More than 1,000 L.A. businesses that contract with City Hall received letters requesting they cut their fees by 10 percent to help the city reduce its mammoth budget deficit.
Many have already agreed to make the cuts. But others have rejected them and still others are offering smaller reductions.
City department heads in February sent out more than 1,000 notices to law firms, towing companies, fuel suppliers and other vendors, requesting cuts of 10 percent from their existing contracts with the city. The cuts are not mandatory and city officials said that companies declining the request would not face any penalties.
But city leaders hope that the request for contract cuts would yield $35 million to $50 million in immediate savings and may reduce the need for worker layoffs. The city is trying to close a $200 million general fund deficit for the current fiscal year ending June 30. Budget-slashing proposals have called for laying off as many as 4,000 employees.
The city staff is working on a formal proposal for cutting contractor rates for the 2010-11 fiscal year that begins July 1. That proposal may be sent to the City Council in April as part of the budget package. The general fund shortfall for the next fiscal year is projected to reach $485 million.
“We’re hoping that some folks will look at this and say, ‘Hey, I want to stay on the good side of the city, so let’s cut 10 percent from our contract,’” said City Councilman Paul Koretz, who has led the council’s action on contractor cuts.
So far, a sizable portion of city contractors appears to be heeding the call. According to the City Administrative Office, of 540 letters sent out to vendors of the General Services Department, 107 contractors agreed to make some cuts, while 68 rejected the request outright. The rest hadn’t responded as of late last week.
Of those agreeing to cuts, 43 said they would be willing to cut the full 10 percent; 64 gave counteroffers of lesser percentage cuts.
Koretz said he understood that many local businesses were going through difficult times and that many may not be able to cut 10 percent.
“Some may come back to us and say our margins are so low that we can only cut 5 percent. But every little bit will help,” he said.
The city’s Department of Cultural Affairs is reporting a much higher response rate among grant recipients. About 240 of the 255 groups and individuals receiving grants from the department said they are willing to forfeit 10 percent of their grants; however, the total saved would be only about $250,000.
Data for other city departments was not expected to be available until late this week or early next week.
Contractors for the city’s three “proprietary departments” – the Harbor Department, Los Angeles World Airports and the Department of Water & Power – were not included in the 10 percent request because those departments are separate from the general fund.
Administrative officer Miguel Santana said the city sent letters to companies with contracts that had some flexibility. Construction contracts, on the other hand, are more difficult to renegotiate.
The call for a voluntary 10 percent reduction is the first example of pressure on city contractors and vendors. Late last week, Mayor Antonio Villaraigosa and City Controller Wendy Greuel issued a memorandum to city department heads calling for limits on general fund spending. Among the steps listed: stopping furniture and equipment purchases; reducing the frequency of landscaping services and halting negotiations for new leased office space.
One business that has agreed to cut its contract 10 percent is ATS Northeast Towing of Glassell Park.
ATS President Art Mercer said he treated the city’s request the same as any other customer who’s going through tough times and requests a price cut.
“They are a good customer and they’ve stuck with us,” Mercer said. “Everybody goes through hard times. We’ll have to suck it up for a while and see what we can do to help them.”
Mercer said that because the city contract represents less than 5 percent of his company’s total revenue, the impact on ATS’ overall business should not be significant. None of the company’s 21 employees would be laid off as a result.
None of the three companies – Mercer’s company and two law firms – contacted for this report said they will need to resort to layoffs to meet contract reduction requests, which is good news to the Los Angeles Area Chamber of Commerce.
“We think a 10 percent cut in city contracts is a reasonable request, as long as the private companies don’t have to lay anyone off as a direct result,” said Sam Garrison, vice president of public policy for the chamber. “However, we would oppose anything that meant laying off private sector jobs. The county’s private sector has already lost 450,000 jobs since the recession began. Why would we want to add to that total?”
Koretz intends to meet in the next few weeks with some of the largest contractors to remind them of the city’s dire fiscal situation and to encourage them to accept cuts.
One contractor that has already accepted the cut is Hurrell & Cantrall LLP, a downtown law firm with 20 attorneys that provides litigation and appellate services to the city.
Managing Partner Tom Hurrell said the decision to take a 10 percent cut was not difficult, especially since city work accounts for less than 5 percent of total billings, as it does for Mercer’s towing company.
“If we can make a difference in a small way and potentially save jobs, we would be willing to do this,” he said. “We can probably absorb the 10 percent cut without much disruption in our operations.”
Even before the letters were sent, about 10 local law offices had agreed to make cuts of 15 percent. Those cuts were the result of an earlier initiative from City Attorney Carmen Trutanich to shift more legal work in-house. Trutanich had made the cuts part of his campaign promises.
One of those 10 is the Westwood law firm Eisenberg Raizman Thurston & Wong LLP. Partner David Raizman said it was an important civic duty to make the cut, especially given the widespread coverage of the city’s budget crunch.
“This is an accommodation we made for the city that we live in and work and prosper,” he said.
Meanwhile, there is some concern in the local business community about another aspect of the budget crisis: the impact on staffing levels at city departments that grant permits to local businesses and developers.
“We are very concerned about the impact the layoffs are going to have on services and departments integral to helping create jobs and grow the economy,” said the chamber’s Garrison. “Business licensing and permit approval are two key areas that we’re concerned about. These need people at City Hall to help make them happen.”
Garrison said layoffs at City Hall would set back efforts on an ambitious proposal to reduce the number of permitting agencies in the city from the current 12 to just two: the Department of Building and Safety and the Planning Department. Mayor Antonio Villaraigosa has made this a cornerstone of his effort to make the city more business-friendly.