Los Angeles teeters on the brink of bankruptcy

November 13, 2012 - By admin

Editor’s Note: This is the Tenth in a CalWatchDog.com Special Series of in-depth articles on municipal bankruptcy

Nov. 13, 2012

By Brian Calle

Taxpayers in Los Angeles are facing a major crisis if Mayor Antonio Villaraigosa and other officials do not begin to address the systemic, structural issues putting the city on the fast track to economic upheaval. The situation is similar to that in other California cities such as Stockton and Vallejo.

The tsunami of unfunded pension liabilities and health benefits is about to hit the shoreline of Los Angeles. And if Stanford University’s estimates are correct, Los Angeles is facing roughly $27 billion in unfunded pension liabilities. For a city whose annual budget is in the $7 billion range this year, that figure is daunting.

The Big Budget Picture

Budget gaps are no rarity for the City of Angels in recent years. It seems like an annual tradition. In fiscal year 2011-2012, the city projected a budget shortfall of more than $400 million. For 2010-11’s fiscal year, the tune was the same. As was 2009-10, and so on.

L.A.’s chief administrative officer, Miguel Santana, noted that the budget shortfall is likely to be much greater by 2014-15. “Every year it gets worse,” he said.

The chain of events is always the same. City officials announce a budget shortfall and the mayor seeks to bandage it with gimmicks that fail to address the underlying causes.

Criticizing Villaraigosa’s approach to last year’s budget shortfall, City Controller Wendy Greuel said that ”kicking the can down the road is not a solution when we can anticipate a growing structural deficit in future years.” She was referring specifically to a plan Villaraigosa outlined to borrow money to solve part of the deficit. But her summation applies to the inept budgeting approach of the city for years.

Former Los Angeles Mayor Richard Riordan predicted increased hardships and eventual bankruptcy if drastic action wasn’t taken by city officials. In an editorial he penned in the Wall Street Journal in 2010, he wrote, “Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy.”

Riordan is not shying away from those comments. In a recent phone conversation, he told me that bankruptcy for L.A. could come “as early as next year.”

Ballooning Pension Costs

What has rapidly perpetuated financial woes for the city is that payouts for retirement benefits have increased in recent years, thus crowding out services the city provides. A study released in early April by the Stanford Institute for Economic Policy Research found that, for the city of Los Angeles, “Pension costs increased from 8.5 percent of total city expenditures in 1999 to 13.7 percent in 2011.” For fiscal year 2011-12, estimated pension costs look to have climbed to “15.4 percent of city expenditures.”

Stanford’s study also estimated that each of the city’s three independent pension funds is unfunded by billions of dollars: the city of Los Angeles Fire and Police Pension System is $9.25 billion unfunded; the Los Angeles City Employees’ Retirement System is $11.32 billion unfunded; and the city of Los Angeles Water and Power Employees’ Retirement System is $6.59 billion unfunded.

“In 1999, Los Angeles City’s aggregate annual required contributions for its three systems totaled $291 million, rising to $923 million in 2011, an annual average growth rate of 11.1 percent,” according to the Stanford report.

But here is the kicker: The growth in pension spending by the city “outpaced that of spending on public protection, which grew at 5.2 percent, on health and sanitation (3.6 percent), and on recreation and cultural services (5.8 percent), and it occurred while spending on public assistance programs fell by an average of 3.0 percent per year.”

If the trend continues, the city will be little more than a professional retirement payment and processing service.

Union Power

Economic downturn aside, interminable spending fueled by powerful unions has pushed Los Angeles to the brink of bankruptcy. As Riordan argues, unions basically control the Los Angeles City Council.

For example, “A compensation package negotiated in 2007 irresponsibly guaranteed many city workers more than 25 percent in pay hikes over five years,” according to a Los Angeles Times editorial.

And as the city continues its downward spiral, “most employees represented by the Coalition of Los Angeles City Unions are scheduled for 11 percent increases in compensation over the coming two years,” the Times reported.

