L.A. County CAO Assesses The State/Local Budgetary Environment Post Passage Of Props. 57 and 58

David, the March 2nd election has resulted in the passage of Propositions 57 and 58. From your vantagepoint as the CAO of the county of L.A., what now becomes the top budget priority?

The top agenda item is to balance the ‘04-‘05 state budget, which is not an insignificant problem. The bond measure only dealt with the past-it's only one-time money. It's an absolutely necessary part of the solution, but they still have a steep hill to climb.

And what needs to happen in the Capitol for that hill to be climbed?

They have some very tough, almost impossible, decisions to make about reductions in state-funded programs. The Legislative Analyst is indicating that even if they adopted the governor's budget as proposed, they would still have a $7 billion deficit in '05-'06, plus another $4 billion of items that are in jeopardy. Even if they adopted the governor's cuts this year, they still could be looking at an almost $10 billion problem in '05-'06. So, the first question they have to consider is, where do you cut $10 to $15 billion out of a budget that's virtually locked into place by initiatives and federal requirements? And second, how do you make up the difference?

Personally, I don't think it can be done without both new revenue sources and program cuts. Neither one can solve the problem independently-you can't raise enough taxes, nor can you make enough cuts to solve the problem. And the sooner they do it, the better.

The pundits have already begun predicting that with the governor's newfound political success, his success with Props 57 and 58 and perhaps even workers comp, budget negotiations are now possible that might permit compromises. Is that your read of today's capitol politics?

I think the message the voters are sending is that they want their elected officials to work together. Regardless of how much influence Schwarzenegger has or doesn't have, the election results show that voters are really looking for people in Sacramento to compromise. The public is more concerned that there are solutions reached than they are about the details of the solutions. Frankly, I'm optimistic about their ability to do this. Gov. Schwarzenegger's got the people behind him, but that doesn't mean that he can roll over everybody. It's going to take compromise.

Most commentators focused on Prop. 57, the $15 billion deficit reduction bonds, without paying close attention to 58. What's your read of 58? What policy changes did it make that are of significance to the county's annual budgetary deliberations?

The two critical pieces of Prop 58 are the prohibition against additional state borrowing and a requirement of a state reserve. The former means that the state cannot do any more borrowing, except for cash flow purposes, without voter approval. The latter means that in 2006 the Governor and legislature must start setting aside part of the budget for a reserve. This is going to force spending reductions of some magnitude. These Prop 58 mandates are really iwhat's going to drive the control on state spending starting in 2006.

Share your views on the ballot measures that are being considered for November to address what many have concluded is a dysfunctional state/local fiscal arrangement. The first is the League of Cities Local Taxpayers and Public Safety Protection Act, and the other is the Property Protection initiative being advanced by Robert Hertzberg and the bipartisan leadership of Assemblymembers Steinberg and Campbell.

Everybody agrees that you can't have two competing measures on the ballot and hope to have success. There are many very difficult and expensive initiatives that are going to be on the ballot in November competing for the public's attention, so passing a reform initiative is going to be difficult. All of that notwithstanding, polls continue to show that the public supports local government. The League of Cities' initiative locks the existing financial system into place and deals with the mandate issue, which is critical for counties. Cities are interested in the protection of their sales tax revenue, but counties are more interested in mandate relief.

The former Speaker's proposal, advanced by Steinberg and Campbell, includes mandate relief, but the primary difference is the swap of property tax for sales tax and vehicle license funds to try to deal with the fiscalization of land use, which we have all talked about in California for more than 15 years but done nothing about. While everybody intellectually recognizes the fiscalization of land use caused by Prop. 13 is a problem, cities are going to have a tough time supporting this initiative. They are not readily willing to give up their sales tax. So, the best solution may be a compromise between the two initiatives to be hammered out through the Legislature.

David, give us an update on what challenges you, as County CAO, face post repeal by the Governor of the Vehicle License Tax fee increase. How does the county grapple with the uncertainty of projected state revenues given its service obligations to constituents?

