ORANGE COUNTY IN BANKRUPTCY : County Will Withhold Some Property Taxes From Cities : Finance: Auditor-controller says 10% of annual revenue will be held back. Dismayed civic officials are at a loss to explain the surprise shortfall in income.

The county’s auditor has informed leaders of cities across the county that a disbursement of property tax revenue scheduled for Friday will be smaller than anticipated, prompting reactions of disappointment Wednesday from officials awaiting a badly needed infusion of cash.

In a letter dated Tuesday, Auditor-Controller Steve E. Lewis told city officials that because of the county’s ongoing financial crisis, about 10% of annual property tax revenue will be withheld from disbursements scheduled to go out to cities Friday. Cities normally receive about 32% of their annual property tax money at this time each year. But on Friday, they will be sent just 22%, Lewis said.

The county action quickly dampened some of the relief officials expressed early in the week about receiving an infusion of tax revenue to ease cash crunches caused by having millions of dollars frozen in the troubled county investment pool.

For the most part, city officials were mystified about the latest news, which represents another turn in their financial problems. After two weeks of wondering how to scrape by without access to their investments in the county pool, the latest news was troubling.

“This is one most of us don’t quite understand,” said Laguna Niguel City Manager Tim Casey. “Most of us feel the full amount is owed.”

Most city officials contacted Wednesday said they believed they could manage temporarily without the withheld revenue, but expressed concerns about cash flow if they don’t receive at least some of the tax money they depend on.

Cities and school districts already are considering a variety of cuts to services and projects because of losses they have suffered in the collapse of the county investment pool.

“Depending on how they break money loose . . . there could be some cash flow problems” in the spring, said Placentia Finance Director Howard Longballa.

The committee that represents cities in the bankruptcy process plans to ask a judge for more emergency money today to meet payroll, debt service and vendor payments.

Santa Ana Unified School District officials said Wednesday the school system stands to lose between $12 million and $28 million if it doesn’t recoup investments frozen in the county pool.

Acting Supt. Don Champlin said officials would draw up a list of potential reductions by early January that could be implemented if the county does not release district funds. Those cuts would focus on programs such as arts, sports and music programs.

Officials also warned the losses could result in larger class sizes.

Property taxes collected by the county before its Dec. 6 bankruptcy filing but not given out to cities will not be distributed, Lewis said in the letter. But city officials said they hope to eventually recover all of the property taxes owed them.

“We think it’s money that should be passed directly through,” said Santa Ana City Manager David N. Ream. “They were just serving as a collection agency under state law.”

The city of Tustin, for example, expected to receive about $3 million in property tax revenue this month. But about $200,000 to $300,000 of that amount is being withheld, City Manager William A. Huston estimated.

Huston said it would be “unacceptable” if the county did not fully reimburse the city for all the property tax revenue it is due. “That would be just outrageous,” he said. “That is not the county’s money to play with.”

Lewis did not return telephone calls from reporters Wednesday.

Property taxes are the second largest source of revenue in Tustin’s $25-million general fund budget, behind sales tax. Officials said road projects could be placed in jeopardy if the county continues to withhold taxes.

In Irvine, city officials said the county plans to withhold about $500,000 in property taxes due the city. Under normal circumstances, the county would distribute $3.3 million to Irvine on Friday. Instead, the city will receive $2.8 million, said City Manager Paul O. Brady Jr.

The withholding is not expected to cause any short-term problems, Brady said. But if the county continues withholding taxes, the city, which depends on property tax for 20% of its revenue, might be forced to look at cuts in its $63-million budget, Brady said.

Placentia officials, who had expected to receive about $756,000 in Friday’s property tax disbursement, estimate they will be allotted $550,000 to $600,000, said Longballa. Property taxes account for 28% of general fund revenue in Placentia, which has a $23-million budget.

In Fullerton, officials said the withheld property tax will leave the city with $2 million in property tax revenue instead of the previously expected $3 million.

“It’s too early to tell if that will have an impact on city services,” said Glenn Steinbrink, the city’s accounting manager. “We do believe we are in pretty good shape in our city as far as cash flow needs.”

But if revenue continue to be withheld, cash flow “could become a concern,” he said.

Fullerton has a general fund budget of about $42 million, Steinbrink said. Property tax revenue is the second largest source of income for the city, with sales tax being the top source.

In Laguna Niguel, officials expect to receive about $1.1 million in property taxes--down from the normal payment of $1.6 million to $1.8 million, Casey said.

“When we were doing our one-year cash flow projections in the aftermath of the December (bankruptcy) announcement, we assumed we might be getting less than normal,” he said.

Newport Beach is set to receive $4.2 million in property tax revenue, instead of the $5.7 million it was expecting, officials said.

In a more encouraging development Wednesday, the Laguna Beach school board decided to go ahead with plans to reconstruct a middle school severely damaged in the 1993 firestorm.

In an early morning special board meeting, Laguna Beach Unified School District trustees voted to accept bids from contractors for the Thurston Middle School project. Two weeks ago, district officials announced that the $2.6-million project would be delayed.

After a 90-minute closed session Wednesday, the board voted to accept the bids and decide later whether to move forward with construction, said Supt. Paul M. Possemato.