One of the ideas for offsetting some of this year’s budget shortfall was to ask city workers to forgo raises. But the union bosses balked at the idea, claiming that city employees had sacrificed enough in recent years.

As for pension benefits, some city employees are able to retire with up to 100 percent of their salaries, a benefit virtually unheard of in the private sector.

Triggering Bankruptcy

“What will likely trigger bankruptcy is when Wall Street stops buying bonds from [the city of] L.A.,” Riordan told me. “Someone will wake up and say, ‘They aren’t going to have enough money to pay off my bonds,’ and that will be that.”

“If you predict ahead three or four years,” Riordan argued, the city will have to “close parks, libraries and cut police and fire services,” similar to what has happened in the cities of Stockton and Vallejo.

Tap Dancing Around Reform

According to KABC, “Mayor Antonio Villaraigosa says the city has cut a third of the general fund civilian workforce” in recent years.

Of course, layoffs will not be enough, and Villaraigosa has argued that city workers will have to assume more costs for their own health care. And he has announced plans for changes to the city’s pension system, including raising the retirement age for new hires to 67 (current workers retire at 55 or 60) and limiting pension benefits so that retirees cannot retire with 100 percent of salary.

Union leaders instantly chastised the mayor for his pension proposals, specifically his plan to raise the retirement age. But frankly, his proposals barely scratch the surface of what’s necessary for fiscal sustainability.

At the very least, a new, less-generous pension plan has to be created for new employees, something like the 401(k) plans private sector employees have. Jan Perry, a Los Angeles city councilwoman and candidate for mayor, told me, “A new pension tier for people not even hired is completely reasonable to pursue.”

Pension expert Marcia Fritz said that all of the city’s employees should pay at least half of pension costs. “This eliminates the employer paid pension contribution and will reduce pension costs as a whole,” she said.

“Another thing L.A. should do,” if bankruptcy becomes reality, “is break retiree health contracts,” she said. “They weren’t prefunded, so are empty promises, and courts have allowed retiree health to be lumped in with other unsecured creditors.”

The best option would be to adjust promised benefit levels for current workers. Some experts believe, as Fritz also noted, that “fiscally distressed agencies may have the ability to adjust benefits for current workers.” She argued that there is a growing precedent that governments can call on employees to increase retirement contributions and suspend cost-of-living increases when municipal or agency funds are at unhealthy levels. Still, these necessarily bold approaches are untested.

Of course, another option to fix the hole would be astronomical tax increases, which would likely only delay real solutions. Riodan balked at the idea, asking, “Can you imagine L.A. quadrupling their taxes? Everyone would flee the city and the state.”

Even with the city’s challenges, as hard is it may be to believe, Riordan contended: “L.A. is better off than a lot of cities” in California and elsewhere. If that’s the case, there is a bumpier road ahead.

Calle is the editor-in-chief of CalWatchDog.com, the investigative journalism bureau of the Pacific Research Institute. 

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Comments(55)
  1. Hondo says:

    Like I said, there is no more money left to steal. The wall of debt Moonbeam talked about is here. There will be an in house civil war when gigantic cuts to the welfare class kick in to protect the gigantic salaries and pensions of the public unions. You will have to shut down most of the services to pay for the service workers.
    You can’t promise more than your next generation can pay for. We are this next generation. By kicking the can down the road so long, they kicked it over the financial cliff.
    Hondo………

  2. doug says:

    tony villar is on his way out. and quite literally, was out campaigning for obama a couple weeks ago. the current mayor has done nothing for the city of LA.
    but, former mayor richard riordan is proposing an initiative for pension reform for 2013. snowball in hell, maybe, but it may be too late.

  3. BobA says:

    Doug:

    Tony Villar is looking for a job in Obama’s 2nd term or to run for prez in 2016. I’m originally from LA and the dirt on him is a mile deep. You think the press will bring it up if he runs for prez? Not on your life. They will dig a deeper hole and bury his dirt.

  4. Ulysses Uhaul says:

    Lost Angeles is a total Somalia clone!

    Why anyone goes there is amazing…

    Filth, blight, 1970’s tawdy glitz…..a collage of ilk and otherwise just plain nasty everything!

