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By Ray Stern
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By Stephen Lemons
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The scenario continued in the 1992-93 budget year, but this time, it got even worse.
"Not only did they increase their revenue projection, they increased it by an even greater amount than in past years. They did the opposite of what all the economic indicators were saying," Hogan says.
County budget analysts overestimated revenue projections for the 1992-93 fiscal year by a whopping $40.2 million. Even with $32 million in spending cuts, the county's reserves were wiped out.
How could the county budget analysts be so far off?
Smith, who left the county last summer after ten years as the top financial manager, declines to discuss the matter, other than to say that it was difficult to forecast revenue because of the turbulent economy.
Others in county government, including prominent Republicans, point to a different reason for the strange revenue estimates: the political ambitions of fellow Republican Jim Bruner, who was planning a run for Congress and who wanted, at the center of his campaign platform, a tenure on the Board of Supervisors that included no tax increases and no layoffs.
The easy way to accomplish this goal was to pass so-called balanced budgets based on overestimated revenue projections. At the end of the year, when shortfalls arose, cash reserves could cover the deficit. When that cash was gone, the deficits were hidden in short-term loans.
"If you project revenues to be coming in substantially higher than reality, that means you don't have to make the cuts at the beginning of the year to balance the budget," explains Supervisor Tom Rawles, who took office in January 1993. "At the end of the year, those revenues haven't come in, but you have spent the money, so what you have to do is borrow."
@body:Year after year, the supervisors were asked to approve increasingly greater financial fixes to make up for shortfalls in the amount of money coming into county coffers. And approve them they did.
The most common fix was the use of what are called Tax Anticipation Notes--TANs--a completely legal way for the county to borrow money without voter approval.
The intent of such notes is to allow the county to get cash quickly and pay it back later, when county property owners start sending in tax checks.
Used for their intended purpose, the notes are a legitimate financial tool, because they allow the county, which must pay its bills every day, to adjust during times when property taxes aren't yet due. The county typically runs short of cash early in the year, before spring tax billings, and late in the summer, before fall billings are due. Ordinarily, TANs are used to tide a government over through a relatively short period, and therefore are issued for fairly small amounts of money. But in the past two years, the outstanding amount at any given time of short-term notes issued by the county has skyrocketed to more than $100 million.
Even that figure, though, does not capture the full size of the county's financial shell game. Supervisors repeatedly have approved one set of TANs to pay off another, or borrowed money from the county's highway fund, or tapped bank loans to pay off earlier TANs.
During the 1992-93 budget year, $215 million in short-term notes were issued. The county's desperation for cash has reached the point where it is now borrowing as much as $25 million from a 1986 bond issue that was passed by voters to build roads, bridges, prisons and court facilities.
In effect, the county has been churning its debt to stave off a final reckoning.
Deputy treasurer Hogan says it was unusual for the county to tap a bank credit line at the time, because the move would be more expensive than issuing tax-free municipal bonds to raise the money. But, he says, one advantage of the bank-borrowing was that it spared the county scrutiny from an outside bond-rating agency.
That move, in Hogan's view, was a huge red flag that something was amiss with the county's finances. Municipal governments live and die by their bond ratings, which essentially are independent reviews of their financial conditions. The higher the rating, the lower the interest on borrowings issued by the county.
Opting to pay higher interest rather than open its books to the rating companies just didn't make sense, Hogan says, unless there was something to hide. Indeed, a year later, the county had no choice but to go public, and the county's bond rating was downgraded.
After obtaining the $75 million bank loan, supervisors then turned to internal sources of cash, borrowing $35 million from the county's risk-management fund and $10 million from the 1986 bond fund.
But the day of reckoning finally came as the 1992-93 budget year closed. The county was faced with a shortfall in cash and couldn't cover $64 million of the borrowed Bank One money when the note came due. So it was forced to go to the public markets and borrow $100 million in TANs.