Business Update with Mark Lacter

Mayor Antonio Villaraigosa's spending plan

KPCC's business analyst Mark Lacter weighs-in on the mayor's proposed budget.

Steve Julian: LA Mayor Antonio Villaraigosa has left some people wondering how his proposed budget will affect them.  Mark, how does the budget proposal look to you?

Mark Lacter: You know, Steve, this budget is a little like taking a Rorschach test - it can be interpreted in any number of ways.  If you're an optimist, you'll see that the mayor has proposed no furloughs, no layoffs, he wants to have the Central Library open seven days a week (it's now open six), and he'd provide more funding for tree trimming and sidewalk repair.  Maybe the best news is that the deficit for next year is expected to be quite a bit lower than expected.  That's not just wishful thinking - this current fiscal year has seen more tax revenue coming in than expected because more people are buying stuff and because L.A. has seen big increases in the number of tourists, and that means additional revenue from the hotel tax.  The bet is that those numbers will keep improving, which would mean still more tax revenue that can be used to pay off higher pension and health care costs.

Julian: That's quite a change from a few years back, when tax revenue was way down and the city had to make some drastic cuts...

Lacter: Yes, in order to cover those retirement costs.  Actually, they're so optimistic about higher tax revenue that by 2017 the city of L.A. is supposedly going to eke out a budget surplus (now that is wishful thinking).  We need to remember that any budget is based on a set of assumptions about how much money will be coming in and how much will be going out.  And budgets are not static - the numbers are always moving.

Julian: Wasn't it just a few months ago when city warned about possible cuts in emergency services if a sales tax increase wasn't approved?

Lacter: That's right - and it wasn't approved by voters, but city officials are nonetheless more optimistic about the economy.  That's why the budget isn't being chopped.  The question is whether city officials have it right this time.  Keep in mind that the unemployment rate in the city of L.A. is still 11 percent.  And, let's also not forget that the city has been forced to eliminate thousands of positions and sharply reduce services.  The real answer is to restructure city government so that business can be done more efficiently.  Of course, that means breaking a lot of eggs, and many elected officials would rather just hope for the best.

Julian: Has this housing market, that seems to be reviving, helped improve the budget picture?

Lacter: It has, though not always for all the best reasons.  The median price for a Southern California home was $345,000 - that's the highest level in more than four-and-half years, according to Dataquick.  Sales have been especially strong at the high end: the number of homes sold for more than $500,000 jumped 40 percent from a year earlier.  But, a lot of the activity is due to pent-up demand and very tight inventory.  To give you an idea of how tight, if you took all the homes on the market in L.A. County and calculate how long it would take sell all of them, based on current pace of sales activity, the time needed would only be 2.7 months.  That's among the lowest in the entire state.

Julian: What's the average?

Lacter: In a healthy housing market, around six months.  Now, when too many buyers are going after too few homes, prices are bound to take off, and that leaves large groups of people on the sidelines.  I mean, why would you want to put your house on the market if buying a new home was essentially prohibitive?  We're seeing lots of potential buyers with financing, but they're often bypassed in favor of all-cash deals (almost one-third of all sales in Southern California last month were all-cash).

Julian: Anything else getting in their way?

Lacter: Well, the average age of homebuyers is increasing - and that could reflect the tough job market, or simply the preference among young people to live in urban areas where home prices tend to be high.  So, this is not an especially healthy housing market - and the local economy isn't really going to get over the hump until it becomes easier to buy and sell homes.  That is why the newfound optimism coming out of LA City Hall might be a little premature.

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


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