Economic outlook 2002 – Huge Challenges in Government

From city to state levels, leaders face large budget shortfalls amid financial fallout.

By HOWARD FINE

Staff Reporter

Recession, terrorism threats, budget deficits it’s a difficult time for elected officials at all levels of government. The coming year promises to be more challenging. The Business Journal talked to leaders in city, county and state government to get their perspectives on the state of the economy and government as we enter 2002.

County Supervisor Zev Yaroslavsky has just become chair of the Board of Supervisors. State Treasurer Phil Angelides made headlines earlier this year with his push for a public power authority to ensure adequate supplies of electricity. L.A. City Attorney Rocky Delgadillo previously served as former Mayor Richard Riordan’s economic development czar.

Zev Yaroslavsky

Question: What is the state of Los Angeles as we enter 2002?

Answer: The state of Los Angeles depends on what your vantage point is. If you’re in the tourism industry or the hospitality industry, it hasn’t looked so good for the last several months. But Los Angeles has one of the most diverse economies in the world. As such, we are somewhat protected against the wild oscillations in the economy, compared to Northern California, which is taking it on the chin because of the high-tech collapse. We have no one industry that dominates here, and that’s a good thing.

Q: How would you compare the local economy now with 10 years ago?

A: It’s nothing like it was 10 years ago, except for the government sector, where it’s maybe even worse. But for the general economy, it doesn’t feel yet like it did in the early 1990s.

Yet having said that, I don’t think anybody is very confident right now. I’m a fairly pessimistic kind of person. The more pessimistic I am, the less disappointed I am when bad things happen, and if I’m wrong, I’m pleasantly surprised. So I don’t believe that this thing is going to be over in the first or second quarter of next year as many economists are saying. I would expect we’ll be in a slow economic environment through most of next year, if not into the following year.

Q: You said the outlook for government is as bad as or worse than the early 1990s. Could you elaborate?

A: For one thing, they didn’t have a $20 billion deficit in 1991; it was only $14 billion. That’s a big difference. Then-Gov. (Pete) Wilson did the only thing he could do: raise taxes by $7 billion and cut spending by $7 billion. As a Republican, he stuck his neck out and twisted some arms to get this through, and it probably cost him a chance at being nominated for president. But it was the right thing to do. Cutting $14 billion in spending would have totally eviscerated the services the government was attempting to provide. Likewise, cutting $20 billion now would totally eviscerate education and social services. But I don’t see where the two-thirds vote is now to raise $10 billion worth of revenues, especially in an election year. I just don’t see a leader in Sacramento willing to stick his or her neck out to do this.

Q: So how is this going to play itself out in the election?

A: Well, Davis has been taking a pounding now for 18 months, first with the electricity crisis and now with the budget. That’s the bad news for him. The good news is that nobody has focused on Dick Riordan’s negatives yet. I suspect that if Riordan wins the Republican nomination, the Democratic Party will try to bring into sharp focus what Riordan’s record is. He’ll have some explaining to do as to why the L.A. Department of Water & Power charged those prices for electricity up and down the state last winter. So until the public has an opportunity to weigh Gray Davis’ negatives with Richard Riordan’s negatives, I really don’t think you have a good sense of what’s going on.

Q: What does the state budget mess mean for the county?

A: If you work for the public sector, be prepared for some rocky times. You can start wherever you want. At the county, the new health department director is going to confront a department that will experience consolidations and dislocations. We have three-and-a-half years left on our federal waiver; at the end of that time we have to close a funding gap of $500 million to $750 million, depending on whom you talk to. Even in the best-case scenario of $500 million, that’s a big hole out of a $3 billion health department budget. We can’t wait until year five, or we’re going to crash and collapse.

Q: By dislocations, do you mean layoffs?

A: I mean either by attrition or, possibly, layoffs. We’ll do everything we can to avert layoffs. But there is a lot of duplication that has to be eliminated. There’s no reason that every hospital in the county has to do heart surgery or kidney transplants. They all do everything and it costs us a fortune to do that.

Q: How realistic is it to believe the cuts will be made?

A: It’s a lot easier said than done. You have so many interest groups that would rather not make the cuts now and would prefer to wait for the crash landing in 2004-05. Whether it’s the unions, the civil servants, or even the private sector, there is a tremendous amount of inertia there, even when they plainly see disaster up ahead. It’s not until they actually see the cliff edge that they react. The fact that there is a sign that says, “Cliff: 10 Miles Ahead” is of no consequence to them.

Q: So how is this going to play out?

A: We need to educate the unions and other interest groups as to just how dire the situation is. Back in the early and mid-1990s, when I first came on the board, the county unions did agree to pay freezes or cuts they still haven’t gotten all those back. The same level of sacrifice is needed here, or the system faces total collapse. I think the advocacy groups are beginning to understand this.

