Steps to a Fiscally Healthy City

What do you do when you’re worried about Wall Street and have to make decisions on a tight city budget and a tiny but tempting reserve fund? Add to that an unsettled policy on how much debt the city can afford.

The first thing you need is a reasonable framework. Mayor Richard Riordan seems to have provided that with his proposed 1998-1999 budget. It manages to maintain a sizable Los Angeles Police Department and still offers improved equipment, 126 new recruits and a badly needed San Fernando Valley fire station.

But another $150 million in voter-approved bonds would be needed to build or refurbish 32 city libraries, raising the debt problem again. The budget leans too heavily on anticipated funds from the city’s Department of Water and Power, which has big debt problems of its own. Riordan says that DWP will manage just fine and DWP General Manager S. David Freeman has reluctantly dropped his objections to helping out.

Next, you bring Wall Street to City Hall for some direct discussions. That’s supposed to happen on Tuesday at a meeting of the Los Angeles City Council’s ad hoc committee on the budget. Representatives of Moody’s Investors Service, one of the two major credit rating firms, are expected to attend, according to City Administrative Officer Keith Comrie. It’s unusual, but basically a sound idea.

Moody’s and Standard & Poor’s decide the city’s bond ratings. The higher the rating, the more attractive those bonds are to investors, and that helps the city work off its debt.

Then you get the city’s chief financial officers, Comrie and City Controller Rick Tuttle, to agree on a well-defined policy on how much debt the city can reasonably assume. Moody’s may have some advice there as well.

Next, you convince the City Council to keep their hands off Riordan’s proposed $38-million reserve fund until a true fiscal emergency arises. Tuttle would like a $50-million reserve fund, but both he and Comrie can live with $38 million.

Maintaining a reserve fund is another factor that influences credit ratings. “Having contingency funds is always a good idea,” says Steven G. Zimmermann, managing director of Standard & Poor’s Western region office in San Francisco, though he acknowledged the “political difficulty” of having funds stashed away. The credit expert noted that a reserve is especially important in Los Angeles because the city has “lost an arrow from its quiver” in having to bring all tax increases before voters under Proposition 218. That limits the city’s ability to raise funds quickly.

If most or all of these safeguards are established, Los Angeles will find itself on strong fiscal ground.