Budget Outlook Improves in City, Worse in County

Staff Reporter

In terms of budgets, the city and county of Los Angeles are in two different worlds.

The city's financial situation has improved in recent months and, thanks to previous belt-tightening and a little creativity, there only will be cuts of about $38 million in the $4.8 billion 2002-03 budget, with most of those coming from internal operations and not services to the public. This has given Mayor James Hahn the flexibility to promise more services to areas of the city considering secession.

But the county situation is more dire. Facing a shortfall of $205 million in the $16.2 billion budget, substantial service cuts are in the offing. What's more, county officials might have to make deeper cuts if funds from the financially strapped state government do not materialize.

"The city looks like it was able to dodge the bullet," said Steve Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College. "But the county has a much tougher row to hoe. They are much more susceptible to the vagaries of state funding."

Last week, county administrative officer David Janssen revealed the proposed county cutbacks, including $50 million from the Sheriff Department budget and $7 million from the District Attorney's office. That doesn't include steep cuts facing the Department of Health Services, which must eliminate more than $700 million in the next four years as federal bailout funds expire.

But even worse news may lie ahead for the county. Janssen said that the county could lose up to $710 million in state funds as California struggles to balance its books.

"We know that in the past, when the state has faced problems, they have raided local government funds to pay for schools," Janssen said. "We're doing everything we can to prevent that from happening this time, because if it does, it would be absolutely devastating."

Vehicle fees at risk

The potential loss in state funds stems from action three years ago to cut by two-thirds the vehicle license fees paid by car owners. California collects the funds and in past years has distributed them back to counties and cities that in turn use them for local services. As part of the compromise to win passage of the VLF cuts, the state agreed to reverse the cuts when confronted with a budget deficit. Also, then-Gov. Pete Wilson pledged to have the state "backfill" the missing funds to counties and cities from the general fund.

But in this election year, even though California faces a budget shortfall of $15 billion to $20 billion, Gov. Gray Davis and several legislative leaders have shown little willingness to reinstate the vehicle license fees. And while Davis has pledged to continue backfilling all of the VLF funds to counties and cities, the magnitude of the state budget deficit may make that pledge impossible to fulfill.

Local officials will find out just how bad the state's fiscal woes are when Davis issues a revised state budget in four weeks. "I don't think the county is prepared to absorb any steeper cuts from the state," Frates said.

Meanwhile, the L.A. city budget, which relies much more on retail sales taxes, business license fees and property taxes, is better positioned to survive further state cutbacks.

Just three months ago, Hahn said that the city faced a $250 million budget gap for the 2002-03 fiscal year beginning July 1. But, according to budget director Crista Binder, higher-than-expected real estate values and more real estate transactions led to $58 million more in revenues than anticipated back in January.

"The city should thank (Federal Reserve Board chairman) Alan Greenspan for that," Frates said. "Those record-low interest rates have fueled this real estate market."

City officials then turned to another unexpected windfall to close the gap. Last year, the L.A. Department of Water & Power turned in record revenues, thanks to its sales of excess power. As a result, the DWP could afford to be more generous and reached an agreement with the Hahn administration to increase the DWP's revenue transfer to the city, from 5 percent to 7 percent. That, along with the increase in the city's traditional 5 percent take, will bring in another $46 million.

Belt-tightening effective

Also, the mid-year belt-tightening from city departments that Hahn ordered last fall has resulted in an additional $63 million that can be rolled over to next year's budget, Binder said.

"Thanks to a combination of the financial picture getting better than we anticipated and the prudent steps we took during this fiscal year, the situation is nowhere near as bad as we projected back in January," said deputy mayor Matt Middlebrook.

Hahn traveled around the city last week to release news of spending increases for police, fire, neighborhood councils, street paving and other essential services. In all, Hahn unveiled more than $70 million in increases for these services.

"This has allowed Hahn to escape what I thought would be a nearly impossible bind: promising more services to those areas of the city contemplating secession while at the same time plugging a quarter-billion-dollar hole," said Larry Kosmont, an L.A.-based economic development consultant who also analyzes local government budgets.

But city officials are not yet ready to celebrate.

"We're not out of the woods yet," said City Council budget committee chair Nick Pacheco. "The city relies on so many revenue streams that are out of our control. And, as we saw with Sept. 11, things can change in a hurry."

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