O.C. Might Raid Cities in Wake of Tax Defeat : Bankruptcy: Property taxes and reserves are targeted. Major service cuts and higher fees would be the result.

Orange County voters may have rejected a higher sales tax as the best remedy for the nation’s worst government bankruptcy, but if some politicians get their way the alternative may be just as costly in other ways: higher fees and reduced services.

Casting about for other ways to fill the gaping $1.7-billion hole caused by investments gone bad, lawmakers are taking inventory of every public vault in Orange County--from that of the transportation agency, sitting on more than $1 billion, to the special reserves held for the upkeep of the county’s harbors, beaches and parks.

What is being targeted most frequently, however, are the savings and property taxes that cities use to keep their service levels high and special districts, such as water and sewer agencies, rely on to keep their customers’ bills low.

Supervisor Marian Bergeson has proposed, for example, that the county could raise about $400 million a year by grabbing some of the property taxes and all of the surplus reserves of dozens of special districts providing water, sewer and sanitation services throughout the county.

Consolidating those agencies, or having private interests absorb them, would free up another $95 million a year, she said.

“It’s something we have to look at,” Bergeson said. “It’s difficult to find any source of revenue. Frankly, these were issues considered before the sales tax vote but were thought to be too difficult to pursue. Now we have to revisit them.”

Even more severe is a proposal by state Sen. Lucy Killea (I-San Diego), the co-chair of the special Senate committee that looked into the county’s bankruptcy.

Killea’s plan calls for taking money both from the special districts and Orange County’s cities.

Her proposal, which also involved the appointment of a state trustee to oversee the county’s finances, was vetoed by Gov. Pete Wilson as premature. It has since been legislatively reintroduced for a possible override.

This bill has all 31 cities in a panic. It calls for diverting property taxes from the cities to the county for the next 20 years, taking 4% of the cities’ tax levies the first year, 8% the second, 12% the third, and 16% from the fourth through the 20th year. Overall, it would strong-arm special districts and cities out of roughly $1 billion.

“We’re very concerned,” said Janet Huston, director of the League of California Cities’ Orange County division. “Because other people refuse to solve their own problems, the cities may be forced to raise revenues and cut services. The cities have worked hard to balance budgets and maintain services, but everyone considers them to have deep pockets.”

Huston said the cities estimate they would lose $605 million, not counting inflation, if Killea’s bill eventually becomes law. And in a meeting with one of Wilson’s top aides last week, city officials failed to win any assurance that their property taxes were safe, given the bankruptcy.

Many cities have already sounded an alarm that a loss in property taxes would have severe impacts on their budgets:

* In Cypress, all capital projects relying on general fund revenue would be halted for the next 20 years, and result in cutbacks to public safety and park maintenance.

* In Garden Grove, the city would eliminate after-school programs, community policing, school crossing guards and 21 city jobs.

* La Palma would cut many of its police community programs, such as DARE and Neighborhood Watch.

* Huntington Beach would reduce or eliminate the jobs of at least 75 full-time employees and 50 to 100 part-time employees.

* Anaheim says all services would be affected.

Killea said she is not sure whether she can muster the two-thirds vote in each house to override Wilson’s veto but is adamant that Orange County taxpayers should solve their own problems without a state bailout.

“They’re the ones who live there, and at least some of them voted for those officials who were in office at the time of the bankruptcy,” Killea said.

“The cities and special districts might not exactly be the same as the county,” Killea added, “but they are at least close relatives. As for the rest of us outside the county, we’d like to be friends, but we’re not part of the immediate family. We’re more like distant relatives.”

City officials could not disagree more, arguing that relying on property taxes to solve the county’s problem is inequitable and unjust, when existing sales taxes or motor vehicle license fees could be tapped instead.

“It’s totally illogical,” said City Manager Kenneth C. Frank of Laguna Beach, one of the cities that relies most heavily on property taxes. “Why take the money from cities because Orange County has a problem? Why should city revenues suffer?’

Laguna Beach has a $19-million annual budget and about $7 million of that comes from property taxes, making it the city likely to suffer most if Killea’s bill becomes law.

