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REPORT FROMOFFICE OF THE CITY ADMINISTRATIVE OFFICER

Date: March 8, 2013 CAO File No. 0590-00098-4259Council File No. 12-0600Council District: AllTo: Antonio R. Villaraigosa, MayorHerb J. Wesson, Jr, City Council PresidentPaul Krekorian, Budget and Finance Committee Chair

From: Miguel A. Santana, City Administrative Officerr J.J}fFiscal Year 2013-14 Budgetubject:

SUMMARYOver the last four years, the City of Los Angeles has made significant progress in reducing itsstructural deficit by over 80 percent. Proposition A was proposed as a measure to address asignificant portion of the remaining problem through an increase in sales tax revenue, not just fornext year, but more importantly for the years that follow. On March 5, 2013, City of Los Angelesvoters defeated Proposition A and as a result, the City will now need to eliminate the remainingdeficits through additional reductions and other strategies that help make available additional ongoing revenues.DEFICIT UPDATEThe "City at a Crossroads" report issued by this Office on February 7, 2013 (CF 12-0600-8171),stated: "the projected $216 million deficit for fiscal year 2013-14 is showing signs ofimprovement." This improvement comes from three factors:

1 Latest projections from the pension systems show that the reforms adopted are starting tobear fruit, resulting in a projected pension contribution that may be $45 million less thanwhat had been projected just one year ago;2. Positive trends in the economy and its impact on City's revenues; and3. The growth in the Budget Stabilization Fund of $70 to $80 million in one-time funds.

Other factors that will ultimately determine the final deficit projection for 2013-14 continue to be influx. The final deficit figure will be determined at the release of the Mayor's budget on April 20,2013. In addition, the projected deficits for 2014-15 and beyond will also be determined in theMayor's proposed budget because they are contingent on the mix of on-going versus one-timesolutions that are adopted in the 2013-14 budget. In other words, every dollar of one-timerevenue that is used to solve the 2013-14 projected deficit will result in increasing the deficit for


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the following year. Moreover, every dollar of on-going revenue used to solve the deficit, willreduce the structural defict the following year.On the expenditure side, while pension costs continue to grow year after year, due to the reformsadopted by the Mayor, City Council and the City's pension systems, the rate of growth is slowing.The latest information from the pension systems indicate the City's contributions for 2013-14 maybe reduced by up to $45 million from what had been previously projected. However, thesesavings may decrease should more positions be added to the budget.Furthermore, countering the anticipated savings in pension contributions are increasedappropriations needed by the Police and Fire departments to maintain existing services.Combined, the two departments require approximately $40 million above original projections tomaintain current service levels. Additionally, the departments require almost another $50 millionmore to replace their aging fleet of vehicles and emergency response apparatuses. Altogether,the total funding increase from the current budget would be about $130 million.On the revenue side, the economy is showing signs of improvement due to a gradual reduction inthe unemployment rate, increase home sales and growing property values. Final revenueprojections will be released as part of the Mayor's proposed budget. However, as reported in themid-year Financial Status Report, this Office is expecting a growth in revenue of approximately2.6 percent for an increase of $50 million above original projections. This projection is consistentwith the revenue outlook presented by the Controller on March 1, 2013.Based on the reductions in expenditures and increases in on-going revenue, as well asaccounting for some obligatory increases in expenditures above prior projections, the currentbudget solutions for 2013-14 are expected to address approximately $50 million to $60 million ofthe $216 million deficit; leaving a balance of between $150 million to $165 million to beaddressed.In light of the budget reductions already experienced by departments over the last several years,the magnitude of this remaining deficit remains a daunting challenge.One-time Versus On-going Solutions:Relying on one-time revenue for on-going expenditures makes the following year deficit largerand does nothing to address the structural deficit. It would be irresponsible and shortsighted torely on one-time revenue to resolve a majority of the structural deficit. This Office recommendsutilizing no more than 30% of one-time revenues or savings for deficit reduction in 2013-14. Inearlier reports, this Office recommended the creation of the the Budget Stabilization Fund for thispurpose in an effort to ease the pain of required reductions and to protect critical services in2013-14. As a result of the improving economy, the City should expect a sizeable amount of onetime revenue in the Budget Stabilization Fund. Additionally, new one-time revenue from the leaseof City property (i.e. Mangrove) and reimbursements from transportation grants may also beavailable. However, this Office strongly recommends against using all or the majority of one-timedollars to address the remaining budget deficit.


