MOORLACH UPDATE — The Bond Buyer — October 8, 2010

Today’s issue of The Bond Buyer covers the panel discussion I participated in yesterday morning.  The moderator was Steve Zimmerman of Standard & Poor’s.  The article also appears in Investment Dealers’ Digest.  The panel format was interactive:  the panelists would discuss various questions asked by the moderator and the audience would also respond to questions presented on the screen, using handheld devices with the results posted within seconds.  With limited time, four panelists, and audience participation, you really have to provide succinct sound bite answers.  The sampling below is a fair one.

Panelists Bemoan California’s Broken Budget Process

By Rich Saskal

SAN FRANCISCO — California’s road to reform is bumpy and may lead to a dead end.

The panel kicking off Thursday’s events at The Bond Buyer’s California Public Finance Conference focused on reforming the state’s government, but neither the panelists nor those who came to hear them thought that road would be an easy one.

More than 74% of participants in an instant, multiple-choice poll indicated that they expect next year’s California budget deficit to exceed $5 billion.

"I bring sad news," said panelist Fred Silva. "The 2010-11 budget looks very much like the 2009-10 budget, which looked very much like the 2008-9 budget."

Nothing will be solved by the budget proposal lawmakers took up Thursday, according to Silva, a state budget expert who works for California Forward, a group that is trying to reform the state’s governance.

Silva said lawmakers close the books every year by deferring expenses into the following fiscal year.

"The good news is, they’re considering today a spending plan," he said. "The bad news is they’re sending those obligations to the next group of lawmakers that will arrive in November."

California Forward member Sunne Wright McPeak, a former Contra Costa County supervisor and former member of Gov. Arnold Schwarzenegger’s cabinet, said: "California is not only broke, it’s broken."

The best thing about the three-month-overdue budget is that Schwarzenegger held the line and demanded pension concessions from state employees, according to Orange County Supervisor John Moorlach.

Such pension reforms have been the centerpiece of his tenure on the county board, Moorlach said, and they have to be at the center of any plan to turn around state and local governments.

"If we don’t declaw the unions and we don’t start doing something about pension reform, then everything else is just moving the deck furniture," Moorlach said. "We’ve got too many cities — too many counties — literally one paycheck away from Chapter 9 bankruptcy."

Panelist Howard Cure, director of municipal research at Evercore Wealth Management, said he is not impressed by the kind of budgeting that comes out of the capital in Sacramento.

"This is a state that gives me a lot of agitation," he said.

Cure’s concerns are more on the level of predicting California general obligation bond spreads, rather than worrying about default.

"Putting everything else aside, it is an investment opportunity because I do not think the state of California is going to default on its debt," he said.

Neither panelists nor audience members expect much out of some of the reforms that have either been enacted or are on the ballot. California has enacted redistricting reform for the Legislature and implemented an open primary system. A modification to term-limits laws has qualified for a future election.

More than 60% of participants in the instant poll, sponsored by Standard & Poor’s and The Bond Buyer, said the changes wouldn’t improve the budget process. The poll drew 280 participants.

Panelists put the most hope in the term-limits measure, which would allow lawmakers to serve 12 years in one chamber, rather than the current eight.

Moorlach favored term limits — until they applied to him. He is serving a second and final term as county supervisor.

"Now that I’m in an elected office that has term limits and have realized how much time it takes to get things done — to really reform things — [I realize that] by the time you really get the ball moving you’re already out of the office," he said. "What really happens in Sacramento and in places that have term limits is that staff runs the place."

The poll also considered whether passage of the Prop. 19 ballot question, that would allow state and local government in California to regulate marijuana use and tax it. Of the 202 responses to that question, 59.9% said that if Prop. 19 passes the market would accept bonds backed by marijuana taxes. The other 40.1% said it would not.

FIVE-YEAR LOOK BACKS

October 8

2000

Ten years ago the LA Times had an Orange County Editorial section on Sundays.  It printed two side-by-side editorial submissions.  The first was mine, making “The Case for Measure G – Spending 40% of the county’s share of the tobacco settlement is the right thing to do because it would free up $386 million in future tax revenue.”  The second was Marian Bergeson’s, making “The Case for Measure H – Orange County can solve a crisis by directing 80% of its tobacco settlement money toward health care – the intended purpose.”  Here is my piece:

Please review your sample ballot or "Candidates/Measures" at http://www.oc.ca.gov/election/. Read the independent financial analyses prepared by another countywide elected official and certified public accountant, Auditor-Controller David E. Sundstrom.

Out of nearly $1.5 billion in projected tobacco revenues, Measure G frees up $256 million of your future tax dollars. Additionally, prepaying our bankruptcy debt provides $130 million of eliminated interest costs. This non-tax revenue source releases $386 million of your taxes for other pressing needs that will directly benefit all of the taxpayers of Orange County.

