O.C. IN BANKRUPTCY : Loss Looms for School Units That Borrowed

Placentia-Yorba Linda Unified could face some of the worst damage from the county’s investment crisis because, like four other school districts, it borrowed about $50 million in the spring of 1993 to make money in the Orange County treasurer’s now-failed investment pool.

Lured by the prospect of high returns in a time of dwindling funding from the state, the district struck a deal with the county and joined the investment in high-risk derivatives.

During the first year of the investment, the district made $1.5-million net profit. About half of that was spent on technology labs, while the other half remains in the county pool, officials said.

“We’re strapped for cash. To us it meant that we wouldn’t have to cut as many programs or suffer as much,” said Kim Stallings, Placentia-Yorba Linda’s assistant superintendent for administrative services. “In retrospect it looks different, but we thought we had the best county treasurer in the state. It was a big mistake, unfortunately. Looking back, it’s always easy to say it was a mistake.”

The deal was separate but similar to the $200-million investment made by Newport-Mesa Unified, Irvine Unified, the North Orange County Community College District and the Orange County Department of Education.

At a meeting Tuesday night of the Irvine Unified School District trustees, Deputy Supt. Paul Reed issued an emergency report laying out best-case and worst-case scenarios.

“In the worst case, we’re broke; we close the doors of the schools and we declare bankruptcy,” Reed said. But the bankruptcy filing could stabilize things and allow the district to get face value on its investment, he added. “The reality is, we don’t know.”

Unlike Irvine and the other three school agencies, Placentia-Yorba Linda received no special guarantees protecting its principal. But the district did buy insurance to help cover its losses in case the variable interest rate on its $50-million loan skyrocketed. The insurance, however, doesn’t protect the principal.

Despite Tuesday’s news that the county had declared bankruptcy, Stallings remained confident.

“We would have to lose quite a bit of money to lose more than we’ve earned,” he said. “Our big question is, ‘Is the principal vulnerable? Or is it going to be protected?’ We haven’t been able to get an answer. If we’re just going to have decreased interest earnings, that’s not going to be as dire a situation.”

Though the five agencies that borrowed money for the investments have the greatest exposure, all 31 of Orange County’s school districts could face massive losses, because they are required by state law to keep virtually all their money in the county treasurer’s pool. As of Nov. 30, school agencies had more than $1 billion in operating funds in the pool, plus some $550 million in borrowed funds.

Scrambling for information Tuesday, a handful of school finance officials from various districts met to consider strategy, while several school districts also consulted private attorneys.

Many said they were searching for legal loopholes in the requirement that all funds be deposited with the treasurer, so that tax receipts expected next week could be kept out of the ailing fund. Several also suggested that schools might have added legal recourse because they have no choice but to keep money in the fund.

Ronald Wenkart, general counsel for the County Department of Education, said his office would probably hire outside legal and financial advisers as early as today.

“It’s an unprecedented situation. We don’t have the expertise in this area of the law,” Wenkart said.

But Wenkart and several other school officials said they were somewhat reassured by the bankruptcy filing because it will prevent a run on the county fund and could stabilize the situation.

“My understanding is that the day-to-day operations of schools won’t be affected,” he said. “Kids will still go to schools, people will still continue to be paid.”

District superintendents and finance officers will meet Thursday afternoon at the county Department of Education. Until then, most are holding onto a wait-and-see attitude.