Orange County Officials Urge Calm as Crisis Fallout Spreads : Finances: Weary leaders seek to reassure investors, employees and residents after bankruptcy filing. Some city and school officials make plans in case situation worsens.

A day after Orange County declared bankruptcy to ward off creditors, its weary leaders appealed for calm and sought to assure the investment world, county employees and dozens of agencies with billions of dollars tied up in its frozen investment fund that civic life could go on.

Even as the county made those pleas, however, city and school officials began calculating that they soon might run out of money if they cannot claim money from the fund; some planned for the inevitability of their own bankruptcy filings if the crisis deepens.

“People are tense and nervous. I wish they would send me our $24 million,” said Saddleback Community College District Chancellor Robert A. Lombardi. “The only thing I can add is we’re trying to operate without getting everybody scared to death.”

County supervisors were insistent Wednesday that all county and school payrolls would be met and that no one’s taxes would be raised because of the financial turmoil. The fate of some major projects--such as new courthouses and a possible stadium project in Anaheim--remained uncertain, however.

“I want to assure the residents of Orange County and the world investment community that Orange County has the wherewithal to resolve this situation in an orderly fashion,” said Thomas F. Riley, chairman of the County Board of Supervisors.

Still, as one of the nation’s wealthiest counties reeled from the news that it had defaulted on a $1.2-billion loan, stumbling into the biggest municipal financial collapse in history, the aftershocks continued:

* City managers from across the county held an emergency session to plot strategy and hire their own bankruptcy attorney. Anaheim, with $169 million in the fund, froze all hiring and halted capital improvement projects. Orange County Water District officials said they will not be able to meet their next payroll in two weeks unless they can tap into the county fund.

* Taxpayers flooded county offices to ask whether they still had to pay property taxes due Monday--as, indeed, they must. One man was so irate on seeing the framed photograph of former Treasurer-Tax Collector Robert L. Citron hanging on a wall that he threatened to come back with a gun if the photo was not taken down.

* Laguna Beach Unified Supt. Paul Possemato said that some school districts may follow the county’s lead and file for Chapter 9 bankruptcy protection. La Habra City School District officials said they would likely put on hold a $1.5-million elementary school expansion.

* In Washington, Federal Reserve Board Chairman Alan Greenspan said he would consider raising interest rates again in January to forestall inflation. That could prove another blow to the county’s investment holdings, which tumbled in value as interest rates soared. Fed Governor Lawrence Lindsey said he was closely monitoring the county’s situation and watching for reaction in the world market.

* The Commodity Futures Trading Commission, a federal agency that oversees futures and commodities markets, announced that it would step up its efforts to investigate Wall Street firms that place local governments, such as Orange County, in risky investments.

* Municipal bond values slumped nationwide as investors responded fearfully to Orange County’s bankruptcy. Mutual fund companies said there was no rush on the part of individual investors to sell California municipal bond funds. But federal regulators said some fund parent firms plan to buy Orange County bonds now in fund portfolios, to calm public jitters.

Traders reported that some Orange County bonds and bonds of municipalities were being priced in the market at just 50 to 80 cents on the dollar Wednesday--but that virtually no bonds were actually changing hands at those prices.

* Standard & Poor’s Corp., a major credit rating agency, followed through on its pledge to lower the county’s bond rating to below investment grade status. That will make the cost of borrowing exorbitant for county government. The rating agency notified cities, schools and special districts with money in the fund that they had been put on negative credit watch, the usual step before a downgrade.

* Payments were briefly delayed for Orange County vendors, though officials said check processing would resume today.

* There were no hearings on the county’s twin bankruptcy filings--one for itself, one for the investment pool. Challenges to the filings are expected from taxpayer groups and some of the giant investment banks that lent money to the county, but none materialized Wednesday.

Pointing Fingers

Tom Rogers, a longtime member of a county taxpayers’s association, hired an attorney to contest the bankruptcy court cases.

“There is no way this county is insolvent,” Rogers said. “Absolutely no way.”

