Non-Emergency Spending Curtailed by Orange County : Finances: Supervisors vote to suspend funding for most services not involving health, welfare or safety. Schools reach tentative accord for separate account.

Orange County curtailed all but emergency spending Monday as its investors grappled with an expanding financial crisis that forced postponement of a major freeway widening, a near-shutdown of the county’s largest water district and a halt to property tax refunds.

One week after the biggest municipal bankruptcy filing in history, some investors in the county’s collapsed securities pool--which includes cities, school districts and other public entities--said their inability to tap into a now-frozen $7.8-billion investment fund was wreaking havoc with their budgets.

After a 4 1/2-hour closed-door session, the County Board of Supervisors voted to curtail any spending that was not related to the “health, welfare or safety of county residents.”

While emergency services ranging from fire and police protection to health care and welfare would be maintained, nearly all other expenditures are being canceled or suspended.

“This is obviously unprecedented,” said Supervisor William G. Steiner. “This reflects the seriousness of the situation but it’s not closing up shop, it is setting priorities.”

In other developments Monday:

* Top county officials continued to work with bankers to seek new sources of money and hired accounting giant Arthur Andersen & Co. as a special consultant to the county treasurer’s office. Thomas E. Daxon, the former state auditor of Oklahoma, will lead the Arthur Andersen team. Acting Treasurer Matthew Raabe will continue in his job and work with the consultants in trying to sort out the county’s loss of up to $2 billion so far in its investment portfolio.

* Because of the financial crisis, the county halted hearings on property tax appeals because it cannot issue refunds. Officials characterized the action as a “timeout” that would stop the clock on the two-year deadline that now applies to such appeals.

* State and local education officials came to a tentative agreement with the county to keep all school funds in an account separate from the ailing county treasury. But administrators in individual districts said they remained worried about making payroll and paying bills.

* The Orange County Water District asked a federal judge for permission to remove $34 million from the fund. Without the money, officials said, the water district would be forced to default on its debt payments and might have to cease operations. The Board of Supervisors tentatively agreed to advance $5.8 million to the district, which manages the county’s ground water supply.

* Sources at the U.S. attorney’s office said they had begun an investigation into the Orange County investment fund that would focus on whether former Treasurer-Tax Collector Robert L. Citron had used the mails or wires to defraud investors. “This thing is so big and so shocking that we have to look into it,” said one investigator.

* Senate leader Bill Lockyer (D-Hayward) announced the formation of a special committee that will begin meeting next week to examine the causes of Orange County’s investment crisis and ways to help. Although Gov. Pete Wilson and others have rejected the idea of a bailout, Lockyer continued to hold out hope that a loan might be feasible if no other avenue is available to keep essential services in the county running.

Assembly Democratic leader Willie Brown of San Francisco, still enmeshed in a fight for the speakership, said he and other Democrats “would be prepared to bring the people back here in a hot minute” to deal with Orange County finances.

Assemblyman Curt Pringle (R-Garden Grove) introduced legislation designed to close the investment loopholes. The bill would apply the strict requirements currently used by the Local Agency Investment fund run by the California treasurer’s office.

It also would limit derivative investments, reverse repurchases and other investment tools blamed for the downfall of the Orange County investment fund. “There should be no gambling at all with taxpayers’ dollars,” Pringle said. “Unfortunately, the way the system is, that can happen. It’s got to change.”

Big Agencies, Big Hits

On Monday, it was some of the county’s biggest agencies--from the one that supplies much of its fresh drinking water to the one that builds it roads--that were taking the biggest hits.

The Orange County Transportation Authority postponed the Interstate 5 freeway widening project through Anaheim. But the agency said most of its other major operations, including bus and rail service, will continue without interruption because of newly arrived property taxes and an expected advance on federal transit funds.

The transportation authority with $1 billion in deposits, the largest investor in the county’s beleaguered pool--unveiled a spending blueprint it says will get the agency through the next 100 days of operations.

Agency chief Stan Oftelie said that construction on five major freeway projects will move forward. But others under design--including the widening of the northbound Santa Ana Freeway through Anaheim--will be put on hold.

Meanwhile, the County Board of Supervisors said it would release $5.8 million to the Orange County Water District, according to General Manager William R. Mills Jr. However, the money will not be disbursed until after the release is reviewed at a meeting today of 11 primary contributors to the troubled bond fund.

The water district is “in a rather unique situation . . . (because) the district used the county (fund) like a checking account,” according to a news release it issued Monday.

