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COMMENTARY ON GOVERNMENT : Supervisors Lack Means to Deal With Gloomy Fiscal Future : County problems stem from responsibilities inherited--without necessary funding--from the state and U.S.

<i> Dennis J. Aigner is dean of the Graduate School of Management at UC Irvine</i>

The Orange County administrator’s five-year financial forecast is indeed depressing. The county is anticipated to run deficits of between $70 million and $100 million annually through fiscal year 1995-96.

No doubt next year’s five-year forecast will extend that gloomy picture to 1996-97, since expenditures to meet program needs show a persistent tendency to outpace revenue and presently there is no relief in sight.

There are a number of reasons for this situation having evolved, the least of them being any actions or inactions on the part of the County Board of Supervisors.

Basically, the county has been handed a growing bundle of new responsibilities over the past 10 years that used to be the province of federal and state government, without the funding to pay for them. Orange County receives only 18 cents back on every dollar we pay to the state in the form of local property taxes, ranking dead last among the 58 counties in California. (San Francisco County receives 85 cents on the dollar, by way of comparison.) This year only 13% of the county’s budget is truly “discretionary,” and that’s where cuts to help reduce the total impact of an almost $70-million projected shortfall have occurred.

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Since neither counties nor states can print money and face limitations on issuing general obligation bonds to finance deficits, there are few short-run choices for dealing with such matters except to cut programs and support services.

The growing obligation to pay for “public protection” (now constituting over half the county’s expenditures) plus expanding expenditures for health, community and social services (another 20%), leaves little room to fund the more productive infrastructure improvements so essential to maintain our economic base. And it’s very clear that public infrastructure investment and business investment go hand in hand.

The ability of government to finance the necessary investment plus cover other commitments is being constrained gradually by economic forces that are national--even global--in scope.

Governments, especially local governments, are impacted in their efforts to tap their tax bases by the threat of firms and jobs moving elsewhere. According to Richard McKenzie and Dwight Lee in their book “Quicksilver Capital,” the decentralization of responsibility for providing public goods and services from federal to state, or from state to local levels of government, is being driven these days by “quicksilver effects” whereby expanded capital mobility is forcing central governments to behave in a much more competitive fashion. This is forcing them to cut (or decentralize) activities and, of course, the ripple effects are tremendous.

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California and Orange County are apparently now experiencing the effects of quicksilver capital. Through UCI’s annual Orange County Executive Survey we have seen steady erosion in Orange County’s attractiveness as a place to do business and an increase in the number of firms that plan to move out of the county in the next five years.

Presently, about 10% of the firms surveyed (20% in the manufacturing sector) plan to move. The most cited reasons for leaving are, in order, traffic congestion, lack of affordable housing, government regulations and the general cost of doing business. At least three out of these four are “infrastructure” issues.

Coupled with a weak economy and chaos in the financial services sector, there are no options for the supervisors, really, but to batten down the hatches and ride out the storm.

Absent a significant restructuring of the state’s tax reallocation system, the best chance for relief is through targeted infrastructure investments on the part of the voters, like Proposition M. But in all likelihood California and Orange County are going to look a lot different when the storm is over.

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If McKenzie and Lee are right, we’re in the midst of an American perestroika of sorts, whereby states, regions and cities that are competitively advantaged will prosper and the others will fall behind. Quicksilver effects in force at the national level and the persistent federal deficit are eroding the federal government’s ability to even manage the process of income transfers needed to ensure that our most disadvantaged states and regions are maintained at an acceptable level, let alone finance them.

As a result, we may be facing a regional version of the growing income gap between rich and poor households that is a legacy of the trickle-down economics practiced in Washington during the 1980s.

Ironically, Orange County, with its considerable tax base, would no doubt be one of the counties to prosper under these conditions. But the state’s inequitable property tax reallocation scheme is pushing us toward the other end of the spectrum, leaving us incapable of providing the infrastructure needed to maintain our economic viability and pay for the services our growing population requires to be safe, healthy and productive.


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