Measure H will cost the taxpayers $66 million. It will come out of your taxes that support the county’s general fund. This further exacerbates an already-debt-constricted budget.

The difference between measures G and H is $452 million. "H" stands for "higher taxes." We have a $950-million bankruptcy debt burden.

The federal government is reducing its deficit. California has some $20 billion of surpluses. Orange County, still a donor county, contributed 10% toward this surplus, gets no benefit and is still in debt. "H" stands for "heist."

Tobacco settlement revenues are not restricted.

The state has been depositing all of its tobacco revenues into its general fund with no legislative restrictions. Now we have certain current and former state elected officials who are telling you what to do with county money. Yet they waste state funds and send none of their bloated surplus to help out our health care needs. "H" stands for "hijack."

Both measures allocate significant funds to health care.

Initially, Measure G allocates 42% to health care, 18% to public safety, and 40% to bankruptcy debt reduction. Over a 39-year period it will allocate 58% to health care, 25% to public safety, and 17% to debt reduction (that’s only one out of every six dollars). It’s that simple. The health care industry doesn’t think 58% is enough, they want 80%. ‘H" stands for "hog."

Neither Measure G nor H will solve the health care industry’s problems.

You will hear plenty of emotional stories of how badly the medical association needs additional funds. Claims that we owe the private sector are fabricated. There is no mandate that all of the funds should go to the medical association. "H" stands for "hype."

The health care industry has money. Orange County hospitals netted more than $200 million last year. The chief executive officer of Tenet Healthcare, which owns 10 hospitals in Orange County and contributed more than $71,000 to the Yes on H campaign, earned more than $102.4 million in compensation since 1993. The corporation spent $40 million for two luxury jets. Why do taxpayers have to subsidize this type of spending? "H" stands for "hypocrisy."

Measure H has no taxpayer protections.

Measure G provides for accountability through oversight, annual audits, performance measures, financial reporting and flexibility. Measure H does not. If this doesn’t remind you of the Robert Citron era, what will? "H" stands for "hoodwink."

Measure G is a way to right the wrongs.

Measure G is an excellent and exciting opportunity to remedy a multitude of financial concerns. It’s a "big-picture" approach. Reducing our debt is the right and honorable thing to do. Measure G is better than what the health care industry was willing to compromise with the Board of Supervisors. "G" stands for "great stewardship."

Be careful who you listen to.

We need to elect citizens to public office who really understand finances. How many times will we need to learn this lesson? Those who have endorsed Measure G have your best financial interest in mind, and reflect the fiscal prudence we taxpayers should expect. Go through your sample ballot. If the candidates are "Yes on H," then write "financially unfit," "pro-special interest," or "anti-taxpayer" next to their names.

It’s time to seriously address our county’s finances. This is a great opportunity. We can do it without a tax increase. And the health care industry will still get nearly 60% of the total dollars.

That’s a win-win. Measure G will ensure that we have a county that is in good physical and fiscal health. Join me in voting yes on Measure G and no on Measure H. It’s a half-billion dollar vote!

Steven Greenhut’s column was the lead, front-page, top-of-the-fold, for the Sunday OC Register Commentary section.  Greenhut supported Measure G over Measure H in Measure G: better medicine – Battling initiatives compete for funds awarded county as a result of lawsuits against tobacco companies.”  Here it is, in full, to provide the color of the debate between the measures on the November 2000 ballot.

Last time I wrote a piece on Measures G and H, the competing O.C. initiatives that will decide how the county’s share of the national tobacco settlement will be spent, one local politician who supports the medical association-backed H, urged me to be "nice" to the doctors and nurses.


In the age of impersonal HMOs, the medical community (everyone’s a "community" these days) might not always be the embodiment of Norman Rockwell imagery. But it does heal the sick, save the dying and improve everyone’s lives through the "miracle" of modern medicine.

Still, as much as doctors, nurses, paramedics et al. deserve our thanks for their individual acts of healing, the idea is disturbing that they deserve nice-ness — i.e., a free pass — when they practice raw politicking.  And political muscle-flexing is exactly what’s occurring in the debate over G and H. The medical community might be the equivalent of Mom and apple pie — but even Mom shouldn’t be spared criticism when she refuses to share more than a sliver of the pie with Dad and the kids.

Voters have a choice between two measures, both of which will earmark the bulk of settlement funds to health-related reimbursements and programs. The question mainly is about how much goes where, about whether to give everything to one vocal group or to spread it around a little — and even provide some eventual relief to taxpayers.

Measure H is on the ballot because of a petition drive spearheaded by the Orange County Medical Association. It would require that 80 percent of the $30-million-plus annually that the county is expected to receive from the settlement to be spent on health-related programs, with the remaining 20 percent going to the Sheriff’s Department for public safety matters.

