County Fears Revenue Deficit Could Triple to $120 Million : Budget: Officials signal that even more cutbacks than envisioned last week will be needed, They hope to offset losses with cash advances from other government sources.

Only a week after announcing $40 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.

Officials say the additional revenue losses may be offset somewhat by further cash advances from federal, state and local sources. It also is possible that the 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.

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

* The county’ 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 A. Andrus said he did not believe it was necessary to alert supervisors at the time.

* 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.

* 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.

Wednesday’s revelation about the magnitude of the county’s shortfall stunned labor leaders, who have equated $40 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 in a Wednesday meeting that the budget situation was more serious than county officials had earlier believed. But they made no mention that the budget cuts might be significantly higher than the $40 million already announced, said Sawyer.

Regardless of the depth 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 receive $120 million in budgeted interest income from the now-collapsed investment fund, which has dropped $2.02 billion in value this year.

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,” said Supervisor William G. Steiner. “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 at Irvine City Hall, city and school officials from around Orange County expressed dismay at the county’s assertion it had not yet assembled 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.”

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 Judge John E. 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 up front.”

Newport-Mesa Unified School District board member Judy Franco said their 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 help 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,” said Barbarosh. “We’re hopeful that those pre-bankruptcy petition dollars will be made available soon.”

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 worker 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, also 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, public defender and county counsel--met with the management council Tuesday to discuss similar issues, according to Paul Crost, who represents the association.

Crost said he made it clear that the association believed 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.

Two more class action lawsuits were filed in U.S. District Court in Santa Ana on Tuesday and Wednesday, bringing the total class action suits stemming from Orange County’s bankruptcy to at least 11.

The new lawsuits by investors ask for damages for those who bought Orange County bonds. The value of county-issued bonds has been damaged, the suits contend, because of “reckless” or “fraudulent” investment practices by county officials and Merrill Lynch, the largest underwriter of the county’s bonds.

Both suits name Merrill Lynch, former treasurer Citron, and Merrill Lynch executive Michael Stamenson as defendants.

One of the suits, on behalf of Jack W. Martin and Gertrude Martin, states that the Martins bought $5,000 worth of county bonds in 1990. The other suit, by Al Markowitz, says he bought $120,898 worth of county bonds earlier this year.

Both suits contend that the defendants misled investors into thinking their money was safe by failing to disclose critical information about the county’s precarious financial health.

* CITRON RESISTED OVERSIGHT: Ex-treasurer told officials panel would hamper his work. A16

* CITIES THREATEN SUITS: Claims would target frozen property tax revenue. A16

* More Coverage of O.C. Bond Crisis, A18-20

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Revenue Shortfall

The bond disaster’s toll on county government grew worse Wednesday when leaders disclosed they face a revenue shortfall of at least $120 million in the next six months.

Discretionary spending, 1994-95: $470 million Spent July-December, 1994: $235 million Interest income budgeted, not available: $120 million Left to spend, January-June, 1995: $115 million ***

Budget Division

* General fund: $3.7 billion, includes mandated programs supervisors cannot alter.

* Discretionary portion: $470 million supervisors can allocate as they see fit. It pays for such items as some court and law enforcement services, as well as some health-care services.

Key Dates

* Dec. 22: Officials call for an immediate $40.2 million in spending cuts as vital first step in budget reductions. Department heads given until Jan. 10 to propose cuts. Union leaders fear up to 1,000 employees could be laid off.

* Dec. 28: Officials disclose that $120 million in anticipated annual interest income cannot be counted on. With six months left in fiscal year, they warn that cuts in next six months may be far greater than announced on Dec. 22

Source: Orange County administrative office