The Board of Supervisors warned Tuesday of program cuts that could be severe as Los Angeles County officials maneuver through the fallout of an unprecedented pandemic and work out major revisions to a preliminary $35.5 billion budget for fiscal year 2020-21.
“The fallout has resulted in broad and deep reductions,” said county CEO Sachi Hamai, who is projecting a $1 billion drop in revenues this fiscal year, set to end June 30.
The CEO estimates that revenues will decline by another $1 billion-plus next year. She said the county is more dependent now on property and sales tax revenue than it was during the 2008 recession, due to state budget realignments.
“This is a budget process unlike any we’ve ever faced before, even in previous downturns,” Hamai said in a statement Monday. “Although the county has its strongest fiscal foundation ever, thanks to our long history of prudent budgeting and investments in our Rainy Day fund, we are in a profoundly challenging economic environment that may get worse before it gets better.”
The county has been operating in a robust economic environment for years, but now will be forced to make tough decisions about which programs to prioritize and which to cut.
“The county of Los Angeles has been living large,” Supervisor Mark Ridley-Thomas said. “It does not mean living irresponsibly,” he added, pointing to significant growth in county programs and services that support more than 10 million residents. “The impact of COVID-19 will be profound by any standard or measurement.”
The CEO said the county would consider a wide variety of approaches to achieve a balanced budget this year and the years ahead, including spending down reserves and trust accounts, continuing a hiring freeze on all non-essential positions, and suspending contributions to employee 401k plans and to a fund for affordable housing.
On March 31, the Board of Supervisors froze hiring for all non-essential positions and has since asked department heads to prepare for program cuts in the year ahead.
The CEO also said the county would now have to pay close attention to its cash flow.
“Cash flow is like the balance in your checking account,” Hamai explained, saying that the county is projected to close the year with a cash balance of roughly $200 million.
“That may sounds like a lot, but … suddenly we have … $950 million less to pay our expenses and our employees,” Hamai said, explaining an unanticipated drop in the balance to the board.
The county employs more than 110,000 people, however the monthly payroll total was not immediately available.
Supervisor Kathryn Barger said the county’s Rainy Day fund “will now be vital to help us ensure continuous services for those who truly do need it.”
That fund currently stands at $602 million, according to a county spokeswoman.
Supervisor Sheila Kuehl made a bid not to cut contributions to the affordable housing trust fund.
“That is not a done deal,” Kuehl said. “This is one of the solutions for people to be able to recover. We need to be able to live in places that we can afford” and avoid a new influx of homeless people.
The proposed budget — which now seems like little more than a placeholder — focuses on developing and preserving affordable housing, in line with the county’s efforts to mitigate homelessness. It also emphasizes health and mental health programs, including funding for more inpatient mental health beds.
One of the open questions is how much federal funding will be available to backfill county losses, but Hamai warned that even critical services like law enforcement and protective social services could be cut.
Los Angeles County officials have joined with the National Association of Counties to advocate for full reimbursement of COVID-19 expenses by the Federal Emergency Management Agency. NAC has also asked the federal government to allow municipalities to use funding from the federal coronavirus relief bill to offset revenue losses.
The budget proposal was largely drafted before the current crisis and assumes a 5.25% increase in tax assessment rolls and a slight increase in state sales tax. It is difficult to draw conclusions about exactly how the county’s priorities might shift going forward as those estimates get knocked down.
Significantly worse-than-expected returns on investments are also likely to result in sharply increased county pension fund costs in future years.
Measure H sales tax revenues, which are used to fight that battle, are projected to decrease significantly as a result of the economic downturn triggered by the global pandemic.
“In fact, all recommendations in the proposed budget are likely to be reconsidered, given the deep uncertainties ahead,” according to a statement released by the county on Monday.
A recent analysis conducted by Moody’s Analytics for the Wall Street Journal and cited in budget documents found that the daily economic output in Los Angeles County has fallen by 35% due to business closures.
“If state sales tax were to drop by 25% or $1.4 billion in the current fiscal year, it would result in drastic cuts to local programs — many of which are needed to continue addressing the pandemic, and to help county residents survive the short and long-term fallout from this event,” according to the county breakdown.
“We are hoping for the best but preparing for the worst as we chart the course ahead,” Hamai said. “As always, we will prioritize vital services to the public and our essential role as the safety net for our most vulnerable residents.”
Kuehl said some changes forced by the coronavirus and economic fallout could be positive, with Kuehl envisioning “a more fulfilling but pared down economic life … we have to think about a post-pandemic world.”
The board is expected to adopt a recommended budget in June and finalize it in September.