Measure G was proposed by county Treasurer John Moorlach as a compromise between the medical association’s approach and that of the Board of Supervisors. The board initially wanted to securitize the settlement — float bonds based on the future income stream — to pay for the jail. The rest would have been spent to reduce debt related to the county’s 1994 bankruptcy.

G would spend 60 percent of the settlement dollars on health care programs and public safety, with the remaining 40 percent going to debt reduction. By paying off the debt early, G would save the county at least $130 million in interest over the course of the pay-out (beginning in 2001), thereby freeing up the general fund for other uses — health care or otherwise.

OCMA spokeswoman Michelle Revelle argues that "We believe these are health care dollars. … If you split the pie too many ways nobody gets full."

I disagree. G is a sensible compromise. The medical folks still get the bulk of the settlement funds. That’s in addition to the $353 million they already receive annually in the county budget, and the $50 million annually they get from the Prop. 10 tobacco tax — that other attempt to make hay from tobacco.

G offers a few other advantages over H. For instance, H caps at 1 percent the amount of tobacco settlement dollars that can be used to cover administration of the distribution of the funds. That sounds good until you realize that an independent analysis of the measure pins administrative costs at 5.5 percent. That means that the difference between the Measure H cap and the actual cost — $1.7 million a year — will come from the county’s general fund.

In addition, G gives an oversight committee needed flexibility to adjust how the dollars are spent if medical needs change over the decades. But the bottom line is that G shares the windfall with others, rather than earmarking almost all of it to one interest group. It is, in essence, the "nice" approach.

The medical professionals argue that they must subsidize emergency room visits and other state-mandated health- care costs.  They say that, when the county sold its public hospital to UCI for $1 back in 1976, the county agreed to reimburse medical providers for these costs, and that the county is now violating that understanding.

During a televised debate, OC Taxpayers’ Association’s John Chamberlain asked Sen. Joseph Dunn, the Santa Ana Democrat who was an attorney involved in the tobacco lawsuit, why the medical providers didn’t sue the county if it was in violation of a specific deal. They did, the senator said, and the two sides arrived at a settlement.

"If it’s settled, it’s settled," Mr. Moorlach said.

Sen. Dunn, he pointed out, recently secured $24.8 million in emergency room funding from the state budget. "How much money do we throw at this one industry?" Mr. Moorlach asked. "I can’t just focus on food in my budget at home."

He compares the medical community to the education community, which never gets enough public cash no matter the size of the windfall.

The county and the medical providers could surely come to an arrangement to fairly reimburse government emergency care mandates without earmarking nearly the entire settlement to various medical programs — most of which have nothing to do with reimbursements or tobacco.

Come on, H isn’t about "fairness," but about supping at the trough.

It’s also about building a bigger government health care behemoth.

OCMA complains that O.C. shortchanges the community because it doesn’t spend as much as other urban counties on health care, and doesn’t run a county hospital system like Los Angeles County. One Measure H spokesman, Tom Uram, the retired director of the county health agency, told me that sin taxes are great, that a certain level of health care should be a government-enforced right.

Given these arguments, it’s not that hard to see the philosophical bent of the H campaign.

Nevertheless, H is the odds-on favorite — no surprise in an era in which every initiative and political race is cast as one between good and evil, with the winning measure or politician typically the one that exudes the best intentions.

H has another factor working in its favor. The board majority — Charles Smith, Cynthia Coad and James Silva — has so infuriated so many people over its handling of the airport, that H has become the latest grudge match.

Airport foes see it as yet another chance to embarrass and defeat the politically tone-deaf trio. To them, it’s Measure F all over again, which is in my mind a petty response on the part of south county activists.

So vote for G, but put your money on H. And you might join me in worrying about a bigger problem — the precedent that the national tobacco settlement and the G & H process are setting.

"The precedent, whether it’s good or bad, is not the focus of the issue," OCMA President J. Brennan Cassidy told me, but what is the fair way to spend the money.

Yet I can’t help but be disturbed by the idea of one industry endorsing government-initiated lawsuits against another industry, then using the political process to grab the proceeds.

Some point out the possibility of this technique being applied to other legal industries, such as gun manufacturers, fast-food restaurants, etc. Or, perhaps, a state might sue the medical community — a frightening specter recently raised by one national columnist.

Last year, the well-respected National Academy of Sciences released a report revealing that medical mistakes — improper doses, botched operations, removing the wrong body part — kill between 44,000 and 98,000 people each year. The low number is more than the number of people who die each year from motor vehicle accidents, breast cancer or AIDS, according to the academy, which pins the costs at between $17 billion and $29 billion.

I’m not arguing for states to launch a similar campaign against Big Medicine as they have against Big Tobacco.

But precedents are being set. Should medical providers find themselves on the other end of similar lawsuits some day, I hope they remember the approach they’re taking these days. It’s nothing personal, it’s just about the money.

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