CALIFORNIA COMMENTARY : Don’t Squeeze Orange County : It is in everyone’s best interest for the state to step in and provide some relief to the bankrupt county.

When the recriminations die down about how one of the richest, most conservative counties in the nation could have gone bankrupt, the question will remain: What do we do about it?

People outside of Orange County may feel it made its own bed and deserves to lie in it--as the county would be expected to preach if another county went bankrupt. Liberals may protest the prospect of a government bailout for an area that perhaps most represented the opposition to such assistance. Nevertheless, when all the finger-pointing stops, we are left with the reality: It is not just a bunch of rich people who lost money. The damage hurts the economic health not just of the county, but of the entire state. This is one time when the public interest is served by government intervention.

While people may be tempted to gloat over Orange County’s predicament, this is a disaster that affects us all. The aftershocks will reverberate throughout the state for years. The state should not make up for all the bond losses; however, it is in everyone’s interest to ensure that public services continue uninterrupted and that vendors and employees be paid on time. Also, the state should provide some form of credit enhancement so that future bond issues can be sold. The costs of these measures can and should be reimbursed by Orange County residents to the state over time.

Who are the losers? It isn’t just the bond holders who lose money when the bankruptcy stops payment on their bonds and forces a reorganization of debt, although they will feel the losses most directly. Nor is it just the participants in the bond fund--the 180 government agencies who have seen their investments in the fund drop in value by $2 billion or more, depending on the latest estimate. Virtually all of us with money invested in mutual funds stand to lose. Bonds throughout the nation have dropped in value as interest rates shot up this year. Even if one does not hold Orange County bonds, the entire municipal bond market has dropped in value as the fear of similar bankruptcies washes over Wall Street. Funds with similar debt have seen withdrawals in excess of 20% since last week.

The fallout from the bankruptcy is just beginning. The most immediate impact will be a sharp rise in interest rates on public indebtedness. The impact on credit affects a county just like it does an individual. When lenders fear they might not be repaid, they charge higher interest rates. After a bankruptcy, it takes years for them to regain confidence in the borrower.

In the short term, public services will be cut. Badly needed construction improvements will be delayed. Laguna Beach, for example, must now wait to start construction on the fire-damaged Thurston Middle School. Santa Ana teachers worry that they may not get paid this month.

Orange County’s bankruptcy hurts the entire Southern California region. Tourist draws like Disneyland may delay expansion. Concerns about the county’s ability to sustain public-service levels will impede the region’s ability to attract new companies to move here. And at least one state, Iowa, has beefed up its mission to entice California businesses to relocate in Iowa.

Should the state come to Orange County’s aid? The answer is yes. It is not just the rich who lose out if they do not. The bankruptcy significantly impairs Southern California’s economic recovery. It destroys confidence in public services and hurts those people who are most vulnerable to cuts in public services, especially education, health and safety. The state must help out, because no one else can.