L.A. needs to borrow millions to cover legal payouts, city report says

The Los Angeles City Council in recent years has repeatedly settled costly, high-profile lawsuits, agreeing to spend millions of dollars to end litigation brought by grieving families, disability-rights groups and people wrongfully convicted of crimes.

City Hall leaders championed some of the settlements as having a silver lining for taxpayers, such as one in 2015 that created a program to fix L.A.’s buckling sidewalks.

But a surge in legal settlements, along with court judgments against the city, is outpacing the city’s ability to keep up.

With payouts projected to total at least $135 million this fiscal year, budget officials said Monday that the city needs to immediately borrow up to $70 million to avoid dipping into its emergency reserve fund.

In a new report, the City Administrative Office said the gap reflected “a new trend of increased liability payouts.” The report recommended raising the money through a bond that would be paid back over 10 years.

Such borrowing would cost the city millions of dollars each year in interest and fees. Under one scenario discussed Monday, the city would pay $9 million each year in principal and interest on a $70-million bond.

Councilman Mitchell Englander voted against the bond at Monday’s budget committee meeting, arguing the city needs to do a better job allocating its money given the repeated lawsuits.

“We’re going to be in the same boat next fiscal year...it’s every year,” Englander said. The measure was approved, 4-1, and sent to the full council.

The city typically budgets $60 million a year for its legal liability fund, but has seen a significant number of settlements since the fiscal year began on July 1.

City Administrative Officer Miguel Santana said his office issued financial reports to the City Council for the last several years warning of costs to the city because of the lawsuits. He also called on the mayor and City Council to “significantly increase” the amount funded for liabilities.

“Ideally we would have budgeted more,” Santana said.

In August, the City Council agreed to a roughly $200-million settlement over a housing-related lawsuit brought by disability-rights groups, with the city expected to pay about $20 million a year.

Last month, the council agreed to an $8-million settlement to end lawsuits related to the fatal Los Angeles Police Department shootings of three unarmed men in separate incidents. The payouts are among the highest by the city for deadly police shootings in the last decade.

Two years ago, officials agreed to spend $1.2 billion over the next three decades as part of a legal settlement to fix the city’s massive backlog of broken sidewalks.

The city paid out $110 million in legal cases last fiscal year, according to budget staff. In January 2016, the city agreed to pay out $24 million to settle lawsuits from two men who alleged that dishonest LAPD detectives led their wrongful murder convictions and caused them to spend decades behind bars.

City lawyers concerned about the police misconduct allegations recommended the settlements, saying in confidential memos to the City Council that taking the cases to trial could be even costlier.

In an interview Monday, Los Angeles City Atty. Mike Feuer cited several reasons for the increased payouts. He said juries are more skeptical about law enforcement when it comes to police liability, and cited a “significant” amount of deferred maintenance of city infrastructure.

Jay Handal, co-chairman of the Los Angeles Neighborhood Council Budget Advocates, questioned the city’s approach given the bond’s interest rates. Such costly borrowing, he said, makes more sense for long-range construction projects, not ongoing legal expenses.

“What this [proposal] tells you is that we have an upper management who quite honestly isn’t addressing the systemic problems we have in our budget,” Handal said.

Already, the city has taken $28.5 million from its reserve fund this fiscal year to cover legal payouts, according to Assistant City Administrative Officer Ben Ceja.

As of November, the reserve fund stood at about $295 million, which the CAO report said is “only precariously above” the minimum amount required under city policy — 5% of the General Fund budget. Reducing the city’s reserve fund has the potential to hurt its bond rating, which makes it more expensive to borrow money.

Ceja said the rising expenditures “could be the new normal in terms of paying out cases.”

The last time L.A. issued a such a bond was after the 2010 May Day Melee, when the city was forced to pay millions in lawsuit settlements after police turned on demonstrators at MacArthur Park.

The city borrowed $50 million and currently spends $6.5 million to pay off that debt, according to budget documents.

Councilman Paul Krekorian, who chairs the city’s Budget and Finance Committee and voted for the bond, said he’s hopeful that a working group established with Feuer’s office in 2015 will help bring down costs as city lawyers work to reduce legal risks.

“It’s not my preferred solution,” Krekorian said of the bond. “My preferred solution is to have a budget that anticipates what our likely liability will be.”

Times staff writer David Zahniser contributed to this report.

dakota.smith@latimes.com

Twitter: @dakotacdsmith

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UPDATES:

7:30 p.m.: This article was updated with the committee vote to approve the bond and other details.

This article was originally published at 1:05 p.m.