ORANGE COUNTY IN BANKRUPTCY : Laid-Off Workers Get a Ray of Hope : Bankruptcy: Judge orders county to take seniority into account when deciding who loses job. Some of 186 already given pink slips may get theirs back.

SANTA ANA — A federal judge on Friday ordered Orange County officials to negotiate with labor leaders to devise a layoff plan that takes into account the seniority rights of workers, offering hope that some of the 186 employees who got pink slips earlier this month may get their jobs back.

U.S. Bankruptcy Court Judge John E. Ryan ruled that the previously announced layoffs can go into effect, but only temporarily. He set another hearing on the matter for Feb. 2.

The judge agreed the county’s unprecedented fiscal fiasco constitutes an emergency that allows voiding the labor agreements, but said that employee groups presented convincing evidence that layoffs could be made while honoring seniority.

“It’s only through communication that the employees can feel comfortable that everything is being done to preserve their rights,” Ryan said. “The association and the county have to get together immediately and review the (specific employees) who have been terminated to decide whether changes ought to be made.”

Dozens of anxious workers whose futures hung in the balance filled the benches of the courtroom behind a throng of lawyers so large they wore numbers on their suits. As the judge issued his ruling, some who had been fired seemed upset with the continued uncertainty, but labor leaders welcomed it as a key victory.

“On a scale of 1 to 10, I think he gave us an 8 1/2-plus,” said Bill Fogarty of the Orange County Central Labor Council. “He told the county it had to sit down with us immediately. The 186 workers are still in limbo but I think their chances are a lot better than they were an hour ago. . . . Judge Ryan was courageous to do what he has done.”

Theresa Trotter, a county custodian, said she was disappointed that those who got layoff notices could not go back to work immediately, but was pleased that the county must sit down with workers. “We want to be part of the process,” she said

In other developments Friday:

* A coalition of business leaders called for the restructuring of county government to increase the power of its top executive, and urged local agencies to avoid filing lawsuits. Three leaders--Arnel & Affiliates Chairman George Argyros, Irvine Co. Executive Vice President Gary Hunt and Pacific Mutual Life Insurance Co. Chairman Thomas C. Sutton--said they plan to convene meetings between county officials and those with money in the failed investment pool.

* Officials of the U.S. Securities and Exchange Commission, one of half a dozen agencies investigating the county’s financial debacle, grilled former Treasurer-Tax Collector Robert L. Citron for four hours.

Flanked by attorney David W. Wiechert, a stone-faced Citron walked quickly into the SEC’s western regional headquarters in Los Angeles just before 10 a.m. Friday. Citron refused to disclose what he planned to tell SEC officials. But Wiechert said, “There were no violations of any federal securities laws” by his client.

Citron will return for more questions, probably next week. “The process of debriefing Mr. Citron will likely be a lengthy one,” Wiechert said.

* The county effectively completed the restructuring of its investment portfolio with the sale of $381.3 million in notes issued by the Student Loan Marketing Assn., known as Sallie Mae.

A day before, Sallie Mae had traded the fixed-rate notes to the county in exchange for an equivalent amount of its own derivative securities, some of the interest-rate-sensitive notes that had imperiled the county investment pool.

Friday’s auction and other smaller sales leave the county with about $52 million in conventional securities from the original portfolio that county officials said do not need to be sold. The remainder of the pool is now invested in cash investments with an average maturity of 10 days, down from four years at the time of the Dec. 6 bankruptcy filing. The overall yield on the reconstructed pool is 5.417%.

* Supervisor Marian Bergeson said she consulted with Gov. Pete Wilson’s office and now believes the state may come through with some indirect assistance to help Orange County with its budget debacle. Wilson and the Legislature are unlikely to provide direct aid, she said, but may relieve the county of some state-required expenses such as welfare payments.

“I’ve sold my wares up there before, and I think we can get something done . . . to plug up some of the hole,” said Bergeson, who stepped down as a state senator to take her seat on the board this month.

* County bankruptcy attorney Bruce Bennett and lawyers for Merrill Lynch & Co. negotiated with U.S. District Court Judge Gary Taylor over whether the county’s lawsuit against the giant brokerage firm should land in Bankruptcy Court or federal district court.

Though Merrill’s attorneys have pushed for the case to be heard by a jury in district court, the county’s lawyers stated in court papers that “it is unlikely that this case will ever be tried to jury.” Taylor is expected to decide the matter next week.

In Bankruptcy Court on Friday, labor leaders argued that the county violated state law and workers’ constitutional rights, but saved only an incremental amount of money by laying off employees “willy-nilly” and voiding union contracts.

“They didn’t have to do it, it’s plain and simple. There were alternatives under the contract,” Larry W. Gabriel, an attorney representing a coalition of 10 county unions, said in his closing argument. “They didn’t like the seniority provisions. They didn’t like the layoff procedure. They didn’t like the grievance procedure because it gave people the right to complain. So they said with one fell swoop: ‘Be gone.’ ”

Union attorneys said the county should follow layoff provisions in the contracts, which allow for both immediate firing of workers hired within six months and four-week furloughs without pay for any employee with just two days’ notice.

Labor groups also want the “bumping” process in their contracts to be observed. That would allow senior employees to move into lower-paid jobs, with the most junior employees being the ones to lose their jobs.

*

Attorneys asked that the county be ordered to comply with labor agreements not just for the workers who have already been given pink slips, but for any future layoffs. The county has already announced plans for 400 layoffs--including the 186 workers who have already been fired--and plans to slash another $80 million from its general fund budget in the year beginning July 1.

