Editorial Note: Although every effort has been made to insure the accuracy of the material in this presentation, the scope of the material covered and the discussions undertaken lends itself to the possibility of minor transcription misinterpretations.

PRESENTATIONS BY
Dr. David Janssen
Chief Administrative Officer
Los Angeles County

Topic: The Los Angeles County Budget
September 7, 2006


Chair Hill then introduced Dr. Janssen and welcomed him to the Commission.

The Los Angeles County Budget

Dr. Janssen opened by saying that the financial state of the County is very strong, with an estimated fund balance of $1 billion, up $200 million from 2005. He said the fund balance should continue to grow in the future, and eventually enable the County to loan money to markets. Dr. Janssen explained that although California Proposition 1-A, the “Local Government Protection Act” did not bring revenue directly to the County, it did prevent Governor Schwarzenegger from siphoning off locally-generated revenue for state initiatives. This has been a major contributing factor in the 2006 fund balance. Dr. Janssen added that Prop 1-A has freed up funds that would otherwise go into reserves.

At the same time, Proposition 1-A caused a backfill budget issue. Governor Davis raised the car tax to its legal maximum, saving the state $4 billion, which it paid out to local governments through the state general fund. Following his election in 2003, Governor Schwarzenegger cut the fee by 66%, creating a $4 billion deficit in the state budget, which is still part of the $4 to $5 billion state deficit. In subsequent budgets, the state began to backfill by transferring funds from school property taxes to counties instead of paying from the state general fund or by raising the state vehicle licensing fee. Los Angeles County actually benefited from the transfer, as property tax from County schools exceeded vehicle licensing fee revenue by more than $100 million per year. In addition, the April 2006 Proposed Budget decreased from $19.8 billion to $19.3 billion, masking an increase of $577 million in the County general fund, the combined result of school property tax funds and a sharp increase in Assessor revenue.

Dr. Janssen then discussed trends in discretionary funds. He recalled that only 3.3% of the 1996 budget went toward discretionary funds. In contrast, nearly 15% of the 2006 budget is discretionary. Overall, Proposition A-1 has increased budget flexibility for local governments. Dr. Janssen pointed out that the figure of 15% is skewed by a significant portion of one-time money, which gives the appearance of more fiscal discretion than the budget may allow in the future. Dr. Janssen recalled that in the past, the primary cost-drivers for counties were welfare, general relief, health care, and child protective services. Today, costs in these programs have leveled out, and the Los Angeles County welfare system has enjoyed a 50% caseload reduction. Both County expenditures and cost-drivers have decreased dramatically, except for In-Home Supportive Services (IHSS), which continues to grow due to an increasingly elderly population. IHSS is also becoming a larger part of the state budget. These program costs are shared between federal, state, and local governments, with state and local governments providing 65%, and the federal government providing 35% of the budget. Dr. Janssen said that IHSS is the major cost driver in the present budget.

Dr. Janssen then took a moment to distinguish discretionary programs from mandatory programs. He said he does not consider the District Attorney mandated because the County must have a District Attorney, but the law does not stipulate the staffing level. Alternatively, the law does mandate that the County pays welfare to qualified applicants. Thus, welfare is a mandated program, as the County is obligated to pay a specified amount. He then said that jails and programs for the homeless are essentially discretionary, receiving funds based upon established priorities. Dr. Janssen went on to say that for years the District Attorney was not considered a priority. For four consecutive years he could not afford to hire any new staff. But, current funding increases along with increase in budgetary flexibility, has provided the District Attorney with additional funds including the funding for a new DNA lab. Dr. Janssen also noted that jails are discretionary. Nevertheless, if the City of Los Angeles hired 1,000 new police officers, more people would be arrested than the jails and courts could process. Dr. Janssen said that these are the new kinds of challenges the County faces. Dr. Janssen then returned to the topic of the State of the County, saying that overall revenues increased, while mandated demands for services either declined or remained constant. He added that the County will finish negotiations with Service Employees International Union (SEIU) Local 660 by September 30th, 2006. At that time all County employees should be under contract for the next three years, which should give the County additional stability.

