TAXES : Voters to Orange County Government: Drop Dead

On the eve of the vote on Measure R, the half-cent sales tax hike intended to smooth Orange County’s emergence from bankruptcy, the chief executive officer of Fluor Corp., a major county employer, urged voters to honor their county’s obligations to repay billions in debt by approving the new levy--or he would move his company elsewhere. It didn’t work.

In what must rank as the largest case of voter denial and abdication of responsibility in California history, a sizable majority said the county’s fiscal mess wasn’t their fault, so why should they pay--even a mere $50 annually per person. Were the crisis an earthquake or a nuclear-plant meltdown, instead of a financial disaster, would a majority of Orange County residents refuse to help in cleanup efforts because they didn’t cause it? Hard to imagine--until Tuesday’s election.

If the voters were sending a message--”We’re mad as hell and aren’t going to take it anymore!”--they picked a strange way of communicating it. Angry at the Orange County Board of Supervisors? Maybe so, but two were replaced just before the county declared bankruptcy, and the remaining three can be voted out in the next election.

Did they want to punish the officials most responsible for the risky investment practices that bankrupted the county? No problem. They are already gone and face criminal prosecution.

Did they want to get even with the investment bankers who lured the county into making the investments? Cheer the county on in suing and prosecuting them.

But why shoot themselves in the foot? Orange County is not some amorphous “them”--it is the schools their children attend, the police and fire departments that protect their neighborhoods and the myriad other agencies that build roads, feed the homeless, maintain the parks and keep water flowing from the taps. Even taking into account Orange County’s long history of anti-government sentiment, is “the county” the enemy?

Once upon a time, the answer would have been an emphatic “no,” but much has changed in the relationship between the citizenry and local government since Proposition 13 passed. Public revenues and budgets have steadily declined, but not demand for the facilities and services they buy. Having exhausted a dizzying array of relatively respectable financial ploys to keep the system going, local finance officials have increasingly turned to speculation to close their budget gaps. Eventually, it caught up with them.

There is yet another factor at work. With the standard property tax a diminishing element in the financing of local government, and with all sorts of special taxes and assessments applied to smaller areas or allocated to special purposes replacing it, there has been a virtual evaporation of a sense of community--at least on a countywide scale. As a result, voters feel little commonality of purpose or interest.

The county had a last-minute wake-up call. A bond issue sold shortly before the election attracted investors after the county offered a premium interest rate and insured its principal. By contrast, an issue marketed the morning of Election Day, with polls showing Measure R destined for defeat and voters apathetic about default, encountered a virtual boycott by the investment community, even with an interest premium five times as high as the previous one. The prevailing view is that the county will have to pay at least half a billion dollars in increased interest alone over the coming decade to attract investor interest for its paper. And the rest of the state can expect to be tarred with the same brush.

Still, the short-term ramifications of Measure R’s defeat are uncertain. If events unfold naturally, the county will default on $1.1 billion in bond debt later this summer, its debt ratings will plummet, and the operations of its local agencies will be hamstrung by the revenue shortfall. Perhaps the public officials and business and community leaders who spearheaded support for the tax measure because they foresaw no alternative will find measures to avoid this calamity.

And just as occurred in the years following passage of Prop 13, such stop-gaps can delay and cushion the impact of the continuing financial shortfall. By borrowing at increasingly higher rates to pay off previous debts, and selling off valuable assets under distressed conditions, some temporary relief will be found. Unfortunately, the anti-tax crowd will seize on this as justification for their anti-R crusade. Worse, the complacency thereby created will make it all the more difficult to act before it is too late.

But all is not yet lost. To borrow an analogy from aviation, when an airplane stalls and goes into a spin, spiraling rapidly downward, the appropriate response is to apply power and gently exert control. So, too, must residents respond to their downward spiraling county by revitalizing their financial capability and seizing control of both the debate and the program of action. Should they refuse to discipline themselves and take actions to restore public confidence in local government, they need only look north to Los Angeles County to see the consequences. There, public budgets have been slashed to the bone in even the most vital service agencies, and serious consideration is being given to selling off County-USC Medical Center. Since the bankruptcy, Orange County has found itself, in one fell swoop, facing all these prospects.

The morning after Measure R’s loss, municipal bond-market officials made it clear that Orange County, far more than after the bankruptcy filing, is viewed as an unsafe bet, its securities regarded as virtual junk bonds, unless a new, more credible recovery plan is promptly put in place. Without rapid consensus on such a plan, there is a growing possibility that the state will soon step in and take over the county government. Irony of ironies that Orange County’s legendary disdain for government, expressed in its anti-tax fervor, would result in more and bigger government.*