Officials Weigh Repaying O.C. Bondholders With Sales Tax Funds

Aiming to restore Wall Street’s confidence in Orange County, state and county officials are to meet today on a proposal that would set aside sales tax revenues normally used for county operations to guarantee the repayment of current or future bond issues.

State Treasurer Matt Fong said Thursday that such an “intercept” program--giving Orange County’s bondholders first crack at a guaranteed stream of revenue--would be a good idea, helping ease anxiety in the bond market and reduce the county’s borrowing costs.

Municipal finance experts said even deeper cuts in government services might be the plan’s immediate action. But they agreed that it could be a crucial component in recovery, enabling the county to return to the bond market for help in refinancing its outstanding debt and for the routine borrowing that governments need to keep operating.

“Any taxes that go into a lockbox and never hit the county coffers give bondholders a lot more confidence,” said Barbara Flickinger, a manager at Moody’s Investors Service, a major bond rating agency in New York.

In other developments Thursday:

* Citing the recent discovery that $85 million in interest due local agencies was diverted to county-controlled accounts, county officials said they will halt payment of the legal fees of former Treasurer-Tax Collector Robert L. Citron and suspended Assistant Treasurer Matthew R. Raabe in 10 days.

* Supervisors started submitting their nominees for an interim chief executive officer to serve about six months while they conduct a nationwide search for a new top administrator. Among the nominees: Los Angeles businessman Sanford C. Sigoloff, who was nominated last year as state superintendent of public instruction and later appointed to the State Board of Education; former Huntington Beach City Councilman Wes Bannister, who in 1990 made an unsuccessful bid to become state insurance commissioner, and Ed Dundon, former superintendent of the Garden Grove Unified School District.

* U.S. Bankruptcy Court Judge John E. Ryan approved the distribution of $220 million in taxes that were collected before the county’s Dec. 6 bankruptcy filing. More than half the money, $142 million, will go to schools, with the rest split among cities, special districts and county services such as fire protection and libraries.

In Santa Ana today, the tax intercept program will be a top item on the agenda when Gov. Pete Wilson’s deputy chief of staff, Kevin Sloat, and state finance Director Russell Gould meet with Board of Supervisors Chairman Gaddi H. Vasquez, Supervisor Marian Bergeson and other top county officials.

Normally, sales taxes and other state levies collected in California’s 58 counties are sent to Sacramento and eventually returned to the counties, sometimes earmarked for certain programs. For this year, Orange County’s general fund budget anticipates $16.8 million in sales taxes and $96.6 million in vehicle license fees being returned by the state.

The intercept proposal calls for a portion of the funds collected in Orange County to be set aside exclusively to repay bondholders. The objective, Fong said in Washington, is “to give them assurance the money will be repaid.”

Segregating some county revenue in this way should lower the county’s cost of future borrowing by 1/20 of 1%, according to Fong--or $5,000 for every $1 million in bonds sold. The state treasurer said similar intercept programs could be established for school districts to help lower the cost of their routine borrowing too.

Other versions of the intercept concept would have the state step in and seize tax money destined for Orange County only if its bonds were not being paid off.

State legislation may be required to authorize any such program. Whatever it takes, finance experts say some such program is crucial to the county’s fiscal recovery.

“Without the long-term bond market, everything in Orange County would come to a halt,” said Zane B. Mann, publisher of the California Municipal Bond Advisor. “They simply couldn’t build any more schools, drill any more wells at the water districts, build any more highways.

“Just the name ‘Orange County’ is kind of under a cloud . . . these days,” Mann said. “It’s essential that they restore confidence in the bond markets.”

A tax set-aside program has worked in New York for 20 years, where the Municipal Assistance Corp. (MAC) was created to deal with New York City’s financial emergency after the city defaulted on some of its bonds.

MAC, which issues long-term bonds for the city, has first claim on sales taxes collected in the five boroughs. The money is deposited in a special account. On a quarterly basis, MAC takes the share it needs to pay debt service and gives the rest to the city for its operations.

Municipal finance experts have said for weeks that state intervention similar to the New York model would be essential to restoring Orange County’s fiscal health. Wilson has been emphatic that the state would not bail the county out. But Wilson spokesman Sean Walsh confirmed that the intercept option would be a top item on the agenda for today’s meeting.

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“I think they would be right in looking into such an option,” said Scott Johnson, chief counsel of the state Senate special committee investigating the Orange County bankruptcy. “The county has some debts coming due, and they must do anything they can to avoid defaulting. The name of the game now is remedies.”

Representatives of the county’s two bankruptcy creditors committees--one representing participants in the now-failed investment pool, the other representing vendors and bondholders--said they favored any plan that would boost Wall Street’s confidence in Orange County.

But some committee members expressed concern that an intercept plan might give bondholders’ claims higher priority than their own.

“We would want to make sure they’re not taking money that is due us and putting it somewhere else,” said Irvine City Manager Paul O. Brady, vice chairman of the pool participants committee.

Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, said a special intercept fund is a very important ingredient in any recovery plan for the county.

But Taylor and others cautioned that the plan would not erase the need for widespread cutbacks in county government or tax hikes.

“I hate to pass on a bit of bad news, but you’re going to have to do all of these things, and you’re going to have to do them in a big way. We’re talking about a big problem,” Taylor said of the county’s stunning $1.69 billion in investment losses. “There is no single magic bullet.”

Rosenblatt reported from Washington, Wilgoren from Orange County and Bailey from Sacramento. Times staff writer Matt Lait and correspondent Shelby Grad in Orange County contributed to this story.