Q: This recession seems to be disproportionately impacting low-income workers. When these workers are laid off, they turn to county health and social services as their safety net. With all these cuts you’re talking about, how do you expect to handle this increased demand?

A: You’ve just hit on the great contradiction in county government. When the economy worsens is when the demand for county services increases. And it’s not just health care. The welfare reform time limits are coming up and many people who went off the welfare rolls and into the workforce are now getting laid off and can’t turn to welfare anymore. I think welfare reform is a great idea in a robust economy. The real test is whether it can work in a recession. We’re about to find out.

Q: Regarding the Sept. 11 terrorist attacks and subsequent bioterror incidents, county public health officials are considered “first responders” in such cases. How are all these cuts in health care and other areas going to impact the ability of these folks to respond to possible terrorist incidents?

A: I am guardedly pleased with our level of preparedness. Remember, we’ve had plenty of practice for major mobilizations. We’re about as well prepared for emergencies as any county in the United States. This is the disaster capital of America. Earthquakes, fires, floods, civil unrest, you name it, we’ve had it, almost every year. On the bioterrorism threat, our sheriff and fire department personnel have been preparing for five years, since before the sarin gas attacks in Tokyo. We have some of the finest people around, and the public should have confidence.

Q: Nonetheless, you don’t have the funds to prepare for every contingency. So where is the balance between preparedness and the need to keep expenses under control?

A: This is not an exact science. It’s really a judgment call. We can’t prepare for a World Trade Center-type event every single day of the year. Suppose the World Trade Center attacks had resulted in 3,000 injuries and not 3,000 deaths. No way could New York have handled that influx, and I daresay (former) Mayor Rudy Giuliani would not be as popular as he now is. We face that kind of scenario every day with earthquakes. So the idea is that when something like that occurs, you mobilize all your doctors, all your hospitals public and private and you avail yourself of those resources with triage procedures and the like.

Phil Angelides

Question: So how long do you expect the slowdown to continue?

Answer: I know people are projecting that this recession will end somewhere around mid-year, but I wouldn’t be surprised if this recession is longer and deeper than many expect. Over the last decade, we’ve had growth exceeding the mean in this country. The mean is roughly equivalent to population growth and productivity growth combined. It’s not uncommon, therefore, after a long period exceeding the mean to have a period of correction. If you talk to some of the older businesspeople up and down the state who have been through past recessions, they are bracing for a longer downturn. It’s the people in their 20s and 30s who think this recession will be over by the second quarter.

Q: What about California?

A: The projections are that the unemployment rate in California will top 6 percent next year and that’s a matter of concern. But Southern California may well hold up as one of the strongest sub-economies in the nation. The economy is much more diverse than either the Bay Area now or the L.A. area in the early 1990s.

Q: What’s the outlook next year for government, particularly state government and its huge deficit?

A: The budget outlook for state government is grimmer than for the economy as a whole. We here in California are more dependent than other states on highly cyclical revenues. For example, in our $100 billion-plus budget, this last fiscal year we saw $18 billion in revenues from capital gains and stock options. That will melt down to $6 billion to $12 billion, depending on whom you talk to. The reason our state is so dependent on these sources can be traced back to Proposition 13. We used to depend a lot more on property taxes, which were more stable.

Q: So how do you close this budget shortfall?

A: There are some steps that can be taken on the spending side. For example, you can do things like pay this year’s pension contributions over time with interest. But that’s only getting at the edges. To really close the shortfall, you need a mix of new revenues and budget cuts, what I call a “fairness package.” Gov. Pete Wilson, confronted with a $14 billion deficit in 1991, had a mix of $7 billion in cuts and $7 billion in new revenues. Wilson, a Republican mind you, signed a bill raising tax rates on high-income couples from 9 percent to 10 percent, among other things. These same Wilson tax fairness items must now be on the table again.

Q: One thing that Wilson signed off on was the diversion of $3 billion in local property tax revenues to state education coffers. Should that also be part of this package?

A: No, it shouldn’t. In fact, I’d be very concerned about overly harsh cuts to local government. The cuts undertaken by the state must be fair. People want their police protection, their fire services, which are provided at the local level. I look at things like the vehicle license fee. Give me a choice of paying $100 more a year to register my car or see a diminution of police and fire services, and I’ll take the increase in the VLF. As long as we explain the choices to people, I think they are intelligent enough to understand the need for such an increase.

Q: For the last six months, you’ve been prepared to sell $12 billion in bonds to refund state coffers drained after buying electricity on behalf of the state’s insolvent utilities. But that bond package has yet to reach you. How much longer can the state go without those bond proceeds before it blows another $6 billion hole in the budget?

