By David Janssen, Chief Administrative Officer, County of Los Angeles
Wayne Bannister, Urban Research Division, Chief Administrative Office, County of Los
Angeles
Beverly Burr, Consulting Economist and
Bruce Smith, Consulting Economist,
Issued 1-20-99 Corrections made 2-3-99
We would like to thank the numerous City of Los Angeles managers who contributed their time and databases to make this study happen. Kristina Pifer did an excellent job calculating and analyzing demographic indicators on the geographic areas. Matt Ruther provided invaluable assistance in developing flowcharts, interviewing City departments, and helping organize the voluminous material. Nancy Miller produced the map and provided geographic analysis and advice. Bonded indebtedness advice was provided by Doug Montague.
This is a draft report and represents a work in progress. Although the information set forth in the report has been obtained from various sources which are believed to be reliable, the information in the report has not necessarily been independently verified. The report and the information contained in the report are provided without warranty of any kind, implicit or explicit and without guaranty as to the accuracy or completeness thereof. The report is subject to change without notice.
This draft report is submitted to the Los Angeles County Local Agency Formation Commission (LAFCO) for its consideration with respect to special reorganization proceedings and may not be used, in whole or in part, for any other purpose. LAFCO, the County of Los Angeles and the report's authors shall not have any liability to any individual or entity with respect to the usage, personal or otherwise, of any information contained herein.
INTRODUCTION
Legal Context
Assumptions
Caveats
Potential Special reorganization
Areas
San Fernando Valley
Harbor City
Eagle Rock
West Los Angeles
Hollywood
Rancho San Vicente
Remainder of City of Los Angeles
Map of Special Reorganization Areas
City of Los Angeles Overview
History
Organizational Structure
Finances
Study Process Issues
Legal Costs
City Records and Cooperation
Conclusions
General
Special Reorganization Areas
Water and Power
Airports
Port
Redevelopment Agency
Pension Funds
Liabilities and Assets
Revenues
Expenditures
Legal Issues
Other Study Costs
Study Costs
References and Information Sources
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| City of Los Angeles Population by area 1990 | Annual House income by areas 1990 | Median Owner Occupied House Price 1990 |
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| Map of Special Reorganization Areas | Growth of area and population |
At present, three areas of the City of Los Angeles have begun the process of seceding and incorporating as separate cities and another four are considering it. [1] California law requires that new cities created through a special reorganization, as well as other affected agencies, be financially self-sufficient. To make these determinations the law requires that the Local Agency Formation Commission (hereafter, the "Commission") conduct and review a comprehensive fiscal analysis. The Commission will then issue its recommendations regarding each proposed special reorganization. Ultimately, a special reorganization can only occur if approved by the voters.
This scoping study provides guidance and recommended approaches to studying the special reorganization of portions of the nation’s second largest city—a city that owns the country’s largest municipal utility and has one of the nation’s leading harbors as well as airport systems. This report outlines the substance and costs of the comprehensive fiscal analysis required for the Commission to arrive at its recommendations about applications for special reorganization in the City of Los Angeles. Return to Index
The Cortese-Knox Local Government Reorganization Act requires that the comprehensive analysis identify the new city’s costs of providing public services and facilities, and its revenues during the three fiscal years following incorporation. Furthermore, the study must identify the effects on the costs and revenues of any affected local agency.
More broadly, the law requires that the report provide any other analyses needed by the Commission to decide whether and how secession might occur. The law empowers the Commission to decide under what financial conditions a special reorganization should occur. The Commission is granted substantial powers in deciding how to divide or transfer the City of Los Angeles’ assets, bonded indebtedness, resource rights, and employees. Furthermore, the Commission may require that a new city raise additional tax revenues, issue bonds, and make lump sum payments.
In the case of all special reorganization areas, the law implicitly places within the scope of the comprehensive fiscal study any analyses needed by the Commission to determine how to divide or transfer assets, liabilities, water rights, and employees.
Special reorganization law provides that "all public employees…shall continue to be deemed public employees of the original local agency or the newly incorporated local agency." Existing collective bargaining agreements and retiree benefits shall remain in effect. Return to Index
In general, we have defined broadly the scope of work with respect to financial issues. We provide the pros and cons of limiting scope and using study techniques that would reduce the costs of the study. We do this to provide the Commission with worst-case cost estimates and with information for its decision-making on the scope of the complete study.
Specifically, we have assumed that all analytic work would be performed by disinterested parties, that high standards of accuracy would be required, and that qualified professionals would conduct the study. In addition, we assume that the Commission would consider the disposition of assets, liabilities and enterprise agencies prior to making recommendations, and that the Commission would request that related financial analysis be within the scope of the study.
