NEWS ANALYSIS : ORANGE COUNTY IN BANKRUPTCY : Others Faced Fiscal Calamity’s Fallout : Change just for the sake of change will have little lasting impact, warn those who have been through municipal crises in other parts of the country.

There is, perhaps, no greater political sin that government leaders can commit than mishandling the taxpayers’ money.

And before Orange County’s financial debacle--which has already claimed numerous political careers--nowhere had that seemed more obvious in recent times than in Chelsea, Mass.

There, citizens were stripped of their right to self-governance three years ago, because City Hall was in chaos--crippled by mismanagement, corruption, conflicting political egos, and a $10 million deficit that forced the closure of schools and other services.

With the city demonstrably unable to handle its own affairs, the state stepped in and placed the municipality of 28,000 in receivership, giving authority to a single man to run the entire government until a revamped government could learn to run on its own.

Less radical solutions were employed when the cities of New York, Philadelphia and Cleveland faced their own financial catastrophes in the last two decades. Their governments were not restructured, but state oversight boards were created to impose discipline in the cities’ budgeting processes.

Somewhere between those two extremes lies Orange County’s governmental future.

Shocked, embarrassed, angered, and at times in denial over who is to blame for the financial woes that have beset one of the richest counties in the nation, Orange County’s political leaders and their irate constituents have settled on the notion that county government must be reformed in some way, to demonstrate that the problem is being addressed.

One solution favored by about half of residents recently surveyed in The Times Orange County poll, is to start with the ouster of the three members of the Board of Supervisors who were in office when the scandal broke last December--Roger R. Stanton, William G. Steiner and Gaddi H. Vasquez.

Stanton himself announced just weeks after the county declared bankruptcy that the financial collapse was a clear signal that county government required a major overhaul, one that might see elected department heads like the treasurer and tax assessor replaced by appointed officials answerable to the Board of Supervisors.

The demotion last week of County Administrative Officer Ernie Schneider was seen as the first step toward reaching that goal. Business and political leaders have suggested that a tough-minded corporate chief be brought in temporarily to oversee a government reorganization.

But changes for the sake of change will have little lasting impact if a revamped government is not accompanied by responsive and responsible leadership, warn those who have been through these municipal crises in the past.

“Good leadership and a bad (government) structure can frequently lead to somewhere, but bad leadership and a new structure can end up yielding the same results,” said David Sweet, Cleveland State University’s dean of public affairs, who watched Cleveland’s financial default and political turmoil in the late 1970s.

Leadership, the experts note, also means knowing when to subordinate one’s political ego and to share decision-making authority, allowing the public to help chart the government’s future so that voters will feel some ownership of the final plan.

“You can make all the changes in the world, and if you walk away and the public does not like it and says ‘Screw you,’ then you have failed,” said Harry Spence, the state-appointed receiver who is overseeing Chelsea’s transition back to democracy.

There is general agreement that Orange County’s recent bankruptcy filing was caused by poor judgment on the part of those guarding the public till.

Most fingers pointed first at former county Treasurer-Tax Collector Robert L. Citron, who gambled with the county’s investment portfolio, and then at the Board of Supervisors, which ignored repeated warnings that Citron was making inordinately risky investments and the fund was in trouble.

While the supervisors remain in office, county government is obviously in chaos. Citron has stepped down; his top assistant, Matthew Raabe, has been placed on paid administrative leave; Schneider lost his post; and on Friday, the entire county treasurer’s office was placed on administrative leave pending the outcome of investigations.

Orange County citizens “are going to feel a lot of pain. This is not something that’s going to go away very quickly in Orange County,” said Jane G. Pisano, the dean of USC’s School of Public Administration.

Another municipal finance expert suggests, however, that because the bankruptcy was not caused by a problem in the government’s basic structure, a major reorganization may not be needed.

“Once you fix this problem in Orange County, it presumably will stay fixed,” says Philip M. Dearborn, a municipal bankruptcy expert who has written about the financial failings of local governments.

