CAO Santana on LA City Structural Deficit & Trade-Offs in Mayor’s Budget

Miguel, Mayor Garcetti’s 2015-2016 budget is being released next week. Is it fiscally responsible?

Miguel Santana: The mayor’s budget will build on the hard work that the city has done over the last several years. It’s going to be balanced. It’s going to show how the recovery has benefitted our revenues. It will contain controls on spending while making strategic investments in areas that are critical to Angelenos, such as sidewalks and public safety. This budget reflects the difficult choices that have been made, as well as optimism for the future. It’s certainly a budget to be proud of.

When we last spoke to you in May 2014, you articulated the city’s critically dependent budget assumptions: “Assuming that we don’t grow the size of the workforce, that we don’t give raises over the next three years, and assuming that there are no major changes to the pension systems on the rate of return assumptions…” Have these expenditure assumptions proven sound and will they be incorporated in the 2015-16 budget?

The new budget will continue to contain our pension costs. It will reflect the pension reforms that have been adopted on the civilian and the sworn side, and that the workforce is still being managed at a sustainable level. It’s going to reflect the growth in revenues and overall compensation to be maintained or contained due to more disciplined labor negotiations. We feel good about how the budget reflects those decisions in the past. They’re starting to bear fruit.

Miguel, for context: Does the city still have a structural deficit? Are expenditures still projected to exceed revenues?

The city will continue having a structural deficit over the next few years.

Expenditures are growing in areas beyond our control. Revenue is so closely tied to the expansion of the economy. We’re fortunate that its expansion has resulted in a significant increase in revenues. But the reality is that the city is underfunded on a structural level. A big reason why we proposed Measure A, an initiative to help increase revenue, was to deal with that shortfall in the long-term.

The good news is that the deficit is being dealt with on an annual basis. It’s moving in the right direction, in large part because of the difficult decision that’s been made and the discipline that this mayor and Council have demonstrated. 

You noted in our 2014 TPR interview that the pension reforms for future employees adopted last year were being challenged by city’s employee unions. Are LA City’s pension reforms certain to withstand legal challenge?

They’re going through litigation, but we’re also in discussions to try to reach a settlement. We weren’t surprised when the civilian labor unions challenged the new pension tier. They told us that they were going to do it. We told them we understood that, but we saw this as an opportunity to demonstrate the city’s “will” for pension reform even in the face of opposition.

The litigation that has surfaced provides us an opportunity to reach a potential settlement on a new pension tier that is acceptable to both sides. I can’t speak to what that looks like since we’re in active discussions. But the best scenario for the city is to eliminate the uncertainty around the current new pension tier and to reach a consensus with labor on what a new pension tier could look like, while still generating significant savings both in the short-term and the long-term.

Would it be fair to say that the savings from pension reform materially impact the city’s structural deficit?

They do. But the overall discussions that we’re having in relation to labor as a whole involve more than pensions.

With city labor negotiations underway, please comment on the agreement reached last month with LAPD and its impact on current negotiations with other city unions. What’s at stake for the city’s fiscal health and the delivery of quality city services to the public?

There’s a lot at stake. Our ability to remain balanced, to have healthy reserves, and to invest in services are at risk if we provide too-generous labor contracts that we ultimately can’t afford. We’re still dealing with the decisions of the past around that.

The city established a template for labor negotiations when we reached agreement with IBW. That contract resulted in three years of no raises, with a modest 2 percent raise at the end. It resulted in a new pension tier and a few other concessions, as well as the resolution of major litigation that would have created a $200 million problem for the General Fund. It was a complete package that helped stabilize the DWP labor costs and bring predictability.

The mayor and the council president have indicated that it is the template for all other bargaining units. We were telegraphing to all of the civilian unions that this is what we’re looking for as the best outcome on our side. We maintain that position.

We’re in the middle of mediation around those very same principles. We’re not asking anyone at the city to do anything differently. We think it’s a fair way to proceed and critical to the long-term sustainability of the city.

Did the LAPD contract agreement follow that DWP labor-cost template?

It did to some degree, but it’s not apples-to-apples because their context is different.

We did get two years of no raises, which was critical. But we know that the environment has changed significantly around recruitment and retention at the LAPD.

At the height of the recession, we were one of the few cities hiring police officers—not just in Southern California, but across the country. We went so far as to reduce the starting salary by 20 percent because it was reflective of the market.

Since then, other jurisdictions—particularly the sheriff and other cities around the state—have aggressively started hiring police officers. Now the pool of applicants has significantly declined.