Dr. Janssen then addressed the complexities of county budgeting, explaining the County must still match state and federal funds, maintain requisite funding in certain areas to draw down other funds, and that the County must compensate for drastic federal reductions in health care funding. He then referred to a chart he handed out entitled “L.A. County 2006-07 Adopted Budget, Total Revenue $20 Billion”. Dr. Janssen pointed out from the chart that funding sources are rather well-balanced, with locally-generated revenues comprising 26%, state 21%, federal 20%, and other revenue sources, including fund balance, special funds, and districts comprising the remaining 33%. He then read an editorial from the Los Angeles Times about how the budget depends precariously on the Los Angeles County real estate market.

Dr. Janssen directed the Commission to a chart describing the relationship between locally-generated revenue and net county cost (NCC). He noted that virtually any budgetary decision the County makes can be traced to NCC. Dr. Janssen then went into detail about property tax revenues, explaining that, four years ago, revenue from property tax comprised 46% of locally-generated revenues, but has recently risen to 60% percent, and comprises closer to 70% of the budget when capital projects, set-asides, and one-time money are subtracted. Dr. Janssen said he would prefer a budget that depended on local property tax revenue over one that relied on the state general fund because, with the exception of occasional market crashes, property tax revenue has shown consistent positive growth. Dr. Janssen said that the CAO has forecasted a 5% growth in property tax revenue, and 4% growth in the subsequent year. If markets crashed as they did in the 1990s, the County would still receive 2% base growth of property tax from Proposition 13, but the base is not as strong as it once was. These facts taken together make Proposition A-1 even more important. Proposition A-1 provides that the state can borrow property tax from local government, but has to pay back what they borrow with interest within three years. Dr. Janssen does not think this will happen and considers protected property tax to be a more reliable revenue source than the state general fund.

Dr. Janssen then moved on to discuss the health system, which he considers the largest problem facing the County. Economic forecasts for 2007-08 indicate a $300 million deficit that continues to grow. In the last year and a half, Dr. Janssen recommended and the Board supported a $150 million increase in Health Department funding from the general fund. The deficit is about 9% of the entire Health Department budget, down 21% from 1995, so that the problem is not as big, but is still substantial. County hospitals serve 909,500 people each year, 600,500 of which cannot afford hospital costs, particularly since hospitals lost waiver funding. The Bush Administration’s Medicaid cuts exacerbate this problem. Dr. Janssen then mentioned rumors of a White House proposal which would cap the reimbursements for costs to hospitals, which he said even the Republican Congress had not been willing to do.

Dr. Janssen said that the only growing revenue stream for the Health Department is Measure B, the property tax assessment for emergency care. Dr. Janssen then said that the deficit will never go away, that costs will always outrun revenue. He said there always seems to be some crisis or diversion that foils the Board’s efforts to reign in costs. Dr. Janssen said the current team of executives in the Health Department is an excellent group, and that he hopes they can work with the Board to reduce costs at Martin Luther King Hospital. Dr. Janssen mentioned that the County is working with state and federal government to bring more revenue streams to the Health Department. He mentioned Proposition 86, which would bring an additional $80-90 million per year to the Health Department. Dr. Janssen said that the Health Department will never reduce their deficit unless major reforms take place within the national healthcare system.

Dr. Janssen mentioned the cost of retiree health. He said that there is a requirement that all local and state governments identify their unfunded liability for retiree health, which has proven to be astronomical. The state’s unfunded liability was $70-$80 billion. Two years ago the Grand Jury identified the County’s unfunded retiree health liability at $9 billion, which Dr. Janssen says is probably a low figure. He then said the County spends about $325 million a year for retiree health. He does not consider the County health plan excessive since it requires ten years of employment to be vested for 40% coverage, and twenty-five years to receive 100% coverage. He believes the County will identify several billions of dollars in unfunded liability. Dr. Janssen said there was a law that passed in 1982 in which the County negotiated an agreement with the Los Angeles County Retired Employee Association (LACERA) that stipulated the County must provide retiree healthcare if it continues to provide active healthcare, meaning Los Angeles County has one of the highest unfunded liabilities. Dr. Janssen said that sometime between 2010 and 2012 the County’s pension obligation bonds will have been paid off and they will have an additional $300 million a year available that would likely be directed toward retiree health.

