County Buys Debt Insurance; Broad Cutbacks Unveiled : Budget: Investors’ service cites ‘severe fiscal pressures’ as it reviews financial rating. Chief administrator’s restructuring plan includes closing County-USC hospital.
As Los Angeles County’s top administrator Monday unveiled a budget proposal full of sweeping cuts, the county turned to a syndicate of Swiss, German and American banks to guarantee repayment of $1.3 billion in short-term borrowing, and a Wall Street credit rating agency placed the county’s long-term debt under review.
The county’s purchase of a bank letter of credit to guarantee this week’s $1.3-billion note offering, while not unusual in municipal finance, marks the first time that Los Angeles County has taken such insurance.
The letter of credit guarantees a top rating for the county’s short-term notes, but the ratings assigned to the county’s $7.9 billion in long-term debt obligations are more closely watched as a barometer of the county’s financial health.
Moody’s Investors Service, a major Wall Street bond rater, said Monday that it has placed the county’s long-term ratings under review pending adoption of a final budget. Moody’s expects to make a rating decision in late July, said Vice President Ken Kurtz in San Francisco.
Fitch Investors Service in New York also said Monday that it would review the county’s debt ratings.
In a report Monday, Moody’s highlighted the “severe fiscal pressures” facing the county. The agency noted that “the county’s decision to rely largely on reserves to offset a shortfall in federal revenue in fiscal 1995 significantly limits its financial flexibility going forward, and raises concerns about officials’ willingness and ability to take timely action in response to new budget pressures.”
Pushing hard for swift action was county Chief Administrative Officer Sally Reed, who released a financial restructuring plan Monday that would close one of the nation’s largest hospitals, County-USC Medical Center, eliminate one of every five county jobs, and make sweeping reductions in a vast array of county services from health and welfare to the courts, parks and libraries.
After four years of spending far beyond its means, Reed said, the county must balance its troubled $11.1-billion budget this year or face insolvency.
“If we act this year, I’m hopeful we can avoid insolvency,” Reed said. “But we have to act this year.”
In the wake of Orange County’s bankruptcy, Reed said the challenge facing the Los Angeles County Board of Supervisors is to immediately bring spending into balance with revenues or risk losing control of the nation’s largest county government to a bankruptcy judge. “That’s the lesson of Orange County,” she said.
But her plan to cut county government by $1.2 billion--and 18,255 jobs--struck a nerve.
About 1,500 people gathered on the main steps of County-USC Medical Center for an afternoon protest organized by the county’s largest employee union. Patients from the hospital, community residents, clergy and health workers held placards, listened to speeches and demanded that the hospital be kept open.
“Hey, hey. Ho, ho. Sally Reed has got to go,” read one placard held aloft by a demonstrator. Another said: “Nurses care. Do you?”
At the Hall of Administration, Board of Supervisors Chairwoman Gloria Molina added her voice to the protest.
“Ms. Reed’s proposal,” she said, “is even more damaging to us than the earthquake was, than the riots were, than the floods were. Eighteen thousand unemployed workers has a devastating effect on the county.”
Reed’s Plan
Reed told a packed news conference that her recommendation to close County-USC was “an extremely agonizing decision,” and she admitted it would have a serious impact on the county’s ability to hold together a fragile network of hospital trauma centers.
“It will have a huge impact on the trauma network,” Reed said. “It will strain the system.”
In blunt terms, Reed said, this year must be the beginning of a new era in county government as federal and state governments cut back on support for health and welfare programs. “I hope we are not too late.”
Reed said the budget proposal, which includes a 20% cut in almost all county departments, will “put reality on the table” as the supervisors consider adoption of a budget for the fiscal year that begins July 1.
The county’s problem has been aggravated by a long and deep economic recession and the state’s taking a portion of the county’s property taxes to ease its own budget woes.
She said the county has been relying on one-time financial moves, borrowing and wishful revenue estimates to mask a growing deficit.
“If we can’t get out of this hole,” she said, “we can’t get out of a bigger hole.”
