A Tax Hike Isn’t the Only Way to Go : Orange County: The new CEO would boost the sales levy, but there are at least three other ways to handle maturing notes.
Orange County’s new CEO, William Popejoy, has begun to implement his rescue plan to cope with the county’s fiscal crisis, which includes proposals backed by the Reason Foundation: layoffs of 10% of the work force, a first round of asset sales and an initial set of services to be outsourced. But Popejoy has also proposed a half-cent sales tax for 10 years, and last week the Board of Supervisors took the first steps toward placing it on the June 27 ballot.
The rationale for a sales-tax increase is: Orange County has about $1 billion of notes coming due this summer and is $382 million short. Asset sales and cutbacks will take time to implement. So to avoid a default, the county must issue new notes to pay off the old ones, and to do this it needs a dedicated revenue stream to provide debt-service payments over the life of the new notes. A new sales tax, we are told, is the only credible revenue stream available.
The only problem with this argument is that it’s not so. At least three other ways to roll over the short-term notes are available, any one of which could address this timing problem without saddling taxpayers with a new levy.
The first plan was proposed in February by the Creditors Committee. It proposed a $1.5-billion bond issue to be paid off by using a portion of the growth in property tax revenue over the next 20 years. The funds would be channeled through a new “bankruptcy-proof” agency to provide credibility to the financial markets. If the tax base grew by at least 2% per year (growth has averaged 7.4% per year over the past decade), then growth would make up for the lost revenue.
A second plan was proposed by Tom Daxon, acting county treasurer. It also involved a new bond issue, this time paid for by dedicating the county’s existing revenue from the Department of Motor Vehicles to this purpose. To replace lost general fund revenues, Daxon proposed raising fees at the landfills and opening them up to garbage from outside Orange County.
Yet another plan is modeled after what is currently being considered by Essex County, N.J. That financially troubled county (home of Newark) is considering asset sales to raise short-term cash. Essex County, too, faces a timing problem. Getting the best price for a range of assets (skating rink, golf courses, a hospital complex, etc.) takes time--a “fire sale” is not the smart way to do it. Consultants have proposed that the Essex County Improvement Authority buy the properties from the county, issuing revenue bonds against their future operating revenues and sale proceeds. The county gets its cash out quickly, while the authority takes its time redeveloping and marketing the properties.
Alternatives like those proposed by the Creditors Committee, Daxon and Essex County have simply not been given serious consideration in Orange County. Powerful figures in business and government have rushed to judgment, concluding that a tax increase is necessary to restore investor confidence. If that approach is the only one given serious study, when the notes come due this summer that will be the only fully researched alternative on the table.
And that would be tragic for the economic health of this vital portion of the Southland’s economy. Orange County already has the highest per-capita tax burden in Southern California--$2,422 per person, compared with $1,976 in Los Angeles County and just $1,650 in Riverside County. Another tax increase will cause more productive people to leave and encourage businesses to expand else-where.
Pursuing only the sales-tax approach is also risky. Proponents must count on getting a majority vote of the electorate, which is hardly a sure thing. A Field poll recently showed 60% opposition to a “temporary increase in sales tax,” with voters strongly preferring such measures as asset sales. Only when the term of the tax was limited to one or two years (not the 10 that Popejoy has proposed) and the revenues were dedicated to schools or law enforcement was a bare majority obtained. If voters turn down the tax increase on June 27 and no other plan has been prepared, the county will have no other alternative but default.
