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L.A. budget crisis threatens jobs, credit rating

LOS ANGELES (Reuters) - Los Angeles, the second-largest city in the United States, is confronting a mounting budget deficit that threatens to force thousands of job cuts, deplete its fiscal reserve and further damage its credit rating.

Downtown Los Angeles is seen from behind a row of trees in East Los Angeles January 18, 2008. REUTERS/Lucy Nicholson

The $212 million budget shortfall, projected to more than double next year, is attributed mainly to plunging tax revenue blamed on the region’s sagging economy, falling property values and a 15 percent jobless rate -- one of the highest of any major U.S. city.

“The last time we saw this kind of drop in revenue was the Great Depression,” Miguel Santana, the city’s chief financial officer, told Reuters. “It speaks to how severe this budget crisis is.”

Mayor Antonio Villaraigosa and other senior city officials spoke on Friday with executives at Fitch Ratings, seeking to forestall a further diminution of Los Angeles’ credit-worthiness.

The city was downgraded late last year from a top rating of “AAA” to “AA-” as serious budget problems loomed.

One major concern for holders of municipal debt is a plan by the city to use most of its $230 million reserve to close its current budget shortfall, Santana said.

He added the city plans to replenish its reserve in part by leasing out its parking garages to private operators. But analysts said sharp revenue declines leave Los Angeles with relatively few options.

“It’s pretty simple. They are going to need to make some serious spending cuts,” said Ian Carroll of Standard & Poor’s.


The crisis has put Villaraigosa, a former labor activist, squarely at odds with unions that represent 98 percent of L.A.’s municipal work force, which in turn accounts for 80 percent of the city budget.

Villaraigosa said last week he will propose the elimination of 1,200 to 2,000 city government jobs in next year’s budget, on top of 1,000 positions the mayor last week ordered to be cut over the next few months.

He hopes to achieve some cuts through attrition and by moving some workers into vacant positions in self-supporting agencies, such as the Department of Water and Power. But Villaraigosa has acknowledged that as many as 350 employees will likely be terminated in the initial round of cuts.

He also has suggested that large layoffs could be avoided if the unions were willing to accept pay cuts.

“If everybody took a 5 percent cut, it would add $150 million to the general fund,” the mayor said on Thursday at an event sponsored by the local business leaders.

Union officials have bristled at those proposals.

“We find it ironic that at the same time Congress is debating a jobs bill, the mayor of one of the largest cities in the country is talking about laying off 3,000 people,” said Barbara Maynard, spokeswoman for the Coalition of L.A. City Unions. “The last thing Los Angeles or any city needs is to have more people on the unemployment line.”

She said before considering layoffs and pay cuts, the city should seek reductions from some of the $2.5 billion it pays for work performed by private contractors.

Private law firms that bill the city for hundreds of dollars an hour, for example, “can certainly afford a pay cut more than a worker who is making $15 an hour,” she said.

Unions are still smarting from concessions recently negotiated with the city to pare back most of a $400 million shortfall in the municipal pension system caused by losses on Wall Street. A key part of that deal was an early retirement package that moved 2,400 employees off the city payroll.

For now, Villaraigosa has said he intends to keep police officers and firefighters exempt from the job cuts he is seeking, even though police and fire protection accounts for 75 percent of the city’s general fund.

In the end he vowed to do what was necessary to get the city’s financial house in order.

“There is no scenario, none, while I am mayor of Los Angeles where this city will ever be bankrupt,” he said. “I can guarantee that.”

Additional reporting by Jim Christie in San Francisco; Editing by Gary Hill and Maureen Bavdek