Los Angeles continues to struggle with one of the most severe budget crises the city has ever faced, a problem that has largely been placed in the hands of Los Angeles City Administrator Miguel Santana to be fixed. Santana spoke with MIR about where the city currently stands in terms of its fiscal problems, how the various agencies, including his own, are coping with dramatic losses of experienced personnel, and the difficult policy decisions that have to be made in order to set Los Angeles back on the path towards economic recovery. Pension costs drive the structural deficit of Los Angeles, and Santana concedes there is little to be done in the short term. It remains to be seen how Los Angeles will approach contract renewals in the fiscal year 2014 under the leadership of a new mayor.
“We are responsible for meeting pension payments, and there is very little we can do in the short term. There’s a lot, however, we can do in the long term.” -Miguel Santana
Please begin by enumerating for our readers the top financial challenges facing the City of Los Angeles today?
Miguel Santana: It’s actually not as complicated as it may appear. Our revenues are growing at 2-3 percent a year, which is a good thing. This shows that the economy is slowly recovering, at an anemic pace, but moving nevertheless towards recovery.
The challenge is that expenditures are growing at a much faster rate—about 4-5 percent each year. That gap between the growth in revenues and the growth in expenditures is what we call the structural deficit. The good news is that three years ago it was projected that by our next fiscal year the city would be facing a deficit that is well over a billion dollars. That made us address some very difficult decisions to put us on a path towards fiscal sustainability. My office issued a report, at the direction of the Mayor and Council, to outline what that would look like. Our latest deficit projections for next year range between $200 million and $250 million, so we went from over a billion to around $200 million, which is significant progress.
The challenge is, we still have that deficit, even though it’s smaller, and the tools that we’ve used to reduce the deficit so far have been exhausted. We’ve reduced the size of the workforce to the Tom Bradley levels; we’ve negotiated all of our contracts—employees went from paying nothing towards retiree healthcare, and we’re now having employees pay for the cost of that.
You have affirmed City Hall’s official assessment of the City’s fiscal condition, but, in fairness, isn’t the city’s problem that the deficit is structural and with increasing deficit spending from now till 2016? In 2005, for example, public safety retirement costs consumed 4.2 percent of the city’s general fund; the cost is expected to reach 11 percent this year and 15.6 percent in 2016. Are ballooning deficits not the true challenge?
There is no doubt that pensions is one of the biggest cost drivers, and the challenge we have is that there is very little that the city can do about it. People’s pensions are their invested right. State law is clear in that area, and case law has consistently supported that notion, so those projected pension costs are to cover benefits that people are entitled to receive. What we can do is essentially change the pension system for people who currently don’t work here, who currently don’t have that right.
Pension reform is clearly on the table, but, is it not true that most other cities long ago have done what LA just now is negotiating? So, hypothetically, if you knew you would still be LA City’s CAO in 2014, what budget fixes would you advocate now, in 2012?
We would do what we’re proposing right now. Ultimately, we have three options before us. We need to continue making reductions. Right now 70 percent of the money that the City Council has some discretion over goes to public safety, so the biggest hit would be basically $200 million of reductions primarily in public safety.
The second thing to be done is ask the public to support new revenue. Revenue sources could vary, and there are a number of options to be explored. We’re recommending doubling the documentary transfer tax, in part because most people don’t even know what it is. You pay it when you sell your home, and people sell their homes once every ten years or so. It’s a fairly small number in terms of what people pay for home values. The median price for a home in Los Angeles is about $350,000, and the tax would be over $4000 and would generate $100 million dollars of additional funds to maintain operations primarily in public safety.
The third way is doing a combination of both, which is probably the best way to proceed. Moving forward, making tough decisions on what the city’s core services are, being more efficient, and finding other ways of doing things that are important but not necessarily the sole responsibility of the city. That’s why we proposed engaging in a partnership with a foundation to run the zoo, much the way the Disney Hall and LACMA are operated by the county model with foundations. Most zoos around the country are operated this way, and it allows us to share the risk in running the zoo and also the costs associated with that.
The other area is the convention center. Frankly, we’re not the most competitive in the convention center area. Sacramento is one of our biggest competitors when we should be competing against San Francisco, Chicago, San Diego, and Anaheim. We could convert that asset into a revenue-generator for the city by drawing more people in from around the country to stay at our hotels and to purchase things and increase our sales tax. If we want to privatize operations, which is the case in San Francisco and Chicago, we would need more oversight responsibility so they can develop and implement a strategic plan to make the Convention Center more competitive.
There are a number of ideas that we’ve proposed in our plan that we’re pursuing slowly, one by one. It means a fundamental examination of what it is that the city is ultimately about, what it is that only we can do as a city. The public would say that the number one priority is public safety—no one here would argue that we should contract that out. A foundation is not going to run our police department, so we continue doing that. Currently we do so much; the dollars that feed an elephant at the zoo are the same dollars that go to maintain our police force. That’s becoming unsustainable.
