Business Update with Mark Lacter

LA's city budget

KPCC's business analyst Mark Lacter talks about Los Angeles' city budget -- what to cut what to keep.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, it's budget time at L.A. City Hall - and there's a deficit. What's there to cut?

Mark Lacter: It’s a big deficit, Steve, $330 million or thereabouts, but if you're an elected official, the answer is cut as little as possible, which is why Mayor Villaraigosa is using duct tape, baling wire, Band-aids - anything, really, without having to address the two big problems that face the city's finances: Too much money going out and not enough money coming in. The City Council is going to consider the budget plan on Wednesday and most likely they'll sign off on much of what the mayor has proposed because, frankly, doing anything else would result in all kinds of pushback among interest groups - the same interest groups that help get them elected. Just look at how they're avoiding major changes to the city's pension system, which is still in crisis and which has resulted in a greater percentage of the general fund being used to pay for the shortfall in retirement payments.

Julian: That's the same general fund that's also used to fund police, fire, garbage pickup, filling potholes -

Lacter: ...basically most all aspects of the city's day-to-day operations. This is a zero-sum game, and if the city has to shell out extra money to cover pensions it can't spend as much on anything else. And the shortfalls are only going to get bigger over the next several years, which mean that the cuts will get bigger as well.

Julian: I've heard this song before.

Lacter: Well, what's happening in L.A. is not that much different from what's happening at the state and federal levels. You have financial problems that are so enormous - and which would require so much political capital - that elected officials would rather choose an easier option. And in L.A., that means jerry-rigging the budget by borrowing more, by coming up with one-time savings that won't do any good next year, and by promising to save lots of money by making government more efficient (and where have you heard that song before). Mostly, they're hoping that the problems will miraculously go away - or at least go away for as long as they're in office.

Julian: Wait a second, isn't the state getting more revenue than expected? What about that?

Lacter: Actually, it's a lot more revenue -- a $6.6 billion windfall because income taxes are coming in way higher than expected. And yes, I'm sure it'll provide an argument for not making as many unpopular cutbacks. But L.A. doesn’t have a personal income tax that can boost revenue. Its sources of generating revenue are barely budging, in part because companies hate doing business here. All kinds of reasons for that - the impossible red tape, an outdated tax system, the hurdles in getting developments off the ground. Now, this has been going on a very long time and it's resulted in existing businesses moving to more accommodating cities; and new businesses not setting up shop in L.A.

Julian: And when a city loses its business base...

Lacter: ...it means that revenues are not going to increase to the levels required to keep up with expenses. The real answer – maybe the impossible answer – is major structural reform, and there are two potential candidates for mayor who are talking up that idea: Austen Beutner, who for the last year was the Deputy Mayor in charge of business development and Rick Caruso, the billionaire developer who basically says that the people running the city don't know what they're doing. Frankly, I'm not sure how effective either of these guys would be as candidates, considering that they're relatively unknown. And saying that we need major change is a lot different than making it happen – as Richard Riordan, L.A.’s last business-oriented mayor discovered back in the 90s. But if services continue to be cut, maybe they’ll be a bigger push to go beyond these short-term fixes.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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