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Los Angeles Heading for Bankruptcy, Mayor Tries to Prevent Bond Market Panic

Economics / US Debt Jan 22, 2010 - 02:24 PM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleWhen a politician says something is "not an option" that generally means it is (or soon will be). Sometimes it means it is all but certain. With that in mind, please consider Mayor Villaraigosa says no bankruptcy for the city.

With city officials declaring that "bankruptcy is not an option," Mayor Antonio Villaraigosa released a long-term plan for the city's finances Thursday, including several billion dollars in potential savings and possible layoffs of 1,000 workers.

In a letter to City Administrative Officer Miguel Santana, the mayor and City Council leaders called for the start of steps needed to make layoffs and perform studies on dealing with this year's continuing shortfall of $200 million and the projected $400 million deficit for next year.

"This mayor has no interest in going down the road to bankruptcy," said Deputy Mayor Matt Szabo, who has been assigned the task of developing the overall financial strategy for the city.

My Comment: It is irrelevant what the mayor wants now. The fate was sealed years ago with pensions. LA came to a fork in the road, and selected the road named "Bankruptcy". Now the mayor says LA has no interest going down that road. Well it is too late for that now, unless unions are ready to do some serious negotiation.

That's the kicker, LA has no choice in the matter other than the mayor's willingness to ask the unions for concessions. Whether or not LA goes bankrupt depends entirely on the response from the unions regarding wages and pension benefits.

The five-page letter from Villaraigosa, also signed by Council President Eric Garcetti and council members Bernard Parks, Jan Perry, Greig Smith and Dennis Zine, sets the stage for a series of decisions to reduce spending in the city's $7.01 billion budget.

There are no plans to ask voters for a tax increase, but the mayor is looking at whether a ballot proposal will be needed to reform the city's pension system.

My Comment: Good luck with that. You will need it.

Santana's office also released a report showing the city's revenues continue to decline, particularly in consumer-sensitive areas such as hotel and sales tax. Also, holiday season sales were much less than expected.

My Comment: Welcome to frugality, the new reality.

Part of the problem for the city is that although there is general consensus that the economy has begun to improve, local government is the last area to see any benefit.

My Comment: The idea that the economy has begun to improve is sheer lunacy. One must not mistake Keynesian stimulus on steroids for a recovery.

Parks, who chairs the Budget and Finance Committee, is planning a series of public hearings around the city, with the first scheduled for 6p.m. Monday at Van Nuys City Hall. The city also has been conducting an Internet survey on what the public would prefer to see cut.

My Comment: If given a choice without outside fear mongering by unions, the first cuts everyone would ask would be the salaries of all the politicians running the city, followed by non-union management, then union salaries and pensions. Indeed all need to be done. But that is not the answer the politicians will want to hear. Instead they will look at libraries.

"We will consider the elimination, consolidation or outsourcing of city assets and services, furloughs and layoffs where permissible," the letter said.

My Comment: Good idea but that is a drop in the ocean compared to the salaries of police and fire and their union benefits.

Cuts in service and outsourcing being considered could be for services like cleaning restrooms at parks, Szabo said.

"We are focusing our attention on what services must be performed by a city worker," Szabo said. "No one is going to argue that police and fire services should be contracted out. That is a core city service. Other services the public demands, we might be able to provide cheaper."

My Comment: I think it would be wise to consider outsourcing the fire department, and at the very minimum threatening to do so. Moreover, unless police and fire services are delivered far cheaper LA bankruptcy is 100% assured.

Options looked at for the long term include either the sale or private operation of assets such as parking facilities, golf courses, the Los Angeles Zoo, Animal Services and the Van Nuys and Ontario airports.

My Comment: It's sheer idiocy to sell long term income producing assets when all one will get is a temporary postponement of the problem. If those assets are not income producing them they should be. Of course they may not be income producing because of all the union workers on those projects.

"Gridlock and partisanship is not an issue here like it is in Sacramento," Szabo said. "This mayor and this City Council are working together to address our problems."

My Translation: "Gridlock and partisanship is an issue here just like it is in Sacramento"

The mayor remains committed to the growth of the Los Angeles Police Department. "The mayor's goal is to protect the gains made by the police," Szabo said.

My comment: The mayor's comments are further proof the city is going to go bankrupt.

Although I commend the mayor for bringing up the "P-Word" (pensions) the rest of his comments suggest he is not willing to stand up to the unions. Moreover, the "B-Word" bankruptcy absolutely needs to be on the table.

As I see it, unions have a choice: Seriously negotiate massive changes in salaries and benefits or face the "Vallejo Option". By taking bankruptcy out of the picture (or by attempting to), unions will simply see no reason to grant major concessions.

By the way, LA is bankrupt, all we are talking about here is whether the city realizes it or not. The mayor's statements prove he does not fully realize the gravity of the situation. Villaraigosa is unfit for office.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2010 Mike Shedlock, All Rights Reserved

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23 Jan 10, 15:31

So the bloody workers have to cop it? Just get over it right wingers, your tax cuts caused it and now you live with the political crap when the inevitable cuts to services haved to be made. You can blame the unions for a while but when it comes down to it, stand up and be honest with the American people - you caused the bankruptcy! And then take the medicine, which is to say sorry and call for tax increases. Ha!

26 Jan 10, 01:09
heading for bankruptcy

Houston - it is the abuse of pensions by the unions that have this city and this country headed for bankruptcy. Throw in the entitlement mentality - where every bonehead who doesnt finish high school believes he should drive a BMW, live in a home he cant afford and have a 60' flat screen.

These people are dillusional. You should see the public workers here in LA. If you owned a business, you wouldn't hire half of them, they are lazy, paid way too well and uneducated...this country is in deep crap - unless we require people to start working for a living again...

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