CSA
Summary
Read the report at California State Auditor ↗
Los Angeles
County:
Balanced Budgets Will Be a
Continuing Challenge
March 1996
96018
Table of Contents
Summary S-1
Introduction 1
Chapter 1
Los Angeles County’s Fiscal Year 1995-96
Balanced Budget Is Predicated
on Achieving Certain Conditions 5
Recommendations 15
Chapter 2
Past Actions Make Balancing Future
Budgets More Difficult 17
Recommendation 24
Chapter 3
The County’s Efforts To Address
Employee Compensation Issues
Are Starting To Show Savings 25
Recommendations 32
Chapter 4
The County Is Facing Numerous Future
Challenges To Balance Its Budgets 35
Appendix A
Review of Memoranda of Understanding
With Four Bargaining Units 41
Appendix B
Percentage Changes in County Salaries
Fiscal Years 1989-90 Through 1995-96 43
Response to the Audit
Los Angeles County 45
Summary
RPreolivainscioe nosn in
Lossp hAaosnrtg tc-etoelelrlsme c tive
Results in Brief
AudCito Husbinoagtlrhyugl t iapi g oirhnnotisdsn ug..c . e d
balaangcreeedm beundtgse atsn d L
os Angeles County (county) is one of California’s
in eeamchp loofy tehee last
original 27 counties and is responsible for providing
fivec foisnctraal cytesa. rs,
public welfare, health, and public safety services to its
after initially
citizens. Under the provisions of the California
announcing
Government Code, Section 29088, the county must
shortfalls ranging
approve a balanced budget by August 30 of every fiscal
from $277 million
year. In preparing its budgets for each fiscal year between
to $1.2 billion;
1991-92 and 1995-96, the county announced that it had
budget shortfalls ranging from $277 million in fiscal year
To balance its 1991-92 to $1.2 billion in fiscal year 1995-96. However, by
fiscal year 1995-96 the time it adopted a budget for each year, the county had
budget by year produced a balanced budget through the use of layoffs,
end, the county program curtailment, one-time financing to raise revenue,
needs federal increased taxes and fees, and use of fund balance. Our
approval of a review focused on the county’s fiscal condition as well as
$346 million health the conditions and actions that have contributed to the
relief package, and budget shortfalls. Specifically, we noted the following:
departments must
meet a 20 percent
In January 1996, the county announced that its shortfall
reduction in net
for fiscal year 1996-97 is $517 million. In addition, the
county cost; and
likelihood of the county’s achieving a balanced budget
in fiscal year 1995-96 is subject to its successfully
Some of the obtaining approval by the federal government of a $346
causes for the million health-relief package and having many of its
fiscal crisis are: departments meet their targeted 20 percent net county
cost reduction, producing a savings of $155 million.
Property tax
shift to schools Several factors, including property tax shifts to schools,
have caused the county’s fiscal crisis. For example,
between fiscal years 1992-93 and 1995-96, the county
will have transferred a total of $3 billion to school
districts and community college districts.
Until fiscal year 1995-96, the county relied heavily on
short-term solutions to resolve its budget shortfalls.
For example, in fiscal year 1992-93, the county raised
cash to cover its operating expenditures by
encumbering a major county asset, Marina del Rey, and
S-1
selling $160 million
in bonds. The county will pay principal and interest on
these bonds until the year 2008.
The county has been limited in the actions it can take to
address budget shortfalls due to provisions in past
collective bargaining agreements and employee
contracts that have stipulated increases in employees’
salaries and benefits. Also, the county has limited
discretion over the spending of 90 percent of its General
Fund revenue because these funds are specifically
designated for operation of state and federal programs.
Future balanced budgets will be difficult to achieve
because the county will need additional funding to
implement the Three Strikes law, repair county-owned
buildings damaged in the Northridge earthquake, and
implement state and federal welfare reform. In
addition, the legality of certain increases in the county’s
taxes may be challenged.
Recommendations
To ensure achieving a balanced budget for the current and
future fiscal years, the county should:
Continue its efforts to finalize Phase I of the 1115
Waiver. In addition, the county should pursue the
necessary changes to state and federal legislation so it
can implement its planned changes to its health care
system in Phase II of the 1115 Waiver.
Closely monitor all affected county departments to
ensure that they reach their targeted 20 percent
reduction in net county costs.
Continue its emphasis on far-reaching strategies for
solving budget shortfalls begun in fiscal year 1995-96.
Continue the policy of negotiating no salary increases in
collective bargaining agreements until its economic
situation improves.
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Continue the hiring-freeze policy but grant exceptions
where limited staff as well as public health and safety
requirements create a strain on departments’ abilities to
fulfill their missions without current employees working
unreasonable overtime hours.
Ensure that all departments establish and maintain
controls over the authorization and use of overtime.
Agency Comments
The county generally agrees with our recommendations
and is proceeding with efforts to implement them. In
addition, the county concurs with the objective of achieving
greater consistency in the authorizing of overtime among
departments and will be working to ensure existing
procedures and controls are more uniformly followed.
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Introduction
E
stablished on February 18, 1850, Los Angeles
County (county) is one of California’s original 27
counties. Located in the southern coastal portion of
the State, it covers 4,083 square miles, and in 1995 had a
population of 9.2 million people. In terms of population,
the county is larger than 42 states in the United States and
is the largest county in the nation.
Under the provisions of the county charter, county
ordinances, and state and federal mandates, the county is
responsible
for providing public welfare, health, and public safety
services and for maintaining public records. The county
provides
health services through a network of 6 county hospitals,
6 comprehensive health centers, and 39 health clinics,
some of which are operated in conjunction with private
providers. While many of the patients served at the county
facilities are indigent or covered by the California Medical
Assistance Program (Medi-Cal), the county health care
delivery system provides health care to the entire
community. The county provides municipal services to
and operates recreational and cultural facilities in the
unincorporated areas. It also provides services such as
law enforcement and public works to cities within the
county that reimburse the county for the costs.
Governing the county is a five-member board of
supervisors who are elected by district to serve four-year
alternating terms at elections held every two years. The
assessor, district attorney, and sheriff are also elected
officers. Appointed officials head all other departments.
The county operates on a fiscal year that runs from July 1
through June 30. Under the provisions of the California
Government Code, Section 29088, the county board of
supervisors is responsible for approving a balanced budget
by August 30 of every fiscal year.
1
In preparing its budgets for each fiscal year between
1991-92 and 1995-96, the county announced that it had
budget shortfalls ranging from $277 million in fiscal year
1991-92 to $1.2 billion in fiscal year 1995-96. However, by
the time it adopted
a budget for each year, the county had produced a
balanced budget in accordance with state law. Over the
past five years, the county has addressed the shortfalls by
taking a number of actions, including layoffs, program
curtailment, one-time financing to raise revenue, increased
taxes and fees, and use of fund balances. These actions
have had both short-term and long-term impacts on current
and subsequent shortfalls. Other actions that are still
pending will have an unknown ultimate effect.
Scope and Methodology
Chapter 518, Statutes of 1995, mandated the Bureau of
State Audits’ review of the county’s fiscal condition as well
as the determination of the conditions and actions
contributing to
the budget shortfall. Specifically, we were directed to:
Review and assess the county’s projection of revenues
and expenditures;
Compare the county’s budgeted revenues and
expenditures with actual revenues and expenditures,
including an analysis of any significant variances;
Review budget actions that the county took in recent
years to meet short-term and long-term funding needs
and that have had or will have an impact on county
budgets;
Identify potential barriers to the implementation of
corrective measures, including the county’s charter,
collective bargaining agreements, and maintenance of
effort requirements imposed by state and federal
governments;
Review the sources, uses, and terms of long-term debt
financing entered into by the county and the extent to
which it funded ongoing operating expenditures; and
2
Recommend, as appropriate, improvements in the
efficiency and effectiveness of the county’s operations.
To determine the process that the county used to estimate
its expenditures and revenues, we interviewed budget
analysts in the Chief Administrative Office (CAO) and in
selected departments. We also reviewed recent audit
reports for other issues related to the revenue and
expenditure process. We compared budgeted and actual
amounts for expenditures and revenues for the past four
fiscal years. We calculated variances between the budget
and actual numbers, and we determined the reasons for
these differences for the county budget as a whole and for
the 12 largest budget units.
To determine the actions taken in recent years to meet
short-term and long-term funding needs that have had or
will have an impact on county budgets, we obtained
schedules of the budget shortfalls from the CAO and
determined the actions taken by the county and the impact
of these actions. We also calculated the fiscal impact
these actions will have on future budgets. We then
analyzed these actions and ascertained additional steps
that the county could consider to address the budget
shortfalls.
To identify potential barriers to the implementation of
corrective measures, we reviewed the county charter for
mandates that could reduce the county’s ability to take
corrective action. We also interviewed personnel in the
CAO and read the collective bargaining agreements to
determine provisions that could reduce the county’s ability
to implement corrective measures. In addition, we
determined the extent of maintenance of effort
requirements imposed by the state and federal
governments and whether the county could negotiate
waivers of these requirements. Further, we determined
the percentage of revenues received by the county that
must be spent for specified purposes.
