May 31, 2012 - From the June, 2012 issue

Paul Krekorian: City’s Budget & Finance Chair On LA’s Management of Austerity

City Councilmember Paul Krekorian, Chair of the Budget and Finance Committee, faces the enormous challenge of balancing the City of Los Angeles’ budget. Councilmember Krekorian recently sat down with TPR to discuss what steps he has taken to reduce the budget deficit, the impacts that his decisions will have on the City’s core services and civil servants, and the tolls and political difficulties that come with taking on a budget crisis during a period of fiscal austerity.



Paul Krekorian

“We continued our momentum towards increasing the reserve, reducing the size of the workforce, reducing costs, finding efficiencies...” -Paul Krekorian

Paul, as chair the Los Angeles City Budget and Finance Committee, you are charged with solving a $228 million budget deficit and enhancing the City’s solvency. How comfortable are you that the City Council and Mayor are making progress towards both these goals? 

This has probably been the most challenging time that the City has faced in our lifetime in trying to develop sustainable and long term structural budget solutions. The collapse of the global economy has impacted state and local governments throughout the country, and we have been no exception to that. For the last four years the City of Los Angeles has undertaken, with considerable success, a number of steps to address those deficits. We created a contribution system that our employees are making towards retiring health benefits, and they contributed zero before. We’ve eliminated five thousand funded positions and have made this workforce the smallest it’s been since Tom Bradley was mayor. We’ve initiated pension reform for new hires, and reduced salary for new hires. Importantly in this budget, we have brought the reserve level up to the highest it’s been in recent memory, and we’ve continued the momentum towards hitting our five percent goal. In all of those respects, I think, we’ve made significant progress. 

But it gets harder each year because there are fewer options left for addressing our deficit. Everything from this point on is a difficult policy option, a difficult choice of reduction in services or revenue increases that are very difficult for people to bear as long as the recession continues. 

I’m pleased that we’ve gone through my first cycle as budget chair in a way that furthered all of those goals. We continued our momentum towards increasing the reserve, reducing the size of the workforce, reducing costs, finding efficiencies, and, importantly, I think, we’re starting to really focus more of our attention on identifying core services being more oriented around performance-based budgeting. 

As the Budget Committee’s new but respected chair, help our readers understand what within a $7.2 billion budget most contributes to the City’s structural deficit. What’s involved in a structural deficit? 

First the general fund, which is what we’re primarily addressing when we talk about the $220 million structural deficit, is a lot less than that. The general fund is around $4 billion, and you have to first understand that the vast majority of that $4 billion is devoted to public safety and expenditures where we have no discretion, like interest payments. When you take those items out of consideration, you’re left with a tiny fraction of the budget left that’s deemed discretionary. Within that remaining amount you have still things that are core services, like parks, libraries, and street services. It’s very difficult to find $220 million in budget solutions in a $4 billion budget, of which about 90 percent is devoted to personnel and two thirds of which are for public safety. 

What is included in a total City budget of $7.2 billion? What are the incremental budgets? 

The other parts would be special funds like sanitation and things that are not funded out of general fund’s tax revenues. Rather, these have a special stream of income that funds them. Then if you add into that the proprietary departments, the DWP, the airport, and the harbor, then we have around $20 billion in total budget for the entire City. Those are off of the budget that we consider here because they’re proprietary departments that operate independently and under a separate commission, and so forth. 

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Those who were seriously fearful a year or two ago of the City’s financial stability have criticized the assertion that you’ve reduced the number of City employees, asserting that you just move them over to the proprietary departments or to the fee-funded departments and that the staff hasn’t really shrunk that much. Is this a fair or unfair criticism? 

Unfair as a criticism and only partly true. There have been some positions that were scheduled to be eliminated entirely, meaning the services would have been eliminated that were really essential like tree trimming services, which are often a matter of life and death. If we don’t trim trees we actually have exposed the city to tremendous civil liability and subjected our residents to the risk of physical injuries. Some of those services, for example, were eliminated from the general fund, but some of the people who were doing that work have since moved over to the DWP, which already is doing tree trimming around power lines. Instead of contracting it to outside vendors, the DWP has now retained former City tree trimmers to perform the same kind of services for the same residents, but they’re doing it now with the public employees that moved off of the general fund. In a sense, it’s kind of a win-win because we’ve reduced the cost of the general fund, and when we picked up those services in the DWP, the DWP doesn’t need to spend the money for outside contracted services to get the same result. That hasn’t been that many positions, however. The vast majority of the position reductions were not those.

