Business Update with Mark Lacter

Possibility of L.A. bankruptcy; gas prices continue to fall in Southland

KPCC's business analyst Mark Lacter says the city of Los Angeles probably won't be going bankrupt. He also explains the recent drop in gasoline prices.

Steve Julian: Mark, is it time to start worrying again about the city of L.A. going bankrupt?

Mark Lacter: Not really Steve - even though the budget director, Miguel Santana, released a gloomy report about the city's finances, and he used the city of Stockton as a kind of cautionary tale - Stockton has a real budget shortfall on its hands and might have to file for bankruptcy if it can't work out a deal with its creditors.

Julian: What shape is LA in?

Lacter: Well, the budget deficit is projected to be over $200 million next year, over $300 million the year after that, and over $400 million the year after that. The basic problem - and we've been talking about this for quite a while now - is that there's way too much money going out in the form of wages, health care costs, retirement benefits, and city services, and there's not nearly enough revenue coming in to pay for all that stuff. Up to now, the city has managed to close big deficits by patchwork - take one-time gains, defer expenses, cut back on the kinds of services that won't be immediately noticed. But you can’t patch things up forever, which is why the budget director is calling for a more comprehensive plan that includes new taxes, possibly more layoffs, and the potential outsourcing of street maintenance and emergency medical transport - an idea that has not gone down well with the firefighters.

Julian: Is this taking LA back 30 years? 50?

Lacter: Sort of. What this really comes down to is resizing the sorts of services the city can realistically offer, and it's a killer from a political standpoint because no elected official wants to take away services that people have become accustomed to receiving. For now, the question isn't so much whether the city of L.A. is on the verge of insolvency - it's really not - but instead how long before the cutbacks become a lot more intolerable.

Julian: Haven't city officials been jostling for ways to bring in more revenue by getting businesses to move to LA?

Lacter: They certainly have, even to the point of offering a three-year tax holiday for companies that move to Los Angeles. Mayor Villaraigosa and several council members have proposed extending that tax holiday for another three years. The problem is how do you offset the money that’s being lost from businesses not paying taxes? And the answer is that so far you don't. Matter of fact, the budget director's report says that further tax reform efforts will result in significant increases to the deficit. Not a great thing.

Julian: Offering a tax holiday for a newcomer is anethema to long-standing companies.

Lacter: That’s right, the businesses already in L.A. don’t get any tax break and they have to put up with a very complicated and outdated tax code. Again, the idea is to raise revenue so that the city can cover its expenses, and that's hard to do if you're offering tax breaks.

Julian: I mentioned yesterday that gas prices have fallen every day for the past two weeks. What goes down must come up, right?

Lacter: Slowly, Steve – very slowly. An average gallon of regular is running at $4.28. That's about a nickel cheaper than last week and a dime cheaper a month ago. Perhaps even more important is that prices have not reached their all-time high in 2008. The economists who study this stuff say that consumers don't seem to get all that worked up if prices aren't any higher than what they've been in the past. And that may explain why retail sales seems to be solid and why consumer confidence is moving up. We’re just conditioned to pay more.

Julian: Fill'er up.

Lacter: Yes, enjoy the 10 cent savings.

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


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