We identify potential areas of agreement between the interested parties that could reduce the costs of the study, including research shortcuts. Furthermore, we identify Commission policy decisions that could reduce the costs of the study.
We have of necessity limited the scope in order to provide cost estimates. We believe that after the completion of the comprehensive fiscal analysis the commissioners will require additional analyses to evaluate a number of scenarios in dividing the City of Los Angeles’ assets, liabilities, employees, and water rights. It is difficult to predict the scope of work during this period following the study and prior to the commissioners’ decision on conditions. The Commission would likely require the assistance of study consultants for analyzing the financial implications of proposed conditions of special reorganization and consultants for structuring any joint powers agreements. We have not estimated the costs of such scenarios. However, we do recommend that the Commission anticipate these costs and require that any databases and models developed during the comprehensive study be owned by the Commission at the completion of the study. We have also excluded the cost of any consultants who might be used in any litigation which might arise concerning any special reorganization.
Additionally, we have limited the scope by assuming that the commissioners would not require that the study cover non-financial issues such as analyzing the size and nature of the new city’s legislative body. Return to Index
As with any scoping study of this magnitude, this study draws broad outlines of the issues involved in analyzing municipal secession. This scoping study, by its nature, cannot uncover all issues, risks, and costs.
The scoping study attempts to anticipate which issues the Commission will require to be researched prior to developing conditional provisions for special reorganization. Clearly, all such issues cannot be anticipated. As the process proceeds and with input from the Commission, the issues will be further defined and clarified.
Even the Commission cannot anticipate all future financial issues germane to the decisions it must make regarding municipal secession. The comprehensive analysis will no doubt uncover additional issues not anticipated by the scoping analysts, the scoping study reviewers, or the commissioners.
We cannot anticipate how many geographic areas will apply and ultimately qualify to have a comprehensive fiscal analysis conducted. Nor can we anticipate whether the timing of such qualification will allow an area’s study to be efficiently and inexpensively consolidated with the study for the San Fernando Valley. Although the financial study must be done for each potential new city, these studies would be most efficiently and inexpensively analyzed simultaneously. Delay of future special reorganization petitions may in fact increase the costs of the comprehensive fiscal analysis for that area. Return to Index
This report scopes out the issues, policy options, research approaches, and costs of studying the feasibility of dividing the City of Los Angeles into as many as seven separate cities. The report identifies issues that would need to be analyzed in order to determine whether and how special reorganization could be accomplished.
The comprehensive fiscal analysis of municipal secession from the City of Los Angeles is costly due to the size of the City, the number and size of different secession areas, and the complexity of City enterprises.
Much of the required work is relatively straightforward, but the volume of work is tremendous. There are many different definitions of the city limits of the remaining City of Los Angeles, depending on which of seven areas actually secedes. Revenues from over one hundred different sources must be divided geographically. Over one thousand diverse properties, several thousand vehicles, and nearly a thousand computers must be catalogued, valued and divided. Dozens of different municipal services must be costed for geographic areas much smaller than service areas. Probable service configurations must be determined for as many as seven special reorganization areas. And over thirty thousand workers must be allocated to the potential new cities.
Portions of the work relating to City enterprises are complex. How should the Commission divide the nation’s largest municipal utility company despite large debt loads and an atmosphere of deregulation? Should a potential special reorganization area keep a regional sewage treatment plant, an international harbor or an international airport located in its proposed boundaries? How much have geographic areas invested in the City’s sewer and harbor? Do geographic areas own equity shares in City enterprises?
This scoping study raises tough questions for the Commission. State law gives the Commission broad powers but little guidance. How should the Commission divide City assets and enterprises? How should the Commission minimize both the costs of the study and potential litigation?
We define three distinct phases of the research project. In the basic research phase, the estimated costs of the comprehensive fiscal study range from $2.1 to $3.1 million. The intermediate research phase would require $1.5 to $5.0 million for basic asset valuation, and currently unknown costs for valuing the utility’s assets. The projected timeline for completing the basic and intermediate phases of the study is twelve to twenty four months. Return to Index
Potential Special reorganization Areas
In this section, we describe the geographic areas of the City of Los Angeles that have applied, or may soon apply, for special reorganization. In addition, we describe particular legal and financial issues relating to specific special reorganization areas. Finally, we discuss how the number and size of the geographic areas impact certain costs of the comprehensive fiscal analysis. Return to Index
This special reorganization area is the portion of the San Fernando Valley west of the Hollywood reservoir and Griffith Park. The San Fernando Valley submitted its petitions in December 1998 and is currently waiting for the petition signers to be verified as registered voters residing in the San Fernando Valley.
