The Cost of Corruption

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The dust has yet to settle on L.A.’s police corruption scandal, but already there is extensive and quite appropriate debate on how the city is to pay for all the costs, which the Business Journal recently estimated at running up to $1 billion or more.

Mayor Richard Riordan was first out with a proposal in which bonds would be issued against future tobacco settlement money, estimated at about $300 million. This way, argues Riordan, the bonds would not be tied to the general fund and thus taxpayers but rather private investors.

Meanwhile, the city administrative officer has proposed a more traditional approach, in which $20 million would set aside from the general fund in each of the next several years plus the issuance of so-called judgment obligation bonds. Last week, the council’s Budget and Finance committee sided with the CAO recommendation and against the Riordan tobacco plan. This week, the full council takes up the issue.

It would be na & #271;ve to believe that politics will not somehow enter into the deliberations. The mayor does not exactly have rosy relations with either the council or the city administrative officer. But factoring out the political sideshows, it does appear that the CAO proposal makes a bit more sense than the mayor’s.

First off, interest rates likely would be cheaper. Given the city’s relatively high credit rating, judgment obligation bonds would carry an interest rate of anywhere from 4 percent (variable rate) or 5.18 percent for a 10-year fixed rate. That compares with a rate of 6.75 percent for tobacco bonds. Besides, the payout from the tobacco settlement remains uncertain with the prospect of declining revenue among cigarette companies.

More profound is the question of whether the $200 billion that cigarette companies have agreed to pay local governments to recover health care costs related to tobacco use should be used to cover liability from police corruption. Soon after Riordan’s proposal was announced, Richard Corlin, an official with the American Medical Association, called the idea “an obscene perversion” of what the money is earmarked for. Also outraged is Assemblyman Gil Cedillo, D-Los Angeles, who says that the money should be used for its original purpose, health care and education.

There will be a price to pay for funding the Rampart scandal from a combination of cash from the general fund and bonds. While the mayor has promised that taxes will not go up as a result of the scandal, there may not be any choice. Certainly, taxes will not go down leaving pretty much dead last year’s effort to cut the city’s business tax. And don’t expect much help from Sacramento; despite L.A.’s much-improved status in the state capital, there is little interest in bailing out local communities for their bad cops.

Regardless of the mechanism, it is the process of sifting through liability claims that should get the most attention. It’s axiomatic that attorneys are looking to score big on lawsuits filed by those claiming to have been mistreated by the police and expecting the city’s ability to defend those cases to be minimal. Rather than write out a blank check on many of these nuisance suits, the city attorney and District Attorney’s Office should be given the resources to fully assess these claims for better or worse. That posture, regardless of cost, would instill a much-needed vote of confidence within L.A.’s badly battered world of law and order.

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