Court Tells O.C. to Let Go of Property Tax Revenue : Bankruptcy: County must disburse more than $220 million it collected to 130 governmental entities. Schools, cities hail ruling.

Cash-strapped school districts, cities and other government agencies will receive more than $220 million in property tax money from the county, under a ruling issued Thursday by U.S. Bankruptcy Court Judge John E. Ryan.

Local governments have been clamoring for the tax payments since the county plunged into bankruptcy on Dec. 6 and announced that it would withhold the money. County officials are expected to begin transferring the funds to 130 government entities very soon, said county bankruptcy attorney Bruce Bennett.

Most of the money will go to more than 100 cities and districts that invested funds in the now-collapsed county investment pool. But taxes will also be distributed to a handful of cities, including Garden Grove and San Juan Capistrano, which have no funds tied up in the bankrupt pool.

The cash infusion will be welcomed by hard-pressed cities and districts that already have received about $550 million in emergency disbursements cleared through bankruptcy court.

“It means that the tax money that they, and the people they serve, rely upon will be received,” said Lee Bogdanoff, one of the county’s bankruptcy attorneys. “It means they will be able to meet their payrolls and conduct their day-to-day business.”

The biggest portion of the money, $142 million, will go to Orange County school districts. Cities will receive $22.9 million; fire and library districts will receive another $7.3 million; the county will receive $8.4 million; and other special districts will receive $18 million, according to court documents. Bennett said other, smaller disbursements bring the total to $220 million, but declined to detail them.

Patrick Shea, who represents investors in the pool, said the $220 million tax payment should ease future demand on the special emergency fund from which $550 million was disbursed to local agencies. Cash shortages have also forced elected officials throughout Orange County to start cutting budgets.

At the start of a court hearing Thursday, attorneys for Dana Point, Lake Forest and Mission Viejo claimed it was unfair of the county to require recipients of the tax money to release the county from future liability related to the disbursements.

Other investors, including the city of Costa Mesa and the Costa Mesa Community Development Agency, argued that the county also owes them a month’s worth of interest on the $1.1 million in tax revenue that was withheld.

The county agreed to drop its demand for immunity from liability and Ryan declined to rule on the interest payments. Attorneys for the county and pool participants said the matter would probably be taken up at a later hearing.

The Special District Risk Management Authority, which handles local government insurance matters and had more than $1 million invested in the pool, also filed an objection to the county’s plan for tax disbursements, claiming it favors some pool participants over others.

Dennis Hauser, attorney for the authority, said he was concerned the disbursement would leave less money in the pool for other investors. “This potentially compromises and discriminates against the rights of my client,” he said.

Ryan said he too was concerned about protecting the rights of other investors, and gave them the right to seek reimbursement if it is ultimately proved the distribution was unfair.

In other court business, Ryan delayed a ruling on whether the county is obligated to set aside $53.4 million in principal payments on $169 million worth of bonds that come due in June.

The county is scheduled to pay the full $169 million at that time. But the county won earlier court approval to stop setting aside money and instead use it to cover daily operations.

Bennett also argued that the county’s obligation to make the payments legally ended when the county filed for bankruptcy.

But an attorney for Alliance Capital Management L.P. and Putnam Investment Management, which together hold about $50 million worth of Orange County bonds, argued that the obligation to pay them off still exists. Robert Darby asked Ryan to allow them to sue for the money in state court.

Ryan set a hearing on the matter for Feb. 23.