Advisers Urge Orange County to Consider Tax Hikes : Bankruptcy: Investment firms say new sources of revenue could be necessary if the county is to return to the municipal bond market. Supervisors stand by their pledge not to raise levies.

While Orange County’s elected officials insist that new taxes are out of the question, the two investment banking firms hired to help rescue the county from its financial crisis say tax hikes could be critical components of any recovery plan, according to documents released Tuesday.

A.G. Edwards & Sons and Goldman Sachs both say new sources of revenue may be needed if the county is to return to the municipal bond market either to restructure its existing debt or to resume the kind of borrowing all governments undertake to maintain operations.

Also Tuesday, a citizens group joined local business leaders in saying no options--including higher taxes or a state or federal bailout--should be ruled out.

“Orange County is one of the wealthiest counties in the country. This is not Appalachia,” county League of Women Voters President Constance Haddad said, tongue-lashing the Board of Supervisors at its weekly meeting. “It is, in our view, unconscionable to declare a tax increase off limits while demanding ever-increasing cuts in those programs and services upon which the poorest and most vulnerable of our residents depend.”

But board members--who will ultimately establish the county’s recovery plan--appeared to remain firm: no new taxes.

“That’s the easy way out,” said Supervisor Jim Silva. “I think there are other things that should be looked at. I don’t think we should even be looking at taxes.”

In other developments Tuesday:

* Supervisors gave final approval to more than $266,000 in public health cuts that will eliminate 15 health care positions, part of $3 million in such reductions proposed this month. The board also agreed to deduct $50 a month from certain welfare payments while making recipients eligible for indigent medical services--a plan similar to the current practice in Los Angeles County--that is expected to save $1 million a year.

* The board balked at a proposal to set aside $12 million to pay for attorneys, accountants and other financial advisers hired since the county filed for bankruptcy Dec. 6. Instead, supervisors said they wanted to see a list of expenses and review them individually. Silva expressed particular concern about payments to Sitrick and Co., a Los Angeles public relations firm, which submitted $238,000 in invoices for three weeks in December.

“I’m not going to issue a carte blanche here,” board Chairman Gaddi H. Vasquez said.

* County Counsel Terry C. Andrus said for the first time that he believes school districts were not required by state law to keep all their money in the county’s investment pool.

School officials have insisted since the early days of the county’s fiscal fiasco that they should be given top priority for repayment because of a state mandate that schools funnel virtually all of their money through the county treasury.

Andrus refused to discuss the details of his legal argument, but said his interpretation of the state law would allow schools to invest their money elsewhere.

Hearing of Andrus’ opinion, Capistrano Unified School District Supt. James Fleming said: “That’s hogwash.”

* Labor leaders said county officials have agreed to respect the seniority provisions in employee contracts when reviewing layoffs announced this month.

Following an order from U.S. Bankruptcy Court Judge John E. Ryan to consider seniority when making layoffs, county officials will meet with employee representatives today to reconsider the 186 pink slips sent and hundreds of other layoffs in the works. The workers most recently hired will be the first to lose their jobs.

“They said they’d go back and follow the bargaining agreements, and that’s what we’ve been trying to get them to do ever since Dec. 22,” said John H. Sawyer, general manager of the Orange County Employees Assn., which represents 11,000 of the county’s 18,000 workers.

* Supervisor Marian Bergeson said she will meet Friday in Orange County with staff from Gov. Pete Wilson’s office to discuss various legislative proposals related to the financial crisis. Bergeson has asked the governor to call a special session of the Legislature next month, and several Orange County-related bills have been introduced in Sacramento.

* Orange County Transportation Authority Chief Executive Stan Oftelie, who chairs the committee of pool participants in Bankruptcy Court, said he probably will ask Ryan to extend emergency disbursements into February for the 186 cities, school districts and other agencies that deposited funds in the pool.

The judge had approved $1 billion in emergency disbursements through Jan. 31. Bruce Bennett, the county’s bankruptcy attorney, had said he would probably submit a draft of a recovery plan by mid-January. But Bennett now has postponed release of the plan indefinitely because of ongoing secret negotiations with creditors. So Oftelie said local agencies may need emergency disbursements longer than originally anticipated.

After soliciting proposals from 17 investment banking firms, the supervisors selected A.G. Edwards and Goldman Sachs last week to develop plans for restructuring the county’s debt and making new borrowing possible in order to right Orange County’s fiscal ship.

County officials are meeting weekly with consultants from Salomon Bros. and representatives of the two new investment banking advisers to develop a financial restructuring program that eventually will be submitted for approval by the supervisors.

Edwards’ proposal, released Tuesday, says the county could increase sales taxes and consumption taxes, levy fees on services and restructure some fees and taxes to crawl out of its budgetary hole.

Goldman Sachs suggests selling off county assets, privatizing services and raising “non-traditional” taxes and fees, though some of those steps would need approval by voters or the state Legislature.

The New York firm’s Jan. 12 proposal says Goldman would be willing to commit its own capital to an Orange County fiscal revamp, but does not state how much. The firm advises the county that its first priority must be making good on upcoming bond payments and suggests that new bonds can be secured by a special pledge of existing revenues.

A Goldman Sachs spokesman said the firm would not comment on its proposal.

Edwards, based in St. Louis, also noted that a key part of any recovery program will be the county’s success in tapping the bond market for new financing. To access Wall Street markets, the county must make good on its outstanding bond issues, restore investor confidence and find new revenue sources, the Edwards proposal states.

The bankers suggest that the county creatively invest the money it sets aside for debt service, boosting the return on the money through complicated “derivative” transactions. Edwards’ proposal also advises the county to seek backing from the state to secure new bond sales, though that--like many of the firms’ suggestions--could be politically difficult to achieve.

Edwards also suggests raising taxes on tourists, sales and consumption, as well as fees for services.

“This proposal is saying the county is going to have to raise a substantial amount of money and it’s going to have to refinance its debt. That’s what I see here,” said Christopher Taylor, executive director of the Municipal Securities Rule Making Board, the primary regulator of the municipal bond market. “The county is going to have to come up with some money, that’s clear.”

Though members of the Board of Supervisors have consistently said they will not raise taxes, county officials have researched the options:

* Raising the sales tax half a cent--to 8.25% from 7.75%--would net the county about $140 million a year. The hike would require majority approval from the county’s voters. Boosting the sales tax before March, 1996, would require a special election.

* Increasing consumption taxes on alcohol or tobacco requires state legislation. Adding 20 cents per drink sold would bring in about $100 million a year; a 35-cent tax on each tobacco product sold would raise $30 million annually.

* The Board of Supervisors has the authority to raise some taxes, but those are unlikely to bring in much cash. A new $10 tax on business licenses would raise about $1 million; a 5% utility users tax would raise $5.5 million.

Thomas Daxon, the county’s interim treasurer, said taxes are a poor solution because of the negative impact on a local economy. He acknowledged that county officials are looking at possible fee increases, but added: “I would do everything possible to stop from getting to that point.”

Despite strong opposition to new taxes in conservative Orange County, some local groups have begun echoing the outside financial experts’ call for weighing the possibility.

And Haddad, the League of Women Voters leader, chastised supervisors Tuesday for declining to consider new revenue sources.

“What kind of damage are you adding to the already critical condition of the county by refusing to look at all options to get back quickly on sound financial footing?” she asked.

Times staff writers Lee Romney, Len Hall, Matt Lait and Mark Platte contributed to this report.

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