Forgetting the Financial Lessons of New York City

The main topic at the reporters’ weekly meeting with Los Angeles County Administrative Officer Sally Reed last Monday was the state’s financial mess.

The state finances almost 40% of county operations and the word that Wall Street had lowered California’s credit rating was bad news in the County Hall of Administration. The word from two big credit rating firms was a follow-up to an earlier bombshell. The banks had told the state it must impose strict fiscal controls before it could borrow to finance daily operations.

As I listened to Reed, I wondered whether California hadn’t sunk to the level of New York City when it teetered on the edge of bankruptcy in the mid-1970s.

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“There are a lot of lessons to be learned from New York,” Reed said when I asked her about it.

It seems nobody has learned them. Under Republican Gov. Pete Wilson and a Democratic Legislature, state spending has exceeded revenues. To balance the budget this year, the Wilson Administration, with the Democrats’ assent, borrowed $4 billion from group of banks headed by Bank of America. The banks insisted that the state make budget cuts if it can’t repay the loan.

I don’t want to sound simplistic, but it looks as though the banks are taking over state government, the way they took over New York City when it was in trouble.

The bank-ordered cuts would reach directly into L.A. County, the state’s biggest and the one with the most severe and insoluble urban problems.

We’ll know about the impact of these cuts when contagious disease rates rise because of reduced public health facilities, or when more criminals are granted early release from overcrowded jails. For it’s the county, not the state, that runs all the unglamorous services we can’t do without--jails, courts, county hospitals, clinics for the mentally ill, parks, flood and fire control, beach lifeguards, and several others.

As far back as March, Moody’s, one of the credit rating services that came down hard on the state, warned that California’s fiscal course was damaging the county.

Before deciding to borrow $4 billion this year, Wilson and the Legislature balanced the state budget to a great extent by raiding the treasuries of counties, which lacked the smarts and clout to compete in Sacramento’s fast-paced political market place.

They did this by shifting the cost of several expensive health and social welfare programs to the counties. State officials grandly promised the counties more sales tax revenue and money from motor vehicle license fees to cover the additional costs. But during the recession, sales of cars, trucks and almost everything else declined. So the revenue was much less than promised.

Los Angeles County was hurt even more when the state shifted a substantial amount of property tax revenue from the counties to the schools, which were in deep financial trouble.

All these state actions, Moody’s said, “substantially increases the economic vulnerability of the county’s revenue structure.”

This combination of huge borrowing, rolling over debts and raiding county income is something new to California.

It used to be an unshakable rule--a law, actually--that the state budget had to be balanced. At least, when I worked in Sacramento, I thought it was a law, and so did everyone else.

But I should have known. Even in the hands of lawmakers, a law is something to be bent or broken.

In 1990, the recession struck California. Revenues from the sales, income, bank and corporation and other taxes declined precipitously. Property tax income was already down, the result of Proposition 13.

Gov. Wilson pushed through a tax increase the first year, but took so much heat from Republicans that he vowed never to do that again. The Democrats gave up on tax increases too. What was left of Republican and Democratic political will was drained by special interest lobbyists who opposed closing loopholes that protected their business clients.

All this added up to stalemate, which ushered in the era of borrowing and debt, New York style.

The old balanced budget law was put aside. Wilson’s Finance Department armed itself with an opinion from Republican Atty. Gen. Dan Lungren “indicating that this financing and budget strategy satisfies the requirements of the California Constitution.”

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You’d think someone would be irate. But I think the public is skeptical of budget crisis stories. Ever since the voters approved Proposition 13, government officials have been crying wolf, and then getting by each year with temporary fixes. The deterioration of public schools, universities, community colleges and other state facilities have been well documented, but they’ve been undramatically slow.

Treasurer Kathleen Brown, the Democratic nominee for governor, is trying to make red-ink financing an issue in her campaign against Wilson. I watched her hold a news conference in Santa Monica the day the credit rating services gave California a bad grade. “Pete Wilson’s fiscal mismanagement has turned the triple-A (rated) state into the IOU state,” she said.

But only two newspaper reporters and one TV crew were there. The rest of the cameras were somewhere else, probably following an angle of the O.J. Simpson story.

The Wilson Administration, meanwhile, is putting a happy face on the mess. I talked to Russell Gould, Wilson’s finance director, and he said, “California is living within its means.” Tax revenue is up and there will be enough money in the state treasury to pay off the debt without raising taxes.

His optimism fits in with the history of these crises. Only when government can no longer write checks, when it’s bankrupt, will anyone admit there’s anything wrong. Then, as was the case in New York, everyone will try to figure out what happened.