O.C. Deficit Could Triple to $120 Million by June : Bankruptcy: County projects loss of interest income. Officials indicate harsher cutbacks may be needed.

Only a week after announcing $40.2 million in budget cutbacks and savings, officials said Wednesday that Orange County’s revenue shortfall for the next six months could be triple that amount and signaled that more severe measures will be needed to close the gap.

The deficit could reach $120 million by June, financial managers now say, because they no longer can count on earning interest on the county government’s $2.7-billion share of the now-bankrupt Orange County investment pool.

“We’ve got to deal with an interest earnings loss of about $120 million,” said Ernie Schneider, the county’s administrative officer, who was counting on the interest income to balance the $470-million general fund budget through June 30.

In other news Wednesday, three weeks into Orange County’s bankruptcy:

* The county’s top lawyer revealed for the first time that he accompanied former Treasurer-Tax Collector Robert L. Citron to a meeting in April with officials of the federal Securities and Exchange Commission, but did not tell the Board of Supervisors about the agency’s concerns over the county’s high-risk investment strategy. County Counsel Terry Andrus said he did not believe it was necessary to alert supervisors at the time.

* It was learned that a treasury oversight committee recommended by the county auditor in 1987 was never officially convened because Citron strenuously resisted the idea and refused to participate, even on an experimental basis.

* A somber protest by about three dozen members of the Orange County Employees Assn. failed to persuade county officials to reinstate labor contracts that were voided after the county filed for bankruptcy Dec. 6. Labor leaders contend that layoffs can be accomplished quickly within contract guidelines, but county management says that process could cost the county millions of dollars in delays.

“The next step is our lawsuit,” said John H. Sawyer, the association’s general manager, who led the team that met with county leaders for about two hours.

* The beleaguered city of Montebello received a $14-million infusion from the investment pool, a key part of the Los Angeles County community’s plan to avoid defaulting on a $25.6-million note payment due Friday.

* The Huntington Beach City Council voted to sue Orange County if an agreement is not reached by Jan. 6 to release city property tax revenues frozen in the pool. Officials in Costa Mesa said they may do likewise.

* A dozen municipal bond firms expressed interest in helping the county sell bonds to bolster its finances--a bailout strategy employed in the mid-1970s, when New York City teetered on the edge of bankruptcy. Among those interested: Goldman, Sachs & Co., Lehman Brothers, J.P. Morgan Securities and Bear Stearns & Co.

Cash Advances

County officials said the additional revenue losses calculated Wednesday may be offset somewhat by further cash advances from federal, state and local sources. It also is possible that the collapsed investment pool may yet generate some interest.

But the county is no longer counting on any money from a stream that had been budgeted to be its single biggest revenue source this year.

The growing deficit could mean even greater cutbacks than those already announced, and it could add urgency to talk of dipping into emergency funds and selling off county assets, such as John Wayne Airport.

The revelation about the magnitude of the county’s shortfall stunned labor leaders, who have equated $40.2-million worth of cuts and savings to a loss of 800 to 1,000 jobs. Tripling the budget gap over just the next six months could mean much greater staff reductions, officials say.

Sawyer said the trio of county managers who announced the cutbacks last week made it clear at a Wednesday meeting that the budget situation was more serious than county officials had earlier believed. But they did not mention that the budget cuts might be significantly higher than the $40.2 million already announced, Sawyer said.

Regardless of the severity of the crisis, he added, management should comply with bargaining agreements in laying off employees.

“We’ve got the same position we had before,” he said. “Whatever they can prove to us is necessary, we can work it out within the provisions of our contract. It makes it more severe, but the procedures are the same.”

County officials’ estimate of a huge loss in income over the next six months is based on their anticipated inability to collect $120 million in budgeted interest income from the now-collapsed investment fund, which has dropped $2.02 billion in value this year.

County officials also are uncertain how much interest--if any--will be generated next year as the portfolio is liquidated and disbursed in U.S. Bankruptcy Court.

Although no one has come up with any firm ideas of how to cover a $120-million revenue shortfall in the next six months, county officials say they have reserves that will have to be emptied, such as $70 million set aside for “economic uncertainties.” Meanwhile, officials said, the county has 1,525 budgeted but unfilled jobs, and 2,256 current employees are eligible for early retirements that could ease the pain.

The staggering new figure “adds an urgency to strategies that will produce additional revenue for the county,” Supervisor William G. Steiner said. “The $40 million in cuts are only part of the solution.”

