Orange County Officials Outline Recovery Proposal : Bankruptcy: Outlook is darker than ever, they say. Plan would require refinancing debt and sharing losses.

Unable to pay bills and maintain many services, Orange County leaders outlined a broad proposal for recovery Wednesday that includes refinancing some of the county’s debt, paring operations, convincing creditors to share in its loss and considering a legal blitz against those they believe are responsible for the financial mess.

Offering their bleakest assessment yet, officials confirmed for the first time that the county faces a budget shortfall of at least $172 million over the next six months and another $160-million gap in the next fiscal year, which begins in July. Previous official estimates were much smaller.

“We now know the size of the problem,” said Board of Supervisors Chairman Gaddi H. Vasquez. “The loss is absolutely real and far deeper than anyone previously anticipated.”

“It’s pretty grim,” said Tom Daxon, acting Orange County treasurer.

In other developments Wednesday:

* Irvine Unified School District trustees declared a state of financial emergency and slashed $795,000 from the district’s 1994-1995 budget of $100 million. “This is the lowest moment that we have experienced,” said longtime trustee Margie Wakeham.

* One of the county’s largest departments, the General Services Agency, announced that 72 employees will lose their jobs, the biggest layoff since the county declared bankruptcy Dec. 6.

“The news has been so bad, I was just mentally prepared,” said GSA employee James Colon, shortly after a supervisor handed him a letter stating that “unprecedented financial difficulty” had made him expendable.

* In Sacramento, the Senate Rules Committee issued subpoenas requiring former Treasurer-Tax Collector Robert L. Citron, his former chief assistant, Matthew R. Raabe, and Michael Stamenson, the Merrill Lynch broker under scrutiny by federal regulators, to appear at a Jan. 17 hearing.

The three are key figures in the county’s financial collapse. Legislators decided to issue subpoenas after the committee received a letter from Orange County Dist. Atty. Michael R. Capizzi asking that lawmakers avoid granting legal immunity to the men if they refuse to testify on the grounds of self-incrimination.

“Mr. Citron is a potential suspect in this important criminal investigation,” Capizzi said in his Jan. 3 letter. “The grant of immunity by a Senate committee would effectively foreclose any criminal prosecution of Mr. Citron or any other witness who gave immunized testimony.”

* Orange County’s administrative and judicial offices have been flooded with calls from people who put up cash for bail money and have been unable to get the money returned once their cases are resolved. The county also continues to hold money the marshal’s office has collected in the form of wage garnishments from people who owe money in legal judgments, according to the county auditor-controller’s office.

“The system has come to a screeching halt,” said Gary Leach, the office’s claims manager. “They’re all going to get their money, we just don’t know when.”

* U.S. Bankruptcy Court Judge John E. Ryan approved the county’s request to make $4.2 million in payments to bondholders, a step county lawyers considered critical to reassuring anxious bond markets in hopes of eventually re-establishing the county’s credit.

* The county auctioned $258 million in corporate securities from its investment pool to reduce the average maturity of the portfolio and lower its exposure to movements in interest rates. The sale represented only a portion of the $458 million that was put up for bid, and the auction is to continue today. It could not be determined what the county received for the securities sold Wednesday.

The county’s financial advisers offered a broad four-point plan for digging out from bankruptcy.

Elements of the plan include refinancing existing debt to stretch out maturities, which would buy the county more time to pay off its existing loans; charting a new course of borrowing--the size and timing of which has not yet been determined--to replace more than $2 billion lost this year in the investment pool; restructuring county government to reduce expenses and taking aggressive legal action to recover the county’s losses.

Bruce Bennett, the county’s bankruptcy attorney, said Orange County itself has taken at least a $700-million hit on its principal investment of $2.4 billion in the now-frozen pool. In all, 187 municipalities had deposited $7.4 billion in the pool before its collapse, according to revised figures released Wednesday. The losses total 27% of the investors’ principal.

The financial advisers stressed Wednesday that all of the fund’s investors should share the losses equitably, although they conceded that some agencies may get a greater share of the remaining money. The disbursement still needs to be negotiated, Bennett said.

