PERSPECTIVE ON THE ORANGE COUNTY CRISIS : Four Steps to Avoid a Tax Increase : Sell assets, cut payroll, restructure, privatize. In other words, do what businesses do when they’re in trouble.
The dimensions of Orange County’s bankruptcy are sobering. The county-run investment pool has lost $1.7 billion belonging to the county, numerous cities and districts, bond holders and individual investors. In addition, the county’s operating budget is short more than $160 million per year in previously expected interest income on the now-lost funds. With losses of this magnitude, it’s no wonder some have begun clamoring for a tax increase. How else could the county and its investors be made whole?
The only proposed tax on the table is an increase in the sales tax. Thanks to Proposition 13, the property tax cannot be increased, and no other tax that the county could impose would produce enough revenue to make a dent in the problem. But sales-tax boosters must come to grips with the very real negative impacts. A sales tax is regressive: It hits lower-income people harder than the more affluent. It would not generate as much as expected, since buyers of some big-ticket items, such as appliances, can shop in other (lower-taxed) counties. And, any increase in Orange County’s already high tax burden will further reduce its attractiveness as a place to live and work--not just in comparison with San Diego or Riverside counties but also with Phoenix, Tucson and Las Vegas.
So the question that needs to be addressed is, are there realistic alternatives to hiking the sales tax? We can gain some insight by looking at how a business copes with the equivalent bankruptcy situation. When a business files for Chapter 11, it intends to reorganize in order to deal with its creditors and re-emerge as a more viable enterprise. Typically, this will involve selling assets to raise cash to make creditors whole, downsizing to cut overall operating costs, restructuring to make continued functions more cost-effective and increasing revenue sources, though not necessarily by raising prices.
All four of these are applicable to Orange County.
* The county can sell assets to firms that are in the business of owning and operating certain functions as commercial enterprises. Among these are the airport, landfills, correctional facilities and office buildings (most of which can be leased back). There also is surplus land that could be sold. Total proceeds: between $1 billion and $1.5 billion--enough to cover most of the lost funds in the investment pool.
* The county can immediately cut its operating costs by reducing its payroll, as any firm in bankruptcy would do. A 10% reduction in workforce would save $91 million per year and bring the county’s workforce per thousand population in line with that of San Diego County (hardly the Scrooge of county governments). This could be done by cutting excess layers of middle management and eliminating low-priority programs. Another $82 million per year could be saved by reducing the $50,250 average compensation of county employees by 10%. Total annual savings: $173 million, more than the projected annual budget shortfall.
* As a business would do, the county needs to restructure its remaining functions to produce the same output at lower cost. While Orange County has been a pioneer in contracting out services (for example, data processing, landscape maintenance, lifeguards, workers compensation administration), other areas remain untouched by competition. Among these are animal control, fleet maintenance, food services, Civic Center janitorial services, paramedics and fire protection. Many jurisdictions are reaping savings up to 50% by contracting out these services. Projected annual savings: $56 million to $60 million .
* The county also can work to expand its tax base, thereby increasing property-tax revenues. How? By shifting many large untaxed properties and facilities onto the tax rolls. Selling county-owned landfills and buildings and the airport is part of the answer, but so is encouraging water and sanitation districts to sell their $2.5-billion worth of utility operations to investor-owned firms. All told, these transfers would add more than $3.5 billion to the tax base. Annual property-tax revenue increase: $44 million to $50 million.
Several of these measures would require permission from the Legislature or the federal government. But they don’t require a penny of “aid” from other levels of government. The county should press its case for getting the authority to solve its own problems, with its own resources.
The county’s losses are real and irretrievable. The choice: Seek to preserve the status quo by making up the losses with higher taxes, or downsize and redesign county government using the same tools a business would use during bankruptcy. The numbers suggest the latter course is feasible. Voter sentiment suggests it is politically preferable.
