The long-running court battle over the city of Los Angeles’ decision to divert tens of millions of dollars in port revenues to its general fund, to pay for hiring more police officers, appears close to being settled.
At a hearing last week, Los Angeles Superior Court Judge Carolyn Kuhl said she would make a ruling on the matter as soon as June 27, or shortly thereafter, putting the onus on both sides to reach a deal before then. The city could end up having to pay the port as much as $100 million, according to sources close to the talks.
Culmination of the four-year battle could not have come at a worse time for the city, which is already facing mushrooming liability from the Rampart police scandal.
The pending settlement will also likely specify that the port boost its annual contribution to the city’s coffers over time, sources said.
“As a result of the hearing, it is certainly in all of the parties’ interest to proceed with a settlement,” said attorney David Woolley, who represents the Steamship Association of Southern California. That shipping industry trade group, and the State Lands Commission, are the entities suing the city to return the diverted millions.
But while lawyers on each side said they are disposed toward settling the case, they also acknowledged that the ultimate decision is out of their hands and in the hands of politicians with egos and financial considerations at stake.
“At this point, the discussions are among counsel only,” said Mark Samuels of O’Melveny & Meyers LLP, which is representing the city in the case. “Ultimately, it’s the clients who decide settlements.”
Any resolution that includes some form of repayment by the city to the port is fraught with peril, given the current political climate over the ongoing Rampart police scandal.
“We’re all extremely aware that the city has unpredictable (financial) exposure as a result of Rampart,” said a source close to the negotiations. “It’s a delicate political situation.”
But there are political and financial considerations on the other side as well. If the city were to prevail in its fight to continue diverting port funds, and not repay funds already taken, state officials fear that other municipalities with ports (Long Beach, Oakland, San Diego and San Francisco) would do likewise. Moreover, the shipping companies that lease space at these ports, and that generate much of the revenue being taken by L.A., could decide to divert at least some of their cargo-laden ships to ports outside the state, such as Seattle and Vancouver.
Origins of the battle
The fight goes back to the early days of L.A. Mayor Richard Riordan’s administration. Seeking additional revenue to boost police and fire services, which Riordan vowed during his campaign to make a top priority, the city hired accounting consultants in 1994 to check its books to determine whether the port, a cash cow, had been paying enough for municipal services.
The consultants concluded, in a study dubbed the Nexus report, that the port had been undercharged since 1977 to the tune of at least $60 million, and that it should be charged an additional $11 million annually. In particular, the report said the harbor should be charged more for fire protection services given the special needs required at the port for fire boats and hazardous waste removal.
Some other charges, however, raised eyebrows. The Nexus study concluded that the harbor should pay for part of the upkeep of the L.A. Convention Center 20 miles away, on the grounds that conventioneers sometimes take harbor cruises which benefit the port.
Using the accounting report as justification, the city transferred $20 million from the port to its general fund in 1995. The state Attorney General’s Office objected to the move, saying it violated California’s Tidelands Trust Act of 1911. That law grants control of tidelands to ports on the condition that all revenue generated be spent on maritime-related issues.
The state filed suit to stop the Riordan-led raid, and the Steamship Association joined the suit, claiming that the shipping lines that lease port facilities already pay considerable taxes to cover municipal services.
“What we have here is the city acting unilaterally and arrogantly changing the terms of agreement,” Woolley told the court last week. “The city is saying, ‘Not only can we charge you again for services we’ve already charged you for, by the way, we have other services we’re going to charge you for.'”
Samuels told Judge Kuhl that the city has a right to do just that, if in fact it has been charging the harbor less than it should have. It doesn’t matter that not all the money taken from the port has been used to pay for port services, he argued, because revenue that goes into the general fund can be used any way the city sees fit.
Heavy hit to city services
Despite the plaintiffs’ objections, the city has taken $67 million from the port since 1995, not counting the $10 million to $15 million the harbor annually pays in taxes. All that money has been transferred to the city’s $2 billion annual fund. The city has also adjusted its budget upward with the expectation that it be allowed to continue diverting $11 million a year from the port. In 1998, the city claimed in a court filing that if it were forced to reimburse the port, the result could be “closure of half the city’s libraries or a quarter of its recreation and parks facilities.”
Nonetheless, according to sources involved in the negotiations, the city might agree to pay back the money it has taken from the port if the harbor were to agree to increase its annual payments in the future.
But just how the city would pay back the $100 million or so demanded by the port the $67 million the city has taken, plus accrued interest could be a significant sticking point. The city’s attorneys at one point apparently proposed that the money be repaid over the next century, a plan rejected out of hand. Now, with Rampart looming, a solution acceptable to everyone is going to be difficult to reach.
“The State Lands Commission doesn’t want to seen as being whipped by the city, and the city must be seen as repaying a reasonable sum of money over a reasonable time,” the source said.