Returning to the subject of the City of LA’s structural deficit, given that pension costs for police and fire are expected to rise from $506 million to $789 million between now and 2016, and deferred compensation from previously negotiated labor contracts will come due in 2013, will the new Mayor and Council taking office in July 2013 be able to get control of the city’s general fund budget?
Four things drive our deficit; our pensions are one. The second is our compensations, so the previously negotiated salary increases that employees are entitled to are also adding to our deficit. The third is the rising cost of healthcare for current employees. Currently it’s anywhere between 7 and 12 percent and is no different from what goes on in the private sector. Finally workman’s comp, which is very complicated because the primary drivers there are in the sworn area, and most of that is regulated by state statute.
We are responsible for meeting pension payments, and there is very little we can do in the short term. There’s a lot, however, we can do in the long term. When it comes to healthcare, we’re no different than any other business—we’re sort of held hostage by Kaiser and other providers. We work hard to negotiate. What we’re doing is trying to share the cost of providing healthcare between the city and the employees. Currently, most employees don’t pay anything, no premium at all, and that has to change. With workman’s comp there is very little that we can do, so trying to focus on the things that we can do is has been the challenge.
Back to my hypothetical: how will the city manage the deferred compensation coming due in 2013 and the negotiation of new labor contracts in the next fiscal year, 2014?
In the middle of the new mayor’s term most contracts will be up for renewal. At that time we’ll be discussing everything from healthcare costs to pension costs and compensation as well as flexibility. Our goal will be to approve contracts that are sustainable—both under compensation as well as health care—which are two of our primary drivers in the creation of our structural deficit.
Is the Mayor’s office now laying the groundwork for a paradigm shift in its relationship with city employees?
We’re trying to have all employees contribute at least ten percent towards the cost of healthcare. We’re going to start doing that on January 1, but most aren’t paying. We’re trying to get to ten percent for everybody, so we’re sharing in that cost and to drive down some of the increases that we’re seeing. On the pension side we would have a new tier, so everyone that we’re hiring will be less expensive than the ones we have today. That helps us on the long-term basis. We believe we can do that on our own and not have to negotiate. It can be difficult when we’re facing deficit after deficit to provide even more raises. It’s not impossible, but I think it’s going to be difficult to do so.
The Coalition of LA City Unions has been vigorous in responding to your dire fiscal reporting and proposed budget recommendations. For example, they criticize your recommendations regarding ‘civilianization’ of LAPD, disputing your civilian health and welfare cost projections, saying you have created a false alarm and that it is preferable for the City to dig into the budget encumbrances and achieve savings on borrowing. The question raised, of course, is, when recommending belt tightening, what is politically acceptable and what isn’t?
We did issue a response to that. We’ve actually made progress with labor and have been able to reach historic agreements with them, particularly in the area of health care where employees went from paying nothing to paying the full cost of providing that benefit. Los Angeles is one of the few places in the country where people went from paying 6 percent to 11 percent overnight, and we did it in the context of retiree health care.
Where we may disagree is that there really isn’t one panacea. The problem is so enormous that it has to be multifaceted and has to include elements that not only deal with the costs but also the revenue. How do you improve services—like what we’re trying to propose with the zoo and convention center—in an environment where you have all of these competing demands? That ultimately means you have to partner with somebody to deliver that program. We disagree on how to get there, but I’ve never heard them argue that we don’t have a problem.
The Pugh Charitable Trust American Cities project has noted that for the first time since 1980 property tax revenue and state aid to local governments are declining at the very same time. Is this trend applicable to California? Is it a permanent trend that the City of Los Angeles must adjust to?
It certainly feels that way. I don’t think we’re going to see much of a change within this decade. It’s the reality we’re facing in part because there’s a shift in the economy that has a disconnect between our workforce and the jobs that are being created.
The fact of the matter is that the property tax has pretty much stayed flat. It declined slightly and is slowly growing, but not at a very aggressive pace. We’ve given up on getting any state aid. We may get it for capital projects, but right now what we hope is that they stop raiding local government to cover their own budget holes like they did with the dissolution of the CRA. Ultimately they’re in desperate shape themselves so they’re pushing responsibilities to local governments by trying to take whatever available funding we have left to cover their own needs.
Are the challenges for the City, going forward, more than staffing challenges? Aren’t they political challenges as well? And in a city that respects the public sector but thinks its politics are too dominated by public sector union interests, what kind of skills and politics must the next leader have to grapple successfully with what you’ve just described as “the freight train heading towards us”?
A strong sense of independence. My best advice to the next mayor is to really confront each issue objectively and head on and to really be honest with the public, with the stakeholders, with their friends and enemies, about the scope of the problem and what will be necessary to address it. Sometimes it means going to some of your best friends and saying, “look, we’re all going to have to contribute in the following way, and this is going to be painful.” It means going to the public saying, “look, if you want to have the same level of service, you’re going to have to give a little bit more.” That’s a very hard thing for any person in a position of authority to do because people elect you to give them good news, to make them feel better, and to tell them everything is going to be ok. Few people get elected to deliver bad news.
