Orange County Schools to Get Full Tax Share : Finances: Levies on property were collected after the bankruptcy filing. Nonprofit groups also get good news.

The Orange County Board of Supervisors on Sunday told school officials--many who feared they could not make their first post-Christmas payroll--that they can have their full share of the millions in property taxes collected after the county filed for bankruptcy nearly two weeks ago.

And in a separate action by the county’s new bankruptcy management council, more than 100 nonprofit groups will get $2.9 million to cover the services they provided before funds in the county investment pool were frozen Dec. 6.

As supervisors moved Sunday to repair the financial damage caused by the nation’s largest municipal bankruptcy case, state auditors sought to determine whether former Treasurer-Tax Collector Robert L. Citron criminally violated laws governing trust accounts.

State Auditor Kurt Sjoberg said that attorneys from his office are looking at whether the agreements that Citron established with certain investors constituted trusts, and whether he dipped into some trust accounts to satisfy the needs of other investors.

A finding by state auditors that trust agreements existed with investors could not only leave Citron open to possible criminal prosecution, but also further financially cripple the county.

The investors found to have trust agreements might be entitled to be paid in full, leaving the county and other government agencies to bear the brunt of county investment fund losses now estimated at more than $2 billion. The trust agreements also may specifically limit how investors’ funds can be used.

“Clearly we will be looking to assure ourselves that local and state regulations were being followed,” said Sjoberg, who is reviewing Citron’s books from June 30 forward at the request of Gov. Pete Wilson.

Chief Assistant Dist. Atty. Maury Evans would not confirm whether his office was investigating Citron’s handling of the trust accounts. “We have an ongoing review going on and we’re working with a number of agencies, both state and local,” he said.

Separate Account

The best news Sunday came for county schools, when the five supervisors set up an account for schools separate within the beleaguered county pool. Both the recent property taxes and about $50 million that the state is scheduled to turn over at month’s end will be deposited in the account. The school fund will be invested in conservative investments, officials said.

The schools’ separate account “will alleviate any concerns the state has that the (schools’) money might get tied up in bankruptcy,” said Ronald D. Wenkart, general counsel for the Orange County Department of Education.

The supervisors’ action Sunday allows county school districts, many of which said they might not be able to operate past March without new funds, to breathe a little easier.

Under the agreement, school districts will receive their portion of property taxes that were paid after Dec. 6, when Orange County filed for protection under Chapter 9 of the Bankruptcy Code.

Saddleback Valley Unified School District Supt. Peter A. Hartman described the action as a “very positive step,” but just one of many needed to help school districts operate for the rest of the year.

“It’s taken longer than we hoped, but I’m glad it’s done,” he said. “This will give us some breathing room for the next month or two.”

The district, one of the county’s biggest, will receive about $20 million in recent property tax payments, about 40% to 50% of what it expects to receive for the year, Hartman said. That money will be used to help the district pay its employees at least through February, he said.

The action also was necessary to calm the worries of state school officials that state money sent to the county would not be used solely for education.

“I think this is very good news, to know that schools can expect this post-petition money,” Wenkart said.

But Wenkart stressed that Sunday’s agreement does not free up money that schools deposited in the county fund before bankruptcy was filed. And Wenkart couldn’t say how much money the schools can now expect.

Sunday’s agreement simply guarantees that schools will be able to meet their immediate financial obligations, by ensuring that they will be able to write checks on an account that isn’t embroiled in bankruptcy proceedings, he said.

“This agreement doesn’t involve a specific amount of money, it involves the flow of money,” said Wenkart, adding that schools still expect to get 100% of their pre-petition money out of the investment fund.

“What I would say to parents of schoolchildren in Orange County is that this is a good first step,” Wenkart said. “Now we have to work on getting more money.”

Nonprofit Groups

The county’s relief agencies were themselves relieved Sunday as news spread that the emergency council coping with Orange County’s crisis had authorized payments to 108 desperate nonprofit groups.

At Hope House, a long-term, 40-bed residential drug treatment program in Anaheim, the news lent a bit of extra cheer to an annual potluck Christmas dinner. At Phoenix House in Santa Ana, another substance abuse treatment program, a senior counselor could only say, “Whoopee!”

