Commentary

An O.C. Sequel May Be Coming Soon


By Mark Baldassare, research director, Public Policy Institute of California
This opinion article appeared in the Los Angeles Times on December 5, 2004

Ten years ago Monday, Orange County, a place best known for its affluent lifestyle and Republican leanings, went bankrupt. It was the largest municipality in U.S. history to do so. But although the financial meltdown is largely forgotten by local residents, its root cause is still with us: The public's appetite for government spending exceeds its willingness to pay for it.

In 1994, the county treasurer thought he was being a faithful servant of the people not a rogue trader seeking financial gains when he set off the chain reaction that led to the bankruptcy filing. He used a multibillion-dollar pool of local government funds to buy exotic investment instruments that amounted to big bets on the direction of interest rates. For a long time his investment strategy yielded a windfall profit of high-interest income for various governmental entities in the county. But when interest rates went up, his gamble led to the sudden fiscal collapse of Orange County government.

What's important to remember is that the treasurer lured not only the county government but also most of the county's city governments, school districts and special districts into the Orange County Investment Pool because he held the key to their political survival.

He made local officials an offer they couldn't refuse: a nontax source of income at a time when tax revenues alone couldn't pay for services that voters demanded. Local officials would still find such a "something for nothing" proposition tempting.

The greatest lesson from the Orange County bankruptcy is how voters reacted to the crisis. Faced with a government shutdown, angry residents supported recalling their local officials. When asked to help, they soundly rejected a half-cent sales tax for 10 years that would have bailed out the county. With no viable alternatives, local officials approved a recovery plan that called for $800 million of bond debt for the next 30 years without new taxes to pay for it. County voters thus limited available funds for spending while retaining their high expectations for local services.

The drift of California's public finances in recent years closely parallels the dark days of the Orange County bankruptcy. Rather than cut spending or raise taxes, state officials last year took on more debt to manage the largest budget deficit in history. In November, voters approved billions of dollars in new bonds. The only taxes they raised were those of millionaires to pay for mental health services. They rejected a monthly 50-cent tax on their phone bills to finance emergency medical services. Meanwhile, the state faces a continuing budget gap of $6 billion to $8 billion.

When will the next Orange County occur? Whether it's the expensive pension plans in San Diego and Contra Costa County or rising healthcare costs in Los Angeles or Trinity counties, the signs of trouble are the same as a decade ago local governments with little control over their revenues and spending, and anti-tax voters who believe they can get more for less.

Publications

PPIC Statewide Survey: Special Survey of Orange County, December 2004

PPIC Statewide Survey: Special Survey of Orange County, December 2003

When Government Fails: The Orange County Bankruptcy