NEWS ANALYSIS : Finance Sector Presses State to Help Orange County : Bankruptcy: Regulators and Wall Street warn that Wilson's 'tough love' stance could hurt all of California.

TIMES STAFF WRITERS

In an era when the political watchwords are "tax cut" and "less government," Gov. Pete Wilson has made it clear that state government won't lead Orange County out of bankruptcy.

And as the county searches for a way to rescue itself from financial quicksand, there has been surprisingly little clamor by Orange County legislators, supervisors and other officials for help from Sacramento.

Contrast that stance--some call it measured, others complacent--with the agitation of national securities regulators and Wall Street executives.

They are all but jumping up and down, warning that unless Wilson and the state take the initiative to head off defaults by Orange County agencies on $2 billion in debt that comes due this spring and summer, there will be a financial disaster with long-lasting consequences for all of California--and for the national market in municipal bonds.

A hearing here today of the state Senate's special committee on local government investment will examine the origins of Orange County's crisis. But the world of high finance is pressing for action in Sacramento-- now.

"The county has demonstrated it can't take care of itself," said Christopher A. Taylor, who as executive director of the Municipal Securities Rule-Making Board in Washington is the nation's top municipal bond regulator.

"If bond investors who invested in one of the wealthiest counties in the state of California end up with something less than 100 cents on the dollar," said Taylor--echoing the sentiments of other key regulators--"the state of California and all its municipalities will pay a very high price over a very long period of time."

Likewise, Charles W. Fish, a former chairman of the muni-bond board who is a principal of Fish & Lederer, an investment management firm in Orange, faulted state lawmakers for not seizing leadership in the crisis, warning of a political backlash.

"The state, without spending one dime of the money of taxpayers outside Orange County, can play a very significant role in making this catastrophe less of a crisis," Fish said.

Wilson's staff contends that his "tough love" approach to Orange County's problems is consistent with his resoundingly successful campaign, which called--among other things--for greater autonomy for city and county governments.

When the county comes forward with proposals, the Wilson Administration will consider them, said Wilson spokesman Sean Walsh. The governor has sent Thomas W. Hayes, former state finance director and treasurer, to advise the county; a delegation from current state Treasurer Matt Fong's office has been dispatched as well.

But Walsh added this caveat: "As we've said in the past, the state is not in the position of bailing out poor decisions made at the county level."

Members of Orange County's exclusively Republican delegation to the state Legislature in interviews shared that view. Assemblyman Curt Pringle (R-Garden Grove) expressed confidence that Orange County will be able to solve its own problem.

Yet Wall Street representatives dealing with the county say officials in Santa Ana, still reeling from the disaster and the ensuing waves of civil and criminal investigations, seem a long way from coming up with a comprehensive blueprint for recovery.

Until now, securities regulators and Wall Street figures note, every time a municipality of significant size got into serious financial trouble, state government swooped in immediately, terrified of the wider financial ramifications of bankruptcy and default. With Orange County running out of time before its debt payments come due, California seems to be rewriting the rules, they say.

In the mid-1970s, for example, New York Gov. Hugh L. Carey intervened immediately--and successfully--to keep New York City's fiscal crisis from becoming a bankruptcy. In 1991, Connecticut state officials worked feverishly to keep Bridgeport, the state's largest city, out of bankruptcy, despite a determined effort by the city's mayor to file. In the late 1970s and early '80s, the city of Cleveland and Chicago's public schools managed to stave off bankruptcy after intervention by state governments.

Fish and other executives of brokerage firms with large municipal bond operations said there are good reasons why states fear the consequences of local bankruptcies.

"The Street doesn't forget the people who don't honor their debts," Fish warns.

If California allows Orange County to default--a step county advisers are struggling to avoid--investors are likely to conclude that the state won't stand behind any local government that floats bonds. And then, critics say, every municipality and agency in the state will find it vastly more difficult and expensive to raise money through bond issues.

Indeed, sources say that SEC Chairman Arthur Levitt Jr., like Taylor, worries that a default by Orange County could have a national impact, shaking confidence in the municipal bond market. If conservative bond investors see greater risk, the muni bond market might start to dry up.

Regulators and municipal finance experts note that while Orange County officials certainly are to blame for the county's $2.02-billion investment loss, the county did not get into its mess alone. The Legislature passed laws making longtime Treasurer Robert L. Citron's risky strategy possible--but did nothing to monitor Orange County's practices or performance.

Wilson, these market experts contend, could use the prestige and power of his office to come up with a rescue package that would ultimately cost the state little or nothing, but would give the county the time and breathing room to work itself out of trouble.

They contend that:

* The governor should appoint a panel of respected investment figures as an oversight board, similar to a panel set up after New York City's crisis. In California, such a board would weigh options for a workout and give Wall Street confidence that sophisticated, nationally respected experts were helping to guide the county out of its troubles.

* The state should set aside funds that would go to Orange County anyway and guarantee that the money would be used only to pay off new bonds floated by Orange County to regain its financial footing. For example, the county sales tax could be increased by one-half percentage point, with the state dedicating the money to pay off part of any new borrowing by the county.

* The state could give itself the power to monitor Orange County's finances, with the aim of boosting investors' confidence by providing a guarantee that the county will strictly meet budget targets.

* Wilson could use other means for guaranteeing new borrowing for the county. For example, Fish said the governor could smooth the way for significant loans from state pension funds, using as security valuable county assets that might otherwise have to be sold outright.

Although none of these steps have been taken in Sacramento, Administration officials say they are considering such solutions, but want to hear more from Hayes and other state experts closer to Orange County's woes.

That lack of action may be a reflection of the fact that Orange County residents so far have directed little anger at Sacramento for not rushing to bail the county out; indeed, many of the county's most outspoken political activists want less government, not more.

But the political risks of withholding a life preserver from a floundering municipality were demonstrated at the depths of New York City's fiscal crisis, when President Gerald R. Ford refused to help secure short-term financing for the city.

The state and Wall Street pulled off a bailout without federal help. But Ford failed to carry New York state in the 1976 presidential election--an election he lost.

Wilson is betting that there will be no such repercussions for him.

He contends that the Orange County bankruptcy is fundamentally different from the earlier East Coast financial crises. In those instances, Walsh said, the cities were in terrible financial shape. By contrast, Orange County's problems stem from a onetime investment disaster.

Observers say, moreover, that Wilson may not want to look like he's playing favorites, rushing to the aid of heavily Republican Orange County after having been viewed as skimping on state aid following rioting and earthquakes in more heavily Democratic Los Angeles County.

But maybe the heart of the problem is a lack of urgency a little akin to Orange County's slack response to rising interest rates.

"The problem is that the state's response has been zilch, mainly because the county has not come forward to the state to say what does it want," said Assemblyman Mickey Conroy (R-Orange). "You're kind of in a bind. You can't do something for the county unless they say what they need."

Paltrow reported from New York, Lesher from Sacramento.

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