Oct. 12 (Bloomberg) -- The job of making Los Angeles run more like a business to cope with budget deficits that may exceed $500 million in four years belongs to the son of illegal Mexican immigrants who grew up poor in the city’s suburbs.
Miguel Santana, 41, put himself through California’s Whittier College and earned a graduate degree from Harvard University to become Los Angeles’s city administrative officer, the highest-ranking non-elected official in the second-largest U.S. city. He oversees 116 employees and an $11 million budget. His $256,803 salary is $24,000 more than the mayor’s.
Santana started work in August 2009, two months after Mayor Antonio Villaraigosa named him the city’s “lead financial steward.” Since then, Los Angeles cut jobs and raised health-plan contributions for some employees. Now Santana is seeking private companies to run municipal parking garages to save costs and is weighing the same for the city zoo and convention center.
“You can absolutely be entrepreneurial,” Santana said in an interview at downtown’s City Hall East building, where his office walls hold paintings of local street scenes done as a hobby by a city employee. “It takes the political will to say, ‘We don’t have to do the old model.’”
U.S. cities face budget deficits approaching $83 billion over the next two years, the Washington-based National League of Cities said in December. Vallejo, California, filed for bankruptcy protection in 2008 and Jefferson County, Alabama, has struggled two years to avoid it. That doesn’t daunt Santana, who’s been a public employee for most of the last two decades.
“My entire life I understood the importance of government and also how government failed people,” he said. “We’re not inherently flawed and destined to collapse.”
With advice from Santana, Mayor Villaraigosa, 57, and the city council plugged a $485 million budget hole for the fiscal year that began July 1 by reducing library hours, tree-trimming and after-school childcare.
Some 3,500 workers were fired, took early retirement or transferred from the general-fund payroll in the past year, the largest employee cutbacks in the city’s history, Santana said. His office also negotiated a decrease of almost $100 million in police overtime pay.
Los Angeles had little choice after Controller Wendy Greuel said on April 5 that the city risked running out of cash because the municipal utility withheld a $73 million payment in a dispute over rates.
The city also had ratings on more than $1.3 billion of general-obligation debt cut one level by three credit evaluators this year. Fitch Ratings went to A+ from AA-, Moody’s Investors Service lowered to Aa3 from Aa2 and Standard & Poor’s moved to AA- from AA. The new grades are the fourth-highest at all three.
“Every time we got downgraded, that for me was a tool to show the consequences of inaction,” Santana said.
Concerns about finances prevented Los Angeles from selling a fifth of $1.2 billion of short-term notes it offered investors on June 30, according to a Santana memo. JPMorgan Chase & Co., the main underwriter, bought the unsold securities.
Investors punished the city for the setbacks. The extra yield they demanded to hold a Los Angeles general-obligation bond due in 12 years compared with an index of AAA rated municipal debt of the same maturity widened to as much as 70 basis points after the incomplete note sale, the most in more than 11 months, according to data compiled by Bloomberg. The gap has since narrowed to 13 points. A basis point is 0.01 percentage point.
In the coming year, Santana will push for cost cuts by seeking private companies to run city-owned assets and negotiating permanent changes to employee benefits.
“We’ve squeezed,” he said. “The next question is: What are we not going to do anymore?”
Los Angeles could lease 10 city-owned parking garages to private operators for 50 years and get up-front payments of as much as $300 million, Santana has proposed.
Wary of how private operators led by Morgan Stanley raised rates in Chicago after leasing parking meters there in 2008, Santana’s office recommended Los Angeles retain control over fees. He plans to have final bids for the concession to the city council for approval by February.
The Los Angeles Zoo and the Los Angeles Convention Center may operate more efficiently under private control, Santana said. Nationally, 70 percent of the 223 attractions accredited by the Silver Spring, Maryland-based Association of Zoos and Aquariums are run by businesses or non-profits.
Hurdles to Jump
“A lot of hurdles would have to be jumped” before such a shift, said Councilor Tom LaBonge, whose district includes the zoo in Griffith Park. “There are a lot of dedicated employees. I want to make sure their issues are dealt with.”
The issue for Santana is how much the city of 3.8 million people can afford. Expenses are expected to climb 3.6 percent annually over the next four years, more than twice the growth in revenue, according to his budget outlook. More than 80 percent of those costs are employee-related.
Pension and health-care expenses for retirees will rise to a projected $802 million this year, 18 percent of general-fund revenue, from $277 million, or 10 percent, in 1999. They’re expected to double again by 2014, when the city could run a budget deficit of $550 million, according to Santana.
Today, he will brief the mayor and council’s Executive Employee Relations Board on reducing pension payments, increasing the retirement age and boosting contributions for future hires. His proposals include a 401(k)-style pension option that would be cheaper for the city.
“What we currently have is not sustainable,” Santana said. “What I tell the unions is, ‘If you want to have a pension plan when you retire, the framework in which we have it has to change.’”
Santana’s office already negotiated $20 million in annual savings in August from the Engineers and Architects Association, which represents one-seventh of the city’s workforce. Members will pay 5 percent of their health-insurance premiums for the first time, according to the mayor’s office.
The deal will increase health-care costs for all city workers because of new federal legislation, said Cheryl Parisi, who heads the 22,000-member Coalition of Los Angeles City Unions. She also said employee terminations will lift expenses by triggering $98 million in pay raises under an earlier labor agreement.
“To be a real agent of change, you have to work closely with all stakeholders,” Parisi said in a telephone interview. “Miguel has attempted to effectuate change through unilateralism.”
Santana was born in the U.S. and grew up in Bell Gardens, California, a city 11 miles (17 kilometers) southeast of Los Angeles where more than one quarter of the 45,000 residents live in poverty, according to the U.S. Census Bureau. His parents, a seamstress and drywall hanger, became citizens under a 1986 law that granted it for residents living in the U.S. since 1982.
Santana said he and his seven siblings hold five bachelor’s degrees, three master’s degrees, including two from Harvard, and one doctorate from the University of Chicago.
“My family is the face of immigration reform and why it is so important for our country,” he said.
Santana worked as a special assistant to the president of the non-profit Mexican American Legal Defense and Education Fund before being asked in 1993 by Los Angeles County Supervisor Gloria Molina to be her legislative assistant.
He left that job to attend Harvard’s John F. Kennedy School of Government, where he earned a master’s degree in 2005. He served as a deputy chief executive officer for Los Angeles County, the largest in the nation with more than 10 million residents, from 2007 until he took the city post.
There have been missteps by the married father of four daughters. In March, Santana was arrested for driving under the influence of alcohol after leaving a charity event. He was sentenced to three years’ probation and fined, according to the Los Angeles County District Attorney’s Office.
“I’m not proud of that,” he said. “I’ve learned what I needed to learn.”
Even with more labor concessions and private outsourcing, city deficits will persist because revenue won’t return to 2007 levels until perhaps the next decade, Santana said.
“We managed to survive, but we still have a long way to go,” he said. “It’s a huge task and it keeps me up at night.”
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