By CATHY BUSSEWITZ
The Associated Press
Friday, July 23, 2010; 12:43 AM
SACRAMENTO, Calif. -- California finance officials will consider Friday whether to loan as much as $12.5 million to Modoc County as the rural, cash-poor municipality prepares for the possibility of filing for bankruptcy protection.
Other California cities and counties have seen steep slides in tax revenue during the recession, but Modoc County's trouble stems largely from another problem: For more than a decade, the county has been funding its hospital using money that was intended for other purposes, such as education and transportation projects.
An audit last year by the state controller's office determined that the county was violating state law by shifting dollars away from their intended purpose, prompting the current financial crisis. The county has hired a bankruptcy attorney in case it needs to declare itself insolvent, said Dan Macsay, chairman of the Modoc County Board of Supervisors.
"We don't want to go bankrupt," he said Thursday. "It does nothing for us - it doesn't help the state, it doesn't help anybody. But what we're doing is preparing for the worst."
He said it's unclear whether Modoc County will have enough money to pay expenses for the current fiscal year that began July 1, considering it must repay millions in debt. The county borrowed $12.5 million from special funds to support the hospital for about 15 years, but never repaid the money.
Modoc County is in California's far northeastern corner, a sparsely populated region of forests and wind-swept plains that is tucked between the Oregon and Nevada borders. In January, the state listed its population at 9,777.
On Friday, the state treasurer, controller and others will discuss proposals to help the county stay afloat. The county has requested a loan from the state's Pooled Money Investment Board, which oversees a portfolio that was worth $69.4 billion as of June. But California has its own financial troubles and is facing a $19 billion deficit.
State officials say they also want Modoc County to avoid bankruptcy.
"When a local entity files for bankruptcy protection, it has a ripple effect on the reputation of the state," said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. "It creates headlines that do not serve the state well when it, for example, tries to sell bonds."
Municipal bankruptcies are rare in California. The most high-profile one was Orange County's bankruptcy filing in 1994; the San Francisco Bay area city of Vallejo filed for bankruptcy protection in 2008 amid a revenue crisis.
Yet helping Modoc County by providing a loan comes with its own dangers. If one financially strapped municipality gets a loan from the state, it could prompt other local officials to ask for handout, too. Dresslar said if the state does issue a loan, it would want to make clear that it's not setting a precedent.
Dresslar also said a loan would carry strict conditions, such as allowing the state to intercept other tax money destined for the county.
"We don't think any county will be chomping at the bit to place themselves under the scrutiny and conditions that this kind of loan would carry with it," Dresslar said.
One question that must be answered immediately is whether Modoc County can use the money it has to pay its bills or whether it is legally obligated to use that money to repay debts, said state Assemblyman Jim Nielsen, R-Yuba City, who represents the region. It remains unclear whether the county will be able to deliver the next paycheck to its employees until that is resolved, he said.
Meanwhile, Modoc Medical Center has had to stop offering services such as minor surgeries and delivering babies, said Macsay, the county supervisor.
The hospital used to deliver about 35 babies per year, he said, but could no longer do so because it can't afford to keep an anesthesiologist on staff.
"The fact is that they have a limited audience to capture," Macsay said. "They were offering services that they really couldn't afford."
Instead, Modoc County residents will have to drive more than two hours to hospitals in Redding or across the Oregon border to receive those services. Calif. considers loan for troubled Modoc County