KPCC business analyst Mark Lacter talks about LA's budget troubles and possible solutions to solve them.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, how much of LA’s budget problems will be helped by the proposed deal with city unions?
Mark Lacter: Well, it’s a start Steve – but it’s only that. This is the agreement that would have roughly half of the municipal workforce contributing to their health care coverage for the first time – 2 percent of their incomes starting April 1, 4 percent beginning in July. And clearly, if it’s ratified by the union membership, the deal will save money for the city – next year they’re looking at almost $70 million in savings. The problem is that the city of L.A. faces a deficit next year of $350 million.
Julian: And it doesn’t get any better after that, right?
Lacter: Over the next four years, they’re looking at a deficit of nearly $2 billion – and this isn’t like the federal government, which can keep operating in the red indefinitely. L.A. has to balance its budgets each year, and that means those shortfalls are going to have to be made up – probably through additional cuts in city services. What this deal with the city unions did not address was significant pension reform – and that’s really the tough nut to crack for all cities and states, even more so than health care.
Julian: It’s the same old story, isn’t it? Not enough money coming in and way too much money going out…
Lacter: That’s right -- largely the result of promising workers a lot more over the years than was probably prudent. And keep in mind that when the pension funds don’t deliver on their investment returns, the city is on the hook for the shortfall – unlike, say, a 401(k) plan, where the employer does not have the obligation to make up anything. All told, you have more than 30,000 workers on payroll and expecting the pension program they had been promised – not to mention the 30,000 or so retired L.A. city workers, who have been collecting their benefits and who expect to keep receiving them – quite understandably. So when the mayor and members of the City Council talk about the union health care deal as some sort of watershed, they’re really not telling the whole story.
Julian: So how does the city try to ramp up revenues?
Lacter: Well, one proposal just approved by the City Council would actually waive taxes – specifically the Transient Occupancy Tax, sometimes called the bed tax – and this would be for a new downtown hotel that would replace the Wilshire Grand. We’re talking about an $80 million tax break. The city did the same thing a few years ago for the developers of the convention center hotels right next to Staples Center – that tax waiver will be in effect for the next 25 years, and it’ll save the developer at least $250 million.
Julian: You’re referring to Anschutz Entertainment Group…
Lacter: Yeah, the same folks behind the proposed football stadium. The developers of the Wilshire Grand obviously saw what Anschutz Entertainment had received, and they were front early on that this was going to be one of their big demands. And, of course, the competing down hotels aren’t thrilled.
Julian: Why would city officials do this?
Lacter: Well, they say that without the tax break, the projects would not pencil out and developers wouldn’t build the hotels in the first place – at least that’s what they’re being told. Thing is, there’s no way of knowing whether the developers would have really backed out without the waivers. By the way, the Wilshire Grand project is controversial for another reason – they’re planning to use the hotel and an adjacent office tower as commercial billboards – really big commercial billboards, up to 10 stories tall. That part of the plan will be considered by the City Council today. But the tax waiver – that’s a done deal.
Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.