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The Rampart Litigation Could Bankrupt the City

Given the propensity for large jury awards, the city must take steps now to prepare itself.

March 02, 2000|WALTER N. PRINCE | Walter N. Prince is chair of the government affairs committee of the Northridge/Porter Ranch Chamber of Commerce

Although the city attorney publicly says that the city's liability in cases arising from the Rampart scandal should be no more than $125 million in settlement costs, it is far more likely that the city could face a payoff of well more than $1 billion.

This is especially worrisome in a place like Los Angeles, where a jury last July ordered General Motors to pay a record $4.9 billion to six people injured while riding in a 1979 Chevrolet that was rear-ended by a drunk motorist speeding at 70 mph. Because the Chevrolet had passed all federal and state safety tests, the judge reduced the award to a mere $1 billion, but it was still an average award of $170 million per person.

Since the city's "extra" cash is limited to the $58 million now in its reserve account, it is obviously in big trouble. The City Council has suggested setting up a "savings account" into which $15 million to $20 million can be siphoned from existing city programs and departments over the next few years, but this will barely pay the attorneys and court costs. On the other hand, the council knows that any mention of wholesale staff layoffs is political suicide, an alternative not particularly popular with any elected official.

The city attorney has tried to help cut costs by announcing that his office will not defend seven of the renegade Rampart officers accused in five of the civil actions already filed because their illegal activities were outside the line of duty. Although this will save a few bucks in legal fees, it is not a guarantee against the city itself being sued, not only by the victims but also by the police officers (or their union), who feel they are entitled to a city-financed defense.

In the end, the city must end its denial and recognize it has a problem. It needs money, and lots of it.

One fund-raising option is to sell excess city real estate and other assets, but which ones?

Another option is to float a huge bond issue, but it is not likely that the city has enough borrowing power for a billion-dollar bond, or that local voters would even approve such a move. Likewise, any attempt to raise taxes or create special assessments would probably be met with stiff resistance from city residents.

Third, the city can free up funds by cutting salaries and eliminating or reducing services to residents, but such action might cause disastrous ripple effects that could disrupt the way the entire city functions.

Fourth, the city can immediately stop its free-wheeling giveaway programs, such as the $1.1 billion in local property taxes being sought from the city by the financially strapped Community Redevelopment Agency over the next 45 years for an as-yet-undefined "redevelopment" program in the Northeast San Fernando Valley.

A fifth option is for the city to try to get a bail-out loan from the state or federal government--as New York did a few years ago when it teetered on bankruptcy--perhaps using funds from the recent settlement with tobacco firms.

The last option is bankruptcy itself, perhaps to be filed before the cases have been heard and punitive damages have been awarded by juries. Although this might seem a desperate, last-ditch solution, it might actually be a solid method of limiting the city's total costs. The Johns-Manville Co. designed the strategy a few years ago when it was faced with certain financial collapse resulting from huge lawsuits it knew it could not win. By declaring bankruptcy before it became mandatory, the company was able to work out its settlements and legal costs in such a way that it remained a viable, ongoing business.

In any event, the city must decide on a course of action, and it must decide soon. The problems are not going to go away, and there is a good chance they might get worse. City officials must pull their heads out of the sand and tell us what they are going to do.

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