Long before Sept. 11, local governments throughout L.A. County were eyeing the slowing economy and preparing to tighten their belts a bit. But in the wake of the terrorist attacks, the economic slowdown has accelerated and some local governments now face the prospect of budget crises as severe as the early 1990s.

"Next year is going to be a real challenge," said Larry Kosmont, an L.A.-based economic development consultant who tracks local governments. "The state was already pulling back on its aid to cities with the energy crisis. Now economic activity is coming to a near standstill."

Los Angeles, Santa Monica, Beverly Hills, Pasadena and other local cities that rely heavily on tourism and retail sales dollars stand to get hit very hard.

But it's not just falling revenues that are causing concern. Several cities, particularly L.A., face higher expenditures for increased security at airports and other public facilities, as well as picking up the tab for thousands of military reservists called up for active duty. And, if the slowdown persists, L.A. County's overburdened social safety net will get pummeled.

Local governments are only now beginning to assess the damage; as of last week, few public officials were prepared to say just how bad they expected things to get.

"It doesn't mean good news on several fronts," said Los Angeles City Controller Laura Chick. "Federal funds to local governments will be decreased if Washington starts reallocating to the military. That means less dollars for housing, social service agencies and transportation improvements."

Locally, Chick said, tax dollars from hotels, restaurants and shopping centers are going down, too. She noted that hotel occupancy rates have plunged 50 percent or more in downtown alone. And Los Angeles International Airport has been losing about $1 million a day in revenues, a portion of which would have been transferred to the city's general fund.

County is vulnerable

At greatest risk in a prolonged downturn is the county budget. On the revenue side, the county relies heavily on transfers of funds from Sacramento and Washington. Should those be reduced, the county is still required to meet all its social service commitments, including welfare and health care services.

But the most severe crisis could develop in the still-troubled county health department. Back in 1995, it teetered on the edge of bankruptcy, until the Clinton administration stepped in with a billion-dollar bailout. That rescue was extended last year through 2005; however, as a condition of receiving the extra aid, the county had to commit to cutting more than $1 billion from its health budget by the year 2005. As of last month, there was still $900 million to go.

"We are already facing a fiscal crisis," said Fred Leaf, the county's acting director of health services. "The slowdown in the economy and the layoffs in the airline and tourism industry will only compound this. If no steps are taken to put more money into the system, the consequences are very serious."

Leaf also noted that, as a result of the Sept. 11 terrorist attacks, county health officials will now have to prepare additional resources to handle the threat of biological or chemical weapon attacks. While not a huge cost when compared to the expected additional demand for conventional health services, it will still make meeting the budget reduction targets that much more difficult, he said.

If there is any good news, it's that after several years of plenty, cities have bolstered their reserve funds. In the next several quarters, that money may have to be tapped to avoid cuts in services and personnel.

Beverly Hills, for example, has a reserve fund of about $40 million, compared to a general fund budget of $110 million, according to the city's chief financial officer, Don Oblander.

"Keeping in mind that any revenue drops we're looking at are likely to hit at different points during the year, we should be able to survive this," Oblander said.

Nonetheless, he said city officials are reviewing expenditures to see what can be delayed "until the situation settles down and we see how long this is going to last."

That's what officials in other cities are doing. If this turns out to be a sharp but short downturn, the consensus is that most cities will have to put off major capital projects and new programs.

"We begin our fiscal year on Oct. 1, but already we're doing a new fiscal analysis to see how things are going to hold up," said Long Beach City Manager Henry Taboada. He also noted a potential silver lining: thanks to the most recent half-percentage point cut in federal interest rates, the cost of borrowing is cheaper than at any time in the last 40 years.

"One step we can take is to refinance some of our higher interest bonds; that alone could save us several million dollars," Taboada said.

But these steps likely will prove insufficient if the downturn lasts more than two or three more quarters.

For reprint and licensing requests for this article, CLICK HERE.