Court Told County’s Choices Are Cuts or Insolvency : Finances: Officials respond to lawsuit that targets health care reductions. They say borrowing is not a likely solution.

In court papers filed Monday, top Los Angeles County officials warned that if a federal judge blocks proposed sweeping cuts in health services, the nation’s largest county government could be insolvent by mid-October.

“The county cannot maintain its current rate of expenditure and stay solvent,” said Maureen Sicotte, the county’s director of public finance. “If expenditure reductions in the adopted 1995-96 budget are enjoined, the county could be insolvent as early as Oct. 15.”

Sicotte also warned in a sworn declaration filed in federal court that if the county is blocked from implementing cuts approved by the Board of Supervisors this month, it is “extremely unlikely that the county could borrow sufficient funds from public or private sources” to meet its cash needs.

“If the county were rendered insolvent and unable to pay its debts as they come due, regardless of whether the county actually filed a petition in bankruptcy, public perception of the county as bankrupt would severely disrupt the county’s operations and its delivery of critical public services,” Sicotte said.

Her declaration and those of other top county officials were the first papers filed by the county in response to a class-action lawsuit filed Thursday on behalf of hundreds of thousands of residents who depend on the county for health care.

Attorneys for the patients argue that the cuts--which could close six comprehensive health centers and 28 community clinics on Oct. 1--violate state and federal law and will leave the patients with no place to turn for vital services. They have asked for a preliminary injunction blocking the cuts, which the county strongly opposes.

The case poses major questions about whether the county must provide health care for those who have no place else to turn or whether the supervisors can enact sweeping reductions to keep the county afloat financially.

Chief Administrative Officer Sally Reed, in her declaration, said the county must bring spending into line with income.

“The continuous decline in public revenues makes it impossible to maintain government operations and services at former levels,” she said.

Reed noted that the state has taken more than $2 billion in property tax receipts from California counties in the last two years alone, with the bulk of it coming from Los Angeles County.

She said the county must have additional revenues if it is required to maintain the current level of health services. Otherwise, Reed said, “there will be insufficient funding to allow the county to . . . meet its financial obligations. If this were to occur, when available funding is exhausted, all services would terminate and the adverse effect on the community would far exceed the impact experienced by the health services curtailments.”

She said it will cost $930,000 a day to keep the clinics, health centers and outpatient hospital services in operation.

In an interview with The Times, the county’s newly hired cash-flow adviser raised the prospect of temporary insolvency rather than a more permanent bankruptcy, even if the county is allowed by a federal judge to proceed with the cuts.

“I think there are legitimate concerns, absolutely,” said Timothy Schaefer of Evensen Dodge Inc., a financial consulting firm in Costa Mesa that specializes in advising state and local governments.

“This county has drawn down its fund balances, its savings account in effect,” Schaefer said. “So even the slightest interruptions of cash inflow or even outflow . . . could have a severe impact.

“It could provoke a domino effect and impair the county’s liquidity, forcing it to sell some assets or securities holdings,” he said.

“If it runs for a month or longer, things could not get paid in time, and that is the definition of insolvency--you don’t have the money in the bank to pay the bills. That is a distinct possibility. There are a lot of risks in the county’s cash-flow situation . . . “