County Mortgaged Most Major Assets : Budget: Stripping equity from its real estate or pledging property as collateral has left few options in current crisis.

Los Angeles County has mortgaged most of its major assets and has few real estate options left for dealing with its worst financial crisis in memory, an examination by The Times has found.

In a practice that has helped obscure the fact that the nation’s biggest county government has been spending more than it takes in, the County Board of Supervisors has engaged in a borrowing binge at an accelerating pace over the past decade.

A review of hundreds of pages of documents found that supervisors have repeatedly voted to strip the equity out of the county’s real estate assets or pledged them as security for ever increasing amounts of borrowing.

The mortgaging involves all of the county’s major trophy assets--from the massive Hall of Administration that is the headquarters of county government to the high-rise Criminal Courts Building where the O.J. Simpson trial is being held; from major hospitals such as County-USC Medical Center to highly valuable coastal property such as Marina del Rey.

While other local governments in California have engaged in borrowing and mortgaging of assets, Los Angeles County has far outpaced other major urban counties, state officials said.

The borrowing is so extensive that almost all of the county buildings in Los Angeles’ Civic Center have either been mortgaged or pledged as collateral. So have most jail and court facilities, sheriff’s substations, hospitals and health centers, fire stations, cultural centers, and some parks, golf courses and libraries.

In a recent memo to the supervisors, county Chief Administrative Officer Sally Reed said that although county government owns a vast amount of land, nearly 100,000 acres by one estimate, only 0.2% of it is available for sale with few or no restrictions or limitations.

The only large assets that the county still owns free and clear are fewer than two dozen parking structures, aging office buildings and warehouses, the memo said.

Reed told the supervisors that the revenue potential from selling or leasing such county-owned real estate is “limited and will not provide substantial help in resolving the current budget crisis.”

Faced with an unprecedented $1.2-billion deficit in the county budget, Reed last month recommended sweeping cuts in services, including closure of one of the nation’s biggest hospitals, County-USC, and elimination of one out of every five county jobs.

Certainly, indebtedness is nothing new to governments, from the federal level down. And in the past, supervisors--hoping that a recession-wracked economy would recover and bring tax revenues along with it--have defended borrowing as a legitimate means of avoiding the kind of profound service cuts now being threatened.

Now, however, with neighboring Orange County bankrupt and Los Angeles County mired in its bleakest fiscal predicament ever, there are second thoughts.

“Right now, we know it was a mistake,” Supervisor Deane Dana said. “We should have bitten the bullet and we didn’t. . . . We’ve mortgaged everything. We’re operating right on the edge.”

The newest supervisor, Zev Yaroslavsky, said he is surprised by what he has found in the past seven months since moving to the Board of Supervisors from the Los Angeles City Council, where he was an acknowledged budget expert.

Yaroslavsky said the city of Los Angeles has neither mortgaged its landmark City Hall nor sold it to investors under a lease-back arrangement.

“People talked about sale and lease-back of City Hall as a joke, as a humorous reference to the extreme, to the ultimate absurdity,” he said. “ ‘If it gets that bad, we’ll sell City Hall.’

“I said that jokingly here once to Sally Reed. ‘If it gets bad enough, we’ll sell the Hall of Administration.’ And she said, ‘We’ve already done that.’ She wasn’t joking.”

The massive building, which includes the supervisors’ chambers and offices, was one of two dozen major county facilities used as collateral in 1984 for the issuance of $262.5 million in certificates of participation.

New Kind of Debt

This type of debt, financial experts said, became much more common in California after passage of property-tax-slashing Proposition 13 in 1978 mandated two-thirds voter approval of general obligation bonds, which is extremely difficult to obtain.

Data compiled by the California Debt Advisory Commission, a state agency that monitors the indebtedness of local governments, shows that Los Angeles County has sold $2.6 billion in certificates of participation to investors since 1985. None of this debt required voter approval.

To repay the notes, the Board of Supervisors, through a little-known arm called the Los Angeles County Capital Asset Leasing Corp., created long-term leases on its own facilities, including the Hall of Administration and many other buildings. Ultimately, the county’s general fund is responsible for repayment of the debt.

That means that every dollar that goes to repay investors who have bought the county’s bonds is one less dollar available for government services ranging from law enforcement and the courts to health and welfare programs, from libraries and children’s services to beaches and parks.