The city estimates it would lose about $1.2 million the first two years under the Killea plan, which equates to the cost of 30 city employees.

“That’s a very significant hit,” Frank said. “Our City Council fought for hours to add just one police officer.”

Frank said the city has already raised fees in previous years when the state was raiding its property taxes. The city’s hotel tax, business license tax, parking fees and vehicle towing fees have already topped out.

“It might be possible to go to voters and ask for a parcel or property tax increase for five years,” he said. “We have the authority to do so. But how are we going to get a two-thirds vote for that?”

To help the county out of bankruptcy, Frank said, his city should just accept the settlement it got from what it placed in the county’s investment pool and demand no more money--effectively forgiving the 20% balance it is owed by the county.

“We took our loss. We’re not whining about it,” Frank said. “Maybe we shouldn’t expect Orange County to repay us 100%. We made good money when times were good and lost money when the county made a mistake. But don’t reduce our police and fire service. Don’t take our normal revenues.”

In Garden Grove, the situation is particularly maddening, because officials there refused to invest in the pool and stand to lose $1 million over the first two years under Killea’s plan. Over the past three years, the city has lost $2.1 million during other shifts in property taxes that it needed to shore up its budget.

“We’re part of Orange County and we must be part of the solution, but this is not fair,” said City Manager George Tindall. “The state has never chosen to deal with local government financing in the right way. They didn’t do it with Proposition 13, and they still haven’t done it today. Not every city is a rich fat cat. We have kept our costs as low as possible.”

Rather than take money from the cities, Tindall said, the county could deal with the bankruptcy by writing off the debts it still owes investors; by telling Sacramento it can no longer provide some state-mandated services; and by diverting money from Measure M, the half-cent transportation sales tax approved by county voters in 1990.

Tindall is not the only official looking at using Measure M money to help the county out of bankruptcy.

Several county supervisors are also eyeing the $3.1 billion the transportation tax will raise over its 20-year life span. About $655 million has already been spent for freeway, street and transit improvements, and another $1 billion in contracts have already been signed.

Whether a popular vote would be needed to redirect the tax revenue from the Orange County Transportation Authority, or whether John Wayne Airport and future rights to the El Toro Marine Corps Air Station could be bought with transit tax money, is still anyone’s guess.

“We expect an onslaught of people coming to the authority to take our money,” said Jim Kenan, finance director of the authority, which still is owed $230 million of its investment pool deposits. “We are willing to help the county through its difficult time, but we have to answer to the taxpayers who voted to improve our freeway network.”

For the special districts, many of which have reserves tied up in bond issues that are dedicated to construction projects, the further siphoning of property tax money would come as no surprise.

In 1992’s state budget crisis, the governor and Legislature, wrestling with a multibillion-dollar budgetary shortfall aggravated by recession, took $47 million in property taxes away from special districts in Orange County--40% of what they had been receiving.

For John Schatz, general manager of the Santa Margarita Water District, it’s deja vu .

“Ever since 1992, we always figured this would be an area the Legislature would revisit,” Schatz said. “I thought they’d come back to get the rest of it in 1993, but the budget picture improved. Now with the bankruptcy, I figured this would resurface.”

At the Santa Margarita district, property taxes contribute only $1.4 million a year to its $25-million operating budget, so their loss would not be a devastating blow.

But the district has $90 million in reserves it has carefully set aside, and Schatz shudders at the thought that this money might be grabbed. Half is cached away for water treatment plants and sewer facilities that are to be built within the next two years in several parts of the district, including the Coto de Caza development. The other half is reserves used to guarantee repayment of outstanding bonds.

Schatz, who is also an attorney, said he did not believe the county could lay any legal claim to the reserves, even with state legislation.

But if that money ever was diverted to the county, he said, “it will cause [water] rates to go up. People will just pay more money for a service or a tax. In essence, it’s a circumvention and it falls on the backs of the public.”

