Municipal CFO Series: Miguel Santana, Los Angeles

Miguel Santana is the city administrative officer for the City of Los Angeles and reports to the mayor and city council on all financial and budgetary matters. He holds an MPA from Harvard University and a BA from Whittier College. He oversees cutting one of the largest budget deficits the city has seen while negotiating pension reforms and creating public-private partnerships to stimulate economic development. 

The budget deficit projection for FY 2013-2014 has dropped from approximately $1 billion to $200 million.  What are the major reduction measures that got you to this point?

The first thing is that we stopped hiring. There are three people who decide if you get hired from the outside: the mayor, the chief legislative analyst who reports to the city council, and myself. The reason we are so tight on who we hire is that when you hire someone, you’re not just hiring her for the first day she starts, but for the rest of her life.

The benefits that are promised to them the day they start—they’re entitled to receive throughout their career and then after they retire to the day they die. So that’s a pretty high bar to meet. Ultimately we have to be mindful that we should only hire those people that we can continue to fulfill that promise to in the future. So we brought it to a very small number. That has resulted in reducing the workforce by 5,000 positions. We have now the smallest workforce we’ve had since the Tom Bradley era in the early nineties. Obviously the city’s population has grown during that period and demands on services have grown.  So we’re doing more with less.

We also started looking at some of the fundamental drivers that have led to our deficit, pensions being the biggest one. Again, we’re limited in what we can do for current employees and current retirees on pensions, but not in the area of retiree healthcare. We believe that retiree healthcare is actually not a vested benefit, and we’re entitled to make changes to that benefit just like any other benefit. So through a series of negotiations and by freezing the benefits at the current level—not letting it grow through inflation—most city employees have gone from paying nothing for that benefit for themselves and their spouse or partner, to actually paying four percent of their salary.  So that provided a significant contribution.

The other thing is that for the areas we are hiring, such as police officers— to maintain the size of the workforce, not to add to it—we reduced the starting salary by 20 percent. It’s forced us to consolidate services, to eliminate redundancies, to look at public-private partnerships, and managing and delivering the same services under a different framework. Combined, all of those things have resulted in a serious reduction in the projected deficit. When I started this job, I had projected that in three years we would be facing a deficit of over a billion, like you pointed out, and now it’s down to about $225 million. So we’re at the final phase.

In California, we’re prohibited from raising revenue ourselves—we have to take it to the voters. So we knew early on that in order for us to bring new revenue into the mix of solutions, we would need to make a credible case that we’ve done everything we can to live within our means. Now we’re in the process of recommending that the voters make a determination. So we’re proposing increasing the sales tax by half a cent. That would provide us about $225 million dollars, which would essentially eliminate next year’s deficit. Unfortunately, our deficit grows by another $100 million after that. So we’re not quite done yet, but it’s much more doable to navigate through these difficult times with these new revenue sources. But ultimately, Angelenos are going to have to decide.

With the cutting back of the workforce to the smallest it’s been since the nineties, has there been any reduction in services or even a public perception of a reduction in services?

There has been a major reduction in services. You can see it in the quality of our roads, you can see it in our sidewalks, you see it in the fact that our recreational centers have fewer services, and in the childcare centers that we don’t have now.

You see it in our responsiveness to the needs of the community. Across the board there have been reductions. We see it in response times in our fire department. The one area that we have tried to avoid making cuts has been in the area of police services. Public safety continues to be our number one priority and has been protected from these cuts. As a result, crime rates are now at 1950s levels. The challenge is, how do you continue that without new revenue? If we continue to make more cuts, then the wall that we’ve placed around public safety will no longer be there—we’ll have to break through it.

In January 2013, your proposal for cutting civilian jobs within the police department is coming up for a vote.

Yes, there are likely 100 to 200 different positions eliminated within the police department. Ideally, many of those people have been moved to other areas. The chief has committed to keeping the size of the police force the same, so the only other area he has is civilians. Most of those cuts are in support staff positions and it won’t be a devastating blow to the department. Processing may take a little longer, and you may have some police officers doing a little bit more deskwork than they normally would, but for the most part, it maintains the current level of service.

