(Photo by Gracie Zheng)

A small audience of largely neighborhood council advocates delivered timed two-minute remarks during a brief public comment session, which was followed by a formal presentation on the budget by City Administrative Officer Miguel Santana.

The two key takeaways from the presentation were:

1. Los Angeles faces a significant structural budget deficit for the foreseeable future.

Without getting into too much budget minutiae (which can be found, in all its glory, in the presentation above), the core of the Los Angeles city budget is the General Fund, which is about $4.4 billion for fiscal year 2011-12.

The General Fund is used to pay for the city’s basic services, such as fire, police and administration. It is funded by a combination of taxes, license sales and fees, with property tax making up the largest share, contributing one-third of its total funding. Together with business tax and sales tax, the three make up half of the General Fund. Considering the fact that amounts paid in these taxes align with larger economic trends (the real estate market and consumer spending in particular), the financial crisis, sustained recession and slow recovery has caused the city serious revenue problems.

Santana and his team divided future labor costs into four categories: employee compensation, health benefits, pension contributions and workers’ compensation, which combined, make up more than 90% of General Fund spending. They projected these expenses over the next five years alongside five years of future General Fund revenue, using, according to Santana, a “fairly modest” growth rate accepted by outside economists.

Comparing these future core personnel expenses against future tax revenue reveals the big concern.

Assuming a balanced budget this year and no additional hiring, for fiscal year 2012-13, the sum of the four major labor cost categories listed above is projected to increase by $208 million, while General Fund revenue goes up by only $73 million. What that means is that just rolling over another year with the same programs as this one, the city needs to find another $135 million in either revenue or cuts to get back to even. This $135 million gap represents the structural deficit.

The structural deficit grows over $200 million in 2013-14 and remains well over that amount through all five projected years. It signals a rough road ahead just to get to basic financial sustainability. Any hiccup at all in the economic recovery would hit tax revenue and dig the city an even deeper hole.

2. There is not a lot more that can be cut to find cost savings without major structural changes in our local government.

Councilman Paul Krekorian made a point to comment on the “continuing perception out there that we just have lots of people on the public payroll, and if we could just trim a little fat here and there we’d be able to take care of this problem.”

In fact, the civilian workforce paid through the General Fund is down 38% since FY 1990-91, and at its lowest level in more than 30 years. Police and fire positions remain relatively consistent, as voters seldom choose politicians or ballot initiatives that put less cops on the street, but according to Santana, the starting salary of new police hires is 20% lower than before, and they are placed in a new pension tier requiring them to contribute a greater proportion of their income than their more senior co-workers.

Santana made one justification for these pay cuts by pointing to the fact that crime has continued to go down even as compensation has, but this seems coincidental, and in any event, it remains unclear whether downward wage pressure on police officers going forward will leave the city more exposed to the many potential hazards of underpaid law enforcement.

The city is considering further salary cuts, but with the workforce being at a low and compensation already having been hit, the budget deficit can hardly be solved with only payroll-related remedies.

A full freeze of both civilian and sworn employee salaries could save over $200 million over a three year period, but the decline in real income of city employees over several years has to affect morale and in turn, the quality of service provided to constituents. A cut-rate government is likely to provide cut-rate services with cut-rate competence, which could be costlier in the long run.

Unlike many other jurisdictions, Los Angeles cannot raise revenue via new taxes unless they are approved by the voters, which hamstrings its ability to make quick revenue adjustments. It also can’t find truly material cost savings without drastic cuts in police and fire salaries and pensions, which given union and electoral politics, is both an impossible and uncomfortable proposition.

Because of this, Los Angeles will likely continue to take the path of lesser resistance, and make difficult cuts in the non-public safety services it provides over the coming years, which will redefine the scope of our city government in a very significant way.

Reach Staff Columnist Matt Pressberg here.