Los Angeles city officials are being urged to issue up to $70 million in bonds to pay for large lawsuit settlements approved by the City Council this fiscal year amid a projected $245 million budget shortfall.
Ben Ceja, an analyst with the City Administrative Office, said the department is recommending that City Council members move forward with borrowing between $50 million and $70 million to pay off some of the settlement amounts. The financing would go toward a $21 million installment on a $200 million settlement in a housing-related lawsuit, as well as cover about $8 million in settlements for fatal police shooting cases.
The housing settlement resolved a 2012 case in which disability advocacy groups alleged required disability accessibility features were not included in housing that received public money.
City officials this year have already dipped into reserves to pay for $28.5 million in settlements, and are anticipating spending another $23 million later this year on pending cases, Ceja said.
But Ceja warned that the financing method, called judgment obligation bonds, “should be considered a rare step and stop-gap measure only.”
“To fix the problem long-term, we need to budget appropriately” and to also address “the issues that have led to these” payouts “in the first place,” he said.
According to a report presented by the Budget and Finance Committee this afternoon, the city’s settlement and judgment payouts are expected to be at least $135.5 million. The city had only budgeted $68.5 million for settlements in the current fiscal year.
Ceja said the “better approach” that the CAO “has recommended is to provide funding within the budget at a level that is based on a comprehensive review of existing cases by the City Attorney.”
Aided by a better understanding of the liabilities faced by the city, the CAO report said, the City Council and Mayor Eric Garcetti could use the bonds as a temporary measure, but “should also commit to appropriately funding the liability account for next year.”
The last time the city borrowed money to cover settlement costs was in 2010, when payouts totaling about $50 million were made in cases related to the May Day melee, Ceja said.
City Administrative Officer Miguel Santana told the budget committee that the CAO suggested borrowing because using reserves for lawsuit payouts could be “a risk to our bond rating should we go below the 5 percent” of the city budget. Maintaining a 5 percent level of reserves was a “significant reason” the city’s bond rating was previously upgraded, and has been important for keeping costs low when the city borrows money, he said.
Santana said that normally he would not recommend issuing bonds just to pay off settlements.
But his office’s recommendation is “being driven by two things, liability being a significant piece, but the other piece being revenues,” which are currently falling behind what was anticipated in the adopted budget.
“We’re hoping that departmental receipts start picking up again ... but there’s no certainty of that,” he said.
Ceja and other budget analysts said in their report that the city is on track to being $245 million in the hole this fiscal year, due to higher than expected spending due to liability costs, labor agreements with firefighters and a human resources benefits account. The report also noted that the city faces additional “risks to year-end revenue in departmental receipts, sales taxes, electric users’ taxes, parking fines, and franchise fees.”
The Budget and Finance Committee voted 4-1 in favor of starting the bond issuance process, which is expected to take about six months or until June to complete. But the panel’s members expressed reluctance about borrowing money to pay for this year’s ballooning financial liabilities.
Councilman Paul Krekorian said he was interested in looking further at the options and finding out what “ends up costing us more — dipping into the reserves or issuing a JO bond.”
If the bond were being issued for “one big unusual case, it makes sense to spread that over years,” Krekorian said. “But if we are under-budgeting what we actually expect to be spending in liability expenditures over the course of the next years, it does not make sense to be borrowing to pay for what we should be budgeting.”
Councilman Mitch Englander, who voted against moving forward with the bond, said he believes that the liabilities now being faced by the city should be seen as an ongoing expense. This means the city should look to its departments to cut costs or borrow from reserves or another fund if possible, instead of issuing bonds, which is “akin to me of putting the mortgage payment on a credit card.”
According to the City Attorney’s office, civil payouts amounted to $120 million last fiscal year, and $64 million before that. The totals have grown each fiscal year from 2011, when it was $48.3 million.
The committee also backed the CAO’s recommendations for addressing the $245 million shortfall, which include:
• No new spending requests until the next fiscal year
• Making adjustments within departments to prevent shortfalls, including adjusting hiring plans
• Holding off on non-required civilian hiring until March, when another analysis of the city’s finances is released
The CAO also recommended ways to “strengthen” city revenues, including:
• Moving forward on hotel tax agreements with short-term rental companies, similar to one reached with Airbnb
• Looking into how the city could generate revenue from allowing billboards on public property
The City Council is still debating short-term rental regulations and a comprehensive billboard policy.
Councilman Bob Blumenfield said the council has a lot of work to do to address the city’s financial troubles.
“We need to manage budget obligations and shortfalls but we shouldn’t shortcut the need to make smart and sensible policy on billboards,” he said. “Solutions are making their way through PLUM (the council’s Planning and Land Use Management Committee) but we need to be very careful about what short term measures we adopt.