CITY BUDGET SEES RED SURPLUS HAS ERODED TO $300 MILLION SHORTFALL DURING HAHN'S TENURE.

Byline: James Nash Staff Writer

Since Mayor James Hahn took office in 2001, Los Angeles has gone from a budget surplus to a budget shortfall that's projected to reach nearly $300 million next year - a dangerous trend that has prompted top bureaucrats to call for drastic measures that could lead to higher fees and further cuts in public services.

City revenue has jumped 10 percent since Hahn took office in 2001, but pay raises and increases in other costs have eaten up the revenue as well as millions of dollars in extra money siphoned from the Department of Water and Power, including $60 million this year that is being challenged in court. At the same time, a ``hard'' freeze in hiring imposed by the mayor has proven to be porous with hundreds of exemptions.

``A ticking time bomb'' is how Councilman Tony Cardenas, a member of the City Council's budget committee, describes the shortfall.

Cardenas, who chaired the state Assembly's budget committee in 2000 and 2001 before the state budget crisis hit, warned that the city may face a similar meltdown.

``In Sacramento, we were very well aware that we needed some structural changes, but no one really warned about it until it really blew up,'' Cardenas said. ``I believe strongly in learning from other people's mistakes.''

For the city, the solutions could involve cutting public services or making the public pay more.

``When we talk about reducing expenditures and increasing revenues, we've got to do both,'' Cardenas said. ``It all has to be on the table.''

Last week, Los Angeles' top municipal bureaucrats released a lengthy report with recommendations to close the long-term budget gap.

Chief Administrative Officer William Fujioka and acting Chief Legislative Analyst Gerry Miller recommended freezing any new city programs, ending the policy of waiving fees for special events, selling surplus city equipment and ensuring that the city recovers the cost of providing services. The last item could include increases in trash pickup fees, which the city currently subsidizes.

Fujioka and Miller estimated that the measures would narrow the budget gap by $200 million a year - enough to reduce the structural deficit by two-thirds. But the city still would need to take other measures, possibly including cutbacks in city services, they wrote.

In an interview, Fujioka said the report provides a road map for digging the city out of its fiscal hole.

``In 2000-01, everyone saw a pop in revenue,'' Fujioka said. ``The city itself saw an almost $500 million increase in revenue.''

Fujioka said then-mayor Richard Riordan used the money to hire more city staff rather than stockpile it in reserves.

``Hindsight is always 20-20,'' Fujioka said. ``At that point, no one saw the recession coming - even the best economists didn't see that.''

The new report constitutes a warning that city leaders no longer will be able to rely on their past practice of shoring up the budget through one- time bonanzas and short-term decisions - an approach that, combined with revenue shortfalls, has led to a $296 million shortage in the fiscal year that will begin on July 1.

Rising employee salaries and pension costs - along with big increases in employees' medical, dental and workers' compensation costs - have the shortfall soaring.

The revenue gap - termed a structural deficit because it is built into the budget - threatens the long-term fiscal stability of the city and could compel widespread service cuts or big increases in fees, such as a possible rise in the cost of trash pickup from a monthly average of $11 per home to $26.

Even as the budget gap widens, the city continues to take on debt to pay for real estate, including an estimated $30 million a year in bond payments for a new police headquarters beginning next year. The city spent $132.7 million on debt payments for real estate in the 2003-04 fiscal year and $151.6 million in 2004-05, according to budget records.

Hahn has plugged some holes with money from one-time sources, such as rolling over $74.4 million from the reserve fund this year and tapping an additional $60 million from the Department of Water and Power - in addition to the utility's regular transfers to city coffers of 7 percent of its revenues.

Deputy Mayor Doane Liu defended Hahn's policies, saying the mayor was confronted with a series of crippling economic blows.

``We had the perfect storm of horrible economic conditions,'' Liu said. ``You had the 1,000 people Riordan hired before he left, you had (Sept. 11, 2001), you had the poor national economy.''

Liu said the mayor has eliminated 800 positions on the city payroll without resorting to layoffs. But Liu declined to comment on why the mayor approved salary increases for many classes of employees. Salaries account for about 85 percent of municipal expenses.

``We've delivered a balanced budget every year the mayor's been in office while maintaining a level of service that constituents expect,'' Liu said.

Critics, and even some city leaders, say they're alarmed that city government continues to spend more and more despite only modest increases in revenue.

Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, said cities, counties and the state spent freely in the boom years of the late 1990s without considering the potential for a crash, and haven't trimmed their spending enough since then.

``We're seeing, in a lot of areas, an escalation in spending,'' Vosburgh said. ``We're seeing it in most cities - spending outpacing revenue.''

Councilman Bernard Parks, who with Cardenas requested the city report on the structural deficit, said Hahn was at least complicitous in allowing the expenditures to grow out of control. Parks, who chairs the council's budget committee, is challenging Hahn for mayor in the March 8 election.

``We have been short-term focused. In my judgment, this (structural deficit) goes beyond the cycle. In a cycle things kind of correct themselves and you can bide your time. From what I've been told, next year's budget may be the toughest we've had to deal with in several years.''

State Sen. Richard Alarcon, D-Van Nuys, who also is challenging Hahn, said the mayor and other officials were shortsighted when the realities of a recession began to set in.

Alarcon, however, did not say he would roll back any salary increases approved during the Hahn administration.

``Four years ago we began to talk about the potential for a recession and there was much work that needed to be done,'' Alarcon said. ``That work was not completed in terms of cutting bureaucracy and cutting waste. You can't continue to tax yourself out of this problem.''

Councilman Antonio Villaraigosa, also a candidate for mayor, said it is a question of leadership.

``A mayor of a city as big as Los Angeles, with so many special interests pulling at our purse strings, needs to have the strength and courage to say no,'' Villaraigosa said.

``It's apparent that under this administration the words `fiscal responsibility' are not in their vocabulary. Our city must bring the structural deficit down if we are going to restore public trust and confidence in our city leadership.''

Staff Writer Rick Orlov contributed to this report.

James Nash, [phone]

james.nash(at)dailynews.com