L.A. Controller Wants Lawmakers to Mind the Budget Gap

Posted on February 13, 2017


By Keeley Webster

Spending grew faster than revenues in Los Angeles in fiscal 2016 prompting the city controller to warn city leaders to be cautious as they begin the budget process.

General fund revenues were $4.9 billion in 2016, a 2.3% increase of $111 million over fiscal year 2015, while expenditures grew 5.1%, a $225 million increase, said Galperin as he released the city's comprehensive annual financial report for fiscal year 2016, which ended on June 30.

Based on current year trends, Galperin said it appears likely that spending growth will outpace revenue growth in 2017 as well unless the city identifies new revenue and curtails spending.

The controller will release a revenue forecast on March 1 that officially launches the budget process leading to Mayor Eric Garcetti releasing his draft budget on April 20.

Galperin cautioned the mayor and council to be prudent in making spending decisions so the city doesn't lose ground gained in eliminating the city's structural budget deficit.

"This type of imbalance in any given year is not necessarily a problem for a large city with strong reserves, but if this becomes a trend it threatens to reverse the progress we have made over the past few years," Galperin wrote to the mayor and City Council in a letter attached to the CAFR.

The city faced a projected deficit of $500 million in 2012, but had reduced that to $100 million by 2015. The city ends each year with a balanced budget, but the controller's office said that is often accomplished with one-time revenues and service cuts.

This news comes after then-City Administrative Officer Miguel Santana had recommended Jan. 6 that the City Council proceed with a judgment obligation bond issuance of between $50 million and $70 million to reimburse the reserve fund for extraordinary liability payouts made resulting from settlements and judgments. The bond sale is planned for June 5.

Santana reported that reduced revenues combined with $82 million in additional costs from liability claims and an agreement to give firefighters a cost of living increase raise resulted in a combined potential deficit of $245 million for fiscal 2016. He also asked city department heads to curtail expenditures.

The city's reserve fund balance stood at $295.1 million, or 5.29% of the general fund balance for fiscal 2016 as of November 21. The city has a policy of maintaining a reserve of at least 5%. Reserves have declined from more than 7% in 2015, according to the controller.

Garcetti signed an executive directive Thursday aimed at reducing both the $220 million the city spends annually on workers' compensation and the $140 million it is expected to spend on litigation claims this year. The directive outlines specific instructions on how city departments should report, analyze and aim to reduce risk through data analytics and improved technology infrastructure, according to the mayor's office.

"Over the last couple of years, we have seen fairly dramatic increases in the city's liability payouts," Councilmember Paul Krekorian, chair of the Budget and Finance committee said. "Going forward, we need to do a more accurate job of estimating what the city's liability is going to be, and more importantly, find ways to reduce it."

The mayor is working with Krekorian and the city attorney's office in crafting the program.

"We had a good year in terms of hotel taxes, sales taxes and parking users' taxes, but we had a decrease in utility user taxes and parking fines," Galperin said of the decline in revenue growth.

The amount of income transferred annually through an agreement with the Los Angeles Department of Water and Power also is expected to decrease this year as a result of a lawsuit against LADWP brought by a citizen's group. The parties are still in mediation, but LADWP told the controller's office it will result in a transfer reduction of $30 million to $40 million to the city, said Matthew Crawford, chief financial officer and director of financial analysis and reporting in the controller's office.

"Based on the information provided in this year's CAFR, and the challenges the city will likely face in the future, it is very clear that the city needs to prioritize amongst competing needs," Galperin said.

The city had hoped to close a structural deficit by fiscal year 2018, but pushed that target out to fiscal 2021-2020 during last year's budget process.

Galperin said he doesn't think the city will need to adjust that target further, but city leaders do need to take the structural deficit into account as they make spending decisions.


Click here to read this article on the BondBuyer website. 

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