L.A. analysts project $1-billion budget gap by 2013

Los Angeles could face a $1-billion deficit by the time Mayor Antonio Villaraigosa wraps up his second term in 2013, a dire forecast driven primarily by escalating employee pension costs and stagnant tax revenues, the city’s top budget analyst said Wednesday.

The grim financial outlook came a day after the city’s credit rating was downgraded by Wall Street-based Fitch Ratings. That could worsen L.A.’s already precarious financial situation by making it more expensive for the city to borrow money.

City Administrative Officer Miguel Santana told City Council members that if they hope to end L.A.’s incessant practice of spending more than it collects they must make severe, and almost assuredly unpopular, cuts to some existing services and possibly eliminate some departments.

Closing the projected budget shortfalls in the years ahead also will require significant reform of the city employee pension systems, such as creating a lower tier of benefits -- a change that would require voter approval, Santana said.

“None of these solutions are easy,” he said.

Noticeably absent from the discussion was any talk of raising taxes or fees. Instead, Santana suggested that Villaraigosa and the council consider more creative ways to raise money, such as privatizing the Los Angeles Convention Center and the L.A. Zoo.

“In this economy, you don’t want to talk about raising taxes,” said Councilman Greig Smith, who represents the northwest San Fernando Valley. “I don’t think voters are in any mood for increasing parcel taxes.”

Los Angeles faces a $98-million shortfall in the 2009-2010 budget year, and with steep declines expected in revenue from property-related taxes, sales taxes, hotel taxes and other fees, that deficit could widen. Santana said the city would be forced to dip into its emergency reserve fund to cover the shortfall, a move expected to lead to another downgrade of the city’s credit rating.

And that’s just the beginning. In 2010-2011, the city faces a projected budget shortfall of $408 million, and that deficit is expected to grow steadily year by year. By 2013-2014, the gap could grow to $1 billion, according to city projections.

The current budget gap comes even after the mayor and council reduced this year’s shortfall by more than $300 million, savings achieved primarily through a series of concessions from city employee unions: salary cuts, furloughs for some workers and an early retirement program that will take 2,400 employees off the payroll. The city also suspended efforts to expand the Los Angeles Police Department, although it will continue to replace officers who leave. To cut overtime expenses, the Fire Department is shutting down rescue units and ambulances on a rotating basis.

Santana said the early retirement program would save the city $47 million this fiscal year, but as a result many of L.A.’s most senior and experienced workers are leaving: “We’re losing much of the brain trust of the city overnight.”

The City Controller’s office, which conducts financial and performance audits of agencies and programs, is losing 180 employees -- 17% of its workforce.

The Los Angeles Police Department will lose 226 civilian employees who range from auto mechanics to office workers. Combined with 325 civilian positions that are currently vacant, that will leave about one out of every six civilian jobs unfilled at the LAPD.

Councilman Bernard C. Parks, chairman of the council’s Budget and Finance Committee, said there are no easy options.

“It’s no longer an issue of saving a program or saving a department, it’s really about the financial health of the city,” said Parks. “I don’t think any of us want to be here and be a part of a news conference about a bankruptcy.”

Along with city tax revenues falling $75 million short of expectations this year, the city faces the burden of ensuring that its two major pension systems -- the Los Angeles City Employees’ Retirement System and the Los Angeles Fire and Police Pensions -- remain solvent despite investment losses suffered in the economic downturn. That is expected to cost an additional $204 million by 2013, according to the city administrator’s office.

Along with the credit downgrade by Fitch, the two other major rating services, Moody’s and Standard & Poors, are expected to release their assessments of city finances next week.

The downgrades translate into higher interest rates when the city goes to the bond market to borrow money, whether it’s for operating expenses or to pay off legal judgments for the city. Over the life of a typical $120-million 30-year bond, that could cost an extra $3.8 million, city analysts estimate.

phil.willon@latimes.com