Contingency Fund Shrinks; County Vulnerable : Budget: A report warns that continued use of the money for non-emergency purposes is fiscally risky.

Risky financial practices and ever-increasing demands have left the Orange County government’s contingency fund “dangerously low,” making the county financially vulnerable in an emergency, according to a mid-year budget report.

The report, the second of three updates to be written this year by Auditor-Controller Steven E. Lewis, warns that the fund stands at just $13.6 million. At the end of the fiscal year last June, it was $16.6 million.

Lewis also warned of the shortage in contingency funds in his first report, but the fund has continued to shrink, dropping from $14.3 million in January, when the earlier report was completed. Cost overruns in some departments and the practice of using contingency funds to pay for non-emergency programs are responsible for the depletion, Lewis said.

“The contingency fund should only be used for emergencies and not to fund ongoing programs which will require additional funding in following years,” Lewis wrote in the report to County Administrative Officer Ernie Schneider. “To continue to use one-time revenues for other than one-time, non-recurring expenditures should be done only as a last resort and must be recognized as dangerous budget policy.”

Ron Rubino, the county’s associate administrative officer for management and budget, agreed that there are risks in using the contingency fund as it has been.

“We’re spending into the bank account, and we’re using it up,” Rubino said in an interview Monday.

In order to prevent a situation in which the county might be caught unprepared for an emergency, Lewis recommends restoring the contingency fund to a “prudent level” of $20 million. But that could prove difficult this year as a large deficit is already projected, and supervisors are struggling to identify areas where they can trim the budget.

Supervisor Thomas F. Riley said he and his colleagues recognize the problem, but so far have been unable to overcome it. Proposition 13 limits the county’s ability to raise taxes but needs have continued to grow, squeezing the budget ever tighter.

“You go through year after year, and you don’t have an emergency that makes you use the contingency fund, so you’re tempted to take a million here and there for other things,” Riley said. “I’ve been a part of that, I guess.”

But unless action is taken, financial officers warn, the funds will continue to shrink, and someday the county will be caught short.

“The risk is that when an emergency happens or something requires some quick reaction, then we may not be able to pay for it without cutting other services,” said Earl Paull, the county’s chief of accounting operations. “That’s a serious risk.”

Paull and other officials said that the shrinking contingency fund is primarily the result of misguided budget practices. For the past several years, for instance, one-time budget bonuses such as money from the sale of county property or unanticipated savings have been pumped back into the general fund.

That can propel the county beyond an immediate fiscal crisis but only delays a moment of reckoning. Eventually, the money from a one-time influx of cash runs out, leaving the general fund short and forcing agency heads or county supervisors to turn to the contingency fund to bail themselves out.

By allowing the county effectively to live beyond its means, that process helps disguise the depth of the real problem, officials said.

“The bottom line here is that the contingency fund has become low because local government doesn’t have the money it needs to carry out its operations,” Paull said. “There just isn’t the money to go around.”

Despite the growing concern about the management of the county’s contingency fund, the budget update does bring some good news.

The January budget report had forecast $431.7 million in available funds for next year’s budget. New estimates of tax income and a few savings bring the available money to $438.1 million, a $6.4-million increase.

Still, with a tight 1990-91 budget predicted, Riley and other officials remain concerned that the contingency fund shortage will continue to bedevil the county for the foreseeable future. The board is scheduled to vote on a preliminary 1990-91 budget on June 27.

“I certainly support the effort to replenish the contingency fund, if we can do it,” Riley said. “But I have doubts. At the least I hope we can keep it from going any lower.”