County Grapples With Pressing Need for Funds : Budget: Supervisors to consider hiring cash flow consultants. Managers told to delay spending if possible.

Like paupers squeezing every penny, Los Angeles County officials say an unprecedented lack of ready cash early in the fiscal year is forcing them to take extraordinary measures to make sure they don’t run out of money--and into bankruptcy.

Citing an unequaled cash flow problem so soon after adopting a budget, county auditors and financial managers are instructing all departments to maximize their funds in hand, delaying expenditures as long as possible while raking in all expected revenues from the state and federal governments as fast as they can.

But with cash flow problems expected to mount, more drastic responses are under consideration. On Tuesday, the Board of Supervisors is scheduled to consider a last-minute addition to its weekly agenda that would allow it to hire “one or more qualified firms for cash flow advisory services” and to take other measures to deal with the problem.

Already, the county is operating so close to the margin as a result of low current and expected cash reserves that it will be forced for the first time to borrow from its trust funds to cover operating expenses as early as September--just two months into the fiscal year, Chief Administrative Officer Sally Reed and other county officials said.

“That, of course, is an alarm,” Reed said. “You have to have enough cash on hand to pay your bills.”

Compounding the problem, she said, is the fact that the county tried to close its $1.2-billion budget gap Tuesday but had to pencil in at least $300 million in state and federal revenues that are not guaranteed, some of which may never come through.

Supervisor Zev Yaroslavsky said Sunday he strongly supports Reed’s recommendation that the county hire independent financial help.

“Do we have enough cash to meet our needs?” asked Yaroslavsky. “The fact that we cannot even answer that question is very ominous.

“It is a crazy position to be in,” said Yaroslavsky, who has been the most outspoken board member in warning that the county could run out of cash and not be able to pay bills. “It demonstrates how tenuous, how stretched, the county’s financial situation is--it is stretched almost to the breaking point.”

The cash problems, and the use of phantom revenues in balancing the budget, are likely to have an immediate effect this week as Wall Street is expected to hammer the county with a significant downgrade in its coveted bond rating. Such a setback could force the county to pay millions of dollars in higher interest on future bond issues that it needs to cover operating costs or to finance capital projects at a time when it most needs to save money, county officials said.

Reed also plans to ask the supervisors Tuesday to instruct her staff and the treasurer and tax collector’s office to “develop alternatives for cash flow borrowing,” presumably to make sure they can come up with quick cash to make payroll and a host of other expenses to keep county government running if needed.

And Yaroslavsky, citing his own concerns, plans to ask Tuesday for a list of immediate health services cuts he says are needed to slash operating costs even further--by $75 million or more--so the county doesn’t keep spending more than it is taking in and exacerbate the cash flow problem.

The county could run out of cash within several months, he said, if some expected revenue sources don’t come through and the county can’t act quickly enough to close hospitals or take other drastic measures it may require to balance the budget.

And if that happens, the county’s cash on hand could evaporate and it could lurch into insolvency or even bankruptcy, county officials say. “If you run out of cash, you can’t pay your bills,” said one. “If you can’t pay your bills, you figure out what’s going to happen.”

Supervisor Deane Dana said Sunday that he, too, is concerned about the county’s lack of cash on hand, but that he plans to speak to Reed today about what needs to be done before committing to hiring outside help. “I don’t want the county to go broke,” he said. “We have to be very concerned about that.”

Because the proposals were contained in agenda items made public late Friday, Treasurer and Tax Collector Larry Monteilh was unavailable for comment, and it could not be determined exactly how much readily available cash the county has in its coffers.

But Reed, Yaroslavsky and Assistant Auditor-Controller J. Tyler McCauley all said the county is in far worse shape than in any previous year in memory because of a number of factors.

Among them: By waiting until a month into the fiscal year to make the cuts needed to pass its budget, the county extended its deficit spending. Also, by putting off some of their most controversial cuts in health care until Oct. 1, the supervisors didn’t really wipe out their massive deficit, particularly a $655-million shortfall in the Health Services Department budget.

