Buck Shortfalls Don't Stop in California

Other states may soon face deep spending cuts as tax-raising limits squeeze local budgets

THE latest "crisis" in California - proposed layoffs this week of 10,000 Los Angeles County workers and the closing of dozens of health and welfare facilities - could soon fade into a blur of financial-scare headlines from states across the nation.

Next week, for example, another Southern Californian fiscal emergency will likely grab the spotlight as neighboring Orange County residents vote on whether to approve a controversial tax increase. The measure would help bail them out of the largest municipal bankruptcy in American history.

But national observers say that, although much of both counties' fiscal woes are peculiarly Californian, a major reason for the period of austerity is a practice increasingly seen on both coasts - states limiting their counties' ability to raise and use tax money.

The national trend of state financial control has its roots in the 1978 California tax revolt known as "Proposition 13." The initiative both lowered property taxes and required a super-majority of two-thirds to raise them.

Thirty-seven states have since adopted some form of state statutory or constitutional tax-expenditure limitations on county governments.

Because of this, these same observers admonish, as Washington cuts back on funding, more and more localities nationwide have no choice but to strike huge parts of their current budgets - both to avoid insolvency, as well as to respond to their constituents' vision of what services local government should provide.

"Cities across America like New York, Chicago, Cleveland, Dallas, are going to be looking at the huge public-sector bureaucracies they have built up and consider how to dismantle them rather than raise taxes to keep them going," says Joel Kotkin, senior fellow for the Denver-based Center for the New West.

In Orange County, polls show voters will disapprove Tuesday of the half-cent sales tax that would raise about $800 million to repay a whopping $1.2 billion lost in bad investments through the county's investment pool. They would rather consider options such as selling off county assets and privatizing services.

In Los Angeles County, leaders are proposing dramatic cuts, including the closing one of the nation's largest and busiest public hospitals.

This because Proposition 13 mandates that only a two-thirds "super majority" of voters can approve the tax increases needed to avoid the cuts.

"More and more, counties around the country are looking at the California Proposition 13 model and realizing it has created problems that didn't show up initially," says Phil Dearborn, director of government finance research for the US Advisory Commission on Intergovernmental Relations. "Now that good times have given over to harsh economic times," he says, "we are seeing major problems."

Dan Wall, fiscal analyst for the California State Association of Counties, notes that counties across the state are lining up to announce similar budget problems. "In the old days, you could cut expenditures, raise taxes, or both," he adds. "Now the option has dwindled to one: cut services. This is really precedent-setting."

Observers in Washington note that California has put more responsibility for social welfare, health, and other services on its counties than most other states. But they also point out several other urban areas that are suffering similar squeezes between tax limitations and expenditure demand: Prince George's County, Md.; Cuyahoga County, Ohio, which includes Cleveland; Westchester County, N.Y.; and Fairfax County, Va.

The problem can become most acute where county lines encompass large urban areas, which provide services to the poor but do not embrace suburbs where wealthier taxpayers can help absorb costs. Philadelphia suffers from such a boundary problem, while Pittsburgh does not, Mr. Dearborn says.

Ralph Tabor, policy director for the Washington D.C.-based National Association of Counties, says the problems for such counties will get worse before they get better, especially those largely dependent on federal money for health, welfare, and social service programs such as Ohio, Minnesota, New York, Illinois, Florida, and Wisconsin.

"Republican cuts of major programs are coming and they are going to hit states dependent on Medicaid and Medicare," he says.

After proposing a list of cutbacks Tuesday that included 10,000 layoffs, the elimination of 18,000 employment positions, as well as juvenile camps, parks and pools, Los Angeles Chief Administrative Officer Sally Reed on Wednesday agreed to create a Health Crisis Task Force to recommend alternatives.

But, she said, "Reductions in state or federal funds are likely to be enacted ... with little or no lead time for adjustment.

"It is especially clear that deferral of Board decisions in hopes of improved federal or state reimbursement is unwise and unrealistic," she says.

California's county analyst, Mr. Wall, says the problems hitting Los Angeles County this week are especially dire because the state has endured sharp budget shortfalls since 1991: $11 billion, $14.5 billion, $8 billion, and a projected $2 billion shortfall this year.

To make up for those gaps, state lawmakers raid discretionary funds usually given to counties. Los Angeles County this year faces a $1.2 billion shortfall of its own.

"We have run out of room to help ourselves," says Wall, noting that all of the state's 58 counties seen their discretionary funds cut in half over since '91.

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