Beyond its impact on county employees, Reed’s budget proposal would force the closure of 12 to 15 county libraries, 30 parks and six swimming pools.
The Reaction Sets In
Supervisor Mike Antonovich said he expects the board to adopt Reed’s budget today as a “working paper,” and predicted 20% cuts for many departments, but said he would seek to delay any cuts to health, sheriff, coroner and probation services. The board will adopt its final budget later this summer, after the state’s budget is approved.
“We are responding to the fiscal realities,” Antonovich said.
Supervisor Yvonne Brathwaite Burke immediately distanced herself from Reed’s four-volume proposal. “The budget delivered is not the budget that will be passed.” she said. “It is somewhere to start.”
Burke said there will be deep and meaningful cuts. “It is likely that most departments will have to take a 20% reduction,” she said. But she expressed hope that the health system will not take such deep cuts as Reed proposed.
She said she was shocked at the way Reed and Supervisor Zev Yaroslavsky have discussed the potential for bankruptcy if the county does not change its ways. “It is a self-fulfilling prophecy,” Burke said. “If you talk about bankruptcy enough, no one will lend you any money.”
Burke said she told Moody’s to “look at the facts and not just every news report that you hear.”
Yaroslavsky said his colleagues need to take Moody’s decision to review the county’s long-term debt very seriously.
The release of Reed’s budget is only the beginning of the process that will lead to a final budget this summer, Yaroslavsky said.
“Whether you close this or cut that, there remains a fundamental problem,” he said. “The county is spending $1 billion a year more than it is taking in. It cannot continue to do that and remain financially solvent.”
Yaroslavsky, who took office in December on the same day that Orange County filed for bankruptcy, said he would not support a budget that merely helped the county borrow its way out of its immediate crisis.
“We need to turn the corner on the fiscal mismanagement that has characterized county spending,” he said. “This is not about spreadsheets. It is about whether the entire county shuts down next year.”
Yaroslavsky joined Molina and Burke in looking to Sacramento for help in dealing with the county’s budget crisis.
“If the state turns a deaf ear to the county,” Yaroslavsky said, “it is inevitable that there will be massive closures.”
Supervisor Deane Dana was unavailable for comment, but issued a statement through an aide saying: “I have seen no evidence of how we can address a $1.2-billion budget deficit without making major sacrifices. But before we take the drastic action of closing County-USC Medical Center and laying off thousands of county employees, I want to be certain that all reasonable options have been thoroughly examined.”
A spokesman for Sheriff Sherman Block said the county’s top law enforcement officer would not comment on Reed’s proposal for a 5% reduction in his department.
But Dist. Atty. Gil Garcetti reacted strongly to Reed’s proposal for a 20% reduction in his office.
“We can’t take this cut and enforce the [three strikes] law,” said Suzanne Childs, a spokeswoman for Garcetti. The law requires stiff sentences for defendants with two prior convictions for violent or serious felonies.
The Wall Street Factor
The county’s purchase of a bank letter of credit to guarantee its $1.3-billion note offering is the kind of move municipalities generally make when it becomes apparent that jittery investors would demand a significantly higher yield to finance the debt uninsured.
In the wake of Orange County’s bankruptcy, and its threat to renege on some of its short-term debt, many California municipalities have been compelled to buy insurance on notes they are issuing this month against next year’s tax revenues.
Last week, for example, San Bernardino County sold $250 million in one-year notes with a tax-free yield to investors of 3.95%. Like Los Angeles County, San Bernardino guaranteed the notes with a bank letter of credit.
The cost of such insurance is relatively small--usually between 0.1% and 0.2% of the amount of the debt--but nonetheless constitutes an extra expense for the issuer and thus taxpayers.
With the letter of credit, Los Angeles County is expected to pay a yield of about 4% on its one-year notes, which will be sold on Wednesday. Bank of America, which is handling the sale of the notes, was said to be hoping for a yield of 3.9%.
But many giant mutual fund companies, outraged by what they view as Orange County’s arrogant treatment of its creditors, have been trying to drive up yields on other California counties’ note offerings this spring--an attempt to show that there is a statewide price to pay for Orange County’s behavior.
