L.A. Controller Says City Could Run Out of Cash by May 5

Los Angeles is in deep trouble. The situation has gotten so grim that the city controller says L.A. to Run Out of Cash in a Month.

Los Angeles will run out of cash on May 5, city Controller Wendy Greuel said today in a release in which she requested a $90 million transfer of reserve funds to pay bills.

“The question I have been asked most often during the budget crisis is, ‘When will the city run out of money?” Greuel said in the e-mailed release. “Unfortunately, we finally have the answer.”

Greuel, 48, said in the release that the city might not be able to make payroll. She asked Mayor Antonio Villaraigosa and the City Council to release $90 million from reserve funds to meet what she described as “an urgent cash need.” The controller’s financial reporting division estimated that the city would need $90 million to ensure solvency through the fiscal year that ends June 30, according to Golombek.

The crisis came to a head on Monday when the Los Angeles Department of Water and Power today indicating the utility wouldn’t send an anticipated $73 million payment to the city’s general fund.

The Department of Water and Power normally makes an 8% contribution to the city in lieu of taxes but does not have the expected $73 million because the city council blocked a proposed electricity rate hike.

Reckless, Irresponsible Spending

The mayor is now blaming the city council. Instead, Mayor Antonio Villaraigosa ought to look in a mirror to see who is to blame.

The city is broke because Mayor Villaraigosa led the City down a path of reckless and irresponsible spending says blogger Phil Jennerjahn in Petition to Recall Mayor Antonio Villaraigosa

Despite record income over the last five years, Mayor Villaraigosa has led the City down a path of reckless and irresponsible spending that would have been avoided by a more professional and logical City Official. In the face of a crushing recession, the Mayor actually accelerated spending and hiring to the point that the City may have to declare BANKRUPTCY before the end of 2010.

While he is now asking City officials to eliminate 1000 city jobs, the Mayor has selfishly refused to fire a single member of his enormous staff - including 16 Deputy Mayors and 93 personal staff members.

In 2009, the Mayor offered a 3.9 BILLION dollar contract to the IBEW (Electricians Union) for the potential construction of solar panels. The no-bid contract, awarded without competition to his political supporters, creates the appearance of corruption and collusion, and would have increased costs for citizens of Los Angeles.

Taxes and Economic Policies

Wikipedia has some interesting facts about Taxes and Economic Policies.

Taxes

Villaraigosa has tripled the city's trash collection fee from $11 per month to $36.32 per month for single-family homes. Villaraigosa supports Proposition O, which currently adds $10.22 to the property tax bill of a $350,000 home and will eventually climb to $35. The mayor also campaigned last fall for two education bond measures that will increase the size of property tax bills over the next decade.

LADWP Controversy

On March 23, 2010, Villaraigosa in a leaked memo, warned the Los Angeles City Council that their potential failure to support a series of four proposed rate increases totaling 37% and already approved by the city's Department of Water and Power would be "the most immediate and direct route to bankruptcy the city could pursue".

Water use

On August 10, 2007, The Los Angeles Times published an expose on water use by Villaraigosa at his private residences. During the Summer of 2007, Villaraigosa challenged Los Angeles residents to slash their water use by 10% in the face of an historic drought. "Los Angeles needs to change course and conserve water to steer clear of this perfect storm," Villaraigosa said then. But DWP records obtained by the Los Angeles Times show that he and his family used 386,716 gallons of water at their Mount Washington home, far higher than the average of 209,000 gallons. Villaraigosa blamed his high water use on "gophers that chewed holes through a rubberized drip-irrigation system."

Labor Organizer

Villaraigosa been criticized because of the high frequency in which he holds press conferences, attends photo-ops, and travels out-of-town (including campaigning for Hillary Clinton).

Before being elected to public office, Villaraigosa was a labor organizer. Villaraigosa served as a national co-chairman of Hillary Rodham Clinton's 2008 presidential campaign and as a member of President Barack Obama's Transition Economic Advisory Board.

And so, after raising taxes and fees, again and again and again, the city is broke and Villaraigosa is blaming the city council for not hiking fees yet again.

L.A. is bankrupt

There is no way L.A. can pay pension obligations thanks to overly generous union contracts and pension benefits. Heck L.A. might not be able to pay any bills on May 5 unless the council votes to increase utility fees.

The best thing Villaraigosa could do would be to admit L.A. is broke and hope to tackle wage and pension issues in bankruptcy court. Instead, and as I commented on January 22, 2010 Mayor of Los Angeles Says "Bankruptcy is Not an Option"

When a politician says something is "not an option" that generally means it is (or soon will be).

... 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.

In response to the above, an attorney friend of mine had this to say:

If LA's unpaid creditors start attaching assets, the mayor has no choice. Literally. He would have to immediately terminate all LA employees before they accrued federal tax trust amounts. If he allows those amounts to accrue without funds to pay them, he's committed a federal felony.

Here's how it works. Basically, you can stiff creditors generally or "stretch" them as is the bankruptcy parlance. So though somebody is on 30 day terms, you effectively fall behind and pay them effectively on 90 day terms. And on one-time creditors whom you don't need in the future, you just stiff them. So long as you have enough cash to pay the employees for the tax trust fund accounts they are accruing -- and generally for their compensation -- you can keep skating. So if LA or Illinois ever get that low on cash, a filing will happen.

Also if lots of those little (and not so little) creditors get restless and sue, you start having problems. They can move for pre-judgment attachments of cash -- freezing cash and preventing it from being used for other purposes -- like paying employees or putting money away for trust funds. Or they can choose simple expedited collection procedures that lead to prompt judgments and attach cash post-judgment. Same effect, you have to file.

But LA and Illinois, I'm sure, have excellent lawyers who know this. Saying bankruptcy is not an option is total bulls*** and he knows it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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