O.C. Layoffs Near; Deficit Could Widen : Crisis: Officials are told $170 million may be needed to balance budget in next six months. Parent work crews may be enlisted by ailing Irvine school district.

By MARK PLATTE, MATT LAIT and RUSS LOAR

Jan. 4, 1995 12 AM PT

SPECIAL TO THE TIMES

SANTA ANA —

Orange County’s financial crisis headed for an especially gloomy turn Tuesday as county officials prepared to announce 80 layoffs of government workers today and confronted warnings that they could need up to $170 million to balance the budget over the next six months.

The terrible strain of the county’s $2 billion in investment fund losses also began to show in one of the Southern California’s most highly regarded public school systems, the Irvine Unified School District, with administrators considering the sale of their headquarters and even enlisting parent work crews to help with maintenance.

“Everybody is very, very concerned,” said resident Paul Harvey, who has two children in Irvine schools. “I’m pretty much in denial and shock myself.”

While county and school officials weighed cutbacks Tuesday:

* Tom Uram, the county’s health care director, said it is likely that some county-operated health clinics will be closed as a result of the fiscal crisis, although no decisions have been made on what services or clinics would be eliminated.

* Starting this week, people who receive county-funded welfare called “general assistance” will no longer be eligible for additional payments to cover bus passes or car repairs. Larry Leaman, director of the county’s Social Services Agency, estimated that the cutback, which affects about 3,500 people, will save the county about $90,000 a year.

* Support for County Administrative Officer Ernie Schneider continued to erode after two supervisors privately called for his ouster.

A third supervisor, former state Sen. Marian Bergeson, said she would give Schneider a month to develop a comprehensive plan for reinvesting the county’s remaining assets and guiding the county toward recovery. If Schneider fails to develop such a program, Bergeson said, the board will look for a new administrator.

* Members of the creditors’ committee said they do not expect the money left in the pool to ultimately be distributed equally among investors. Based on discussions with the county, they said, they believe some investors will receive 100 cents on the dollar, while the county itself will take the largest hit, probably even larger than the 27% plunge the pool overall has already suffered.

* In Sacramento, a Senate committee probing the Orange County financial debacle decided to seek subpoenas of former county Treasurer-Tax Collector Robert L. Citron and his chief assistant, Matthew R. Raabe, for a Jan. 17 hearing.

Scott Johnson, chief counsel for the Senate Special Committee on Local Government Investments, said the panel will make a formal request for the subpoenas today of the Senate Rules Committee, which has the power to compel Citron and Raabe to appear. The committee on local government, which is eyeing possible legislative changes in the aftermath of the crisis, wants to question Citron and Raabe about their dealings with school districts and municipalities that invested--and lost--millions of dollars in the county’s pool.

* A judge indicated he will consider Friday whether to unseal search warrant affidavits detailing the Orange County district attorney’s office’s criminal investigation involving Citron and other officials.

Superior Court Judge Theodore E. Millard agreed to hold a closed session to review the district attorney’s arguments against making the documents public. Attorneys for The Times have petitioned to unseal the court papers, contending that the investigation is a matter of vital public interest.

* County officials said they will auction $458 million in corporate securities today in a further move to reduce the average maturity--and thus the risk exposure--of the investment portfolio. The notes all mature in late 1998 or early 1999.

Salomon Bros., the county’s financial advisers, will conduct the auction of $350 million in fixed-rate notes issued by Ford Motor Credit and its own parent company, Salomon Inc., along with $108 million in floating-rate notes also issued by Ford Motor Credit.

The dollar figures represent the face value of the notes at their maturities in 1998. The county is likely to receive less than that from bidders for the fixed-rate notes; they pay interest ranging from 5.32% to 5.83%, but investors earn much higher rates now on less risky U.S. Treasury securities.

Later this week the county will auction $1.082 billion in corporate-issued derivatives. These are notes representing a bet that interest rates would remain low or fall, in which case they would pay more interest. Rates shot up throughout 1994 and the interest payouts on the notes--as well as their market values--fell sharply.

Most of the notes--about $690 million in face value--were underwritten by Merrill Lynch & Co., the leading vendor of exotic securities to Orange County. The issuers include BankAmerica Corp., Caterpillar, Ford Motor Credit, Household Finance and Merrill Lynch. All are to be put up for bid beginning Thursday.

Sources close to efforts to restructure the portfolio said the county still is negotiating with the 12 Federal Home Loan Banks, the issuers of a combined $1 billion in county holdings, to sell the securities back to the banks in return for cash or some less exotic type of notes.

As the county seeks to restructure its portfolio, county leaders said Tuesday that the first 80 layoffs are expected to come from the General Services Agency, a department that oversees real estate purchases, building maintenance and the county’s public libraries.

“We suspect there’s a lot going on we aren’t going to like,” said John H. Sawyer, general manager of the Orange County Employees Assn., who heard about the layoffs Tuesday.

County officials are expecting more bad news: a possible $170-million shortfall. Previous estimates had put the gap around $120 million, but the county’s financial advisers told supervisors Tuesday to brace for an even greater loss if the county cannot recover its expected interest earnings from the investment pool, sources said.