The agency petitioned U.S. Bankruptcy Court Judge John E. Ryan for “immediate access” to more than $34 million of the $118 million it has invested in the county pool. The district had just $100,000 in cash on hand to pay operating bills Friday, according to court documents. District Finance Director Andrew V. Czorny said in the court filings that the severe cash crunch could force service cutbacks and push the agency into default.

The water district, which serves nearly 2 million people, says it needs $5 million to deal with debts due at the end of this week.

District board members have ordered employees to review all “non-critical” funding requests to ensure that the agency can meet payroll and other day-to-day expenses. “We plan to reduce expenditures until we can determine the full implications of the (bankruptcy) filing,” Mills said.

Blow to Schools

Schools were expected to feel the biggest hit from the investment debacle, because so much of their money is tied up in the Orange County portfolio.

School officials said they expected to announce an agreement as early as this morning in which all incoming funds--including local property taxes, state and federal grants--would be segregated in a special fund accessible only to schools.

The fund would be invested conservatively and allow the county’s 31 school districts to continue meeting payroll and operating expenses for months regardless of what happens with the now-frozen county pool.

Bruce Bennett, the county’s bankruptcy attorney, said he probably would support such an agreement, calling it “sensible” to keep the money separate.

In Sacramento Monday, Brown said he would support special bailout loans specifically for schools, while acting state Supt. of Public Instruction William D. Dawson wrote a letter to Orange County Board of Supervisors Chairman Thomas F. Riley demanding that the board approve a plan segregating school funds by Friday.

Private health and social service providers scrambled Monday to determine whether funds crucial to their operation would be frozen as a result of Orange County’s growing financial crisis.

Confusion reigned in many nonprofit agencies. Administrators worried not just about delays in county funding, but about whether state and federal money funneled through the county would be held up as well.

A county spokesman said officials were still “looking at” which county contractors and vendors would receive priority. But the spokesman, Jim Bourne, had reassuring news for agencies expecting state and federal money, saying its distribution would not be affected.

On Monday evening, county Budget Director Fred Branca said the process of weeding out all nonessential invoices already had begun.

“The development of a critical list has started,” he said.

Branca said department heads will get the first crack at deciding whether each contract is essential to either health, welfare or public safety, although he admitted the criteria to judge this still is being worked out. The bills approved by department heads will be sent to the County Administrative Office, which will decide which invoices to pay. For example, Branca said, bills for medicine for county clinics or jail inmates will be paid, as will bills for essential Sheriff’s Department services.

Branca said it was still too early to tell if there will be a ceiling on the amount of money to pay these bills or at what point nonessential vendors would be paid. Daxon and his financial consulting team will help Branca and other county officials decide how to manage the county’s money.

“We’ve got to get to the bottom of this and find out what the problem is,” Daxon said. “We’ve got to sit down and start asking questions. It’ll be a while before we have any answers.”

Daxon said Orange County’s crisis is of an unrivaled magnitude, but he said he and his firm are “certainly not strangers to adversity.” He said the state of Oklahoma was on the verge of losing federal funding when he took over as state auditor and that he worked on a team that straightened out the troubled Resolution Trust Corp.

Today, the Board of Supervisors will hold its first regular meeting since the county declared bankruptcy. Meanwhile, a Laguna Beach woman said she will file a lawsuit this morning asking a judge to force the supervisors to stop discussing the financial crisis in secret.

Wall Street Sales

On Wall Street, $100 million more of county-owned bonds were sold Monday by Donaldson, Lufkin & Jenrette Securities Corp., which held the bonds as collateral for loans to the county fund.

DLJ Securities’ bond sale followed $11.4 billion in collateral bond liquidations by other major brokerages last week as the county defaulted on loan payments and the brokerages seized the collateral and sold it. The loans had been used to balloon the fund’s massive--and, as it turned out, ill considered--bet on falling interest rates.

In the wake of the bond liquidations, the county has sued one of the brokerages--Nomura Securities--and has promised to sue the rest demanding that the bonds be replaced.

Wall Street’s sale of its collateral has reduced the county fund from $18.5 billion in bonds to perhaps as little as $5 billion, analysts say, not including a $2-billion loan still outstanding from Merrill Lynch, the sole remaining brokerage extending credit to the fund.

On Monday, Merrill Lynch sent Daniel Napoli, its senior vice president, to Orange County to assess the damage.

Throughout Monday, county officials continued to seek help from banks they hope will extend the county a line of credit that could allow bills to be paid while the investment fund remains frozen in bankruptcy.

The Los Angeles branch of the Industrial Bank of Japan last week, for example, came to the aid of the transportation authority, extending a $78-million loan under its line of credit agreement so the agency could repay certain debts to bondholders that were due last Wednesday.