NEWS ANALYSIS : County Budget Finally Forced to Face Reality : Spending: Demand for services has long outpaced revenues. Previous stopgap measures no longer apply.

It’s a big, powerful and complex piece of machinery.

But when you look under the hood of Los Angeles County, you find an engine held together with baling wire and bubble gum.

The now-sputtering contraption known as the county budget has long been a miracle of accounting gimmickry, a collection of thousands of programs largely funded by other levels of government and presently facing the political equivalent of a product recall.

After nearly two decades in which demands for services have increasingly outstripped resources, county bureaucrats are finally acknowledging that they can no longer keep it all going with worn and, increasingly, borrowed parts.

This is the year, most players at the Hall of Administration agree, that the long-awaited restructuring of the nation’s largest county government must begin.

And many say that acknowledgment has come not a moment too soon.

County borrowings have skyrocketed in the past decade. The Board of Supervisors has at times used long-term debt to solve short-term budget problems, a strategy that has proven dangerous in other jurisdictions. Two years ago, in one of its more aggressive and controversial moves, the supervisors authorized mortgaging one of the county’s most valuable real estate assets--Marina del Rey.

Meanwhile, increasingly risky bets on financing schemes finally took a bad turn. The board wagered that the federal and state governments would come through with more than $600 million in additional health care financing to enable the county to balance its 1994-95 budget. It was a bad bet. And the county deficit swelled.

The budget mechanics have now largely run out of those quick fixes. The supervisors cannot afford to borrow much more, and, given the current cost-paring climate, they cannot count on a check from Washington or Sacramento.

Supervisors face a projected $1.2-billion budget deficit--the largest in county history--and the prospect of eliminating more than 18,000 jobs and closing County-USC Medical Center, along with dozens of clinics, parks and libraries. The county, which also is responsible for services ranging from restaurant inspections to checking the accuracy of gasoline pumps and supermarket scales to monitoring for an invasion of killer bees, is weighing cutbacks that could affect virtually every resident.

“The county has balanced its budget by borrowing against future revenues in order to pay today’s bills,” said the county’s newest supervisor, Zev Yaroslavsky, who was sworn in the same day that Orange County filed for bankruptcy.

As county supervisors struggle to adopt a budget this summer, it seems clear that this year’s deliberations, which started last week, will be dramatically different from those in years gone by.

The Orange County bankruptcy, the biggest of its kind in the nation’s history, has changed the financial and political landscape for all California governments. And in Los Angeles County, two relatively new players--Yaroslavsky, formerly the budget expert of City Hall, and Chief Administrative Officer Sally Reed, who earned her tightfisted reputation as the top executive in Santa Clara County--are forcing the county’s financial practices into the open.

They are now questioning the supervisors’ status quo approach at a time when others in government and private industry were retrenching in the midst of a stubborn recession.

Despite five years of crisis budgeting, the size of the county work force has remained almost unchanged and county employees received pay raises when their counterparts in state government did not. The city of Los Angeles, by contrast, has frozen hiring, wages and reduced its non-public safety work force by more than 27%.

Reed said the county’s sleight-of-hand budget actions have masked its real financial troubles.

“Often described as miracles, these techniques have merely been methods of delaying the inevitable reconciliation between the cost of services and available resources,” she said. “Each year, the county is unavoidably faced with a larger problem than it had the year before. . . . With each successive budget miracle, the credibility of the county is damaged.”

Supervisors and other county officials say their intention was to provide the greatest level of service possible, given the extraordinary financial circumstances: shrinking revenues and growing demand for services. They were always hopeful of an economic rebound and state and federal bailouts that never materialized. And along the way, they have made some cuts, such as closing down libraries and laying off workers in the assessor’s office.

