Los Angeles May Borrow $70 Million to Pay the Bills

LOS ANGELES (CN) — Facing a projected $245 million budget deficit, Los Angeles City Council on Wednesday approved a plan to borrow up to $70 million to cover legal costs of several cases with larger than anticipated liabilities.

By 11-1 vote, the council directed City Attorney Mike Feuer to seek a judgment obligation bond to cover the legal costs.

On Jan. 6, former City Administrative Officer Miguel Santana told the Budget and Finance Committee the city had exceeded its adopted budget by $67 million and that payouts were expected to exceed $135.5 million.

The city reached a $200 million settlement in August last year for failing to provide adequate public housing for people with disabilities. If all goes according to plan, the city will pay close to $20 million a year, according to the Los Angeles Times.

In December, the council approved $8 million to settle LAPD officer-involved shootings of three unarmed men.

A report from the Budget and Finance Committee recommends that the city chip away at the deficit by instructing city departments to curtail spending. It also recommends measures to bolster the city’s general fund.

More controversially, the committee also recommended that Feuer proceed with a judgment obligation bond to replenish the city’s reserve fund.

The Budget and Finance Committee has proposed raising the liabilities budget to at least $120 million for fiscal year 2017-18. It budgeted $60 million in each of the previous two fiscal years, according to the committee’s Jan. 9 report.

Councilman Mitch Englander asked the city administrative officer to identify savings that could be made to cover the legal payouts. He was the only vote against the judgment obligation bond on Wednesday.

In an interview, Englander likened borrowing to paying on a mortgage with a credit card, and said that borrowing the money should have been a last resort. He said the expense was foreseeable because the city constantly faces settlements and judgments.

“Because it was underfunded it doesn’t mean we should borrow to pay for it,” Englander said. “We should first look at reducing services, cutting our expenses. It’s not a revenue issue, it’s an expenditure issue, and we should never borrow our way out of it.”

Councilman Paul Krekorian, who submitted the motion for approval, was not immediately available for comment Wednesday. But at the Jan. 9 council meeting he told Englander that in the past five years the committee had worked hard to cut costs.

“I don’t want this discussion to suggest that we’ve been asleep at the switch and haven’t looked at cost reductions. That’s all that any of us have been doing since we’ve been on this committee,” Krekorian said.

Even though the city could be exposed to tens of millions of dollars of liability every year, the amount is not necessarily an ongoing expense, Krekorian said.

“Our mortgage payment is predictable. Our liability payments are not.” Krekorian said that after the committee had studied trends in liability it should budget for legal payouts.

“If we don’t budget for it and we have a shortfall, we shouldn’t be borrowing to cover that,” Krekorian said.

In its Jan. 9 report, the committee said it had discussed allowing the reserve fund to drop below 5 percent to cover the liabilities. But this move would require the city to restructure the fund, since rules allow the city to deplete funds below the 5 percent limit only due to a fall in revenue, typically during a recession.

Santana’s office said that rating agencies would likely view a one-time dip into the reserve fund as an anomaly.

“But if that were to occur in subsequent fiscal years, the city’s bond rating could be negatively affected, and a downgrade could cost the city $5 million plus in additional costs for every bond it issues,” the report states.

For that reason, Santana recommended the judgment bond obligation as the most prudent option.