NEWS ANALYSIS : Supervisors’ Spending Plan a Gamble Again

They did it again.

Despite dramatic changes in the political makeup of the Los Angeles County Board of Supervisors--and promises of greater accountability--the new county budget is once again a risky gamble.

Acting in spite of warnings from the county’s chief administrative officer, the grand jury and Wall Street bond rating agencies, and the lesson of Orange County that fiscal roulette can lead to bankruptcy, the supervisors Tuesday built their $11.5-million budget on a series of bets.

Concerned about the precariousness of the budget, one Wall Street firm Wednesday launched an immediate analysis of the spending plan--a likely prelude to downgrading the county’s bond rating.

One of the county’s biggest wagers--a $75-million-a-year raid on Metropolitan Transportation Authority coffers--didn’t even survive the first night. Gov. Pete Wilson vetoed a hastily drafted measure that would have diverted transportation money to the financially strapped county.

Other underpinnings of the spending plan, negotiated in private and rammed through in public, are similarly shaky.

None is shakier than the $178-million assumption that Sacramento and Washington will swiftly approve a waiver of state and federal regulations that now provide far more money for treatment of patients at hospitals than in outpatient health centers and clinics.

The supervisors also are betting the county can enact a rigid hiring freeze, impose a Christmastime furlough without pay for county employees, and levy a new entertainment tax and higher hotel taxes.

In agreeing to spend several hundred million dollars that are by no means certain to be available, the supervisors systematically backed away from threatened service cuts and layoffs in most departments from parks to libraries, welfare to probation, the district attorney to the sheriff.

They delayed the inevitable downsizing of the county’s vast system of health centers, clinics and hospitals for at least two months, in the hopes that Sacramento and Washington will provide more assistance to save the safety net for the poor and uninsured.

But if more money is not available by Oct. 1, at least 4,800 county employees who work in the health care system may lose their jobs.

Despite dire warnings that business as usual cannot continue, it did. But this time, the stakes are far higher.

After years of spending far more than it takes in and avoiding the financial realities, the county is in danger of running out of cash during this fiscal year.

Last fall, months before Orange County declared bankruptcy, Wall Street rating agencies lowered Los Angeles County’s long-term credit rating. They were concerned that the nation’s biggest county government has used one-time financial fixes to mask a deep structural deficit in its budget.

Even before the county was forced to take the unprecedented step of buying insurance before selling $1.3 billion in short-term notes in June, the rating agencies put the county’s credit rating under review unless action was taken quickly to bring spending into line with income.

And on Wednesday--less than 24 hours after the board adopted a spending plan a month into the new fiscal year--the rating agencies were on the phone with county officials, asking if the budget was really balanced.

“Obviously we will be concerned if there are revenues that are not locked in yet, one-time revenues, and cuts that are difficult to implement,” said Ken Kurtz, a vice president of Moody’s Investors Service in San Francisco.

After a telephone conference call with top county officials, Moody’s will analyze the decisions of the supervisors and make a decision on whether to again lower the county’s credit rating. “A downgrade is certainly likely,” Kurtz said. “What’s under consideration is how much of a downgrade.”

A lower credit rating typically results in higher borrowing costs.

The budget that emerged from the frantic flurry of activity Tuesday bore little resemblance to the tough spending plan proposed in June by Chief Administrative Officer Sally Reed.

“I do not gamble or take significant risks,” Reed said Wednesday. “The board took another course. . . . It clearly, very definitely, does include some of the same practices we saw in the past.”

But board Chairwoman Gloria Molina, who took a leading role in the budget decisions, defended the plan. “It’s stable money from where I sit,” she said.

She acknowledged that reliance on the $75 million from the MTA had been a gamble, but said it was the only really risky component of the budget.

Molina expressed confidence that the supervisors will be able to push through $6 million in higher taxes and landfill charges, $12 million from a strict freeze on new hiring, and $28 million from the four-day furlough without pay for county workers between Christmas and New Year’s.

After traveling to Washington, Molina said she has strong assurances from federal officials that the waiver of clinic/hospital reimbursement regulations will be granted. State approval is under consideration by the governor.

Yet past reliance on such uncertain funding sources has been a problem for the county.

Faced with a huge gap in funding for health services last year, the board, at the last minute, plugged into its unbalanced budget as much as $600 million in federal health care money that was not guaranteed. Most of the money never came.

And within months of incorporating the uncertain funding within the budget, the county was being told the money was in doubt, documents show. Yet, health care spending continued at a pace that could not be sustained, magnifying the severity of the current health crisis that may lead to the closure of health centers and clinics and outpatient services at hospitals.

Last year, the board counted on $150 million from a massive $2-billion borrowing for its pension funds. But while the deal was being put together, interest rates rose to the point where the deal was riskier. Locked into their budget plan, the supervisors had to proceed.

Two years ago, the board embarked on a plan to borrow from employees’ savings for retirement, but were blocked by the U.S. Securities and Exchange Commission. Since the money was already being spent, the supervisors hastily mortgaged one of their most valuable assets, Marina del Rey, for a one-time infusion of $189.5 million to pay ongoing operating expenses.

And it may not be over yet. There are questions whether the supervisors will turn to more sleight of hand to soften the blow of the next day of reckoning, Oct. 1, when thousands of layoffs, closures of health centers and clinics and deep cuts in hospital services are to take effect.

Supervisor Yvonne Brathwaite Burke conceded that the budget adopted Tuesday includes “very, very uncertain revenues,” but said it was a responsible approach, considering the perils of making severe, immediate and irreversible cuts in the health care system.

For the board’s newest and one of its most outspoken members, Zev Yaroslavsky, it was a tough introduction to the way the county does business.

Yet, despite reliance on uncertain revenues, Yaroslavsky said the budget is different this year because it contains no borrowing as in years past and a firm schedule for deep and painful cuts in health care.

“We’re taking a risk,” he said. “We’re betting that the President of the United States and the governor of California, running for President against each other, are able to put political differences aside and put together a health care system for L.A. County.”

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