The county treasury had invested $7.8 billion on behalf of 187 cities, school districts and other agencies in a high-risk investment strategy that backfired this year as interest rates rose and the value of the pool plunged 27%.

At a closed-door meeting Wednesday in Irvine City Hall, city and school officials from across the county expressed dismay at the county’s assertion that it had not yet formed a clear picture of its fiscal condition.

“I have to assume the county doesn’t know,” said Seal Beach City Manager Jerry L. Bankston. “They honestly do not know.”

Another city manager who did not want to be identified said the county’s financial management practices appeared to be “from the Stone Age.”

Accounting Firm

Cities and school districts with money tied up in the ill-fated investment pool plan to hire an accounting firm to help make sense of county records, said Craig A. Barbarosh, an attorney who represents some cities that invested in the pool.

“At this point, we simply don’t have equal access with the county to information,” Barbarosh said. “We need to know what the county, as the debtor in this case, needs short-term as well as long-term. We need information from the county to do that.”

Huntington Beach Mayor Victor Leipzig said there are “drumbeats of discontent” among municipalities that invested in the fund. But Leipzig added that public officials seem, for the most part, willing to work within the system set up last week by U.S. Bankruptcy Court Judge John Ryan for distributing money from the fund on an emergency basis.

“The cities are committed to working with the county,” Leipzig said. “But they’re getting frustrated, because the county does not appear to be working with them. The county could solve a lot of their problems by being a little bit more upfront.”

Newport-Mesa Unified School District board member Judy Franco said there have been no indications that the county has a long-range plan in place for dealing with the crisis.

“The question is, where do we go from here?” Franco said. “There isn’t a lot of information out there yet.”

City officials said they are hopeful that ongoing negotiations with the county will lead to the distribution of some property tax revenues that have been held up since the bankruptcy filing. The county administers the money for the cities.

“We’re negotiating with the county to get those funds made available to the cities and districts,” Barbarosh said. “We’re hopeful that those pre-bankruptcy petition dollars will be made available soon.”

Union Contracts

Also Wednesday, the county’s management council--made up of Sheriff Brad Gates, Dist. Atty. Michael R. Capizzi and Health Care Agency Director Tom Uram--spoke with union members about the county’s dire economic picture. The three stood by their recommendation that the Board of Supervisors suspend union contracts.

The county employees association had requested that the management council urge supervisors to rescind last Thursday’s resolutions. Those actions superseded layoff provisions in employee contracts, which require that any terminations be based on seniority.

“We’re hopeful, but they certainly didn’t agree with our request,” Sawyer said. “They said they had made their decision.”

Some employees said they felt betrayed.

“God knows how many countless hours I’ve sat in negotiations with the county,” said Jim Best, a civilian employee with the Sheriff’s Department who has been on union bargaining teams since 1982. “It makes me wonder, what have I done with all this time if they unilaterally rescind our contract?”

Best said he addressed the management council on the topics of “honesty, honor and dishonor.”

“Every worker is angry. What are we going to do to remedy this situation?” he said. “I don’t feel very comfortable knowing that my department head can arbitrarily lay me off two weeks from now.”

But Bruce Moore, a deputy probation counselor, said he talked with Capizzi after the closed session and found him receptive to workers’ concerns.

“He appeared to be agonizing over the process,” said Moore, a 23-year county employee. “I think we might have moved him a fraction of an inch, to at least go back to the board and express our feelings.”

Members of the union, which represents 11,000 of the county’s 18,000 workers, expressed concerns about accrued benefits such as vacation, sick time and retirement money placed in deferred compensation accounts, employees said.

The meeting came as other unions researched the legality of last week’s actions by the Board of Supervisors, which has asked county department heads to report back Jan. 10 with specific plans for budget cuts and layoffs.

The Orange County Attorneys Assn.--made up of about 300 lawyers from the offices of the district attorney, the public defender and the county counsel--met with the management council Tuesday to discuss similar issues, said Paul Crost, who represents the association.

Crost said he made it clear that the association believed that its contracts should be reinstated and that accrued vacation hours should not be tied up in the bankruptcy proceedings.

“We’re going to be considering the legal ramifications of actions they have taken,” Crost said.

Times staff writers Greg Johnson, Tracy Weber, Dan Weikel and Jeff Brazil and correspondent Russ Loar contributed to this report.

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