GOODBYE L.A.

May 5, 2010

Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy.  Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact, say Richard Riordan, a former mayor of Los Angeles and Alexander Rubalcava, president of Rubalcava Capital Management, an investment advisory firm. 

According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government.  Even if Villaraigosa were to enact drastic pension reform today -- which he shows no signs of doing -- the city would only save a few hundred million per year. 

Los Angeles's fiscal woes can be traced to two numbers, say Riordan and Rubalcava: 8 percent and 5,000. 

  • Eight percent has been the projected annual rate of return on the assets in Los Angeles pension funds.
  • Four years ago, Riordan and Rubalcava warned Villaraigosa of the dangers behind the myth of that 8 percent, only to be told by the city controller's office that their warnings were "based on faulty assumptions which are largely disputed." 

How faulty were Riordan and Rubalcava's assumptions?  Over the last decade, the two main pension funds in Los Angeles have seen their assets grow at just 3.5 percent and 2.8 percent annually. 

Five thousand is the number of employees added to the city's payroll during Villaraigosa's first term as mayor, say Riordan and Rubalcava: 

  • According to California's Economic Development Department, when Villaraigosa took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people.
  • Today, there are just 4.19 million jobs in Los Angeles and over 632,000 unemployed people.  

The mayor can't control the economy, but he could have chosen to control spending to keep the size of government proportional to the size of the local economy.  Instead he's done the opposite: squeezing the city's productive workers to fund the salaries, pensions and other benefits of government workers, say Riordan and Rubalcava. 

Source: Richard Riordan and Alexander Rubalcava, "Los Angeles on the Brink of Bankruptcy; What Mayor Villaraigosa must do to save the city," Wall Street Journal, May 5, 2010. 

For text:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html 

 

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