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$5,400$5,200$5,000$4,800$4,600$4,400$4,200

Budget OutlookAdopted 2009-10 to 2012-13Projected 2013-14 to 2016-17

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CAO File No.0590-00098-4259

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17Fiscal Year

~ R e v e n u e s c:liJ!I::;:,Expenditures

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The City's Four Year Budget Outlook will be updated as part of the Mayor's Proposed Budget for Fiscal Year 2013-14 as a result of new retirement costs illustrations to be provided by LAGERS and LAFPP.A better approach to utilizing one-time revenue, and one that is consistent with the City's existingfinancial policies, is to invest one-time revenues in one-time expenditures to strengthen the City'saging public infrastructure such as streets and sidewalks; address deferred maintenance on theCity's emergency response vehicles; reduce the City's liabilities due to police banked overtimeand overgrown trees; payout one-time expenses such as judgments and settlements; strengtheninternal systems such as the City's financial management system and information technologyinfrastructure; and reduce the City's debt burden.These one-time expenditures should reduce the City's liability, provide immediate improvement tothe quality of life, and reinforce the City's capacity to deliver services. After four years ofdeferring basic infrastructure needs, the City can no longer afford to simply rely on hope that oneday these issues will be addressed.Moreover, in light of the projected out year deficits and pending legal cases related to sidewalks,the telephone users tax, and employee relations, one-time dollars should be set aside each yearto build a healthy Budget Stabilization Fund to address these potentially large liabilities.While solutions to the budget deficit for 2013-14 have begun to take shape, with the defeat ofProposition A, more work is needed to address to the City's structural deficit. This work willrequire setting priorities and reducing expenditures while increasing on-going revenue by freeingup General Fund dollars that are diverted for specific non-essential activities. Procedurally, mostof this work with be done in the context of the budget process. However, in light of the certaintythat there will not be a new source of on-going revenue to depend on, this Office recommends


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that the Mayor and City Council immediately provide direction that could reduce projected ongoing expenditures or increase on-going revenues from existing sources.BUILDING STRUCTURAL BUDGET SOLUTIONSIn order for the 2013-14 budget to make an impact on the structural deficit, this Officerecommends that at a minimum, 70 percent of all budget solutions come from a combination ofon-going revenue increases and expenditure reductions (inclusive of pension savings). Theoptions for on-going expenditure reductions are discussed in the subsequent section. Withrespect to revenue, based on current projections for both on-going and one-time revenues, thepotential budget solutions are evenly split as illustrated below.

Potential 2013-14 Budget Solutions

The even split between on-going revenues and one-time revenues does not promote fiscalsustainability nor does it position the City to withstand any future economic downturns.Furthermore, as previously stated, this Office strongly recommends against using additional onetime revenue for on-going purposes. Additionally, should additional one-time revenue becomeavailable such as from the sale of surplus property (e.g. Mangrove), these revenues should beused for the following purposes:1) Ensure that the City's Reserve Fund remains at 5 percent of the General Fund;2) Rebuild the Budget Stabilization Fund for use in the event of another economic downturnand to stabilize the 2014-15 budget;3) Defease the City's debt burden to provide on-going savings; and/or4) Fund critical one-time infrastructure needs and projects to mitigate future liabilities such astree-trimming and sidewalk repairs.


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In order for the City to have a balanced budget approach everything must be on the table. In lightof the structural deficit any on-going solution that is not considered for 2013-2014 will need to berevisited in the following year. Considerations should be given to the following:1) Reduce or maintain current employee compensation levels;2) Reduce or maintain current employee healthcare costs;3) Mitigate the future and on-going impact of cost of living increases;4) Identify service reductions, departmental consolidations, and/or efficiencies;5) Identify revenue and collection opportunities;6) Increase fees and fines to ensure full cost recovery.

It should be noted that achieving savings from any option that impacts labor will most likelyrequire agreement from labor through the negotiation of their contracts. In some cases thesecontracts do not expire until the end of 2013-14. As such, in the context of the budgetdevelopment process for 2013-14, this Office will continue to review all other budget reductionproposals that departments have submitted for possible inclusion in the budget for 2013-14.RECOMMENDATIONThat the Council, subject to the approval of the Mayor:

1. Instruct the City Administrative Officer to report to the Executive Employee RelationsCommittee with a framework on how to achieve savings from options including but notlimited to: reducing or maintaining the current employee compensation levels, reducing ormaintaining the current employee healthcare costs, and mitigating the future and on-goingimpact of cost of living increases.

2. Instruct the City Administrative Officer to report back on potential service reductions,departmental consolidations, efficiencies, potential revenue and collection opportunities.

FISCAL IMPACTThere is no fiscal impact directly resulting from the recommendations in this report. However,subsequent actions taken by the Mayor or City Council on issues presented in this report mayaddress the City's projected budget deficit for 2013-14 of $216 million as well as address the Citystructural deficit.MAS:RPC:BC:01130066

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