Los Angeles is witnessing a sharp fall in revenue largely because of 12.5% unemployment figure.

Huge budget shortfall in Los Angeles will have a dramatic impact. Extraordinary steps would be taken for many months ahead to bring back balance to the budget. The size of the government would have to be trimmed and spending on pensions would also have to be sliced, said an important budget official of the city.

The largest city in California, Los Angeles, is witnessing a sharp fall in revenue largely because of 12.5% unemployment figure. This has led to less spending on the part of the consumers, instability in the housing market and deteriorating condition of the commercial real estate.

The Fitch Ratings have down graded the general obligations of the city debts to AA- minus from AA. Fitch apprehends that the economic drop will hamper financial recovery. High unemployment has been cited as one of the main causes. Value of houses have also dropped, foreclosures have increased together with increase in negative equity problems.

The administrative officer of the city Miguel Santana noted that he was not taken by surprise by the downgrading. He is intimately connected with the finances of the city – it being in dire condition. He was speaking in a telephone interview after discussing with the City Council about the alternatives for balancing the accounts books of Los Angeles.

The gap of about $100 million has to be bridged in the budget of the present year. Reserve funds would have to be dipped in to, said Santana. He apprehended that in the forthcoming year the deficit would run into $400 million. He added, “We really need to prioritize our programs. Next year we’ll have to find some real structural adjustments.” Adjustments hint at more layoffs and transferring some of the city jobs to the private sector to cut down on expenses.

It could also include a fresh pension scheme for the employees of the city – the two-tier system. Many local officials around California are thinking on these lines. According to it, new public workers and employees hired after a scheduled date would get less pension benefits in comparison to what the current employees are getting. The contributions to the retirement accounts would come more from the pockets of the new workers than previously. Santana said that all possibilities of bridging the gap are being looked into.

In a statement Fitch underlined its worry about how much the city would be actually contributing towards the pension funds.

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