Business Update with Mark Lacter

Lacter: The city of Los Angeles unlikely to face bankruptcy

KPCC's business analyst Mark Lacter discusses the municipal bankruptcies in California, and says LA is not going down the same financial path.

Susanne Whatley: Mark, with the city of Stockton having filed for bankruptcy protection and San Bernardino preparing to file, the obvious question is whether other cities might follow. Is L.A. vulnerable?

Mark Lacter: Very unlikely, Susanne, for a number of reasons that we’ll get to in a moment. But first off, it’s worth pointing out that Stockton and San Bernardino were done in by the housing meltdown, which lowered the value of homes and brought down property tax revenue. And they were stuck: raising taxes is quite difficult to do, they’ve lost redevelopment funds to the state, and they’re shelling out huge amounts of their budget on pension and health care.

Whatley: San Bernardino had been struggling for some time…

Lacter: Yes, well before the recession. Some economists say that the slide goes back to the 1980s, when the Kaiser Steel mill was shut down, and the opening of the 15 freeway drew business away from the city. Longtime residents began selling their homes around that time. And yes, there will probably be other filings – at least eight California cities have indicated that they’re in bad financial shape, including El Monte, Monrovia, Lancaster, and Tehachapi in Kern County. That doesn’t necessarily mean they’ll all file for bankruptcy – as a matter of fact, going to bankruptcy court can be a lengthy process - and judging by the experience in Vallejo, which came out of bankruptcy last year, it doesn’t always result in great results for creditors.

Whatley: Who are the creditors?

Lacter: Not just banks and corporations, but real people – could be retirees who worked for the city and face big cuts in their pension plans; or even bondholders who had been assured that investing in a local government was extremely safe and tax free to boot. Well, most muni bonds are still very safe, but lawyers for the city of Stockton would like to see investors share in the pain, even though no U.S. city has used the bankruptcy process to force bondholders to take less than the full principal (and that goes back to the 1930s). Opening up that possibility would be a huge deal for other cities. Of course, bankruptcy filings are likely to remain very unusual – the political ramifications for elected officials are just too great.

Whatley: Does that explain why it’s not likely to happen in Los Angeles?

Lacter: That’s part of it. A guy like Mayor Villaraigosa is obviously very ambitious (as are several members of the City Council and the City Controller and the City Attorney), and it’s just hard to imagine that they would want the stain of a bankruptcy filing on their resumes if they could at all avoid it or delay it. The mayor has made it very clear that there will be no bankruptcy filing on his watch. But politics isn’t the only reason an L.A. bankruptcy is extremely unlikely. You know, for all its troubles, the city is large enough and its economy is strong enough to have the financial resources that a smaller town like Stockton doesn’t have.

Whatley: But L.A. is struggling too, right?

Lacter: Struggling big time. Over the last five years, thousands of jobs have been eliminated and department budgets getting slashed. Even the police department is feeling the effects, not with any cuts in the number of officers (the current figure is running a little under 10,000). But you are seeing cuts in the back office operations – areas that include fingerprint and DNA analysis. Again, it’s largely the result of a terrible housing market, and those large pension and health care obligations. (I write about the city’s budget troubles in the August edition of Los Angeles magazine.)

Whatley: The city does manage to balance its books each year…

Lacter: Yes, but only because it has to – and only because money is shifted from one department to another, and maintenance is deferred. Of course, there’s a lot of borrowing. It’s a tough slog – and the deficits are not going away.

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


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