About 1.2 million people reside in the San Fernando Valley, slightly over one-third of the City of Los Angeles population.[2] As a whole San Fernando Valley residents have higher incomes than other City residents. City residents living in the Valley have incomes about 27% higher than do City residents living outside the Valley. Poverty is less prevalent in the Valley as well.[3] Eleven percent of Valley residents live below poverty level, compared with 23 percent of City residents living outside the Valley.
The Valley was developed later than other areas of the City. About one in seven Valley homes were built before 1950, compared with three in seven homes in the remainder of the City.
Most of this area was originally annexed to the City of Los Angeles in 1915 shortly after the City completed construction of the Owens River Valley Aqueduct. Portions of the area were annexed subsequently, such as Owensmouth (1917), Griffith Ranch (1918), Chatsworth (1920), and Sunland (1926).[4] A few communities - Porter Ranch, Bell Canyon Park, Knapp Ranch Park, and Tujunga - joined Los Angeles after 1930.[5] In all cases, residents of the San Fernando Valley voted to join the City after the aqueduct was completed. Of these areas, only Tujunga had been incorporated as a separate city prior to consolidating with the City of Los Angeles.
Special issues in the comprehensive fiscal analysis of the San Fernando Valley relate to assets located in the Valley. The Tillman water reclamation plant, the Van Nuys airport, the Los Angeles aqueduct and a number of reservoirs are located in the Valley. Return to Index
The area of Westchester and Playa del Rey is considering a petition drive for special reorganization. Their proposed boundaries include the entirety of the Los Angeles airport and the Hyperion sewage treatment facility.
About 84,000 people live in this potential special reorganization area. Compared with other City residents, Westchester households make about 30 percent greater incomes. The poverty rate in this area is lower than in the City as a whole, although one in ten residents are poor.
Special issues arising in the analysis of the Westchester secession involve the ownership and divisibility of the City’s largest sewage treatment facility as well as the airport system. Return to Index
The area of San Pedro and Wilmington recently began a petition drive for special reorganization. The secession advocates call the community "Harbor City." The boundaries include most of the City south of the narrow strip known as the Gateway.
About 130,000 Angelenos live in this area. Residents’ incomes are the lowest of the potential special reorganization areas and are slightly lower than the City-wide average. The poverty rate in the Harbor City area is 16 percent, slightly less than the City-wide poverty rate.
Most of this area voted to consolidate with the City of Los Angeles in 1909 after the City promised harbor improvements, a new highway, and stable terminal rents. At that time, the cities of San Pedro and Wilmington lacked the resources needed to develop the harbor. Between 1919 and 1928, seven small areas neighboring the original San Pedro were annexed to the City.
Special issues in analyzing a Harbor City special reorganization involve the Los Angeles port, which is an enterprise of the City of Los Angeles. In addition, a secondary sewage treatment plant is located in this area. Return to Index
The Eagle Rock area is currently gathering petition signatures for special reorganization. This small community is just west of Pasadena.
Eagle Rock is the smallest of the potential special reorganization areas, with less than 59,000 residents. Eagle Rock incomes are only slightly lower than in the City as a whole. Home values are lower here than in any of the other special reorganization areas. The housing stock is relatively old. Just over half the homes in Eagle Rock were built prior to 1950, compared with one-third in the City as a whole.
The bulk of Eagle Rock incorporated as a city in 1911, but voted to consolidate with the City of Los Angeles in 1923. Portions of the special reorganization area are outside the boundaries of the original city.
Special issues arise in the analysis of the Eagle Rock secession due to its small size and geological peculiarities.
First, the small size of the Eagle Rock area suggests that Eagle Rock might rely on the City of Los Angeles or other agencies to provide its major services. Although the new city could opt to provide its own central services,[6] its small size makes it likely to contract with outside agencies for police, fire, paramedic, street maintenance, sewage treatment, and other major services
Second, Eagle Rock’s geology makes the area prone to natural disaster and sewage back-ups. Eagle Rock is a clay basin surrounded by hills, and has a tendency to flood during winter rains. The floodwaters do not drain easily through the clay soil and often seep into the sewage system. This in turn causes raw sewage to back up into the streets. The City of Los Angeles is currently investing in major upgrades to the sewer system in Eagle Rock. For these reasons, a comprehensive fiscal analysis of the Eagle Rock area would require analysis of the new city’s ability to pay off debt associated with current and future sewer investments. In addition, the analysis would identify future municipal costs of flood control. Return to Index
The West Los Angeles area has not formally begun a petition drive for special reorganization, but is considering doing so in early 1999. The area includes Brentwood, Pacific Palisades, Westwood, Century City, and Venice. The area extends east of Beverly Hills to Hollywood. This area includes the entire Rancho San Vicente special reorganization area and parts of the Hollywood special reorganization area.