Are these cuts an alternative to some of the revenue measures or are they both necessary?

They are a part of what needs to happen. The council adopted a budget last year that essentially gave about 200 people a lifeline for six months. We’re now up to those six months. Things are stable, but they haven’t improved dramatically enough where it’s justified to no longer make those reductions. So I’m simply saying that we need to move forward with the budget that was approved—meaning those reductions still need to happen for two reasons. One, because we want to end the year in the black and protect our reserve fund, and also because we see a tsunami coming with the $200 billion budget deficit. All of the tools that we use, we’ve exhausted. So the worst thing we can do is avoid making this tough decision, and that decision just comes back to haunt us a few months later.

How have the unions been reacting in negotiations to the cuts?

I think they would say that they’ve been frustrated. We’ve been able to open up their contracts twice. We were able to renegotiate the retiree healthcare piece. They contribute more to healthcare through copay increases. But I think they would say, “When is this finally going to be over?” I sympathize with that frustration. The reality is that there were cost of living adjustments (COLAs) that had been negotiated prior to the recession hitting that have resulted in 25 percent increases over a period of time. We were able to defer some of those increases twice, but at the end of the day, they’re still getting them. So that’s part of what’s driving the deficit as well. They’ve said they’re not willing to reopen up those contracts again and take those COLAs off the table, but they also don’t want layoffs. It’s kind of hard to have it both ways. What we’re hoping is that the new revenue source gets us back into a financial footing.

There has been a dismantling of the community redevelopment agency (CRA) funding from the state level, but there are still current contracts and employees are working on CRA projects.  What does the future of the Community Redevelopment Agency of Los Angeles (CRA/LA) look like without this funding?

They are on their last leg. After the court ruled that his bill could be effectuated, it basically dissolved the CRAs throughout the state. The governor has shown no willingness to do anything different from that.

Immediately after the ruling around Christmas of last year, every city that had a CRA had two weeks to decide whether they wanted to be the successor agency. I actually recommended to the council that they not be the successor agency, which shocked a lot of people. The reason why is that at the end of the day, the sole purpose of the successor agency was to unwind the CRA, which meant laying off 200 employees, which nobody wants it do. It means dismantling programs and projects and ultimately breaking it apart.

The county’s oversight committee ultimately had to get approval by the Department of Finance, which is controlled by the state and the governor. So the perception of being in control was really just that of a perception, it wasn’t a reality. They got to make all the decisions, and the city would have had to do all of the dirty work. So I said, “Why do you want to be the successor agency?” By choosing not to be the successor agency, the problem went back to the governor. He had to appoint a separate successor agency to organize the dissolution of the CRA. They’ve approved the oversight committee and, after much work, approved a series of projects to continue funding, arguing that there were already contractual obligations associated with those projects.

There were projects already on their way or there was a binding document that said they should be completed. The Finance Department said, “No. We don’t buy that. We’re done. We don’t want these projects to continue.” So now guess what? They are having to dismantle them. They inherit most of the liability, but some of the liability still falls on the city because if you’re a private developer, you agree to build this project based on the understanding you’re going to receive some financial support from the CRA. Even though the CRA was a separate agency, the city was still a partner in that. So we’re going to get challenged legally in the mix of that, but we’re not the primary plaintiff in that case. It’s been a very difficult process.

The last thing the governor has done is to take funding away from the successor agency so that it’s having to lay off even more employees. It’s going to be basically operating as a shell shortly. It’s been a huge mess and incredibly complicated, and the effects of it will be lingering for the next decade. But because we chose not to be the successor agency, we’re sort of watching it and trying to intervene in places where we can. It has freed us to ask another question, which is, “So now that the CRA is dead, what other model of economic development do we want to explore?”

