L.A. Gives State a Loan for Quake Recovery : Finance: Critics say borrowing HUD funds from city will help Wilson make budget appear better than it is. Official calls the deal resourceful.

In a move critics are denouncing as a smoke-and-mirrors budget maneuver, the state is borrowing $125 million in federal housing money from the city of Los Angeles, saying the state lacks the funds to finance its share of Northridge earthquake recovery costs.

The three-year loan of money from U.S. Housing and Urban Development Department block grants marks the first--and possibly the only--time that municipal and state officials have entered into such an arrangement in California, authorities said.

The deal has sparked questions about the diversion of housing funds in a region where the Jan. 17, 1994, quake only worsened the supply of affordable dwellings.

It also renews criticism of the Wilson Administration for refusing to dip into the state’s existing resources to pay California’s portion of the rebuilding costs. By borrowing to cover expenses, critics say, Gov. Pete Wilson is making the state budget appear more robust than it actually is, enhancing his chances for a politically beneficial tax cut.

State budget officials, however, say that the Administration’s short-term use of Los Angeles housing funds is not expected to delay any city projects and that nailing down the deal reflects the state’s resourcefulness.

“We tried to be as creative as we could, given the fiscal constraints we had,” said Stan Stancell, chief deputy director of finance. “We tried to meet our obligation in the least onerous way.”

H.D. Palmer, assistant state finance director, said, “It certainly isn’t being done for the purposes of making a ledger look better.”

The agreement with the city comes on top of a $175-million loan that California secured from the Federal Emergency Management Agency. Combined, the state is borrowing $300 million in federal funds to use for payment of the 10% share it owes as matching funds for federal disaster aid. The dollars will go toward paying the state’s portion of bills for everything from demolition to hospital repairs to street and public building reconstruction.

Using federal money to fulfill Washington’s requirements for matching funds is sparking skepticism from the governor’s Democratic detractors.

“This is being used to let Wilson off the hook because Wilson couldn’t come up with any cash,” said Assemblyman Richard Katz (D-Sylmar). “This is a good example of using smoke and mirrors to balance the budget.”

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City officials say housing projects won’t actually be affected much by the deal. They note that a large portion of the money is still earmarked for housing and that, within three years, the state will replenish the funds anyway.

“Why did we agree to it?” said Matt Callahan, the city Housing Department’s director for administrative services. “Because we all agree that in this recovery process, housing was a priority, but that doesn’t mean there weren’t other interests that had to be balanced against it.

“There were economic development considerations, public services issues, public facilities and more,” he said. In waiving the policy issues to approve the loan, Callahan said, “the city made a good choice and balanced its needs, every step of the way.”

The loan agreement entitles California to two pots of city HUD funds--$40 million in supplemental earthquake recovery money and $85 million in regular community development block grant funds.

According to the loan document, the larger sum will be used to meet the state’s obligation for demolition and debris removal; repair of municipal buildings such as fire, police and power stations; repair of recreation centers and cultural centers such as City Hall; reconstruction of County-USC and Olive View hospitals and the Los Angeles Memorial Coliseum, and more.

Of the smaller amount, $7.7 million will be used to cover the state’s cost for security measures and demolition in the San Fernando Valley’s “ghost towns” of damaged and abandoned apartment or condo units. About $24 million will go toward repair of city streets, sewers, bridges, street lights and municipal buildings. And the remainder is pegged for public services, including a $3.6 million reimbursement for the city’s waiver of building fees on earthquake damaged structures.

Jan Breidenbach of the Southern California Assn. of Non-Profit Housing said city officials should not lose sight of the fact that federal housing dollars were originally meant to put roofs over people’s heads.

Breidenbach has been critical of the Wilson Administration since it shelved a state-funded housing assistance program after California voters defeated a bond financing measure on the June, 1994, ballot. State leaders said they simply could not afford the program, even though Northern Californians benefited from it after the 1989 Loma Prieta quake.

“There’s a serious longtime public policy issue when the state of California refuses as a state to pay for disaster relief,” she said. “The state of California has yet to pay for any housing destroyed in the earthquake.”

Mayor Richard Riordan’s press secretary, Jane Galbraith, said it was in the city’s interest to sign off on the loan. “We were in jeopardy of losing federal funds if the state didn’t come up with the match, so L.A. came to the aid of the state,” she said. “We were looking more at the broader picture, versus any kind of deal-making.”

Likewise, City Councilman Hal Bernson, who represents hard-hit Valley neighborhoods, said the risks of a loan are worth it because the city may have suffered had the state not come up with the resources to cover the last phases of recovery projects.

“There is a very definite need for us to be able to restore our public facilities,” Bernson said. “We still have a tremendous amount of recovery to do even though the earthquake is a year and a half behind us.”

Jim Miller, a Finance Department analyst, said the state plans to begin withdrawals from the loan’s line of credit in July or August. Up to $100 million is available the first year, he said.

Although the city is prohibited from profiting off the deal and cannot charge interest, California is obliged to pay up to 6.7% interest to Washington for the $175 million loan, Miller said.

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State budget watchdogs warn that such borrowing has the effect of letting the bills pile up so as not to draw the bank balance down. The practice can result in a false sense of financial security.

Others note that it serves Wilson well to make the budget appear as plump as possible, increasing his prospects for getting a tax cut passed. The tax cut is viewed as a cornerstone of Wilson’s nascent presidential bid.

“I think the main point about it is that by adopting this strategy, it pushes the state’s obligations into the future and it makes our operating budget look better than it is,” said legislative analyst Elizabeth Hill.

State Sen. Tom Hayden (D-Santa Monica), a frequent critic of the state’s borrowing, agreed.

“I think that it’s a further step toward sleight-of-hand financing,” he said. “We turned our back on earthquake problems in the wake of Northridge from the point of view of financing. We’ve just been stumbling around since Northridge, putting off the day of reckoning.”

Stancell said the state did not have enough extra money in the general fund to avoid borrowing after voters turned down the bond financing backed by the governor.

“Under an ideal situation, the legislative analyst is correct. You do pay as you go,” he said. “But we did not have the capacity or the capability and they did not, in their analysis, suggest where we would have to cut programs to get it.”

Galbraith dismissed suggestions that this might have been a sweetheart deal between the GOP governor and mayor.

“We did this much more for the greater good of the state,” she said.