“It’ll help us survive,” said Marc Corradini, executive director of Hope House. He said his agency would have run out of money in February, so Sunday’s news was not a last-minute reprieve, but something very close.

Residents at the treatment center were aware of the crisis, Corradini said.

“They know what’s going on and they were reading the papers and asking me, so I pretty much let them know what our status was.”

Corradini said he was determined that the center would not close its doors, especially not for want of $5,000.

“We literally were turning out lights in our therapy room and trying to get food donated because there’s not much fat in our budget,” he said. “Today, we’re having a potluck celebration. Families brought in (food) to celebrate Christmas. So (the news) comes at a very nice time.”

But Supervisor William G. Steiner warned the county’s nonprofit agencies, most of which rely on county funds, that they may not be able to count on public money in the future. The county will pay for bills it already has received from the groups, but future bills face more delays and uncertainty, said Steiner, the former director of Orange County’s home for abused and neglected children.

“I was alarmed at how many depend on public funds,” Steiner said. “This means, of course, that they’re at greatest risk of their programs being jeopardized, in contrast to those agencies . . . that are primarily relying on private donations.”

Trust Agreements

While the schools and relief agencies celebrated their bit of extra cash, the state auditor’s office was trying to sort out what their status was in the county pool.

Auditor Sjoberg said his office is looking to determine whether investors--such as school districts that are required by law to invest in the county--had, in essence, trust agreements with Citron. The auditors are also scrutinizing whether these agreements detailed how their money could be used.

Sjoberg said auditors will be looking to see whether Citron violated trust agreements by using some investors’ money to pay off other obligations.

Sjoberg said that if a trust fund was established by a specific agreement or contract or by government statute, Citron “could not dip into those funds for any purpose than what’s spelled out in the trust agreement.”

The auditor’s legal department also is attempting to determine what the potential penalties would be for the violations of a trust agreement, he said.

The trust fund provision states that “when any public entity or public official . . . who is required or authorized by law to deposit funds into a county treasury makes a deposit, those funds shall be deemed to be held in trust . . . these funds shall not be deemed funds or assets of the county.”

If investors’ funds are found to be trusts, the county would be required to repay investing agencies in full before withdrawing any money for itself.

That argument is already being made forcefully by school district attorneys, individuals who invested court settlements at the encouragement of local judges, and some government agencies that say they had received assurances and documentation from Citron that their money would be invested separately and more conservatively.

On Friday, U.S. Trustee Marcy J. K. Tiffany, who is overseeing the case for federal Bankruptcy Court, dismissed the idea of investors recovering their money from the fund first as “shortsighted” and not supported by the law. “It’s like choking yourself with your own hand,” she said.

If all other investors were repaid in full, the county could lose about three-quarters of the nearly $3 billion it has tied up in the fund.

Some investors have said they have letters from Citron indicating that their funds were protected from risky investments and kept in a “bond pool” separate from the commingled county investment pool.

But Bruce Bennett, the county’s bankruptcy attorney, said Saturday that it remains unclear whether funds in the pool were kept in separate accounts earning different returns. Bennett said he had discovered conflicting records about whether Citron--who resigned two weeks ago--kept segregated accounts for some of the 187 cities, school districts and other agencies that had money in the county’s investment pool.

Sjoberg said the auditors would be looking at the letters that investors received from Citron “to see whether they create a contractual agreement or trust agreement.”

News that state auditors were looking into the issue of trusts and whether Citron handled them properly was greeted with enthusiasm by the fund’s investors Sunday.

“All investors, especially those school districts who were assured their investment was risk-free, have to certainly welcome the state auditor’s investigation,” said Peer Swan, chairman of the Irvine Ranch Water District.

Swan said he had never heard that Citron juggled investors’ funds to meet other obligations, but he said, “I think we will all be very curious about that.”

Times staff writer Anna Cekola contributed to this story.

* BANKRUPTCY COVERAGE: Related Orange County stories inside. A26, D1, D3