Reckoning Day : L.A. County Feeling New Pressure to Fix Budget After O.C. Bankruptcy

Is bankruptcy catching? The Orange County debacle has hit Los Angeles County indirectly by spurring Moody’s and Standard & Poor’s, the municipal bond ratings agencies, to demand a clear, firm and immediate solution to Los Angeles’ own budget crisis.

“The situation is grim, no question about that,” says County Supervisor Zev Yaroslavsky, new this year to the governing board. “It’s part of the larger problem of changing relationships between local, state and federal governments.”

The numbers are staggering. The county has a $600-million-plus deficit looming in its budget for the current fiscal year, which ends June 30. For fiscal 1996, the projected gap could be as high as $1.3 billion.

The day of reckoning could come distressingly soon as the county tries to sell $1 billion in tax revenue anticipation notes this June. The ratings agencies, which have always been tolerant of small shortfalls in the county’s massive budget--$14.2 billion in the current year--have changed their tune in the wake of Orange County.

“It’s very simple; they (L.A. County officials) should cut expenditures and show us a budget that will be in balance,” says a Moody’s official.

But cutting expenditures on the scale demanded will be outrageously difficult because the Board of Supervisors has authority over only $2.7 billion of the county’s total budget, with the rest accounted for by the state and federal governments. For example, Washington and Sacramento fund about 75% of the county’s expenditures for health and welfare--although they also mandate how much local government has to put up in matching funds.

The county’s five elected supervisors have some discretion over financing for the Sheriff’s Department, county courts and health services, including County-USC Medical Center, which is still waiting for federal earthquake repair money. In all, 19% of the total budget is subject to local discretion.

So cuts big enough to make a dent would be difficult in the best of times, but particularly so in the present atmosphere in which Washington is bent on returning responsibilities to local government and the state government is bent on cutting taxes to help the governor run for President.

“While brave and painful decisions might be made at the federal and state level,” says Sally Reed, the county’s chief administrative officer, “looking people in the eye and saying ‘No’ will happen at the county level. Smaller government translates to fewer services.”

To close the budget gap in the current fiscal year, 2,127 jobs were eliminated out of the county’s total employment of 84,373. To cut expenditures in next year’s budget, which is being prepared now, the supervisors will have to look at the courts.

“It costs $500,000 a year to run a court,” Reed says. To cut costs, electronic recorders rather than court reporters may have to be used and caseloads may have to be reduced, she says.

“Get the most important cases into court and encourage people to seek arbitration and other solutions,” Reed says.

Why are these troubles arising now? Partly it’s due to a government snafu. The county anticipated $640 million in federal payments for administering the Medi-Cal program. But the Feds are refusing to pay on a technicality about categories and forms. “Whether the Feds reneged or the county made a misjudgment, the result is a serious problem,” says David Abel, editor of Metro Investment Report, a newsletter on public investment in Southern California.

The county is vulnerable because past borrowing against its pension funds and using reserves to roll over deficits from one year to the next have left its budget weakened. Such practices used to be acceptable, but not since Orange County’s collapse, which embarrassed Moody’s and S&P; because they didn’t foresee it.

“Ratings agencies that used to say ‘I’ll take your word for it’ are looking much more closely at budgets,” says John Fitzgerald of Seidler Fitzgerald Securities, a Los Angeles municipal underwriting firm.

Orange County officials, who were scheduled to vote Tuesday on whether to authorize a June ballot measure to increase sales taxes, have put the heat on borrowers everywhere by their reluctant and dilatory approach to the bankruptcy. “They’ve shown all the backbone of a chocolate eclair,” says Joe Mysak, editor of Grant’s Municipal Bond Observer, a newsletter that reflects financial market opinion.

So what will happen? Short-term, Los Angeles County’s tax revenue notes, which anticipate next December’s property tax receipts, will sell in June. Orange County may have more options for raising cash--from privatizing trash collection to diverting transit funds--but Los Angeles has the highest rating for short-term borrowings because its treasurer, Larry Monteilh--unlike his former counterpart, Robert L. Citron--has always invested county funds conservatively.

The 1995-96 budget will look better because the county will get enough Medi-Cal money from the federal government, Reed estimates, to reduce the amount to be cut to $500 million.

But then “there’s no way to avoid very deep cuts,” says Yaroslavsky, a former City Council member who believes budgeting traditions have to change.

He questions, for example, the county’s annual use of tax anticipation notes to provide cash flow and ease government operations. “They cost interest, don’t they--$40 million for this year’s issue?” asks Yaroslavsky. “That would pay for a lot of neonatal incubators or sheriff’s deputies.”

His point is that the world has changed for cities and counties as federal and state governments give them more responsibility and municipal debt markets impose stricter requirements on financing.

That’s why we’re likely to see new approaches to financing and delivering local services, with many of them tested under forced march conditions in America’s largest county, Los Angeles.

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The County’s Dilemma

Los Angeles County is facing a $600-million deficit in its $14-billion annual budget. The County Boad of Supervisors had discretion over only about $2.7 billion of the budget figure; the rest comes from state and federal sources. The breakdown for the 1994-95 fiscal year, which ends June 30:

Total L.A. County Budget *

INCOME

State aid: 33%

*Other: 32%

Federal aid: 23%

Property taxes: 12% Note: *Other (Income) includes sheriff’s encome from contract police services to cities fines and forfeitures, and interest earnings.

*

SPENDING

Health: 32%

Social services: 28%

Justice: 17%

Special funds: 17%

**Other: 6%

Note: “Special funds” (Spending) includes monies earmarked for flood control, roads, libraries and fire districts.

*

What the Supervisors Control (in millions of dollars) Public safety (sheriff, district attorney’s, etc.) $1,208.6 Courts and justice: $339.7 Health and mental health* $453.9 Social services* $466.9 General government (includes parks, beaches) $246.2

Total: $2,715.3 * Includes money needed to match state and federal funds Source: County of Los Angeles 1994-95 budget.