MOORLACH UPDATE — VLF Theft — October 1, 2011

Some 2 ½ hours after the Board of Supervisors passed its budget on June 16th, the State’s Legislature approved Senate Bill 89.  This bill was crafted the night before and it swept vehicle license fee (VLF) revenues away from cities and one county, the County of Orange.  See MOORLACH UPDATE — AB 108 — June 30, 2011 and MOORLACH UPDATE — BOS Actions — September 14, 2011 for my previous comments on this topic.  To summarize, even though the revenue stream was called VLF, it was really property tax revenues.  Consequently, the property tax revenues are the County’s.  Taking something that doesn’t belong to you from someone else is theft.  The $49.5 million is 7.5 percent of the County’s General Fund.  The General Fund is split in two.  Half goes to departments like the Treasurer-Tax Collector, Assessor and Auditor-Controller, which are required to collect our property taxes.  The other half goes to public safety, like the Sheriff, DA, Probation and Public Defender.  Consequently, it would make sense if the $49.5 million were split in a similar manner, but this is not the proposal.  The County’s Budget Director has had the unpleasant assignment of allocating this loss and has done a commendable job.  The story is covered in today’s OC Register and was also picked up by msnbc.com.

BONUS:  Morning hike on October 29th.  See below for details.

County faces $29 million in cuts, dozens of layoffs

By Kimberly Edds Register Writer

The County of Orange needs to make $29 million in cuts, lay off dozens of employees and dip into its reserves under a plan recommended by the county’s chief executive to recoup $49.5million the state took to fix its own budget issues.

The plan would avoid draconian service cuts and massive layoffs, but it also relies on $8 million in county reserves and estimates that better-than-predicted sales and property tax revenues will continue. Those solutions are temporary, county budget officials warn.  

“These solutions, if they’re not available in year two, these cuts will have to grow,” said Frank Kim, the county’s budget director.

The county is engaged in an exercise in frustration, having gone from a balanced $5.6 billion budget that increased spending 2.7percent to being $49.5million in the hole as the result of a legislative money grab targeting special funds Orange County receives from California vehicle license fees while the county pays off its bankruptcy debt.

“It’s not a shortfall,” Vice Chairman John Moorlach said. “It’s a theft.”

County lawmakers and union officials failed to persuade state legislators to give back the $49.5 million before the Legislature’s session ended Sept. 9. The county has hired lawyers to explore any legal options the county may have to recover the money, but even if the courts agree that the state should pay what is owed, the county cannot force the state to write a check.

The state reimburses the county for state-mandated services rendered by the county, but payment delays can range from a few days to months, Kim said. At the same time, the county still has to pay its employees and vendors. California already owes Orange County an additional $91 million for a wide variety of state-mandated services, and it remains unclear if and when the county will see that money.

“The state is the multi-ton elephant in the room,” said county Chief Financial Officer Bob Franz. “They have a lot of authority.”

The loss of vehicle license fees has forced the county to push through a months-long budget process in a matter of weeks.

The Board of Supervisors will discuss the CEO’s recommended plan at Tuesday’s board meeting along with a more draconian proposal that would slash 175 county jobs, shut down the fourth floor of the Men’s Central Jail and make service cuts across the county.

Eighty-eight percent of the county’s $5.6 billion budget is restricted revenue including pass-through money from the federal and state government to pay for services. The remaining 12percent – $663.8 million – funds the county’s core public safety services and general government, and that is what the county can control.

“Services are required to be provided,” Kim said. “But the service level is at the county’s discretion, and that’s what gets impacted.”

Among the hardest hit by the CEO’s proposal are the county’s public safety services, including the Sheriff’s Department, the District Attorney’s Office and the Public Defender.

The CEO is recommending the district attorney cut $3.29 million from its budget and the Sheriff’s Department cut $2.48 million, including the elimination of a $450,000 program aimed at keeping drug-addicted inmates from reoffending and returning to jail.

Thirty-one district attorney and 12 public defender positions are potentially being targeted for layoffs. An additional 44 vacant county positions are recommended for elimination.

“The OCDA budget has reached a tipping point where further cuts are unsustainable and could directly endanger public safety,” read the CEO’s report to the board.

To avoid public impact, the district attorney can draw on a specially designated reserve fund to reduce the number of people losing their jobs to eight, but that must be approved by the board. The Public Defender is restricted from using those funds.