It has been a rollercoaster ride since November for local government because of the Vehicle License Fee reduction, then increase, and then reduction.

Backfill money is coming by order of the governor, not by approval of the Legislature. The governor's proposal would transfer additional property tax to schools next year. At this point, I don't think there's anything that's secure, or anything we can depend on, because of the magnitude of the problem in Sacramento. The backfill is included in the governor's budget next year, but they still have a $7 billion deficit. A property tax transfer is also included in next year's budget. But, there's tremendous risk for local government, both in the VLF backfill and in property tax transfer. We're likely to lose $1.3 billion in one-way or the other.

It is in some ways the same old thing we do every year with the state. They haven't passed a budget on time in years and years and years, and we've never known what the impact would be. In putting our budget together, we'll do it the same way we've done it in the past-we'll deal with our own local problems in the April budget, and then deal with the state when they finish their process, hopefully in June.

Translate that insider analysis into choices which must be made by the county that our readers can easily understand.

The property tax loss accounts for almost $300 million in discretionary revenue for L.A. county. We spend our discretionary revenues in a very limited fashion because of maintenance of effort requirements, matching requirements, and federal and state law. So, there will be reductions in the Sheriff's department, for example. The Sheriff estimates losing 1,000 positions in addition to the 1,000 they have lost in the last two years because of local and state budget problems. Libraries are looking at a 33% reduction, which translates into 18 libraries closing. In the Parks Department, swimming pools will be closed and recreational programs eliminated. Our Probation Department, which operates 18 youth camps that hold 2,000 kids at any given time, will have to close some camps. In the District Attorney's office, most of the major attorneys dedicated to specific crimes will be eliminated. Those are the kinds of decisions that the board is going to be faced with if we lose the $300 million that the governor's proposing.

David, you've been in government administration and public service for a long time. Are we in an exceptional time now with respect to these fiscal challenges, or is this just another fiscal bump in the road?

When Proposition 13 passed twenty-five years ago, local government was in line to lose over 40% of their discretionary revenue. Prop. 13 was resolved primarily by a bailout from the state government. In the early 1990s, California was faced with a serious problem in state and local government because of the economic recession. In his first year in office, Governor Wilson had a $14 billion shortfall and an $11 billion shortfall the following year. The Wilson deficits were solved by a combination of cuts and revenues. I think the current problem facing the sate is worse than both of them. Not just because the numbers are larger, but in part because there are fewer options available to address the issue. The structural problems are so overwhelming and the hole so big that the options are very limited. So I think it's much worse.

No MIR interview of you would be complete without referencing the county's healthcare system. How might Tenet's threat to close some of its local hospitals further strain the county's overburdened health care system?

We keep hearing that Tenet has buyers for many of these hospitals. We're optimistic that that is true, and in fact, the hospitals won't necessarily close. But, the whole hospital infrastructure in California is so fragile now with private hospitals closing, the emergency rooms are more and more backed up and are forced to go on bypass more often. It's going to be more and more difficult to deal with emergencies in the region as hospitals close.

Someone has to decide that health care is a priority in this sate and in this country, and no one has. I have to believe that in part that's because the public isn't communicating to their elected officials that health care is a priority. One exception is in L.A. County, where 72% of the voters said they were willing to tax themselves for trauma and emergency care. So, there is some indication that there's interest in health care, but there is no health care policy-it just doesn't exist. The President is proposing cuts in Medicaid, which potentially will create a half-a-billion dollar loss to our Health Department. Everywhere you turn, there's another jeopardy to the safety net, not just in L.A, but throughout the country.

From a discussion of our healthcare safety net, please comment in closing on the county's first-responder readiness. Are we as prepared as we must be in the county for any and all homeland challenges we might face?

We're as prepared as anyone can be. We have a very good integrated fire and public safety mutual aid system in the Los Angeles region that's a model for the nation. We have a very strong and integrated hospital communications system and the kinds of antibiotics and medicines that are necessary to deal with various kinds of terrorist threats. That's not to say that we're anywhere near perfect, but L.A. County has done a pretty good job.