During the day, county officials lashed out at the federal Securities and Exchange Commission, which is investigating the county’s portfolio for possible misconduct.

County Supervisor William G. Steiner said he believes the SEC, which the county had begged for help in freezing its investment fund short of a bankruptcy filing, wanted a “meltdown” of the pool so it could pressure Congress for power to regulate the municipal securities market.

SEC officials denied the allegation.

“As far as the SEC is concerned, we’re not responsible for the financial condition of this county,” said William McLucas, head of enforcement for the agency. “It’s absolutely absurd. Somebody must have been smoking something or dropped in from planet Mars.”

Orange County Chief Administrative Officer Ernie Schneider pointed blame for the financial disaster squarely at Citron, who resigned Sunday. “The responsibility for managing the pool lies with a separately elected official--and that was Bob Citron,” Schneider said.

A management team of county department leaders and major investors was being assembled to review the county’s future investments. Officials said the county’s 18,000 workers will be updated on their employer’s fiscal health through an electronic phone service.

“The county is not broke,” said bankruptcy attorney Bruce Bennett, who is working with the county to devise a financial reorganization plan. “The county is not going out of business.”

Some Wall Street investment bankers said Wednesday that the Chapter 9 filing could have been prevented, but that some major brokerages had lost faith in county leaders and saw no support coming from state lawmakers in Sacramento.

“Wall Street was dying for leadership on this,” said one investment banker who spoke on the condition that he not be named. “The logical place for it to have come from was Sacramento, but we saw nothing.”

The banker also said there was discord within the Wall Street community. CS First Boston Corp.--which precipitated the bankruptcy by calling in $1.2 billion in loans to the county--took its action without consulting Merrill Lynch & Co. or Morgan Stanley & Co., the county’s other big lenders, this banker said.

The county’s failure to make a $1.2-billion payment to First Boston prompted the firm to sell $2 billion in securities it held as collateral, analysts said.

“I think it was a combination of them getting increasingly nervous and also frustrated with their inability to get to the decision-makers in the county,” the banker said. “But I also think they just panicked.”

In addition, Nomura Securities in New York was said to have called in loans it had made to the county, after its parent firm in Japan ordered its U.S. managers “to get out,” a Wall Street source said. Nomura was said to have put $500 million in county securities up for sale Wednesday afternoon.

Trying to Assess Losses

One question the county has yet to answer is how big a loss it took on the $2 billion securities sale by First Boston. Wall Street sources estimated that the loss would have been about 20%, meaning that the county realized a $400 million loss on its portfolio. Until Tuesday, the county had lost money only on paper.

Merrill Lynch continued to say it will stand by the county and that it has not withdrawn $2 billion in credit extended to the county fund.

But the giant firm’s supportive position may soon become a burden, some Wall Street executives said, because Merrill Lynch is unlikely to single-handedly take on the job of financing the county’s portfolio if other firms continue to walk away.

In a statement, officials of Smith Barney Inc., which has $800 million in credit outstanding to the county fund, said they were not contemplating any liquidation of Orange County holdings pledged as collateral.

But the firm added that it believed it has the right to liquidate its position if the county fails to make timely payments--regardless of the Chapter 9 bankruptcy filing.

“We believe that the automatic stay under Chapter 9 of the Bankruptcy Code does not apply” to its loan, Smith Barney said.

Chapter 9 freezes a government’s assets, protecting them from creditors, but allows the agency to retain control of its money and continue running its government as attorneys and financial advisers untangle the financial mess.

But filings like Orange County’s--which are extremely rare--can also lead to a host of fiscal woes, including a ruined credit rating that can prevent local governments from selling bonds to raise money for public works projects.

Some legal experts believe that even with the Chapter 9 filing, Orange County will not escape lenders, like First Boston, which move to sell the county’s collateral if loan payments are not made on time.

Officials in cities, school systems and special districts countywide sought to calm worried staffs and constituents, even as they struggled to come to terms with an economic landscape that appeared drastically altered.

Most city officials said they have sufficient money to meet immediate payrolls, purchase supplies and honor commitments to vendors but expressed concerns about the future, especially if their monies remain frozen for long in the county’s troubled investment pool.