Also frustrating the county’s public safety departments is today’s rollout of the state’s realignment program, a cost-saving endeavor to send an estimated 3,434 prisoners a month to be housed in Orange County jails or be monitored by county probation officers rather than state parole agents. The state has guaranteed funding for the prisoner realignment for the next nine months without guaranteeing an end date to shifting state prisoners and parolees to county responsibility – leaving the county unsure what the actual financial impact will be.

“It’s perfectly bad timing,” said Sheriff’s Department Executive Director Rick Dostal.

County officials have recommended $18.2 million in cuts to health and social service programs, but those cuts likely won’t have a significant impact on residents because of a shift in how mental health services are funded by the state.

“We just don’t know how it will work out,” said Terry Lynn Fisher, spokeswoman for the county’s Social Services Agency. “We wish we had a crystal ball.”

FIVE-YEAR LOOK BACKS

October 1

1986

Twenty-five years ago I had an article submission printed in a national nonprofit industry magazine.  It created quite a stir for a technical piece.  But, the topic was a hot one for tax preparers like me.  I had a large number of clients who were ordained ministers and the issue of “common law employee” versus “independent contractor” came up often.  The publication was Christian Management Report and the title was “Doctrinal Dispute – Form W-2 or Form 1099?”   It reminds me that taking on the “standard paradigm” must be something that is in my DNA.  Since the article is technical, I’ll only provide one of the box quotes:

                As these well respected “clergy tax specialists” are making this [Form 1099] assertion in newsletters, books, seminars and articles in reputable Christian publications, it begs the question:  Is this the true and correct position to take?

2001

Fifteen years later, I’m mentioned in Reader’s Digest.  Who would have thunk it?  The article was by Eric Felten and it was titled “Up In Smoke – Remember the multibillion-dollar tobacco settlements?  States were supposed to spend them on health care.  Guess where your money is really going.”  The article attempted to inform the country about where the National Tobacco Settlement funds were going.  Having the funds go totally to health care would be nice, but other past services were impacted and sacrificed to pay for health care.  So a blend of some form would be fair.  What is not fair is using all the funding for something other than health care, which is what the state of California did.  Gov. Gray Davis securitized the income stream and used the bond proceeds to balance only one year of his annual budgets.  Up in smoke, indeed.  The article recounted the recent Measure G versus H campaigns.

                A disastrous foray into the bond market in 1994 left the county with such a staggering debt that it is still nearly $1 billion in the hole.  No wonder Orange County’s board looked at their tobacco money as a lifeboat.

                “We’re all for health care,” says the county’s treasurer, John M. W. Moorlach.  “But if we reduce our debt we can save $450 million in interest over 40 years.  And that would pay for a lot of health care.”

The Orange County Business Journal covered my attempts to address the SCE situation in the OC Insider column by Rick Reiff.  It was titled “They Sized Up Citron, Now They Want at Edison” and is provided in full.

               

What are the chances that Southern California Edison will wind up in bankruptcy court? "Nine out of 10," says OC treasurer John Moorlach. What are the chances he, Moorlach, will succeed in his bid to become chairman of the creditors’ committee? "Three out of 10." Moorlach insists his motivation for plunging into the power crisis isn’t a desire for higher office. "I’m a CPA. This stuff excites me. Bob Citron was financial, the 91 toll road was financial, school bonds are financial, this is financial. That’s as shallow as it gets and I’m sorry." Save the apologies for Gov. Gray Davis, whose plan to bail out SCE is, in Moorlach’s words, "atrocious." While Davis and SCE continue to lobby lawmakers for a government-backed remedy, Moorlach is talking to the people holding the bills. Moorlach, whose own claim on SCE is $1 million in defaulted bonds held by the county employees’ pension fund, says he has the support of some creditors and is talking with others. He’s getting advice from longtime associate Chriss Street, a Newport Beach financial-workout expert (and subject of another story on this page). Davis wants the state to float $3.9 billion in bonds for SCE, paid off by a state purchase of SCE’s power grid for $2.4 billion and in higher electric bills for businesses; the utility would be left pretty much as is. Moorlach and Street doubt the Legislature will go along, which is why they anticipate a bankruptcy workout that will overhaul SCE’s balance sheet and operations. Street thinks there’s $100 million a year to squeeze out by cutting overhead, increasing efficiency and leveraging assets, and that a leaner SCE would generate hundreds of million dollars more in new cash flow as energy costs drop in the years ahead. He says that should satisfy creditors who would be holding new debt, stock options and other rights.

