Page 5 - 2020-21 Supporting Information Book_Revised

Structural Balance
The City’s Financial Policies include a goal of achieving and maintaining a
structurally balanced budget in which future costs are projected to be fully paid by future
revenues. In order to assess structural balance, my Office prepares the Four-Year Budget
Outlook (Outlook) that compares projected revenues to projected expenditures through
2024-25. The Outlook projects budget gaps of $272 million in 2021-22, $348 million in
2022-23, $349 million in 2023-24, and $397 million in 2024-25. By Charter, the City will
close each of these gaps as part of that year’s annual budget process. Nonetheless, at
this time the Outlook does not demonstrate structural balance. In order to achieve
structural balance in the coming years, the City must reduce ongoing spending and/or
increase ongoing revenues.

The Outlook makes several assumptions that, if not met, would change future year
projections. Both the City’s civilian and sworn retirement systems will conduct new
experience studies in the coming months. During that process, the retirement systems will
consider reducing the assumed investment rate of return from 7.25 percent to 7.00
percent. If this happens, this would increase the City’s annual contribution, which is not
reflected in the Outlook.

The Outlook also does not assume any increased expenditures for the City’s
response to the COVID-19 pandemic. The Outlook also does not include state or federal
aid or reimbursements. Unreimbursed spending in future years could affect the Outlook
negatively, while aid for lost revenue relief could improve it.

Finally, the Outlook assumes that revenues will continue to grow consistent with
historical averages and that expenditures will remain consistent, with growth dedicated to
maintaining current service levels. There has yet to be a final decision on costs associated
with pursuing the Civic Center Master Plan, the expansion of the Convention Center, or
the Los Angeles River Revitalization Master Plan. As such, the Outlook does not include
the costs of these major construction projects whether as debt service payments or
availability payments.

Areas of Concern

It is customary for my Office to identify the areas of concern with the Proposed
Budget that we believe may require attention and/or solutions during the course of
2020-21. Of course, the current uncertainty regarding the full impacts of the COVID-19
pandemic is the largest risk to the Proposed Budget.

I recommend directing any unexpected additional funding to the following areas of
risk:

x Repaying the special funds that have front-funded the City’s response to the
pandemic to the extent that the expenditures are not eligible uses of those funds.
x Restoring the Reserve Fund to the 5 percent policy level.
x Restoring the $20 million for liability claims, consistent with recent
appropriations and expenditures for settlements and judgments.