Posted on March 7, 2013

Will Los Angeles Join Detroit as a Fiscal Zombie City?

Steven Malanga, Real Clear Markets, March 7, 2013

Few people should have been surprised when Michigan Gov. Rick Snyder said last week that he was beginning a state takeover of insolvent Detroit. After all, the city’s schools have been operating under state control since 2009, while Detroit government itself has been running an accumulated deficit since 2005 and papering over its finances with borrowing.

No one would mistake Los Angeles for Detroit, however, and not just because of the weather. Los Angeles is not a fading rustbelt metropolis but a global city, a center of entertainment, finance and trade. But at a forum for mayoral candidates last month, one journalist on the panel of questioners asked the contenders whether they thought Los Angeles faced a real prospect of bankruptcy, and at least two of the candidates agreed it did.

The question didn’t come out of nowhere. Last April, the city’s administrative officer issued a report on Los Angeles’ deteriorating finances and its long-term structural imbalance, which is budget talk for the fact that the city’s projected revenues and spending don’t match up over the coming years. Just to ensure that readers didn’t miss his point, the CAO, Miguel Santana, started his report by recounting the path to insolvency trod by another California city, Stockton, and observed that in that case, “Getting to the doorstep of bankruptcy did not happen overnight.”

Since then, Los Angeles’ political leadership has engineered small changes in its budget, such as less expensive pensions for new workers, but that won’t generate substantial savings for years. Now a new report issued last week by a budget watchdog group, California Common Sense, says that Los Angeles’ current workforce retirement costs alone are so great that reforming then is essential to ‘avoiding insolvency’ in the nation’s third largest city. {snip}

Los Angeles represents the new model of urban distress. That is so because it isn’t coming face-to-face with its crisis after decades of decline spurred by job losses in its single most important industry, as Detroit did with the auto makers. For all of the shortcomings of Los Angeles’ civic leadership, the city also hasn’t endured the political follies of Detroit during its economic decline, like the tenure of Mayor Kwame Kilpatrick, dubbed “America’s hip-hop mayor,” who went to jail for obstruction of justice after lying about an extramarital affair in a sex-and texting scandal with a city employee, and who still faces federal charges for extortion, bribery and fraud.

Although Los Angeles hasn’t been rocked by the kind of jobs exit that hit Detroit, the Southern California economy is not robust, and hasn’t been for some time. More to the point, the area’s economy isn’t generating nearly the kind of growth needed to support its rapidly increasing government costs, most especially the cost of employing its workers. Even during the housing bubble-induced economic growth of 2005 through 2007 in Southern California, the greater Los Angeles area never exceeded its jobs peak of 20 years ago. For more than two decades, the area’s economy has just been cycling through eras of boom and bust without any permanent job growth.

The city’s manufacturing economy, which remained vibrant far longer than Detroit’s, has been on a steady decline of late, losing 55 percent of its jobs over 20 years. Nothing has stepped up to take its place. The city’s information industries, a large part of any tech economy, have been stagnant. So has LA’s imposing professional and business service sector, stuck in another 20-year boom and bust cycle that has resulted in no net new jobs. {snip}