Los Angeles is a global center for entertainment, trade and finance but it is also rife with some of the same financial issues plaguing Detroit, leading some financial experts to claim Los Angeles could be the next Detroit. According to James Lacy, an author, there has not only been zero job growth in Los Angeles within the last twenty-five years, but pension liability has also grown exponentially with little funding.
Los Angeles faced with long-term structural imbalance
By investigating Detroit, Stockton and other cities facing a financial crisis it is clear the path to bankruptcy can be a long and winding road, but unfortunately city leaders in Los Angeles may not be doing enough to stave off financial disaster. In fact, they have made a common mistake other cities have made. Their current workforce retirement costs alone are so great that reforming them is essential to avoiding insolvency.
In a recent article in Real Clear Markets, pension costs in Los Angeles “have gone in 10 years from 3 percent of the city’s budget to 18 percent, and even with the increased contributions by the city, its pension debt is growing larger.”
The crisis in Los Angeles, however, is a bit different than Detroit. Much of Detroit’s issues surfaced after years of job losses in the auto industry, flight from the cities, increased crime and political mistakes. Los Angeles, however, has suffered from a lackluster economy, one which is not generating enough job growth. Add to that the growing costs of employment and it is a recipe for disaster.
Experts also note that although the city’s manufacturing economy remained strong for much longer than Detroit’s, it is now on the decline. Also suffering is the tech economy which has stalled.
But Detroit and Los Angeles do have one thing in common- city expenditures continue to outpace taxes. Although the city has begun to address the problems and has been reducing its headcount the last several years by 5,300 workers or nearly 15 percent, it’s not going to be enough. Los Angeles residents have also been hesitant to increase the sales taxes, a move that some claim is necessary to avoid even steeper cuts.
Unions join in the fight
Los Angeles is also plagued by union groups who fail to see that tough budget choices must be made to help grow the economy and decrease the costs for employment. Some city leaders have tried to avoid the city’s coming fiscal train wreck but have found that they are battling against a heavily unionized city where 91 percent of general fund costs are salary and benefits. When efforts have been made to cut costs to the city’s pension system there has been heavy opposition from unions.
What’s even more concerning is the precedent that Michigan could be setting that the state should come to the rescue of Detroit. What happens in California when L.A. faces their financial crisis? It’s likely the city will first turn to the state for help. If that doesn’t work they are likely to ask the federal government for help. That means you and me will pay for the mistakes of the city leaders who continually write checks they cannot cash.
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