Rising Energy Bills Threatens To Set Back Los Angeles County's Already Strained Budget

David, when MIR last interviewed you in September 2000, the

headline read: "L.A. County's New $15 Billion Fiscal Budget Is Healthier Except for Health." What, if anything, has changed in nine months?

A couple of things. One, the budget has gone up from about $15 billion to $16 billion. And two, we now have some rather significant energy costs to deal with.

What hasn't changed is that the Health Department continues to be a major challenge for the County, and will remain so for the next several years. And that likely won't change anytime soon.

Let's focus on the health budget. As Federal health dollars steadily decrease per the terms of the waiver agreement, the fiscal challenges will clearly be difficult to manage. In fact, your two top health officials have just resigned. How does L.A. County, and counties in general, plan to accommodate growth in demand for health services with declining revenues available to support such services?

In less than three years, the Health Department will again face a substantial deficit, which will increase each year thereafter. We're estimating the shortfall to be about $900 million-roughly 20% of the overall budget-which is exactly what it was in 1995. The question is: Why does the deficit continue to be the same size?

The simple answer is that there hasn't been a permanent replacement revenue stream to deal with the cost of healthcare. The purpose of the first waiver was to demonstrate that an outpatient health system could be operated more efficiently than an inpatient one, which the County did by increasing outpatient expenditures and public-private partnerships, and decreasing inpatients by about 28% of its beds. But at the end of the five-year period, the federal government said, "That's very nice but we're still not going to change the basic underlying revenue stream; it's still based on inpatient expenditure." The waiver ended up reducing our revenue and increasing our costs, and then we were told, "Oh, by the way, we're going to phase it out entirely."

We're now in a situation where costs continue to rise, and federal revenue will decline by $252 million dollars a year in 2005. And the revenue sources on which the Department depends-primarily DISH federal dollars, Medicaid, the County General Fund, and State matching funds-do not increase as costs do. It doesn't take a genius to figure out that that's a recipe for disaster.

So what are we doing about it? The Department produced a five-year strategic plan last December, but it really didn't address the magnitude of the problem. They're now in the process of approaching it from a different standpoint, putting together an assessment report of how much healthcare the County could afford assuming the system were 20% smaller. Once that document is complete, they'll take it to the Board.

Unfortunately, everyone seems to have a different opinion about what to do with healthcare in L.A. County-which is perfectly understandable given there aren't any good alternatives. But I think it's going to take a combination of new revenue, a greatly streamlined operation, and reduced services to make it work. The problem is just too big for any single solution this time.

If President Bush continues to send the message to California to "drop dead," and if the negative impacts of the waiver's ending are felt fiscally in the County's budget in coming years, are we facing an interview with you a year or two from now that seriously examines County bankruptcy as an option?

No. Bankruptcy is not a consideration. We have two to three years to fix this. It may well be that nobody likes the fix because it's too painful, but that does not necessitate bankruptcy.

The rising energy bills are now hitting the County's budget and could balloon from last year's $70 million to $140 million this year. How does the County plan to deal with such unexpected increases in costs?

The estimates continue to increase. In April, they were over what we projected in February's budget, and now they've again risen $10 million over what I said in April. The final energy bill will probably be in the neighborhood of $150 to $155 million. Natural gas-which has tripled in cost-has been the driver for that increase.

We've been fortunate to date that our revenue growth is essentially covering the increased costs. However, we are requiring departments that have other revenues to absorb the increase, and if energy costs continue to rise, it's going to have a very significant impact on their ability to provide services. In the General Fund, it's going to make it near impossible to continue investing in infrastructure and automation.

Over the last seven years, the County has invested about $25 million in energy reduction and has reduced use by about 15%. Going after another 7% will be a challenge because it gets harder after you've already de-lamped offices and bought more energy efficient bulbs, appliances, etc. On May 17, we'll be joining the State in a pilot program where everyone will voluntarily turn off everything they're not using for a two hour period-copy machines, lights, computers, etc. With the help of monitoring devices, they'll then determine what kind of difference that makes. We've also been talking about changing the County dress code during the summer months to help employees keep cool with less air conditioning.

David, the dim prospects for county budgets is a subject that we've talked about often in the past. Is there anything on the horizon-given a Democratic Governor, a Democratic Legislature, and the current focus on healthcare and energy-that leads you to believe the revenue picture for counties will improve soon?

Unfortunately, no. Sacramento is totally absorbed in energy right now. Even when they weren't, the most they were ever willing to give us was one-time expenditures. Last year, it was $212 million; this year, it's $250 million. We can certainly use the one-time money, so I shouldn't complain. But there doesn't seem to be any effort to take on the overall problem of State-local finance.

Could you elaborate?

I used to believe that it took a crisis to generate dramatic change in our political institutions. But we had a recession in the ‘90s, and the problem wasn't solved. Then the paradigm was that if you had enough money, surely you could fix the problem. Well, that didn't work either. So we're still looking for a paradigm that works in California.

The Speaker's Commission on Regionalism is very important because it forces the dialogue to continue. Because State-local finance is such a complicated issue, it's hard to get people to focus on it. But if the conversation stops altogether, then it really doesn't stand a chance.

"What happens to counties?" is a difficult question. If anyone knew the answer, this would have been fixed 15 years ago. While Prop. 13 may have initially started the fiscal imbalance, California has changed so much since then that it's going to take a lot more than fixing Prop. 13 to put it back together.

So, if counties disappeared, what do you think would happen? What would be the impact, if any, on people's lives in Los Angeles County?

