Los Angeles mayor Antonio Villaraigosa is in a race against the clock. Two years ago, he declared at a press conference that city finances were sound and would stay that way: “The fact of the matter is this city will never go bankrupt.” Then he hedged a bit, adding, “It will never go bankrupt under my watch.” Villaraigosa’s watch—his second mayoral term, after which the law obliges him to leave office—ends just over a year from now, on July 1, 2013. He may be able to keep his (amended) promise, but perhaps not by much.

Miguel Santana, the city’s top budget officer, has just released a fiscal forecast that confirms what critics of Villaraigosa and the city council have been saying for some time: If Los Angeles continues on its present course, it will go broke. This is not a prediction buried in the charts and footnotes, either. It’s right up front, in a preface titled “A Cautionary Tale: The City of Stockton, California.” Santana notes that Stockton has entered a state-mandated mediation period—in essence, the last chance for the city unions and bondholders to work out a deal—after which it will be officially in default. “Stockton’s story provides a cautionary tale for the City of Los Angeles and other cities struggling to remain solvent,” he says.

Santana is right, and his report offers some compelling numbers to prove it. Over the next four years, he notes, the average annual growth in the city’s general-fund expenditures is expected to top 3.8 percent. The projected increase in salaries, pensions, and health care is even greater—at least 4.7 percent. But the city expects revenue to increase by only 2.3 percent annually over the same period. This is the picture of a structural deficit, which no economic recovery is likely to erase. Santana expects the city’s general-fund deficit to rise from $222 million in the coming fiscal year to $427 million by fiscal year 2015. He suggests raising some taxes, mainly on property sales, to close the gap partly. But Santana also warns that city officials must do more to control spending, especially labor costs, which consume 93 percent of general-fund spending. Layoffs aren’t enough. The real trouble, in Los Angeles as in other cities, is with pensions and health benefits. The city in five years expects to spend $943 million more in labor costs—and that’s without adding a single new employee.

At least some Los Angeles officials are speaking seriously about the city’s fiscal solvency, even if their sense of urgency comes a bit late. Others, most notably former mayor Richard Riordan, have been sounding the alarm for at least two years. In fact, Villaraigosa delivered his May 2010 no-bankruptcy pledge in response to a Wall Street Journal op-ed, coauthored by Riordan and investment advisor Alex Rubalcava, predicting that L.A. would likely declare bankruptcy by 2014. Riordan and Rubalcava argued that the city’s finances were set to collapse under the weight of pensions and retiree health costs. At the time, Santana countered with a point-by-point rebuttal, disputing Riordan’s numbers and the ex-mayor’s charge that the city under Villaraigosa had done a poor job controlling labor costs. Santana also tried to shift the blame to Riordan, who left office four years before Villaraigosa took over. “We’re having to clean up after the lack of pension reform from the [Riordan] administration,” he said.

Cut to June 2011, when the story was much the same. Once again, Riordan warned of trouble ahead. “A lot of things are going to happen dramatically over the next couple of years, and then people will listen,” Riordan said in an interview with The Bond Buyer, a newspaper specializing in public finance. “If you close down all the parks and all the libraries, this is political dynamite.” Not to worry, replied Santana in the same publication a few days later. “There are so many tools in front of us before insolvency even becomes an option,” he said. “We have actually made significant progress over the last two to three years to address some of our underlying challenges. We are very proud of what we have done.”

Now Santana admits that the city hasn’t done nearly enough. But will his alarm about a massive bankruptcy finally produce the reforms that L.A. needs? Not necessarily. Even a new mayor with a mandate from voters to cut future pensions would have to contend with the city’s powerful public-employee unions. Then there is the wall of state jurisprudence. California’s courts have held time and again that a public worker’s future retirement benefits—even those not yet earned—cannot be reduced unless benefits of equal value are added in their place. A 1981 voter-approved Los Angeles City Charter amendment was overturned on precisely those grounds. Cities may lay off workers to cut costs, but they cannot change their pension formulas (a common remedy in the private sector) even to save jobs. It may require a change in the state’s constitution to overturn this rule.

Yet even within the limits of state law, Los Angeles could do more to avert bankruptcy than it has done under Villaraigosa. Nothing but union pressure prevents the city from putting new hires in 401(k)-type defined-contribution retirement plans. The city also has considerable leeway in deciding how much to pay in post-retirement health coverage. Villaraigosa has about a year to take some bold steps to put his city back on a sound footing. The path of least resistance is to let his successor deal with the mess, and maybe that’s what he had in mind when he promised that L.A. would not go bankrupt on his watch. But he owes the city more, and he might start by admitting that Riordan was right.


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