But county officials said the procedures suggested by union officials take too much time, and that swift, targeted layoffs were the most effective way to ease Orange County’s massive cash shortfall, which is pegged at $172 million by June 30.

“Because the cash-flow liquidity crisis was an immediate one, delay was intolerable because delay meant cost,”’ said attorney Michael H. Goldstein, who represents the county. “The county had to take control of the crisis to show the markets that it knew what it was doing, that it had credibility, that it could move forward.”

Sheriff Brad Gates, who led the management council that developed the county’s first round of cuts and layoffs, also said any delay in imposing staff reductions would be detrimental.

“In the middle of riots, fires and floods, there are times when you have to walk past the person with the broken leg to get to the person who is bleeding to death,” Gates testified.

The sheriff’s more than two hours on the witness stand triggered groans from many of the employees in the courtroom audience who received pink slips earlier this month.

“I don’t think the sheriff knows too much about what he’s done,” said Gayle Clanton, 48, a data entry specialist who has worked for the county for 10 years. “He’s ruined a lot of lives.”

Union leaders also argued that ignoring the labor contracts could ultimately backfire for the county, threatening that laid-off workers would file “hundreds of millions” of dollars in legal claims if the contracts were not reinstated.

*

Lawyers for two committees representing the county’s creditors and investors also addressed the court on that point, expressing concern that the workers would join a long line of people owed by the bankrupt county, slicing a too-small pie into tinier slivers.

“We’re primarily concerned that there not be additional damage,” said Larry Engel, who represents agencies that deposited funds in the county’s failed investment pool. “We do not want additional damage claims.”

After the judge’s ruling, the sheriff said he was “not unhappy with the situation.”

“I believe he said the law allowed us to do what we did,” Gates said. “He wants communication and discussion. We have no objection to that.”

Union officials, however, said they believe the layoffs orchestrated by Gates’ council would be overturned.

“I heard the court say to the county that seniority is extremely important and complying with collective bargaining laws is extremely important,” said Marc Beilinson, an attorney for the labor coalition. “He does want give-and-take, but we strongly believe the give-and-take can be done within the four corners” of the contracts.

Charles Axelrod, an attorney for the county, said he was optimistic that negotiations with labor leaders would yield a compromise. “While seniority seems to be important to the judge, it doesn’t seem to be a sacred cow,” he said.

In the first major move by the local business community since financial disaster struck one of America’s wealthier counties nearly two months ago, the Orange County Business Council on Friday called for the appointment of a strong chief executive who would have far more power to run county government than current Chief Administrative Officer Ernie Schneider.

“Ernie has done a really good job, but given the way the position has been structured by the supervisors, it severely limited his ability to do the job,” said Todd Nicholson, president of the newly formed council, which represents 2,100 local companies with 350,000 employees.

“It’s obvious that (Schneider) didn’t have the authority needed,” Nicholson said. “The chief executive officer role would provide for a much smoother operation.”

*

Top business leaders met for six hours on Friday at the Irvine Marriott to hear status reports from county officials and representatives from agencies that invested in the ill-fated county investment pool.

Council members include Disneyland President Paul Pressler; Alan Hoops, chairman of PacifiCare of California; William P. Foley II, chairman of CKE Restaurants and Fidelity National Financial Inc.; Leslie G. McCraw, chairman of Fluor Daniel Inc.; UC Irvine Chancellor Laurel L. Wilkening and Chapman University President James L. Doti.

Business leaders said it was “glaringly obvious” that the current chief administrative officer’s powers were too limited to deal with the ongoing bond crisis. They called for the immediate appointment of an interim chief executive, and recommended that a search begin for a permanent chief executive.

“We need someone who can come in with the authority to make decisions” as the county struggles to craft a plan needed to exit U.S. Bankruptcy Court, said Walt Disney Co. board member Ray Watson. “The immediate problem is that we need someone with decision-making power who can speak for the county.”

Business leaders demanded that county and municipal officials explore “all possible options” for recovery from the investment pool’s stunning $1.69-billion plunge last year.

Tax hikes were not discussed during Friday’s daylong session but business leaders have not ruled them out. “Obviously, everything has to be put on the table,” Nicholson said.

The newly formed committee of business leaders also urged county and municipal officials to avoid litigation that would eat up taxpayer dollars.

“Taxpayers will end up the losers, not once, but three times” if a lengthy battle is fought in court, Nicholson said. “First in the loss to the pool, second in the legal defense costs and third in the legal costs of the suing party. This course of action is in no one’s best interest.”

*

During Friday’s lengthy session, business leaders heard status reports from Schneider, Bennett and the county’s chief financial adviser, Thomas W. Hayes. Orange County Transportation Authority Director Stan Oftelie, Irvine City Manager Paul O. Brady Jr. and representatives of other agencies that invested in the county fund also spoke to the group.

“The feedback we got at the meeting (from government leaders) is that they want someone, a third party, to step in and be a facilitator,” Watson said. “This is one gigantic problem. . . . The business community has all kinds of experience in mergers, negotiations and the like, so, potentially, we can be helpful, first as listeners, then to help them reach compromises.”

The task force that met on Friday plans to reconvene within two weeks. Additional members will be added as the task force determines where it can best help the county, Nicholson said.

Times staff writers Michael A. Hiltzik and Debora Vrana in Los Angeles and Matt Lait, John O’Dell, Greg Johnson and Mark Platte in Orange County contributed to this report.