One of two things would have to happen, because the need for services that counties provide (which are both State and Federal programs) will not disappear: either the State would set up regional offices to handle all of those programs, or cities would assume the responsibilities themselves.

Both models exist on the East Coast, where most services are provided by cities or a combination of cities and states, and counties are responsible only for unincorporated areas. California is actually somewhat unique in that counties provide both State and Federal services. If counties disappeared, we'd also have to rethink California's 5,500 to 6,000 special districts.

Basically, there's just so much government in California that it's very difficult to get anything done.

Changing subjects, the County is now receiving proposals from developers to rehabilitate the 76-year old Hall of Justice at Temple & Broadway, which your office must evaluate. What is the vision here? What are the goals? And what will go into the mix of considerations that will guide the County's decision-making process re: this facility?

The principle consideration is to put that facility back into service. After the Northridge earthquake in 1994, the County closed the building due to modest structural damage. At that point, the County was at the bottom of a recession and could not afford to do anything but close it, so the Sheriff bought his own building and left.

Everyone agrees that the architecture is a tremendous addition to the Downtown Civic Center and needs to be resurrected. The Sheriff is very interested in moving his headquarters back into the building, and our goal is to make it revenue-neutral. To do that, we'll consolidate existing leases that we're currently paying for in order to offset the cost of rehabilitation.

Speaking of visions, how does the Gehry vision for Grand Avenue impact your operations and the County's real estate plans?

With Disney Hall, the Music Center, the Hall of Administration, the Courthouse and Parcel Q, the County has an enormous interest in what happens to Grand Avenue. With the new Cathedral, the completion of Disney Hall, MOCA, and Coburn, there is a real opportunity to transform Downtown L.A. into a vibrant cultural entity.

Like everything else, it will cost money, so the question ultimately comes down to: Where will the money come from? Conceptually, though, there are a lot of people interested in advancing a very exciting change in Downtown Los Angeles.

David, in terms of asset management, has the County moved forward since our last interview in its ability to manage its real estate assets?

We still have a long way to go, but I think we're doing a better job. We recently finished the asset management strategy that will go to the Board next month, and we're certainly doing a better job evaluating our ability to integrate County programs into the same facilities, particularly in social services and welfare.

The County's assets have grown dramatically over the last several years because of increased State and Federal revenue sales, and we've been involved in a lot of real estate transactions recently. Thanks to the unique work the Commission has done on asset management, we've really been able to focus on the way we handle our assets.

Returning to the issue of county governance, San Diego-which you're very familiar with-is currently embarking on a regional reform experiment. A regional governance efficiency commission has been created and will issue its recommendations this summer, and San Diego voters are going to have a chance to consider consolidating some responsibilities into a regional entity. Does L.A. have anything to gain or lose from the success or failure of San Diego's regional experimentation?

There is a lot we can learn, although in some ways San Diego is unique. Because of its relatively isolated geography, just one body-the County of San Diego-is responsible for everything related to transportation and air quality, unlike the L.A. Basin, which has multiple counties and hundreds of cities. From that perspective, San Diego does not offer a good model.

On the other hand, San Diego's challenge is essentially the same: How to overcome the status quo of the existing political entities at the county, city and special district levels? San Diego has over 250 special districts, 18 cities and a county, plus SANDAG. What they're trying to do is partially consolidate all of those entities-which will all be resistant to change-without producing simply one more level of government.

Voters in San Diego originally decided by 2/3 to consolidate and eliminate government, and it never happened. That was mostly due to the fact that the restructuring never went back to the voters; it was the political institutions that successfully made sure nothing happened. But if San Diego can overcome that political status quo, their experience will have a lot to offer the rest of California.

You don't often get the chance to make speeches about regional governance, but if you were offering testimony before the Speaker's Commission on Regionalism as to what the ideal form of governance for California's regions should be, what would you suggest?

A discussion about regional governance has to start with services-who receives them, who delivers them, and who pays for them. I'd recommend starting with some principles that everyone can agree on, and then building structures from there. Generally, people don't know how most services are delivered-they don't know, they don't care, and they feel they're paying too much.

There also have to be assurances that the integrity of our communities will be protected. To be successful long-term, the U.S. is going to have to compete with the rest of the world. NAFTA is a very small example of that; the recent Conference of the Americas is another. We're going to be competing with a unified Europe and an Asian marketplace, and we will not be successful if we're fighting with each other over political institutions. There has to be some sort of reasonably sized regional government that can provide the services that people need. But there also has to be enough room within that structure for community so that people feel comfortable. At home, the issues people care about most have to do with their neighborhoods. But there are a lot of other issues that are not high on their radar screens, and those are the things that regional government could do.

Elaborate, in closing, on what you mean when you say "regional government." What would that organizational structure include?

In San Diego, there was one regional government already there-the Board of Supervisors. They were responsible for everything that happened in San Diego, including air quality. But the cities fought back hard because they didn't want the Board to be responsible for anything that might directly affect them. That's how SANDAG was established-the cities were successful in preventing the Board from taking that initiative.

The problem is, at least in San Diego, the Board of Supervisors is really the best place for a regional body, although it would probably have to be larger than five members if it were to provide a broader scope of services. In that case, it might make sense to do what L.A. County was considering in terms of establishing an elected county executive.

Now, in the Los Angeles region, because it incorporates the counties of San Bernardino, Ventura, Riverside, parts of Orange, and L.A., the County Board of Supervisors would not be the natural place to put a regional body. In L.A., it would have to be something else.

What it can't be in either case is just another level of government. That will never work, not practically nor politically. Anywhere in California, regional governance is going to require consolidation.