West Los Angeles represents a large portion of the City of Los Angeles. With nearly 660,000 residents it is the second largest potential special reorganization area. Similar to the San Fernando Valley area, West Los Angeles residents have a median annual income that surpasses the median income for the city of Los Angeles ($43,000) by more than 20%. Unlike most of the other areas, the median value of owner-occupied housing, $422,000, is more than 50% higher in West Los Angeles than it is in the City of Los Angeles.
The West Los Angeles area was annexed to and consolidated with the City of Los Angeles between 1910 and 1930. The area includes Venice, Sawtelle, and Hollywood—originally incorporated as separate cities. Return to Index
The Hollywood area has not formally begun a petition drive for special reorganization. Secession advocates in Hollywood, however, have drawn preliminary boundaries. Much of this special reorganization area is also included in the preliminary West Los Angeles special reorganization area.
About 210,000 people live in the Hollywood area. Household income in Hollywood is slightly lower than the city-wide average. Hollywood’s housing stock is relatively old compared with other special reorganization areas. Two-fifths of Hollywood homes were built prior to 1950, compared with one-half of homes in the portion of the City not considering secession.
Hollywood incorporated as a city in 1903, but voted to consolidate with the City of Los Angeles in 1910 just as the City was building its aqueduct.
Special issues in analyzing a Hollywood secession include the sizeable Hollywood redevelopment project. This project is financed by a portion of property tax revenues attributed to growth in the redevelopment area. This may significantly reduce the property tax revenues available for providing municipal services if Hollywood were to secede. In addition, the project has outstanding debt of $323 million, compared with recent revenues of less than $10 million annually. Return to Index
Activists residing in the Brentwood, Pacific Palisades, and Sawtelle neighborhoods have not formally begun a petition drive for special reorganization, but have attended Commission meetings in 1998. The potential new city - Rancho San Vicente - also forms part of another potential special reorganization area known as West Los Angeles.
About 91,000 people reside in the Rancho San Vicente area. Residents of this area have by far the highest incomes of any potential special reorganization area. Average household income in this community is $95,000, practically twice as high as the city-wide average. By comparison, household income averages about $25,000 in the portion of the City with no secession efforts underway.
Brentwood and Pacific Palisades were annexed to the City of Los Angeles in 1916, while the Sawtelle area consolidated with the City in 1922.
Two special issues present in analyzing a Rancho San Vicente special reorganization. First, there is a dearth of businesses in this area, particularly high-volume retailers. Although the area no doubt generates significant property tax revenues, it most likely generates low business and sales tax revenues. In addition, it would receive a relatively low allocation of vehicle license fees due to its relatively low population density. This may require some additional analysis of alternative tax sources and rates.
A second issue in analyzing secession of this area is that the Pacific Palisades area is prone to storm damage and mudslides. Street and storm water maintenance expenses in this hilly area are likely to be relatively high. Ironically, the area may not be self-sufficient as a municipality at current tax rates. Return to Index
Based on current knowledge of special reorganization areas, Los Angeles could lose at most 2.2 million residents. This could happen if the San Fernando Valley, West Los Angeles, Harbor City, Eagle Rock, and Westchester all seceded.
The average income of City residents would decrease from $45,000 to $25,000 if all five of these areas secede. In addition, the percentage of the remaining city’s population living below the poverty line would increase from 19% to nearly 30%. Secession of all five areas would result in a halving of the median value of owner-occupied housing units from $280,000 to $132,000.
Of course, depending on which of the potential special reorganization areas were to sever from the City, the boundaries of the remaining City could vary tremendously. There are 80 potential definitions of the remaining City of Los Angeles, depending on which of the seven areas succeeds in seceding. Clearly, the impact of secession on the remaining City depends on both the size and economic structure of the special reorganization areas.
California law provides that new city incorporations should not occur primarily for financial reasons. Special issues in a comprehensive fiscal analysis include determining the financial impact of secession on the remaining City. In most cases, the comprehensive analysis will assess the impact of each secession on the remaining City.
In some cases, the study will likely analyze the impact of joint secession on the remaining City. Certain financial impacts on the remaining City vary depending on the size the City ultimately becomes. The study would consider the impact on a remaining City under different definitions. In analyzing how the size of the remaining City might increase service costs, the study would also consider the impact on the City remaining after a group of areas secede.
Depending on which areas secede, the City could lose higher income residents. An important component of the fiscal analysis will be the financial implications for the City of the loss of such areas. Return to Index
Before discussing how to divide the City financially, we provide background on the City’s history and political structure. Further, we define and provide an overview of the City’s revenues, services, assets and liabilities. Those already familiar with the City’s structure and finances may wish to proceed to the next section of the report, "Independent Agencies. Return to Index
The City of Los Angeles is now the second largest in the nation. In this section we outline how the City reached its current size and provide a brief sketch of the City’s history.
