garcetti and the City Council. In July of 2019, the City told us that the budget was balanced and the City would generate a cumulative surplus of $200 million over the next four years. But in October of 2019, the City knowingly entered into budget busting labor agreements with the police and firefighters that created a hole in its then current budget of over $150 million and on-going budget deficits of $200 to $400 million in each of the four years.
Over the next four years, the cumulative shortfall is estimated to be in the range of $1.4 billion when considering new labor agreements with the City’s public sector unions and lower projected growth rates in revenues.
The question: Will the Budget and Finance Committee address the City’s Structural Deficit or will the Committee and the City Council continue to kick the can down the road and deplete the Reserve Fund?
Note: The four year cumulative shortfall of $1.4 billion does not include additional money to repair our deteriorating infrastructure (the Deferred Maintenance Budget) or properly fund the City’s two pension plans that are underwater by almost $20 billion. Together, they would require a minimum of $750 million a year.