Concerns over runaway spending brought on by a turnover on the Los Angeles County Supervisors, including the election of Supervisor Sheila Kuehl, haven’t been realized.

LOS ANGELES — Los Angeles County, known for tight-fisted management, may be in a position to step up spending to address homelessness, prison overcrowding and other social needs.

A shake-up in the county's leadership two years ago, when two long-time county supervisors retired, hasn't resulted in any loosening in fiscal restraint, according to ratings analysts. The county maintained a moderate overall debt burden of $36.9 billion, and direct debt of less than 5% of its liabilities, according to a Fitch Ratings report released in June, when the county issued $800 million of tax and revenue anticipation notes.

Though no new bond issuances are planned until fiscal 2018 when the county may issue $250 million in lease revenue bonds, the county has identified $1 billion in deferred maintenance needs that might spur the need for new debt, Fitch said. The figure that doesn't include replacement or refurbishment costs associated with buildings that exceed their useful lives. The county plans to replace the county's Men's Jail, though the timing on that$1.5 billion to $2 billion project hasn't been determined.

County Supervisors Sheila Kuehl and Mark Ridley-Thomas are on a mission to solve the county's homeless problem. At this point, the county has only dedicated $150 million of its $28 billion budget and the same amount in the 2016-17 budget, according to Kuehl. But it also spends about $1 billion in related services on homeless people, according to a report.

"I think the county is less averse to spending now, but only time will tell" said former County Supervisor Zev Yaroslavsky, who is well known for his fiscal conservatism. A modest increase in debt would not be an irresponsible thing to do, Yaroslavsky said, because the county's current burden is small.

Former State Senator Kuehl, age 75, replaced fellow Democrat Yaroslavsky on the board in November 2014. Former Congresswoman and Secretary of Labor Hilda Solis, also a Democrat replaced Supervisor Gloria Molina, a Democrat, in the November 2014 election.

Ridley-Thomas, a Democrat and former state legislator, is serving his second term as a supervisor.

Term limits will result in the replacement of a third long-time county supervisor, Republican Michael Antonovich, who represents the northern part of Los Angeles County. Antonovich is running for state senator.

The county has also experienced a shuffling of its finance staff over the past two years. After William Fujioka, 62, retired from the top slot at the county executive's office in December 2014, the county leaders began moving away from a top-down system. The process was finalized in February.

His departure coincided with the retirement of Supervisors Molina and Yaroslavsky, both forced out by term limits after more than 20 years on the board. "It doesn't look like there has been a significant change in financial management or policy," said Alan Gibson, a Fitch analyst. "I don't think anyone is anticipating a sudden change in financial policy after the November elections."

Concerns had been raised that the more progressive Democrat replacements of Yaroslavsky and Molina, who termed out in November 2014 after decades on the board, would not adhere to the strict fiscal constraints that enabled the county to weather the Great Recession.

The board was comprised of three fiscally-conservative Democrats and two Republicans during Yaroslavsky's two decades of service.

 

Rating Raised

Fitch questioned county officials in February about whether the changes would result in the county loosening its tight fiscal constraints, but was assured it will not, Gibson said.

Fitch boosted the county's issuer credit rating to AA in February. The county also holds AA-plus and Aa2 implied GO ratings from S&P Global and Moody's Investors Service.

The county's solid financial profile, improved operations in terms of budget management and support for the general fund led to the upgrade, Gibson said.

The general fund budget had grown to $209 billion at the end of fiscal 2015, but the reserve as a percentage of the general fund has also grown, he said.

"They have the capacity to issue more debt and still have a Double A rating, because only 5% of the budget is liability," Gibson said.

The liability takes into account the bonded indebtedness of the county, of Los Angeles Unified School District and of pension and OPEB liability.

The preponderance of debt overlaps with LAUSD, he said.

Taxable assessed value for the county reached an all-time high of $1.3 trillion in fiscal 2016 and a further 5% taxable assessed valuation increase is expected in 2017, according to the Fitch report.

The county has a really strong debt position, said Jen Hansen, an S&P Global analyst.

"Carrying charges are 1.1% of expenditures, which is quite low; and direct debt is less than 7% of revenue, which in our matrix for our scoring, it is the very strongest it can be," Hansen said.

The county could issue "quite a bit of debt" and retain its high investment grade rating, she said.

"They have tended to be very conservative in debt issuances," she said. "In California, many municipalities tend to have weak debt scores. We are not a very debt averse state."

The county's exposure to healthcare costs through subsidies provided to the Department of Health Services also lessened as a result of changes wrought by the adoption of Affordable Care Act, Gibson said.

The extension of the Medi-Cal waiver through 2020 helped stabilize healthcare costs in the county as did the enrollment of previously uncovered county residents under the Affordable Care Act.