Dr. Janssen returned to the topic of jails, saying that since the County’s conservative fiscal forecasting has yielded a substantial fund balance, this has enabled the County to invest $225 million cash into rebuilding and reopening jails. The Board approved a motion to restore and reopen the Sybil Brand Institute following completion of an environmental impact review. The plan calls for the transfer of female inmates to Sybil Brand from Century Regional Detention Facility (CRDF), freeing up 1,400 high-security cells. Building a thousand-bed medium-security facility will add thousands of beds to the overall system at a cost of about $80 million.

Questions and Comments

Dr. Janssen asked if anyone had questions. Commissioner Petak asked whether the unfunded liability for retiree healthcare has been an ongoing problem. Dr. Janssen replied that it has been. Dr. Janssen added that he believes there is no reasonable way to fund this liability, and the County is not required to do so. Dr. Janssen added that he is not sure how worthwhile it would be to pay into the County’s unfunded liability, because no one can predict what state of medicine will be in ten years from now, therefore the County could unnecessarily risk assuming huge debts. Commissioner Petak asked whether long-term care is counted as part of that liability. Dr. Janssen replied that it is not.

Commissioner Parks asked if the new DNA forensics laboratory for the District Attorney’s Office could be operated through the Coroner’s Office in the interest of equal access to resources for defendants. Dr. Janssen noted that DNA samples are not incontrovertible at present, and asked whether Mr. Cooley, the District Attorney, had any comments on the subject. Mr. Cooley replied that the County Coroner is developing a DNA lab that relates to its statutory duties, and added that the number of attorneys specializing in legal issues associated with DNA samples will need to increase in proportion to the broadening applications of DNA analysis. Mr. Cooley then noted that once DNA is matched with a defendant, the prosecutor must still build a case around that evidence. Dr. Janssen asked Mr. Cooley how many active cases involving DNA samples are currently underway in the County. Mr. Cooley replied that the number of active cases exceeds one-hundred fifty.

Chair Emeritus Philibosian asked how much the County spends on healthcare for illegal aliens, what efforts have been made recover costs, and to what extent these costs have been reimbursed by the federal government. Dr. Janssen replied that the best rough estimate of costs is around $100 million net of the $3 billion dollar health budget, with most expenditure going toward emergency care. Dr. Janssen added that the County spends about the same amount in jail healthcare, and said that the federal government will not directly fund the cost of healthcare for illegal aliens, but that Medicaid formulas do cover a portion of these costs. Dr. Janssen noted that healthcare for illegal aliens are a big part of the budget, and that hospitals cannot refuse emergency care to anyone for lack of funds.

Commissioner Tortorice asked Dr. Janssen to what extent County executives will be leaving office. Dr. Janssen said the actual percentage has not been determined, but that the trend is national, and can be attributed to smaller pools of qualified executives who are drawn into new positions by higher pay as the demand for them increases. Dr. Janssen also believes that the new generations of workers place less importance on work because they have lived in more prosperous times than the preceding generation, and may take their range of opportunities, services, and amenities for granted. Dr. Janssen then said that this ideological shift will also bring an influx of new ideas and change the way people conduct business. Dr. Janssen remarked that he wonders what impact this shift will have on government and decision-making.

Commissioner Parks said he was glad to hear that the position of the County is strong, but that he has concerns about sales tax distribution, which flows from the County to the State. Commissioner Parks then asked Dr. Janssen how sales tax revenue might be distributed according to population as opposed to point of sale. Dr. Janssen replied that he is not sure how this would be done, and then took the moment to say Proposition 13 had such a detrimental effect on California that he feels the subsequent budgeting has been highly illogical. Dr. Janssen recalled earning his PhD from the University of California at very little cost, which he says is no longer possible. Dr. Janssen explained that people often curtail the long-term benefits of resourceful budgeting when they complain about paying relatively nominal fees, such as the car tax. Dr. Janssen then expressed interest in a regulation that required proposed tax reductions to list which services would need to be cut to make them possible.

Chair Hill thanked Dr. Janssen for his informative presentation.

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