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Cities Under the Gun

Legislation sponsored by state Sen. Lucy Killea (I-San Diego) would divert city property tax revenues for 20 years at a rate of 4-16% annually to repay the county’s bankruptcy debts. Amount diverted from each city and projected impacts (dollar amounts in millions, not adjusted for inflation):

City: Anaheim

Cost: $52.2

Impacts & reductions: All services, staff layoffs

****

City: Brea

Cost: $7.5

Impacts & reductions: To be determined

****

City: Buena Park

Cost: $11.6

Impacts & reductions: To be determined

****

City: Costa Mesa

Cost: $39.7

Impacts & reductions: Staff layoffs, park and facility maintenance, city planning, computer system development, contract services

****

City: Cypress

Cost: $20.0

Impacts & reductions: Staff layoffs, including law enforcement cutbacks; street and park maintenance, all general funded capital outlays and projects

****

City: Dana Point

Cost: $7.7

Impacts & reductions: Staff layoffs, including law enforcement cutbacks; park and street maintenance, drainage and traffic safety projects, recreation programs

****

City: Fountain Valley

Cost: $12.2

Impacts & reductions: Fire prevention, hazardous materials, specialized gang detail, staff layoffs, capital projects

****

City: Fullerton

Cost: $37.9

Impacts & reductions: Staff layoffs, including law enforcement and fire department cutbacks; library services, maintenance, engineering, planning, recreation

****

City: Garden Grove

Cost: $19.5

Impacts & reductions: After-school programs, public safety, including crossing guards, staff layoffs, including law enforcement and Fire department cutbacks

****

City: Huntington Beach

Cost: $101.0

Impacts & reductions: Library, senior services, beach maintenance and cutbacks in law enforcement, fire protection, and recreation services

****

City: Irvine

Cost: $24.9

Impacts & reductions: To be determined

****

City: La Habra

Cost: $23.0

Impacts & reductions: Law enforcement cutbacks, streets and park maintenance, staff reductions

****

City: La Palma

Cost: $3.7

Impacts & reductions: Law enforcement cutbacks, recreation and community services, senior and youth programs, staff reductions

****

City: Laguna Beach

Cost: $22.8

Impacts & reductions: Streets, parks, building and planning depts., community services

****

City: Laguna Hills

Cost: $8.8

Impacts & reductions: Law enforcement cutbacks

****

City: Laguna Niguel

Cost: $3.8

Impacts & reductions: To be determined

****

City: Lake Forest

Cost: $8.9

Impacts & reductions: Law enforcement cutbacks

****

City: Los Alamitos

Cost: $4.3

Impacts & reductions: Law enforcement cutbacks

****

City: Mission Viejo

Cost: $32.5

Impacts & reductions: Law enforcement cutbacks, senior programs, recreation, staffing reductions

****

City: Newport Beach

Cost: N/A

Impacts & reductions: N/A

****

City: Orange

Cost: $7.3

Impacts & reductions: Staffing, services, public safety

****

City: Placentia

Cost: $9.1

Impacts & reductions: Human services dept. eliminated, recreation, law enforcement cutbacks, staff reductions

****

City: San Clemente

Cost: $29.3

Impacts & reductions: Staffing, law enforcement cutbacks services

****

City: San Juan Capistrano

Cost: $9.3

Impacts & reductions: Staffing, community services

****

City: Santa Ana

Cost: $58.0

Impacts & reductions: Staffing, library services, maintenance, Pride program

****

City: Seal Beach

Cost: N/A

Impacts & reductions: N/A

****

City: Stanton

Cost: $4.6

Impacts & reductions: Law enforcement, fire protection cuts; community services

****

City: Tustin

Cost: $10.7

Impacts & reductions: Youth services, staffing, capital improvements

****

City: Villa Park

Cost: $2.7

Impacts & reductions: Public works, street maintenance, staffing

****

City: Westminster

Cost: $11.9

Impacts & reductions: Staff reductions, gang and drug intervention programs

****

City: Yorba Linda

Cost: $20.5

Impacts & reductions: To be determined

N/A: City did not respond

Source: League of California Cities