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Bankruptcy ‘not an option’ to help L.A.

Marketplace Staff Apr 26, 2010

Bankruptcy ‘not an option’ to help L.A.

Marketplace Staff Apr 26, 2010


Stacey Vanek-Smith: Out here in Los Angeles, we like to think of ourselves as on the cutting edge. And we could be setting a new trend: filing for bankruptcy. We’d be the first major U.S. city to do that. Our mayor says it won’t happen, but skeptics say his budget doesn’t address the city’s biggest budget problem: pensions. Chris Richard has more.

Chris Richard: One of those skeptics is money manager Alex Rubalcava, who’s been warning about L.A.’s high pension costs for years. He says the retirement funds are supposed to pay for themselves with profits from investments, but Rubalcava says returns have been less than half the funds’ predictions for the last decade, leaving the pensions badly underfunded. This year’s $1 billion city bailout is projected to triple.

Alex Rubalcava: The increase from $1 [billion] today to $3.5 billion a few years from now is greater than the combined budgets of LAPD, Los Angeles Fire Department, the Sanitation Department, the City Attorney Department, Transportation, Rec and Park and Tree Services. So how we are going to operate our city, absent bankruptcy? I don’t know.

Some business leaders agree. Stuart Waldman is president of the Valley Industry and Commerce Association. He says his members are growing impatient with elected officials’ reluctance to face business facts.

Stuart Waldman: Most business people understand that if you can’t run your business, you need to reorganize. And unfortunately it may take something as drastic as bankruptcy for the government to run more efficiently.

Backers of the bankruptcy option hope to follow the example of nearby Orange County. It filed bankruptcy in 1994, after losing more than $1.5 billion in bad investments. County officials used the process to cut spending sharply and reorganize their debt, but in Los Angeles:

Sarah Hamilton: The mayor’s said that he will not allow the city to go bankrupt on his watch.

Sarah Hamilton is press secretary to Los Angeles Mayor Antonio Villaraigosa. She says a filing would mean surrendering control of the city’s assets. Villaraigosa’s not about to be the first big-city mayor in the country to do that.

Hamilton: He’s even said it would be akin to using an atom bomb on a riot. It’s just not an option that he is considering.

Bernard Parks, chairman of the City Council’s Budget and Finance Committee, doesn’t see it that way:

Bernard Parks: I don’t think you can say, “Bankruptcy’s not an option so therefore we’ll ignore the possibility.” We need to know what are the ramifications, what are the requirements once you get into it.

Leading business groups have the same questions. The Los Angeles Chamber of Commerce has started studying the possible effects of a bankruptcy filing.

In Los Angeles, I’m Chris Richard for Marketplace.

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