In 1781 the City was settled and was granted land and exclusive rights to all water in the Los Angeles Basin by the Spanish government. Two years after Mexico ceded California to the United States, the City formally incorporated in 1850. At that time, the City covered 28 square miles six percent of its current size.
The City’s subsequent growth was constrained shortly after the turn of the century by the local water supply. The City acquired water rights from the Owens Valley and constructed an aqueduct through $25 million in bond proceeds. When the overabundant water flowed through the completed aqueduct in 1913, the City's capacity exceeded its residents requirements four-fold.
At about the same time, the State of California granted the San Pedro harbor to the City. The City made substantial investments in its municipal harbor after the independent cities of San Pedro and Wilmington joined the City in 1909. During its early years, the City invested $29 million in the harbor area.
During the same decade, the City also entered the electricity business. Through another bond issue, the City built hydroelectric generating facilities along the new aqueduct.
In order to repay its substantial debt and sell its surplus water, the City formed an Annexation Commission and refused to sell water to areas outside its boundaries. Over the next three years, the City land area tripled in size with many areas annexing and some independent cities consolidating with the City of Los Angeles. The annexation drive continued up through 1930. Since that time only 13 square miles have been added to the City’s area to make up its current boundaries.
The City consolidated control over electricity sold to its residents by buying out Southern California Edison’s distribution system in 1922 and the Los Angeles Gas and Electric Corporation in 1937. The City was now the monopoly supplier of electricity to its residents. It has become the largest municipal electric utility in the country.
An airport was the last major enterprise that the City took on. And, following approval by the voters in the 1940s, the City built the Los Angeles International Airport. Several bond issues financed the building of the terminals as we know them today. Return to Index
The City is a charter city governed by the Mayor and 15-member Council (see Appendix A for the City’s organizational chart). [7]
The municipal government includes 37 general departments bureaus, commissions, and offices for which operating funds are annually budgeted by the Council. The heads of these departments are appointed by the Mayor and confirmed by the Council, with the exception of the elected City Attorney and Controller. Of these, 24 are operating departments that provide services to the public, such as police, fire, and street maintenance. Two of the operating departments—library as well as recreation and parks—are quasi-independent with some control over their own funds. Of the general departments, 13 are support departments that primarily provide services to other departments, such as personnel, controller, and information technology.
The six independent departments are headed by mayor-appointed boards, control their own budgets, and generally keep their finances separate from the City’s general fund. These include the City's three pension funds as well as the enterprise agencies—Harbor, Airports, and the Department of Water and Power. These enterprise agencies are also known as proprietary departments. Two other departments are headed by city commissions—the Community Redevelopment Agency and the Housing Authority. Return to Index
The City uses a number of different funds to process its finances. The general fund is the major fund into which tax revenues are deposited and from which general departments’ expenditures are made. Close to 60 special funds are used for processing revenues restricted to certain uses, such as sewer fees, federal and state grants, and fees for special services. Special funds are also used as trust funds and for separating the City’s reserves from the general fund.
The enterprise agencies, CRA and the Housing Authority maintain their own funds, also separate from the City’s general and special funds. Similarly, the state law departments maintain separate funds.
In general, we divide the City’s finances into four major categories: liabilities, assets, revenues, and expenditures.
Liabilities are essentially debts owed by the City and include known liabilities such as bonded indebtedness, as well as unpredictable liabilities such as the City’s exposure in pending lawsuits or future lawsuits related to past activity.
Assets are properties and investments and can be categorized as follows:
Real Estate: land and buildings, such as police stations, parks, and
City Hall
Plants: asphalt plants, sewage treatment facilities, and electric
generating plants
Infrastructure: streets, sewage pipes, and electricity distribution
system
Vehicles: trucks, cars, helicopters, motorcycles, and armored personnel
carriers
Equipment: computers, guns, ladders, gurneys, and furniture
Intangibles: databases, maps, records, and administrative methods
Portfolios: pension and reserve fund investments.
Most of the City’s real estate and plant assets are owned free and clear, while others are secured--essentially used as collateral for bond issues. Those assets are used as collateral under some control by bondholders until a bond is paid off.
Revenues are the City’s income from taxes, user charges, grants, permits, and fines. Unrestricted revenues can be used for any City purpose and typically are deposited in the general fund. Property, utility, business, and sales taxes are examples of unrestricted revenues. Restricted revenues are limited in their use and typically deposited in special funds. Examples of restricted revenues are sewer charges, gas tax, grant monies, and special fees. Enterprise revenues are fees and rents charged by the City’s enterprise agencies to utility customers, harbor tenants, and airport tenants.
