I Love (And Leave) L.A.

Tim Rutten's piece in the LA Times is worth reading this morning as he explores the very real possibility that the City of Angels may end up being the City of Bankruptcy, and that filing it may be the only way out.

Former mayor Richard Riordan has been roiling the civic waters by arguing that the surest -- and perhaps the only -- way out of Los Angeles' fiscal crisis is a declaration of municipal bankruptcy, which he believes ought to come sooner rather than later.

In a conversation with The Times over the weekend, Riordan argued that bankruptcy may be the only way to attack the structural problem gnawing the heart out of the city budget: unsustainable public employee pension costs. Currently, Riordan says, the city is struggling to meet its pension obligations, and that's assuming it will receive 8% annually on the money invested on retirees' behalf. In fact, the average return over the past decade has been just 4%. Over the next few years, L.A. may be looking at $1.5 billion in pension obligations it can't meet. "We need some adults to come alive in the city and to talk through how to meet that liability," he said. "If that doesn't happen, we shouldn't rule out bankruptcy."

Mayor Antonio Villaraigosa's chief of staff, Jeff Carr, says categorically that "this mayor has made it clear that we are not going to declare bankruptcy." Moreover, while federal law lets bankruptcy judges reduce negotiated pension and health benefits in the private sector, it forbids changes in public employees' agreements.

Wherever you come down on the bankruptcy question, it's clear that anything approaching a genuine resolution of the civic financial troubles will have to involve a thorough overhaul of the pension system. Traditionally, public employment offered generous benefits because wages and salaries were lower than in the private sector for comparable work. More recently, public sector salaries have increased -- in part because the governmental workforce is the most significantly unionized in the American economy -- at the same time compensation in most of the private sector has been falling. When you narrow the focus of this national trend to labor-friendly L.A., the picture that emerges is fairly stunning.

When you throw in the fact that cities like Los Angeles invested pension fund money inthe same subprime schemes that the banks did, well...you get the picture.  But in this case it's the employees of the city and county who are going to have to pay for it.  An 8% return is simply not sustainable in this economy anymore, and that means benefits are going to be cut.

The real problem of course is that the people who made the decisions to invest the city's pension fund aren't exactly going to be able to pay that $1.5 billion back.

Now multiply this by dozens of other large cities in the same boat, and you're getting a clearer picture of just how bad this economy still is, and how far it has yet to fall.