The majority of those are a result of early retirements, no?  

Over the course of the four years the majority of those five thousand reductions came through ERIP, attrition, ordinary retirement, and layoffs. That’s real money that is being shaved out of the budget, but it’s real services that are being lost. Those employees were providing services that we’re just not providing now at the same level because of that position reduction. There’s no question that our constituents are in fact feeling the impact of service reduction. But in these austere times there’s no way we can maintain the same service level and still make the kind of cost reductions necessary to have a balanced budget. 

Paul, as Chair of Budget and Finance, does the Los Angeles City Council and your committee have jurisdiction over the budget of the LADWP, or is that proprietary department run by it’s own commission? If the salaries negotiated for DWP employees are much higher than equivalent positions with ‘the City’, are employees who moved over to LADWP actually doing better with their new employer? 

The DWP reports its budget to us through the budget process that we go through in budget approval, but their budget is approved by the commission, and its memorandum of agreement with its employees will ultimately be approved by the Council as well. I think their underlying bargaining agreement has to be approved by the Council ultimately, but it’s as part of the ordinary budget process. We don’t have oversight over their budget; that’s done by the commission. 

How dependent is the City’s budget on a ‘dividend’ transfer from the DWP to the Council? What is that ‘dividend’ expected to be in this year’s budget? 

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There is a power revenue transfer function built into the budget. It has become more predictable now because it’s based on the prior year’s revenue requirements, so we don’t have the same kind of ambiguity over how much it will be and when or whether it will be transferred as we have had You might remember a year or so ago when there was a question raised by the then general manager of the department over whether or not the power revenue transfer would be made at the very same time that the department was demanding rate structure changes. We don’t have that situation anymore, thankfully, and we have a new general manager too. 

How helpful was your earlier budget experience in the State Assembly to your addressing the challenges of the City’s fiscal challenges? 

If you’re comparing with the Legislature, it’s a very different process here because we don’t have caucuses and we don’t have a 2/3 vote that requires going across a political aisle. In a sense it’s easier to build consensus here. I think the Mayor and everybody on the Council appreciates the degree of crisis that we face and the magnitude of the job ahead. There are different views on how best to make up the projected deficits, but that’s always something you expect to have in a representative democracy where different people represent different districts and constituencies. I do think that there is much more consensus here than there ever would be in the Legislature about the task ahead. I think it’s universally understood that we face a significant deficit that can only be made up by a combination of cuts, revenues, and efficiencies. 

When we last interviewed you in 2010 regarding the prospects then of the City potentially going bankrupt, you demurred. Are you more sanguine about city bankruptcy now, despite what has happened in other California cities? 

I don’t see that as a possibility, honestly. As the economy has been making slow but steady progress, we’re picking up economic activity and we’re creating jobs, even though it’s painfully slow. By the same token, our progress in dealing with our budget deficit in Los Angeles has been steady and sure. We have made progress in all of the areas that we’ve needed to. This includes reduction in the costs of our workforce, long term structural solutions, permanent reductions in the size of our work force, identifying efficiencies, identifying new revenue sources that are sustainable and long term, and building up our reserve fund. All of those things are marks of long-term health, and as long as we continue to maintain momentum in those areas I see this as a path to long-term solvency. 

The CAO of the city, Miguel Santana, has often warned of Wall Street’s concern with LA’s financial condition. Are those unfounded fears on his part? Or is there a consensus, as you are suggesting, that the City is now out of trouble?

This is a serious situation that we’re facing, and people need to take it seriously. Policy makers and our citizenry need to understand that this is a real budget crisis, and it’s caused by a real economic crisis. Until that economic crisis begins to resolve itself, we’re going to have a number of years of extraordinarily difficult budgets in this city. That’s going to mean a reduction in services to the public, and it’s going to mean that the public may pay more for fees. There are going to be some revenues that are going to have be born, and it’s not going to be an easy time. It’s something people need to take seriously, creating structural change so that when better economic times do resume this city will be much better situated to take advantage of them.

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There have been a number of articles written about the Mayor’s wish and the Council discussion to front fund a number of capital projects and maintenance programs, relying on prospective City revenues. Are you supportive? 

The 30/10 proposal, for example, has been championed by the Mayor. That’s become quite a cause in Washington, and I think even Washington is seeing it now as a model for what other cities and states might be able to do to prime the economic pump with investment in capital improvements. I think that’s exactly what we should be doing when it comes to capital investment. What I wouldn’t want to see done is a front loading of revenues that are used for ongoing expenses. That’s a different matter. But if we’re accelerating revenues and bonding against them in order to invest in capital, and if it’s going to create jobs and create long term durable improvement, then that’s absolutely what we should be doing. 