  5. BobA says:

    Hondo:

    Brace yourself. The tax increases are just getting started. The economic and financial illiterates in California will likely vote for at least 80% of the coming tax increases. Never mind that they lose their jobs when their employers are taxed out of business.

    I was just reading this morning at a financial news site where a liberal economist posited the idea that the solution to our financial woes is to raise corporate taxes. Un-freakin-believable huh???

  6. ted says:

    The skyyyyyyyyyyyy is faaaaaaaalling !!!

  7. Sean Morham says:

    Retired public servants and their families will be food for the welfare class. It will be quite the spectacle. Chomp, chomp..

  8. BobA says:

    Ted;

    Your one line zingers exhibits a nescient understanding of the issues under discussion here. Perhaps you should refrain from making such vacuous remarks that impugns your mental acuity.

  9. jimmydeeoc says:

    Ulysses…..

    I detect a hint of the facetious, but you are ignorant as to how right you are.

    Excepting the Hipster Doofus neighborhoods like Hollywood and Los Feliz, how many people of even moderate income are left in LA, unless safely ensconced on the Westside or burrowed away in the foothills or far fringes of The Valley?

    No one.

  10. Bob says:

    The DemoNcrats in the state legislature will try to make it easier for cities and counties to raise taxes and if that doesn’t work they will just bailout the counties and cities for as long as possible by raising taxes at the state level.

    And when that doesn’t work they will go to Obama hat in hand.

  11. Bob says:

    Riodan balked at the idea, asking, “Can you imagine L.A. quadrupling their taxes?

    Richie, with DemoNcrats running things what do you expect?

  12. Bob says:

    Anyone who doesn’t think the DemoNcrats™ won’t do everything they can to massively increase taxes is completely dillusional.

  13. Bob says:

    And moving to another state may only work temporarily as DemoNcrats are planning to over-run other states.

  14. ted says:

    Boba— Your big words is real pretty.

  15. ted says:

    Hey Bob– Thanks– I appreciate the intel. property desuignation of ™. Way to go!

  16. us citizen says:

    Rumor has it that LA is going to put a sales tax on selling your home. Villagrossa is just another POS that keeps coming back. Now with his eyes on the white house………….how delusional can you get…..He thinks he’s pretty ‘hot’ stuff. bahahahahahhaha

  17. CG says:

    Makes you wonder why Prop 32 failed.

  18. Rex the Wonder Dog! says:

    Hey teddy, what is a “SERIOUS dem”???? :)

    So much for Prop 30 beingthe cure for he spending losers;

    “L.A. City Council votes to put sales tax hike on March 5 ballot”

    http://latimesblogs.latimes.com/lanow/2012/11/la-city-council-votes-to-put-sales-tax-hike-on-march-5-ballot.html

    “L.A.’s first freeway toll lanes off to smooth start, officials say”

  19. Rex the Wonder Dog! says:

    “L.A.’s first freeway toll lanes off to smooth start, officials say”

    http://latimesblogs.latimes.com/lanow/2012/11/la-110-freeway-toll-lanes-smooth-start.html

  20. Rex the Wonder Dog! says:

    “Cal State proposes ‘graduation incentive fee'”
    http://www.wthr.com/story/20069169/cal-state-proposes-graduation-incentive-fee
    Hhahahahahhaa…..

  21. Rex the Wonder Dog! says:

    “L.A. City Council votes to put sales tax hike on March 5 ballot”

    http://latimesblogs.latimes.com/lanow/2012/11/la-city-council-votes-to-put-sales-tax-hike-on-march-5-ballot.html

    LOL!!!!!!

  22. ted says:

    Pedantic Boba– please excuse Zero the Poodle’s melt down.

    0 for 14 ™!

  23. Rex the Wonder Dog! says:

    I lose ONE prediction and Teddy Steals™ piles on the gloating, that hurts me so bad Teddy….you made me cry :)

  24. Rex the Wonder Dog! says:

    Hey Teddy- I think Cyclops and Porky Ramos are going to be looking like these two dirty cops in about 6-12 months!!!!!!

