O. C. IN BANKRUPTCY : Area Businesses Face Worrisome Prospects : Impacts: Uncertainty regarding public projects, the possibility of tax hikes and higher county borrowing costs could affect building and other industries.
With Orange County’s bankruptcy came frightening prospects for business. Suddenly, area executives faced uncertainty about upcoming public projects, possible tax increases, higher borrowing costs and a huge blow to Orange County’s prized public image.
No one was certain Wednesday what to make of the bankruptcy. But there was no lack of attention to the crisis.
The Irvine Co., the county’s largest landowner, said only that executives “are watching the situation closely and will continue to do so.” But for now, said spokeswoman Dawn McCormick, company managers including Chairman Donald Bren do not believe there is anything “constructive or beneficial they could say about the bankruptcy.”
Others expressed shock or dismay at the financial crisis, but most said they believed the trouble could be resolved and that the county will stage a complete recovery.
County officials helped bolster that optimism by assuring suppliers and vendors that the county would continue making most scheduled payments, along with providing regular public services, such as police and fire protection.
“It’s unbelievable that this could happen,” exclaimed Larry Webb, president of Greystone Homes’ South Coast division, which has 600 homes under construction in Orange County. “I thought the county’s economic decline had bottomed out. Now I need to wait and see what happens when the dust settles.”
Home builder Kathryn Thompson was more sanguine.
“I think Orange County still has ample funds and strength,” she said. “The bankruptcy was a prudent course of action to gain breathing room. I think that we all will get through this if we don’t panic.”
Developers, including the giant Irvine Co., could be hurt if the bankruptcy curtails local governments’ future ability to issue bonds to finance the road and sewer construction needed to support real estate construction.
At the company’s publicly traded Irvine Apartment Communities subsidiary, chief financial officer Dick Moran said he fielded a number of calls from investment analysts in New York concerned about the bankruptcy’s impact on the subsidiary’s stock and on other publicly traded stocks and bonds tied to Orange County.
“The consistent theme” in their questions, he said, “is whether there would be significant tax increases to make up for (revenue) shortfalls” because higher taxes would put many Orange County companies at a competitive disadvantage.
“It is our hope that this is a onetime financial event that is much like a natural disaster . . . and then the economy reasserts itself and recovers,” Moran said. “I suspect people will realize it is an isolated financial catastrophe that will never occur again.”
Roland Osgood, president of Los Angeles builder Kaufman & Broad Home Corp.’s Orange County division, said his sales staff had received calls all day from buyers and potential buyers worried about what the county crisis would mean to them.
“Can they raise my taxes?” was a big concern, he said, adding that his staff has been assuring callers that “there is really nothing the county can do to raise taxes because of Proposition 13,” which requires a two-thirds vote in the general election to increase property taxes.
County Administrative Officer Ernie Schneider said in a news conference late Wednesday that no tax increase is being considered.
Osgood worries, however, that the bankruptcy will give Orange County such a black eye in the financial community that many of the cities and special agencies that issue bonds to build schools, roads, sewers and water systems will find it difficult to raise money.
Such bonds aren’t linked directly to Orange County’s credit, he said, “But they do carry the county name. And in the short run, who is going to touch anything that says O.C. on it? I think the work will go ahead, but it will be more expensive.”
Economists who specialize in watching Orange County say that the county’s inherent strengths remain and that the long term looks bright.
At Chapman University, where the economic research center staff was frantically reworking a 1995 forecast scheduled to be released today, economist Esmael Adibi said Wednesday that the bankruptcy will hurt, but shouldn’t derail the county’s economic recovery.
“Even if the whole impact of the bankruptcy, all the losses, is realized in one year it wouldn’t stop the recovery,” Adibi said, adding that the combined total of all goods and services produced in Orange County next year is projected at nearly $83 billion.
While many in the business community declined to speculate about the impacts of the county’s bankruptcy so soon after the filing, others were generally optimistic: Expect some economic pain in the short term but have confidence for the future.
Still, there are concerns about the bankruptcy’s impact over the next few months on major economic factors like home sales and business expansions and relocations. “We have a substantial image problem on our hands,” said Anil Puri, head of the economic department at Cal State Fullerton.
At Disneyland, where officials have been discussing a major expansion that hinges on substantial public improvements in the surrounding area, spokesman John McClintock said park officials and executives at the Disney Development Co. “remain optimistic” but didn’t want to “speculate on the possible impacts” of the bankruptcy filing. If the bankruptcy cuts off funding for proposed freeway improvements and construction of publicly financed parking structures, however, the entire $3-billion park expansion could be scrapped.
At Fluor Corp., the international engineering and construction services firm in Irvine, spokeswoman Deborah Land said officials had concerns that some of the larger projects being proposed for the county could be canceled, including a new football stadium for the Rams, the Disney expansion and a new county courthouse. Fluor was considering bids on all of those projects and now, she said, “we may never know.”
Bruce DeVine, chief economist for the Southern California Assn. of Governments, said his immediate concern is how the crisis will affect the 14,000 businesses that supply the county with everything from toilet paper to skilled technicians and consultants.
“In a bankruptcy, they have the ability to suspend debt payments,” DeVine said. “They don’t have to, but they can, and the question is how they will prioritize their debt and who will get paid and who won’t.”
Bruce Bennett, the county’s bankruptcy attorney, said Wednesday that all payroll and day-to-day operations will continue as normal. Retirees and vendors who receive regular payments from the county will also be paid on time, he said.
“The checks that are out there now are going to clear,” Bennett said. All of the ordinary-course activities of the county are going to continue. That means people are going to have to be paid to do it.”
But Bennett said that ongoing special projects such as the expansion of Interstate 5 and the building of the San Joaquin Hills toll road, which are dependent upon money currently invested in the fund, may be in more jeopardy.
“If the money is invested in the fund for those large projects, for the time being there won’t be a distribution,” he said.
But Aaron Lovejoy, president of Ultratech Resources in Santa Ana, said he has no worries about being paid.
He dispatched his usual crew of three workers Wednesday to county offices under a contract to maintain county computer systems.
“We have the full faith and confidence that the county is going to pull out of this,” said Lovejoy, whose firm does about $3 million in sales a year. The bankruptcy was particularly chilling news in construction union halls around Orange County. Union members have largely survived the recession because of jobs on public works projects. But the future of many of those projects is in question and union officials worry that the construction industry’s fledgling recovery could sink back into a recession.
“It’s more than worrisome, it’s distressful,” said Mike Potts, area representative for the Building and Construction Trades Council. He said that about a third of the 30,000 construction union members in Orange County found employment this year through the publicly funded projects, such as the ongoing $100-million Santa Ana jail project.
Southern California Edison and Pacific Bell say they probably will treat the highly unusual filing by the county as if it were simply another bankruptcy by a large corporation.
County agencies maintain nearly 800 separate electric accounts and the county’s overall monthly bill is about $1 million. SCE meter readers are canvassing the county to determine how much the county owed when it declared bankruptcy.
Typically, when a big corporate customer declares Chapter 11 bankruptcy, SCE protects shareholder and ratepayer interests by asking the bankruptcy court judge to approve a hefty cash down payment equal to two months’ billings, said SCE attorney Steve Lopez.
Pacific Bell, which is also a general unsecured creditor in the county filing, also generally demands a cash security deposit equal to two months’ worth of telephone bills. “We usually send a letter right away and ask for that deposit within 20 days,” Britton said. He declined to disclose the size of the county’s average monthly telephone bill.
