Legislature to Meet on O.C. Aid : Bankruptcy: Wilson calls special session of state lawmakers for emergency measures. County approves plan for settling with agencies that have funds in pool.

Gov. Pete Wilson on Tuesday ordered a special session of the state Legislature next week to consider emergency measures to help Orange County as its beleaguered Board of Supervisors was approving a proposal for settling with the 186 other agencies whose funds are frozen in the county’s ill-fated investment pool.

The settlement plan, brokered by a trio of county business leaders, offers participants immediate access to 77 cents for every dollar that they had invested in the pool when it collapsed in early December, and holds out a promise that they will be able to recoup the remainder.

As they struggle to cope with the county’s bankruptcy, both state and county leaders are under increasing pressure from Wall Street, where angry investors have complained that the county has not taken the steps necessary to avoid a default on about $1.2 billion in bonds that come due between June and August.

Part of the urgency of the special session, scheduled to begin Feb. 17, is to consider a plan in which the state would help repair Orange County’s shattered credit rating in the bond market by telling bond buyers it will set up a mechanism for paying off bonds in the future.

Under the so-called “intercept plan,” subject to Legislative approval of a bill being presented, the state would set aside some of the property taxes and vehicle license fees due the county in a special fund dedicated to repaying bondholders.

The settlement proposal, brokered by the increasingly influential Orange County Business Council, favors school districts over the cities and other special districts that had invested in the pool.

In addition to getting 77 cents on every investment dollar, schools would be given an additional 13% of their investment stake in marketable 15-year notes, and could lodge claims in Bankruptcy Court for the remaining 10%. Other investors would get only 3% in marketable notes, and would be forced to seek the remaining 20% of their investment stakes in bankruptcy claims.

Several investors expressed disappointment with the plan, which comes more than two months after the bankruptcy. Orange County’s bankruptcy attorney, Bruce Bennett, seemed to expect a cool initial reaction to the plan, saying it was “because the results don’t match (investors’) expectations.”

In Sacramento, Wilson said it was “important that we act together to resolve the Orange County situation and enact legislation which would prevent similar occurrences from happening elsewhere in the state.”

“The purpose of this session is to help Orange County shrink the size of government. Further, we need to ensure that this type of fiscal abuse does not happen again,” said Wilson, who left Tuesday on a three-day trip to Washington.

Several legislators reacted coolly to some of the proposals aimed at shrinking the size of county government.

The package could trigger a heated debate in the Legislature, where some members already fear that Republicans and the governor are using the Orange County crisis to pursue a political agenda that they have tried unsuccessfully to push through the Legislature for years.

Specifically, one bill would make the general assistance welfare program optional, allowing the county to drastically reduce or eliminate its support for able-bodied and childless poor people. Another would allow the county to contract out many of its services to private vendors.

“Some of those are going to hit the fan, for sure,” said state Sen. Lucy L. Killea (I-San Diego), co-chair of a special committee that has been holding hearings on the Orange County bankruptcy. “These are some long-term projects that there is going to be considerable controversy about.”

Democratic Senate leader Bill Lockyer of Hayward, who appointed a special committee to investigate the Orange County scandal when it surfaced a month ago, had a similar reaction. After meeting Tuesday with financial advisers to Wilson, Lockyer said he welcomed the governor’s participation, but he said some of the trial balloons floated so far may not fly.

“I want to cooperate and help solve the problems,” he said. “But I would make a distinction between efforts designed to restore fiscal stability to the county and a controversial agenda that injures employees, working people, the poor and the elderly.”

Assembly Speaker Willie Brown (D-San Francisco), who was attending a legislative seminar in Davis, made only a brief comment: “If Gov. Wilson deems it appropriate, then we will entertain the idea.”

Killea said there are several ways the state can help Orange County avoid further problems. She noted that she is concerned with the warning from Wall Street brokers that a default by the county could have financial repercussions for city and county governments throughout the state and, possibly, the nation.

She suggested legislation that would advance state funding already designated for Orange County and she endorsed the state’s so-called intercept plan.

Like others, though, Killea said vehemently that county officials should take more steps than they have, notably to reconsider their pledge not to raise taxes.

“That was not a very wise thing to do,” she said. “That is one thing the bond houses say would help.”

Orange County business leaders seemed to agree. George Argyros, a developer who was one of the architects of the settlement plan, said, “We cannot exclude the famous t-word (from) our arsenal of solutions. Taxes have to be an alternative that none of us wants. It has to be in our vocabulary if we’re going to find a solution to the problem.”

