L.A. may borrow money to pay its growing legal bills

Good morning, and welcome to L.A. on the Record — our City Hall newsletter. It’s Dakota Smith and David Zahniser with all your local political news.

The city of L.A. is overspending and burning through its reserve funds.

City departments have gone at least $215 million over budget for the fiscal year that began July 1, according to a new analysis. Expensive legal settlements and court judgments resulting from lawsuits against the city are a big part of that.

Now, the city is proposing to borrow money to cover the cost of legal payouts — a move that will give some short-term relief but ultimately add to the city’s debt.

At a Wednesday committee meeting, council members laid the groundwork to borrow at least $80 million through a “judgment obligation bond” that would cover payouts for such legal matters as errors or misconduct by LAPD officers, accidents caused by buckled sidewalks and discrimination claims lodged by city workers.

“We need to take that action essentially to stop the bleeding,” said City Administrative Officer Matt Szabo, who advises the mayor and council on the budget.

The city routinely issues bonds to pay for physical assets, such as major building upgrades. Borrowing to pay for ongoing legal costs is generally not encouraged, however, because of the interest.

Based on current interest rates, it could cost the city as much as $20 million in interest to borrow $80 million.

(To put that $20 million in perspective, the budget for the city’s Cultural Affairs Department for the full fiscal year is $18.6 million.)

The bond proposal, which is expected to have a 2.73% interest rate, still needs approval from the council.

If the plan moves forward, the city would use its reserve fund — a bucket of money used for budget crises — to pay off the legal bills, then repay the reserve fund with the loan.

Councilmember Traci Park, who serves on the budget committee, voiced dismay at the idea of borrowing money to pay the bills.

“I don’t love debt financing,” she said. “And I love it even less when we don’t get a product out of it at the end of the day.”

Park sits on the three-member claims board, which reviews lawsuits against the city. She said she was disturbed to see the same problems, such as broken sidewalks, leading to lawsuits.

“We sit and go through binders of cases that are recurring fact patterns. It’s the same problems over and over again,” she said.

City Controller Kenneth Mejia sharply criticized the borrowing strategy this week and said the interest costs will hamper efforts to fund projects in the future.

“Borrowing as part of a comprehensive strategic plan to put the city back in fiscal balance makes sense,” he said. “Borrowing to postpone the day of budget reckoning is short-sighted, reckless and irresponsible.”

The last time the council issued a judgment obligation bond was in 2010, when the city borrowed more than $53 million to cover legal settlements, including several stemming from a 2007 “May Day Melee” where immigration protesters and news media were injured by police in MacArthur Park.

The council also considered borrowing $60 million in 2017 to cover the cost of some big legal payouts. Then-City Controller Ron Galperin pushed back on that idea, which the council eventually abandoned.

The council also contemplated borrowing money to pay its ongoing bills in 2020, when COVID-19 walloped the economy, reducing tax revenue from hotels and other sources. The city was rescued after President Joe Biden signed a relief package that sent it more than $1 billion.

At Wednesday’s meeting, Szabo said he also wants the council to identify budget cuts throughout city departments this fiscal year to help replenish the city’s reserve fund.

Whoever wins Tuesday’s City Council elections — three races are on the ballot — likely will have to confront those budget-cutting decisions.

In the coming months, council members will also have to decide whether to go forward with renovating the city’s convention center in time for the 2028 Olympics.

And if Donald Trump wins on Nov. 5, he could seek to block some government funding to L.A., as he did the last time he was president.

Zach Seidl, a spokesperson for Mayor Karen Bass, said that initiatives put forward by the city will “ensure the city remains on stable financial ground.” He did not address the proposed bond.

“Despite fiscal headwinds sweeping the nation, homelessness is down, LAPD applications are up, and essential city workers are being paid more fairly,” he said.

State of play

— WE’RE ALMOST THERE: Just a few days remain before Tuesday’s election, which features three council races and eight city and county ballot measures. Then there are the days — weeks? — of awaiting the results. The L.A. Times voter guides are here, and you can find early voting spots here. In L.A., most of the noise is coming from Council District 14, where tenant rights attorney Ysabel Jurado is looking to unseat Councilmember Kevin de León.

— HARD TO SAY I’M SORRY: The question of when, and how, to apologize has become a recurring theme in the Jurado-De León contest. First it was De León and the racist audio leak, which turned City Hall upside down in 2022. Then it was Jurado and the recent ‘F— the police’ controversy.

— POLICE PRESENCE: Law enforcement spending and the concept of police abolition have become divisive issues in the De León-Jurado contest, as well as in the council race between former State Assemblymember Adrin Nazarian and small-business owner Jillian Burgos. The police union supports Nazarian and De León. The Democratic Socialists of America, known for putting the abolition question on its candidate questionnaires, backs Burgos and Jurado.

— DE LEÓN’S DONATIONS: The state Fair Political Practices Commission is investigating contributions to De León’s reelection campaign from a nonprofit that distributes food to needy residents in his district. De León’s camp has denied wrongdoing. Meanwhile, Jurado supporters are hitting De León over his campaign’s decision to hire activist Najee Ali. In an application for a restraining order, which was granted by a judge, a woman alleged that Ali harassed, bullied and threatened her. Ali said he’s the target of a smear campaign.

— MAKING THE BIG BUCKS: Former L.A. County Sheriff Jim McDonnell, recently tapped by Mayor Karen Bass to become the city’s next police chief, could earn more than $507,000 annually, under a proposal being considered by the Police Commission. The council is expected to take up his nomination on Friday.

— EXPENSIVE ETHICS? The county’s plan for creating a new ethics enforcement agency could cost nearly $22 million per year and add as many as 93 new public employees, according to a new report. The findings drew envy from some corners of City Hall. “Wow, that is a big staff,” said David Tristan, who heads the city’s Ethics Commission, which has a $6.3-million yearly budget and employs about 45 people. “I’d love to have that budget.”

— RENTERS & REMODELS: The City Council took a step toward eliminating a rule that allows renters to be evicted when landlords carry out major renovations of their buildings. On an 11-0 vote, council members instructed the city attorney to draft an ordinance removing the remodel clause. A day later, they approved an ordinance beefing up the city’s anti-harassment law protecting renters.

— CONTRACTING PROBE: Los Angeles County officials rarely suspend problem contractors and don’t always explain why they have awarded “no bid” contracts, according to a multiyear investigation following the indictment of former Supervisor Mark Ridley-Thomas. However, the investigation also found that county contracting has been not been tainted by widespread fraud.

— THE DANCING D.A.: Dist. Atty. George Gascón, behind in the polls and struggling to keep his job, is dancing on Instagram and mouthing lyrics from pop star Olivia Rodrigo — all in the hope of turning the tide in the Nov. 5 election. The Times looks at his four-year tenure running the D.A.’s office and his struggle to stay for four more.

— SHUFFLE AT THE DWP: The DWP’s Aram Benyamin, who is serving as the utility’s chief operating officer, said in an email to staff that he’ll step down in January. Earlier this year, it appeared that Bass might pick Benyamin to lead the utility. Instead, she chose Janisse Quiñones.

QUICK HITS

• Where is Inside Safe? The mayor’s program to combat homelessness went to a stretch of Budlong Avenue in South Los Angeles, an area represented by Councilmember Marqueece Harris-Dawson, according to Bass’ team. The initiative also went to 8th and Catalina in Koreatown, which is represented by Councilmember Heather Hutt.
• On the docket for next week: The election is on Tuesday! If you haven’t voted yet, go do that!