County Warned of $63-Million Deficit in the Next 2 Years : Government: The forecast is gloomy, but a healthy surplus is possible down the road. New programs will suffer, the CAO report says.

Orange County government will have to find ways to cut spending or increase revenue in order to avoid a budget deficit that could reach $63 million in two years, according to a financial forecast presented Tuesday to the Board of Supervisors.

The five-year forecast by the county administrative office predicts budget deficits in the next four out of five fiscal years, which will make it difficult to add new county programs, Supervisor Gaddi H. Vasquez said.

The county is being squeezed by a variety of factors, including growth, dwindling federal dollars, statewide voter initiatives limiting taxes, and the creation of new cities in the county that have diverted tax revenue, County Administrative Officer Ernie Schneider said in his report.

The financial forecast, the second to be issued under a new budget-review process begun last year, projects a deficit of $25 million in the fiscal year beginning this July if no new money comes in and no spending cuts are made.

The deficit would climb to $63 million the following fiscal year, according to the forecast. However, the study also shows an easing of the financial crunch in subsequent years, projecting a $14.7-million surplus by 1994-95.

“All of these years since Proposition 13, we’ve always been waiting for the other shoe to drop and I think it has,” Supervisor Harriett M. Wieder said in response to the forecast. “It’s a signal.”

Vasquez noted, however, that a similar forecast last year predicted a deficit that the county avoided through budget adjustments and unexpected tax revenue. The county administrative office had projected a $38-million deficit; the county came in with a $23-million surplus.

“The suggestion that there’s a shortfall is not a doomsday prophesy,” Vasquez said. “It is something that we should be alerted to because there are contingencies we will have to deal with.”

The report’s most ominous warning focuses on expenses not factored into the five-year forecast: $1.1 billion that will be needed to build two new jails and a court complex. The county, which is under federal court order to ease jail overcrowding, has approved the projects without financing plans.

If the county is forced to issue bonds, in effect to borrow money to the pay for the construction, its “ability to weather future budget difficulties and make debt payments” could be in doubt, according to the CAO report. The county’s debt, when compared to its population and the size of its budget, would be greater than those of most local governments in the country, a situation that could threaten its credit rating, the report says.

Vasquez said he believes that Orange County may find some relief from the state because jail overcrowding has become a statewide problem. Eighteen counties in California are grappling with serious jail overcrowding, he added.

Wieder said the county should consider contracting with the private sector for new jail construction. Hiring a private concern to run the day-to-day operations of the jail, a step some jurisdictions have taken to control costs and deal with a burgeoning prison populations, might be considered down the road, she said.

“We can start looking at privatization,” Wieder suggested. “It’s an idea that has been around for years. . . . Well, I think the time is arriving. . . . We can’t jeopardize our bond rating.”

A high bond rating, which the county currently enjoys, allows it to borrow money at the most favorable interest rates available on the bond market.

To protect that credit rating, the county should increase the money it sets aside for an emergency--called its contingency fund--from $15 million to $20 million, the CAO’s report says.

Karen Davis, a budget analyst for the CAO, said the following factors account for most of the projected deficit for the upcoming fiscal year:

* The $5-million increase in the contingency fund.

* The $6 million to be spent on the expansion of the Theo Lacy Branch Jail in Orange.

* The $1.5 million budgeted for increasing the Sheriff’s Department South County patrols.

The rest can be attributed to the increased cost of providing services to a growing county, Davis said.

The $63-million deficit projected for 1991-92 takes into account the possibility that the county will decide to drop a program under which it receives $25 million in state money to operate its courts.

Under the state funding program, the board must reach an agreement on salaries and other court expenses with representatives of the courts and the state before it receives the funding.

In recent years the supervisors have been embroiled in protracted arguments over court expenditures and have approved salary raises under deadline pressure to reach agreement or lose the state money.

The county is now studying whether it might save money in the long run by dropping out of the program, Davis said.

The five-year financial forecast also shows an easing of the county’s financial crunch in later years, in part, because analysts can project increases in tax revenue due to growth but cannot predict what new spending will be necessary, Davis said.

“It’s very difficult to project beyond the second year,” Davis explained. “There’s all kinds of unknowns for the future. The projections do become weaker as the lengths of time progress.”

Vasquez, however, said the forecast makes new programs unlikely.

Financial Forecast A five-year forecast indicates that Orange County faces budget deficits during the next four fiscal years but will end up with a $14.7-million surplus in 1994-95. Source: County Administration Office