We reviewed the sources, uses, and terms of long-term
financing entered into by the county and the extent to which
it funded ongoing operating expenditures. We also
analyzed the county’s use of long-term leases, leases of
3
county-owned property, and bond anticipation notes to
determine if the county used them to its best advantage.
Finally, in this, the first of five reports, we focused on
employee compensation. We analyzed the changes in the
county’s payroll and benefits structures from July 1, 1989,
through December 31, 1995. We also reviewed the
county’s internal controls over the use of overtime.
4
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5
Chapter 1
Los Angeles County’s Fiscal Year 1995-96
Balanced Budget Is Predicated
on Achieving Certain Conditions
Chapter Summary
L
os Angeles County (county) ended fiscal year 1994-95
with a fund balance of $208.5 million in its General
Fund. For fiscal year 1995-96, the county estimated
that it
would require General Fund revenues of $8.4 billion in
addition to its $208.5 million ending fund balance to meet
its estimated expenditures of $8.6 billion. As of January
22, 1996, the county expected to end fiscal year 1995-96
with a $0 fund balance in its General Fund. However, the
likelihood of achieving a balanced budget in fiscal year
1995-96 is subject to the following conditions:
A $346 million increase in health-related revenues
through the approval by the federal government of a
health relief package, also known as the 1115 Waiver;
Achieving the targeted 20 percent net county cost
reduction by all affected county departments for an
estimated savings of $155 million;
Transfer of $50 million from the Los Angeles
Metropolitan Transit Authority to the county;
An increase of $17 million in state revenue for funding
the county’s probation camps;
Layoffs and attrition of permanent county employees
in addition to the 20 percent reductions for an estimated
savings of $12 million; and
The Commission on State Mandates’ approval of the
county’s request for relief from the mandated minimum
general assistance cash grant resulting in an estimated
savings in fiscal year 1995-96 of $25 million.
6
When preparing the budget in June 1995, the county used
these balancing actions with the understanding that they
required further work or time to implement. The county
achieved four of the six major budget-balancing items as of
February 23, 1996. Further, the approval of the 1115
Waiver is pending and the 20 percent reduction in net
county cost is in progress. Since we completed our field
work on February 23, 1996, the county has received an
indication from the federal Department of Health and
Human Services that the federal government would be
prepared to issue formal approval of the 1115 Waiver by
the end of March 1996.
Two Budget Balancing Actions
Are Not Yet Complete
As of the end of February, the county was working to
complete two budget balancing actions, which total
$501 million. The 1115 Waiver, the most critical to the
county’s budget balancing program, depends on the federal
government’s approval. The other action, a 20 percent
reduction of net county cost, will take the cooperation of all
affected county departments and requires constant
monitoring by the Chief Administrative Office (CAO).
The 1115 Waiver Is a Key Element
in Resolving the Budget Shortfall
In June 1995, the county faced a $655 million deficit in its
health care budget for fiscal year 1995-96. County
hospitals serving a disproportionate share of indigent
patients were confronted by a potential substantial
reduction in California Medical Assistance Program
(Medi-Cal) revenues as a result
of hospital-specific limits on federal funding adopted by
Congress in the Omnibus Budget Reconciliation Act of
1993 (OBRA 93). In the past, these federal funds have
served as
a key factor in maintaining county hospitals. Recognizing
that the county could no longer afford to maintain its public
health care system as it was currently structured, the
county made plans to close health centers, lay off or
7
demote employees, and possibly close one or more
hospitals.
State, federal, and county officials created a plan to
stabilize the county health care system and provide time for
The 1115 Waiver is implementing reforms in a reasonable fashion and averting
intended to stabilize the a shutdown of hospitals and clinics. The plan, commonly
county’s health care referred to as the 1115 Waiver, was developed pursuant to
system to provide time to Section 1115(a) of the federal Social Security Act and
implement reforms. Article 7 of the California Welfare and Institutions Code,
which authorizes the director of the State Department of
Health Services to seek development
of alternative forms for the financing and delivery of health
services.
On December 4, 1995, the county’s request for an 1115
Waiver entered a 30-day public comment phase, which
means
that a draft of the proposal was prepared and distributed to
interested members of the health care community for their
comments. As of February 23, 1996, the county and the
State Department of Health Services were working to
incorporate the public comments into the official state
waiver request to be sent
to the federal government. The county expects the federal
Department of Health and Human Services to issue a
Phase I of the waiver will decision by the end of March 1996.
provide an additional
$346.3 million in federal The request describes a project that is to remain in place
fiscal relief. for five years and includes two phases. The county
developed Phase I to stabilize the system financially by
providing federal fiscal relief to the county and to begin the
process of restructuring. The county anticipates that
Phase II will involve fundamental changes in both the
financing and delivery of health care services.
In total, the relief plan will provide the county with
$346.3 million, $40 million of which will create a reserve to
help reduce the projected funding shortfall for fiscal year
1996-97. The elements of the relief plan are the following:
Federal Medicaid matching payments of $34 million
for indigent care at county clinics. This additional
funding will be present throughout the five years the
1115 Waiver is in effect. The county anticipates
shifting the emphasis in the way it delivers health care
away from inpatient hospital services to outpatient
8
services. The shift from inpatient to outpatient services
will be facilitated, in part, through the provision of
federal matching Medicaid funds for services rendered
to indigent patients in outpatient settings, such as
county clinics.
An interagency agreement between the State and
the county for funding of indigent care in hospital
settings totaling approximately $92 million. This
additional funding will also be present throughout the
1115 Waiver period and involves amounts that would
otherwise be excluded from federal matching payments
due to the passage of OBRA 93. In certain Medi-Cal
programs, the federal government matches state funds,
which are then allocated to public and nonpublic
hospitals providing services through the Medi-Cal
program. Public hospitals are those hospitals owned or
operated by the State or a unit of government within the
State. The State’s share of the funds are moneys
contributed annually by the public hospitals; nonpublic
hospitals are not required to contribute. The county
contributes on behalf of its public hospitals and
also contributes the nonpublic hospital share. Under
the interagency agreement, the county will continue to
contribute for both the public and nonpublic hospitals.
However, the nonpublic hospital share will be included
as a valid Medi-Cal expenditure in the calculation of the
limits set by OBRA 93, thereby increasing
reimbursements the county receives for providing these
services. The county’s portion of the administrative fee
charged by the State to administer the Medi-Cal
program will also be included
as a valid Medi-Cal expenditure, further increasing
reimbursements to the county.
County recalculation of its hospital revenues in
determining revenue limits imposed by OBRA 93.
The recalculation will generate approximately
$79 million in additional payments during fiscal year
1995-96 for the hospitals participating in the
Disproportionate Share Hospital program. This
program allows hospitals that provide service to an
exceptionally large number of low-income patients to
receive additional Medi-Cal funding.
9
A revised payment plan to defer the county’s
obligation for a portion of its fiscal year 1995-96
contribution to the State’s match of federal funds in
the Medi-Cal program. This will result in a benefit to
the county of an additional $125 million for fiscal year
1995-96, subject to final calculation of the county’s
obligation. As part of this agreement, the county
hospitals’ Medi-Cal disproportionate share payments
will not be reduced by the limits imposed by OBRA 93.
Under the terms of the agreement, any repayment
based on federal determination that payments received
by the county exceeded what the county should have
received for fiscal year 1995-96 will be deferred until
after December 31, 1997.
A package of public health service grants totaling
$16 million. Although not expressly a part of the
1115 Waiver, the federal Department of Health and
Human Services has agreed to provide an additional
$16 million in grants to assist the county in carrying out
public health activities.
In anticipation of federal approval of the 1115 Waiver, the
county utilized these health relief funding measures to
avoid hospital closures, partially restore outpatient services
in health clinics scheduled for closure, and address a
portion of the fiscal year 1996-97 anticipated health
services shortfall. However, even with these restorations,
it was necessary for the county to take other steps to
eliminate the remaining fiscal year 1995-96 deficit and to
reduce its cost of providing health care.
Overall, to balance the fiscal year 1995-96 health budget,
the county reduced expenditures and increased revenues.
Specifically, the board of supervisors reduced expenditures
by adopting $63 million in reductions to health services
administration, $217 million in reductions to direct services,
and $20 million in cost savings. Increased revenues
included $159 million in one-time revenues such as a
transfer of funds from the Los Angeles Metropolitan Transit
Authority (transit authority) and $403 million in anticipated
revenues, which included the health relief package and
other Medi-Cal adjustments. These increases in revenue
To reduce the cost of
allowed the county to reserve $40 million to apply towards
operating its health
the next year’s projected health budget deficit. During the
clinics, the county is
developing partnerships implementation of these actions, it was necessary for the
with private health care county to recognize $107 million in new costs and an
organizations to provide
outpatient services. 10
additional $60 million in unrealized Administrative Claims
Program (SB 910) revenues.
