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Bubble budget

April 19, 2006

THINK OF THE LOS ANGELES county budget as a mountain balanced precariously on top of a pebble. It is a massive entity, coming in this year at $19.4 billion -- less than last year's but more than nearly half the state budgets in the union.

Why is it balanced on a pebble? Because the slightest movement could send the whole structure toppling. And few things lurch more violently than the Los Angeles real estate market.

This year, the county is expecting $392 million more in property tax revenue than last, roughly half of which is directly attributable to the continuing upsurge in home sales and valuations. In the budget proposed Tuesday, the Board of Supervisors' discretionary portion was 14%, up from just 3.2% in 1997-1998. The entire difference is funded by property taxes.

Those dramatic numbers are somewhat misleading. Proposition 1A, passed two years ago, keeps state hands out of the county's revenue cookie jar while reducing Sacramento's need to transfer the pilfered funds back down; on the other hand, once you strip out federal and state assistance, the $3.2-billion property-related haul amounts to a whopping 64% of the board's entire pot of locally generated revenue. By any measure, the county's exposure to real estate risk is huge and untenable.

The property boom is good news for the county today, but in the words of Chief Administrative Officer David Janssen, "it's scary as hell." Janssen cites the recession-triggered meltdown of 1991, when the bottom fell out of the real estate market and the county's finances went into a tailspin. The ensuing fiscal wreckage stretched out over several years; by 1995, the county was teetering on bankruptcy. An uptick in the economy -- and two federal bailouts -- kept the budget afloat.

So how, knowing that, can Janssen propose to hire 3,000 new county employees -- increasing the payroll to 98,000 people, or about the entire population of Compton -- while funding new programs such as a DNA lab?

Janssen argues that failing to spend now, while the money is there, could end up costing more down the line. No DNA funds means a county hopelessly behind the law enforcement curve, with felons escaping justice and innocent people languishing behind bars. No new hires at juvenile hall means more federal penalties for inadequate supervision of violent teens. No smart use of newly available foster-care money means more children lost in the system and headed toward costly behavior as adults. And no urgent action on bloody jails and homeless-filled streets means enduring shame for a would-be world capital.

Still, last year's revenue spike was devoted to one-time fixes that did their work and disappeared. This year's proposals for longer-term rebuilding require new demands on the budget not just this year, when the county is flush, but in years to come, after the real estate bubble may have deflated or even popped. The supervisors must be mindful of that fact and know that costly programs they commit to now will still be there when the money stops flowing.

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