Fund’s Loss Put at $2 Billion; Delays in Projects Loom : Orange County: Planned spending on public works, youth programs, police upgrades threatened. Government workers may face shorter workweeks, pay cuts, layoffs.

As a top official revealed that Orange County’s investment loss had reached at least $2 billion, county leaders said for the first time Saturday that the financial debacle could mean layoffs, shortened workweeks and salary reductions for county employees.

Members of the County Board of Supervisors said they expect to delay dozens of major projects, including the widening of the Santa Ana Freeway through Anaheim and a massive overhaul of the county’s police communications system, as they concentrate on paying bills.

“Business is not as usual, that’s the heartbreak,” said Supervisor Harriett M. Wieder. “We’re not going to be the same for a long while. It’s scary. It’s tragic. Absolutely tragic.”

County officials were working through the weekend to further analyze the damage and help reassure a nervous financial world that the county, the largest U.S. municipality to declare bankruptcy, would pull itself out of its monetary crisis.

In other developments:

* County Supervisor William G. Steiner said he has been told that the losses have reached at least $2 billion in value--providing the first county confirmation that the losses have worsened. That amounts to 25% of what investors put in the fund.

Previously, the losses were estimated at $1.5 billion, or 20% of investors’ capital.

* County officials continued to push bankers and state and federal authorities for immediate help, seeking lines of credit from Bank of America and other financial institutions.

* Gov. Pete Wilson said the state may be able to advance the county its normal allowance of next year’s tax money, but probably will not get more involved. “I am deliberately not raising anybody’s expectations because I think there is a very limited role that the state can play,” Wilson said.

* County Administrative Officer Ernie Schneider removed 22 spending items from this Tuesday’s meeting agenda, from youth programs and public works projects to such minor matters as repairing a barbed wire fence at a wilderness park. And the situation could get worse. Another top county official said there was talk Saturday of salary cuts and reduced work hours for the county. “The worst-case scenario would be layoffs,” Schneider said.

* State Sen. Tom Hayden (D-Santa Monica) proposed “serious reforms” to regulate the relationships between financial brokers and those who invest taxpayer money. He called for strong prohibitions on gifts and campaign contributions from financial firms to public officials who invest public money.

In Sacramento, former state Treasurer Tom Hayes--the county’s new financial adviser--made the rounds of state leaders seeking financial help.

In Santa Ana, county officials worked with Salomon Bros., the county’s financial strategist, to consider various budget-slashing scenarios.

The county has had partial success in getting money from outside sources.

Bank Picks Up Debt for Notes

The Industrial Bank of Japan picked up the debt last week for $78 million worth of notes issued by the Orange County Transportation Authority and has agreed to pick up $100 million more of the agency’s notes that come due in January, Steiner said. Bank of America officials also are considering a line of credit to Orange County.

Steiner said any money that comes from state and federal officials in the form of sales tax revenue and federal highway funds would not be a handout.

“This would not be a loan,” he said. “This would help us get some funds early to help with our liquidity.”

Also Saturday, trustees of the Anaheim Union High School District held a special meeting and directed Orange County officials to keep their property tax funds separate from the county investment pool. Previously, a portion of those funds had automatically gone into the pool. The trustees followed the lead of several other school boards that have petitioned the county to do the same.

Within just a few days last week, Orange County, one of the richest areas of the world, saw its treasurer-tax collector of 24 years resign and the next day filed for bankruptcy protection after it defaulted on a $1.2 billion loan. That action triggered a Wall Street investment brokerage to sell off $2 billion in securities that it had held as collateral for the county’s loan.

In the days after the bankruptcy filing, nervous brokerages dumped $11.4 billion in securities onto the market. What the investment firms were paid for those securities will determine how much is left of the $7.8 billion county investment fund, which had been leveraged to nearly three times its value. Steiner said Saturday that he believes the portfolio, which includes the investments of more than 185 school districts, cities and other agencies, has lost $2 billion in value so far.

“The pool participants need to know what’s left in the fund and what can be released,” he said.

Steiner said that eventually he will seek to have the county’s investments removed from the county treasurer’s responsibility and managed by a private financial manager accountable to the Board of Supervisors.

Wieder said she felt some relief at hiring Hayes and Salomon Bros.

“I said to the county counsel, ‘I feel as though I can see the light at the end of this tunnel,’ ” Wieder recalled. “And he said, ‘No, it’s just like coming down on an elevator from the 100th floor--we’ve just passed the 95th.’ ”

Wieder said it is impossible to approve any new expenditures in today’s financial light.