“If this were a household, it’d be kind of like putting meat and potatoes on the table, but not getting to have the apple pie,” said Huntington Beach City Manager Donald L. Watson. “We’re asking everyone to batten down the hatches. We won’t be spending a nickel we don’t have to.”

Bennett, the county’s bankruptcy attorney, said ongoing projects that are dependent upon money invested in the fund --such as the expansion of the Santa Ana Freeway and the building of the San Joaquin Hills toll road--may be in more jeopardy.

“If the money is invested in the fund, right now, for those large projects, for the time being there won’t be a distribution,” he said. Asked how long the “time being” would last, Bennett said he was unsure.

Rescue Plans Explored

Bank of America officials, who loaned the state billions of dollars this year so it could overcome a budget deficit, are flying from San Francisco to Orange County today to meet with officials from the county and Orange County Transportation Authority.

“I think very important resources are coming forward to help,” said Steiner about the development.

Officials in Sacramento and Orange County expressed frustration with each other for not preventing the crisis. County leaders accused state administrators of not coming to the county’s aid, despite repeated pleas for loans and even a bailout. State leaders say they were rebuffed in their attempts to help out.

Officials in the state Department of Finance said it was still too early to tell what aid the state could provide, but suggested one scenario that recently occurred to avert a financial crisis in Merced County. In that case, state officials agreed to let the county defer payments to the state for some programs, most notably a contract with the state Department of Forestry.

Reflecting the day’s turmoil, bankruptcy lawyer Bennett said: “I really can’t point to any particular thing that is the next step” in the still unfolding crisis.

No hearings are yet scheduled in Bankruptcy Court.

“Obviously, we’re devoting all of our efforts right now to finding sensible solutions for the (county’s investment) problems,” he said. “That’s the most important thing that I’m working on, that’s the most important thing that everybody else is working on. The highest priority is forming a plan to get the county out (of this crisis).”

Platte and Lait reported from Orange County, Petruno from Los Angeles. Times staff writers Jodi Wilgoren, Rebecca Trounson, Chris Woodyard, Eric Bailey, Debora Vrana, John O’Dell and Susan Marquez Owen also contributed to this report.

More Coverage

* TAKING ON PROBLEM--Two women who helped pioneer derivatives are scrambling to solve portfolio problems. A24

* POLITICAL POSSE--The continuing financial crisis also touched off a furious search for someone to blame. A27

* POSSIBLE EXPOSURE--Wall Street giant Merrill Lynch and other brokerage firms may face major liability in the financial debacle. D1

Additional stories, pictures and graphics: A24-A29, D1-D3.

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Coast-to-Coast Impact

The financial crisis in Orange County is having an impact across the nation. Among Wednesday’s actions:

1) SACRAMENTO

* The governor’s office considers sending a financial “crisis team.”

* Treasury officials assure investors that the state’s portfolio is safe.

* Officials see no domino effect on state funds.

2) STATEWIDE

* Other municipalities use some of the same financing techniques as Orange County, but much more conservatively, experts say.

3) ORANGE COUNTY

* The county says employees will be paid and operations will continue as normal.

* A key rating service drops the county’s bond rating to the “speculative-grade” category.

4) WASHINGTON, D.C.

* Federal Reserve Board Chairman Alan Greenspan tells Congress there are no plans for federal intervention.

* The Commodity Futures Trading Commission, which overseas commodity markets, says it is conducting a preliminary review.

5) NEW YORK

* Prices plunge in the municipal bond market amid fears that other large municipalities may hold risky investments.

* The Dow Jones industrial average falls 10.43 points as the bankruptcy filing unsettles some investors.

Source: Times reports

County Bond Crisis

* For complete background on the bankruptcy of Orange County, sign on to the TimesLink on-line service. Or by phone, Times on Demand offers reprints of two articles about the muni bond market by Times Market Beat columnist Tom Petruno (Item No. 2811) and an article explaining the complex world of derivatives (Item No. 2810).

Details on Times electronic services, B4