    LAPD officers lied under oath in drug probe, jury finds
    http://latimesblogs.latimes.com/lanow/2012/11/lapd-officers-lied-under-oath-in-drug-probe-jury-finds.html

  25. Bob says:

    Good old Teddy Steals™

  26. Bob says:

    “L.A. City Council votes to put sales tax hike on March 5 ballot”

    Dang, LA will have a 9% sales tax once the Old Brown Buzzard’s tax is implmented and if this goes through it would be 9.5%.

    The tard voters will probably pass it, just like the voters of Sucramento who just pass a local sales tax increase.

    But why not just make it 10% or why not 20%

    Makes no difference, no matter how much the thieving, criminal, dirty DemoNcrats™ are allowed to steal it will never be enought.

  27. us citizen says:

    But the dems just keep on asking to be kicked in the butt. Just proves how stupid they are.

  28. Ulysses Uhaul says:

    Lots of sick bunker gloomers…..you all appear to relish losing…

    Taxes are not popular….but….you losers caused this mess….unbending whacko positions….your finished…now we all may get cleaned out when Buzz or Johnnny have a hemrrhoid flare!

  29. Rex the Wonder Dog! says:

    Ted;

    Your one line zingers exhibits a nescient understanding of the issues under discussion here. Perhaps you should refrain from making such vacuous remarks that impugns your mental acuity.
    Ahhhh……OMG this was is funny…I am laughig so hard it hurts :)

  30. Rex the Wonder Dog! says:

    nescient and vacuous are now my favorite words ;)

    Teddy, I was stil depressed from Nov 6, until I read Boba’s post……….that comment put a smile on my face for the first time in a week…….

  31. a frequent reader says:

    this was a great read…i love the debate…and even more so Bob’s reply to ted’s zinger. BEAUTIFUL!

  32. Ted Steele, The Decider says:

    All I can honestly say is….

    wait for it….

    0 for 14 ™!

  33. John Steele says:

    Let LA LA go bankrupt. This is the legacy of hard left unions. Nobody will have a pension or healthcare . These are the idiots who voted for FREE Stuff and the LA city council is about to default on the pensions. The unions in the future will have to pay a large part of their own retirement and health care. Welcome to the Obama century. 50% of our citizens voted for Karl Marx and 48% voted for Tomas Jefferson

  34. Ulysses Uhaul says:

    Losers….every election….you should be ashamed and humble in dealing with the sane and balanced posters. You mock us…..your pitiful!

  35. BobA says:

    John Steele:

    You are absolutely right. The only way LA can save itself is to bankrupt. We now live in a free stuff society where the voters always vote for the person who promises them free stuff. Complimentary debt& deficits an poverty is provided courtesy of the government. Welcome to Obama’s version of hell.

  36. Ulysses Uhaul says:

    LA is worse than Stockton. Why waste your brain on a miserable place.

    Stay away!

  37. Tough Love says:

    Quoting …”As for pension benefits, some city employees are able to retire with up to 100 percent of their salaries, a benefit virtually unheard of in the private sector.”

    Fact…. You would be hard-pressed to find more than a handful of Private Sector Plans even providing 50% of final pay after 30 years of service.

    And Private sector Plan never give automatic annual COLA increases while virtually all Public Sector Plans do. The inclusion of a COLA benefits to an otherwise identical Plan W/O COLA increases it’s cost by 1/3.

    Example…. say a full career 35-yr Public Sector worker typically retires with a 75% of pay (COLA-adjusted pension) and a comparable Private Sector workers (one of the FEW than still has a DB Pension) get 40% (w/o Cola). On an apples-to apples basis the 75% COLA-adjusted pension is equal to a 75%x1.33=100% of pay non-COLA pension …. 250% of the 40%-of-pay pension the Private Sector workers gets. This is unnecessary (to attract and retain a qualified workforce) and is grossly unjust to Taxpayers.

