Why Defecit

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By HOWARD FINE

Staff Reporter

L.A.’s economy is booming. Thousands of jobs are being added to payrolls each month, home prices have climbed more than 16 percent in the last year, and new millionaires seem to be created every day.

As a result of all this good fortune, politicians in Sacramento are now debating the best ways to spend a $4 billion surplus.

But at L.A. City Hall, talk continues on how to close a budget deficit. In each of the last five years, that deficit has topped $100 million and has had to be closed with deep spending cuts, temporary revenue grants and stepped-up borrowing. The 1998-99 budget deficit is slightly smaller, at $75 million, but it still represents a substantial portion of the $2.6 billion general fund budget.

Why can’t the city balance its books, even in these times of plenty?

The short answer is that, despite the surging economy, the city’s revenue stream is growing much more slowly than its expenditures.

“The council and the mayor have decided to provide certain levels of funding to police, fire and other services, and those expenditures have increased significantly over the years,” said City Administrative Officer Keith Comrie. “But the problem is that those expenditures are costing more than the revenues we take in each year.”

So why are the city’s revenues growing so slowly? After all, revenues flowing into state coffers have far outstripped the growth in expenditures over the last couple of years.

The answer lies in the types of revenue the city collects. Unlike the state, the city cannot tax people’s incomes. That means the city has no way to tap into the huge gains from Wall Street. So when a top-level executive who lives and works in L.A. cashes in on options worth tens of millions of dollars, not one dime of that goes directly into city coffers. The city may eventually see some of these dollars, but only after they first pass through Sacramento, which has been very reluctant to part with the extra money.

The city gets most of its revenue from three sources: property taxes, sales taxes and business receipts taxes. Property taxes have yet to rebound fully from double whammy the city suffered in the recession.

Not only did property values plummet as much as 40 percent in some areas, but in 1993 the state began taking additional property-tax revenue that it formerly rebated to local government costing the city of Los Angeles about $100 million a year in lost revenue.

Property values are now rising once again, but tax receipts tend to lag transactions by a year or two, so it may be next year before these increases show up in city coffers.

Sales taxes may have a more immediate impact, but here, too, the city is missing out. That’s because people are flocking to new stores and malls outside city limits. Part of this reflects the suburbs’ appeal for consumers and for businesses, which find it less expensive to operate outside city limits.

“It’s the hole-in-the-doughnut syndrome at work here,” said Administrative Deputy City Controller Timothy Lynch.

And business receipts taxes have remained virtually flat in recent years. That’s in part because, until the last year or so, most of the gains on the balance sheets of businesses have come not from sales but from cost cutting and increased efficiencies. Also, the city has actually cut business taxes for several sectors, like multimedia companies, in an attempt to woo more businesses to the city.

On the expenditure side, the city has spent tens of millions of dollars hiring new police officers, which has been the single biggest factor behind the budget increases. Police and fire expenditures make up two-thirds of the general fund budget.

Much of the funding for the beefed-up police force has come from Washington as part of President Clinton’s pledge to put 100,000 new police officers on America’s streets. But that funding is due to expire next year, unless the Riordan administration can convince Washington to keep the purse strings open. If that fails, the city will have to find its own sources of revenue for its police force.

Thus, even if more property-tax receipts begin flowing into city coffers, that money may have to replace these federal funds instead of restoring the city’s budget into balance.

Another major expenditure is $130 million a year in police pension-fund payments over and above the current rate of inflation. The higher payments stem from a court ruling that blocked the city’s attempt to readjust payment levels to officers who retired in the late 1970s, when inflation was in double digits.

The Riordan administration has held the line on spending in other city departments; in fact, total staffing outside of the Police Department has actually been on a steady downward trend.

Yet critics say there is more the city can do to contain costs. Robert Poole, president of the Reason Foundation, said the city could save more than $100 million a year by privatizing trash collection, parking enforcement and other services. However, the City Council majority has resisted most privatization efforts in order to preserve the jobs of city employees.

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