We Will Have to Pay the Piper--but How?

Beyond the emotional costs in shattered lives and lost trust in city officials and the police, the Rampart Division scandal comes with a huge price tag. No one yet knows the taxpayers’ financial liabilities, but the city attorney’s office has estimated the cost at $125 million, and other guesses have ranged up to $1 billion. Considering that an all-star team of the area’s top civil rights attorneys already has met at Johnnie Cochran’s office--no doubt loading fresh batteries into their calculators--the higher figures are not implausible.

Yet before paying out any money on Rampart, city officials must have a plan that makes sense. Obviously, city lawyers will try many standard procedures to reduce costs, including offering settlements to save court costs and prevent large jury awards. Such tactics only go so far. We will have to pay the piper, but how?

Orange County, which faced bankruptcy a few years ago and had to come up with an extra $1.7 billion in the budget, might offer a few lessons.

Lesson No. 1: Don’t try to raise taxes. When Orange County officials put a tax increase on the ballot to help pay bankruptcy bills, voters shot it down. It is hard enough to raise taxes for services. It is nearly impossible to raise taxes to pay for malfeasance.

In any case, when it comes to raising tax revenue, the city of Los Angeles’ options are extremely limited. Officials could seek an increase in the already high utility tax. Or they could fund property-related services, like fire services, with newly created property assessments, thus freeing up the general fund money that now supports those services. Thankfully, because of Propositions 13 and 218, those options require a vote of the people, so they are not likely to succeed.

Los Angeles would be better to look at the other option Orange County took. A significant part of Orange County’s bankruptcy solution was to acquire a pool of money through bonds secured with the county’s share of the vehicle license fee. To pay for the bonds, the county cut services and drew upon increased revenue generated by the improved economy. Vehicle license fee revenue, a local government source that is collected and distributed annually by the state, would go to the bondholders if the county could not make its bond payments. (Of course, if Los Angeles were to go this way, it would mean that vehicle license fee revenue usually counted on by budget writers would be unavailable if needed to meet debt obligations.)

Los Angeles Mayor Richard Riordan has made a similar proposal to pay for the Los Angeles police scandal, except he wants to secure a bond with a revenue source that will not threaten a reduction of city services: the city’s share of the tobacco lawsuit settlement money.

Despite the popular belief that the tobacco settlement must be used for health purposes, the settlement contains no restrictions on the use of the money. And, unlike the vehicle license fee, the tobacco revenue was never part of the Los Angeles budget. Using it to secure a bond to pay any liability would not require cutbacks in city services.

However, the city’s chief administrative officer and some members of the City Council instead want to set general fund money aside each year to build a kitty, and pay any liability judgments with so-called judgment bonds. They argue this method is cheaper and faster than the proposal secured by tobacco revenues. They also suggest that selling off the tobacco settlement to bondholders would mean the city would end up with less money from the settlement than if the city collected the tobacco money in annual installments.

All true as far as it goes. But the City Council plan comes with its own risks. The judgment bonds are cheaper because they are backed by the faith and credit of the city--meaning the taxpayers would be on the hook for the payments if the city defaults. Whereas with bonds secured by tobacco payments, the bondholders take the risk. Also, the size of the annual tobacco settlement payments are not certain; they depend on the amount of cigarette consumption.

Whichever plan is chosen, the bond money may not be enough. Officials are going to have to consider how they will get more revenue if need be. This could come through service cuts. A better idea, though, would be to have it come through alternative service delivery, such as some form of privatization of city services.

The greatest danger occurs if the city has no plan to deal with its liability and gets hit with massive judgments. If that situation occurred, the city surely would face bankruptcy or the possibility of a judge stepping in to brush away taxpayer protections and order tax increases to pay the claims.

Such a scenario has played out in other American cities. One example: A federal judge ignored a voter-approved property tax limitation and ordered property tax increases to pay for a civil rights judgment in a case involving a Kansas City school district.

Surely elected officials would not want to face the wrath of voters if such a thing were to happen here.