Balancing Act

Can the City of Los Angeles manage its budget without cutting public services? UCLA Institute for Research on Labor and Employment director Chris Tilly weighs in

Photograph courtesy

theessentials_masa_tThere are no simple or short-term solutions to balancing the City of Los Angeles’s budget.  The budget crisis does not result from large pools of unnecessary spending, large numbers of overpaid employees, or waste.  One can find some examples of unnecessary expenditure, overly high compensation, and misallocation of resources, and eliminating these would be wise—but won’t resolve the fiscal crisis. Compared to most large private enterprises, the City of L.A. is a model of leanness and efficiency.

No, the real roots of the budget crunch lie elsewhere—and they result from national- and state-level processes more than local ones.  The first and most important cause is the ongoing economic slump, which continues to hammer Southern California harder than the rest of the country because the housing bubble popped more explosively here.  A second driver is growing economic inequality, which leaves much of our population in need of extra government assistance for schooling, transport, primary health care, and public safety—all services that local government is deeply involved in providing.   A third reason for the shortfall is politically imposed limits on local taxation, chiefly Proposition 13.

With regard to the first cause, L.A.’s ability to revitalize the economy is sharply limited.  The best thing the City can do is spend more than it takes in, providing some degree of economic stimulus.  While some observers have decried the budget’s “accounting tricks”, in a stagnant economy accounting tricks that allow extra spending can be a very good thing.  If U.S. states and municipalities scrupulously seek to balance their budgets instead, we risk a repeat of the double-dip depression that hit in the 1930s as cuts in state and local spending canceled out the effects of expanded federal outlays.

Spending should particularly be directed to investments that can help overcome the crisis’s second source: widening inequality.  In the short to middle run, the City must single-mindedly use its land-use powers and transportation expenditures to create jobs, as the LA Economic Roundtable and others have argued. For maximum impact, it’s critical to create good jobs, not just any jobs, and to build access for historically excluded populations: Metro’s recent Project Labor Agreement is a good example of this approach.  In the longer run, strengthening K-12 education is an essential road to reducing inequality and developing a skilled workforce that will attract employers. It’s a road that will take ten years or more to have a measurable effect.

On the third front, expanding revenues, there is some low-hanging fruit, such as improving collections of existing taxes and fees (as recommended by the 2010 Commission on Revenue Efficiency).  There are also possibilities to enlarge in-lieu-of-tax payments by major tax-exempt properties, to further expand user fees (preferably targeted at those with greater ability to pay), and to increase public employee contributions to pension funds (again, especially among higher earners).  But it’s hard to think of a way to significantly expand revenues without relaxing Proposition 13.  Provisions to expand property tax collections could build in “circuit-breakers” to protect the most vulnerable property owners, such as lower income homeowners, laid-off workers, and elders on a fixed income. 

Expanding the property tax is greatly preferable to the other main local tax alternative, the sales tax.  The sales tax, unlike the property tax, hits hardest at those least able to pay.  By the same token, the sales tax mainly takes money out of the hands of people who would otherwise spend it themselves (canceling out the stimulus effect of government spending), whereas the property tax gets into circulation money that the wealthy would otherwise save.  Best of all would be higher state or federal taxes on the richest, with increased aid to localities.

I expect that some people reading this set of recommendations will see me either as a misguided job-killer or an impractical dreamer.  But the reality is that the U.S. in its economic heyday (think 1940s-1960s) and Europe’s most successful economies (think Germany) followed polices a lot like the ones I’m describing.  Deep-rooted problems call for far-reaching solutions, even if at the moment our reach may exceed our grasp.