OFFICE OF THE CITY ADMINISTRATIVE OFFICER
March 8, 2013 Antonio R. Villaraigosa, Mayor Herb J. Wesson, Jr, City Council President Paul Krekorian, Budget and Finance Committee Chair
CAO File No. 0590-00098-4259 Council File No. 12-0600 Council District: All
Miguel A. Santana, City Administrative Officerr
Fiscal Year 2013-14 Budget
SUMMARY Over the last four years, the City of Los Angeles has made significant progress in reducing its structural deficit by over 80 percent. Proposition A was proposed as a measure to address a significant portion of the remaining problem through an increase in sales tax revenue, not just for next year, but more importantly for the years that follow. On March 5, 2013, City of Los Angeles voters defeated Proposition A and as a result, the City will now need to eliminate the remaining deficits through additional reductions and other strategies that help make available additional ongoing revenues. DEFICIT UPDATE The "City at a Crossroads" report issued by this Office on February 7, 2013 (CF 12-0600-8171), stated: "the projected $216 million deficit for fiscal year 2013-14 is showing signs of improvement." This improvement comes from three factors: 1. Latest projections from the pension systems show that the reforms adopted are starting to bear fruit, resulting in a projected pension contribution that may be $45 million less than what had been projected just one year ago; 2. Positive trends in the economy and its impact on City's revenues; and 3. The growth in the Budget Stabilization Fund of $70 to $80 million in one-time funds. Other factors that will ultimately determine the final deficit projection for 2013-14 continue to be in flux. The final deficit figure will be determined at the release of the Mayor's budget on April 20, 2013. In addition, the projected deficits for 2014-15 and beyond will also be determined in the Mayor's proposed budget because they are contingent on the mix of on-going versus one-time solutions that are adopted in the 2013-14 budget. In other words, every dollar of one-time revenue that is used to solve the 2013-14 projected deficit will result in increasing the deficit for
GAO File No.
the following year. Moreover, every dollar of on-going revenue used to solve the deficit, will reduce the structural defict the following year. On the expenditure side, while pension costs continue to grow year after year, due to the reforms adopted by the Mayor, City Council and the City's pension systems, the rate of growth is slowing. The latest information from the pension systems indicate the City's contributions for 2013-14 may be reduced by up to $45 million from what had been previously projected. However, these savings may decrease should more positions be added to the budget. Furthermore, countering the anticipated savings in pension contributions are increased appropriations needed by the Police and Fire departments to maintain existing services. Combined, the two departments require approximately $40 million above original projections to maintain current service levels. Additionally, the departments require almost another $50 million more to replace their aging fleet of vehicles and emergency response apparatuses. Altogether, the total funding increase from the current budget would be about $130 million. On the revenue side, the economy is showing signs of improvement due to a gradual reduction in the unemployment rate, increase home sales and growing property values. Final revenue projections will be released as part of the Mayor's proposed budget. However, as reported in the mid-year Financial Status Report, this Office is expecting a growth in revenue of approximately 2.6 percent for an increase of $50 million above original projections. This projection is consistent with the revenue outlook presented by the Controller on March 1, 2013. Based on the reductions in expenditures and increases in on-going revenue, as well as accounting for some obligatory increases in expenditures above prior projections, the current budget solutions for 2013-14 are expected to address approximately $50 million to $60 million of the $216 million deficit; leaving a balance of between $150 million to $165 million to be addressed. In light of the budget reductions already experienced by departments over the last several years, the magnitude of this remaining deficit remains a daunting challenge. One-time Versus On-going Solutions: Relying on one-time revenue for on-going expenditures makes the following year deficit larger and does nothing to address the structural deficit. It would be irresponsible and shortsighted to rely on one-time revenue to resolve a majority of the structural deficit. This Office recommends utilizing no more than 30% of one-time revenues or savings for deficit reduction in 2013-14. In earlier reports, this Office recommended the creation of the the Budget Stabilization Fund for this purpose in an effort to ease the pain of required reductions and to protect critical services in 2013-14. As a result of the improving economy, the City should expect a sizeable amount of onetime revenue in the Budget Stabilization Fund. Additionally, new one-time revenue from the lease of City property (i.e. Mangrove) and reimbursements from transportation grants may also be available. However, this Office strongly recommends against using all or the majority of one-time dollars to address the remaining budget deficit.
CAO File No.
Budget Outlook Adopted 2009-10 to 2012-13 Projected 2013-14 to 2016-17
$5,400 $5,200 $5,000
~ $4,800 ~ $4,600
$4,400 $4,200 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
The City's Four Year Budget Outlook will be updated as part of the Mayor's Proposed Budget for Fiscal Year 201314 as a result of new retirement costs illustrations to be provided by LAGERS and LAFPP.