Additionally, as of October 31, 1995, the county entered
into six public-private partnership contracts under which
private health care organizations provide health care to
county residents in six of the county’s health clinics. This
effort was an emergency stabilization strategy for reducing
county costs and preserving the availability of community
health services that would otherwise be lost.
The county anticipates continued development of
public-private partnerships to expand access to primary
care. It plans to finalize another 22 contracts for these
partnerships by June 30, 1996, with the goal of reducing
the county’s expense for operating the health clinics.
Financing for outpatient indigent care delivered in these
clinics will be available through the forthcoming 1115
Waiver. Much of the health care the county has
traditionally provided in expensive, hospital-based settings
will move to more cost-effective, outpatient care settings.
To meet the projected increase in primary and preventive
care, the county will need to find additional service capacity
in public and private facilities. The county believes that
continued development of public-private partnerships is
one way it can increase the availability of outpatient care
for its indigent population.
During Phase II, the county will begin restructuring its
health services delivery system to comprehensive care with
an emphasis on prevention and primary care. Planning for
Phase II is to start in fiscal year 1995-96, with
implementation to begin in fiscal year 1996-97, contingent
on necessary federal and state legislation. Although it will
work to reduce county inpatient services by providing
accessible outpatient care, the county cannot successfully
achieve this reduction within the traditional financing
structure. Under current provisions, special funding is
available in the form of additional payments for hospital
inpatient services based on the volume of care provided.
The shortcoming with this payment method is that it may
encourage the overuse of expensive inpatient services and
undermine the county’s ability to provide cost-effective,
nonhospital, outpatient care to the Medi-Cal and indigent
populations, since such care services are now excluded
from Medi-Cal programs. State legislation is necessary to
11
implement the planned modifications, but such legislation is
During Phase II, the
contingent on federal approval of the concept of
county hopes to
de-emphasizing hospital inpatient services in
de-emphasize expensive
the distribution of Medi-Cal funding and the inclusion of
inpatient services to
focus on less-costly costs for nonhospital outpatient services. The county
outpatient anticipates that as service delivery changes and the
care. demand for inpatient and emergency room services
decreases, legislation will continue to provide Medi-Cal
funds, but that the funds will support the entire health care
system rather than only a portion of it.
The fiscal impact of the restructuring efforts are unknown at
this time because specifics have not been identified.
However, the goals of Phase II include the following:
Increasing the availability of outpatient services in
county facilities by providing services through smaller
health clinics;
Contracting with community clinics and other private
providers for additional outpatient services and
additional service sites;
Exploring ways to consolidate various programs and
funding streams to establish a single level of eligibility
for all medically indigent persons;
Restructuring the payment mechanisms for county
inpatient and outpatient services; and
Developing comprehensive primary care services in the
county’s health clinics and the comprehensive health
centers. Currently, in addition to primary care services,
the health clinics provide preventive care, and the
comprehensive health centers provide specialty care.
County Departments Have Not Met
20 Percent Net County Cost Reductions
For fiscal year 1995-96, the approved budgets for many of
the individual county departments reflected a 20 percent
reduction of their prior year net county cost. The county
estimated that this would resolve $155.7 million of its
budget shortfall. However, on January 22, 1996, the CAO
12
issued a report to the board of supervisors estimating that
county departments funded by the General Fund would
overspend their approved budgets for the year by
$21.9 million. If the departments are not able to correct for
this overspending, the actual savings from the 20 percent
reduction in net county cost will be $133.8 million rather
than the $155.7 million originally projected. Seven
departments were overexpending their budgets by at least
$1 million each, as shown in Table 1.
Table 1
Departments With Budget Overruns
at January 22, 1996
(in Thousands)
Budgeted Actual Net Budget
Budget Unit Net County Cost Overru
County Cost n
Superior Court $ 133,832 $ 144,382 $10,550
Municipal Court 54,149 59,235 5,086
Public Social 344,003 347,076 3,073
Services—Assistance
Probation Department 180,382 182,296 1,914
Public Defender 76,205 78,034 1,829
Music Center Operations 2,842 4,046 1,204
Registrar-Recorder/County Clerk 10,950 11,951 1,001
Other budget units 1,519,264 1,516,519 (2,745)
Total $2,321,627 $2,343,539 $21,912
Superior Court estimates it will exceed its budget by
$10.5 million. This figure includes $6.3 million in
salaries and wages, $3.1 million in services and
supplies, $0.8 million less in intrafund transfers, and
$0.2 million less in revenues.
Seven departments are
projected to exceed their Municipal Court estimates it will exceed its budget by
budgets by at least $5 million. The court’s budget overrun is primarily due
$1 million. to a shortfall in anticipated fines, forfeitures, and civil
assessments revenues of $5.3 million. Additionally, the
court will exceed its salaries and wages by another
$0.7 million, but it has other savings of $0.9 million.
Public Social Services—Assistance estimates it will
exceed its budget by $3 million. This overspending is
13
the result of a $6 million deficit caused by an estimated
one-month delay in the Commission on State Mandates’
approval of the county’s application to reduce General
Relief cash grants and a $3 million surplus related to a
decline in the caseload for the Aid to Families with
Dependent Children (AFDC) program.
Probation Department estimates it will exceed its
budget by $2 million. This overrun relates to the loss of
federal funding for probation camps.
Public Defender estimates it will exceed its budget by
$1.8 million. This overrun results from more salary and
benefits expenditures paid than budgeted for much of
the fiscal year.
Music Center Operations estimates it will exceed its
budget by $1.2 million related to less-than-anticipated
parking revenues.
Registrar-Recorder/County Clerk estimates it will
exceed its budget by $1 million related to workload
increases resulting from implementation of the National
Voter Registration Act of 1993, recent certification of
two new political parties, the 37th Congressional District
special election, and use of unbudgeted overtime to
meet legal requirements and to deposit county funds
promptly.
The County Has Completed
Four Budget Balancing Actions
As of February 23, 1996, the county had achieved four of
its budget balancing actions totaling $104 million for fiscal
year 1995-96.
Transfer of $50 Million From the
Los Angeles Metropolitan
Transit Authority
The governor approved SB 727 (Chapter 518, Statutes of
1995) in October 1995 authorizing a $150 million transfer to
the county from the transit authority. These funds come
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from county sales and use tax revenues that otherwise
would be allocated from the county’s local transportation
fund to the transit authority. The legislation specifically
required this money be used for funding county-owned and
contracted health services, and that these funds not be
used to supplant other county funds that have historically
been used to fund county health services. In addition, the
legislation also required the county to repay, over a
five-year period, any amounts transferred from the transit
authority over $50 million.
On September 26, 1995, the county accepted a grant of
$50 million from the transit authority to be applied towards
the budget shortfall within the Department of Health
Services. As of February 23, 1996, none of the $50 million
had been transferred, although the county plans to make
three monthly transfers of $15 million beginning in March
1996. The county plans a final transfer of $5 million in
June 1996. To avoid undertaking another debt that it will
have to repay from future county revenues, the county
does not anticipate transferring any of the remaining $100
million authorized by the legislation.
Probation Camp Funding
On February 2, 1996, the governor signed AB 1483
State legislation added (Chapter 7, Statutes of 1996), which provides $17 million in
$17 million to the
state funding for the county’s probation camps. This
county’s budget for
funding, to be received in four payments, allows the county
probation camps.
to keep its 18 probation camps open for the remainder of
fiscal year 1995-96 and to rescind layoff notices to its
probation camp employees.
In a separate funding issue, as of January 1, 1996, the
federal government stopped providing federal
reimbursement to counties for probation costs under one of
its emergency assistance programs. This elimination of
funding caused an additional budget shortfall of $25 million
in the probation department budget for fiscal year 1995-96.
The county’s budget forecast for fiscal year 1996-97 shows
a full year’s reduction of this federal revenue of
$53.2 million. Consequently, the funding of the county’s
probation camps will continue to be an issue in the next
fiscal year.
15
Layoffs and Attrition of
Permanent County Employees
To meet its target of a 20 percent reduction in net county
costs, and because of the serious budget shortfall in the
Department of Health Services, the county, in October
1995, laid off full-time and part-time employees. These
staff reductions occurred in addition to a hiring freeze,
projected to generate $12 million in savings, that the county
had established in August 1995. The effect of the 20
percent reduction in net county cost and
the hiring freeze from July 1 through December 31, 1995,
has been a net reduction of more than 2,800 permanent
employees, 3,500 temporary employees, and a savings of
approximately $70 million in gross salaries of permanent
employees paid through the General Fund.
Approval of County’s Request To Reduce
General Relief Cash Grants
On November 13, 1995, the county submitted an
application to the Commission on State Mandates asking it
to find that the county was suffering significant financial
distress and to approve the reduction of its General Relief
cash grants. The General Relief program provides cash
assistance and social services to indigent persons who do
not qualify for state or federal aid programs. The county
submitted this application under the provisions of the
The approval of relief California Welfare and Institutions Code, Sections 17000.5
from mandated minimum and 17000.6. The county asserted that without the
general relief grants will
reduction in General Relief cash grants it would be unable
save the county
to provide basic county services.
