Muni `Race to Bottom' May Cost $1 Trillion, Former Los Angeles Mayor Says
Richard Riordan, former mayor of Los Angeles, speaks during an interview in Los Angeles on July 22, 2010. Photographer: Jonathan Alcorn/Bloomberg
Richard Riordan, former mayor of Los Angeles, speaks during an interview in Los Angeles on July 22, 2010. Photographer: Jonathan Alcorn/Bloomberg
U.S. cities and states may need more than $1 trillion of federal assistance in the next three years to stave off financial failure, former Los Angeles Mayor Richard Riordan said.
Local governments are in a “race to the bottom” and U.S. taxpayers will inevitably be called on to bail them out, Riordan said in an interview at Bloomberg News’s Los Angeles office. The federal government should make pension, health-care and school reform a condition of receiving the aid, he said yesterday.
“It’s not just L.A., it’s not just California, it’s all over the country, you’re going to see all these entities become totally insolvent,” Riordan said. “I think the federal government has to come in and have a list of what the states have to do to be saved.”
Riordan envisions incentives modeled on President Barack Obama’s “Race to the Top” aid to school districts. To receive funds, state and city officials should be prodded to cut public- employee pension benefits, renegotiate union work rules and add charter schools to improve student performance and save on costs, he said.
Riordan said the need for federal help will be unavoidable and when it comes Obama will have to demand concessions from unions.
“I think he would have zero chance of getting reelected if he didn’t,” Riordan said.
States, recovering from the longest recession since the Great Depression, have projected budget deficits of $116 billion for fiscal 2011 and 2012, according to a report last month by the National Governors Association and the National Association of State Budget Officers.
Pension Funds
State public-employee pensions are underfunded by $438 billion and estimates using different accounting methods suggest a number as large as $3 trillion, according to an April report from the American Enterprise Institute for Public Policy Research.
States can’t count on the federal government for more aid, Erskine Bowles, co-chairman of the National Commission on Fiscal Responsibility and Reform, said at the governors association meeting in Boston this month.
Investors won’t keep buying municipal debt to help cash- strapped cities and states finance operations, Riordan said.
The 80-year-old Republican, who predicted insolvency for Los Angeles by 2014 in a Wall Street Journal commentary in May, said the city will have to declare bankruptcy to reduce its pension and health-care obligations to public employees. Politicians understand they won’t succeed in raising taxes to dig out of deficits, Riordan said.
“If a government can’t sell bonds, they might as well close the door,” Riordan said. “If you can’t do that, you’re out of cash, you’re out of business.”
Borrowing Costs
Los Angeles paid a higher yield on $1.16 billion in short- term notes issued three weeks ago than it did on similar debt a year earlier, Riordan said. The notes were sold at yields of 0.55 percent to 0.85 percent, and underwriter J.P. Morgan Securities bought $252 million of the securities after buyers balked, City Administrator Miguel Santana said in a July 2 memo.
California may experience similar difficulty in coming months when it seeks to borrow, Riordan said. He said he supports Republican Meg Whitman for governor in November over Democrat Edmund G. “Jerry” Brown.
Riordan served as the mayor of Los Angeles from 1993 to 2001. Prior to entering public service, he started a law firm, Riordan & McKinzie, which was acquired by Los Angeles-based Bingham McCutchen in 2003, and private-equity company Riordan, Lewis & Haden, in 1982.
‘No Out-Sized Risk’
Los Angeles faced a financial crisis in April after the Department of Water & Power withheld a payment to the city and Controller Wendy Greuel said the nation’s second-largest metropolis by population would run out of cash in a month. Mayor Antonio Villaraigosa, a Democrat, has said Los Angeles will not declare bankruptcy as long as he is mayor.
Some investors and analysts say odds of a wave of municipal defaults is low.
“Even in a Draconian scenario such as the Great Depression, we believe that there is no out-sized risk in the municipal bond market,” Bijan Moazami, an insurance analyst with FBR Capital, said in a July 20 research note.
To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.
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