Top county officials concede that it will take a much greater combination of cutbacks, layoffs, refinancing, leasing, property sales and borrowing than previously expected. Although many of the 187 cities, school districts and other public entities that made deposits in Orange County’s investment pool are struggling to find ways to pay bills and meet bond payments, Irvine Unified is in perhaps the deepest trouble.

Irvine School Board President Tom Burnham said the district is focusing on making an upcoming bond payment of $54.5 million.

“We have this silver bullet headed toward us on June 15. What is the precise amount the county will provide us? That’s the big unknown here,” he said. “I call it the 900-pound gorilla.”

Burnham said the district has a moral obligation to make the payment. “I will resign from the board if my fellow trustees do not feel a high moral obligation to pay off those bondholders. This is other people’s money that we have borrowed,” he said. “I’ll be damned if I don’t honor it.”

Irvine Unified has more than $105 million tied up in the pool and was reviewing possible cutbacks Tuesday night. The district invested more heavily than any other--in part because it was one of four education agencies that borrowed $200 million for the sole purpose of reinvesting it in Citron’s once high-flying pool.

In June, 1993, Irvine Unified borrowed about $55 million--more than half its annual budget--in hope of raising much-needed revenue and on a promise from Citron’s office that there would be no risk to the district’s principal.

After earning about $1 million, Irvine and the three other agencies--Newport-Mesa Unified, the North Orange County Community College District and the Orange County Department of Education--took out another loan to invest in the now-bankrupt pool.

Now, Irvine school officials say, layoffs will be inevitable. Under state law, the district must inform administrators by March 1 and teachers by March 15 if they in danger of losing their jobs.

“We’re going to fight for every teacher’s job, because they’re the people in the classroom that provide the service to the kids,” said Steven Garretson, head of the Irvine teachers union. “They’re plain-out worried about how it’s going to effect affect them.”

District officials have estimated that the sale of four district-owned properties--including their headquarters on Barranca Parkway--could bring $21.8 million. The aim would be to rent the headquarters back from the buyer.

Elizabeth Thomas, head of the Irvine Education Foundation, said other cost-saving and revenue-generating ideas under discussion include enlisting parents for maintenance and cleanup crews--work now handled by district employees--and requiring parents to pay fees for special science, music and arts program that now are free. The school day--now longer than required by state law--could be reduced, she added.

Board member Hank Adler has suggested having school principals be responsible for managing two campuses instead of one.

Thomas said some parents want to consider a temporary $30 to $50 parcel tax to get the district through the crisis. But the tax--which has been proposed before--is unpopular with many in the city, where only 30% of residents have children in schools.

Gary Norton, a district administrator, said that while some parents would be willing to volunteer their time to the district, others are simply too busy. About 90% of district parents work, and 50% head single-parent families, he said.

Some parents, such as Paul Harvey, say they fear that extracurricular activities--as well as arts and music programs--could be among the first things to go.

“Those kinds of programs could easily die here if we don’t find other revenue sources,” said Harvey, a Nissan Corp. manager. “Sports may be the most vulnerable.”

Other investors in the county’s fund continued to debate who should have standing in U.S. Bankruptcy Court as money from the investment pool is distributed.

Members of the creditors committee said they do not expect the money left in the pool to ultimately be distributed equally. Based on discussions with the county, they said, they believe some investors will receive 100 cents on the dollar, while the county itself will take the largest hit.

Stan Oftelie, executive director of the Orange County Transportation Authority and chairman of the creditors committee, said he expects to receive a first draft for a restructuring plan from county bankruptcy attorney Bruce Bennett next week. Bennett said he plans to stick by his promise to produce the plan by the middle of January, which could be as early as next Friday.

Oftelie said he believes that even Bennett will agree that some investing agencies deserve to be repaid 100% of their principal because they used the county treasury as a trust fund.

“In general, he understands the trust fund argument. I’m not saying he buys it,” Oftelie said of Bennett. “He doesn’t believe that everyone should get 100 cents on the dollar, but he thinks that some might.”

Bennett said it was “premature” to discuss who would get what.

“That’s far from clear at this time,” he said.

Times staff writers Michael A. Hiltzik in Los Angeles and Julie Marquis, Tracy Weber, Jodi Wilgoren and correspondent Shelby Grad in Orange County contributed to this report.

* CITRON WAS PRAISED: OCTA head lauded ex-treasurer’s high-yield strategy. A16

* STUCK IN LIMBO: Bondholders, unable to sell, worry about their money. D1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

For Sale?

The Irvine Unified School District, which is in need of cash to make bond payments, might sell four properties. The district has $102 million in the county’s collapsed investment pool, the most of any Orange County school system.

Site: District headquarters

Size: 35,000 sq. ft.

Estimated value (in millions): $7.5

Description: Houses all administrative offices

Site: Westpark parcel

Size: 10 acres

Estimated value (in millions): $7.5

Description: Future elementary school site

Site: Woodbridge parcel

Size: 6 acres

Estimated value (in millions): $4.8

Description: Now houses preschool program