Orange County Voices : O.C. IN BANKRUPTCY : Easy Money’s Just a Fairy Tale--but the Sky Really Was Falling : Irvine is paying a high price for jumping on the county investment pool bandwagon. View it as a civics lesson for all of us.

The fingers of blame for Orange County’s “bondquake” have been duly pointed at former Treasurer-Tax Collector Robert L. Citron and the Board of Supervisors. In our rush to judgment, however, many other culprits have so far escaped public scrutiny. They may go forever unknown because their names never appear in headlines or on a ballot.

Not that their intentions were evil. Far from it. Orange County cities have suffered several lean fiscal years. Although the money wasn’t there, the public’s demand for services and infrastructure improvements never wavered.

Well-intentioned elected officials and public agency executives were forced to scramble for new revenues wherever they could find them. If it made a buck and kept the public happy, no questions were asked.

Such a scenario occurred last July in Irvine. The scheme, all but hidden from the taxpayers, may result in the city declaring bankruptcy. The optimistic scenario requires Irvine taxpayers to absorb a major fiscal loss of $20 million or more.

In the late 1980s, a more prudent Irvine City Council created an Economic Uncertainties Reserve. This policy required the city to set aside 5% of its operating budget for protection against extreme financial hardship or disaster.

When the recession began, Irvine suffered a drastic loss in revenues. Subsequent City Councils dipped into the reserve but eventually had to lay off 20% of the staff and cut services. Still the city bled red ink. In May, 1993, with no end to the recession in sight, city officials made a deal with the devil.

Disregarding prudent policies, Irvine created a Revenue Enhancement Fund. This obscure account was opened not to pay for street improvements or a new park or even sewer lines. It was created to bankroll a swim in the county’s investment pool.

Irvine issued $60 million of general obligation taxable notes, due and payable in one year. Irvine invested it in the Orange County Investment Pool (OCIP), which yielded a higher interest rate than the rate on the notes. The objective was to make a profit off the difference and transfer it to the depleted general fund, the city’s operating budget.

It worked--the first time.

Irvine made $2 million off the scheme, and most of it was transferred into the general fund, satisfying city policy to maintain a 5% reserve. It worked so well that in July, they did it again, dropping another $62 million into OCIP.

But this time it won’t work.

When OCIP was declared bankrupt, its assets were frozen. If Irvine can’t get all of its money back by next July, it will have to repay $62 million plus interest to the note holders. Irvine taxpayers will have to pick up the tab for the $3-million interest plus whatever the city can’t recover from the OCIP’s liquidation--which according to recent media reports may be $17 million or more.

City Manager Paul O. Brady Jr. and Finance Director Jeff Niven proposed the issuance of the general obligation notes. They were supported by Rauscher Pierce Refsnes Inc., the note underwriter. Mayor Michael Ward and council members Barry J. Hammond and Paula Werner voted to approve it. Members Christina L. Shea and Greg Smith had the foresight to oppose it.

The resolution adopted by the majority of the Irvine City Council clearly states the consequences of a general obligation note. If the principal isn’t available to repay the debt, the note holders are repaid from the general fund--the fund that pays for virtually every daily service provided by the city. But the $62 million is more than the entire projected general fund revenues for the current fiscal year.

Under state law, general obligation bonds require a two-thirds voter approval. General obligation notes , however, require no voter approval. City officials used this loophole to issue a $62-million debt without any review by the voters. The consequence is that Irvine’s operating budget is in danger of bankruptcy.

State and federal legislators are already scrambling to plug loopholes such as these. Assemblyman Curt Pringle (R-Garden Grove) has introduced AB 47, which intends to close many of these loopholes. The bill must include a provision to prohibit a city from issuing general obligation taxable notes, which place its operating budget at risk.

The voters must take responsibility as well. When was the last time you read your city’s budget? When was the last time you attended a city council meeting? Schemes like the Irvine note program happen because no members of the public ask hard questions. Local government is perhaps the last place where citizens can still make a difference. When we don’t get involved, disasters such as this bondquake are inevitable.