For Now, California Leads Nation in Going Broke

Once again, California is a leader of national trends--but this time it’s with troubles in public finance.

Los Angeles County’s financial impasse and Orange County’s bankruptcy--and the state government’s hands-off policy on both--are not temporary lapses that will be remedied with a strong economic upturn.

Rather they represent historic change in public finance. In California and across the country, local governments are scrambling for funds to provide public services. And that’s a task that will become much harder as the federal government, in what is called the Devolution Revolution, sends responsibilities back to the states and municipalities.

Then local governments will have to finance public services in new ways that are only being suggested today. We are in transition right now--and it can be painful.

Los Angeles County, for example, has the responsibility but not the funds to provide health care for the indigent, as well as police and courts and care of parks and beaches. The projected budget gap on health care this year is more than $650 million.

But Sacramento is not rushing to aid either Los Angeles or Orange County. It is not even standing behind them with a reassuring statement to the debt-rating agencies, Moody’s and Standard & Poor’s.

The state’s own credit ratings are slipping. It grabbed $1 billion in property taxes from Los Angeles County last year to balance its budget. And now politics is intervening: Gov. Pete Wilson is running for the Republican nomination for President and doesn’t wish to appear liberal with public money.

Wilson is not alone in playing politics. He was going to allow Los Angeles County to borrow $75 million from Metropolitan Transit Authority funds, but Mayor Richard Riordan argued him out of it to preserve subway construction for the city.

The spectacle of California’s governments fighting over dollars, with no leadership from the governor, angers the financial community. “When Philadelphia got in trouble, the state of Pennsylvania stood behind it,” notes Ken Kurtz of Moody’s Investors Service.

Moody’s downgrade of Los Angeles County’s credit rating last week will cost taxpayers at least $2 million in extra interest for each $1 billion the county borrows.

But you ain’t seen nothing yet. When Congress shifts funding for welfare and other programs to block grants administered by the states, Los Angeles County will face $500 million a year more in charges for general relief, says Supervisor Zev Yaroslavsky.

The creaking system may simply collapse. “The libraries [which are partly supported by county funds] are living on borrowed time,” retired Supervisor Ed Edelman told the Planning Report newsletter.

What is going on? The voters have withdrawn their mandate from public spending. Orange County, where voters refused to hike sales taxes to offset losses caused by government bungling, is only one example of a widespread trend.

“Electorates are saying no to bond issues and to any kind of new tax,” says Zane Mann, publisher of the California Municipal Bond Advisor, who recalls when bond issues built America’s suburban communities.

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Now faith in government has waned. “People don’t want to spend $400 to fill a $100 pothole,” says Joe Mysak, editor of Grant’s Municipal Bond Observer newsletter.

The sentiment has deep roots. Economically, most taxpayers don’t see their own incomes growing, but they’re facing a rising burden for state and local taxes.

There is an emotional edge as well. With persistent poverty, teen-age pregnancies and horrendous school scores, taxpayers are not seeing results. They are withdrawing approval from social expenditure.

So what is the solution? Let poor people die in the street?

No, it is to think anew. The crux of the economic problem is not people but inefficient use of resources.

In Los Angeles, one in three members of the work force is without health insurance, Yaroslavsky explains. These are not unemployed or homeless people but low-wage workers in apparel and other local industries. In a sense, society subsidizes those industries, by providing medical care, because of the larger economic activity they bring to the area.

And in a sense society protects itself from epidemics, as societies for two centuries have used public health to prevent the spread of tuberculosis and other diseases.

Los Angeles--and New York and other cities--are still threatened by tuberculosis. So we have public health.

It need not be wasteful, however. A bone of contention currently is the fate of County-USC Medical Center, which was damaged in the 1994 earthquake. Almost $1 billion in federal funds may be spent to restore County-USC as a 1,000-bed giant facility.

But the Los Angeles area has scores of hospitals operating at 60% and less of capacity--floors blocked off, expensive equipment sitting mostly idle.

Why can’t county patients be treated at such hospitals, with bills paid as they are now by Medicaid? The hospitals would work more efficiently and see costs go down. That way, County-USC could be rebuilt as a smaller, more useful facility--not as a white elephant.

Lines will blur between public and private in such arrangements, which is all to the good. Because communities will need to use every resource they can find. Paradoxically, requirements for public services are mounting even as people talk of not paying for them.

For example, the Safe Drinking Water Act, just passed in Washington, requires $30-million treatment plants, with special filtration membranes, says David Miller, an economist with Apogee Research, a Bethesda, Md., consulting firm.

But since voters will balk at bond issues, a whole new system of private investment will emerge to pay for water treatment, Miller says.

Private capital will be used increasingly to build highways, says Robert Poole, head of the Los Angeles-based Reason Foundation, a conservative think tank. “With electronic tolls, we can introduce pricing based on congestion, and probably find we don’t need to build so many new highways,” he says.

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Times change. A great example of public finance in the postwar decades was the Interstate Highway System, built and maintained by gasoline taxes through the Highway Trust Fund. But in recent decades, fuel economy has reduced the flow of gas taxes and the Trust Fund has not been able to keep up with maintenance on the system.

Innovative thinking, a California specialty in times past, is needed. Will the state come through again?

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