I’m working on developing a new model of economic development. One that doesn’t assume the continuation of the CRA; one that looks at the best practices around the country where a CRA doesn’t exist, borrowing from what is happening in Chicago, New York, San Antonio, San Diego, and other parts of the country; and establishing a set of objectives that still provides a comprehensive economic development strategy.

In some ways we used the CRA as a crutch to sort of avoid asking the bigger economic development questions for the city. We’re now having to confront that, and what we’re recommending is putting together a non-profit economic organization modeled after what’s in New York and Austin, that essentially allows a lot of the development, prioritization, and strategic planning to continue. It is separate from the city, but still has a contractual relationship with the city. So they have to ultimately fulfill the objectives laid out by the elected officials, but are given a level of autonomy and flexibility to be able to be more creative than we can be because of various regulations that exist in how we govern ourselves.

We’re also recommending creating a separate economic development department within the city family that does a lot of the implementation of some of the broader goals set out by the non-profit in concurrence with the mayor and city council. That part of it has been exciting because we’re able to now plan something for the future without feeling like we’re being held back by this chaos of the dissolution of the CRA.

Now there’s a third piece of this that few people talk about. At the end of the day, the city fund benefited from the dissolution of the CRA. The way it worked is that if you drew a line around a CRA area, all the tax increments in that area stayed in that area. That included the part that would have normally gone to the general fund to pay for the police officers and fire fighters. So now this doesn’t exist anymore, and guess what? All of the revenue goes partly to the state (50 percent of it), 25 percent of it goes to the county, and we get an additional 25 percent that then helps pay for police officers. Part of reducing the structural benefit from over a billion plus has been this new revenue source without raising taxes. We’re simply now taking a piece of revenue that normally would have stayed with the area and applying it to citywide needs. So there was a positive outcome that came out of that for the general fund itself.

Going forward with this non-profit organization, what are some of the areas or projects that really need economic development?

The biggest area, frankly, is that the city doesn’t really have an effective asset management strategy. We own dozens of yards throughout the city to house trucks and heavy equipment for various departments from Streets Services to the Department of Water & Power. They’re sometimes located in prime areas for economic development or projects. We actually run a mall right next to the city hall that is a poster child of how this is not a core service of the city. This is just so poorly managed, unattractive, and not remotely competitive to what that marketplace should be. What we’re hoping is that this economic development corporation could help us figure out how we maximize those assets. How do we then convert them into vehicles for economic activity, put them back on the market, maximize their commercial use, and generate revenue for the city, but also leverage our assets with public-private partnerships?

The second area is really about developing broader goals around economic development to build on the natural growth that’s occurring now. We have a huge growth in tourism in the city. How do we continue that and strengthen it? We have the largest manufacturing center in the country, the largest port in the country, and with LAX, the largest airport in the country. So we have these incredible assets that are drivers of economic activity. How do we maximize them, improve them, and strengthen them so that they actually help provide greater opportunity to the city as a whole?  That’s what we’re hoping that non-profit can help us think about and provide strategies around.

Sometimes economic development measures in different cities get criticized for leading to gentrification and the moving out of certain populations. Is that a criticism that you find yourself facing or something that you focus on?

One of the things that we’re trying to do is, as these projects develop, create agreements that require the developer to invest in affordable housing and provide amenities that improve the infrastructure in the public services that exist—not just for those who move in but for the surrounding community. We recently provided USC entitlements to build on their campus a significant amount of housing and commercial space. We modeled after what happened in Columbia and Harvard, and required that they provide us $20 million for affordable housing because they’ve impacted the level of affordable housing in the surrounding community as USC students take up those slots that would be available for working families.

I negotiated with AEG on the stadium in the heart of downtown, right next to the Staples Center, and part of that includes an investment in hiring locally and includes a contribution towards public infrastructure, as well as an agreement with one of the activist groups to provide $15 million of affordable housing funds. So we try to address it by making it a part of the agreement. We try to strike a balance between wanting to promote the development of these projects, because they help stimulate the economy and create jobs and new revenue for the city, and also insuring that the developer fulfills their responsibility to address any kind of inequality that they create by their development.