    With Public Sector cash pay no less than that of comparable Private Sector jobs (per the US Gov’t BLS), there is no justification for ANY greater pensions let alone ones that are 2.5 times greater (and often 4-5 times greater for safety workers).

    Taxpayers … it’s time to REFUSE any further funding of Public Sector pensions (expressed as a % of pay) greater than what YOU get from your employer.

  38. Ulysses Uhaul says:

    Just like a repeating Roy Rodgers cap gun!

    Same stuff over and over again. Infomercial for chronically uphappy manics.

  39. Tough Love says:

    Ulysses Uhaul (uh …”Ted”),

    And because it’s repeated dose make it less true?

    How does it feel being so old you’re maybe 5-10 years from fertilizer, and knowing the grey matter withers away daily (as attested to by your nutty comments and multiple handles) ?

  40. ted says:

    I’m Ted– sleepy– but if you want, it’s ok with me if in your fantasy other posters are me! It saves me the work!

    God Bless ya little buddy!

  41. Ulysses Uhaul says:

    Tough Love….thanks for paying for my retirement…your truly a sharing caring person!

  42. eatingdogfood says:

    Democrats + Unions = Bankruptcy!

  43. Tough Love says:

    Ulysses, Granted it will be tough, but hopefully we (the Taxpayers) will succeed in halving (or better) your unjust pension.

    As another commentator said elsewhere today …………. “just wait until the iron bitch called “the math” catches up with them”.

  44. Donkey says:

    This is the way the RAGWUS cabal looks at the math TL: “The different branches of Arithmetic — Ambition, Distraction, Uglification, and Derision.:
    Alice in Wonderland.

    :)

  45. Rex the Wonder Dog! says:

    10 L.A. County courthouses slashed amid budget cuts
    http://latimesblogs.latimes.com/lanow/2012/11/10-la-courthouses-slashed-amid-budget-cuts.html
    And the hits just keep on coming!!!!!!!!!!!!!!!!!!!!!!!!!

    Bring on that “sales tax” ;)

  46. Queeg says:

    Tough Love….love trickle down gov pensions….the laughing curve works!

  47. Richard Rider says:

    LA is the reason we can’t ever split up this state. Every plan — splitting into 2 states, 3 states, or even 5 states — fails for one simple reason — NO ONE wants LA in their state.

    LA is a black hole of economic destruction — draining the vitality of all that are associated with it — geographically or financially.

  48. SeeSaw says:

    Speak for yourself, RR. I go to LA on the Metrolink, and there are all kinds of fun things to do. We will never split up this state because we like it the way it is. You are one sore looser!

  49. Queeg says:

    LA is a pit….plain and simple…a pit… filth everywhere….seedy properties….noise, pollution….nasty food places…..in the suburbs the cowering residents have bars on their windows…riding public transportation is like presigning your death certificate…

  50. BobA says:

    SeeSaw:

    You say you take the Metrolink to LA? Tell you what, take the south bound bus down Vermont Ave. after 8PM at night and get off at say Century Blvd. If you’re still alive the next morning, write me if you can and I’ll donate $100 bucks to your favorite police charity for finding you alive and scraping you up of the pavement.

  51. SeeSaw says:

    Oh, silly! I don’t wander around in places like that. I go to Union Station, Phillipes, CA Plaza Watercourt, Hollywood, LACMA, Central Library, Music Center, etc.–in the daylight. I ride the Metrolink, and the Red and Gold Lines. Lots of fun!

  52. BobA says:

    SeeSaw;

    So you go to the relatively “safe” places in LA.? So you are aware that after sundown, LA is a downright dangerous place to be or go. There areas in LA where even the police fear to tread.

    I couldn’t live a city where hearing gun shots and screams and car crashes and police sirens and police choppers overhead is a typical night and business as usual and nothing to get excited about. A city where when it gets quiet means you’re moments away from losing your life.

  53. Rex the Wonder Dog! says:

    Tell you what, take the south bound bus down Vermont Ave.

