Orange County Fund Investors Demand Records : Bankruptcy: Creditors seek documents amid growing mood of distrust. They also hire own accounting firm.

City and school representatives, increasingly distrustful of Orange County’s promises to equitably disburse money left in its collapsed investment pool, have demanded county financial records and hired their own accounting firm to arm themselves in the fight for what funds remain.

Until now, county officials and representatives of the 186 municipalities with money invested in the fund have talked of working together to reach a consensus on a formula for distributing the money left after the county’s estimated $2.02 billion in investment losses.

But ill will has developed and spawned talk of lawsuits as weeks have passed without the county producing a promised plan to distribute the assets.

“We are getting more antsy by the day,” said Irvine City Manager Paul O. Brady Jr., who represents Orange County cities on the creditors’ committee made up of cities, schools and special districts with money in the pool. “We have been able to prevent separate filings in Bankruptcy Court or state court, but I don’t know how long that will last.”

Costa Mesa City Manager Allan Roeder said his city is looking into the possibility of taking the county to state court to gain access to funds frozen in the investment pool. Though county lawyers attribute the rift to misunderstandings, Roeder said some municipal officials have begun to question the county’s motives as requests for financial data go unanswered.

“Out of frustration over not receiving information and because of the delays, some cities and school districts are beginning to question if it is happening simply because of the circumstances, or if it is part of an unstated strategy to have the creditors capitulate,” he said.

In other developments Monday:

* Orange County is contemplating a return to borrowing in the municipal bond market by selling as much as $900 million in notes that would refinance old debt and provide cash to pay bills, sources said. Interim Treasurer Thomas E. Daxon said he will recommend to the Board of Supervisors that the county hire Goldman Sachs and A. G. Edwards, two bond underwriting firms that warned the county about its risky investment strategies. Sources said they will structure a new offering that could be sold in the next six months.

While details of the proposed bond offering are being kept under wraps, it is likely to include the creation of a separate borrowing entity whose revenues could not be claimed by creditors in the bankruptcy proceedings, sources said.

In a statement released late Monday, county officials said no underwriting is currently planned.

* Attorneys for 10 bargaining units covering nearly 16,000 county employees will seek a court order today reinstating their labor contracts, which the county suspended in declaring bankruptcy. The Orange County Superior Court petition is expected to charge that in planning layoffs, the county discriminated against older workers. The worker groups will also claim that the county violated state and federal labor laws in issuing layoff notices to 186 employees.

Marc Beilinson, a Los Angeles lawyer representing the labor groups, said he will ask the court for a temporary order halting the layoffs until a judge can hear formal arguments from both sides.

* Motorola Corp., intent on salvaging its $82-million deal for an emergency communications system, has submitted a new financing package to the county. The project, placed on hold in the wake of the financial crisis, would link all law enforcement, fire and public works authorities through one radio system.

Originally, it was to be financed with contributions from the county and local municipalities, but the bankruptcy is expected to make it difficult for the county to raise the money. Motorola now proposes taking out a loan on behalf of the county for the full price of the system. Ron Thompson, sales manager for the company, said he was not sure what interest rate the county would be charged.

The straw that broke the camel’s back in the county’s worsening relations with its municipal investment partners apparently came at a League of California Cities meeting Thursday.

Brady, the Irvine city manager, said the county’s bankruptcy attorney, Bruce Bennett, stunned attendees at the meeting by announcing that the county’s plan for disbursing the money remaining in the shrinking investment pool might not be ready until March.

“That blew our minds,” Brady said. “If they came and said, ‘We thought we’d have it to you Wednesday, but we can’t because of this reason and that reason,’ then fine.” But he said it was a shock “to be promised something and then find out at a meeting with other public officials that we won’t get it till March.”

“If they’re just stringing us along here, we need to know,” he said. “When they make promises to us and don’t fulfill them, what else can we think?”

Bennett, one of the speakers at the meeting, arrived more than two hours late because the county had arranged for an emergency after-hours hearing in Bankruptcy Court, where it was seeking an order to prevent Merrill Lynch from selling securities used as collateral for loans to the county.

Bennett said Brady misunderstood his comments. He intends to have a complete distribution plan finalized with court approval by March, Bennett said, but will have a draft proposal ready “relatively quickly.”

In any event, he said, the county needs to take the time to be more inclusive in developing a plan for distributing the beleaguered fund’s assets.

“The county should not proceed by making a unilateral proposal, but instead should devote some time to a dialogue with interested parties in order to see if a proposal could be developed which enjoys some support of at least some of its terms,” he said.

A focus of the municipalities’ frustration, Brady said, is the county’s delay in releasing 17,000 pages of financial documents that Bennett has been holding since Jan. 10.

The creditors’ committee last week hired accounting giant Price Waterhouse to review the documents, but Brady said Bennett will not release them until Brady’s committee and a group of county lenders sign letters of confidentiality that Bennett has not yet drafted.

Attorney Ronald Rus, who represents several cities and water districts, said the intensity of the crisis is forcing local agencies to take a tougher stand.

“In the early stages of all this, we were all in denial,” he said. “We are beginning to recognize that we are going to have to do things for ourselves.”

Times staff writers Matt Lait, Debora Vrana and James Granelli in Orange County and Eric Bailey in Sacramento contributed to this report.