$25 million this fiscal
year.
As part of its application for relief, the county provided
descriptions of unmet needs in all three of its mandated
service areas: health, public welfare, and public safety.
Further, county staff testified about the county’s financial
limitations at the Commission on State Mandates hearing
on January 12, 1996.
On February 6, 1996, the Commission on State Mandates
approved the county’s application for relief from the
mandated minimum level of general assistance grants for
12 months. The board of supervisors voted on February
16
13, 1996, to reduce the General Relief cash grant from
$285 to $212 per month effective March 1, 1996, for an
estimated savings of $25 million through the end of the
current fiscal year and an additional savings of $53 million
for fiscal year 1996-97.
Conclusion
The county is highly dependent on certain conditions
occurring in order to achieve a balanced budget for fiscal
year 1995-96. Although it has made some progress in
reaching this objective, the county must still successfully
complete two critical elements. Federal approval of the
$346 million health relief package is particularly critical at
this point in the fiscal year. In addition, if individual
departments do not end the year
in accordance with their reduced budgets, the county will
have great difficulty balancing its budget. Unless it
accomplishes these two essential measures, the county will
not be able to meet a balanced budget for fiscal year
1995-96 as required by statute.
Recommendations
The county should continue its efforts to finalize Phase I
of the 1115 Waiver. In addition, the county should
pursue the necessary changes in state and federal
legislation so it can implement its planned changes to
its health care system in Phase II of the 1115 Waiver.
The county should closely monitor all affected
departments to ensure that they reach their targeted
20 percent reduction in net county cost.
17
Blank page inserted for reproduction purposes only.
18
Chapter 2
Past Actions Make Balancing Future
Budgets More Difficult
Chapter Summary
L
os Angeles County’s (county) fiscal crisis arises from
several factors, including:
Property tax shifts to schools that began in fiscal year
1992-93 and that have continued in subsequent fiscal
years;
Designated funding and maintenance of effort
requirements of state and federal programs that
comprise most of the county’s General Fund budget;
and
Questionable actions the county took to balance prior
years’ budgets.
Collectively, these factors have reduced the county’s
financial resources by a total of at least $3 billion over the
last four years or have limited its ability to adjust how it
spends money for the programs it operates.
Property Tax Shifts to Schools
Have Resulted in a Reduction
of County Resources
In September 1992, the governor approved SB 617
(Chapter 699, Statutes of 1992), which required all counties
to annually transfer a portion of their property tax revenue
to a county Educational Revenue Augmentation Fund.
Each county is to use the moneys in this fund to augment
the funding of school districts and community college
districts in the county. The original calculation method was
revised by SB 1135 (Chapter 68, Statutes of 1993). As a
result, the county transferred $263 million in property taxes
in fiscal year 1992-93, $927 million in fiscal year 1993-94,
19
and $1.05 billion each year in fiscal years 1994-95 and
1995-96. Starting in fiscal year 1996-97, the county’s
continuing annual obligation under this property tax
realignment is about $1.012 billion. The State partially
offset this transfer by legislation and the passage of
Proposition 172, which made a temporary 0.5 percent sales
tax permanent, the proceeds of which are allocated to local
governments for public safety purposes. The county
estimates that it will receive about $388 million from this
additional sales tax in fiscal year 1995-96.
Designated Revenues and Maintenance
of Effort Limit the County’s Flexibility
Of the county’s total adopted budget for the General Fund
of $8.6 billion for fiscal year 1995-96, about 67 percent is
revenue that the county receives from the state and federal
governments. This revenue totals $5.8 billion and is to be
used to fund specific state and federal programs. These
consist primarily of social welfare programs, such as Aid to
Families with Dependent Children (AFDC), In-Home
Supportive Services, Adoption Assistance, and Foster
Care. For fiscal year 1995-96, the county expects to
receive approximately $3.3 billion in aid money,
$776 million for county administrative costs, and $1.6 billion
for other specific purposes. The county would not receive
these moneys unless it was administering the specific
programs.
In addition to the designated funding, the county is also
required to use some of its own resources to support
various programs. For fiscal year 1995-96, the county
estimates that it will use $1.9 billion of its own General
Fund resources to match activities mandated by the State.
This $1.9 billion is approximately 23 percent of the county’s
total General Fund budget. Included in the $1.9 billion is
$761 million for public safety, $527 million for health
programs, $451 million for social welfare programs,
$194 million for trial court funding, and $33 million for other
programs.
Past County Actions Have an
Impact on Future Budgets
20
In an effort to mitigate budget shortfalls as they were
occurring, the county took actions that forestalled the
Past efforts to balance immediate crises but will impact future budgets.
the budget will cost the Specifically, the county relied heavily on short-term
county $36 million in solutions to balance previous annual budgets, implemented
fiscal year 1996-97 and an early separation program in fiscal year 1992-93, sold
$15 million in 1997-98. Marina del Rey bonds in fiscal year 1992-93 to help fund
the county’s operating costs for that year, and sold Pension
Obligation Bonds in fiscal year 1994-95. As a result of
these actions, the county will have to fund costs over
normal county operations of $36 million in fiscal year
1996-97 and $15 million in fiscal year 1997-98.
The County Has Relied Heavily
on Short-Term Solutions To
Reduce Budget Shortfalls
Over the past four fiscal years, the county has used a
variety of methods to reduce its budget shortfalls.
However, the county has relied heavily on short-term
solutions that consisted of using available fund balance and
retirement system savings and of deferring expenditures.
These short-term solutions have merely delayed decisions
on more far-reaching measures, such as program
curtailment. While these solutions would have worked to
the county’s advantage if the economic climate had
improved in one or two years, they have only prolonged the
county’s fiscal crisis. The table below shows how the
county used short-term as contrasted to long-term solutions
to balance its budgets over the past four years.
Table 2
Los Angeles County’s Use of
Short-Term Versus Long-Term Solutions in
Fiscal Years 1992-93 Through 1995-96
(in Thousands)
Fiscal Short-Te Long-
Year Shortfall rm Percentag Term Percentag
e e
1992-93 $ 531,600 $294,100 55.3% $237,500 44.7%
1993-94 1,163,900 561,600 48.2 602,300 51.8
1994-95 1,236,400 999,900 80.9 236,500 19.1
21
1995-96 1,270,100 434,000 34.2 836,100 65.8
The county cannot continue to rely on short-term solutions
to balance its budgets. For fiscal year 1994-95, it used
short-term solutions to reduce its budget shortfall by nearly
$1 billion. The county relied heavily on a new provision
within the Medicaid program that officials believed would
allow the county to claim additional money for
administrative costs. This money did not materialize, and
this failure caused additional problems in balancing the
county’s fiscal year 1995-96 budget. In addition, although
the county was able to use $150.5 million in excess
investment earnings of the Los Angeles County
Employees’ Retirement Association (LACERA) to reduce
the county’s fiscal year 1994-95 pension obligation in the
General Fund,
the county should not count on this funding in the future.
The county’s agreement with LACERA requires 75 percent
of LACERA’s excess investment earnings be applied
against the county’s pension obligation each year between
fiscal years 1995-96 and 1999-2000. However, the county
cannot count on LACERA’s having excess investment
earnings every year.
In fiscal year 1995-96, the county significantly reduced its
reliance on short-term solutions. It put into effect a hiring
freeze and a 20 percent reduction in some departments’
net county cost. The county also increased taxes on hotel
occupancy, entertainment, and landfill users, and
implemented other long-term solutions to reduce its budget
shortfall by $836 million.
The county has relied on available fund balance, deferrals
of expenditures, and retirement system savings to help
The county has relied on
balance its budgets. However, at January 22, 1996, the
available fund balance,
county estimated that it will end fiscal year 1995-96 with a
postponing expenditures,
and retirement system $0 fund balance in its General Fund and does not know
savings to balance its how much, if any, savings will be available from a reduction
budgets. in county contributions to the retirement system.
Consequently, the county cannot continue to rely on
short-term solutions to help balance its future budgets. In
addition, the county will continue to feel the impact of some
of its short-term solutions for several years.
22
County’s Early Separation Program
Generated Some Savings but Added
Costs to Future Fiscal Years
In fiscal year 1992-93, the county implemented an early
separation program to reduce the number of county
employees and lower salary and wage costs. This
program had three options:
An offer of severance payments to full-time employees
with a minimum of 10 years of service before October 1,
1992. The county would defer the cash payments until
July 1, 1993, and then make annual payments over a
five-year period.
An offer of two years of additional retirement credit for
early separation. The county would cover the cost of
this option by paying five annual payments to the Board
of Retirement beginning in fiscal year 1993-94.
An offer to allow employees who opt for the severance
pay plan to waive part of the cash payment and direct
the county to buy up to two years of additional
retirement credit.
In order to generate the maximum savings in fiscal year
1992-93, the county originally designed the program to
postpone the first payments until fiscal year 1993-94.