Richard B. Dixon, who served as the county’s chief administrative officer from 1987 to 1992, defended the stopgap measures taken during his tenure, citing a conversation he had with a single working mother:

“I keep telling her, ‘You’ve got to save money for the kids’ education.’ She says to me, ‘I’m spending money to feed the kids. If I don’t feed them, they won’t be around for a college education.’ ”

That is an apt analogy for the county’s own approach, Dixon said in an interview. “As a matter of public policy,” he said, “I didn’t think the board was ready to say to somebody ‘We’re going to deprive you of these services.’ ”

The county’s budget woes are only partially of its own making. The state and federal governments, as well as voters, also shoulder blame.

The tax-slashing Proposition 13 in 1978 eliminated the county’s only meaningful taxing authority. State and federal funds for mandated programs persistently shrank over the next decade as the anti-tax movement grew. Immigration--legal and illegal--soared.

A deep and prolonged recession gripped California in 1991, drying up sales and property tax revenues and driving a record number of Los Angeles residents into county-run health and welfare programs.

In the last 5 1/2 years, the number of residents on public assistance has doubled--from one in 10 to one in five.

“The county gets a double whammy when the economy goes south,” said one county official, referring to the lower property and sales tax revenues and higher health and welfare caseloads.

Desperate to balance their own budget, state officials raided the county treasury in 1993, shifting more than $1 billion in property tax revenues away from the county and into the state government’s own coffers.

And beginning with the new fiscal year, a federal program that provided more than $100 million a year for five years to provide health care for illegal immigrants who were granted amnesty in 1986 comes to an end.

Supervisor Mike Antonovich, a 15-year veteran of the board, said the county’s financial troubles are the result of federal government’s failure to control the borders and, along with state, failing to provide full funding for mandates.

“If the state had not confiscated the $1 billion in tax revenues, we wouldn’t have the crisis that we have today,” he said. Antonovich contended that the supervisors have promoted efficiencies by contracting with private companies to provide services.

“We’re not going to go into debt any longer,” he said. “The debt only increases costs to taxpayers and sends a false message to the citizens that everything is well.”

That message is not new.

As long ago as 1988, then-county Supervisor Pete Schabarum cautioned his colleagues that they were taking a “slapdash Band-Aid approach” to balance the budget.

County Assessor Kenneth Hahn warned of financial danger early in 1991, his first year in office.

Even though Hahn reported a record property tax assessment roll for that fiscal year, he warned that “any expectation of similar gains in the future should be tempered.”

The next year, the roll expanded, but at significantly reduced pace. In fiscal 1993-94, he reported the slowest rate increases in 20 years, what Hahn called “a harsh jolt of economic reality.” The next year, showing the combined effects of riot, flood, fire and earthquake, the property tax assessment roll was even worse.

As revenues shrank and demands on county programs grew, the Board of Supervisors chose to maintain services at virtually any cost and their record shows wishful thinking often won out over hard financial analysis.

In 1990, supervisors deferred closing mental health clinics in hopes that voters would approve a ballot measure to increase alcoholic beverage taxes. They didn’t, and in a scramble to raise the money already budgeted, the supervisors exercised their limited taxing authority--imposing a utility tax in unincorporated areas.

And last year, under heavy pressure from the board to come up with a fix for a projected $1-billion deficit, county officials concocted a plan to squeeze an additional $650 million out of a federal health program. Only a fraction of the federal money was ever collected.

In recent years, the supervisors also began employing some unusual financing schemes to beef up income and delay expenses--even if it meant making the upcoming year’s budget prospects all the more difficult:

* Rather than lay off employees, the county adopted an early retirement program in 1992-93, which gave certain employees cash payments over a five-year period. The total cost was more than $100 million, spread over the five years.

* During 1992-93, the county delayed payment of $17 million in salary increases until 1994-95.

* In 1993-94, the county pushed its expenses even further into the future, deferring $140 million in overtime pay and salary increases until 1994-95 and 1995-96.

