ORANGE COUNTY IN BANKRUPTCY : School District Credit Ratings Are Slashed

Credit ratings were slashed Tuesday for more than $220 million worth of notes issued by four school groups in the ill-fated Orange County investment pool, placing any future borrowing by those agencies in jeopardy.

Standard & Poor’s rating service announced it was giving its lowest speculative-grade rating to notes issued by Irvine Unified, Newport-Mesa Unified, the North Orange County Community College District and the Orange County Department of Education, four agencies that each borrowed large sums for the sole purpose of reaping profits through the fund, which has been frozen since the county declared bankruptcy Dec. 6.

“I’m certainly disappointed,” said John F. Dean, superintendent of the Department of Education.

Newport-Mesa Supt. Mac Bernd said Tuesday that he expected the downgrade, and that he remains confident that his district will be repaid 100% of what it invested in the pool, which would allow the credit rating to rise again.

“It depends completely on the settlement we get from the bankruptcy,” he said. “Nobody, at this point, knows what it’s going to be.”

Lured by the promise of high returns, the four education agencies borrowed a total of $200 million in the spring of 1993, and repeated the unconventional deal last June.

“They would like to pay the interest payments, but they can’t get their hands on the money,” said a Standard & Poor’s official, summarizing the plight of the four issuers.

In its formal announcement, the rating agency said that the notes equaled about half of each agency’s annual budget and that without access to the money in the now-frozen pool, the agencies would be unable to repay their loans.

Tuesday’s S&P; action represents a severe blow to the future ability to borrow money by the school districts.

All of the issues were previously rated SP-1+, the firm’s highest ranking for short-term debt. The new ranking, SP-3, reflects “uncertainties about their capacity to meet their payment obligations on the taxable notes, as well as their other obligations, from currently identifiable and available resources,” said the Standard & Poor’s rating group.

In addition to the $200 million in taxable notes, the downgrade also affected $20.7 million in tax and revenue anticipation notes issued by Irvine Unified and $5.3 million in certificates of participation issued by Newport-Mesa.

While most investors and public officials have expressed sympathy for the 31 school districts that funneled virtually all their operating funds through the county treasury as mandated by state law, many have criticized the districts that borrowed to invest and said they should be reimbursed last.

But Bernd said Tuesday that his district was given a written guarantee from the county treasurer’s office protecting the principal of its investment and that he plans to fight the county for full repayment.