How Deep the Cuts? Even Hahn Can’t Say

When Los Angeles Mayor James K. Hahn unveils the new city budget on April 19, his proposal will include cuts to city services for the first time since the early 1990s. But even as the mayor compiles next year’s spending plan, it remains unclear how severe those cuts will have to be.

The downturn in the economy has contributed to a projected shortfall of as much as $250 million in the 2002-03 budget. However, Hahn’s aides said they hope that the gap will end up smaller once final revenue projections come in over the next few weeks.

The mayor’s task of presenting the City Council with a balanced budget is made especially difficult this year by the unpredictable state of the economy. After a year in which some local revenues plunged and others grew steadily, economists say pinning down how much money will be coming into the city coffers next year is more of a guessing game than ever.

“The consensus among economic professionals is that the economy is recovering, but the question is, ‘How quickly will we come along?’” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. “There are a lot of unknowns out there.”

Those unknowns matter a lot. The majority of the city’s $3.2-billion general fund comes from revenues that swell or shrink with the health of the economy, such as business, sales and property taxes.

Projecting how much the economy will grow, if at all, is the key to determining exactly how much Hahn will have to put on the cutting block. Under a worst-case scenario, officials have said everything but essential public safety programs could come under the hatchet. If the city’s fiscal health improves, departments could undergo more modest trims that would not be as obvious to Los Angeles residents.

Mayor Quiet on Proposed Cuts

The mayor and his aides have declined to divulge the cuts he will propose. In an interview last week, Hahn said he will try to cover Los Angeles’ shortfall without raising taxes or laying off city employees. He said his priorities will be to preserve public safety programs and basic city services.

“But there’s going to belt-tightening all over the city,” he warned.

Los Angeles is not the only city wrestling with financial problems, as municipalities across the country cope with the fallout of the recession and the Sept. 11 terrorist attacks. New York has been hit with its largest budget gap in 30 years, forcing Mayor Michael R. Bloomberg to slash $1.8 billion from the city budget and raise taxes and fines. In San Francisco, officials are contemplating cutting park hours and mental health programs to cover two years of projected budget deficits.

Budget Plan Requires Creativity

“The Hahn administration, through no fault of its own, has to be exceptionally creative with the biggest fiscal challenge that any mayor has ever faced in a decade,” said former City Councilman Mike Feuer, who was head of the council’s Budget Committee before he left office last year. “This is really a time when Mayor Hahn’s leadership is needed.”

For Hahn, the budget crunch comes at an especially problematic moment, just as he tries to win over dissatisfied residents in the San Fernando Valley, Hollywood and the harbor area who want to break away and create their own cities.

“That’s a huge challenge for me,” the mayor said. “It couldn’t have come at a worse time.”

Hahn said that planning next year’s budget has been made more difficult because steps taken by his predecessor, former Mayor Richard Riordan, forced Hahn to deplete much of the city’s reserves this year.

Hahn said that in Riordan’s last budget, the former mayor failed to fund some items that should have been anticipated, such as increased sanitation costs and Fire Department overtime.

In addition, Hahn said Riordan included one-time revenue sources--such as money from a business tax amnesty program--in this year’s budget base. That money is not available again in planning next year’s budget.

“It’s easy to go out in style if it’s your last year,” Hahn said. “But it still presents us with a huge problem.... If they’re one-time revenues, where are you going to get the money ... next year?”

A former Riordan official disputed Hahn’s contentions. If programs ran out of money, it was because they were badly managed or the City Council did not give them enough funding when it approved the final budget, the aide said.

Riordan’s former aide also argued that one-time revenues are always used in the city’s budget. In fact, a five-year budget forecast prepared last year by the city administrative officer shows the city surplus growing as one-time revenue sources disappear.

“When budget season comes around and projections aren’t lining up, budget playbook 101 is to blame the last guy, even if the last guy left you the biggest reserve in the city’s history,” said Ben Austin, Riordan’s former deputy mayor for communications.

Riordan aside, Hahn and his aides agree that one of the biggest problems this year has been an unanticipated decline in city revenues. Last year, the city administrative officer predicted revenues would grow at a rate of about 3.5%. Instead, the amount of money coming into the city shrank.

No one could imagine that problem a year ago, when Los Angeles ended the year with more than $100 million in reserves, the highest level ever.

It wasn’t until the first few months of Hahn’s administration that the local economy showed the first signs of the national recession. Spring sales revenue was down significantly when the first reports came in over the summer, alarming the city’s economists.

“We heard a lot of talk about recession and slowdown, but we had a surplus,” said Rex Olliff, the city’s finance specialist. “So it was hard to grasp that instead of a slowdown, there were actually negative receipts.”

After the terrorist attacks in September, the city’s tourism and travel industry took another hit. Revenue from parking fines dropped dramatically as the city’s enforcement officers were diverted to control traffic at the airport. Hotel occupancy dropped 25%, which cut into the city hotel tax.

Local economists are trying to anticipate what will happen in the next fiscal year.

But contradictory signs in different sectors of the economy are blurring the picture.

Tourism and Sales Remain Down

Tourism and sales remain down, but the housing market is strong.

Olliff, who has been predicting city revenues for more than 20 years, said that task has been harder this year than any year previous.

“It is a very difficult time to really estimate accurately because the normal patterns aren’t there,” he said. “There are these crosscurrents where things are moving in many different directions.”

But city officials don’t have much room to be off in their estimates.

“If we’re just 1% off, that’s $32 million,” said William Fujioka, the city administrative officer. “And $32 million can buy a lot of services.”

There’s some good news. Los Angeles’ diverse economy means that it hasn’t suffered as much as technology-dependent regions like the Bay Area, and will recover more quickly, Fujioka said.

And if revenue projections improve before the City Council approves the budget on June 1, officials can restore some programs that may be facing cuts now.

But the bad news is that some economists believe the local economy will not grow much next year.

Chris Thornberg, senior economist at the UCLA Anderson Forecast, predicts that city revenues will grow by only 2%. “We’re going to kind of float around,” he said.

At the same time, about $84 million in cost-of-living increases for city employees is expected to kick in next year. Many of the increases were negotiated before Hahn took office.

Police officers and firefighters, along with half of the city’s 30,000 civilian employees, are due for a 4% raise. The city is in negotiations with the unions that represent the rest of its employees, whose contracts should be settled by July.

Economist Kyser has two pieces of advice for the mayor as he finalizes his first city budget in this climate.

“Be on the cautious side as you estimate your revenues,” he said. “And get a bottle of aspirin, super size.”