If DHS continues strides toward self-sufficiency, Fitch could consider an upgrade, Gibson said.

In terms of services for the homeless, Gibson said the county is looking to size services in line with revenue generated through the various tax increases being proposed, rather than setting it up in a way that would deplete the general fund.

He said the millionaire's tax, a budget trailer proposed by the county that failed to pass the governor's desk this week, additive.

"If more money came in from one of those new funding initiatives, it would be dedicated to the homeless," Gibson said.

 

Targeting the Homeless Problems

The supervisors are crafting a multi-million dollar plan to work in conjunction with city officials to reduce a homeless population estimated at 46,000 people in the county of 10 million.

The $150 million budgeted annually, which pays for mental health services, is not nearly enough, Kuehl said.

"If you think of a $28 billion budget – and that doesn't count transportation, which is separate, and goes through metro, $150 million doesn't sound like a lot of money," Kuehl said in an interview last month. "We spend almost $1 billion on people who are homeless, because they are indigent."

That is why the county has been searching for revenue sources – including the failed trailer bill on the state's budget that would have placed a proposal to raise taxes by a half-cent per $100 on income over $1 million on November's ballot, she said.

On Monday, the county also delivered a petition with nearly 11,400 signatures from citizens in favor of an emergency declaration to the governor.

California Gov. Jerry Brown rejected both the tax and the statewide emergency declaration.

"As we've said in the past, the governor had deep concerns about this plan," said Deborah Hoffman, Brown's deputy press secretary.

The governor has said previously that he is concerned about the precedent it sets for local government to enact income taxes, which has historically only been an income source for the state.

But the county has several ideas, beyond the proposed millionaires' tax, to help tackle the issue, Gibson said.

"We have talked to the county and they are exploring a variety of revenue options," Gibson said.

Fitch is not concerned about the amount of money the county plans to spend on homeless programs, because the county has a healthy reserve and low debt ratio, Gibson said.

"We are aware that homelessness is a priority for the county," Gibson said. "They are looking to fund those services through budget realignment and reprioritization."

On Tuesday, the Los Angeles City Council approved ballot language for a $1 billion general obligation bond measure to pay for housing for the homeless for November's election. The county is trying to find funds to provide ancillary services.

"I think what the board has done is to redefine fiscal conservatism," Kuehl said. "It seemed to me that in the past it had to do with being very reluctant about spending."

She said when she took office there were hundreds of different accounts where money had been put away, just in case.

When you have a prudent reserve, she said, there is no reason to hold back in every other area; so county supervisors looked at the budget with an eye to allocating more money to social services.

"We are spending less on programs that did not work," Kuehl said. "We have a strong and prudent reserve; pensions are 84% funded, which is high across the nation; and our bond rating went up, and that is all in the year that the new people have been here."

Hansen said the county is well-positioned even if the country should enter a recession.

S&P looks at how management manages through the economic cycles, Hansen said.

"Our assessment of Los Angeles County is very strong," Hansen said. "They have well embedded policies and practices that brought them through the previous recession."

The county has a reserve right now of over 17% and Hansen said S&P expects they will continue to manage well through any economic cycle.

 

Yaroslavsky Cautions on Spending

During the 20 years Yaroslavsky was in office, he said there was enough of a reserve, so the board could flatten the revenue amplitudes that tended to plague the county.

"We sought to put away enough money in good years to navigate the lean years," he said.

He understands, however, the need to spend more money on the challenges faced by the county. He said during his tenure the county budget grew from $11 billion to about $26 billion.

"Inflation certainly played a role, but we were always mindful of a need to be able to live within our means and not get in the situation our predecessors got us into in the early 1990s," he said. "The key philosophy is that government like everyone else should not undertake expenditures in the good years that they can't take care of in the lean years."

A telling contrast, he said, is the way the city handled its finances.

"The city gave exorbitant pay increases and pension increases and spent beyond its means," he said. "After the recession, they had to lay off several thousand employees and furlough many more."

Many of the union leaders represent both city and county leaders – and Yaroslavsky said when he met with them post-recession, he asked if they would rather take zero cost of living increases, and have everyone working, or have what is going on down the street at Los Angeles City Hall, which was tumult and fiscal problems for employees.

"LA County is in good fiscal shape, but it would be easy to squander that position," Yaroslavsky said.

The county handled the recession by preparing for it in the years that preceeded the downturn, he said.

"We did not know that we would experience that kind of a recession, but we did not want to get stuck," Yaroslavsky said.

When the Great Recession struck in 2008, he said it was difficult and supervisors had to shrink the organization a bit, but no layoffs were required.

"We were able to provide services to clientele, though it was not in a way that we would have liked," he said. "We didn't have any choice. We can't print money."

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