Davis touts a government takeover of the power grid as giving California more control of power distribution (while preserving SCE’s monopoly). Street envisions the opposite, throwing open the grid to out-of-state producers who will pay or partner with SCE for the right to sell directly to California consumers (while ending SCE’s monopoly). Street also thinks the utility can sell rights of way to telecoms, broadband firms and others wanting to wire homes and businesses: "Edison has these enormous amounts of sunk costs that modern technology is making more valuable." Street says a reorganization has a better chance than the Davis plan of returning SCE to credit-worthiness, doesn’t put taxpayers at risk and doesn’t cause "collateral damage" to business. Meanwhile, Pacific Gas & Electric, which is in Chapter 11, has proposed a reorganization that pays creditors in full, doesn’t raise electric rates and has buoyed parent PG & E; Corp.’s stock price. Oh, to be a fly on the wall when directors of SCE parent Edison International meet again Oct. 18 . . .  

The OC Register’s editorial staff jumped into the SCE issue with a lead editorial titled “Bankruptcy best solution for SCE.”  Here it is in full:

In a last-ditch effort to save Southern California Edison from bankruptcy, Gov. Gray Davis has called for a special legislative session on October 9 to deal specifically with that topic. Yet all of the governor’s political arm-twisting and all of SCE’s lobbying dollars don’t appear to be enough to save the ailing utility from bankruptcy court.

The reason, obvious across the ideological spectrum in Sacramento, is there is no obvious benefit to the California economy or to the state’s ratepayers and taxpayers by crafting a multibillion-dollar bailout plan. Filing for Chapter 11 bankruptcy simply will force a reorganization in court rather than in the more unpredictable Legislature.

Back when Pacific Gas & Electric filed for bankruptcy protection on April 6, some commentators predicted disaster. But the lights are still on in northern California, the utility’s employees have fared well, and the company appears well on its way back to financial health. Most everyone has been pleasantly surprised by what’s actually happened.

In recent weeks, many observers are coming to the conclusion that SCE bankruptcy may not be such a bad thing. One influential local voice who changed his mind is Orange County Treasurer John Moorlach. Given that the state crafted the rules that put the investor-owned utilities in a precarious position — i.e., deregulating the prices of wholesale electricity while capping their retail prices — he had believed it to be fair to craft a deal to make the utilities whole. But after watching the legislative session, with its proposals to strip SCE of its transmission lines and much property, Mr. Moorlach concluded bankruptcy court would be a better place to reorganize and start anew. Given that Orange County has a financial interest in Edison, Mr. Moorlach wants to lead the creditors’ committee.

SCE officials have been furious with him and others who have taken a similar position. The governor continues to lobby for his bailout plan, but Mr. Moorlach said he doesn’t have the votes and will be surprised if the special session even takes place.

“The only people I’ve talked to who don’t think bankruptcy is a good idea are the utility company employees who talk to the press,” he told us. Why, then, are Edison International Chairman John Bryson and Gov. Davis fighting so hard for a bailout?

In Mr. Moorlach‘s view and ours, it comes down to pride, ego and political futures. That might explain why the two men are fighting so hard to avoid a bankruptcy filing.

Let a judge sort it out, and get the company on a sound footing. That’s got to be better than a political solution that paves the way for a state-controlled power company or that deprives the utility of property it needs to sustain itself in the future.

NNL 5th Anniversary hike in Fremont Canyon with Orange County 2nd District Supervisor John Moorlach

Description & Registration Information

Come celebrate the 5th Anniversary of the designation of the Irvine Ranch National Natural Landmark on a hike with 2nd District Supervisor John Moorlach in remote Fremont Canyon. This moderately strenuous hike will travel along the north rim of Fremont to the site of an abandoned surface coal mine worked during the late 1800s. Expect spectacular views of oak studded canyons, rocky outcrops, rare scrub habitats, and the San Bernardino Mountains in the distance. We will learn about this wonderful land and why it qualified as the only place to be designated a Natural Landmark by both the National Park Service and the State of California. The hike covers 5 miles round trip in 3 hours and has an elevation change of 1,000 feet. Not recommended for children under age 12.  Registration Code Required.  Participation is limited to the first 30 people to sign up. To join the hike, please call 714-834-3220 in order to obtain registration instructions.

Spaces Available:

30

Led By:

Irvine Ranch Conservancy

Activity Date:

10/29/2011

Time:

8:00 AM

Activity Type:

Hiking

Distance:

5 miles

Duration:

3 hour(s)

Elevation Change:

1,000′

Guided:

Docent-Led

Recommended Age:

12+

Level of Interpretation:

Low

Additional Information:

Please call 714-834-3220 or email info@irconservancy.org

The program can be found here:   http://www.irlandmarks.org/Activities/default.aspx (click on October)

Code:                                   NNL5TH


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