CommentsLA BUDGET WATCH - These remarks by Jack Humphreville were made at the Congress of Neighborhoods on Saturday, September 25, 2021 following the presentation of Liz Amsden.
In this session on the City Budget, participants will explore areas of concern to Angelenos: the Structural Deficit and the impact of labor agreements, unfunded pension liabilities, and deferred maintenance on the City’s Four Year Budget Outlook; the resulting impact on basic services the City provides; the importance of a healthy Reserve Fund; and the concept of Intergenerational Theft and how it affects future generations. Attendees will gain insight into a deeper level of the City’s budget situation and leave with a better understanding of the City’s financial future.
As Liz mentioned, the goal is to put the City on a solid financial footing so that it is able to weather another recession or pandemic that impacts the City’s budget. The first step is to have a truly balanced budget where we eliminate the Structural Deficit and have a robust Reserve Fund.
The City also needs to address its billions in undisclosed long-term liabilities, including the unfunded pension liabilities and deferred maintenance. More than likely, the homeless situation will require additional money.
We are also concerned about Intergenerational Theft where we dump billions of today’s costs / liabilities on the next generations of Angelenos.
Structural Deficit
This year’s budget is balanced thanks to a $1.3 billion cash infusion from the Federal Government. The City also has a healthy Reserve Fund of $500 million, again thanks to Washington. So life is good.
Next year is another story. The City is anticipating a budget gap of $260 million. This may be understated because City Hall may want to continue some programs that were financed by one time money.
This is the beginning of the Structural Deficit where the growth in revenues does not cover the increase in expenditures. This results in budget gaps for the next several years when future pay raises are considered.
To finance this shortfall, the City will have to cut services or hit up the Reserve Fund or a combination of both. It also has the option to raise taxes, but this requires the approval of the voters.
Another issue that will add to the Structural Deficit are the costs associated with new labor agreements with the City’s civilian and sworn employees. The existing civilian contracts begin to expire in December of 2022 while those for the police and firefighters expire in June of 2024.
To give you an example of the impact of new labor agreements with the public sector unions, in October of 2019, the City entered into agreements with police and firefighters. These agreements blew a $150 million hole in the current year’s budget and resulted in annual shortfalls of $200 to $400 million in each of the next four years. The total hit was about $1.5 billion over a five year period.
Budget for 2025-26
To give you a better understanding of the impact of new labor agreements, let’s look at the City’s budget outlook for the fiscal year 2025-26, four years from now.
The City is anticipating a budget surplus of $157 million on record revenues of over $8 billion. But that does not include the impact of any new labor agreements. If the cost of new labor agreements of $220 million are factored into the projections, this surplus quickly turns into a shortfall of $63 million. And this estimate of the costs of the new labor agreements may be understated.
Underestimated Costs
The City needs to have a robust Reserve Fund. That will require contributions of about $50 million a year to achieve funding equal to 10% of General Fund revenue.
The City is also scrimping on the repair and maintenance of our streets and the rest of our infrastructure. Proper funding would require a minimum of $250 million a year.
The City is also underestimating the costs of its pension plans by relying on an overly optimistic investment rate assumption of 7%. If the rate were 6%, a level recommended by the hayseed from Omaha, Warren Buffett, then the City would need to contribute an additional $500 million a year.
More that likely, the City will need to increase its funding for homeless services by at least $100 million.
If you factor these costs into the projections, the shortfall for 2025-26 is over $950 million, or close to $1 billion.
Long Term Liabilities
In addition to its $2 billion of outstanding debt which is manageable, the City has two significant long term liabilities.
Pensions. As of June 30, 2020, the unfunded pension liability of the City was over $12 billion and only 75% funded. This liability will be substantially reduced because the investment returns for the last year were in the range of 25 to 30%. We should be able to get a better understanding in November when the pension plans will have their annual reports.
[Update: The return on the pension funds’ investment portfolios for the year ending June 30, 2021 is estimated to be 30%, resulting in almost $10 billion of excess returns. This will reduce the unfunded pension liability to around $2 billion.]
Infrastructure. The City is also considering major infrastructure projects that total more than $10 billion. These include street and sidewalk repairs of $6 billion, $2 billion for Recreation Parks, $2 billion for the expansion of the Civic Center and Convention Center, $1 billion for flood control projects, and another $1 billion for the restoration of the Los Angeles River. This does not include billions to comply with the Clean Act.
What Can We Do?
We can urge City Hall to implement several recommendations of the LA 2020 Commission.
- Establish an Office of Transparency and Accountability to oversee the City’s budget and finances in real time.
- Form a Pension Commission to review and analyze the City’s two underfunded pension plans and make recommendations on how to reduce if not eliminate the unfunded liabilities.
- Implement multiyear budgeting
Develop an Infrastructure Plan
Appoint a City Manager to oversee the operations of the City with an emphasis on increasing productivity.
Place on the ballot a measure that would prohibit the City from entering into any labor contract that would produce a deficit.
Finally, use your vote: Make the budget an issue in the election for the Mayor, City Attorney, Controller, and the Councilmembers.
Conclusion
The City has significant budget and financial issues that must be addressed. This includes the Structural Deficit, unfunded pension liabilities and our infrastructure, all of which, if not addressed, will contribute to Intergenerational Theft where we dump billions on the next generations of Angelenos.
We welcome any questions.
For Liz Amsden’s presentation, click here.
(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].)