What, for you personally, are the city’s core services and public deliverables? 

This is maybe our biggest challenge because everyone who comes to this question is going to answer it a little bit differently depending upon the unique circumstances of their district and their perspective. I think there is wide consensus that public safety is the most important core service that the City offers, but there will be different perspectives on how best to deliver public safety, even when it comes to crime prevention. Is it a better expenditure of City funds for crime prevention to increase the size of the police department or to invest more in youth services and gang prevention? It’s a hard question to answer, and I don’t think there is a way that you can answer it with certainty. If we invest more in police but less in our city attorney’s office is that a wise investment of funds? 

These are exactly the questions that we’re grappling with right now. It’s precisely the reason that the Budget Finance Committee felt that it was appropriate to get a little breathing space before initiating the layoffs of the employees, primarily in the police department, who are scheduled for layoffs because it gives us an opportunity to evaluate where we should have those positions restored. We’ve already eliminated over 400 positions in this budget. We have another 200 or so that were on the layoff list, which we have funding now to begin restoring through unanticipated increased property tax revenues and the additional budget solutions that we were able to implement. We have some funding to restore some of those critical positions, so now we have to take the time and go through the public process of evaluating where should those positions best be restored. Should they be restored in the civilian positions in the police department? Should they be restored in the fire department? Should they be restored in other areas that had already been eliminated merely because of the happenstance that the position wasn’t currently filled? Those are the sorts of things that we’re going to take a long hard look at over the next six months. 

Share with our readers how politically and personally challenging it is, as one of 15 City Councilmembers, to eliminate a City job. Given the inherent and legitimate power today of the public employee unions, what pressures do you face in making these tough budgetary decisions? 

I wouldn’t say it’s so difficult because of inherent power of public employee unions. I would say one of the big differences between budgeting here and budgeting in Sacramento is that when I was dealing with cuts in Sacramento it was unpleasant, difficult, and in many respects contrary to many of the core beliefs that formed the foundation for my wanting to get into public service. By necessity you’re cutting healthcare to the poor, for example. That’s a brutally difficult thing to have to do. But in some respect in Sacramento there’s a distance between the decision makers and the impact. In the City Council the feedback is immediate, and the how you feel from the impact of your decisions is immediate. When you’re talking about laying off an employee, that employee might be standing at the microphone describing the impact that will have on their family and to the constituents of ours that they serve in their job. There’s a real sense of immediacy in the impact that makes it very difficult for all Councilmembers to talk about position elimination. 

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It’s been difficult as we’ve eliminated five thousand positions, and it will grow increasingly difficult, as there are fewer options. But as difficult as it may be, there’s no escaping the fact that we have deficits that will be continuing for the coming years. And without reduction in the cost of our workforce, it will be almost mathematically impossible to erase those projected deficits and bring the budget into long term, sustainable balance. Now reducing the cost of the workforce doesn’t necessarily mean layoffs of furloughs. There are other way’s we can do it through negotiation and so on. But when 90 percent of your budget is devoted to the cost of people, you can’t escape the fact that cost reduction in the workforce is going to be essential in balancing the budget. 

Lastly, if we talk in a year’s time about the same subject, what’s likely to be the focus of our interview in terms of successes and lack thereof? 

This is a multiyear process, and for me in the Budget and Finance Committee it’s going to be a year round process. This is not a situation under my chairmanship where we deal with this for a few months during budget season and then we hear periodic reports, and that’s it. We’re going to spend 12 months a year rooting out every efficiency we can and identifying budget solutions where we can. 

A year from now, I hope that I’ll be able to tell you what I’ve told you today: we’re continuing to make steady progress and continuing to maintain momentum towards our goals. I don’t expect to tell you a year from now that we’ve solved all of our problems and that the budget will be balanced for the foreseeable future. I don’t expect that at all. I expect to be better off a year from now, and I expect to continue to be able to reduce our long-term budget deficit projections and to maintain momentum. 

A few years ago we were projecting that the 2012-2013 budget would have a deficit of about half a billion dollars. Through the work that the Council and the Mayor have made over the ensuing couple of years, we cut that projection down to $230 million. This year we resolved that deficit with solutions, and we’re able to balance the budget. Now there remain deficit projections for the coming years, but the point is those projections are much improved since we started this journey of finding sustainable solutions a few years ago. 

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