The Drought That's Draining L.A.

In May, the Los Angeles County Board of Supervisors made an 11th-hour trip to Washington with outstretched hands. Desperate to close a yawning $1.2 billion budget gap and fearful over the specter of cuts to federal programs that help pay for everything from county hospitals to the arts, the five-member board pleaded for relief with White House Chief of Staff Leon E. Panetta, Senate Majority Leader Bob Dole (R-Kan.), and 16 members of Congress. To no avail.

On June 20, the nation's largest county--home to more than 9 million residents--began weighing severe cutbacks. The board is considering a plan to slash more than 18,000 jobs--20% of the county workforce. It may shutter more than a dozen libraries, close 30 parks, and dismiss six judges. Most draconian of all: the board may shut down the 1,400-bed Los Angeles County-USC Medical Center, along with 29 outpatient facilities. "We need to act now to remain solvent," says Sally R. Reed, the County's chief administrative officer.

URBAN ILLS. Los Angeles is not alone. New York City faces a recurring budget crisis. Washington is a fiscal disaster. And with the economy slowing, the budget squeeze is bound to spread. Says Helen F. Ladd, a professor of public policy studies at Duke University and co-author of America's Ailing Cities. "We have an increasing proportion of disadvantaged people living in cities who put demands on city resources at the same time the cities' ability to raise revenue is decreasing."

Certainly, the political climate is inhospitable toward cities. State capitals are tightfisted. Washington wavers between indifference and hostility. "With 30 Republican governors and Newt Federalism in Washington, states are free to simply say no," says Richard P. Nathan, director of the Rockefeller Institute of Government. "We're watching the start of the biggest political shift since the New Deal."

Look at New York. Just weeks before the beginning of the city's new fiscal year, Mayor Rudolph W. Giuliani found out he would be receiving nearly $700 million less in state aid than he had been counting on. His latest budget cuts millions for schools, hospitals, welfare, and the arts. And after pushing through a series of tax cuts in a state with its own economic problems, New York Governor George E. Pataki has little room to help out. "You can't get blood from a stone," says Harrison J. Goldin, a former New York City comptroller.

Los Angeles County exacerbated its problems by relying on short-term borrowing and accounting tricks to balance the budget. But L.A.'s problems run a lot deeper than a politician's typical bag of financial gimmicks. Years of defense-industry layoffs, a crumbling real estate market, and a mind-boggling combination of natural and man-made disasters ranging from earthquakes to riots, put L.A. into a slump for much of the '90s. Many middle-class taxpayers fled the county in favor of other parts of California and other states. The county has seen its property tax revenues cut in half since 1992, and the state government is focused on putting its own budget house in order. This year, the L.A. economy is growing at a fragile 1% rate, and it can ill afford to absorb the loss of another 18,000 jobs, says David Hensley, economist for Salomon Brothers Inc.

JITTERS. The county will tap the public markets to replenish the coffers for now. But investors are jittery after the bankruptcy of Orange County, L.A.'s neighbor to the south. The rating agencies are considering downgrading up to $3 billion in long-term debt. To ensure a smooth June 21 sale of $1.3 billion in short-term notes, L.A. had to purchase a costly letter of credit from a syndicate of banks led by Credit Suisse.

Big-city governments are at the early stages of a drastic overhaul to reduce their huge operating deficits. Cost cutting is in. Privatizing public services is popular. But these reforms take time to work--and that offers scant comfort to the country's major cities over the next several years. "The rubber band has been stretched and stretched for years," says Theodore Hershberg, professor of public policy at the University of Pennsylvania. "Now it has snapped." For large urban areas, the message is clear: You're on your own.

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