An effective executive is ultimately someone who can assess the situation and give an honest forecast of what’s necessary to get through a difficult time. All the policy issues and specifics are secondary. It starts with a strong sense of independence, caring about the city and the institution of the city, and then laying out a path forward that is honest about the trade-offs.
You have a reputation nationally and locally for being the honest communicator about LA’s fiscal challenges, but what allies do you have and need? Do you even have the staff necessary for the budget challenges ahead?
I’ve sacrificed in my own office just like anyone else. When I first got here, one the first things I had to recommend was that the City adopt furloughs as a short-term measure to deal with our crisis, and I started with myself. When I took this job I didn’t get much of a bump in salary. We were adopting furloughs immediately when I got here, and so my office alone has been reduced by 20 percent over the last three years. Yet the demands have grown since.
It’s about prioritizing and crafting a game plan. It is not appropriate to expect everybody to operate under the same duties or produce the same amount with 20 percent less staff, so I have to say, “look, I just can’t do it anymore; this is more important than that.” For the most part I get support from the Mayor and the Council when I lay it out like that. I think the general manager shouldn’t be afraid to do that because not everything is equally important.
In terms of allies, we find allies in labor, in the business community, certainly in the Council, and in the Mayor’s Office. Our job is to lay out a plan, to give our best advice, but, ultimately, I don’t have a vote. We’re in the persuasion business; our job is to provide a sound recommendation and to make the best argument for it. The elected officials are the ones that make the final decision.
In hindsight, was the program for early retirement a success when maybe that leadership and wisdom could be helpful in steering the ship through these troubled waters?
That was one of my biggest concerns when I got here and why I recommended against the program within my first three days here, even though the Mayor and the Council had already adopted it in concept, in addition to the fact that it was actually going to make our problem worse not better. But in the first 90 days that I was here it became very clear that the City has never really gone through a major downsizing in its history. Politically it would have been very difficult to have the equivalent number of layoffs—over 2400—and we needed to reduce the size of the workforce as soon as possible
We had two things occurring at the same time: increasing expenditures and a decrease in revenue. The budget already had significant holes that were growing day by day. The only feasible option we had at that point was the early retirement program. I remember being asked at one point, “you don’t even know what’s going to be cut or what’s going to be impacted—how can you support that?” I said I do because I know the alternative is a lot worse.
Given that specific context in which we were forced to downsize so quickly, would I do it again? Absolutely! The alternative was much worse. Was it the smartest thing that we did? No, it had impacts that we still feel day by day as we work on difficult issues.
Would I have done it differently? Yes, I think I would have limited it only to the general fund. All those issues were already negotiated before I got here, and there was a decision to apply it all across the board. I would only have applied it to the area of crisis, and I would have ultimately insisted on employees paying more. They went from paying for none of it to paying for half of it. I would have wanted all of it covered. I don’t live in the past, and at the end of the day it was necessary to get through one of the most difficult years in the City’s history.
There are some civically active stakeholders who worry that the damage to the City’s service delivery capacity being enacted in reaction to the fiscal crisis will cripple the city’s capacity to recover from the recession. Many observe City Hall making short term budget fixes rather than investing in the capacity of our enterprises—private and public—to recover. How would you respond to such concerns?
Well, it’s not exactly a fair characterization because unlike Chicago and other cities around the country, when this crisis hit raising taxes was the last thing we turned to for more revenue. We basically started off by looking internally and becoming more efficient, reducing the size of our government, renegotiating our contracts. The long-term, where we’re at now in this phase of the recovery, will require the public’s affirmation that it wants to maintain the same service levels.
Part of our responsibility is to make a credible argument that we have done as much as we can. Is there room for improvement? Of course, and we’re working on that every day. But in terms of the big picture items, in terms of the major shifts that we’re talking about, Los Angeles is a lot safer than it was when I started in this business during the riots, and we want to keep it that way. Ultimately that impacts business, quality of life, and whether people decide to move and raise their families here. We think it is important to keep that infrastructure in place with services.
Lastly, what about the City’s sizable proprietary departments—LADWP, the airport, the harbor? Are they wisely stewarding their resources and positively participating in the restructuring of budget priorities?
The harbor and the airport are adapting well. The harbor has actually seen significant growth after a significant decline, and they’re moving quickly to remain competitive after the expansion of the Panama Canal takes place.
There’s been an enormous investment in LAX—the new international terminal, which is going up next year, will be a tremendous asset to Los Angeles.
DWP is going through the painstaking process of determining how it will meet state and federally mandated responsibilities while still maintaining the same level of programs. All three have very strong general managers who are very persuasive in convincing the Mayor, the Council, and the various boards to adopt their recommendations.