November 25, 2009 / 11:44 PM / 10 years ago

Los Angeles' budget gaps may force dramatic change

SAN FRANCISCO (Reuters) - Los Angeles must take dramatic steps in coming months to bring its budget back into balance, including measures to slim the size of its government and reduce how much it spends on pensions for retired employees, the city’s top budget official said on Wednesday.

Los Angeles, California’s biggest city, is seeing a steep drop in revenues fueled by the state’s 12.5 percent unemployment rate, a slump in consumer spending, an uncertain housing market and a weakening commercial real estate sector.

Fitch Ratings has grown so concerned about Los Angeles’ budget woes that on Tuesday it downgraded the city’s general obligation debt to AA-minus from AA.

Fitch said it expects the city’s economic decline to impede financial recovery. Among problems it cited were high unemployment, sales tax weakness, assessed value losses, high home foreclosure and negative amortization mortgage exposure.

Miguel Santana, the city’s administrative officer, said he was not surprised by the downgrade. He is intimately aware of how the city’s finances are faring, and they’re in dire shape, he told Reuters in a telephone interview after briefing the city council on options for balancing the city’s books.

Officials must close a nearly $100 million gap in the city’s current-year budget, and are likely to use reserve funds to do so, Santana said.

“Next year we’re expecting a $400 million deficit,” he said.

“We really need to prioritize our programs,” he added, noting that tapping reserve funds next year would be imprudent.

Instead, difficult choices about the size of Los Angeles government should be made. “Next year we’ll have to find some real structural adjustments,” Santana said.

Those adjustments may include layoffs and shifting some work done by the city to the private sector to shave costs.

They may also include a new pension benefit structure for city employees — the so-called “two tier” system that many local officials around California are mulling.

The system would basically have new public employees hired after a certain date receive fewer pension benefits than current employees.

New public workers may also have to contribute more from their paychecks to their retirement accounts.

“We’re looking at everything,” Santana said.

Fitch in its statement underscored its concern about how much Los Angeles may be spending on pension benefits.

“As rising pension costs contribute significantly to the future financial needs, the city cites pension reform as necessary to achieve fiscal balance and has already begun discussions with some labor groups. However, Fitch views the ability to achieve savings in this expense as uncertain in both amount and timing, especially since any change to the police and fire retirement systems requires voter approval,” the credit rating agency said.

Editing by Andrew Hay

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