On the one hand, the city wants to contain costs, but on the other hand, still remain competitive. We got feedback from the police union that they could sustain a couple years of no raises, but because they only received a small part of the 25 percent raise civilian groups got, they were significantly behind the city family as a whole.

The agreement we reached with the police unions puts them slightly below where the civilians are in terms of pay raises, over a period twice as long as what the civilians experienced.

We tried to be fiscally responsible while at the same time mindful that the LAPD was significantly behind the civilians, and aware that we were starting to lose our competitiveness in bringing the best and brightest into this workforce.

At the end of the day, it was a balanced proposal—addressing our fiscal challenges by having two years of zero, and then granting increases to help them catch up to remain competitive at the end.

You noted that the civilian city employees had received wage increases, in the transition from Mayor Villaraigosa to Garcetti, of 25 percent over three years. That wage contract is now up for renewal and, to bolster their bargaining position, the Coalition of City Unions recently called a strike vote. Could you comment on the status of current negotiations?

Due to mediation rules, I can’t speak to that. But I can tell you that we’re making good progress. We’re optimistic that, by early May, we should reach a resolution that is balanced, fiscally responsible, fair to our employees, and consistent with the framework we created at the DWP.

Miguel, in reaction to the strike vote, LA Watchdog reports and opines this week:  “But there is no need to cry for our City employees as the average cost per City employee has increased 50 percent over the last nine years, from $96,000 to almost $145,000.  At the same time, total employee related costs have increased by almost $1 billion (33 percent) despite 11 percent (4,000) fewer workers.” Are these numbers correct? 

Yes, we presented those numbers at a City Council Budget and Finance Committee meeting earlier this week.

Often overlooked when reporting on city employee collective bargaining, and often done behind closed doors, is the nexus between the outcomes of such negotiations and the ability of the city to meet its services and infrastructure investment priorities. These include: paying down the $12 billion in unfunded city pension liabilities; funding a 100,000 units of affordable housing; funding the priorities of the Sustainable City pLAn; implementing the recently mandated sidewalk repair court settlement; and commitments for new parks, to name but a few. How dependent are such public expenditures on the outcome of current labor negotiations and, of course, the survival of earlier-agreed-upon pension reforms? 

They’re closely tied. We’re in the service industry, so 80 percent of our costs go toward labor. When our labor costs increase, that challenges our ability to hire more employees and to reinvest in services.

Our goal has been to be a fair and competitive employer while at the same time maintaining our costs at a sustainable level. That’s not an easy thing to do. That’s why labor negotiations are difficult and get heated. There’s a lot of drama, like we’ve seen over the last several days.

But at the end of this process, we will come up with a new agreement. Our goal is that it maintains that delicate balance of being fair and competitive while at the same time fiscally responsible. We’ve demonstrated that we can do it—we did it at the DWP with IBW. We’ve done it with the LAPD workforce. We’re well on our way to doing it with our civilians.

Turning  now to revenue challenges: The city’s relatively high business tax was recently decreased after years of protest from the business community about the competitiveness of the city as compared to its neighbors. You gave a warning at City Council: If the city reduces that revenue, then it has to make up for it in some other place. Elaborate.

When the mayor and the council reached a compromise, we were direct in saying, “This reduces the future growth of business tax revenue by $45 million.” (The business tax will continue to grow, but by about $45 million less over the next four years.)

            The council and mayor understood that. They felt that the benefit of reducing the rate—so that we’re no longer the highest in the county—was an important enough investment to justify that reduction. That’s the policy decision that they made. It’s my job to make sure that they understand the fiscal consequences.

            From our standpoint, the best thing we could ask for is predictability. The plan that was adopted by the mayor and the council was responsible in that it’s a four-year strategy: the first year was a zero reduction; the second year, which begins July 1, is a $15 million reduction; there’s an additional $15 million the year after that; and the final $15 million comes in the fourth year. We can plan for that. Businesses know their tax will be reduced.

            I think it was a fair and responsible proposal. It keeps the majority of the business tax intact. Keep in mind that the business tax will generate somewhere in the neighborhood $490 million even with the reduction, so it’s still a significant part of the overall revenue stream for the city. 

In a recent TPR interview, LA City’s Rec & Parks GM Mike Schull noted that his thrice reduced department budget was currently $206 million. When asked what it should be, he responded, “Probably double that. Our deficiencies are obviously in deferred maintenance. We’ve gone through eight consecutive years of cuts. So has every park agency across the nation—we’re not unique in that way. Our staff has been reduced 40 percent over that time.” This past week, the Rec & Parks Commission voted to take over, self-operate, and maintain the famous Greek Theater, a revenue-producing venue for generations. Have you been asked to comment on the fiscal wisdom of “reverse privatization”?