However, in accordance with generally accepted
accounting principles, the county accrued the first year cost
of the program in fiscal year 1992-93, which negated that
portion of the intended budget savings. The county limited
the early separation program to employees whose
positions were scheduled to be eliminated and whose
department heads certified in writing that they could meet
their departmental mission without the position.
In September 1992, the county expanded the early
separation program to include both represented and
nonrepresented employees. The county also extended the
date for entry to the program to January 15, 1993, and
enhanced the benefits.
The additional benefits included a revised severance rate,
a small lump-sum payment to the employee upon
separation, outplacement services, and annuities.
23
After the cutoff date of January 15, 1993, the Chief
Administrative Office (CAO) prepared an analysis showing
that 1,943 employees elected to participate in the program
with an estimated annual savings generated by the
program of $48.1 million in fiscal year 1992-93,
$77.3 million for
each of the fiscal years 1993-94 through 1997-98, and
$104.9 million each year thereafter. The $77.3 million
savings was computed by deducting the $27.6 million
annual cost for the early separation program in the first five
years from the $104.9 million annual savings. The county
prepared this analysis based on the assumption that there
would be no natural attrition and that the program would
produce a long-term reduction in the size of the county
work force. These assumptions were not accurate.
The early separation program appears to have reduced
only temporarily the number of employees working for the
county. The number of permanent, full-time employees
Not only were the in county service totaled 77,570 at July 1, 1992, (the
savings originally beginning of the early separation program), decreased to
projected from the early 74,912 at
separation program not
June 30, 1993, and further decreased to 74,813 by June
realized, the program will
30, 1994. However, the number of county employees
cost the county $23
increased to 76,919 by June 30, 1995, which offsets the
million annually for the
impact of any remaining savings from the early separation
next three
program. Our analysis also shows that the salaries and
years.
wages for permanent, full-time employees paid by the
county from the General Fund increased from $2.07 billion
in fiscal year 1992-93 to $2.1 billion in fiscal year 1993-94.
This increase was probably a result of the general salary
increases given to remaining county employees, which
exceeded the savings from the loss of employees from the
early separation program. We discuss general salary
increases at page 26.
Because it is obligated to pay $23 million every year from
fiscal year 1995-96 through 1997-98 for the remaining
costs of the early separation program, and because it has
since added back as many of the positions as it eliminated
under the program, the county has not achieved the
savings that it originally projected. The early separation
program has resulted in increases to the subsequent
budget shortfalls. In June 1995, the current chief
administrative officer did not endorse another early
24
separation program that was proposed, noting that such
programs are expensive ways to downsize.
The Prudence of Selling Marina del Rey
Bonds Is Questionable
By selling the 1993 Marina del Rey Certificates of
Participation (certificates) in fiscal year 1992-93, the county
entered into a long-term borrowing and encumbered a
county asset to produce cash it could use to finance that
year’s operating expenditures. According to the chief of
the CAO’s debt management unit, the purpose of the
transaction was to raise as much cash as possible for the
county’s immediate needs. As a result, the county must
now use marina lease revenues to meet debt service
payments and use General Fund money to meet the costs
of maintaining the marina.
Specifically, the county issued the certificates as part of its
solution to balancing its fiscal year 1992-93 budget, which
called for the reduction of county operations and staffing
because of a $531.6 million budget shortfall. In order to
increase its revenues to continue paying for operations
while the reductions were carried out, the county sold and
Lease revenues are
simultaneously repurchased its interest in Marina del Rey
earmarked to repay
ground leases. The county also agreed to use the
bonds, leaving limited
revenues generated over
General Fund resources
the subsequent 15 years from the Marina del Rey ground
to pay for marina
leases as the means to repay the certificates.
operations.
The certificates provided $160 million to the General Fund
in fiscal year 1992-93 for general operations and an
additional $12.5 million that the county applied as interest
payments on the marina debt in fiscal year 1993-94. As a
result of this action to raise money for its fiscal year
1992-93 operations, lease revenues averaging
$20.7 million per year will go to loan payments and will not
be available for marina operations. Consequently, the
county will need to use limited General Fund resources to
operate the marina.
Results of the Sale of Pension
Obligation Bonds Have Been Beneficial
In October 1994, the county took actions to fund its
unfunded actuarial accrued liability (unfunded liability) to
25
LACERA. An unfunded actuarial accrued liability is simply
a projection of the amount of shortfall in the pension fund to
meet the fund’s future obligations to its members. These
actions also resulted in a reduction in the county’s current
pension expense. To achieve this funding, the county
entered into three agreements:
The sale of $1.9 billion of pension obligation bonds;
A side agreement with LACERA that decreased the
county’s fiscal year 1994-95 net pension contribution of
the General Fund by $150 million; and
A debt service deposit agreement (agreement),
effectively selling the future interest earnings on
amounts to be deposited annually to the pension bond’s
interest and principal payment accounts.
The board of supervisors stipulated that the pension
obligation bonds needed to sell for 8 percent or less.
Because of an increase in interest rates, the county
entered into an agreement whereby it received a
$56 million premium on the bonds, which the county used
to satisfy partially its fiscal year 1994-95 pension obligation.
This transaction in turn released county General Fund
money to pay for some of the costs of issuing the bonds.
An additional $23 million from the agreement also paid for
some of the costs of issuing the bonds.
In fiscal year 1994-95, LACERA earned more on its
investments than originally projected. LACERA has
agreed to use these excess earnings to reduce the
By issuing pension county’s current pension obligation. Specifically, in fiscal
obligation bonds to fund year 1995-96, the county’s contributions to LACERA on
its unfunded liability, the behalf of its employees paid through the General Fund
county reduced its cash were reduced by $87.5 million. The county hopes a similar
commitments by reduction in its fiscal year 1996-97 pension costs will occur.
$303.8 million over the
17-year bond life. We calculated the difference in cash flow between what the
county had been doing—that is, amortizing the unfunded
liability over time—and the pension bond debt service
schedule. By issuing pension obligation bonds to fund its
unfunded liability rather than continuing to amortize it, the
county has reduced its cost by $303.8 million over the
17-year life of the bonds.
26
Conclusion
The county has been constrained in what it could do to
address budget shortfalls of the past few years because
most of its General Fund moneys are restricted for use to
specific state and federal programs. In fiscal year 1995-96,
90 percent of the county’s General Fund resources was
required to operate programs of the state and federal
governments. Also, since fiscal year 1992-93, the State
has required the county to transfer a portion of county
revenue to school districts. These transfers of funds,
which in fiscal year 1996-97 will total over $1 billion, will
continue to impact future budgets.
Further, the county will have difficulty balancing future
budgets because its solutions to past shortfalls have
created costs that will persist for years into the future. In
fiscal year 1992-93, for example, the county sold Marina
del Rey bonds to help fund the county’s operating costs for
that year; the county will be repaying the certificates for 15
years. However, in fiscal year 1995-96, the county
reduced its reliance on these types of solutions by
implementing a hiring freeze and a 20 percent reduction in
net county cost.
Recommendation
The county should continue its emphasis on far-reaching
strategies for solving budget shortfalls begun in fiscal year
1995-96.
27
Chapter 3
The County’s Efforts To Address
Employee Compensation Issues
Are Starting To Show Savings
Chapter Summary
I
n fiscal year 1994-95, Los Angeles County (county)
decreased its General Fund salaries and wages by more
than $10 million. In addition, the county is projecting a
further reduction in its salaries and wages for fiscal year
1995-96. However, these savings have occurred after at
least four consecutive years in which the county’s General
Fund salaries and wages had increased. Although some
of the decrease in the county’s salaries and wages in fiscal
years 1994-95 and 1995-96 can be attributed to employee
layoffs and attrition, part of the decreases result from the
county’s eliminating salary increases for its employees. In
fiscal years 1994-95 and 1995-96, the collective bargaining
agreements negotiated during 1992 began to expire.
Once this occurred, the county had the opportunity to slow
salary and wage growth by eliminating salary increases for
its represented employees. Except in one case, the
collective bargaining agreements that the county and the
unions negotiated and that became effective after
September 1992 do not have salary increases. Similarly,
the county has generally not granted salary increases to its
nonrepresented employees since September 1992.
We also learned that the introduction of enhanced flexible
benefit programs to county employees had the unintended
effect of dramatically increasing the county’s obligation to
the county retirement system. By the time the county
acted to limit these increases, it had incurred a $265 million
liability for its nonrepresented employees and nearly half of
its represented employees.
Another compensation issue that merits the county’s
attention is the amount of overtime worked by county
employees. While payments for overtime have decreased
in fiscal year 1995-96 from 1994-95, the county needs to
28
improve compliance with its procedures for ensuring that
overtime receives proper authorization before employees
work extra hours.
Collective Bargaining Agreements
and Other Employee Contracts
Limit the County’s Ability
To Reduce Salary Costs
Through fiscal year 1993-94, the amount that the county
spent on salaries and wages, benefits, and overtime
increased. This increase was due partly to provisions in
the county’s past collective bargaining agreements and
other negotiated employee contracts. These past
provisions have hindered the county’s ability to slow salary
growth.
