Let an Arbitrator Settle Bankruptcy

When U.S. Bankruptcy Trustee Marcy J.K. Tiffany announced steps to control the legal and financial advisory fees piling up in the aftermath of Orange County’s fiscal blowout, she set a goal to contain legal costs at around $30 million. Taxpayers numbed by the scale of losses may not blink at that sum, but they should. The legal mobilization touched off by the county’s Chapter 9 filing is not irreversible. But elected officials will have to move quickly to stand down before courtroom trenches are dug at a cost of millions in scarce resources.

There are just two over-arching issues: how to apportion the $2 billion-plus loss; and which private parties owe the various public entities damages for errors and omissions in the advice they provided.

The nearly 200 different government entities scrambling to shift the losses away from their treasuries are doing so on the assumption that their interests conflict, that every dollar they absorb in losses is a setback. Given that all losses are taxpayers’ losses, this assumption is a legal fiction that will benefit only the bar. (I find myself paying taxes or fees to at least five governmental entities with separately retained lawyers.) The officials representing these various bodies have it within their power to end the hemorrhaging of scarce resources on legal bills. Each entity--the cities, school boards, special districts--ought to agree on an arbitrator to quickly settle on a loss allocation, which can then be proposed to the Bankruptcy Court.

The various legal teams will snort at the idea that a single individual can resolve an allocation over which battalions of lawyers are presently poised to battle. But there are scores of disinterested and supremely capable national figures who could rapidly and fairly assess the claims and divvy up the losses. Former U.S. Atty. Gen. Dick Thornburgh, former Solicitor Gen. Rex E. Lee, or former Assistant Atty. Gen. Carol Dinkins, for example, have all mastered the business of complex conflict resolution. There are others. The selection of such a czar and the transfer to that individual of the loss allocation process will save taxpayers a minimum of $25 million. Elected officials must put aside their own self-interest and posturing and agree to such an expedited arbitration.

There will be a hundred-plus different formulas proposed for sharing the pain. Common sense suggests some obvious priorities: First, individual investors guided by courts to deposit monies in the investment fund should be repaid in full, and quickly. It is inequitable to allow a small set of individuals, many of whom appear to be children, to suffer a loss wholly disproportionate to the average taxpayers’ loss.

Second, public safety--police, fire and jails--should be kept intact. It is government’s first job to protect its citizens from crime.

Third, the school districts--even those that borrowed to add to their fund balances--must be made whole. The schools are already strapped. Not one dollar should be siphoned from these districts.

After the high priority list, an arbitrator can choose any number of formulas. But “rich” agencies worried about long-range projects should look to help out the generalized taxpayer interest, not their particular plans.

The second “mega” issue is the question of whether private entities owe damages to the fund’s investors because of bad advice rendered in the past. Again, all of the government agencies warily eyeing their past advisers as potential defendants must resist the rush to sue everyone in sight. One law firm pursuing all civil suits on behalf of all potential governmental plaintiffs is a much preferable course to a free-for-all that has every city and district bringing damage suits left and right. And that one firm ought to be working on a contingent fee basis, to discourage the accumulation of defendants. Taxpayers should not be party to a search and destroy mission of all potential defendants that routinely marks the American legal system.

Approaches that focus on common-sense solutions and the common good have historically run into the entrenched ideas of bureaucratic and political turf. The willing surrender of power in the pursuit of simplicity is an unnatural act for public officials. The ceding of power to a loss-allocation czar and a single plaintiff’s firm will inevitably deny the illusion of control to many entrenched public figures. But voters have a right to demand just such unusual steps.

There are other minor corrections to be made. Two are symbolic but important. First, the closed sessions of the various public bodies must end. Muttered warnings about potential litigation too often serve as a smoke screen behind which public officials hide.

Second, the taxpayers of Orange County are presently paying an undisclosed sum to a Century City public relations firm, Sitrick Krantz & Co. This is unacceptable. You can’t “spin” a fiscal disaster of this magnitude. In fact, the only spin that works is no spin at all. Supervisor Roger R. Stanton has already recognized this, and is communicating in writing to the public and the media. That’s the formula for rebuilding public confidence, not cobbled-up press releases. Whatever has been spent on the P.R. effort ought to be disclosed, and then the contract ended. It’s a waste.

Finally, the search for villains is a diversion. “It is not the function of our government to keep the citizen from falling into error,” wrote U.S. Supreme Court Justice Robert H. Jackson more than 40 years ago, “it is the function of the citizen to keep the Government from falling into error.” Every county voter has a portion of responsibility for allowing an ethic of unaccountability to take root and spread. That disinterest is over. The dismay and anger over the bankruptcy ought to evolve into a firm resolution to return government to its appropriate status as servant, not master.