Saturday, July 2, 2011

Happy Days Are Here Again! Someone Willing to Lend Los Angeles Money

We couldn't help but smile at this story in the LA Times. Forget about the 12% unemployment rate, the continuing free fall in the real estate market, and a projected budget deficit of $196 million for the next fiscal year! For that matter, forget about last year's debt downgrade, the battle with the Department of Water and Power, and that article in Bond Buyer called "Los Angeles Nears Edge of Fiscal Cliff." Because things are turning around! And how do we know it? Because Wall Street investors just agreed to lend the city $1.3 billion in short-term debt at low interest.

There are lots of ways to interpret this news. On the face of it, of course, it's good for Los Angeles: being able to borrow at an average annualized interest rate of 0.26% is welcome news for a city with chronically stressed finances. And there's probably some truth to the idea that Wall Street was willing to reward the city for taking steps toward fixing its finances: given that the 2012-13 deficit was projected at $446 million less than two years ago, lopping off over half of that shortfall by firing 13% of the workforce and getting concessions from unionized workers is a real achievement. Though administrator Miguel Santana loses us when he declares that the new agreement with the cops union will save LA even more money.

We're less convinced, though, that the loan signifies a step in what Santana called LA's "turnaround story." For one thing, with banks sitting on tons of excess reserves these days, it makes sense that the prices of low-risk loans would be favorable to borrowers. And this is a low-risk loan: the debt that LA sold to investors came in the form of revenue anticipation notes, which are short-term instruments that governments use to pay day-to-day expenses until tax revenues roll in later in the fiscal year. So Los Angeles will be paying this money back very soon. Opinion is more divided on the city's credit-worthiness when it comes to long-term lending. While Santana is clearly optimistic, Councilman Bernard Parks (who heads the city's Budget and Finance Committee), said, "I don't think we're close to solving the budget problem. It's a work in progress — you can't declare victory on it." Both Parks and former Mayor Richard Riordan believe that more dramatic reforms, including outsourcing of public services and raising the retirement age, are needed to avert bankruptcy in the near future. We would also add this word of caution to anyone considering buying Los Angeles' long-term debt: corruption continues to be both a very real and very costly problem in the city's government. One juicy example is the recently-disbanded Gold Card Desk, by which city officials and their friends enjoyed special treatment with regard to parking violations, potentially costing the city millions. Let the lender beware.

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