The county has annual salaries and wages funded by the
General Fund of approximately $2 billion. The county pays
salary expenditures for most departments—including the
Sheriff’s Department, Probation Department, and
Department of Public Social Services—through the General
Fund. It pays salaries for other departments, such as the
Department of Health Services and the Fire Department,
through other county funds. As shown in Table 3, the
county increased its salaries and wages over the period
July 1, 1989, through June 30, 1994. In fiscal year
1994-95, the county decreased its General Fund salaries
and wages by over $10 million.
While the county has experienced budget shortfalls during
the past four fiscal years, it has also attempted to reduce
the amounts paid for salaries and wages. Total salaries
and wages paid from the General Fund continued to
increase through
fiscal year 1993-94, although the pace of the increase
began to slow in fiscal year 1992-93. Salaries and wages
began
to decrease in fiscal year 1994-95 because the county
negotiated no salary increases in the collective bargaining
agreements with its represented employees and generally
did not grant salary increases to its nonrepresented
employees after September 1992. Nonrepresented
employees are those that may have individual employment
29
contracts but are not subject to the provisions of the
collective bargaining agreements.
The salaries and wages that the county paid from its
General Fund increased by more than $160 million in fiscal
The county continues to
years 1990-91 and 1991-92. In fiscal years 1992-93 and
reduce its salaries and
1993-94, when the county was experiencing significant
wages in fiscal year
budget shortfalls, its salaries and wages increased by
1995-96 through layoffs,
$46.5 million and $39.5 million, respectively, despite efforts
a hiring freeze, and by
to reduce the county workforce. In fiscal year 1994-95, the
not providing salary
county reduced its salary and wage payments by
increases.
$10.8 million and is continuing to reduce its salaries and
wages significantly in fiscal year 1995-96 through layoffs, a
hiring freeze, and elimination of salary increases. We
estimate that if the county continues with these
Table 3
Los Angeles County General Fund
Salaries and Wages During
Fiscal Years 1989-90 Through 1995-96
(in Thousands)
Salaries Dollar Percentag
Fiscal Year and Wages Change e
Change
1989-90 $1,685,437
1990-91 1,856,381 $ 170,863 10.14%
1991-92 2,024,542 168,161 9.06
1992-93 2,071,032 46,490 2.30
1993-94 2,110,570 39,538 1.91
1994-95 2,099,740 (10,830) (0.51)
1995-96 1,944,055 (155,685)* (7.41)
* Estimated
actions, it will achieve a General Fund salary and wage
reduction of more than $150 million by the end of the
current fiscal year.
Part of the overall decreases that began to show in fiscal
year 1994-95 and continued into fiscal year 1995-96 can be
attributed to the county’s eliminating salary increases for
nonrepresented employees after September 1992, limiting
salary increases included in collective bargaining
agreements entered into after June 1992, and
implementing the employee layoff and attrition program in
30
fiscal year 1995-96. We discuss the employee layoff and
attrition program on page 13.
Salary Increases for
Represented Employees
We analyzed payroll salary increases that the county gave
over the period July 1, 1989, through December 31, 1995.
We separated the information into two categories:
represented employees and nonrepresented employees.
Represented employees are covered by collective
bargaining agreements between the county and the
employee labor unions. These agreements cover
approximately 89 percent of all county employees. The
county has 54 bargaining units represented by 18 individual
labor unions. For issues such as salaries and wages, the
county enters into collective bargaining agreements with
each union for the bargaining units that it represents. For
other areas such as fringe benefits, 13 of the unions have
created a coalition and will negotiate for all bargaining units
represented by those unions to reach one agreement; the
other 5 unions negotiate their own fringe benefit
agreements with the county. In Appendix A we present
the terms of the collective bargaining agreements for a
sample of four of the county’s represented employee
groups.
The negotiation process for agreements entered into before
June 1992 had determined represented employees’ salary
increases that occurred before fiscal year 1995-96.
Most of the salary Because these salary increases were part of a legal
increases that occurred contract, the county could not refuse to provide them.
before fiscal year Most of the county’s current collective bargaining
1995-96 were negotiated agreements expired at the end of September 1995. Many
prior to June 1992. of these agreements had effective periods of three to five
years. The county is currently entering into one- and
two-year agreements with the unions because neither party
is willing to make a long-term commitment while the
county’s finances are so uncertain. None of the collective
bargaining agreements that the county entered into during
fiscal year 1995-96 included any salary increases.
Salary Increases for
Nonrepresented Employees
31
Appendix B shows that the county gave salary increases
to its nonrepresented employee classes, which total
1,700 classes, during four of the past six years. For
example, during fiscal year 1989-90, the county granted
general salary increases to all of the nonrepresented
groups of employees. These increases ranged from 3
percent for the other nonrepresented employees with
salaries greater than $90,000 to 10 percent for the county’s
department heads with salaries greater than $90,000.
Similar salary increases were awarded to the
nonrepresented employees in fiscal years 1991-92 and
1992-93, although the increases were smaller than the
general salary increases of
fiscal year 1989-90, averaging about 2 percent overall. In
fiscal year 1993-94 and beyond, only two groups of
employees,
the department heads and the court employees, received
increases. While the salaries of nonrepresented
employees have increased over the past six years, many
had their salaries adjusted for specific periods of time, as
part of the county’s response to its fiscal crisis.
Nonrepresented employees have been subject to two
salary adjustments imposed by the
county—one in which the county imposed a suspension of
the scheduled 3 percent pay increases for the period
September 1992 through June 1993. The county also
imposed a 2 percent salary reduction in October 1993 that
was effective from that date until June 1994. In effect,
these salary adjustments were only temporary since these
employees were ultimately paid back this lost salary in the
form of cash payments or added vacation time in
subsequent fiscal years. The county has not adjusted
salaries since September 1, 1992, for nonrepresented
employees, with the exception of the department head
classes and court employees whose salaries are adjusted
when comparable represented classifications receive
salary increases.
32
The department head class, a group of approximately
40 nonrepresented employees, also took the two salary
adjustments discussed above. However, the department
heads’ salaries show the highest salary increases even
Department heads
during the period of budget shortfalls. The board of
received the highest
supervisors sets these salaries, which are included in the
salary increases even
during the period of employment agreements with the individual department
budget shortfalls. heads. The employment agreements for department
heads appointed before February 1994 include a
cost-of-living adjustment clause that is tied to the
Consumer Price Index. Employment agreements with
individuals appointed as department heads after February
1, 1994, do not include these clauses.
Benefits Packages Provided by
the County Increased Pension Costs
The introduction of enhanced flexible benefit programs to
county employees had the unintended effect of dramatically
increasing the county’s obligation to the county retirement
system. An amendment to the County Retirement Law of
1937 prompted the unintended effect. Specifically, by the
time the county acted to limit increases in pension costs
related to
the new flexible benefit programs, it had incurred a
$265 million unfunded liability to the retirement system for
its nonrepresented employees and nearly half of its
represented employees.
In January 1985, the county established a flexible benefit
plan, including medical, dental, and life insurance, for
nonrepresented employees. The plan expanded in
January 1991 to include most leave benefits, such as
vacation and sick leave. Between July 1989 and July
1992, the county implemented similar flexible benefit plans
for represented employees.
Under these flexible benefit plans, often called “cafeteria
plans,” the county makes a fixed dollar contribution to an
employee, who then chooses how to spend the contribution
on an array of fringe benefits. If the chosen fringe benefits
exceed the county contribution, the employee makes up
the difference in pre-tax dollars. If the county contribution
exceeds the chosen benefits, the employee receives the
difference as taxable compensation.
33
In 1992, the county became aware that the flexible
By the time the county benefits plans had unexpectedly increased the county’s
realized that flexible retirement liability by providing excess benefit dollars to
benefits plans employees and allowing cash payments. In November
unexpectedly increased 1992, the county counsel, the Los Angeles County
its retirement liability, Employees’ Retirement Association, and an independent
$265 million in counsel agreed that the county contributions under the
obligations had accrued. flexible benefit plans were pensionable compensation.
Pensionable compensation is any amount included in an
employee’s wages and benefits for the purpose of
calculating retirement payments.
By the time the county realized the significant implications
of the flexible benefit plans on retirement contributions,
bargaining agreements extending through September 1995
were already in effect for represented employees. In
November 1992, the Los Angeles County Citizens
Economy and Efficiency Commission estimated that the
impact of expanding flexible benefits for the county’s
nonrepresented employees and nearly half of the county’s
represented employees was $265 million in unfunded
liability to the Los Angeles County Employees’ Retirement
Association. To rectify this situation, the county sponsored
legislation at the state level to exclude cafeteria plan
contributions and other allowances from pensionable
compensation. The governor approved this legislation in
September 1993.