Supervisor Yvonne Brathwaite Burke acknowledged the heavy cost of such borrowing but defended it as a necessary means of maintaining services in the short term. “I can’t really say it was a mistake,” she said. “Before I see us go into bankruptcy, I’d say borrow again. Sometime the economy and real estate values will turn around.”

Unlike the consequences faced by an overextended homeowner, few believe that the county would ever be in danger of losing its assets through foreclosure. For one thing, many of the buildings are suited only for government purposes--in addition to being old, deteriorating from lack of maintenance and failing to meet building codes and environmental standards.

A more pressing worry is that failure to repay past borrowings may damage the county’s credit rating and impair its ability to borrow in the future. Yaroslavsky also has voiced concerns that because of the outstanding debt, bondholders now take precedence over constituents when it comes to the first claim on county dollars.

In the past six years, the annual cost of the county’s debt service payments has grown faster than any major program, more than doubling from $175 million to $382 million in the fiscal year that ended two weeks ago. Only the Sheriff’s Department and health programs now cost more in county dollars than annual payments on $7.9 billion in outstanding debt. (The county’s own funds account for little more than one-fifth of its budget; the rest comes from federal and state government, largely to fund social programs.)

The share of the county’s own dollars devoted to paying the cost of past borrowing has more than doubled in the past six years from 7.7% of the county’s own revenue in 1989-90 to 15.6% in the fiscal year that ended June 30.

And because of the way the county has structured its borrowing, the debt service expense will continue to grow, devouring more than half a billion dollars annually in little more than 10 years, county financial documents show.

“When any category of your budget starts expanding in this fashion, it is not a healthy trend,” said Peter Schaafsma, executive director of the California Debt Advisory Commission.

Schaafsma, a longtime budget analyst in Sacramento, said certificates of participation are more expensive than voter-approved bond issues. Higher interest must be paid because the certificates have more risk to investors than other types of bonds since the lease payments must be budgeted every year.

Many California governments have used certificates of participation to finance construction of new facilities, including jails, hospitals, courthouses and law enforcement facilities.

The city of Los Angeles has also used certificates of participation to finance construction of such facilities as the new convention center, but has steered clear of using long-term borrowing to pay short-term bills, officials said. In 1993, the City Council turned down a controversial plan advanced by tobacco giant Philip Morris to sell and lease back the restored Central Library.

On the other hand, Los Angeles County, which pioneered the use of lease-back transactions in 1962 to finance construction of the Music Center, has made more extensive use of this type of debt than most other counties, state officials said.

Faced with a serious budget deficit two years ago, the Board of Supervisors mortgaged one of its prime real estate assets, Marina del Rey, to pay one-time operating expenses.

To repay this $189.5 million borrowing with interest will cost the county $295 million over the next 15 years. And most revenue from marina leases will not be available to support county programs.

Borrowing From the Future

In her memo, Reed warned that “reliance on the sale of assets as well as long-term borrowing or sale and lease-back transactions to finance current operating expenses is viewed extremely negatively by the rating agencies and could result in a downgrade of the county’s credit rating.”

In bankrupt Orange County, officials are considering the lease-back of government buildings and facilities as one means to help it recover.

Such an approach is common in Los Angeles County, which also has used a relatively rare form of financing called a bond anticipation note to finance the early stages of construction on buildings.

Altogether, county supervisors have authorized borrowing $285 million from the Los Angeles County treasury pool, which invests funds for many Los Angeles-area school districts, cities and special districts.

As supervisors contemplate severe reductions in health services, the county has devoted $150 million of the bond anticipation notes to planning, engineering and preparations for building a scaled-down medical center in East Los Angeles.

Yet most county officials now say the county cannot afford to borrow the estimated $1 billion needed to build the center, which would replace the County-USC structure, opened in the 1930s.

Yaroslavsky said the county, unlike the city of Los Angeles, borrowed from the future to pay today’s bills. “That’s where the county has gone wrong in its mortgaging policy. It has mortgaged assets to pay operating expenses, not to pay capital expenses,” he said.

“That’s the difference between a person who gets a $200,000 mortgage to buy a house . . . versus borrowing $200,000 to go to Vegas tonight to play the craps tables and then lose it all,” said Yaroslavsky, who was not on the board when the decisions were made. “What do you do tomorrow night for dinner? What do you do for breakfast or lunch the next day?”

