Neighborhood council groups in Los Angeles and mayoral candidate Richard Alarcon are taking on 65 years of precedent in their suit challenging the Department of Water & Power's right to transfer tens of millions of dollars to the city's general fund.


The suit, filed last month, challenges the DWP's practice of transferring the so-called surplus revenues while at the same time asking for a double-digit rate increase. In effect, they're saying that the city is using the rate increase and fund transfer as a tax increase.


The practice has been in place ever since the Great Depression forced the city to be more creative in tapping revenues, said Steve Erie, professor of political science at the University of California San Diego.


"Back in the late 1930s, the city's general fund was hurting," Erie said, noting that the city was also coming under pressure from the private utility, Southern California Edison, not to lower rates for DWP customers because it would have placed pressure on Edison to cut its rates as well.


Bending to these pressures, the city instituted an annual 5 percent transfer from the DWP to the general fund a transfer that DWP is allowed to make since it is a city-owned utility. Transfers from the other revenue-generating agencies the harbor and airport departments are not allowed.


The Port of Los Angeles is under the jurisdiction of the state Tidelands Act, which forbids port revenues from leaving the harbor area. The same applies to the city's four airfields, which are barred by federal law from transferring funds to the city.


Erie said that in the 1970s, the DWP pushed through rate increases on the power side, even though the agency was still transferring 5 percent of revenues to the city's general fund.


At that time, though, homeowners had not yet mobilized against municipal levies. An anti-tax movement emerged with Proposition 13 in 1978 and then, in the early 1990s, Proposition 218, which forbade local governments from imposing taxes without first getting voter approval.


The DWP's latest rate hike is the first since the passage of Proposition 218. Originally, the DWP proposed a water rate increase of 18 percent to raise funds for long-delayed maintenance of the water system. After an uproar from neighborhood councils, the City Council in April scaled back the rate increase to 11 percent.


The amount of the rate increase, about $60 million per year, matches almost exactly with the additional transfers that the city has been taking from DWP for the past two years. In fiscal 2002-2003, and faced with a huge budget deficit, Mayor James Hahn raised the DWP's annual revenue transfer to 7 percent from the longstanding 5 percent.


Alarcon and others argue that the rate increase is designed to make up for the additional amount the DWP has been forking over to the city $60 million a year.


Garamendi Tackles State Fund


State Insurance Commissioner John Garamendi had some strong words for both Gov. Arnold Schwarzenegger and the State Compensation Insurance Fund last week.


In town to address a group of business executives, Garamendi blamed State Fund for the relative lack of downward movement on workers' compensation insurance premiums.


With more than half of the state's overall workers' compensation insurance market, State Fund has become a major market force. This past summer, after two rounds of workers' comp reforms had been signed into law, State Fund announced it had lowered premiums an average of about 10 percent, far short of the 20 percent to 25 percent that Garamendi and various advocate groups had called for.


But Garamendi, who has been feuding with State Fund since he was elected two years ago, said the quasi-governmental body has been slow to adapt to the new reforms.


The commissioner threw down the gauntlet in Schwarzenegger's direction: "Until he gets State Fund under control, we're not going to see much of a price decrease," he said. "The governor wants to blow up boxes and change things; this is where he needs to go."


State Fund spokesman Jim Zelinski said the fund is working to reduce rates, and he expects further rate cuts once the full impact of various reforms and cost-saving measures materialize. He added that State Fund has to charge high enough premiums to ensure claims can be paid while still competing in the marketplace.


Schwarzenegger spokesman Vince Sollitto said that the governor has already acted, appointing three new board members who have "reinvigorated" the organization. "Now, State Fund must implement the reforms in a swift and sure way," Sollito said.


Reform Bump


A landmark business tax reform package hit what proponents hope will be only a brief snag as it goes through the Los Angeles City Council.


Last week, the council's five-member Budget Committee, which is chaired by Councilman and mayoral candidate Bernard Parks, raised questions about a recent change to the package put forward by councilmembers Eric Garcetti and Wendy Greuel. Instead of the original language of a three percent across-the-board cut in the gross receipts tax for five years starting in 2006, Greuel and Garcetti inserted language simply stating the tax should be cut 15 percent by 2010.


With sufficient revenues, the cuts could take effect faster, under their proposal. But if business tax revenues to the city plummet during a given year, it's also conceivable the planned tax cuts could be put off until the following year.


Budget committee members were uncertain whether such a change should be accompanied by more specific guidelines for implementing the tax cuts, so they voted to reconsider the tax reform package this Tuesday (16th). If the budget committee does approve the package, it could go to the full City Council as early as Wednesday (17th).


Staff reporter Howard Fine can be reached at (323) 549-5225, ext. 227, or at hfine@labusinessjournal.com .

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