Could the city of L.A. go bankrupt?

Mayor Antonio Villaraigosa says it'll never happen on his watch and former Mayor Richard Riordan says it's inevitable. They're both probably right. In plowing through the numbers for my October column in Los Angeles magazine, I'm guessing that there's either a total lack of awareness at City Hall about the budget shortfall - or an unwillingness to face reality (keep in mind that Villaraigosa and many of the others will be out of office by the time the crisis really kicks in). City officials patted themselves on the back a few months ago for making a few nickel-and-dime cuts that were required to balance the current budget. But the real nightmare is the city's mammoth pension obligations - hundreds of millions of dollars that are owed to current retirees, as well as those still on the city payroll. Well, there is simply not enough money to pay these folks without slashing city services to the point where they would be unrecognizable. For now, roughly one out of six dollars in L.A.'s general fund goes toward paying pensions. By 2014, the amount could easily be one out of three. When so much money is required for retirees, less money is available for libraries, parks, trash pickup - perhaps police and fire services, too. From my piece:

Money and common sense have never been the best companions. Consider the City of Los Angeles, which faces horrific financial woes largely because nobody was paying attention to a problem that in hindsight looks pretty obvious. As it now stands, a typical L.A. police officer or firefighter can retire at 55 and receive up to 90 percent of the salary made in the last year of employment. For life. Plus free health care, also for life. So if you put in 30 years on the job and live an additional 30, the city is essentially bankrolling almost two full salaries, pre- and postretirement. Other city employees enjoy nearly the same benefits. It's quite the arrangement, and it's untenable. Common sense tells you that--what entity, private or public, can pay its people twice and remain solvent for very long? Steven Frates, director of research at Pepperdine University's Davenport Institute, calls it the "triumph of optimism over experience."


The mayor and city council have been talking up those options--ideas such as lowering the benefits package for new hires, coaxing current employees into making larger contributions, and raising the retirement age. But the unions are not showing much interest, and under state law cities cannot roll back a retirement benefit for current workers unless a new benefit of equal value is provided. That would nullify any potential budget savings. Besides, the adjustments wouldn't begin to eat into the hundreds of millions of dollars already owed to retired city workers (L.A.'s pension payout for 2010 is more than twice the cost of running the fire department--and that excludes health care). The only viable solution, short of an economic miracle or a federal bailout, is to bring in a bankruptcy judge to untangle the city's obligations.

Miguel Santana, the city administrative officer, doubts that a bankruptcy filing will be needed. But unlike most lawmakers, he's also realistic. "Sometimes we have to just say, we can't do this anymore," Santana told me. When I asked whether the city's massive obligations could result in police and fire reductions, he acknowledged, "I think it's a legitimate concern."

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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