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2022: Major Storm Warnings for LA's Financial Forecast!

LA WATCHDOG - With so much uncertainty in the world, will the Nury Martinez led City Council and the Mayor (whoever he or she is) be “prudent” in developing next year’s City’s budget?   

Los Angeles is experiencing a spike in the number of cases of Covid-19.  Hospitals are overflowing with infected patients.  Events are being cancelled, including the New Year’s celebration in Grand Park.  Businesses are closing for the holidays, including Hollywood’s Musso and Frank Grill.  

The resulting Covid-19 related slowdown will have an adverse impact on the City’s budget, especially on the City’s seven economically sensitive taxes. 

The delays at the Port of los Angeles have caused serious delays in the supply chain that have added to the cost of retail and industrial products throughout the country.   

Inflation is rearing its ugly head, with the Consumer Price Index increasing by over 6% in the past year.  The Producer Price Index increased by 9.6% during the last twelve months.  

These inflationary pressures will prompt the Federal Reserve to raise interest rates. This may have an adverse impact on the economy, possibly causing a mild recession. 

The bond and stock markets may take a hit which would have a negative impact on the City’s two pension plans that have investment portfolios that exceed $50 billion.   

The State’s budget may suffer.  Over the past three years, revenues from capital gains have ballooned because the stock market has almost doubled.  Initial public offerings of venture capital sponsored unicorns have also added to the tsunami of capital gains.  

But what is the impact on the State’s budget if these capital gains disappear?  Does the State have an adequate Reserve Fund?  Unfortunately, not.   

The situation in Washington is not comforting as the divide between the two parties seems to be widening. 

Internationally, there is also the uncertainty involving China and Russia.  And do not forget Iran and North Korea as well as other hot spots around the world.    

In the City, the projected budget gap for next year is $261 million. There are proposals in the pipeline that will cost an additional $125 million. There may be calls for additional funds for services to the homeless.  The Police Department also wants to increase its budget by over $200 million. 

With all the uncertainties, the Mayor and the City Council need to develop a “prudent man’s” budget that can withstand any hits from these and other unknown events. 

There are two simple rules that will help to City prepare for any hits to its budget. 

First, in the developing the budget, the Reserve Fund should not be a source of revenue as it was last year.  The Reserve Fund of $725 million is for emergencies, not ordinary budgetary items.  And who knows what will happen with the resurgence of Covid-19? 

Second, the City Council and the Mayor should not enter into any labor agreements with the public sector unions that will result in a budget deficit.  This was the case in 2019 when the City Council approved labor agreements with the police and firefighters that blew a $1.5 billion hole in the City’s budget over the following four years. 

Will City Council President Nury Martinez, Budget and Finance Chair Paul Krekorian, Personnel Chair (and wannabe Controller) Paul Koretz, and the Mayor develop a fiscally responsible budget?  Based on past performance, do not hold your breath. 

 

 (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:  [email protected])