The marina transaction, followed by the deepening deficit in the county budget, raised a red flag for Wall Street. As the depth of the budget woes became apparent, three rating agencies last month placed portions of the county’s long-term debt under review pending adoption of a new budget this summer.

One-time borrowing against future revenues as in the Marina del Rey deal was seen by some county officials as a way to buy time to bring spending and income into balance.

But Schaafsma said one-time financial fixes are not an answer without a long-term plan for reconciling government spending and income. He said that if such techniques are used to postpone the inevitable, then “you aren’t helping yourself in the long run.”

In Yaroslavsky’s view, “the problem here is not that they have borrowed, although they have borrowed far more than is prudent. . . . The problem is the reason for which they borrowed. . . . They borrowed in order to avoid tough decisions.”

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Debt Costly for L.A. County

The third-largest expenditure of Los Angeles County dollars goes to repaying the county’s debts. Here is a list of how the county proposes to support its biggest programs in the new fiscal year: Program: Funds Sheriff: $565.8 million Health Services: $427.2 million Debt Service: $381.8 million* Social Services: $379.9 million Source: Los Angeles County Chief Administrative Office

*--1994-95 figure; current year expenditures expected to be higher

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Landmark Collateral

Numerous government buildings are mortgaged or pledged as collateral on other debt issued by Los Angeles County. Here are a few prominent examples:

OTHER COUNTY BUILDINGS MORTGAGED OR USED AS LOAN COLLATERAL

* Los Angeles County Courthouse

* Mark Taper Forum at the Los Angeles County Music Center

* Main hospital building at the Olive View/UCLA Medical Center, Sylmar

* Numerous buildings at Martin Luther King/Drew Medical Center, including the Psychiatric Hospital

* Anderson Gallery and Japanese Pavilion at the Los Angeles County Museum of Art

* Petersen Automotive Museum of the Natural History Museum

* County Emergency Operations Center, East Los Angeles

* Fire Department Command and Control Facility, East Los Angeles

****

SHERIFF’S DEPARTMENT:

* Main buildings, addition to the Men’s Central Jail

* East Housing Unit at the Lynwood Justice Center

* Medium security housing and other buildings at the Pitchess Detention Center in Saugus

* Sheriff’s stations in East Los Angeles, Santa Clarita, Malibu, Norwalk, Lost Hills, Carson, Pico Rivera, Temple City and elswhere

* Star Center, Whittier

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HEALTH:

* Health Services Administration Building, Los Angeles

* AIDS outpatient clinic at County-USC

* Central District Health Center, Los Angeles

* Edward Roybal Comprehensive Health Center, East Los Angeles

* El Monte Comprehensive Health Center

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COURTS:

* Courthouses in Pasadena, Alhambra, Norwalk, Compton, Long Beach, Torrance, and elsewhere

* Metropolitan Branch Traffic Court

* Ed Edelman Children’s Court, Monterey Park

* Municipal Court buildings in East Los Angeles, Downey, San Pedro, Beverly Hills and elsewhere

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FIRE DEPARTMENT:

* Fire Stations in Santa Clarita, La Canada Flintridge, Malibu, Duarte, Valencia, Agoura, San Fernando and elsewhere

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PROBATION DEPARTMENT:

* Downey Administration Center

* Dormitories, gym, kitchen and other buildngs at Challenger facility in Lancaster

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LIBRARIES:

* Valencia, Santa Clarita

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PUBLIC WORKS:

* Santa Clarita Administration Building

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SENIORS:

* Mid-Valley Senior Citizens Service Center

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PARKS AND RECREATION:

* Golf Courses in Lakewood, Downey, Palos Verdes, La Verne

Compiled by JEFFREY L. RABIN / Times Staff Writer

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Debt Service

The soaring debt service takes a larger share of Los Angeles County dollars.

Year Annual Cost in millions Percentage of county dollars ‘89-’90 $175.5 7.7% ‘90-’91 $183.8 8.5% ‘91-’92 $199.5 6.4% ‘92-’93 $210.7 7.0% ‘93-’94 $255.3 10.6% ‘94-’95 $381.8 15.6%