Wall Street Puts L.A. County on Warning

A high-level delegation of Los Angeles County officials who went to Wall Street this week seeking to borrow $1.3 billion returned Wednesday with a stern message: The nation’s largest county government must get its financial house in order or face the consequences.

The intense scrutiny from Wall Street credit rating agencies comes in the aftermath of Orange County’s bankruptcy last year and as Los Angeles County faces its grimmest budget outlook in memory.

As the delegation was flying back from New York on Wednesday morning, the Board of Supervisors was considering an array of urgent steps, including possible tax increases, one-time financing schemes and sale of county assets to close a $1.2-billion deficit in the county budget for the coming fiscal year.

County Chief Administrative Officer Sally Reed on Monday is to unveil her proposed financial plan, which would balance the budget by drastic cuts in county services, particularly in health services, and a reduction in county employees.

“I’m sure there will be some health facilities that will be closed,” Reed said. “A substantial number of facilities.”

The officials went to New York seeking a rating on $1.3 billion in short-term borrowing against next year’s property tax receipts, said Los Angeles County Treasurer Larry J. Monteilh, who was part of the delegation.

Monteilh said the county for the first time in his memory may use a letter of credit to insure the short-term borrowing--a move that could give investors greater confidence in the tax revenue anticipation notes.

In the past, the county’s short-term notes have received the highest possible safety ratings. Officials at Moody’s Investors Service and Standard & Poor’s Corp. would not speculate Wednesday on how the new notes will be rated.

“We are still in the rating process,” said an S&P; official in San Francisco.

Privately, rating agency officials concede that the size of the county’s estimated budget deficit is enormous, and say they would closely scrutinize the county’s budget even if Orange County’s bankruptcy had never happened.

“The [deficit] number is big. That is the issue, obviously,” one rating-agency analyst said.

The county has asked for a rating on the notes by Monday. Both Moody’s and S&P; said they have agreed to try to meet that deadline.

It was clear that the rating agencies want to see the county’s budget balanced.

“This was a tough trip,” Monteilh said. “Obviously, we did not go back there with a budget that has good news. We’re going back there with a very tough year . . . and a budget that calls for restructuring. There are tough cards to deal with here.”

He said Wall Street rating agencies expressed surprise at the magnitude of proposed cuts in health services.

The county, like many municipalities, borrows each spring against expected tax revenues due in the coming year. Such note offerings are cash-management tools--not remedies for specific budget problems.

Municipal bond analysts say there is little doubt that the county will be able to sell its $1.3 billion in one-year notes next week. The only question is the interest rate that investors will demand to hold the debt.

That rate will be affected by the quality ratings ascribed to the county’s debt by the major credit rating agencies, including Moody’s and S&P.;

One strategy that the county has undertaken to promote the sale of the $1.3 billion in notes is to instruct its Wall Street underwriters to market them aggressively to wealthy individual investors.

With market interest rates on other notes and bonds having plunged this year, the county apparently hopes that yield-hungry individuals will flock to one-year, tax-exempt securities from a major American municipality.

“We are pushing them very heavily” to individual investors, one New York bond dealer said.

At the same time, large institutional investors that have become wary of California municipal debt because of Orange County’s debacle may have little choice but to buy Los Angeles County notes, even if they are worried about the county’s financial health.

Because the state of California is not borrowing in the note market this spring, and because billions of dollars in notes issued a year ago now are maturing, tax-exempt mutual funds and other institutional investors need new securities for their portfolios.

With a letter of credit as a guarantee, institutional investors would be expected to be satisfied with the notes’ safety despite the county’s grim fiscal outlook.

The Board of Supervisors, struggling to close the $1.2-billion deficit, on Wednesday began considering a variety of measures, ranging from a program to pursue drivers with unpaid traffic tickets to a proposal to give county employees a shorter workweek--complete with a corresponding cut in pay.

County officials estimate that those and other measures under serious consideration could bring in $195 million, an admittedly minuscule amount of the county’s $14-billion-plus budget but important in avoiding potentially devastating cuts in services.

Also under consideration is a plan to seek legislation to impose a “tipplers tax” of up to 25 cents on each alcoholic drink sold in the county.

Altogether, the county is also seeking taxing authority from the state Legislature that could produce nearly $400 million more in revenue.

But the board’s tentative steps toward plugging the budget in a patchwork manner immediately set it at odds with Reed, who has repeatedly voiced her opposition to one-time financial fixes and borrowing against future revenues.

Reed reiterated her misgivings after Wednesday’s meeting.

“Clearly a lot of the discussion today goes in a different direction than my policy of balancing the budget,” Reed said. “I don’t think borrowing future revenues is the way to do business. The problem is you’re going to need them next year.”

Arguing that the county can no longer afford to spend money that it doesn’t have, Reed is instead recommending massive cuts in county services to close the gaping budget hole.

More than $650 million of that hole is in county health services, and she is recommending closing at least one hospital and a number of clinics. She also is recommending a retrenchment in medical and some public health services.

But other county departments face an equally grim outlook. Reed is recommending across-the-board 20% cutbacks in each department except the sheriff’s. All in all, county officials estimate that the cuts could result in thousands of county workers losing their jobs.

In a series of pre-budget meetings over the last few weeks, however, the board has signaled that it intends to stave off as many cuts as possible.

That intention was made clear Wednesday, as the board set in motion the preliminary steps to increase budget savings through a series of measures, including:

* Prepaying contributions into the county’s retirement fund at a discount. This would produce an estimated $7 million in savings in the 1995-96 fiscal year.

* Implementing a utility tax on water and cable TV bills, which would bring in about $4.7 million in revenue.

* Expanding the business license tax, with estimated revenue proceeds of $7.3 million.

The board also is looking to sell or lease county-owned property and will work with Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County, to evaluate revenue potential.

Board Chairwoman Gloria Molina, who has led the discussion of pursuing revenue options, defended the board against charges that it is seeking to use one-time financial schemes to avoid tough decisions that could potentially vastly reduce the scope of county government.

“It is hard for me to understand why we have to operate under the cloud of slashing everything in sight,” Molina said. “I am not saying that some departments are not facing serious cuts or that the county doesn’t face serious problems. But there are also consequences to the cuts, and we need to look at that as well.”