TAXES

All over the country there is talk of surpluses. In Washington and Sacramento, legislators are trying to figure out how best to spend or refund the newfound money, as revenues keep pouring in beyond expectations. But not in Los Angeles. Here, the talk is not of how to spend budget surpluses; rather it’s how to close recurring deficits of $100 million a year or more. Staff cuts, new taxes and postponement of much-needed infrastructure projects are the issues on the table these days. So how come L.A. isn’t sharing in the economic boom? And why can’t the city seem to get its fiscal house in order? The short answer is that, despite the surging economy, the city’s revenue stream is growing much more slowly than its expenditures. “The council and the mayor have decided to provide certain levels of funding to police, fire and other services, and those expenditures have increased significantly over the years,” said City Administrative Officer Keith Comrie. “But the problem is that those expenditures are costing more than the revenues we take in each year. We have had to fill in the gap each year with one-time revenues.” In each of the last four fiscal years, despite an improving economy, Los Angeles has been relying on one-time revenues or temporary revenues such as federal grant monies for new police officers to close this structural budget deficit. In 1995, for example, the city used more than $200 million in one-time revenues, according to Mayor Richard Riordan’s 1997-1998 Budget Summary report. The city has made some progress in closing the gap: for the current fiscal year, which ends June 30, operating revenues were projected to fall $101 million short of the $2.59 billion in general fund expenditures. But that still forces the city to once again rely on one-time revenues. As the city prepares to enter another budget cycle with the release of the mayor’s 1998-1999 budget proposal next month, this inability to balance the books on an operating basis shows no sign of ending. “We face ever-increasing demands for services as our population grows and our infrastructure ages, yet we have very limited flexibility in what we can do because of this structural budget deficit,” said City Councilman Mike Feuer, who sits on the budget committee. Last year’s mayoral budget report projected a $57 million shortfall for fiscal year 1998-1999 and a $35 million shortfall for 1999-2000. That assumes that the region’s economic growth rate continues to chug along at a robust 3.25 percent. If the growth rate slows to 2.5 percent, the shortfalls are projected to be $71 million and $64 million, respectively. In addition, one of the city’s favorite tactics for getting around the budget shortfall the use of debt financing appears to be running its course. For the first time, the city is approaching the recommended maximum debt repayment load. Debts at the Department of Water and Power and increased debt payments for projects like the Convention Center expansion and the planned Staples Sports Arena have contributed to the problem. Earlier this month, Feuer introduced a debt moratorium and the City Council delayed action on funding for the restoration of the Van Nuys civic center. Behind the recurring shortfalls is a classic squeeze. On the revenue side, the city suffered sharp sales tax and property tax drops during the recession. The sales tax has rebounded somewhat to an average growth rate of 3.5 percent in the current fiscal year. And property taxes posted gains of about 6 percent in fiscal year 1995-95 and fiscal year 1996-97. But that was after three years of double-digit declines resulting from the recession and $130 million in diversions by the state to balance its own budget. Despite the booming economy, sales tax growth is weak because people are flocking to new stores and malls outside the city limits, according to Administrative Deputy City Controller Timothy Lynch. Part of this simply reflects the suburbs’ appeal both for consumers and for retailers, who find it less expensive to operate stores outside the Los Angeles city limits. “It’s the hole in the doughnut syndrome at work here,” Lynch said. Property taxes, meanwhile, have not rebounded as strongly in part because reassessments usually lag trends in actual transaction value by a year or two, he said. And gross receipts revenues from businesses actually fell 0.5 percent in fiscal year 1996-1997. “With all the cost cutting and increased efficiencies in business, the real revenue generators from business are on profits, not gross receipts,” Lynch said. Los Angeles, unlike the state or federal government, has no income tax or capital gains taxes, which have largely driven the huge revenue increases seen in Sacramento and Washington, Comrie said. On the expenditure side, the city has spent tens of millions of dollars hiring new police officers, which has been the single biggest factor behind the budget increases. Police and fire expenditures make up about two-thirds of the general fund budget. Another major expenditure is an additional $130 million a year in police pension fund payments over and above the current rate of inflation, Comrie said. The higher payments stem from a court ruling that blocked the city’s attempt to readjust payment levels to officers who retired in the late 1970s when inflation was in double digits, he said. Councilman Richard Alatorre, who chairs the Budget Committee, said pushing for further cuts in spending is going to be difficult. “We have a growing population with greater needs. I’m not going to tell my constituents, who are crying out for more police and fire protection, that they can’t have it,” he said. Alatorre faults Sacramento for changing the property tax diversion formulas in 1993. “Sacramento is taking $100 million a year from us in property taxes. We have got to get that money back. If we don’t, we are going to have to look for new sources of revenue to support the services that we must provide,” he said. But other observers say more should be done to cut costs. “The city has a very bloated cost structure,” said Robert Poole, president of the Reason Foundation, a privatization think tank in Santa Monica. “The unions have control of the City Council and they have ensured that the cost of providing city services will not be reduced.”