There may be signs of an economic recovery in the stock market, but times are still tough in Los Angeles: The city is expected to run out of cash as early as May 5, according to a desperate warning from City Controller Wendy Greuel.
In a memo titled "URGENT CASH FLOW UPDATE," Greuel begs Los Angeles Mayor Antonio Villaraigosa and City Council members to approve a transfer of $90 million from an emergency reserve fund into the city's general fund to cover basic expenses, like payments for city employees.
The most pressing problem is that the city did not receive an expected $220 million payment from the Department of Water and Power. Instead, it got a measly $147 million, which means the city will not only run out of cash on May 5, but its general fund will fall into negative territory by about $10 million. By June 30, the balance on the reserve fund could range anywhere from $0 to negative $43 million, depending on how much or how little additional cash the city squeezes out of the Department of Water and Power.
For its part, the Los Angeles Department of Water and Power's inability to make its payment seems to stem from a proposed rate hike which was rejected by the City Council last week. As a result of the vetoed rate hike, credit ratings agency Fitch withdrew its AA- rating on some LADWP bonds and postponed the bonds' sale, which was expected to happen this month. The sale was expected to generate roughly $720 million.
In order to remedy the situation -- or at least stay current on the city's payments -- Greuel wants to transfer $90 million from the city's reserve fund to its general fund. Under the Los Angeles charter, such transfers can only be made in cases in which payments are late, not in cases where there is no anticipated payment; in this case, it's not clear when the city will be able to recover the cash from the Department of Water and Power. The transfer is also only an option through April 26.
As the center of the entertainment industry, Los Angeles thrived in economic boom times, but it's a different story now. Studios have cut costs, some have been shuttered, and others have dramatically cut the number of movies in their production pipelines.
Meanwhile, the city is facing stiff competition from other film-friendly cities like Vancouver and Toronto, and states including Michigan, Louisiana, New York and New Mexico. An estimated 57% of all TV pilots were shot in L.A. in 2009, down from 81% in 2004, which means there is less production-related revenue for the city.
Take the first steps to building your portfolio.View Course »