Cities' raid on port funds could sink expansions.

International trade, the engine that helps to drive the region's economy, could take a severe blow with the state's decision to divert port reserves to cities' depleted coffers, said trade and port officials.

Jay Winter, spokesman for The Steamship Association, which represents ocean carriers, stevedores and terminal operators, is one of many who feel that the state's short-term solution to its budget debacle will cause "long-term damage."

He said port projects will be delayed at an incalculable cost and worries that the state will come back in two years for more money.

The ports of L.A. and Long Beach -- self-funding entities -- have been building up their reserves for years to fund ambitious capital improvements. Those improvements are being undertaken to accommodate the doubling of cargo expected by the year 2020.

The state's formula

The state, faced with a record $10.7 billion budget deficit, developed a formula to tap the ports' treasure chest for the next two years. The Port of L.A. faces a $44 million cut in its discretionary reserves and the Port of Long Beach faces a $5 million cut.

The provision, passed as part of the final budget package, was designed to make up for the state's cutback in its property-tax subsidy. For years the state has provided subsidies to local governments to cushion the impact of Proposition 13, the 1978 measure that required a statewide rollback in property taxes.

Under the budget measure, Californian ports are required to pay the greater of $4 million or 25 percent of their discretionary reserves. But that amount is limited to the amount of the property-tax refund cut to the cities by the budget.

Although 25 percent of the Port of Long Beach's reserves ($288 million) is $72 million, the city's property-tax subsidy is $5 million. Twenty-five percent of the Port of L.A.'s reserves ($177 million) is $44 million but its property-tax subsidy is $56 million.

Bond rating in peril

As a sign of the most immediate impact to long-term growth, the credit rating agency Standard & Poor's placed the ports of Los Angeles, Long Beach, Oakland and San Francisco on CreditWatch, which is often the precursor to a lowered credit rating. A lowered credit rating, in turn, makes it more difficult and costly for ports to borrow money for expansion projects because it warns investors of a higher risk.

Peter Bianchini, a director in S&P's San Francisco office, said the CreditWatch is an indication that the bonds are being reviewed. (S&P does not rate Port of San Diego bonds).

"This brings up the question of autonomy," he said. "If the state allows it to happen this time, it might do it again."

He said S&P rated the bonds based on the trust that the ports were self-supporting entities.

"Now that the ports have done well, their reserves are the target of the state Legislature. We're concerned over the state's change in philosophy," Bianchini said.

S&P's rating is now AA on the bonds of both the Port of L.A. and the Port of Long Beach. The highest possible rating is AAA and the lowest rating is D. Ratings are based on each port's financial stability.

Bianchini said S&P is in the process of meeting with ports officials to determine the long-term implications of the state's decision. He said S&P is waiting to see if some cities decide not to take the money.

Both ports are governed by the California State Tidelands Act, which states that all port business must be for the promotion of maritime activities. It is the state's break with this trust that has S&P most concerned, said Bianchini. It could also be the source of legal action, said port officials.

Gearing for growth

Combined, the ports are in the world's top five largest port facilities, based on tonnage. They account for 500,000 jobs in the region and contribute $3 billion annually to the economies of Los Angeles, Ventura, Orange, San Bernardino and Riverside counties, according to a long-range port planning blueprint known as the 2020 Plan. By the year 2020, the ports are predicting a 120-percent growth in cargo, a doubling of the economic contribution to $6.2 billion and an increase of direct port-related employment from 42,000 workers to 97,000.

The ports may be cash cows said port officials, but all the money they make gets plowed back into capital improvement.

"We've been saving money for years knowing that 1992 was going to be the year we'd be spending money," said Yvonne Avila, a spokeswoman for the Port of Long Beach.

She said the money will come out of the $387 million earmarked for capital improvements. The improvements include $250 million for purchasing several hundred acres of land, $200 million for construction of terminals and $160 million for creating overpasses for trucks to rise over train tracks.

Said Jeff Leong, a Port of L.A. spokesman: "The $44 million diversion could seriously jeopardize expansion plans."

To meet future cargo predictions, the Port of L.A. is planning to develop 582 acres of land for cargo-handling facilities, he said. That expansion involves months of dredging to create landfill, drying out the land mass and passing a slew of environmental laws. The port also plans to build a new container terminal, which Leong estimated would cost about $125 million.

Despite the fierce rivalry between the ports of Los Angeles and Long Beach that doesn't mean Long Beach is happy about the decision, said Avila.

"It's always been our goal to surpass L.A. in size and customers," said Avila. "But we're not gloating that L.A. has a bigger price to pay. It's our intention to have both ports thrive so the Southern California economy can thrive."

In fact, she said the only benefit the City of Long Beach, the No. 2 money-making port in the nation, would have at surpassing the Port of L.A. as No. 1 is "civic pride" and income derived from the "possessory" interest tax that port tenants pay to the city and county based on the length and value of their leases.

Creating jobs

"Our feeling is that port expansion is going to create much-needed jobs," said Avila, pointing out that on any given day 350 construction workers have been working on the 107-acre Maersk terminal, a 16-month project scheduled for completion in March.

Up to 20,000 jobs are predicted to be generated by the Alameda Corridor project, the grand plan to link the ports of L.A. and Long Beach to downtown Los Angeles rail yards by building a 20-mile-long rail and truck thoroughfare.

"As the economy grows at a snail's pace, we've been creating jobs," said Avila.

Both ports operate independently of their respective city councils. But each city is governed by a harbor commission, with commissioners being appointed by the mayor and confirmed by the city council. The commissioners have the final say over port operations, including how the port spends its money.

The Port of Long Beach contributed to its city's coffers by purchasing the property on which the World Trade Center is located, and it contributed $30 million toward the expansion of the Long Beach Convention Center.

Both ports also pay for city services, such as fire and trash. Long Beach pays $8 million for such services and Los Angeles pays $23 million, according to port officials.

Will it happen again?

In three years, the state will totally cut off its property-tax subsidies, which observers say could bring the cities clamoring to the ports to make up for the huge loss and jeopardize that growth.

Both the City of Los Angeles and City of Long Beach already have racked up record deficits. Long Beach is $17 million in debt for the current year and Los Angeles faces a $100 million-plus short-fall.

Gov. Pete Wilson already has conceded that if the economy remains sluggish, California will be facing another budget crisis next year.