That may be easier said than done.

Rarely seeking outside help when making big decisions, the five-member Board of Supervisors does not have a good track record of spontaneously involving the community--other than the business community--in the development of public policy.

The rancorous, public debate over who should decide the future use of the El Toro Marine Corps Air Station is a glaring example of the supervisors’ tendency toward exclusion, rather than inclusion.

Originally maintaining that they alone should decide what the El Toro base should become, the supervisors bobbed and weaved as competing interests maneuvered for control of a host of proposed decision-making bodies.

After two years of indecision, voters finally took the decision out of the supervisors’ hands last November, when they approved a pro-airport initiative backed by the business community.

Now, with trust in county government at an all-time low in the wake of the financial firestorm, citizens groups, business leaders and the supervisors are independently exploring a variety of remedies.

They range from doing away with elected department heads and giving the county more autonomy from the state, to recalling some of the supervisors, or even doing away with county government altogether.

The junking of county government--although considered highly unlikely--is nonetheless one of many options being considered by the California Constitutional Revision Commission.

Appointed last year by a Legislature frustrated that some strata of California government are “dysfunctional,” the commission is studying how to untangle all of the overlapping layers of government--from the state Capitol down to the thousands of small special districts that oversee, among other things, pest control or mosquito abatement.

“In California, the lines of responsibility have become very blurred, and it’s very difficult to hold any level accountable. And then it’s very difficult to point a finger,” said Pisano, the USC dean, who also serves on the commission.

Pivotal school funding decisions, for example, are not made by local school boards but by state government, Pisano said.

Since a large portion of county budgets are now spent on programs mandated by the federal and state governments, Pisano asks whether county governments should be turned into administrative agents of the state. Or should they be freed from the unfunded mandates to better serve the public in their areas?

Even in the absence of crisis, local governments across the country that attempted to consolidate for the sake of efficiency had trouble doing so.

The consolidations of city and county governments in areas such as Indianapolis and Columbus, Ga., took years to accomplish, even though there were convincing arguments that tax dollars could be saved if a regional government provided transportation, water and solid waste, air quality management, and fire, police and paramedic services.

The biggest stumbling block: conflicting political egos. Which government and which officials get to stay in power?

“That’s always the issue,” said Dick Ellis, the community development director in Columbus, Ga., who is often asked for advice by agencies considering reorganization.

“Get everybody together and talk about it and take the time,” Ellis advises. “Don’t be defensive, don’t be turf-conscious, and try to have an open mind. But don’t get too turfy about it.”

Major cities that were on the brink of bankruptcy in the 1970s and 1980s faced public ridicule and, in some cases, were forced to operate their budgets under state government supervision. But there were no major overhauls of local government.

More recently, Cuyahoga County, where Cleveland is located, shut down its investment pool and removed the county treasurer’s authority over the fund following a controversy similar to Orange County’s.

Although criminal investigations are underway and the state is considering new laws to prevent a recurrence of the risky investment strategy, public reaction has not been as fever-pitched as in Orange County, said Sweet, the Cleveland political scientist.

It is even more ironic, he added, when one considers that this is the first decade since the 1950s that there has been no attempt to consolidate the county with the Cleveland city government.

The most drastic government reorganization in recent times has occurred in Chelsea, the rusty industrial town near Boston.

When the first post-reform City Council members were sworn into office last month, only three of the 17 departments heads still held their jobs. The new city charter was developed by a citizens’ commission with a professional mediator brought in to break through traditional political rivalries.

Spence said that the decision to bring in a receiver--in effect, a dictator--to reshape government and balance the budget, is not a solution easily copied, particularly in large metropolitan areas.

But if Chelsea can offer any examples, he added, it would be the will of its people to take control of their government.

“Having been deeply embarrassed as a community, and having faced Chelsea jokes, there is a determination to demonstrate competence and a capability to manage its own affairs,” Spence said. “The public has to make the commitment.”