A better approach to utilizing one-time revenue, and one that is consistent with the City's existing financial policies, is to invest one-time revenues in one-time expenditures to strengthen the City's aging public infrastructure such as streets and sidewalks; address deferred maintenance on the City's emergency response vehicles; reduce the City's liabilities due to police banked overtime and overgrown trees; payout one-time expenses such as judgments and settlements; strengthen internal systems such as the City's financial management system and information technology infrastructure; and reduce the City's debt burden. These one-time expenditures should reduce the City's liability, provide immediate improvement to the quality of life, and reinforce the City's capacity to deliver services. After four years of deferring basic infrastructure needs, the City can no longer afford to simply rely on hope that one day these issues will be addressed. Moreover, in light of the projected out year deficits and pending legal cases related to sidewalks, the telephone users tax, and employee relations, one-time dollars should be set aside each year to build a healthy Budget Stabilization Fund to address these potentially large liabilities. While solutions to the budget deficit for 2013-14 have begun to take shape, with the defeat of Proposition A, more work is needed to address to the City's structural deficit. This work will require setting priorities and reducing expenditures while increasing on-going revenue by freeing up General Fund dollars that are diverted for specific non-essential activities. Procedurally, most of this work with be done in the context of the budget process. However, in light of the certainty that there will not be a new source of on-going revenue to depend on, this Office recommends
CAO File No. 0590-00098-4259
that the Mayor and City Council immediately provide direction that could reduce projected ongoing expenditures or increase on-going revenues from existing sources. BUILDING STRUCTURAL BUDGET SOLUTIONS In order for the 2013-14 budget to make an impact on the structural deficit, this Office recommends that at a minimum, 70 percent of all budget solutions come from a combination of on-going revenue increases and expenditure reductions (inclusive of pension savings). The options for on-going expenditure reductions are discussed in the subsequent section. With respect to revenue, based on current projections for both on-going and one-time revenues, the potential budget solutions are evenly split as illustrated below.
Potential 2013-14 Budget Solutions
The even split between on-going revenues and one-time revenues does not promote fiscal sustainability nor does it position the City to withstand any future economic downturns. Furthermore, as previously stated, this Office strongly recommends against using additional onetime revenue for on-going purposes. Additionally, should additional one-time revenue become available such as from the sale of surplus property (e.g. Mangrove), these revenues should be used for the following purposes: 1) Ensure that the City's Reserve Fund remains at 5 percent of the General Fund; 2) Rebuild the Budget Stabilization Fund for use in the event of another economic downturn and to stabilize the 2014-15 budget; 3) Defease the City's debt burden to provide on-going savings; and/or 4) Fund critical one-time infrastructure needs and projects to mitigate future liabilities such as tree-trimming and sidewalk repairs.
CAO File No. 0590-00098-4259
In order for the City to have a balanced budget approach everything must be on the table. In light of the structural deficit any on-going solution that is not considered for 2013-2014 will need to be revisited in the following year. Considerations should be given to the following: 1) 2) 3) 4) 5) 6) Reduce or maintain current employee compensation levels; Reduce or maintain current employee healthcare costs; Mitigate the future and on-going impact of cost of living increases; Identify service reductions, departmental consolidations, and/or efficiencies; Identify revenue and collection opportunities; Increase fees and fines to ensure full cost recovery.
It should be noted that achieving savings from any option that impacts labor will most likely require agreement from labor through the negotiation of their contracts. In some cases these contracts do not expire until the end of 2013-14. As such, in the context of the budget development process for 2013-14, this Office will continue to review all other budget reduction proposals that departments have submitted for possible inclusion in the budget for 2013-14. RECOMMENDATION That the Council, subject to the approval of the Mayor: 1. Instruct the City Administrative Officer to report to the Executive Employee Relations Committee with a framework on how to achieve savings from options including but not limited to: reducing or maintaining the current employee compensation levels, reducing or maintaining the current employee healthcare costs, and mitigating the future and on-going impact of cost of living increases. 2. Instruct the City Administrative Officer to report back on potential service reductions, departmental consolidations, efficiencies, potential revenue and collection opportunities.
FISCAL IMPACT There is no fiscal impact directly resulting from the recommendations in this report. However, subsequent actions taken by the Mayor or City Council on issues presented in this report may address the City's projected budget deficit for 2013-14 of $216 million as well as address the City structural deficit.