“I think 4% on L.A. County’s notes would be fair,” said one fund manager who asked not to be identified. Given that San Bernardino County paid 3.95%, a 4% yield would send a message that Los Angeles County--for all its resources--is less trustworthy a credit than its smaller neighbor.
Many big investors said any thought that Los Angeles County could issue its notes uninsured went out the window when it became clear that major bond-rating agencies are contemplating another downgrade of the county’s long-term credit worthiness.
Moody’s has downgraded Los Angeles County’s long-term debt twice in the last two years. The county’s general obligation bonds, for example, were downgraded from Aa1 to Aa in January, 1993, and then to A1 in September, 1994.
An A1 rating is still considered “upper medium grade” in credit quality, but is several notches below highest quality. Each downgrade increases the likelihood that the county will have to pay higher interest rates on future debt sold.
The only bright note in the Moody’s report was the agency’s commendation of Los Angeles County’s handling of its investment practices in the $7-billion pool it manages for its own funds and those of other county municipalities.
Contrary to the risky investment strategies that forced Orange County into bankruptcy, Los Angeles County’s investment practices “do not pose investment or liquidity risk and are not a credit concern,” Moody’s said. It said most of the money is invested in very short-term U.S. Treasury securities or bank certificates.
Los Angeles County Treasurer Larry J. Monteilh said Orange County’s bankruptcy had “negatively” affected Los Angeles County’s borrowing.
He said the bankruptcy has made it more difficult for local governments across California to borrow against future property tax receipts.
Monteilh said he believes Moody’s action is reasonable and not surprising considering the magnitude of the budget problem the supervisors must wrestle with. “They said you have a tough problem ahead, and we want to see how you handle it,” he said.
Times staff writers Frederick M. Muir, Richard Simon and John M. Glionna contributed to this story.
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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Facing the Ax
An $11.1-billion Los Angeles County budget that proposes to, close County-USC Medical Center and eliminate more than 18,000 jobs was presented Monday to the Board of Supervisors. Among the proposed cuts:
HEALTH
* County-USC Medical Center, the county’s busiest hospital, would be closed, along with Mid-Valley, Hudson, Humphrey and Long Beach comprehensive health centers and 25 neighborhood health centers: Alhambra, Asuza, Bellflower, Canoga Park, Dollarhide (Compton), Hawaiian Gardens, Lawndale, Northeast, Paramount, San Fernando, Torrance, Venice, Wilmington, Avalon, Bell Gardens, Burbank, Dr. Ruth Temple (South Los Angeles), Florence/Firestone, Imperial Heights (South Los Angeles), Monrovia, Pacoima, Pico Rivera, South (South Los Angeles), Tujunga and Whittier. Two comprehensive health centers and 14 community clinics would remain open. Total cut: $655 million.
LIBRARIES
* Of 87 county libraries, 12 to 15 would be closed. Specific sites have yet to be identified. Service would be reduced elsewhere, in many cases from five days a week to three days. Spending on new books and materials would be slashed 65%, leaving just $4 million for purchases.
SHERIFF
* Sheriff’s officials would have to deal with a $65-million cut. The closing of the Biscailuz Center and the ranch facility at the Peter J. Pitchess Honor Rancho have saved an additional $28 million.
COURTS
* Municipal and Superior court budgets would be cut 20%. Twenty-three of 67 courts staffed by commissioners and 25% of the Municipal Court’s administrative staff would be cut. Also, 20 of 60 commissioners and six judges assigned to hear civil matters in the Superior Court would be cut.
WELFARE
* 2,300 layoffs would reduce the department’s staff to 7,600. No offices would be closed altogether, but all would be closed to the public one day a week. Officials say they anticipate an 18-week wait for appointments to apply for aid.
PARKS
* A $7-million reduction would close 30 parks, including six swimming pools; locations have yet to be identified. Forty-seven county parks, including 25 swimming pools, would stay open with fewer services. The department would lose about 168 of 874 jobs.
Source: Proposed budget, county departments
Compiled by Times staff writers Richard Simon and Frederick M. Muir
