ORANGE COUNTY IN BANKRUPTCY : Plan to ‘Intercept’ Tax Revenue May Help Ease Wall Street Fears : Crisis: County and state officials meet today on proposal to use sales taxes to repay bondholders.

In an effort to restore Wall Street’s confidence in Orange County, state and county officials are meeting today on a plan to 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 in an interview Thursday that such an “intercept” program would be “a good idea” to help ease the anxiety in the bond market and reduce the cost of borrowing for beleaguered Orange County in the future.

Municipal finance experts agreed state interception of tax revenue could be a crucial component in recovery because it would enable Orange County to return to the bond market for help in rescuing it from its current financial fiasco as well as for the routine borrowing governments do to keep operating.

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 Orange County. He said its creation would be “a giant step forward.”

But Taylor and others cautioned that while the intercept program would support the county’s efforts to restructure millions in outstanding debt and issue new debt, it 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 stunning $1.69-billion plunge in the county-run investment pool that triggered the largest municipal bankruptcy in American history. “There is no single magic bullet.”

*

The intercept program will be a key proposal on the table today when Gov. Pete Wilson’s deputy chief of staff, Kevin Sloat, and finance director, Russell Gould, meet in Santa Ana with Board of Supervisors Chairman Gaddi H. Vasquez, Supervisor Marian Bergeson, acting County Administrative Officer Tom Uram, and Denny Carpenter, Orange County’s Sacramento lobbyist.

Bergeson has also asked the state to help the county save money by easing requirements that it pay for a host of state-mandated programs.

Sean Walsh, Wilson’s spokesman, said the “intercept option” will be “a top item on (Friday’s) agenda.”

Sales taxes and other state fees normally are collected in the counties, sent to Sacramento, and eventually returned to the counties, sometimes earmarked for certain programs.

The “intercept” proposal calls for a portion of the funds collected in Orange County to be set aside exclusively to repay bondholders “to give them assurance the money will be repaid,” Fong said in Washington between meetings Thursday with congressional leaders and California lawmakers.

Segregating some county income in this way should lower the cost of future borrowing by .05%, according to the state treasurer. Fong suggested that 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 the tax money headed for Orange County only if loans were not being paid off. State legislation may be required to authorize a special tax intercept program for Orange County.

Orange County’s 1994-95 discretionary general fund budget of $462 million included $16.8 million in sales taxes and $96.6 million in vehicle license fees returned from the state.

If some or all of that money were intercepted and reserved for bond payments, it would not be available for routine county services. But finance experts said that while service cuts might be the immediate impact of the intercept proposal, county residents would ultimately benefit from the boost on Wall Street.

“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 set-aside program has worked in New York for 20 years, where the Municipal Assistance Corp. 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 the sales taxes collected in New York City. The money is deposited in a special account. On a quarterly basis, MAC takes the share it needs to pay debt service, and then gives the rest to the city.

Municipal finance experts have said for weeks that state intervention similar to the New York model would be essential to help Orange County recover. But Wilson has been emphatic that the state would not bail out Orange County.

The intercept concept is a compromise through which the state could assist the county without spending a dime.

“I think they would be right in looking into such an option,” said Scott Johnson, chief counsel for 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.”

County bankruptcy attorney Bruce Bennett has said that debt restructuring and new debt will be key components in the county’s recovery.

*

Representatives of the county’s two bankruptcy creditor’s committees--one representing participants in the now-failed pool, the other representing vendors and bondholders--said they favored any plan that would boost Wall Street’s confidence in the county, but were concerned that the intercept might prioritize bondholders’ claims over 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 Jr., vice chair of the pool participants committee.

“The issue of reserving funds to address bond obligations is really essential,” said Robert Moore, an attorney representing the other creditor’s committee. “It is in the long-term interest of the residents of the county, and the county government, that the creditors be paid in full. You’ve got to be able to pay the bond debt to do that.”

Richard Lehmann, president of Florida-based Bond Investors Assn., raised the question of whether the intercept program would set aside money to pay debt service on current bonds, or just to back new issuances. He also said the intercept would not help if the money set aside was far less than the debt service obligations.

County and state officials refused to elaborate Thursday on the details of the intercept proposal.

Bond experts said the special set-aside of funds to pay bondholders would be welcomed by investors.

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

“You would need to make sure that all the debt was being taken care of,” Flickinger cautioned. “You can’t create a situation where current bondholders sit waiting for their payment, and new bondholders are taken care of by the intercept.”

Staff writer Matt Lait and correspondent Shelby Grad contributed to this story. MORE WITH LESS: County health agencies expect more clients, fewer funds. B7

SHARING PROPERTY TAXES: A judge orders O.C. to disburse more than $220 million. D1