* In the 1992-93 fiscal year, the supervisors mortgaged Marina del Rey in order to finance the county’s operating expenses. It sold $189 million in notes secured by its income from the marina. In effect, the county exchanged future income for a one-time cash infusion needed to balance that year’s budget--even though the deal cost $105 million, most of that interest. It is a financial gambit similar to those employed by New York City prior to its near-collapse in 1975.

* Similarly, in 1994, the county sold $1.9 billion in bonds, one of the largest municipal financing deals of its kind, to pay off a debt to its own pension fund. As part of the deal, the administrators of the pension fund agreed to release about $150 million back to the county, which it desperately needed to bring the budget into balance.

County officials defend those moves as necessary to provide critical services. Referring to the pension fund deal, one county manager said: “That was good financial management. That wasn’t gimmickry. It was what every homeowner in town did last year.” The manager contended that the county lost millions of dollars by not refinancing sooner when interest rates started going down.

Supervisors also made some costly operational decisions.

While much of the nation was mired in recession, and employers both private and public were cutting back, the county gave its work force frequent pay hikes and fringe benefits.

Over the five years starting in fiscal 1989-90, most county employee groups received a series of wage increases, ranging from a low of 7.25% to more than 30%, with most receiving increases in the 13% to 25% range. While critical groups such as sheriff’s deputies and nurses received some of the largest increases, other groups also shared in the county’s largess. Lifeguards received a 24% wage hike, social workers 25% and custodians 15%.

In contrast, state employees received a 4% pay raise in 1990 and 5% in 1991, but went without pay raises in 1992 and 1993 before receiving 5% last year. And in 1992, state workers agreed to forfeit one day’s pay per month for 18 months in return for receiving the amount back later in cash or vacation.

In 1991, in a controversial move that eventually led to the forced resignation of former CAO Dixon, the supervisors quietly gave themselves and other senior managers a 19% boost in pension benefits. Under the extraordinary arrangement, the high-ranking officials could earn more in retirement than in their salary while working.

Under pressure, the board extended similar, but lower, benefits to all other county workers. The bill for the extraordinary county pension plan totaled more than $500 million.

Perhaps even more costly was the toll on the county’s reputation. State officials, already skeptical of the county’s perennial pleas for money, turned a deaf ear to the county’s pleading for more resources after disclosure of the pension scheme.

Other moves by the Board of Supervisors to keep up the flow of services to constituents sometimes seemed to defy logic.

In 1992, the supervisors sought and won voter approval for a property tax levy to fund new park construction, even though it clearly had no money to staff them. Under this year’s proposed budget, the county would close 30 parks.

When interim county CAO Harry Hufford recommended in 1993 that scores of the county’s 99 commissions could be eliminated, and several million dollars saved, the Board of Supervisors refused to disband any, despite evidence that many were ineffective, obsolete or redundant.

The board’s unwillingness to deal with economic realities hit a new low in 1994, when Reed asked supervisors to approve a package of conservative budget principles that would have required them to establish prudent reserves, spend only money that was in hand and not defer expenses into succeeding budget years. The board approved the package, but only after it was agreed that they would not be held to the principles for several years.

This year will likely be a turning point for the county.

The county’s debt level--$7.9 billion, with annual payments of $381 million (up from $175 million in 1989-90)--is enormous in absolute terms, although it is considered within the realm of average for a government entity of its size.

Still, to increase its debt much more would likely cost it its current high bond rating.

The new attitude at the county is partly due to the difference in styles between Reed--known around the county Hall of Administration as “Cash and Carry Sally”--and her predecessors.

Dixon was famous for his creative financing schemes and magician-like abilities to pull money out of a hat on the eve of pending budget disaster. He believed in running the county like a private corporation--rewarding managers with hefty bonuses and allowing departments to keep budget savings rather than return them to the general fund.

And sometimes Dixon wonders whether the county took the right steps as soon as it should have. “I have from time to time asked myself the question: Did we in the early years after Prop. 13 do the right thing to make the system work rather than bringing it to a boil and saying to the people, ‘You voted for it, is this the level of government services you really want?’ ”