Caution Flags on L.A.’s Debt

Two of Los Angeles’ ranking financial experts have issued warnings about the city’s growing debt. Counting current and future financial obligations, they project the city’s debt service costs will breach an informal but long-respected 10% ceiling by 2001.

City Controller Rick Tuttle and City Administrative Officer Keith Comrie both propose formal debt ceilings. The city should take heed because much more debt could pose a threat to its excellent credit rating.

The figure in question is the percentage of the city’s annual general fund revenues spent for its overall principal and interest payments on voter-approved debt and other obligations. Examples of voter debt are bond issues for various public improvements.

The percentage this fiscal year is 8.6%, which is respectable. But by fiscal 2003, it could rise to 12%. Bond rating experts say that won’t automatically kick the city’s rating down from its current double-A. But it could matter in combination with other city financial data, and there are signs of trouble on the horizon.

The city’s reserve fund fell below $14 million in fiscal 1996-97--the lowest point in 10 years. Los Angeles’ flexibility in generating revenue was crushed by Proposition 218, which requires that all tax increases go before voters. And the city’s tax collection rate in recent years has been about 88%, while 95% or more is common in other cities. The business tax collection rate is especially low in part because of the city’s labyrinthine business tax codes. Also, the average state and local pension fund had 87% of the assets needed to cover its pension liabilities; Los Angeles last year had just 72%.

However, Los Angeles’ investment rating and overall financial standing are still quite good in comparison with the rest of the nation’s 10 largest cities. Only Dallas and Phoenix have a higher bond investment rating.

So, what should be done to keep it that way? Comrie is right when he says that the city’s debt should be permitted, briefly, to exceed 10%. But Tuttle too is correct when he says that Comrie’s proposed 15% limit is too high. City Councilman Mike Feuer wants Comrie and Tuttle to work out their differences before the city acts, and that makes sense. The city’s debt payments will exceed $406 million in fiscal 1999. City Hall should start keeping a closer watch on current and future projects to prevent debt from reaching unmanageable levels.