    Vermont is such a lovely area, especially at Slauson :)

    Vermont is what happens when the troughers soak the poor thru sales tax hikes……

  54. YJ Draiman for Mayor of LA says:

    Last Cab Ride

    I arrived at the address and honked the horn.

    After waiting a few minutes I honked again.
    Since this was going to be my last ride of my shift I thought about just driving away,
    but instead I put the car in park and walked up to the door and knocked..

    ‘Just a minute’, answered a frail, elderly voice.

    I could hear something being dragged across the floor.
    After a long pause, the door opened. A small woman in her 90’s stood before me.

    She was wearing a print dress and a pillbox hat with a veil pinned on it, like somebody out of a 1940’s movie. By her side was a small nylon suitcase.
    The apartment looked as if no one had lived in it for years.
    All the furniture was covered with sheets.
    There were no clocks on the walls, no knickknacks or utensils on the counters.
    In the corner was a cardboard box filled with photos and glassware.

    ‘Would you carry my bag out to the car?’ she said.
    I took the suitcase to the cab, then returned to assist the woman.

    She took my arm and we walked slowly toward the curb.

    She kept thanking me for my kindness.

    ‘It’s nothing’, I told her.. ‘I just try to treat my passengers
    the way I would want my mother to be treated.’

    ‘Oh, you’re such a good boy, she said. When we got in the cab, she gave
    me an address and then asked, ‘Could you drive through downtown?’

    ‘It’s not the shortest way,’ I answered quickly..
    ‘Oh, I don’t mind,’ she said. ‘I’m in no hurry. I’m on my way to a hospice.
    I looked in the rear-view mirror. Her eyes were glistening.
    ‘I don’t have any family left,’ she continued in a soft voice..’
    The doctor says I don’t have very long.’ I quietly reached over and shut off the meter.
    ‘What route would you like me to take?’ I asked.

    For the next two hours, we drove through the city. She showed me
    the building where she had once worked as an elevator operator.

    We drove through the neighborhood where she and her husband had lived when they were
    newlyweds She had me pull up in front of a furniture warehouse that
    had once been a ballroom where she had gone dancing as a girl.

    Sometimes she’d ask me to slow in front of a particular building or corner and
    would sit staring into the darkness, saying nothing.

    As the first hint of sun was
    creasing the horizon, she suddenly said, ‘I’m tired. Let’s go now’.

    We drove in silence to the address she had given me. It was a low building,
    like a small convalescent home, with a driveway that passed under a portico.

    Two orderlies came out to
    the cab as soon as we pulled up. They were
    solicitous and intent, watching her every move.
    They must have been expecting her.

    I opened the trunk and took the small suitcase to
    the door. The woman was already seated in a wheelchair.

    ‘How much do I owe you?’ She asked, reaching into her purse.

    ‘Nothing,’ I said

    ‘You have to make a living,’ she answered.

    ‘There are other passengers,’ I responded.

    Almost without thinking, I bent and gave her a hug. She held onto me tightly.

    ‘You gave an old woman a little moment of joy,’ she said. ‘Thank you.’

    I squeezed her hand, and then walked into the dim morning
    light.. Behind me, a door shut.

    It was the sound of the closing of a life..

    I didn’t pick up any more passengers that shift.
    I drove aimlessly lost in thought. For the rest of that day, I could hardly talk.
    What if that woman had gotten an angry driver, or one who was impatient to end his shift? What if I had refused to take the run, or had honked once, then driven away?

    On a quick review, I don’t think that I have done anything more important in my life.

    We’re conditioned to think that our lives revolve around great moments.

    But great moments often catch us unaware-beautifully
    wrapped in what others may consider a small one.

    PEOPLE MAY NOT REMEMBER EXACTLY WHAT YOU DID,
    OR WHAT YOU SAID ~BUT~THEY WILL ALWAYS REMEMBER HOW YOU MADE THEM FEEL.

    At the bottom of this great story was a request
    to forward this – I deleted that request because if you have read
    to this point, you won’t have to be asked to pass it along
    you just will…Thank you, my friend…

    Life may not be the party we hoped for, but while we are here we might as well dance.

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