ORANGE COUNTY IN BANKRUPTCY : A Blemish on Paradise : Irvine, Which Prides Itself on Its Planning, Did Not See the Fund Debacle Coming

Matters are not left to chance here. Not Irvine, where municipal thoughtfulness has gone into the style of each McDonald’s and the color of each house, where the tidiness of life is decreed in the covenants, codes and restrictions.

Yet chance caught up to Irvine when a bet on the direction of interest rates went the wrong way. With Orange County plunged into bankruptcy, this town of 120,000 stands to take the biggest tumble of any city--up to $165 million.

Among its three public governing bodies--the city, the Irvine Unified School District and the Irvine Ranch Water District--more than $600 million is invested in the ill-fated county investment portfolio. Included in that are tens of millions of dollars that the city and school district had borrowed to up their ante in the pool.

Marilyn Vassos, a retired Irvine elementary school teacher who has lived in the city since 1966, is stunned to see her tranquil city and its model schools hit so hard.

“It’s a little bit like the rise and fall of the Roman Empire,” she said. “Maybe we reached our peak and now we’re on the downswing.”

In a way, the city set itself up for the fall.

Residents insist on the best in schools, police and other services, and they espouse high morals. Some, for instance, scoffed at the chairman of Irvine-based Taco Bell last spring when he discussed publicly his love for his live-in companion, whom he since has married.

Perhaps the personification of master-planned Irvine is the 1,750-acre Woodbridge Village community, where two man-made lakes, stocked with bass and catfish, reflect the sky and the waterfront homes that line them. On weekends, residents take to the waters to cruise in canoes and paddle boats.

Four of the five council members and more than 20% of the city’s residents live in the village, which in October was named the best large-scale residential development in the nation by the Urban Land Institute.

Irvine, in short, is a place that likes to think of itself as the epitome of suburbia and family values, a bastion in conservative Orange County.

That it would put so much money in such high-risk investments seems to go against the grain, but that may be the bane of modern-day cities seeking the money they need to keep residents satisfied.

“Public entities today are desperate for funds because there are more demands on them,” said Raymond Watson, vice chairman of the Irvine Co., the county’s biggest real estate developer. “People want to cut taxes, and that’s understandable, but they also want more services. So where do you cut? The high school drill team? The swimming pool?”

But city cutbacks in Irvine do not have the Draconian ring that they would have in more hard-pressed towns.

For now, plans for new parks in the Northwood and Woodbridge neighborhoods are on hold in a city known for its plethora of public parks. So is the community roller hockey rink.

Cuts to the school district, which borrowed $54 million to invest in the county pool, could reach more basic services. The payment on that debt is due in August.

The school board is holding off on plans to build a high school and elementary school, and worries that if it cannot get hold of its money, layoffs could lie in the offing.

That is a painful prospect for a school district so highly thought of that it is one of the major lures drawing residents to the city. Just last August, University High School posted the highest Scholastic Aptitude Test scores in the county, more than 200 points above state and national averages.

But the high expectations of parents places exceptional demands on the 21,500-student district, one of five in Orange County that chose to borrow money to make an additional investment in the county pool.

Former Irvine Unified Supt. David E. Brown, who left the district in October to head the Napa Valley Unified School District, said trustees were aware that the investment pool and the decision to borrow were risky.

“The school board was reminded of the more aggressive nature of the investment pool,” Brown said from his Northern California office. But the past performance of the pool won out over the concerns.

“Because public education has all been so underfunded, we have been forced to operate on the edge to maximize our revenues,” he said.

Brown is not sanguine about the district’s prospects if it must absorb the full 27% loss of the county portfolio--a loss that would mean $27.5 million.

“The district cannot survive that kind of hit,” Brown said. “This is horrible. It’s a real shame that an institution that provides the most valuable and critical service could be so negatively impacted.”

Current school board President Tom Burnham was the only trustee to vote against the additional borrowing in the summer of 1993.

But Burnham is not pointing fingers at his colleagues. He also says the drive to be No. 1 weighs heavily on everyone associated with the school district.

“You don’t understand the immense pressure to try and get more money in the classroom for the kids,” Burnham said. “It’s pretty seductive when somebody in the county comes along and says, “I can make you a million dollars.’ ”

No one understands that pressure more than City Manager Paul Brady Jr., president of the county association of city managers, who has taken an aggressive stance to urge his colleagues to pursue legal action against the county.

Even though the city government has $209 million in the county pool, with $78.6 million due over various payments ending July 27, 1995, Brady remains confident that all its financial obligations will be met in the near future. More than $80 million in city investments are secure outside the county pool, Brady said.

“We have a diversified portfolio--not all our eggs are in this one basket,” Brady said. “You are not going to see a reduction of service levels in the community at this time.”

City officials were simply misled, just like many of the other 186 investors in the county pool and officials from cities all over the county, said Mayor Mike Ward, a resident of Woodbridge.

“All the experts we talked to said this was a great investment,” Ward said.

The Irvine Co.’s Watson said Irvine is not unlike most cities in the country that are struggling to raise revenues in increasingly difficult times. In Irvine, residents demand the excellent schools, the county’s highest-paid police force and the extraordinary services that the city is famous for, Watson said.

But starting back in 1978, when California’s Proposition 13 limited the revenues that could be generated from property taxes, government has had to look for alternate sources--including high-risk investments--for funds, Watson said. The legacy of that proposition, which its opponents said would haunt California, has come home to roost, Watson said.

“My view is this is about the whole problem of municipal finance today,” said Watson, 68, who was one of the architects of Irvine as a planner for the Irvine Co. in the early 1960s. “Cities are desperate for money because of Proposition 13. Investments have become so complex, they are beyond the understanding of most elected officials. . . . You could go across the U.S. and find this (problem) today.”

Former Mayor Sally Anne Sheridan called the disaster the talk of the town.

“Everyone is talking about it, at every cocktail party, at every lunch. My stockbroker called me about it from New Jersey,” she said.

Sheridan, remembered as the conservative on the council during the years when Larry Agran was mayor, refuses to criticize the city’s elected officials, instead blaming the county supervisors for allowing the risky investments.

But other city residents are less sympathetic. At the council’s recent meeting, one resident called for council members’ resignations. And Agran has been an outspoken critic.

“How the city could get itself into this bind is beyond comprehension,” said the former councilman and mayor, who was voted out of office in 1990. “These are not paper losses; this money is gone. What is so shocking about this is that we are talking about public funds, the public trust. . . . They turned the rules on their heads and now we have a huge, huge shortfall.”

Despite the disaster, most residents of this village believe that the dream of Irvine is still viable, at least partly because they are prepared for an uncertain future with $5 million stashed away in the homeowners association accounts.

“This is obviously going to hurt over time, but I don’t think there’s any panic,” said Bill Mavity, a retired electronics specialist and president of the association. “Everybody’s keeping their powder dry at the moment.”

When the dust settles, Irvine will still be the same modern city that lures new residents from around the world, Watson said.

“When we finally get through with this, Irvine will still be the safest city in the United States. It will still have the best school district,” Watson said. “It’s really not going to change much. It’s a shame the money was lost, but the city will figure out a way through this.”

Len Hall is a Times staff writer; Russ Loar is a Times correspondent.