3 School Districts in Orange County Expect Cash Crisis : Education: Officials say they will run out of money by March if denied access to frozen funds. County warns that thousands may not get paid after Christmas.

Less than a week after Orange County filed for bankruptcy, top officials from three county school districts said Sunday that they will run out of money by March at the latest unless they can withdraw cash from the now-frozen county investment pool.

The county’s Department of Education also has warned local superintendents that, despite repeated promises that payroll demands would be met, it has no guarantee that thousands of teachers and other school employees will receive paychecks a week after Christmas.

School officials said aftershocks from the financial crisis will affect students in the next several months, possibly forcing the state to step in and pay local school bills.

“The county has told us nothing,” said Peter Hartman, superintendent of Saddleback Valley Unified School District, which along with Capistrano Unified and Placentia-Yorba Linda Unified school districts, face the looming financial problems.

“The bottom line for us is even if we get access to all our property taxes and state aid and federal aid,” he said, “it will not be enough to keep our schools open through the spring.”

Former state Treasurer Thomas W. Hayes--the county’s new financial adviser--said in an interview Sunday that he and a team from the Salomon Bros. investment firm have been working around the clock to protect what’s left in the county’s portfolio. The fund has lost $1.5 billion to $2 billion in value, sources close to the restructuring effort confirmed Sunday.

“We’re trying to systematically and thoroughly re-evaluate the situation and the value of the portfolio, then execute a plan of action that preserves as much as can,” Hayes said. “I don’t want to tip my hand.”

In other developments Sunday:

* Gov. Pete Wilson announced that he is sending state Auditor General Kurt Sjoberg to Orange County to help sort out the financial crisis. A team of state auditors is expected to arrive in Orange County today to review all activities in the fund since July, 1994, and audits from three previous years.

* Investment bankers analyzing the portfolio say last week’s sales of collateral by the county’s lenders consumed many of the easiest-to-sell securities. That leaves the county holding a higher proportion of complex securities that aren’t as easily sold; the residual portfolio is also especially exposed to changes in interest rates--an exposure the bankers will labor to diffuse.

The investment banking sources also said that a lack of crucial documentation of the fund’s administrative structure is creating a major obstacle to deciding how to apportion losses or income among the fund’s investors.

* Former Treasurer-Tax Collector Robert L. Citron, who resigned Dec. 5, has offered to help auditors decipher his investment records, according to his lawyer. “We’d be more than happy to cooperate with the county and its counsel in any way necessary to help,” said attorney David Weichert. But county sources said Citron earlier rebuffed an effort to gain his cooperation.

* The Orange County Transportation Authority board will unveil a plan today to keep the county’s buses, rail services and construction contracts running for the next 100 days.

* A longtime county government critic is calling for the Board of Supervisors to follow Citron’s lead and resign. Tom Rogers, a member of a county taxpayers association, said of board members, “they’re done, they’re dead, they’re through.”

Rogers, who said he has been deluged with calls from others who feel the same, said, “I think they are more responsible than he (Citron) is. Ultimately, they are the stewards of the county’s assets.”

No Federal Help Seen

In Washington, Treasury Secretary Lloyd Bentsen said the county shouldn’t count on a federal bailout. On ABC’s “This Week With David Brinkley,” he said state and local governments are responsible for solving crises such as the one in Orange County.

“It is up to them to do a better job of risk management,” Bentsen said.

Hayes, who spent the weekend in Sacramento, where he lives, would not say whether the state was at fault for giving Orange County too much investment authority. He also would not say whether the state should do something to help bail out the county.

But he said the power of local government to invest public funds clearly needs to be limited in the wake of the Orange County bankruptcy filing.

“I think a complete re-evaluation is in order,” said Hayes, who is on a 90-day leave from his job as president of Metropolitan West Securities, which has offices in Sacramento and Los Angeles.

Hayes said he had to be careful about disclosing his strategy for the portfolio because “the things I say can move the market.”

But he said the first goal is to protect the remainder of the fund, putting it in much less risky investments.

