Use a Weighted Scale for Investment Refunds : O.C. crisis: Consider per capita impact, each agency’s ability to raise revenue and if it had a choice in joining pool.
After the immediate Orange County crisis is over, the county will have to figure out how to distribute the losses suffered by the investment pool. The county can’t fully pay the 187 agencies that invested money.
The easiest solution is to give everyone a prorated share: If 25% of the money is gone, then everyone gets a dividend of 75 cents on the dollar. That is harsh, but it is fast and cheap. Is there a better way? Should the county pay non-uniform dividends based on the circumstances of each investor? Is the county authorized to do so?
The answer to the last question is probably “yes.” There is very little law to guide the county, since Chapter 9 municipal reorganizations are so rare. In a Chapter 11 corporate bankruptcy reorganization, however, the debtor’s plan may classify the creditors into various groups, both secured and unsecured. For various strategic reasons, debtors sometimes treat different types of unsecured creditors differently, rather than lumping them all together.
Although those strategic considerations may not apply here, there are other reasons for thinking about disparate classes under the plan. The agencies that invested in the pool are not all similarly situated. Thus, completely equal treatment would result in unequal burdens.
First, the various agencies do not have the same ability to raise revenue to replace the lost funds. Some, such as school districts, cannot increase taxes; some, such as water districts, can raise rates within certain limits. I think that the Orange County Transportation Agency has a great deal of ability to raise revenue through sales taxes. Agencies that cannot raise revenue to replace the losses should bear less of the burden.
Second, the per capita impact will vary greatly. For example, if a large city has suffered a loss of $60 million, but a very small town has suffered a loss of $20 million, then the per capita loss in the smaller town is greater. One group of citizens should not bear a disproportionate part of the loss.
Third, the investors vary according to the degree to which they “assumed the risk.” Some local agencies were required by law to invest in the fund; they had no choice. Others invested voluntarily. Still others borrowed in order to increase their investments. Agencies forced into the pool should not be treated on par with those who knowingly participated in the leveraging scheme.
The county ought to think about proposing a plan that takes those factors into account. Perhaps there are other relevant factors, but it will be hard enough to balance those three. Perhaps each factor could be assigned sliding-scale point values, and then the factors for each local agency could be added up.
A crude example: An agency with no ability to raise taxes would receive a score of 3. An agency with a limited ability to raise revenue would get 2 points, and one with unfettered revenue-generating capability would get 1 point. Similarly, a city with a per capita loss of $1,500 would receive 3 points; one with a per capita loss of $1,000 would get 2, and one with a loss of $500 per person would get 1. Finally, an agency that was forced to invest would get 3 points. A voluntary investor would get 2, and a voluntary investor who borrowed in order to invest would get 1.
The agencies with the higher point totals would receive proportionally greater dividends. I would expect, however, that the total range of outcomes would still be relatively narrow. In a perfect world, the scales would be more finely calibrated, and the factors might receive differential weighting.
In making this proposal, I am fully aware that it may be simplistic, naive, impractical, impolitic and unpopular. The possibilities for subjectivity, error and acrimonious disputes are endless. Which factors are relevant? How should they be weighted? How should they be applied? The alternative, however, is to force everyone to share the same loss, regardless of circumstances.
It is in the county’s best interests to make sure that the impact of this loss is proportionate: The county’s residents also make up almost all of the 187 local entities who are the primary investors. That is a unique crossover. Imagine a Chapter 11 reorganization in which the corporate debtor is owned by a large group of public shareholders; at the same time, little groups of those same people own each of the corporate debtor’s major unsecured creditors.
Even if this proposal has no effect on the ultimate shape of the plan, I would hope that the residents of Orange County will get involved in helping to formulate the plan of reorganization. I would expect that the county will give them the opportunity to express their opinions about the reorganization process. After all, the local agencies are not the ones who will bear the real world costs of this disaster. In the end, the people pay.