L.A. budget gets good marks, but big obstacles ahead

A few years ago, the Los Angeles city government appeared to be hurtling toward the fiscal abyss because of heavy pension costs for police and firefighters and a sluggish local economy. But a pension reform measure and a relatively tough line on spending by Mayor Eric Garcetti, the City Council and City Administrative Officer Miguel Santana have the city in good enough shape that the $8.6 billion budget for 2015-16 signed by Garcetti this week drew praise in coverage from The Bond Buyer:

The year before Garcetti ascended from council president to mayor in 2013, the city adopted a new retirement tier for civilian employees hired after July 1, 2013 that lowered maximum pension benefits to 75 percent from 100 percent of final compensation. It also limits retiree health care to the employee, excluding dependents. Projected savings over a 30-year period are expected to be $4 billion, with the majority of savings in out years.

 

Strides made by the city include significant progress toward reducing fixed cost burdens for pension and other post-employment benefits such as retiree health care, according to a Moody’s Investors Service report in December.

 

The rating agency affirmed the city’s Aa2 general obligation bond rating in November and upgraded the city’s outstanding real property and lease-backed debt ratings to A1 and A2 from A2 and A3, respectively.

The 2015-16 spending plan estimates that pension and other retirement benefit costs will be $1.077 billion — just under 13 percent of the city’s total spending. That’s a vast increase over pension costs from 15 years ago. But the rise has stabilized, and Santana told reporters that the pension fund for city firefighters would be 92 percent funded by 2020 — a far better figure than in most California cities.

Unions counted on to make concessions

But there are reasons to wonder if the sunny speeches Garcetti has been giving about Los Angeles City Hall’s future are too optimistic. The first is that the city budget will balance in the fiscal year starting July 1 only if Garcetti and Santana win new concessions from public employee unions. The spending plan “assumes that about 20,000 city workers will agree to no raises and many will pay a bigger percentage of their health care costs, but talks with city employee unions have dragged on since their contracts expired last year,” the Daily News reported.

This will be tough to swallow for non public-safety unions, given that police won a four-year, 8.2 percent raise this spring, and given the United Teachers Los Angeles’ success in securing a 10 percent, two-year raise from the Los Angeles Unified School District in April.

The second, much bigger problem is downbeat expectations for the city’s private-sector economy. Garcetti and other city leaders are counting on the local economy to finally begin a strong recovery at a time when pessimism in elite circles has never been higher.

The Los Angeles 2020 Commission, consisting of powerful figures from in and out of government, issued a report in December 2013 that warned of chronic stagnation without sweeping changes:

As the result of two decades of slow job growth and stagnant wages, 28 percent of working Angelenos earn poverty pay. If you add those out of work, almost 40 percent of our community lives in what only can be called misery. The poverty rate in Los Angeles is higher than any other major American city. Median income in Los Angeles is lower than it was in 2007.

 

When it comes to job creation, Los Angeles has not kept pace with the nation or other cities. Our unemployment rate is among the highest for any major city. This is not just a consequence of the Great Recession. We have lagged behind in each of the three business cycles since 1990. Los Angeles is the only one of the seven major metropolitan areas in the country to show a net decline in non-farm job employment over the last decade.

 

Activity in most of our key economic sectors is flat or in decline. We have repeatedly ignored or fumbled opportunities in one of this era’s major growth industries, the intersection of science and engineering — a field where our university-based intellectual capital ought to make us a leader. With the closure of Boeing’s plant in ‡Long Beach, there is no longer a large-scale aircraft, space vehicle fabrication or assembly facility left in the area.

Only key policy change: Much higher minimum wage

Garcetti and other leaders welcomed the report and acknowledged the challenges facing the city’s private sector. But the most significant major policy change since the report’s issuance came just this week, when the City Council approved increasing the minimum wage within city borders to $15 an hour by 2020.

The sharp increase was opposed by business interests, who warned it would make the city’s business climate even worse.