Expenditures are the City’s costs of providing services, servicing and repaying debt, and building new infrastructure. In differentiating between expenditures and assets, typically durability and purchase price make the distinction. Paper clips, although useful, are quickly consumed and very inexpensive. Computer monitors are relatively inexpensive but may last for several years. Helicopters are relatively expensive and have extended useful lives. Paper clips are clearly costs and helicopters are clearly assets. However, computer monitors are expenditures if they were purchased for less than the City’s current asset cut-off of $300, and are assets if they are more expensive. [8] Return to Index
In this section, we discuss how the City’s reaction to the study might affect legal costs and consultant costs.
The Commission has already decided to conduct the study with some combination of consulting firms and individuals working directly for the Commission. Given the short-term nature of the comprehensive analysis, those individuals working for the Commission may actually be hired as consultants, rather than employees. We expect that the Commission will issue a request for proposals (RFP) to potential consultants and will thereby learn from their responses the true costs of the study. Return to Index
Preliminary attempts to obtain consulting services have illustrated that contractors may anticipate litigation, the costs of which might exceed the consultants’ contract proceeds. An issue for the Commission to decide would be the extent to which the Commission would be willing to modify the usual requirements that the consultants obtain errors and omissions insurance and agree to indemnify LAFCO for issues arising from their services. Return to Index
In this section, we discuss our findings with respect to City cooperation and the suitability of City records for answering complex questions raised by the comprehensive fiscal analysis. We discuss how these factors might be expected to affect the costs of the study.
Most difficulties in gathering information relate to the state of City records. Although some departments have modern databases useful for the study, computerized record-keeping is not universal. Some City databases are incomplete, whereas others are not well-suited to answering the complex questions raised by the comprehensive fiscal analysis. In these cases, the Commission will face costs of computerizing records and modifying City databases.
In addition, certain City databases needed for the comprehensive fiscal analysis are confidential. Confidential databases are needed to analyze the geographic distribution of tax revenues as well as special reorganization areas’ electric, water, and sewer usage. For example, the City’s Tax and Permit System is a confidential database with each taxpayer’s geographic location. In order to identify the portion of revenues received from different areas of the City, the Commission’s research team will need access to several such confidential databases. The confidential databases are under the control of the City Clerk, the Department of Water and Power, the County Assessor, and the State Board of Equalization. Although the City has released these databases to City consultants in the past, the process of negotiating confidentiality agreements and acquiring the data is time-consuming . The availability of these confidential databases will affect both the duration and nature of the fiscal analysis.
In the course of scoping the comprehensive fiscal analysis, we found that most City managers and employees cooperated with our requests for information. We have spoken with roughly 100 different managers and employees of the City thus far, most of whom were prompt to return phone calls and helpful in answering questions. The cooperation of the City of Los Angeles will be an important factor in the cost and the duration of the study. Return to Index
This scoping study provides guidance and recommended approaches to studying the special reorganization of portions of the nation’s second largest city. In general, we have defined broadly the scope of work with respect to financial issues. We have assumed that all analytic work would be performed by disinterested parties, that high standards of accuracy would be required, and that qualified professionals would conduct the study. As with any scoping study, this study draws broad outlines of the issues involved in analyzing municipal secession. This scoping study, by its nature, cannot uncover all issues, risks, and costs.
The Cortese-Knox Local Government Reorganization Act requires that the comprehensive analysis identify a new city’s costs and revenues during its first three fiscal years and identify the effects on the costs and revenues of affected local agencies.
The law empowers the Commission to approve or disapprove special reorganization and determine under what conditions, including how assets, bonded indebtedness, resource rights, and employees would be allocated and the effect on particular taxes, bonds, and lump sum payments. Return to Index
Each of the possible special reorganization areas presents unique challenges, and each secession raises issues regarding the financial effects of the secession on the remaining City of Los Angeles. Major pieces of expensive regional infrastructure are located in some special reorganization areas (such as reclamation plants, airports, and harbors), extensive geographically-specific infrastructure exist in all (such as sewer and water pipes), and some special reorganization areas may lack the property, sales, and business tax base to be reasonably self-sufficient at current tax rates. The case of Eagle Rock's secession is complicated by major drainage investments made by the City, and that of Hollywood by the location of a major redevelopment project that appears unable to service its debt. The Rancho San Vicente area includes Pacific Palisades, an area prone to storm damage and mudslides and the major costs of dealing with these. Return to Index
Substantial research is necessary to determine if and how the Commission can allocate the assets and liabilities of DWP to the parties of a special reorganization. Valuation research would quantify these, and economic research would provide formulae for their division.
While the rights to water service seem clear, the question of who owns the water after special reorganization needs substantial legal research. This is critical to answering the question of what options the Commission can reasonably consider in the case of water.