We haven’t been asked to weigh in. If we do, we’re going to ask questions about the costs associated with running the Greek; about the potential benefits; about the plan to continue investing in the capital; and about how we’re going to be competitive as a venue.

Turning to the fiscal impact on the budget of the settlement of the city’s sidewalk repair obligations: Will the city be able to actually meet its annual commitments given current labor and pension obligations? 

It’s a very significant and historic settlement.

The city now has an ongoing commitment to accessibility of our sidewalks over the 30-year period. It’s going to be budgeted in as a priority item. It’s no longer a “nice-to-have”—now, it is a “must-have.” No matter our city’s fiscal situation, we will be committed to that $31 million investment on an annual basis. This provides reassurance to Angelenos that our sidewalks will be accessible not just for the disabled community, but for all communities.

The settlement responsibility acknowledges that a project this large can’t be done overnight. It establishes flexibility for the city on how it achieves those goals, which is critical since it’s a long-term project.

Connecting the fiscal/budgetary dots, if current lawsuits undermine reformed city pension tiers, or, if current labor negotiations—both total cost to employees and to employee pension contributions—undermine expenditure discipline, how will the sidewalk repair program be funded?

Keep in the mind that the city has a General Fund of well over $5 billion. Within the $5.4 billion General Fund, and as that budget grows over time, we won’t be short-changing sidewalks. That means we’re not going to be doing something else.

Looking at other city operations impacted by negotiated or court-mandated budget obligations, the Department of City Planning, post-Prop 13, is funded in part by the General Fund and in part from fees. Ray Chan, the GM of LA City’s Building & Safety Department, shared in this month’s TPR that the valuation of constructions permits being processed will reach $7.3 billion by the end of June, compared to a peak valuation of $5.3 billion during the last record construction cycle. What percentage of those revenues coming in from the fees on valuation go to the Planning Department? Is it enough for Planning to greatly improve services and investment in community plans?

Yes. The Planning Department is pretty much self-sufficient. It survives almost exclusively on the fees that it generates. It generates more fees than it can spend and actually establishes a healthy reserve so that it can continue providing services even during an economic downturn.

TPR’s interview with Ray Chan documents his department’s investment in staff and better Building & Safety services, but no metrics are available from the Department of City Planning—there’s been no new community plans processed or adopted and no increase in service delivery time. What might explain the difference?

The Planning Department is funded by fees, and the fees have to go for a specific service. When a developer requests Planning to review and approve their plans, they pay for that service.

But the Planning Department can’t profit from those fees. Services that are pro-active, such as the General Plan, have to come from a different source, such as the General Fund, because it is prohibited to have fees cover an expenditure that is not directly related to the outcome. That’s why they’re in a different situation than Building & Safety.

Should the public assume the Planning Department is incentivized—by how it’s funded—to process development plan approvals? Is the Planning Department likewise incentivized—via a like dedicated stream of funding outside of the General Fund—to process community plans? 

Community plans do not receive a dedicated funding stream. 

Affordable housing is a mayor and Council priority. How competitive will such projects be in securing dollars from the new city budget?

The affordable housing investment that the mayor articulated in the State of the City entails, first, $5 million from the General Fund. Then, Mayor Garcetti intends to account for revenue generated by AirBnB units paying their share of the hotel tax. That is expected to generate an additional $5 million. The combination of the two will provide a budget for expansion of affordable housing.

It’s a major step forward to address the housing crisis that exists in the city.

The mayor has just released a very ambitious Sustainable City pLAn, which includes a 20-year stretch goal of reducing water supply importation to 50 percent. Is the pLAn and the mayor’s supply goal impacted materially by the 2015-16 city budget being proposed?

The mayor laid out objectives. The next step is to create a specific action plan to meet them. We’re going to start doing that. It’s premature to respond to that in relation to the budget for next year. But as we develop a strategy for the coming years, we’ll have to ensure that we’re being responsive to the mayor’s sustainability plan.

Finally, given how candid you are in “speaking truth to power” about budget discipline, have you any budget allies?

I have a lot of allies.

The Charter is clear about the role of the CAO. The CAO is independent. Because the CAO reports both to the mayor and the City Council, whoever sits in this chair is expected to be objective and neutral, to simply say things as they are, and to lay out recommendations with the interest of the city first and foremost.

This job is not about me. It is about honoring the intent of the Charter to provide objective, clear, and informative advice to the people who do run the city, the mayor and the Council.