“How can we talk about spending money when we don’t know what we have?” she asked. “Once we find that out, we’re going to have to set the priorities on who gets paid.”

Local Businesses Show Support

In recent days, Wieder said, she has seen a huge outpouring of support by the local business community. Before Salomon Bros. joined the effort, she said, Pacific Investments offered free financial advice. Local accountants also have offered to give her briefings on securities trading so she can better understand the investment portfolio, she said.

Supervisors said it is almost certain that some spending, such as land purchases for widening Interstate 5, a bond sale for the $94 million emergency communications system and the hiring of new deputies to staff the Theo Lacy Branch Jail in Orange, will be postponed indefinitely.

Stan Oftelie, head of the Orange County Transportation Authority, said its board of directors will vote Monday on a 100-day operating plan to keep the agency going.

“It’s a plan to stabilize all of our activities, and this involves contracts, vendors, professional services, cash flow, payroll and everything else,” Oftelie said. There are no plans to curtail bus service, he added.

One expected casualty is a private toll road that was to be built down the middle of the Santa Ana River and is still being designed.

Most of the construction was to be funded through the sale of bonds to private investors, but the transportation authority has agreed to contribute $12 million for an environmental study, said Mel Placilla, the project manager.

Placilla said transportation officials informed him Friday that the $650-million project would be put on hold. The transportation group has $1 billion tied up in the county’s investment pool, which was frozen as a result of the bankruptcy filing.

“It’s too early to say we won’t be able to do the road,” Placilla said. “But I can tell you that this is going to make it much more difficult for us to continue. We’ll just have to wait and see what happens.”

Meanwhile, former Treasurer-Tax Collector Robert L. Citron and his assistant, Matthew Raabe, have each hired private attorneys, a pair of former federal prosecutors with experience in criminal defense and fraud. Raabe is now the acting treasurer.

Michael Kolbenschlag, who is acting as a spokesman for the county during the crisis, said the county would pay Citron’s and Raabe’s legal bills unless they are convicted of any wrongdoing.

Raabe’s lawyer, Terry W. Bird of Century City, said it is too soon to tell what types of legal work he will be handling. Bird said he has not yet been notified of the class-action lawsuits by bondholders naming Raabe as a defendant, and has not been contacted by the Securities and Exchange Commission, one of half a dozen agencies investigating the county’s financial situation.

“I’m representing him for all purposes right now,” Bird said. “This is changing so quickly, it’s hard for me to tell what’s happening next. It’s been rather hectic, and I’m working with Raabe on a daily basis.”

“Matt’s going to do his job, he’s going to do it right,” Bird said of his client. “It’ll take a while before this thing gets sorted out, but I think everybody will see that Matt did what he could.”

Officials from Washington, D.C., to Sacramento are scrutinizing Citron’s risky investments. Hayden said state lawmakers need to get more involved.

“I agree with the governor that we should not bail out Orange County,” Hayden said in a letter to Senate President Pro Tempore Bill Lockyer. “But I disagree with the notion that we’ve had no hand in this,” he added, pointing to laws approved by the Legislature that allowed county treasurers to participate in risky investments with taxpayer money.

In the letter Hayden asked that the state ban governments from engaging in reverse repurchase agreements, “the practice which was the death knell of the Orange County fund,” and limit the percentage of public funds that can be put into derivatives, complex investment instruments tied to interest rates or other variable mechanisms.

He also suggested that the state repeal the law allowing local governments to buy lower-rated securities, prohibit governments from purchasing long-term securities, and institute “strong prohibitions” against contributions by brokerages to campaigns of officials who invest money.

Hayden also said he had assigned an attorney from his staff to investigate the Orange County crisis and work on the legislation full-time.

“I don’t think you can turn your back on something as though it’s kind of a localized cancer,” Hayden said Saturday. “On the one hand, the state is not responsible for a failed set of policies on the Orange County level. On the other hand, the state has fostered a climate of deregulation without oversight.

“The state is broke,” he added. “The state can’t bail out Orange County.

“But Orange County is not an isolated case. It’s the tip of a melting iceberg of irresponsible fiscal decisions abetted by special interest campaign contributions. If this could happen in a county that has a reputation for believing in fiscal conservatism, it certainly could happen, and is happening, in other places.”

Times staff writers Jodi Wilgoren and H.G. Reza contributed to this report.