In February 1994, the county limited the share of the
benefits contributions it paid for nonrepresented employees
and the amount that they could take in cash. This limited
increases in future pensionable compensation for these
employees. The Chief Administrative Office (CAO)
estimated that the first-year cost savings resulting from this
limitation would amount to $144,000. Cost savings will
increase over time as the cost of salaries and health care
premiums increases.
In fiscal year 1995-96, the county and the unions agreed
that employees hired after January 1, 1996, would not have
county contributions to flexible benefit plans counted as
pensionable compensation. In exchange, the county
agreed to increase its funding of a deferred savings plan by
$3.85 million in fiscal year 1996-97 and $7.65 million in
subsequent years. The same provisions were adopted for
34
nonrepresented employees in a separate resolution
approved by the board of supervisors on December 6,
1995.
According to our calculations of the present value of this
agreement, the county obtained a long-term benefit from
this action of $28.6 million. However, the shortcoming to
this action is an increase in short-term General Fund cash
requirements over the first nine years of the program. We
estimate an additional cost to the county of $28 million over
the next nine years, thus increasing the current and
near-future shortfall problems.
The County Can Improve Its Controls
Over Overtime Expenditures
Another aspect of its employee compensation program that
merits the county’s attention is the amount of overtime
worked by county employees. During the last four fiscal
If current trends continue,
years, overtime expenditures paid by the General Fund
projected overtime costs
rose from 2.9 percent to 3.8 percent of salary and wage
for fiscal year 1995-96
expenditures. The county’s expenditures for overtime paid
will be $78.8 million.
from the General Fund increased from $66 million in fiscal
year 1992-93 to $87.3 million in fiscal year 1994-95. The
county has decreased the amount paid for overtime in
fiscal year 1995-96, and we estimate that, if the current
trend continues, the county will pay $78.8 million in
overtime expenditures by the end of the current fiscal year.
Departments control overtime expenditures through
procedures requiring pre-authorization of overtime,
approval of overtime actually worked, recording of overtime
by a designated timekeeper, and calculation and payment
of overtime by the county’s automated payroll system.
The county maintains limited control over department
overtime expenditures through CAO review and board of
supervisors’ approval of annual department budgets that
include specific allocations for overtime. However, our
review of overtime controls at four county departments
showed that the county can improve the implementation of
these control procedures.
We reviewed overtime payments made by four
departments since December 1994. These departments
are the Sheriff’s Department, Probation Department,
35
Department of Children and Family Services, and the Los
Angeles County/University of Southern California
(LAC/USC) Medical Center. In all cases, we found that
overtime payments were properly recorded, paid, and
approved after the fact. We also found, however, that
three departments did not have sufficient documentation to
determine whether a supervisor had actually approved
overtime before the employee worked the extra hours.
The fourth department, LAC/USC Medical Center, did not
have sufficient documentation for us to determine the
number of hours that
supervisors had pre-authorized. Out of eight instances we
could test for pre-authorizations, five were not
pre-authorized. Pre-authorization is essential to ensure
that overtime is actually required and the overtime worked
does not exceed authorized levels.
The four departments estimated that they are significantly
over their budgets for overtime expenditures based on their
actual expenditures for the first half of fiscal year 1995-96.
They range from $2.6 million to $14.5 million over budgeted
levels. The budget overruns are partially offset by
lower-than-budgeted salary expenditures in these
departments. According to department staff, as
permanent employees leave county service and are not
replaced because of the hiring freeze, the remaining
employees must work overtime to meet public health and
safety requirements.
Conclusion
Until recently, provisions of past collective bargaining
agreements and employee contracts have limited the
county’s ability to reduce the county’s cost for salaries and
benefits. In fiscal year 1994-95, the county decreased its
General Fund payroll by over $10 million and projects a
further reduction for fiscal year 1995-96. One way that the
county has slowed the growth of its payroll has been to
eliminate salary increases for most of its represented and
nonrepresented employees. Except in one case, collective
bargaining agreements for represented employees that
became effective after September 1992 do not have salary
increases. Similarly, the county has not granted salary
increases to its nonrepresented employees since
September 1992. In addition, the county took action in
36
1994 to limit its liability to the county retirement system
under its enhanced flexible benefit programs. For the
nonrepresented employees and nearly half of its
represented employees, the county had incurred an
unfunded liability of $265 million. Finally, another aspect
of its employee compensation
program that merits the county’s attention is the amount
of overtime worked by county employees. In our review
we found overtime worked that had not received
pre-authorization, as required by county procedures.
Recommendations
The county should implement the following
recommendations in order to reduce its General Fund
expenditures so that it can continue to adopt balanced
budgets in the future:
Continue the policy of negotiating no salary increases in
collective bargaining agreements until its economic
situation improves.
Continue the hiring-freeze policy but grant exceptions
where limited staff as well as public health and safety
requirements create a strain on departments’ abilities to
fulfill their missions without current employees working
unreasonable overtime hours.
Ensure that all departments establish and maintain
controls over the authorization and use of overtime.
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Chapter 4
The County Is Facing Numerous Future
Challenges To Balance Its Budgets
Chapter Summary
T
he Los Angeles County (county) is already estimating
a budget shortfall of $517 million for fiscal year
1996-97.
In addition to the budget issues for fiscal year 1996-97, the
county needs to address other issues in the near future.
Specifically, the county will need to stretch already tight
resources to find new revenue streams to fund the costs of
Three Strikes court cases, repairs of earthquake-damaged
county-owned buildings, and federal welfare reform. The
amounts needed to address some of these issues can be
estimated, and others cannot. When these issues will
need funding is also uncertain. However, the county is
aware that it will need to address these issues and that
some could overwhelm its already overstretched resources.
County’s Projection of $517 Million Shortfall
for Fiscal Year 1996-97 Is Tentative
On January 22, 1996, in preparation for the budget meeting
held by the board of supervisors on January 25, 1996, the
Chief Administrative Office (CAO) projected a budget
shortfall of $517 million. Based upon a $0 fund balance in
the county’s General Fund at the 1995-96 fiscal year-end,
Although too early to this projection estimates a $169 million shortfall in the
accurately predict, county’s health services and a $348 million shortfall in
indications show the general county operations. However, this projection does
county will have difficulty not account for an estimated $280 million in costs related to
meeting its fiscal year Three Strikes court cases.
1996-97 service
requirements. It is too early to predict a firm budget shortfall for fiscal year
1996-97, although figures indicate that the county will have
difficulty meeting its service requirements with available
resources. The county will not know its actual collections
of property tax revenue until April. How the State’s budget
will affect the county’s finances is another current unknown.
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The county cannot determine its ending fund balance in the
General Fund until it closes its books in August.
Costs for Three Strikes Court Cases Will
Increase Over the Next Few Years
In November 1995, the Countywide Criminal Justice
Coordination Committee (committee) submitted a report to
the board of supervisors on its year-long study of the
impact of
the Three Strikes law (law) on the county’s criminal justice
system. This law, effective March 7, 1994, was intended
to ensure longer prison sentences and greater punishment
for those who commit a felony and have one or more
qualifying prior felony convictions, known as “strikes.” The
report found that although the law caused severe increases
in workloads and case backlogs, the county has thus far
averted major breakdowns in the justice system by
reprioritizing and redirecting resources, deferring current
costs, and incurring future liabilities. The committee’s
specific findings include:
Although Three Strikes court cases constitute 13
percent of the new felony filings, they are tying up an
excessively disproportionate share of justice system
resources for prosecution, indigent defense, trial courts,
and jails;
Three Strikes court cases are backlogging the justice
system and remaining open for significantly longer time
periods; and
The sheriff is housing an increasing number of
pre-adjudicated, high-security inmates for longer time
periods.
The county estimates that new and increased costs
resulting from Three Strikes court cases from March 1994
through September 1995 totaled $98.7 million. The county
The “Three Strikes” law plans to file an administrative claim with the Commission on
has cost the county an State Mandates requesting reimbursement for certain of
estimated $98.7 million the new or increased service costs it incurred in
since its implementation.
implementing the law. Theoretically, significant long-term
benefits would be derived if recidivism were reduced and
crime rates lowered. However, the county must deal with
40
the short-term costs to the justice system in the next few
fiscal years.
Repair Costs for Earthquake Damaged
Buildings Are Significant
In an August 1995 report to the board of supervisors, the
CAO gave an update on the status of the county’s efforts to
effect repairs to county-owned buildings that were
damaged in the Northridge earthquake. The report
focused on the nearly 400 buildings in which damage was
structural in nature and, therefore, most critical.
Approximately 80 of these buildings were so severely
damaged as to be unusable. The CAO also reported that
the county had submitted architectural and engineering
(A&E) evaluations, the first phase of the claiming process,
totaling $386.6 million to the Federal Emergency
Management Agency (FEMA), of which the county had
thus far received only $19.5 million. Negotiations with
FEMA have been ongoing and the county has submitted 52
A&E evaluations to FEMA as of the end of February 1996.
The county plans
to submit the remaining A&E evaluations to FEMA by
May 30, 1996.
