Business Update with Mark Lacter |

Could the city of L.A. go bankrupt?

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Mayor Antonio Villaraigosa says it'll never happen on his watch and former Mayor Richard Riordan says it's inevitable. They're both probably right. In plowing through the numbers for my October column in Los Angeles magazine, I'm guessing that there's either a total lack of awareness at City Hall about the budget shortfall - or an unwillingness to face reality (keep in mind that Villaraigosa and many of the others will be out of office by the time the crisis really kicks in).

City officials patted themselves on the back a few months ago for making a few nickel-and-dime cuts that were required to balance the current budget. But the real nightmare is the city's mammoth pension obligations - hundreds of millions of dollars that are owed to current retirees, as well as those still on the city payroll. Well, there is simply not enough money to pay these folks without slashing city services to the point where they would be unrecognizable. For now, roughly one out of six dollars in L.A.'s general fund goes toward paying pensions. By 2014, the amount could easily be one out of three. When so much money is required for retirees, less money is available for libraries, parks, trash pickup - perhaps police and fire services, too. From my piece:

Money and common sense have never been the best companions. Consider the City of Los Angeles, which faces horrific financial woes largely because nobody was paying attention to a problem that in hindsight looks pretty obvious. As it now stands, a typical L.A. police officer or firefighter can retire at 55 and receive up to 90 percent of the salary made in the last year of employment. For life. Plus free health care, also for life. So if you put in 30 years on the job and live an additional 30, the city is essentially bankrolling almost two full salaries, pre- and postretirement. Other city employees enjoy nearly the same benefits. It's quite the arrangement, and it's untenable. Common sense tells you that--what entity, private or public, can pay its people twice and remain solvent for very long? Steven Frates, director of research at Pepperdine University's Davenport Institute, calls it the "triumph of optimism over experience."


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More budget hocus pocus from Sacramento

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Accounting tricks, optimistic projections, and more federal money than has been promised - it all adds up to the budget deal that state lawmakers are expected to be voting on. Of course, given the size of the deficit and the amount of tax revenue coming in, they didn't have much of a choice. The budget plan:

--cuts spending by $7.5 billion, less than the $12 billion sought by Schwarzenegger and Republicans lawmakers.

--counts on California getting $5.3 billion in federal funds for welfare, education and prison costs instead of the $3.4 billion that the governor had estimated in May. (No explanation on how that's going to happen.)

--avoids elimination of California's main welfare program, as well as child care for 140,000 children of low-income families.

--lowers school spending by $3 billion, though more than half of that cut would involve deferring payment of certain school bills until the following fiscal year - essentially an accounting trick.

--provides the University of California and California State University with $200 million to compensate for cuts made last year.

--uses rosier tax-revenue forecasts from the state's Legislative Analyst's Office than those used by Schwarzenegger in May.

--picks up $1.2 billion that the state will save by suspending a business tax credit that lets companies count part of one year's losses against future earnings.

--borrows $2.8 billion from internal state accounts.

--allows companies to avoid paying a 20 percent penalty when they understate their tax liability by more than $1 million. This would cost the state $132 million a year.

--sets in motion pension reform by proposing to roll back pension benefits for new state employees to 1999 levels (no change for folks currently in the system, which is where the problem really lies). Also eliminates pension spiking in the last year of employment.

--proposes a ballot initiative that would ask voters to require a rainy-day fund.

Here's the 8-page summary from the Budget Conference Committee and here are stories from Bloomberg and the LAT.


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Richest people in Southern California

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Forbes magazine's annual roster of richest Americans has OC real estate mogul Donald Bren in the top spot for Southern California, at $12.2 billion. He's followed by Eli Broad, at $5.8 billion, Patrick Soon-Shiong, $5.6 billion, and David Geffen, $5.1 billion. Topping the list of Californians is Oracle's Larry Ellison, at a whopping $27 billion. Here's the Socal rundown (number indicates ranking on the full list):

21 Donald Bren
$12 B 78 Newport Beach, CA real estate

44 Eli Broad
$5.8 B 77 Los Angeles, CA Investments

46 Patrick Soon-Shiong
$5.6 B 58 Los Angeles, CA generic drugs

54 David Geffen
$5.1 B 67 Malibu, CA movies, music

90 Haim Saban
$3.4 B 65 Beverly Hills, CA television

110 Steven Spielberg
$3 B 63 Pacific Palisades, CA movies

119 Kirk Kerkorian
$2.9 B 93 Los Angeles, CA investments, casinos


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Immigrants are positive for economy

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In the long-run, they expand productive capacity, stimulate investment, and promote specialization, according to Giovanni Peri, an associate professor at the University of California, Davis, and a visiting scholar at the Federal Reserve Bank of San Francisco. He also says there's no evidence that immigrants take jobs at the expense of workers born in the U.S. Peri, whose work appears in the Federal Reserve Bank's Economic Letter, reached his conclusions by looking at output, income and employment in states with heavy immigration populations and those with without. (In California, one worker in three was foreign born in 2008; in West Virginia it was one in 100.)

This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.

In general, other studies have found that the economic effects of immigration to be a net positive. Unfortunately, this is a highly political, often emotional issue that will likely transcend any Ivory Tower analysis.


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Why the big drop in home sales is a big deal

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This is what many economists had been dreading - the end of federal homebuyer tax credits made mincemeat of the housing market in July. Home sales in L.A., Riverside, San Diego, Ventura, San Bernardino and Orange counties fell 20.6 percent from June and 21.4 percent from July 2009, according to DataQuick. The message is loud and clear: Given the unsettled economy, American consumers are unlikely to make any large purchases without some sort of government assistance. It's a little like what happened to car sales immediately after the end of the Cash for Clunkers program. From Dataquick:

"It appears some of the sales that normally would have occurred in July were instead tugged into June or even May as buyers tried to take advantage of the expiring tax credits. Some of last month's underlying technical numbers were largely flat, indicating that the market is treading water," said John Walsh, MDA DataQuick president. "We do expect some sideways buying and selling to kick in, especially among homeowners who have owned for more than seven years and didn't take out equity during the frenzy. You may have to 'discount' your self-perceived home value, but if the person you're buying from has to do the same thing, it doesn't matter. And you may get a spectacularly low mortgage rate."

The obvious question is what happens this month and next? There's certainly no sign that consumers are in any mood to start buying homes again. That probably means a drop in prices, though to what degree is unclear. Optimistically, lower prices could encourage buyers over the next few months. Pessimistally, all it spells is a further decline in property values, leaving more folks with mortgages that are higher than the value of their homes. That's right, underwater. I know we don't spend much time listening to Alan Greenspan anymore, but for what it's worth the former Fed chairman says that a drop in home prices could result in the economy contracting again. From Bloomberg:


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