Budget Cuts Loom as O.C. Economy Sours

Orange County is bracing for budget cutbacks that it had hoped to avoid after hearing a report on how a weakening economy will squeeze local government resources.

The county may escape a recession next year, but overall its revenue picture will be flat, said a Chapman University economic forecaster who recently gave county officials their first glimpse of the economic picture since the Sept. 11 terrorist attacks.

“The [county’s] weaknesses are in tourism and consumer spending, and they will help bring the job growth in Orange County to zero, where before the growth was at 2.5% annually,” said Esmael Adibi, director of the Center for Economic Research at Chapman University in Orange.

The local economy had been outperforming other counties and the state before the attacks. Los Angeles County may experience a recession next year but Orange County may not because it has more diversified industries, Adibi said.

But if linked to a national recession, he said, the county’s economy will experience a deep drop in the next four to five months. It could recover equally swiftly, though, in the second quarter of 2002.

Even before Sept. 11, Chapman was forecasting a decline in the job growth the county enjoyed in 2000, which saw 45,500 jobs created in construction, manufacturing and services. But Adibi said those fields will experience job losses that may be offset by new jobs in defense and aircraft industry.

“It is prudent,” Adibi warned, for the county to monitor sales tax revenue, vehicle license fee revenue from the state and interest earnings for fiscal impact. His forecast and a combination of anticipated state revenue reductions could mean a round of belt-tightening for county departments.

County finance officials said it’s too early to predict the effects of the Sept. 11 attacks and resulting revenue falloff on government services. But department heads advised of Adibi’s forecast two weeks ago are laying the groundwork for potential cutbacks in advance of an Oct. 30 meeting on strategic financial planning.

The county’s $4.6-billion budget is mainly fed by state and federal funds for mandated programs like mental health, foster care and public works projects.

Most sensitive to the ebb and flow of the local economy is the county’s $475-million general purpose fund, which it uses for programs such as improvement of unincorporated islands, El Toro master leases and other programs.

Hardest hit could be programs funded with discretionary money, such as community program grants.

Gary Burton, the county’s chief financial officer, said construction and opening dates for some projects, such as Orangewood’s proposed facility at the former Tustin Marine base, and financing for the county’s sixth youth and family resource center could be delayed. Theo Lacy Jail expansion would be finished, but the opening could be delayed until the county gets back on stronger financial footing.

“It’s more of a wait-and-see because it’s too soon to come to a conclusion” about revenue shortfalls, Burton said. “But department heads have been asked to find out what to do with their strategic plans, and the county will look at programs matched in part by the state.”

In the event of a major economic slide, the county may have to postpone some of its strategic priorities: affordable housing, gang prevention, watershed and ocean monitoring, and computer system upgrades.

Only police, public safety and firefighting budgets would be spared. And in light of the Sept. 11 attacks, a potential new strategic priority may be allotting additional money to the county Health Care Agency’s public and environmental health budgets to fight bioterrorism.

“One of the things we want to do is make Orange County an economically good place for tourism, and one of the ways to do that is to make it safe. In our case it’s the Sheriff’s Department, and we intend to keep it fully staffed and equipped,” Burton said.

Of main concern is the state’s budget, Burton said, because it’s the biggest unknown. The governor has told state agencies to trim next year’s budgets by 15%.

The reductions came amid a negative credit outlook by Moody’s Investor Service to each of the state’s 58 counties; it stops short of warning that a downgrade in the rating is imminent, but indicates that it could be later.

Moody’s did so because of “the possibility that the state could address a significant part of any budget shortfall by diverting revenues from local governments, particularly counties,” to balance the state budget, the firm said in a report.

“Given that set of circumstances, people at the county level are saying, ‘Keep your hands on your wallets,’ ” said Pat Leary, a legislative analyst with the California State Assn. of Counties.

Leary said one area for potential cuts is vehicle license fees. The county receives $158 million in DMV fees, about 32% of its general fund pie.

Burton believes the county could sustain a budget loss here, mainly because most of the fees go to pay off the county’s bankruptcy bonds. But if the license fees are held up in Sacramento indefinitely, the county may have to go to its reserve to pay off the bonds.

Fortunately, county supervisors have been thrifty. The county now has $22 million in reserves and $77 million set aside for strategic projects, Burton said.