Federal Welfare Reform May
Impact County’s Health Care
and Social Programs
In budget negotiations at the federal and state levels,
welfare reforms have been a frequent discussion topic.
These discussions have revolved around the use of block
grants to state and local governments. Block grants
usually reduce the number and degree of mandated
activities, but they mayalso limit the amount of money that
is available for the program. Some of the programs that
could be affected by these reforms are Medicare, California
Medical Assistance Program (Medi-Cal), Aid to Families
with Dependent Children (AFDC), and other social
programs.
Large reductions in state and federal money could have a
significant impact on the county’s health care and social
programs. For example, reduced eligibility for certain
41
federal welfare programs could cause more people to apply
for the county-funded General Relief program.
Past Increases in Some Taxes
May Be in Jeopardy
In September 1995, the California Supreme Court upheld
the constitutionality of Proposition 62, a 1986 initiative that
Approximately
requires voter approval of all new or increased local taxes.
$294 million in tax
Certain taxes first imposed or increased without voter
collections are in
approval after the effective date of Proposition 62 may be
question because of a
invalidated. The county estimates that between the
California Supreme Court
effective date of Proposition 62, November 4, 1986, and
ruling.
June 30, 1995, it collected approximately $294 million in
such taxes. The county has asked the court to clarify
whether its ruling applies to prior years. The California
State Association of Counties is also pursuing legislative
relief related to prior-year collection.
Asset Management Could Be a Way To
Meet the County’s Mission More Efficiently
In September 1995, the Los Angeles County Citizen’s
Economy and Efficiency Commission released a report
entitled “Asset Management Strategies for the Los Angeles
County Real Estate Portfolio.” This report recommended
26 specific actions that the county could take to control its
real estate portfolio more efficiently, including adopting a
mission statement and asset management goals;
establishing specific criteria for the optimum utilization of
county property; preparing a comprehensive information
system for real property land holdings; and identifying
changes to federal, state, and local legislation to enable the
disposition of surplus assets. The report also cites
one-time and ongoing savings of $20 million and $27
million, respectively, that the implementation of these
recommendations would create. In February 1996, the
CAO issued an assessment of the Los Angeles County
Citizens Economy and Efficiency Commission report, which
concurred with much of that report. However, the CAO
also cautioned that the magnitude of the reported cost
savings could be too optimistic.
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We believe these recommendations are important for the
county to consider and implement as they fit into the
county’s mission to provide services more efficiently. It is
important for the county to know the real estate it
possesses in order to develop strategies for consolidating
services or for the identification and disposal of surplus
property. During our review, the county informed us that it
was in the process of developing a comprehensive
inventory of its real estate portfolio.
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We conducted this review under the authority vested in the
state auditor by Section 8543 et seq. of the California
Government Code and according to generally accepted
governmental auditing standards. We limited our review to
those areas specified in the audit scope section of this
report.
Respectfully submitted,
KURT R. SJOBERG
State Auditor
Date: March 28, 1996
Staff: Steven M. Hendrickson, Audit Principal
Nancy C. Woodward, CPA
Nasir Ahmadi
George Alves
Jacqueline Conway
James Sandberg-Larsen
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Appendix A
Review of Memoranda of Understanding
With Four Bargaining Units
Peace Officers—The term of the Memorandum of
Understanding (MOU) dated December 15, 1989, was
effective through January 31, 1993. It included salary
increases of 3 percent in both January and October
1990 and 5 percent in June 1991 and June 1992. On
March 3, 1992, the Los Angeles County (county) and
the Association for Los Angeles Deputy Sheriffs (union)
entered into an amendment to the MOU to be effective
from June 1, 1993, through January 1995. This
amendment included a 4 percent salary increase on
both June 1, 1993, and June 1, 1994. In October
1993, the county and the union entered into an
amendment to the MOU to be effective from February 1,
1995, through January 1996. That amendment
included no salary increases.
Clerical and Office Services Employees—Of the
three available MOUs that we reviewed, the first MOU
with this unit was dated January 22, 1990, effective
through September 30, 1991. The second MOU was
dated March 26, 1992, effective through September 30,
1993. These two agreements included a 3 percent
salary increase on each of the effective dates. The
third MOU was dated October 1, 1993, and was
effective through September 30, 1995. This agreement
required a 2 percent reduction of employees’ current
pay for the period October 1, 1993, through June 30,
1994.
Registered Nurses—Of the three available MOUs that
we reviewed, the first MOU with this unit was dated
October 26, 1989, effective through September 1991.
This agreement included salary increases of various
percentages to take effect in October 1989, July 1990,
October 1990, and July 1991. The second agreement
was dated December 23, 1991, effective through
September 1993. This agreement included salary
increases of 6 percent in December 1991 and 7 percent
46
in October 1992. The third agreement was dated
October 1, 1993, effective through September 1995.
This agreement did not include any salary increases.
Dental Professionals—Of the two available MOUs that
we reviewed, the first MOU with this unit was dated
November 9, 1989, effective through September 1991.
This agreement included a 3 percent salary increase in
October 1989, October 1990, and July 1991. The
second MOU was dated April 17, 1992, effective
through September 1994. It included salary increases
that are linked to the change in salaries for state
employees for a particular time, not to exceed 2
percent.
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Appendix B
Percentage Changes in County Salaries
Fiscal Years 1989-90 Through 1995-96
Fiscal Years
Unit 1989-90 1990-91 1991-92 1 1992-93 2 1993-94 1994-95 1995-96
Represented
101 1.00% 3.50% 2.75%
111/112/121/122
341/342/431/432 3.50 3.00 2.75 2.00% 2.00%
131/132/501/502
511/512 3.00 3.00 7.75 4.00 4.00
201 3.50 3.00 2.75 3.00 3.00
211/221 3.00 3.00 2.75 3.00 3.00
301/421/821 3.00 3.00 2.75 3.00 4.00
311/312 11.50 3.00 8.75 7.00
323 3.50 3.00 2.75 3.00
321 3.00 3.00 2.75 2.50 4.00
325 3.75 3.00 2.75 7.00 3.00
331 11.00 2.75 3.00
332 3.75 3.00 2.75 3.00 3.00
401 3.00 4.50 8.00 5.00
411/412 3.00 2.00 3.00 4.00 4.23
601/602/611/612 6.00 5.00 5.00 4.00 4.00
613/641/642 3.00 3.00 5.00 5.00 4.00 4.00%
614/621 3.00 3.00 2.75 10.00 5.00
631/632 3.00 3.00 2.75 2.00 2.00%
701 9.50 2.00 3.00 5.00 4.00 4.00
702 4.00 7.50 3.00 5.00 1.50 5.50
711 3.00 3.00 2.75 5.50 5.50 5.50
721 3.00 3.00 2.75 3.00 4.00 7.75
722 3.00 3.00 2.75 4.50 4.00
723 3.50 3.00 2.75 3.00 5.50 7.75
724 3.50 3.00 2.75 7.50 4.00 7.75
729 3.00 3.00 2.75 4.50 4.00
731 4.00 3.00 2.75 2.00 2.00
732 3.00 6.00 3.25 2.00 2.00
777 3.00 2.75 3.00 5.50 7.75
811 3.00 3.00 2.75 2.00 2.00
Court Employees3
Annual Salary Less Than $90,000
Municipal Court Classes 6.16 6.10 3.61 0.54 0.56
Marshal Classes 5.33 6.04 2.12 2.99 2.16 0.06
Superior Court Classes 4.68 6.55 2.27 1.49 0.06
Annual Salary More Than $90,000
Municipal Court Classes 4.53 9.64 1.75 1.68 2.16 1.33
Superior Court Classes 5.00 5.25 5.00 3.00
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Fiscal Years
Unit 1989-90 1990-91 1991-92 1 1992-93 2 1993-94 1994-95 1995-96
Nonrepresented
Annual Salary Less Than $90,000
Performance-Based Pay Class 4.35 6.65 6.04 3.43
Department Head Classes 6.45 1.83 4.60 2.43 2.27 0.50
Physicians Pay Plan Classes 3.01 5.82 3.01 5.83
Other Nonrepresented Classes 5.73 5.15 0.94 3.65 (0.04)
Annual Salary More Than $90,000
Performance-Based Pay Classes 3.83 6.43 5.67 3.01 0.00
Department Head Classes 9.69 10.95 3.50 2.60 2.07 1.71
Physicians Pay Plan Classes 5.17 6.48 3.00 5.86 0.00
Other Nonrepresented Classes 2.75 2.72 1.51 2.98
1 In October 1992, the county imposed a 3 percent salary reduction for the period January 1992 through June 1993.
2 In October 1993, the county imposed a 2 percent salary reduction for the period October 1993 through June 1994.
3 Salaries for Superior Court employees are prescribed primarily in the California Government Code, Section 69894. Salaries
for Municipal Court and Marshal employees are prescribed in the California Government Code, Section 72609.
Salaries of Superior Court and Municipal Court judges are prescribed by the California Government Code, Section 68202.
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