April 14, 2010 / 7:34 PM / in 8 years

Huge utility at center of Los Angeles budget fight

* City’s powerful utility says cannot make payment

* Three-way political showdown leaves problems lingering

* Controller warns city’s reserves falling dangerously low

By Steve Gorman and Dan Whitcomb

LOS ANGELES, April 14 (Reuters) - Days after Los Angeles’ top accountant raised the specter of America’s second-largest city going broke, its leaders wrestled with a worsening budget crisis that has eroded the city’s credit rating and put thousands of jobs in jeopardy.

Officials sought this week to tamp down talk of insolvency that emerged from a showdown between the City Council and Los Angeles’ powerful utility over a rate increase supported by the mayor but vetoed by the council.

Part of the rate hike was earmarked for investments in solar and wind power projects touted by Mayor Antonio Villaraigosa as necessary to meet his aim of shifting 20 percent of the city’s power needs from fossil fuels to cleaner, renewable energy.

But the Department of Water and Power, the largest municipal utility in the country, said in a statement on Tuesday that it now regards those green-energy objectives as out of reach and remains at odds with city leaders over the budget crunch.

In a sign the DWP was hardening its position in its standoff with the City Council over rate hikes, the utility insisted that it lacks the cash to make a surplus-revenue payment eagerly sought by Los Angeles officials to help fill a $212 million budget hole.


The agency said its ability to make the scheduled $73.5 million payment into city coffers had depended on approval of higher utility fees, most which were intended to cover rising costs of providing electricity to city customers.

“There simply is no surplus money to transfer at this time,” the DWP said in a terse statement.

Sources said on Wednesday that the mayor’s office, City Council and the DWP were holding behind-the-scenes talks on a possible compromise rate increase.

The mayor last week asked the utility to scrape together enough cost savings to allow at least a $20 million payment to the city.

The budget crisis, the worst to hit the city in decades, is attributed mainly to plunging tax revenues blamed on the region’s sagging economy, falling property values and double-digit unemployment.

With the budget deficit projected to more than double to nearly $500 million in the fiscal year that starts July 1, the mayor has ordered about 1,000 job cuts and is expected to propose eliminating up to 3,000 more in a budget proposal due out next Tuesday.

Many of those are likely to come from layoffs. And while Villaraigosa had pledged to keep public safety agencies off-limits to the cuts, a City Council committee voted on Monday to recommend an immediate police hiring freeze.

The squabble over DWP rates also triggered a further downgrading of the city’s credit worthiness: Moody’s Investors Service cut its rating on Los Angeles’ general obligation bonds from Aa2 to Aa3 last Wednesday, citing the loss of DWP funds and a “continued erosion of the city’s historically better-than-average willingness and ability to quickly re-balance its budget mid-year.”


And on Thursday, Standard & Poor’s placed its ratings for Los Angeles on a watch list for potential downgrades.

City Controller Wendy Greuel responded by ordering an audit of the DWP and warned that the city’s general fund could run out of cash and fall $10 million into the red by May 5 without the utility’s revenue transfer.

One angry city councilman, Greig Smith, urged the council to seek greater control over the DWP’s budget and appointments to its board. Villaraigosa upped the ante by threatening to shut down nonessential city services two days a week, only to later back down after some challenged his authority to do so.

The city’s acting budget boss, Ray Ciranna, told Reuters on Monday there was no chance of going broke before the fiscal year ends because the city has sufficient reserves to plug its existing deficit, even without the $73.5 million DWP payment.

“At this point the city is solvent and will be paying its bills through the end of the (fiscal) year,” he said.

Still, Los Angeles’ fiscal outlook remains precarious.

Without the DWP’s payment, the city would be left with just over $39 million in reserve -- “not a lot of money to have in a reserve fund when you’re dealing with the kinds of ups and downs we’re seeing in our economy,” Greuel told Reuters.

Greuel, however, insisted the city will honor its bond payments: “It’s always been a top priority ... . Those are the first things we would pay going forward.” (Additional reporting by Jim Christie in San Francisco) (Editing by Xavier Briand)

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