OFFICE OF THE MAYOR
Antonio R. Villaraigosa

MEMORANDUM

To: Heads of All City Departments
From: Antonio R. Villaraigosa, Mayor
Subject: Credit Crunch and Market Uncertainty
Date: September 22, 2008

Events of late last week and through the weekend have quickened the pace of unprecedented upheavals in the nation’s economy. The effects of this turmoil are experienced in the City of Los Angeles in rising unemployment, challenges for the private and public sectors in the credit market, and thus a challenge to healthy economic growth throughout our community. Our city and region are further buffeted by uncertainties in the state economy and budget. As we know from our work every day, many Angelenos are struggling just to get by. Uncertainty itself is a great concern.

Despite these challenges, we should not allow the unsound and unconscionable practices of Wall Street to stop the progress we have made on increasing the public’s safety and improving the delivery of basic city services. As city leaders, we have an opportunity and obligation to demonstrate strong fiscal management to ensure the financial health of this city and to protect every taxpayer dollar.

Overall, the City government’s fiscal health is strong, with our bond ratings one key indicator of sound municipal financial health. The City has an AA rating from Fitch, an Aa2 rating from Moody’s and a AA from Standard & Poors. Still, the overall robustness of the local economy is the single-most significant determinant of City revenues, and our focus on continuing to safeguard the city’s assets and financial health in uncertain times is imperative. In response to several questions, you should know that our pension funds investment operations are holding up well and structured to focus on the long-term. This enables them to safely ride out periods of market volatility as we are currently experiencing. The pension funds are invested in highly diversified portfolios, spreading their holdings (and therefore their risks) across multiple asset classes, including domestic and foreign stocks, government and corporate bonds, real estate, and private equities and other alternative investments.

In separate actions, I am requesting a thorough review by several key departments of the impact of the economic upheaval upon the city government’s operations, capital plans, capacity and ability to issue debt, disposition of pension funds, etc. and recommendations regarding any near and mid-term actions to consider to ensure the delivery of essential city services and projects. I am directing these reviews in the context of the following:

On the national level, the Federal bailout for Fannie Mae, Freddie Mac, American International Group and others is estimated to cost several hundred billion of taxpayer dollars. The Administration has recently asked Congress for authority to spend $700 billion to intervene in and calm the financial markets and stabilize money market funds. The long-term picture and specific future tax burden for the actions the Congress is now considering is not yet knowable. However, there will likely be proposals emerging to reduce future federal allocations for local social programs, even as federal funding for these important services for the most atrisk in our city has already, and steadily, declined over the last several years.

At the local level, the credit crunch is making it more difficult for both the public and private sectors to raise capital through the issuance of bonds for economic development projects and critical infrastructure improvements. Interest rates have risen as municipal bond buyers demand higher returns. With the slowdown in employment, along with the slowing of consumer spending and housing, economy-sensitive revenues for our city budget, such as sales tax, business tax, and documentary transfer tax, may fall further than anticipated for this fiscal year, trends we are closely monitoring. I have directed my Finance Advisory Cabinet, including key General Managers and CFO’s with fiscal responsibilities, to continue to stay on top of these conditions. I ask you to do likewise. Throughout, the City will continue to adhere to its sound financial policies and practices.

Should you have questions about the City’s financial condition, please contact Ray Ciranna in the CAO’s office or City Treasurer Joya de Foor.