“The saddest part about it is it’s a pure zero-sum game,” Bennett said. “This is potentially a free-for-all, but we’re going to do everything in our power to resolve this.”

Bennett said the county could not absorb the entire $2.02-billion loss on the portfolio and give the other agencies that invested 100% of their money even if it wanted to. The county has $2.4 billion in the fund, but state and federal laws restrict what the county can do with much of that money, he said.

“It’s too much to ask that there will be consensus” among the 187 pool investors, Bennett acknowledged, but he said he is seeking fiscal options that will win support from a majority of the investors.

New borrowing will be necessary for the county to work its way out of its fiscal nightmare, officials said. But the ability to take out future loans will depend on whether the county can balance its budget and generate enough cash to regain the confidence of the financial markets, officials said.

“The county is not going to be able to borrow its way out of its problems,” said former state Treasurer Thomas W. Hayes, the county’s chief financial adviser. “You can’t borrow money you can’t pay back.”

Another possible, but unlikely, solution is raising taxes. Bennett said he could not rule out the option. But Hayes said there is neither political nor public support for such action.

“Any meaningful increase in revenues will take a two-thirds vote of the people and that is not going to happen in Orange County,” Hayes said.

The county also faces significant legal hurdles in structuring a debt offering, especially one that would be paid off over 10 to 20 years, he said. State law prohibits counties and other governmental entities from selling certain types of bonds if they do not have balanced budgets, Hayes said.

Because of their cash flow crisis, county officials said they do not have enough money on hand to make debt payments on existing bonds over the next six months.

But that does not mean that the county isn’t planning to make good on its debt to bondholders, Bennett said.

“We will be talking with bondholders about extending the maturities on some of the bonds” and possible refinancing of bonds, Bennett said.

Bennett said it is inevitable that the county will file more lawsuits to recover its money. The county already has sued Nomura Securities, one of the investment houses that cashed in collateral it held on loans to the county, triggering the bankruptcy.

Adding to the day’s gloom over finances was the news that 72 workers were being laid off and six other workers had accepted an early-retirement offer in the county’s General Services Agency, which purchases real estate, maintains county buildings and oversees the library system. Another 39 positions will go unfilled. Some of the workers are employed by Martin Marietta Corp. and work under contract at the county data center.

Talk of new layoffs brought an angry reaction from the Orange County Employee Assn., which represents 11,000 of the county’s 18,000 workers.

General Services Agency Director Bert Scott “has taken an inhumane, meat-ax approach that defies common sense and totally violates our labor agreements,” said John H. Sawyer, general manager of the union.

Scott did not return calls for comment.

The union’s anger was exacerbated, Sawyer said, by its discovery that the county has hired 84 people in a variety of departments and positions since the financial crisis erupted last month.

“They’ll give you all kinds of explanations (for the hirings), including special skills and all that, but a lot of it is going to be hogwash,” he said.

More than 50 private defense attorneys and investigators who represent impoverished defendants learned Wednesday that their services probably would not be needed after the public defender’s office creates two new divisions to handle criminal cases that previously were farmed out to private counsel.

In addition, lawyers who took cases for the county before the bankruptcy complained that they were not getting paid. The attorney for Dana Point computer consultant Richard K. Overton, accused of poisoning his wife with cyanide, said he is owed “tens of thousands” of dollars and is uncertain if he can take the case to trial next month.

Times staff writers Michael A. Hiltzik in Los Angeles, Eric Bailey in Sacramento and Tracy Weber, Susan Marquez Owen, Rebecca Trounson, Chris Woodyard and correspondents Shelby Grad and Russ Loar in Orange County contributed to this report.

More on Bankruptcy

* News and analysis on the Orange County bankruptcy, including profiles of the key players, is available on-line through TimesLink. Reprints of two articles about bond transactions are available through Times on Demand. Call 808-8463, press *8630 and select option 1. Order No. 2811. $3.95. For a reprint explaining derivatives, order No. 2810. $2.95.

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