Already, as much as $75 million that the supervisors had counted on has evaporated, now that Gov. Pete Wilson has vetoed an effort to allow the supervisors to divert funds from the Metropolitan Transportation Authority this year.

Also, much of the revenue upon which the county is relying, including $178 million in federal health care money, may not be available for use until much later in the fiscal year, if it becomes available at all. And under complicated funding formulas, the county has to put up huge sums of money at the beginning of the fiscal year so they can be matched with state and federal dollars and then disbursed later in the year, while the county must pay to run hospitals and other services in the meantime, Reed said.

In the past, the county has had to borrow from trust funds, but usually far later in the fiscal year, and usually only as a way of paying bills until $1 billion or so in property tax revenues roll in after mid-December.

Running low on cash so early this year presents an additional problem: Until the county can guarantee that projected revenues used to balance the budget are coming, including the $178 million in federal health care funds, it would run against accepted practice to borrow from trust funds to tide it over--and that uncertainty could last for months, according to Yaroslavsky, Reed and county financial experts.

Auditors said that without a truly balanced budget, they will not borrow from the trust funds, which contain about $1 billion, most of it tax revenues. In other words, auditor McCauley said, the supervisors must come up with cold hard cash instead of $300 million in “soft” and anticipated revenues, or slash the budget enough so that the money going out equals the revenues coming in.

“I can’t borrow anything from the trust fund if the budget isn’t balanced,” McCauley said. “I don’t want to borrow from the trust funds if there are no means to pay it back.”

Asked if the supervisors will be able to drastically cut spending, or secure expected revenues from the state and federal governments before their cash runs out, McCauley said: “We are trying to figure that out now. . . . If we don’t get the [projected] revenue, we don’t have the cash and we can’t pay our bills.”

McCauley said his office is scrutinizing every nickel and dime of the county’s incoming and outgoing cash to make sure the supervisors don’t become overextended and start bouncing checks. In addition, he said, “We are trying to project for them when the problems will be acute, so they can take the necessary action. We don’t want to call them up on a Monday morning and say, ‘Hey guys, you’re out of cash.’ ”

County officials have provided few details of the proposal to hire outside cash flow advisers, including how much they would cost and what services they could provide that Reed’s and McCauley’s large staffs cannot.

Yaroslavsky said he strongly supports Reed’s recommendation to seek help from the outside, saying the “negligible” cost would pale by comparison to what could happen if the county coffers run dry.

“I think these are extraordinary times, and they require extraordinary precautions,” he said. “Given what is at stake, the county leaders need to know as much about what is going on as possible so they can make informed decisions about the future course of county government.”

But retaining advisers is not enough, many county officials say. If the county is to avoid going over the fiscal precipice, they say, it will have to slash an already bare-bones, $12-billion budget only weeks after passing it, perhaps even before an Oct. 1 date that has been set to reassess the county’s financial situation to determine if severe health services cuts are needed.

Although he voted for the budget, Yaroslavsky criticized the board for passing its budget while “punting” on many of its most serious decisions, largely in the area of health care.

“The Board of Supervisors must come to grips with the fact it is going to have to act,” he said, “and take some very controversial and politically unpalatable decisions to cut spending in ways they never have dreamed of before.”

While agreeing that the board’s toughest decisions on paring down the budget remain, Dana defended the decision to plug gaping holes in the county’s deficit with hopes and promises of money to come.

“I didn’t feel we could bite the bullet and throw everyone out of work and make the cuts we need to make immediately,” Dana said. “This gives us time to let people in Washington and Sacramento know we are really in trouble this time, but the longer we wait, the more drastic the cuts are.

“We’ve never been in so much trouble as we are in now,” Dana conceded. “I’m very concerned; you’re talking about people’s lives, their health care, and no one outside L.A. County seems to care.”