SEC Likely to Reject County Borrowing Plan : Finances: Tapping employee savings program was seen as way to prevent layoffs. If U.S. opposes idea, new budget crisis looms.

Los Angeles County could face a new budget crisis early next year because federal authorities appear unwilling to grant approval to a plan to balance the county budget by borrowing up to $250 million from an employee savings program, officials said.

The U.S. Securities and Exchange Commission, which has questioned the legality of the plan, is likely to refuse approval, county officials said. The federal agency reportedly fears that the plan could set a precedent for other cities and counties.

“We’re 80% sure they won’t approve it,” said one top county official close to the federal investigation. “It’s less than 50-50.”

If the borrowing plan is rejected, the county will once again face the prospect of massive layoffs and program cutbacks. The loan was a key element in a compromise budget agreement last fall that helped the county avoid 4,200 layoffs.

In November, SEC officials notified the county counsel’s office of their concerns about the plan.

“We believe the use of such assets for meeting county operating expenses violates federal securities laws,” SEC officials told the county in a memorandum.

An SEC spokesman in Washington declined to comment on the matter Wednesday.

Mary Jung, top assistant to Chief Administrative Officer Richard B. Dixon, said the county has yet to draw any funds from the Horizons plan. The money was to be used to finance the county’s “soft-landing” plan to eliminate hundreds of county jobs through attrition and early retirement. Nearly 700 county employees have accepted early retirement so far.

Jung said that although the Board of Supervisors authorized a loan of up to $250 million, county officials expected to borrow about $150 million.

Supervisor Ed Edelman, who opposed the borrowing plan when it was proposed in September, said that if the loan is rejected, the county probably will face deeper cuts than those proposed in the fall.

“We’re looking at cuts in services, layoffs and generating new sources of revenue (fees and taxes),” Edelman said.

Gerry Hertzberg, chief legislative deputy to Supervisor Gloria Molina, added: “We’re going to be in a difficult situation. We’re going to have to look at further cuts and see if there are other pots of money we can look at to prevent cuts in essential services.

“There’s going to be some serious decisions to be made in January,” Hertzberg said.

Representatives of county employee unions said they would oppose deep service cuts and layoffs.

“It would be effectively impossible for the county to reduce expenditures during the remaining months of this fiscal year to make up for the loss of funds,” said Phil Ansell of Service Employees International Union Local 535.

“The cuts would have to be so massive, the reduction of services so drastic, that people would literally be dying in the streets,” he said. “We don’t think that is socially, fiscally or politically acceptable.”

Ansell said there are a number of special funds the county might be able to draw upon to balance its budget, including funds for courthouse construction and public works.

Gilbert Cedillo, general manager of Service Employees International Union Local 660, said the county could operate in the red for the remainder of the fiscal year. “It may force the county to operate at a deficit until the next budget,” Cedillo said.

The strongest opposition to the plan came from many firms specializing in the investing of funds from employee pensions and savings plans, Cedillo said.

“If the plan unravels, it will be unfortunate that a handful of people in a disinterested community will do something that affects thousands of workers,” Cedillo said.

The president of one such company, Robert E. Hancox of Washington, D.C.-based ICMA Retirement Corp., said he strongly opposes the borrowing plan because it represents a misuse of employee savings.

“We understand the well-meaning intentions of the county,” Hancox said. “But in the long run, it’s going to be very harmful for the (Horizons plan) participants.”