Credit Rating in Peril, County Warned

From their high-rise Wall Street offices, financial analysts watching the Board of Supervisors struggle with the problems of growth have always rated Orange County as one of the safest investments available.

Recently, however, some warnings about the future of that rating have been sounded.

Auditor-Controller Steve Lewis told the supervisors in a letter two weeks ago that they must put together a long-term plan to provide more year-to-year financial stability for the county. He cautioned that if “a plan is not developed . . . the county’s excellent reputation in the financial community could soon be seriously damaged and our ability to borrow needed funds could be jeopardized and/or made extremely costly.”

Could Pay Millions More

Last week, County Administrative Officer Larry Parrish also expressed concern about “how long we’ll be able to maintain” the county’s credit rating--the second highest given by New York analysts.

If the rating fell, the county could end up paying millions more for taxpayer-financed projects like the $600-million jail the supervisors formally approved last week and the new court facilities they want to build.

Both Lewis and Parrish say they are confident the county will not lose its AA-1 credit rating this year. But they see warning signs for the future.

The $1.7-billion fiscal 1987-88 budget that the supervisors will formally adopt later this month is one of the tightest ever for Orange County. It has forced the supervisors to make high-stakes decisions about health care, police protection and the financial posture of the county. It also has cut the county’s financial reserves to the bone, at a time when county spending is fast approaching the ceiling imposed by the Gann Initiative.

In addition, county officials say:

- The county’s annual revenues, from sources such as taxes, fees and state grants, are not adequate or consistent and have forced the county to rely heavily on “one-time” infusions of money, from sales of property and the like, to balance the budget.

- More than 100 positions are to be lost under the 1987-88 budget, and there is no provision for salary increases for other workers, causing an increasingly heated showdown with eight county unions.

Last spring, before they learned how much money they would receive from the state, Parrish was predicting as many as 340 county jobs would be lost under the 1987-88 budget. As it turned out, the county got more money than it had anticipated from the state, saving dozens of positions and some key health care programs.

But the county still had to take $15 million from a special landfill management fund and dip deep into its contingency account to save more jobs.

In three of the four categories the analysts use to rate a county’s credit, Orange County scores well.

Its long-term debt is among the lowest anywhere. Last month’s City and State magazine said Orange County owed $5.50 per resident in long-term debt, compared with $179.90 in Los Angeles County and $198.40 in San Diego County.

The county’s economic base, another category, is strong. Development is still booming, unemployment is consistently below state and national averages, and business in the county is diverse.

The county’s administration, a third category, has also scored well in past reviews.

But in the fourth category, financial factors, Orange County--like many other counties in the state--has slipped.

One reason is the relatively low amount of the county’s contingency fund.

In April, Lewis warned the supervisors that the contingency account was already “dangerously low” and that it should not be allowed to drop below $20 million. Later, Parrish told the supervisors that $15 million was “rock bottom” for the account.

When the supervisors finished their budget hearings earlier this month, about $16.7 million was left in the contingency fund--less than 1% of the county’s budget. By contrast, the state maintains a contingency account that is at least 3% of its budget.

“It’s not precarious if we’re lucky,” Parrish said. “But it’s a pretty low amount for the size budget we have.”

He drew a parallel with “people who don’t carry health insurance: A catastrophic illness and you’re dead.”

At $16.7 million, he said, the fund could be wiped out by something like a big lawsuit or any natural disaster such as flooding or an earthquake.

The amount now in the contingency fund is half what it was just five years ago. At the beginning of fiscal 1982-83, the fund totaled more than $30 million. It fell to $25.2 million at the beginning of 1983-84, $30 million the next year, $20.1 million in 1985-86 and $18.3 million at the beginning of last fiscal year.

Other counties are in the same tight spot with their contingency accounts, said Carey Jung, an analyst with the County Supervisors Assn. of California. He said most counties’ savings are below 1% of their budgets.

“Like Orange, a lot of them use that money to make ends meet,” he said.

Financial analysts view the contingency account as one indicator of financial protection because it is a source for paying off bonded indebtedness if normal revenues are interrupted.

For similar reasons, the analysts are concerned about the Gann limit, which could prohibit the county from spending some of its money.

Sponsored by tax crusader Paul Gann and passed in 1978, the Gann limit freezes government spending at 1979 levels, allowing only for population and cost-of-living increases.

For several years, the Gann limit was not a problem because it was tied to the relatively high inflation rate. But low inflation levels in recent years have kept the spending cap down, and in Orange County officials are certain they will reach the limit either this year or next.

That would mean the county would have to either ask voters to override the limit or return excess revenues to the taxpayers.

Stanton and Parrish said the county has not yet considered whether it would go to the voters and ask for an override of the limit. The county is already considering a plan to ask voters next year for a property tax increase to pay for the new jail.