LA's budget problems; the trouble with banks
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KPCC business analyst Mark Lacter talks about the city of Los Angeles possibly going bankrupt; he also talks about the trouble with banks.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, the L.A. City council met yesterday to talk about a big budget deficit. The city isn't quite broke, yet, but could L.A. go bankrupt?
Mark Lacter: It is possible, what with a $200 million budget deficit this year and perhaps $400 million next year. Just not enough revenue coming in – the most recent projections show a huge shortfall, more than what city officials had been expecting just a few months ago. That comes after an earlier round of early retirements, furloughs and reduced work schedules.
Julian: So what's next?
Lacter: They start cutting. The city’s top budget official is proposing 1,500 layoffs, more early retirements, more furloughs, lots of departmental cuts and consolidations – and even assuming the council goes along with that, they still have to borrow a bunch of money and dip into its reserves in order to cover the deficit.
What really makes this tough is that a lot of the budget goes for public safety, paying off debt and other obligations, so that doesn’t leave much for the chopping block. That’s why they’re looking at cuts for street-cleaning, tree-trimming, services that are considered important but not essential.
Julian: How easy is it for a city to file for bankruptcy?
Lacter: Not easy at all, which explains why there have been only a few dozen in the last 30 years. Actually, the state needs to approve the filing (municipalities are state entities and not under federal jurisdiction). Also you can't sell off assets like you would in a corporate bankruptcy. So no putting City Hall on the block.
Julian: I guess there’s also the politics.
Lacter: That's right. I mean, could you imagine trying to run for higher office after dealing with a bankruptcy filing on your watch? Back in the 1970s, the city of New York never actually filed, but elected officials got so much heat that some of their careers were ruined. So, you better believe that the mayor and the council will do anything – handstands, somersaults, anything – to avoid Chapter 9, which covers municipal bankruptcies.
Julian: Does it matter that local banks are failing?
Lacter: Well, individually, not really. As you reported yesterday, First Regional Bank in Culver City was seized by federal regulators and those assets were then passed over to a North Carolina bank.
It was the first local bank failure this year (10 were closed in 2009). First Regional was a small bank – as are most of the banks that get taken over by the feds – and so long as depositors are covered by the FDIC, they won't notice much change.
Julian: But there have been so many failures over the last year or so – what are regulators left with?
Lacter: Well, they're wondering whether they have enough money to handle those federally insured deposits. If they don't, they'll have to ask the banks to cough up more. There's no mystery why all this is taking place – just too many banks taking on too many bad loans.
Regulators are telling the banks they need to raise more money in order to handle future losses – except that the small banks struggling to stay in business aren't able to raise money. The ones in relatively decent shape aren't all that anxious to lend money – and their customers aren't all that anxious to borrow either. All of which is terrible for the economy.
Julian: What's Washington doing?
Lacter: The White House is offering several programs to help support these small banks, with the hope that it would prompt more lending. But this could be another case of healthy banks getting access to federal money they don't really need or want and the sick banks too far gone for the money to be of much help. These days, nothing seems very easy to make better.
Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.
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