But the business leaders are demanding that county and municipal agencies first cut staff, sell county assets and privatize city services. Without deep budget cuts and additional revenue, Argyros said, “we face a paralysis, if not a meltdown of our economy and quality of life.”

Attorney Ron Rus, who represents several water districts that invested in the pool, called the settlement plan a “standard share-the-pain deal” that offers little more than what the county said it could provide soon after the bankruptcy.

“I don’t understand what they’ve been doing for two months,” Rus said. “This is the sort of deal that the county was talking about being able to do when Chapter 9 was filed.”

Bennett cautioned that the plan is doomed unless there is “overwhelming support from the investors.” At least 80% of the nearly 190 pool investors, or investors representing 90% of the total funds in the pool, must agree to it before it can be submitted to the federal judge hearing the county’s bankruptcy case, he said.

In other developments Tuesday, the Board of Supervisors approved a wide-ranging legislative plan aimed at easing the county’s financial crisis.

Supervisor Marian Bergeson said the package of legislative proposals will “allow Orange County to begin to fix its problems on our own, with our own resources.” The plan includes proposals likely to be controversial with some lawmakers, including relief for the county from mandated state and federal programs, and privatization of many services.

The supervisors also interviewed two more candidates to become the county’s interim chief executive officer--corporate turnaround specialist Sanford Sigoloff and William J. Popejoy, former chairman of American Savings & Loan and former president of the Federal Home Loan Mortgage Corp.

Meanwhile, Paul Kranhold, a Wilson spokesman, rejected any allegation that the governor or Republican lawmakers are trying to capitalize on Orange County’s dilemma.

“The only agenda here is to provide relief to Orange County when it is in the midst of a severe economic crisis,” he said. “Anybody that thinks there is some type of subverted effort to ram through proposals that have otherwise been stymied is just being paranoid.”

In Orange County, reactions to the business community’s proposal varied from cautious to perturbed.

Robert Moore, an attorney for the Orange County creditors committee, said its members, who include many of the county’s bondholders, were troubled that the recovery plan does not detail how the county will pay back all its debt.

“The plan only addresses the rights of pool participants and pool assets and doesn’t address how the county will pay its existing indebtedness,” Moore said, “or how it will deal with the indebtedness it would incur if this proposal is approved.”

Bennett, the bankruptcy attorney, agreed that it does not tackle the $2-billion mountain of debt that the county faces.

“There’s more than $2 billion of a job still to be done at the county level,” Bennett said. “This (plan) is just a starting point.”

“This hole is a black hole, it’s very deep and it’s a mess,” said Irvine Co. Vice President Gary Hunt, one of three local businessmen who have spent the past three weeks brokering the plan. “This solution is tough love.”

Hunt, along with Argyros and Pacific Mutual Life Insurance Co. Chairman Thomas C. Sutton, advised residents to support a tax increase if they “want to maintain the quality of life they’ve had in the past.”

“Without a new source of revenue there’s no cash available,” Hunt said. “And the county won’t be able to avoid default” on its outstanding debts.

“Walking away from legitimate debt is not an option,” Argyros said. “(Orange County) has a legal and moral obligation” to pay its debts.”

The business leaders made it clear that they would support a tax hike only if elected officials throughout the county first make dramatic operating cuts by eliminating staff, privatizing services and selling assets.

“The problem for Orange County is a very serious problem,” Hunt said. “The fix will be hard and it needs to start now.”

John Schotz of Saybrook Capital Corp., financial advisers for the pool participants, said he was glad to see a specific plan on the table, but remained uncertain that the specifics would meet his clients’ needs.

“Conceptually, it’s a big step forward for the county to admit that taxes are necessary,” Schotz said.

“The good news is, you get your cash out. For a bankruptcy, this is moving at lightning speed. The good news is the business council hit the supervisors on the side of the head and said, ‘You’ve got to wake up and smell the coffee and consider taxes.’ It’s a first step,” Schotz said. “The bad news is that we’ve got to work through a lot of things.”

But Tom Burnham, president of the Irvine Unified School District Board of Education, said the business council’s plan would leave the district with a $10-million deficit.

Burnham said it would be impossible for the district to live with such a loss “without major pain.” He noted that the district estimated that a $6-million loss in the financial crisis would force the closure of two schools, the firing of dozens of employees, the elimination of high school sports and massive cuts in science, arts and elective programs.

“You are risking the current delivery system of education to the community,” Burnham said.

Times staff writers Jerry Gillam and Carl Ingram in Sacramento contributed to this story. Lesher reported from Sacramento and Trounson reported from Orange County.