O.C. Shortfall Estimate Called Much Too Low

In a devastating new assessment of Orange County’s finances, the California state auditor said Thursday that the county’s estimate of the amount needed to pay its bills through June 30 falls short by at least $73 million--and probably by tens of millions of dollars more.

In a strongly worded letter to Gov. Pete Wilson and legislative leaders, state Auditor Kurt R. Sjoberg said county officials--perhaps illegally--transferred about $73 million that had been set aside to repay bondholders into the county general fund six days after filing for bankruptcy protection Dec. 6.

That sum, Sjoberg said, has not been factored into the county’s estimate that it will fall $122 million short of meeting its expenses for the balance of the current fiscal year. Nor, he noted, has the county added in at least $70 million it must repay local agencies that were shortchanged on their interest earnings by the county.

The auditor said his staff is examining an additional $209 million that county officials may have improperly transferred into the general fund soon after the unprecedented bankruptcy filing.

In all, state officials said, the questionable transactions could more than double the county’s budget shortfall, with the impact dependent on how quickly any improper fund transfers must be rectified.

Paul Sachs, chief of the Arthur Andersen & Co. accounting team working for the county, said he was aware of all the issues raised by Sjoberg’s report. But Sachs said he did not believe they would significantly worsen the county’s cash flow problems between now and June 30.

He cautioned that the investigation into the county’s financial records and rulings by the U.S. Bankruptcy Court could change that outlook.

“This is changing every week,” he noted.

County officials reacted with pained resignation to the possibility of more bad news, with one supervisor warning that payments to bondholders might have to be stretched out if county government is to keep its head above water.

“I think there’s going to have to be some deferring of maturities on bonds,” said Supervisor William G. Steiner. “I know this makes the (financial) markets very nervous, but when you keep adding up the figures and the picture gets more grim, this potential looms.”

Because of irregularities in county records, Sjoberg wrote in his letter, his office is unable to rely on cash flow information provided by county officials for an ongoing audit of the county’s troubled investment fund.

“We doubt the accuracy and reliability of the county’s cash flow analysis,” the auditor wrote.

In other developments Thursday:

* County officials said the Board of Supervisors has set aside $12 million previously earmarked for a host of county projects to pay dozens of accountants, lawyers and others hired to help resolve the financial crisis. According to Budget Director Fred Branca, the money would otherwise have been used to pay for county cars, employee sick leave and a communications system for law enforcement. Those projects are now on hold.

* Assistant Tax Collector Gary Cowan said that because of the bankruptcy proceedings, about $17 million in property tax refunds scheduled for disbursement in coming weeks will not be made, at least for now.

* In Sacramento, Assemblyman Louis Caldera (D-Los Angeles) announced plans to introduce a bill to help children who were encouraged by judges to deposit legal awards in Orange County’s troubled investment pool. The measure would require the state to pay the difference between what the children ultimately get back from Orange County and what they would have had if their money had been deposited in a safer fund. The legislation also would repeal a state law that obliged the children to deposit $7 million in the county portfolio.

* A subcommittee of county vendors established as part of the bankruptcy proceeding said it has received long-awaited assurances from the county that those who have provided goods or services in the weeks since Dec. 6 will be paid. But there is no agreement yet on paying vendors whose bills date from before the bankruptcy filing.

* The Orange County Employees Retirement System voted to ask the bankruptcy court to direct the county to turn over more than $10 million in employee and employer pension contributions tied up in the frozen investment pool. Funds to meet the retirement system’s January and February payrolls arrived late, officials said, leaving them scrambling to cover $7.5 million in retiree benefit payments for about 5,300 retirees.

Marianne Evashenk, the chief deputy state auditor, said Thursday that Sjoberg’s staff came upon a number of questionable fund transfers in reviewing the county’s budget estimates.

Although she said she could not discuss the transactions in detail, Evashenk said some of the transfers may have involved money that belonged to some of the 186 cities, school districts and special districts that invested in the pool.

Sjoberg said his staff still has not determined how much interest due those investors had been diverted to county accounts, or when former county Treasurer Robert L. Citron began misallocating the funds.

Last week, the county’s outside accountants said they had found evidence that $85 million in interest earnings due other pool investors was skimmed into an obscure county account known as the Economic Uncertainty Fund.

The county’s accountants do not dispute that $73 million transferred into the general fund following the bankruptcy filing will have to be returned. The money was earmarked to repay taxable notes and can only be used for that purpose, officials said.

Sachs, of Arthur Anderson, said county officials believed they were allowed to move the money into the general fund because they had been putting money away to repay the notes far in advance of when the payments were due. But because the bankruptcy filing freezes all accounts, the $73 million must be put back where it was Dec. 6, Sachs explained.

“Just because it was physically there, even though it didn’t have to be there, the creditors have a right to it,” Sachs said.

Sachs acknowledged that his team has not yet fully analyzed how much interest the county improperly diverted from local agencies’ accounts into its Economic Uncertainty Fund .

Now, there is about $70 million remaining in the fund, he said. If the county owes much more than that to pool participants because of improper diversions, its immediate budgetary gap will widen.

“After we do the reallocation of the interest, if all we have to return is $70 million, then we’re OK,” Sachs said. “If we have to return more, than the general fund will be affected.”

Meanwhile, county budget director Branca said the $12.3 million set aside to pay for the services of the small army of high-priced consultants that has arrived in Orange County since the bankruptcy filing may grow still further.

The initial amount, for instance, does not include the bills for the underwriters hired last month to refinance the county’s debt.

Supervisor Steiner said the sums needed to pay attorneys and consultants were steep but inevitable. “It’s a lot of money,” Steiner said. “It adds to the county’s financial problems, but if the money is not spent, the financial problems could get worse.”

The Board of Supervisors agreed to set the money aside Tuesday, with guarantees that supervisors will review all invoices every two weeks and have the power to deny payment.