“Orange County has been much more aggressive in its investments than the state of California, and as a result, they have higher bubbles of risks,” he said. “As interest rates have gone up, the value of the underlying assets have gone down.”

Hayes said he was not in position to say whether the ultimate losses will be greater than the $2 billion that is now being cited.

He would not put a timetable on the restructuring, but he said that he would be “proactive” in alerting the public when decisions are reached.

At Hayes’ urging, Gov. Wilson also is sending the state auditor general here to help.

Sjoberg and a team of his auditors--charged with reviewing expenditures, income and current fund balances--will arrive today to help determine the shape of the county’s current finances while Hayes continues to examine its investments, said H. D. Palmer, assistant director of the state’s Department of Finance.

“Just as Tom (Hayes) is trying to get a clear picture of the county’s investment funds, Kurt’s team will look at the operational side,” Palmer said.

Sjoberg’s role will be to focus on simple accounting questions, such as whether the county has enough money to pay its bills, while Hayes continues to try to untangle the complexities of Orange County’s investment practices, the governor’s office said.

Tougher Guidelines

Wilson’s action comes as several state legislators began issuing calls for tightening up investment guidelines for municipalities, at least bringing them in line with more conservative rules the state is required to follow.

In a letter to Sjoberg released Sunday, Wilson asked the state auditor to report back to the governor as he runs across significant findings.

“Because of the immediate implications for the citizens of Orange County as well as implications relative to the state of California’s credit rating, I am requesting that you immediately make information available to the Legislature, myself, and the public as you reach your incremental conclusions,” Wilson wrote.

Sjoberg’s review will include an examination of fiscal practices as of June 30, 1994--the start of the current fiscal year--as well as all audits conducted over the past three years.

Supervisor Harriett Wieder first reacted with anger when a reporter told her that Wilson asked the state’s auditor to review Orange County’s financial records. She questioned whether the effort would duplicate the work already accomplished by the federal Securities and Exchange Commission.

“What we don’t need are any more searches into the treasurer’s finances; that is what happened 10 days ago when the SEC spent hours and doing the same thing,” Wieder said. “Why spend all this extra time and money and it sounds like the same thing?”

Wieder also asked why she had not been informed of the action.

“I thought we were one of (Wilson’s) best friends; aren’t we his family?” Weider asked rhetorically.

But Wieder later softened her stance. After conferring with Supervisor William G. Steiner, Wieder said the move may have been part of the help Wilson had promised earlier in the form of financial experts.

Several supervisors said they were also concerned about reports that Citron’s records are in disarray. Wieder said the county might need Citron to figure it all out.

“I think it could probably be helpful since it seems no one else touched those things except him,” Wieder said.

And according to a source close to the county’s rescue effort, Salomon Brothers is having problems such as finding Acting Treasurer Matt Raabe’s home phone number.

Supervisors gave assurances Sunday that schools would be first in line for available dollars. And Bruce Bennett, the county’s bankruptcy attorney, said the teachers will be paid.

“To the best of my knowledge, no one has told the schools that the county will cut off their payroll Jan. 3,” he said.

Officials said that in the worst case, the state would be required by law to keep schools open.

“The state must provide the education,” said John F. Dean, the county’s school superintendent. “It must keep the schools open. And keeping them open means paying the bills.”

Funding for Schools in County Still Murky

School superintendents for the first time Sunday demonstrated fears that by spring, they will run out of money to operate their schools and have been given no guarantees that millions of dollars deposited with the county will be available to pay expenses ranging from medical bills to the light bill.

“People say we like you and want to help you. But you need something you can take to the bank. And banks won’t cash good intentions,” said Hartman of the Saddleback Valley Unified School District, which postponed plans to put finishing touches on a new elementary school over the upcoming school vacation.

“I’m not trying to cry wolf or panic people,” Hartman said. “But we can’t sugarcoat this.”

As public school employees face an uncertain Christmas, county transportation officials are tackling the next 100 days.

At its meeting today, the Orange County Transportation Authority board will get a plan to keep the county’s public transportation moving for the next three months, said Stan Oftelie, chief operating officer of the agency.

