Sunday, April 11, 2010

Los Angeles Fiscal Crisis Intensifies

Los Angeles has endured a devastating decrease in tax and fee revenues as the result of the global economic downturn.  In addition, the entire state of California is struggling with it's own budget crisis, putting the State's bonds in jeopardy of being downgraded to junk status.

Compounding the situation was the collapse in investment revenues for the city employees' pension funds because of the Wall Street implosion that contributed to the recession.  Thus, the identical factors that have caused City Hall to spend dramatically more, have also contributed to taking in substantiall less.

The budget gap for the city of Los Angeles has grown to $222.4 million this fiscal year, prompting plans to transfer money from the Department of Water and Power (DWP) to close the shortfall.  Relations between the city and DWP have become very strained over the proposal.

The only bright note has been a small increase in property tax fees.  City Administrative Officer Ray Ciranna said the city has collected $26 million more than expected in property tax revenues.

The massive budget gap means the city will have to dig deeply into its reserves to balance its books to end the fiscal year on June 30 in the black.  City Council President Eric Garcetti and Councilman Bernard C. Parks, chairman of the budget committee, stressed that the better than expected revenue collections did not mean the city’s budget crisis has been solved.

DWP executives refuse to send the city a promised $73.5 million because council members refuse to approve a sweeping electricity rate increase.  Meanwhile, other budget-balancing moves, in combination with the increased revenue, had reduced the midyear deficit from $212 million to $148.9 million.

Ciranna said he believed that the city’s reserve fund, which is about $207 million, would drop to about $39 million at the end of the fiscal year, far below what bond rating agencies consider to be a healthy threshold.

The budget stalement has led to a downgrade of the city's credit rating.  Rating agency Moody’s announced last Wednesday that it had downgraded the credit rating for the City of Los Angeles from Aa2 to Aa3.  This affects approximately $3.2 billion in debt.

Moody’s expressed concern about the DWP’s transfer of $147 million instead of the previously budgeted $220 million.  The rating agency noted that the reduction in the transfer of funds posed a challenge for the city’s general reserve funds.

Expressing fear that the City would run out of cash in less than a month, Mayor Villaraigosa proposed a two-day-a-week shutdown for all General-funded city services except for public safety and revenue-generating positions beginning the week of April 12.

The City of Angels is beset by devils.  As the global financial crisis intensifies, problems are being felt from the Euro-Zone to individual cities.  The question is how many entities can suffer major problems before the fabric of the entire global financial community unravels.

Marko's Take

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