Electric power issues will be substantially affected by DWP’s stated objectives of removing generation-related debt from their balance sheet by 2003. Substantial research into options that will allow special reorganization areas and the residual City to compete in an increasingly cost-sensitive marketplace must be made. Flight of business could negatively impact any of these areas.
The commission will face four options for each utility (water and power) and it is not reasonable to eliminate any of these before the comprehensive fiscal study is performed. The first is that residents and businesses continue to be customers of DWP, with no further changes. The second is for a Joint Powers Authority (JPA) established to supervise DWP by the new city and City of Los Angeles. The third is for newly-formed cities establish their own municipal utilities, purchasing water or power wholesale from DWP (or others) and distributing and selling these retail to residents and businesses in the newly-formed city. The fourth is for newly-formed cities to facilitate the privatization of utilities to serve their residents and businesses. Return to Index
Research into options for satellite general aviation airports such as Van Nuys would identify federal rules and counterparts associated with other major gateway airports in the nation. Should Van Nuys come under effective control of a new San Fernando Valley city? Should the Airport be transformed into a JPA?
If so, fees for municipal services need to be resolved. Financial research will identify the revenues and numbers of affected employees, thus allowing resolution of the financial impacts.
The question of the present value of the City's initial investment in the airport should be avoided by the Commission, other than to establish shares for any future resolution of this issue. Return to Index
The state has the ultimate authority over tideland areas and issues such as whether to revoke or otherwise modify the City of Los Angeles tidelands grant. The state could award the grant to a successful special reorganization area, another city, a joint powers authority agreement, or to the state.
The State of California considers excessive the City’s current charges for providing the Port with services and is litigating the City’s right to require the Port to purchase these services.
The status of the City’s historic investment is unresolved and it may not be productive for the Commission to enter into research, other than apportioning shares to be used in any future resolution of this issue.
Several policy options are presented. First, the Port of Los Angeles could remain with the City of Los Angeles, even if its properties were non-contiguous with the remainder of the City. The second involves a possible transfer of the Port of Los Angeles to a joint powers authority agreement between the City of Los Angeles and the new city of Harbor City. The third is to request that the state alter the state tidelands grant and transfer the Port of Los Angeles to the new city of Harbor City. The latter two depend on decisions of the state and are outside the scope of the study. Return to Index
Eight projects are located in potential special reorganization areas, and all but North Hollywood operate at a loss. The two largest in potential special reorganization areas owe substantial debt to bondholders and the City. The Agency has been capitalizing its losses by issuing debt, cross-subsidizing projects, and postponing payment of contractors.
Redevelopment would likely be split on the basis of projects’ geographic locations which could lead to unequal burdens on special reorganization areas and the residual City. Considerable research is indicated to disentangle the finances of the Agency’s separate projects and provide necessary economic forecasts of property tax revenues available for redevelopment purposes. Return to Index
Five issues arise. The first issue concerns legal requirements that existing retiree benefits be protected. The second issue concerns the funding status of the pensions. If fully-funded, division among geographic areas is more straightforward. The third issue concerns the impact of special reorganization on employees transferred from the City of Los Angeles to the new cities. If new cities contract for service with the City, the impact on the City’s pensions will be minimal. However, substantial staff reductions may result if this does not happen. The fourth issue arises from the City Charter which currently prevents the pensions from covering employees of other cities,¾ a situation that may lead the City to consider amending its Charter. The final issue is the question of whether the Commission may require new cities to opt for coverage through the City of Los Angeles pension fund. It is not clear that the Commission can require that a new city contract with the City for pension coverage. Return to Index
Four issues dominate this subject: asset ownership shares of different geographic areas of the City, the value basis (historical, depreciated, market, or replacement cost), divisibility of assets (especially as this relates to outstanding indebtedness associated with the asset), and financial repercussions of a requirement that streets be transferred from the City of Los Angeles to new cities.
Four approaches to the potentially costly process of valuing assets and liabilities were discussed, with one appearing to be highly preferable. Under this approach each special reorganization area would receive the share of assets it has historically financed, and must pay the same share of the City’s debt. Each area’s share of City revenues would be its share of the City’s asset pool. The revenue share would also be that area’s share in the City’s debt burden. Areas with fewer physical assets within their boundaries would be compensated by the other areas either through a decrease in debt burden or through future payments from the sale of assets. Return to Index
The City of Los Angeles $4 billion revenue base includes a variety of taxes, user fees, federal grants, and investment income, excluding the receipts of independent agencies. The geographic division of tax revenues is straightforward, although it will be time-consuming because the City receives revenues from hundreds of different sources.