Officials said that they have identified funds that will enable them to continue with main freeway interchange projects now under construction, and will be able to keep buses and Metrolink services operating. Oftelie would not give details of the plan.

“It’s a business plan on how we plan to move forward,” Oftelie said Sunday. “We have operated on the scenario that we won’t get money for 100 days.”

Montebello Mapping Out Its Legal Options

Meanwhile Sunday, city officials in Montebello, which has $47 million invested in the Orange County pool, spent 3 1/2 hours behind closed doors mapping legal strategy with lawyers from the Los Angeles law firm of Clark & Trevithick. City officials stressed they are not planning to follow Orange County into bankruptcy.

“Chapter 9 bankruptcy is not being contemplated whatsoever,” City Administrator Richard Torres said in a prepared statement. “This alternative has been deemed unnecessary.”

Montebello’s most pressing problem is finding $25 million for a six-month note, due Dec. 30 and secured by city tax revenue. The city floated the bond specifically to invest in the Orange County pool and was counting on withdrawing money from the fund to cover the debt.

The city’s stake in the Orange County pool is bigger than its operating budget for the entire fiscal year and represents 60% of the city’s total investment portfolio. The city was projecting $1.9 million in earnings this year from the Orange County fund, with half payable this week. But that revenue now appears in jeopardy.

City officials said they are “making every attempt” to prod Orange County into releasing at least some of the city’s investment fund. “They’re aware of our immediate cash-flow needs, but they haven’t really said very much,” Torres said.

Weber and Lynch reported from Orange County; Craft reported from Sacramento. Times staff writers Ken Ellingwood, Susan Marquez Owen, Greg Hernandez and Michael A. Hiltzik also contributed to this report, as did Times Sacramento bureau chief George Skelton.

* BANKRUPTCY COVERAGE: Related Orange County stories inside. A3, A22

Deadlines Looming

A number of Orange County governmental agencies face imminent deadlines for making payments on their debt but may have trouble because money is tied up in the county investment fund. A list of those agencies most immediately at risk of defaulting--with little time before December or early January deadlines for making bond payments--was released Sunday night by Moody’s Investors Service, a Wall Street credit rating agency.

“We want to find out what kind of sources they are going to use to make the payments,” said Howard Mischel, a managing director with Moody’s.

Of the 19 bond issues that have payments due in the next three weeks, first up is the city of Anaheim, which is slated to retire a $2.5-million note issue on Thursday, Mischel said. City officials assured Moody’s that they will make the payment by drawing upon other city funds.

Here is a list of agencies that must make bond principal or interest payments in December or January. A report for payments due in subsequent months will be released Monday.

Thursday, Dec. 15

City of Anaheim: $2.5-million principal payment due on revenue anticipation note.

Jan. 1

Centralia School District: $155,000 principal payment due

City of Costa Mesa: $160,000 principal and $52,000 in interest due on general obligation bond issue

City of Irvine: $1.41-million principal payment due on general obligation bond issue

Irvine Unified School District: $2.43-million principal payment due

John Wayne Airport: $2-million principal and $9.25-million interest payment due on revenue bond issue

Orange County Sanitation Districts: $15,000 principal payment due

Placentia Redevelopment Agency: $130,000 principal payment due

Aliso Water Management Agency: $55,500 interest payment due on lease rental bonds

California Transportation Finance Corp.--Orange County Transportation Authority: Interest payment due (amount unspecified)

Coastal District Finance Authority, South Coastal Water District: $129,000 interest payment due

Orange County: Interest payment due on general obligation bonds (amount unspecified)

Orange County Public Facilities Corp.: $488,175 interest payment due

Santa Ana Unified School District: Interest payment due (amount unspecified)

City of Santa Ana: Interest payment due on bond issue (amount unspecified)

Seal Beach: Interest payment due on water revenue bonds (amount unspecified)

Yorba Linda School District: Interest payment due (amount unspecified)

Jan. 2

Orange County: Interest payment due on pension obligation bonds, already defaulted (amount unspecified)

Source: Moody’s Investors Service