A: The energy bonds need to happen, and the earlier the better. The clock is running. The Davis administration and the Public Utilities Commission are in active discussions to resolve this. It’s a must from my perspective. It’s completely wrong to have $6 billion lent from the revenues that would otherwise go to pay for education and law enforcement.

One quick word on the size of this bond package: The state spends $6 billion in general fund revenues to buy power, but there’s also $4.3 billion in outstanding loans from a set of banks that must be repaid, with interest. That’s why the bond package must be in the neighborhood of $12 billion.

Rocky Delgadillo

Question: How is Los Angeles going to fare in 2002?

Answer: I think Los Angeles is probably going to be OK. L.A. tends to get every economic cycle last, so we might see some residual effects from Sept. 11 after other areas have. But I have to tell you that many of those small companies that I was helping back in the early and mid-1990s (under then-Mayor Richard Riordan) that were mostly minority and women-owned are in expansion mode. They are out there acquiring companies.

Q: These are nuts-and-bolts companies, right?

A: Some of them are furniture makers and other widget makers. But you also have some high-tech companies in there, too, especially biotech.

Q: What steps are being taken by your office to make sure this downturn in the economy doesn’t get out of hand?

A: We’re looking at trying to improve the quality of life in poor neighborhoods throughout Los Angeles. For example, we have these blighted buildings in neighborhoods that are attractions for local gangs, and they drive away customers of legitimate businesses in the area. We’ve got 2,000 abandoned buildings in the hopper that we’re preparing to take down. Now some of those buildings could be rehabbed and turned into affordable homes to help ease our affordable housing crunch. Others could be turned into primary centers for schools.

Also, in a down economy, crime tends to go up. I don’t want to go to another press conference to offer a $25,000 reward for information leading to the arrest of the killer of a 13-year-old boy. We’ve got to nip these things in the bud, to prevent the commission of smaller crimes that lead up to these bigger crimes.

Q: One of the deterrents to business in these poorer neighborhoods is the rise of gang violence. What is your office doing to curtail that rise?

A: We plan to expand the use of gang injunctions. There was a moratorium of sorts on these injunctions after Rampart, but it’s time to bring them back. I also want to target kids who I believe can be coaxed out of gangs if you just give them other opportunities.

Q: Are you looking at other ways to jump-start the local economy?

A: Well, as you know, we’ve got an affordable housing crunch in L.A. County. I’d like to see a fund for housing and convince private investors to put money into these emerging neighborhoods. But to do that, we’ve got to get a handle on this crime problem.

Q: All this hardly sounds like the job description for a typical city attorney. Aren’t you concerned that some people at City Hall are going to resent this expansive view of your role?

A: I wouldn’t call it an expansion of my role. I’m trying to redefine the office. The fact is we have great lawyers in the City Attorney’s office that I want to unleash. I want to use their talents to solve the community’s problems. They may have a narrowly defined job description, but that doesn’t mean they are not committed to broader public service. The new mayor or his staff may be looking over their shoulders at what we’re doing, but we’re just about trying to make things happen and the Council so far has gone along with us.

Q: It sounds like you’re stepping on a lot of toes in other city departments: housing, the community redevelopment folks, the Mayor’s business team, etc. These folks all tend to be very territorial.

A: All I’m doing is assisting them. The City Attorney’s job is to advise his or her clients. That way, our lawyers can get in on these deals early on, as they are being structured, rather than having a project shot down at the last minute because some deputy city attorney says you can’t do it that way.

Q: With the city facing a $156 million budget shortfall next year, council members are looking to you and Controller Laura Chick to reduce the city’s liability and eliminate waste in city government. So what are you doing?

A: One of my top goals is to reduce the city’s liability, which the previous Controller, Rick Tuttle, put at $1 billion. A big component of that is workers’ compensation. Last year the workers’ comp liability was $98 million. This year it’s $110 million. That’s just incomprehensible. Part of the problem is our workers’ comp lawyers have 400 cases each, while the industry standard is 250 cases. So I’ve put in a request to hire more workers’ comp lawyers. Other cities have done this and found that each additional lawyer saves hundreds of thousands of dollars.

Q: The contract of L.A. Police Chief Bernard Parks is up for renewal in June and many are saying this is going to be a very divisive debate for the city. Are you concerned that all this could make your relationship with the LAPD more difficult?

A: We are building a real partnership with the LAPD, and I think I have a good relationship with Chief Parks. Now I’m also the chief spokesman for the courts on the consent decree; that consent decree is going to take some resources away from other things. I’m trying to build a relationship so we can comply with that consent decree and make reform of the police department something real. Frankly, I would like to see the chief reappointed. He’s worked very well with our department so far.