ORANGE COUNTY IN BANKRUPTCY : County Tells Agencies: No 100% Return : Crisis: Officials say all must share in $2-billion loss, but some investors vow to recover every dollar. Layoffs continue as 19 administrative staffers lose their jobs.

Orange County’s elected leaders on Friday told cities, schools and government agencies with money in the county’s collapsed investment pool that there’s virtually no way they will get 100% of their funds back and that they all must share in the $2-billion loss if the county is to survive.

Although the county issued its warning delicately and urged compromise, some investors promised a fight if they don’t recover every dollar.

At the same time, the county--threatened with lawsuits--agreed to release $175 million in property taxes to cities and school districts that were collected before the county filed for bankruptcy one month ago. The money had been frozen in the county treasury.

As the county wades through its increasingly messy financial crisis, it must treat the 187 government entities with money in the investment fund as gently as possible in hopes of avoiding protracted litigation over who gets how much of what remains.

The more that other government agencies get out of the fund, the less will be left for the county. Even with equal sharing, the county faces a $700-million loss on the $2.7-billion it had invested, while it struggles to function in the face of a $172-million shortfall in revenue over the next six months alone.

At a meeting Friday with more than 100 representatives of the county’s special districts, Supervisor Roger R. Stanton said the loss must be shared by everyone.

“I have yet to see a compelling argument as to why it should not be spread equally,” Stanton said after the meeting.

But persuading investors to settle for losses is proving a massive challenge.

“I still believe that we’re going to get 100%. We’re going to fight for that 100%,” said Irvine City Manager Paul O. Brady Jr., who represents cities on the bankruptcy court’s creditors’ committee. “When I hear comments saying, ‘There’s no way possible, it’s a zero sum game,’ I don’t believe that. The (creditors’) committee believes there’s a way we can get 100% here, and the county can continue to operate.”

In other developments Friday:

* Nineteen staff analysts, planners and other workers were laid off in the county administrative office. The cut amounts to 20% of the office’s staff. Four workers were also let go in the auditor-controller’s office. In all, 95 full-time county employees have lost their jobs as a result of the financial crisis.

* Board of Supervisors Chairman Gaddi H. Vasquez and Stanton have tentatively agreed to voluntarily testify before a state Senate committee that is probing the financial crisis. Unlike former Treasurer-Tax Collector Robert L. Citron, who resigned when the fund collapsed and was subpoenaed to appear, the supervisors accepted invitations from the committee to attend the hearings Jan. 17 in Sacramento.

* Senate Banking Committee chairman Alphonse D’Amato (R-N.Y.) called on the brokerage industry to supply more financial information to investors who are potential buyers of municipal and local government securities or else face the threat of increased federal regulation in the wake of the Orange County bankruptcy.

* Supervisors got word from their lobbyists in Sacramento and Washington that there will be no federal or state money forthcoming to help them out of bankruptcy. “There is not going to be any pot of money for Orange County,” said Jim McConnell, the county’s Washington lobbyist. Dennis Carpenter, McConnell’s counterpart in Sacramento, said the picture was equally bleak on the state level.

* Investors with money in the frozen portfolio offered up various solutions to recovering their funds. Peer Swan, chairman of the Irvine Ranch Water District, suggested that those with the smallest amounts be paid in full to reduce the number of parties involved in the bankruptcy case. Officials of one large agency suggested they might be willing to loan the county some cash to solve its short-term financial problems in exchange for being paid 100% of their pool investment.

* The Grand Jurors Assn. of Orange County, composed of 150 former volunteer members, offered to act as a liaison between residents and county officials. Association members said they could draft a county charter or help suggest government restructuring.

* University educators were forced to halt two popular programs that train and support nearly 200 teachers at eight kindergarten-12th grade school districts throughout Orange County because their funds are entangled in the bankruptcy. The programs, administered by UC Irvine and Cal State Fullerton, offered mentors and innovative seminars to foster the growth of young teachers.

* The county sold $317 million in corporate structured securities for $276 million, completing nearly two-thirds of the portfolio restructuring. Thus far, the county has sold $5.8 billion worth of securities with proceeds approaching $5.4 billion. About $3.4 billion of the proceeds have gone directly to the county. The remaining $1.9 billion has gone to pay off county loans.

* A second major Wall Street credit rating agency slashed the county’s bond ratings to non-investment grade, the lowest level possible. Ratings on the county’s once grade-A debt were suspended Dec. 6, at the time officials filed bankruptcy.

“With the information we received from the county this week it became much more clear how difficult it will be for them to make debt payments,” said Karen Krop, an assistant vice president with Moody’s Investors Service in New York. “We think they will try to make those payments, but it will be a very difficult thing for them to do.”

Ratings on $1.58 billion worth of Orange County bonds were lowered to non-investment grade levels by another rating agency, Standard & Poor’s Corp. on Dec. 7. The decision by Moody’s to lower its ratings will make it even more difficult for the county to restructure or borrow money to counter its losses, and signals the increasingly uncertain position of thousands of county bondholders.

