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L.A. budget gap could hit $1 billion

City already faces $427-million shortfall, which could more than double due to pension fund problems.

February 28, 2009|Phil Willon

Los Angeles could face nearly a $1-billion shortfall by 2010 because of a mammoth bailout needed for the city's employee pension funds, which have seen investments tank in the spiraling national recession, according to a city budget report released Friday.

The grim forecast of a $983-million budget gap came as Mayor Antonio Villaraigosa already was considering widespread city layoffs and deep cuts to services because of the worsening financial crisis. The mayor is also exploring whether to privatize the Los Angeles Zoo and leasing city parking garages and meters, which could raise hundreds of millions of dollars. The total budget this year is $7 billion.

"The deficit and the economy are the biggest challenges we face right now," Villaraigosa told a roundtable of Latino journalists at City Hall on Friday. "This is going to be the most serious effort to reduce the size of government . . . because we have no other options."

Villaraigosa said city officials are negotiating with employees' unions to work out a plan that would allow for early retirements and layoffs.

The city's top budget analyst, interim City Administrative Officer Raymond P. Ciranna, informed the mayor and City Council that Los Angeles faces a $427-million budget shortfall in 2009-10, driven primarily by declining tax revenue and increases in employee pay and benefits.

The budget gap would more than double in the next year because of the troubled pension system. The two-year price tag of that bailout -- the city is obligated to keep the system afloat -- would be enormous, costing $458 million in 2010-11 and $663 million in 2011-2012.

"We are looking at some very difficult times ahead," Ciranna said. "We're going to have to make some major structural changes."

The Los Angeles City Employees' Retirement System and the Los Angeles Fire and Police Pensions are expected to suffer combined investment losses of 25% in the current budget year and to have flat returns in the next year, Ciranna said.

Those losses could be softened if Wall Street rebounds in the next four months, although that is not expected. The city also could extend the standard five-year time period it normally uses to absorb such losses, which would carry a lower annual cost. "There are a lot of things up in the air at this point," Ciranna said.

The two city pension systems include 43,000 active city employees and 27,000 retirees and beneficiaries.

"The market downturn has caused our fund to lose money, as has happened with every other fund," said Michael Perez, general manager of the Department of Fire and Police Pensions. "That loss has got to be recognized and made up for in the future. And if we continue to have the loss we have already sustained in the current year, it will require a larger contribution from the city."

Perez said the planned payment from the general fund set for July 2009 is $355 million. If the fund sustained a 25% loss in value, that annual contribution would increase to $657 million on July 15, 2010.

"That's a significant jolt to the city," Perez said

The city employee pension fund's spokeswoman, Linda Aparicio, said Ciranna's forecast of the pension system's investments and financial viability was premature. However, she declined to comment on the system's own financial forecast.

In a more immediate concern for Los Angeles, the city also faces a $35-million deficit for the current budget year, which ends in June, despite the $74 million in midyear cuts approved by the council in December as part of Villaraigosa's attempt to keep the city's books in balance. Those cuts singed many city departments, including the library and the zoo, the police overtime account, programs such as sexual harassment training and salary money that hasn't been used because of a hiring freeze.

However, city tax revenues -- including business and hotel taxes, as well as documentary stamp taxes collected on home sales -- continue to decline.

At the same time, spending has increased, driven in part by police and firefighter overtime and delays in state funding from Proposition 1B, the transportation bond measure approved by California voters in 2006.

The city's budget troubles are not expected to be eased by the $787-billion stimulus package recently approved by Congress and signed into law by President Obama. Although the package may include some money for the mayor's police hiring program, most will go to specific projects and not the city's day-to-day operational costs, Ciranna said.

Meanwhile, the state budget trouble "presents a real threat" to the city's finances in the current budget year and the next, Ciranna said. The budget deal approved by the Legislature and Gov. Schwarzenegger on Feb. 20 is expected to cut state funding for law enforcement in the city by up to $7.5 million. The state also is temporarily withholding money for transportation projects, as well as the city's share of the state gas tax.

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phil.willon@latimes.com

Times staff writers Louis Sahagun and David Zahniser contributed to this report.

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