City financial advisors warn LA of dire outlook

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The Los Angeles City Council heard more dire warnings about its financial outlook Tuesday. The city faces a $685 million shortfall over the next 18 months.

For weeks, city administrators have said the City Council needs to slash spending to deal with plummeting tax revenues and a growing pension obligation.

This time, the warnings came from three outside financial advisors to the city.

“We’re very concerned going forward this summer if there’s not a resolution to this year’s budget,” said Lisa Smith of Gardner, Underwood and Bacon, which advises cities around the country.

Jo Mortensen of Public Resources Advisory Group said bond rating companies are closely watching L.A.

“The depletion of the city’s cash and an over-reliance on one-time solutions in the absence of a clear commitment to the city’s long term fiscal health could have dire consequences on the city’s credit ratings," she said.

Like all cities, L.A. regularly borrows money to maintain cash flow. It may need to borrow more in the coming months as the city faces the possibility of depleting its emergency reserve.

Lois Scott of the firm Scott Balice Strategies warned the council that borrowing has become more complicated.

“Your short term borrowing is typically purchased by money market funds. Money market funds have just come under new regulations passed Jan. 27 which significantly restrict their ability to invest in tier two securities," said Scott. "That is going to drive the market. If you lose your highest short term ratings, there will be very significant financial consequences to the city.”

In other words, it could cost the city a lot more to borrow money.

On the council, there’s sharp debate over whether layoffs are necessary – the city administrator’s recommended a thousand.

“That’s a thousand people that aren’t paying their mortgage – that’s a thousand people who are not contributing to our economy," said Councilwoman Janice Hahn. "And aren’t we just contributing to this downward spiral?"

Hahn’s passion was met by Councilman Grieg Smith’s calculations.

“Revenue streams have dropped over $400 million in about 18 months. We will never get to the finish line if we don’t take these drastic actions today.”

The council took no drastic actions.

It instead agreed to study recommendations to privatize the convention center and zoo. It did the same with shifting special funds out of the council’s own control and into the emergency reserve fund.

The council did vote to eliminate the Environmental Affairs Department, but shifted most of its functions to other departments.

Mayor Antonio Villaraigosa made a rare question and answer appearance before the council, to explain why he ordered the process of eliminating a thousand jobs to begin.

Dozens of city workers greeted him with boos and hisses.

"There are a number of options that we can employ that will reduce the number of layoffs," said Villaraigosa. "Ultimately though, there will be some even with revenue generation, even with cuts."

The mayor added, "My only request is that you understand the urgency."

For 10 years, Timothy Butcher’s driven an asphalt truck for the Bureau of Street Services.

“I’m a shop steward for the union. There are folks on the streets that I talk to that are very, very scared.”

While other union leaders vowed to fight any layoffs, Butcher seemed more resigned.

“They’re trying to do everything they can, but it may ultimately have to come down to people hitting the street. People may have to go out the door."

Butcher said the consequences could be devestating. "You lose your job in this economy, you probably going to lose your house, your way of life. It’s a scary time.”

City number crunchers say that even if the City Council makes deep spending cuts and even if many workers are transferred to positions not paid for by the general fund as planned, layoffs may very well end up in the hundreds.