As Budget Season Approaches, the City Is Bracing for a Big Dip in Revenue

First comes the health crisis, then comes the financial crisis

The tens of thousands of Angelenos who have seen their work hours cut, their jobs eliminated, or their incomes otherwise ravaged by the pandemic are not the only ones facing a dire financial situation—the city itself is hurtling toward an unprecedented and quickly approaching fiscal precipice.

Mayor Eric Garcetti has made references to falling revenue streams in his televised evening briefings, as the near elimination of travel to Los Angeles is putting a clamp on hotel room taxes, and the shutdown of non-essential businesses and stores is shrinking the sales tax that flows into city coffers. On Wednesday, City Controller Ron Galperin put some numbers to the approaching calamity. He said that new estimates indicate that the coronavirus will reduce revenue in the current fiscal year (it runs through June 30) by $231 million. That, of course, means there is less money to spend.

Next year could be far worse. According to Galperin, projected revenues could decline by as much as $598 million, though given the uncertainty over the length and scope of the crisis and the economic recovery, the fall could be as little as $194 million.

“Our revenue outlook is much darker than it was even a month ago,” Galperin said in a press release for his Revised Revenue Forecast, which is fronted by an image of an open umbrella amid a pounding storm, indicating that the ever-imagined “rainy day” has arrived. Though he noted that Los Angeles is in a better financial state than many other cities due to the diversity of its revenue streams and a healthy reserve fund, he added, “Reductions like we’re seeing will undoubtedly strain our ability to provide high-quality services and require some very difficult budgeting decisions this year and in the future.”

This doesn’t mean Los Angeles is in an immediate financial sinkhole requiring furloughs or layoffs, as occurred during the depths of the Great Recession. Galperin points out that the city is not facing an imminent cash-flow crisis, as projections still call for a 2.3 percent increase over last year’s general fund receipts.

There is never a good time for an economic malaise, but the crisis hitting now poses particular challenges, given that April in City Hall is known as “budget season.” Garcetti is scheduled to release his annual spending proposal (which in the current year totals $10.71 billion) on April 20. In his evening coronavirus briefings the mayor has noted that the rapidly changing situation is causing a constant reimagining of how much money will be available, and what repercussions will follow.

“This pandemic has caused us to have to look every single day at revenues. There is no question though that we are going to have cuts,” he said in his Tuesday address.

Galperin pointed out that whereas in early March the city was anticipating General Fund revenue for the current year to total $6.61 billion, that expectation is being downgraded to $6.38 billion (another approximately $4 billion is devoted to specific purposes, resulting in the total nearly $11 billion budget). That works out to a 3.5 percent decline, and while it might not at first sound significant, these funds cover everything from salaries to money for road repairs.

In a normal year, the mayor’s budget proposal is followed by rounds of wrangling as the City Council and department heads set their priorities. There are generally a lot of hands trying to claw into the pie.

The size of the pie is poised to be smaller than expected. Garcetti noted Tuesday that he has instituted a hiring freeze in Los Angeles, and department heads have been told to hold off on pushing new programs.

The financial shrinkage will be seen across the board. Galperin said that anticipated revenue from the hotel tax (officially called the Transient Occupancy Tax), which accounts for both traditional hotels and short-term and home-sharing rentals, are slated to fall by $61 million in the current fiscal year. Next year’s receipts could be $80 million below what was originally envisioned.

Numerous other revenue streams will also be cinched tighter. Galperin said business tax receipts could tumble by 8 to 12 percent next year, bringing in $55 million to $85 million less than anticipated. Sales tax revenues could decline by up to $67 million. In the revised revenue statement, Galperin said the drops in the business, sales, and parking tax could be “roughly similar to what was experienced during the Great Recession.”

Other revenue streams that could see steep declines include parking fines, which could tumble from an anticipated 2021 level of $135 million to as low as $100 million, and what are known as “Licenses, Permits, Fees and Fines.” Those could be $54 million less than anticipated this year, and as much as $124 million below projections the following year.

In total, General Fund receipts originally envisioned at $6.82 billion next year could be as low as $6.22 billion, an 8.8 percent decline. Galperin also noted that there are “middle” and “higher” revisions—again, reflecting the uncertainty of what lies ahead—that anticipate declines of 5.1 percent and 2.8 percent respectively.

The situation puts Los Angeles, like many other cities, in a difficult situation. In his Tuesday briefing Garcetti thanked federal officials for agreeing to reimburse much of the city’s direct COVID-19 related expenses, but positioned that as just a starting point.

“Cities around the country and local governments as well as state governments will go off a fiscal cliff without assistance from Washington, and I’m imploring our Congress, I’m imploring our president, to make sure the next round also helps bail out cities,” he stated. “That’s the only way you can bail out all of America’s people, and we need your help.”

Expect to see the first painful financial proposals next week.

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