Several issues arise in allocating revenues geographically. The Commission’s consultants will of necessity assume that new cities would have a revenue structure similar to that of the City of Los Angeles. If a new city is unable to support itself based on these revenues, the Commission may consider scenarios where new cities increase tax rates to support themselves. New cities would typically not receive revenues from the City’s provision of services to neighboring cities and enterprise agencies. New cities would not necessarily receive the same grants as the City of Los Angeles. New cities would not necessarily receive any portion of revenues from City of Los Angeles enterprises and assets. Revenues collected from taxpayers located outside the City of Los Angeles are difficult to allocate geographically. The study analysts would need access to confidential taxpayer data. Return to Index
The City of Los Angeles is expected to spend $4 billion this fiscal year, excluding the costs of running independent agencies.
Expenditures relating to certain City enterprises would prove more complicated to analyze in the case of the wastewater system. The comprehensive fiscal analysis would tackle the wastewater issue during the basic research stage by analyzing the conveyance and treatment costs for the special reorganization areas. Part of the basic analysis would involve analyzing the difference between current fees and actual costs by geographic area.
Several issues arise in allocating expenditures geographically. Services could feasibly be reduced by new cities. New cities may want to explore reducing expenditures for services currently privatized. New cities could opt not to provide certain services. New cities might decide not to pay for services that would otherwise be provided at no charge by the County. New cities might face different costs for providing services following reorganization. New cities could contract with the City or other agencies for providing particular services. The City of Los Angeles cost of providing direct services to the shoestring connecting South Central with the Harbor area would appear to be high (see map in the section entitled "Potential Special Reorganization Areas".
In order to allocate geographically the costs of direct services, the comprehensive fiscal analysis will use a combination of geographic and statistical techniques to calculate the direct service costs associated with field personnel. The analysts will then apply relevant overhead factors to these field costs. Return to Index
Obtaining the services of qualified consultants will do more to reduce the Commission’s legal exposure than any other decision the Commission can make. The Commission should consider holding consultants harmless beyond contract amounts. Return to Index
The condition of City records, especially as they relate to assets and liabilities, will present challenges to the comprehensive study. Computerization of manual records, geocoding of existing low-quality (i.e., high error) databases, and negotiating access to confidential databases will add to the consulting costs and time to complete the comprehensive study.
The cooperation of the City of Los Angeles will be an important factor affecting the cost and duration of the study. Return to Index
We distinguish between a basic, advanced and final research phase of the project (please see chart entitled "Study Timeline" following this section. During the basic phase, only research that is definitely required would be conducted. The basic research would help inform the Commissioners, who would then decide how to proceed in valuing and dividing assets. Research related to asset valuation and division is mostly reserved for the intermediate research phase. In addition, following the Commission’s decision on asset division, the comprehensive fiscal study could provide estimates of asset-related revenue and expenditure impacts. Following the intermediate phase of research, the petitioners would submit their operating plans to the Commission for evaluation. Research assistance required by the Commission in evaluating these operating plans would compose the final research phase.
We estimate that the cost of the basic research phase could vary between $2.1 and $3.1 million. The intermediate research phase would include asset valuation work costing between $1.5 and $5.0 million, in addition to currently unknown costs for valuing the utility company’s assets. Additional work analyzing the impact on revenues and expenditures of Commission decisions regarding assets and liabilities might cost $100,000 during this phase. We cannot anticipate the costs of research assistance to the Commission during the final research phase at this time. Return to Index
TO BE ADDED WHEN RECEIVED
[1] Special reorganization" is the legal term for a secession and simultaneous incorporation as a separate city. Popular terms describing this process are municipal secession and detachment. Throughout this report, we use the term secession to refer to a special reorganization.
[2] Demographic and housing figures were derived from the 1990 Census of Population and Housing. However, the figures are slightly imprecise because special reorganization areas were approximated by using census tracts. A small portion of the census tracts lie on either side of a special reorganization area boundary. Researchers attributed partial census tracts to special reorganization areas after reviewing detailed maps.
[3] Poverty is defined as families with incomes less than their needs, where needs are defined by the federal poverty line.
[4] Fogelson, Robert M. The Fragmented Metropolis: Los Angeles, 1850-1930. Berkeley: University of California Press, 1993.
[5] Pitt, Leonard and Dale Pitt. Los Angeles A to Z: An Encyclopedia of the City and County. Berkeley: University of California Press, 1997.
[6] Central municipal services include accounting, legislating, planning, and legally defending the new city.
[7] The major services provided by the City include police, fire, street and sewer maintenance. Educational services provided by the Los Angeles Unified School District are unrelated to municipal government as are county services such as welfare, the judicial system and health care for the indigent.
[8]The City Controller’s definition of an asset will change this year to durables costing more than $5,000 with a useful life of at least three years. Return to Index
