When the nation’s second largest city teeters on the verge of bankruptcy, local elected officials "“ and especially taxpayers elsewhere "“ ought to take it as a wake-up call and ponder the evident public policy blunders that laid the groundwork for such an unnecessary scenario.
Los Angeles’ potential bankruptcy and $238 million budget shortfall were predictable and preventable. So predictable in fact that former Los Angeles Mayor Richard Riordan warned of the looming crisis in a Wall Street Journal editorial in 2010. Now he says bankruptcy may be just a year away.
What underscores this municipal catastrophe is the undue influence of public employee unions on city expenditures, irresponsible decisions by elected leaders and unsustainable benefit structures practically germane to the government sector.
When reporting the projected budget gap for the 2012-13 fiscal year, L.A.’s chief administrative officer, Miguel Santana, noted that the budget shortfall is likely to be much greater "“ $427 million "“ by 2014-15, if drastic action is not taken.
Ominous as the projections are, they understate the forthcoming structural challenges in L.A.
A study released earlier this month by the Stanford Institute for Economic Policy Research estimated that each of the city’s three independent pension funds are 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. To put the numbers in context, L.A.’s 2011-12 operating budget is $6.87 billion, according to the city.
Stanford’s study also found that “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 be “15.4 percent of city expenditures.” That means public employee retirement costs continue to crowd out other city budgetary priorities and perhaps serve as a precursor to insolvency.
Considering these trends, the city of Los Angeles could be facing the start of bankruptcy “as early as next year,” Riordan argues. “What will likely trigger bankruptcy is when Wall Street stops buying bonds from [the city of] LA,” he said. “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 argues, 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.
What helped to cause many of these problems is the political might of public employee unions and the willingness of elected officials to kowtow to their whims. Riordan made the point more bluntly when he said the unions basically control the L.A. 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.
Even now, as the city faces crisis, “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. Given that in February the unemployment rate in the City of Angels was 13.3 percent, according to the U.S. Department of Labor Statistics, it should be unthinkable to even consider raises for public workers.
City officials have suggested offsetting budget shortfalls partially by asking workers to forgo these raises but the union bosses are crying foul. Councilwoman Jan Perry, via phone, said the raise issue will come down to a simple question for the unions: “Do you want to save jobs for more people or raises for fewer people?” If the union is unwilling to give up the raises, layoffs appear imminent, diminishing the city’s workforce.
“Whether people have the political will or not,” Perry said, “the numbers are the numbers, right there in front of them.”
Of course, layoffs will not be enough. City workers will have to assume more costs for their own health care and, at the very least, a new, less-generous pension plan has to be created for new employees.
“A new pension tier for people not even hired is completely reasonable to pursue,” Perry argued.
The unions will have to be part of, if not the catalysts for, serious reform or they will be the biggest losers. Either unions make major concessions or the city will have to raise taxes to astronomical levels, Riordan argued.
“Can you imagine L.A. quadrupling their taxes? Everyone would flee the city and the state. Somewhere along the line the unions have to take action because their people are the ones who will be hurt.”
Cities and municipalities throughout California and elsewhere ought to take note of L.A.’s follies before shortfalls overwhelm their coffers, too. Riordan contends: “LA is better off than a lot of cities but it is not well enough off to prevent bankruptcy.”
If that is the case, California has a bumpier road ahead.
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