L.A. County, Wall Street in Budget Conflict

As the Los Angeles County Board of Supervisors this week gets down to the business of finalizing a spending plan for the coming fiscal year, pent-up pressure to boost spending is running head-on into demands from Wall Street that the county take firm steps to actually balance its huge $12-billion budget.

There are moves afoot by some supervisors to tap the county’s soaring pension fund to free up money for more projects, including opening the high-security Twin Towers jail east of downtown Los Angeles, which stands empty for lack of operating funds.

Such an approach to increasing spending runs counter to a report issued Friday by Moody’s Investors Service, a major Wall Street bond rating agency, which calls on county officials to reduce dependence on one-time excess earnings from its pension fund and carry-over balances from previous budgets to pay for ongoing programs.

The proposed 1996-97 budget for the fiscal year that begins a week from today already contains more than $400 million in one-time money from those two sources, masking a persistent structural deficit in the county finances.

“While the county’s recent steps are encouraging, it still has a long way to go before it demonstrates that it has established a sound fiscal policy,” Moody’s said. “Of most concern is the continued reliance on one-time funding sources.”

Although the county’s finances have stabilized from the crisis of last year, both Moody’s and Standard & Poor’s, the other major bond rating agency, have served notice that what is at stake in the board’s budget decisions is the county’s long-term credit rating--critical to its ability to borrow at favorable interest rates in the future.

While Standard & Poor’s this month removed the county from its “credit watch,” the agency said the outlook for the county’s long-term credit rating remains “negative” unless the supervisors make more progress to control spending.

“Without continued restraint in the county’s budget, elimination of its reliance on nonrecurring revenues and successful reform of the health care system, the county’s fiscal position could erode and prompt a ratings downgrade,” S&P; said.

Both agencies have downgraded the county’s credit rating several times in recent years. Some county bonds are rated at the lowest investment grade, one notch above junk bond status.

The Wall Street bond raters left no doubt that they want to see the nation’s largest county government bring its spending into line with its income, and wean itself off dependence on one-time money to pay operating expenses.

But such advice runs counter to the basic political instinct to spend what is available.

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Supervisor Zev Yaroslavsky’s plan to cut nearly $50 million in spending from county departments, including the Sheriff’s Department, to provide the resources to open the first of the Twin Towers has not been embraced by his colleagues and is being fought by Sheriff Sherman Block.

“There is no long-term restructuring possible unless the county reduces its spending,” Yaroslavsky said. “Any effort to keep spending at the current or higher levels is a return to the old way of doing business.”

Yaroslavsky said the reliance on one-time revenues is excessive and must be reduced or the county will experience another budget crisis. But he complained “that message is falling on deaf ears . . . there is absolutely no appetite to make a single solitary cut.”

Ironically, it is Wall Street and the surging stock market that may give some of Yaroslavsky’s colleagues the dual opportunity to boost spending and pay to open one of the Twin Towers.

The $20.7-billion Los Angeles County pension fund, heavily invested in the stock market, has generated $694 million in excess earnings above its needs in the last 11 months alone, Chief Executive Officer Marsha Richter said.

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Under terms of a complex agreement between the county and the retirement board, 75% of the retirement system’s excess earnings--about $520 million--is available to offset the county’s annual contributions to the pension fund.

Only $270 million is needed to cover the county’s entire cost of retirement contributions in the coming fiscal year, Richter said, leaving $250 million in additional excess earnings. That amount could increase when final figures on total excess earnings become available after the current fiscal year closes Sunday.

Board Chairman Mike Antonovich is expected to propose this week that the quarter of a billion dollars be used as a huge down payment on the county’s retire ment contributions in the following fiscal year beginning July 1, 1997.

Antonovich said he wants to “be conservative and realistic when it comes to the fiscal health of the county.”

But he added that public safety is crucial, including maintaining sheriff’s patrols in unincorporated areas, keeping probation camps open for youthful offenders and opening up the jails to full capacity.

Supervisor Gloria Molina plans to introduce a motion to direct the county’s chief administrative officer and counsel to negotiate with the retirement system to make permanent the excess-earnings agreement, which expires in three years.

Molina’s budget deputy, Barbara Maynard, said the supervisor is interested in finding a way to use some excess pension earnings to offset retirees’ health insurance cost, which could free up an additional $60 million for the general fund.

Maynard said intensive discussions are underway with county lawyers and tax attorneys to find a legal way to tap the pension funds. Maynard said Molina wants to devote $18 million to open one of the Twin Towers and use the remainder to build a bigger budget reserve.

Molina disagrees with the rating agencies that pension funds and carry-over balances represent one-time funding sources. “It’s not just a matter of semantics,” Maynard said.