After getting new information and noting that the county’s future debt payments are “very much in jeopardy,” Moody’s lowered ratings on the county’s long-term debt to “Caa.” Rating on short-term notes that the county must pay off in June and July dropped to speculative grade.

“Recent actions are indicative of the continued precarious position of debt holders,” the rating service said.

Moody’s said its ratings remain suspended on the Orange County airport revenue bonds and a pooled borrowing sold by several Orange County school districts. Both are still under review.

In Santa Ana, the county agreed Friday to distribute $175 million in property tax revenue that was frozen in the county treasury when bankruptcy was declared.

The money will go to cities, school districts and other agencies and represents the taxes collected between Nov. 15 and Dec. 6, the day the county declared bankruptcy, said Brady, the Irvine city manager.

Brady said representatives of the creditors committee and the county will file a joint motion in U.S. Bankruptcy Court on Monday to have the funds released. If the judge agrees, checks could be distributed to more than 100 agencies by the end of next week, he said.

The agreement came on the day Huntington Beach set as its deadline before suing the county for its share of the revenues.

“It certainly looks like good news,” said Huntington Beach Mayor Victor Leipzig, whose city stands to receive $2.5 million in taxes. “But we’ll want to hold judgment until after the court action is taken.”

Added Fountain Valley City Manager Ray Kromer: “We were set to sue, but if we can get our money, we will save money.” Kromer said that the city is due about $500,000.

Throughout the day, supervisors told investors that it would be nearly impossible to guarantee them a full return on their investments.

The county is especially worried that it could lose much more than it already has. When the portfolio collapsed, it had lost 27% of its value over the past year. Officials have calculated that the county stands to lose $50 million for each percentage point that its own loss increases above the 27% figure.

“We haven’t even figured out how we could absorb the 27% hit,” said acting county Treasurer Thomas E. Daxon. “It’s a very, very serious situation. The county is not in the position to absorb that large of a hit.”

Daxon said he will soon give supervisors his recommendations on how to operate the treasurer’s office in the days ahead. He said he may suggest that an outside oversight committee be established to review the treasurer’s investment portfolio. John M.W. Moorlach, a Costa Mesa certified public accountant who lost to Citron in the June primary election, said Daxon has asked him to head that committee. But on Friday, Daxon said that although he and Moorlach have spoken about the committee, no one has been named to the post.

In Washington, the Senate Banking Committee Chairman D’Amato, traditionally a staunch advocate of Wall Street’s brokerage firms, called for reforms in the brokerage business.

“It behooves the industry, which I have been accused of being too protective of, to do something,” he said.

He wants brokers to get detailed information about local government investments, financial strategies, and the use of instruments such as derivatives, which provided a large portion of the Orange County portfolio at the time of its bankruptcy.

“I don’t mean the minimum, but . . . to disclose to the greatest dunderhead what the situation is,” D’Amato said at the second day of his committee’s special hearings on derivatives.

His comment was the first call by an influential Republican for strongly improved self-regulation by the industry responsible for marketing hundreds of billions of dollars of public securities. Previously, most GOP members of the committee have dismissed the Orange County situation as an isolated debacle, useful as an illustration of the risks of the marketplace.

However, D’Amato was somewhat uneasy with reassurances on Thursday from the nation’s chief financial regulators, and Friday from witnesses representing the securities and banking industries, that the Orange County situation poses no general threat. He wants more disclosure in the area of municipal finance, hoping to prevent a repetition of the gamble in which former treasurer Citron leveraged a $7-billion portfolio into a $20-billion bet that interest rates would fall. States, cities and counties are exempt from the disclosure rules that require corporations to issue detailed financial reports when they seek to market securities.

Citron borrowed short-term money to buy long-term Treasury bonds. When interest rates rose, the value of the long-term bonds plunged, causing massive losses for the county portfolio. Derivatives, complex instruments linked to other indicators, were the tool used by Citron to make his bet on interest rates. One derivative was pegged to a combination of the currencies of Switzerland and Sweden, and the cost of borrowing in London.

“It was a strategy politely called highly speculative, more bluntly put, utterly stupid,” Robert Seale, state Treasurer of Nevada, and president of the National Assn. of State Treasurers, told the committee. D’Amato, a man with a reputation for blunt speech, praised Seale for using “stupid” as a description of Orange County’s investment style. “That is the first time I heard anyone put his finger on it,” said D’Amato. “Everyone else beat around the bush.”

Seale said the treasurers’ association has created a task force to study the operation of local government investment pools, such as the Orange County system, which acted like a mutual fund for money from local school districts and other governmental bodies.

Platte and Vrana reported from Orange County and Rosenblatt reported from Washington. Times staff writers Alicia Di Rado, Nancy Hsu, J.R. Moehringer, Debora Vrana, Jodi Wilgoren and correspondents Debra Cano and Shelby Grad contributed to this report.

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