Governor Orders a Special Session on O.C. Fund Crisis : Bankruptcy: Legislature will consider emergency measures to speed recovery. Board OKs repayment plan. Wall Street increasing pressure on state, county leaders.

Gov. Pete Wilson on Tuesday ordered a special session of the state Legislature next week to consider a host of emergency measures aimed at helping Orange County recover from the worst governmental bankruptcy in U.S. history.

Wilson said it was “important that we act together to resolve the Orange County situation and . . . to help Orange County shrink the size of government. Further, we need to ensure that this type of fiscal abuse does not happen again.”

Wilson’s order was issued as the beleaguered Board of Supervisors was approving a plan to repay the 186 other agencies with billions still frozen in the county’s ill-fated $7-billion investment pool, which at last count had suffered a $1.69-billion loss. Many investors, however, reacted coolly to the plan.

The plan, brokered by a trio of county business leaders, offers pool participants immediate access to 77 cents for every dollar 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, state and county leaders alike are under increasing pressure from Wall Street, where angry bond buyers have complained that the county has not taken the steps necessary to avoid default on about $1.2 billion in bonds that come due from June to 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 assume some of the responsibility for paying off bonds in the future.

Under the so-called intercept plan, the state, subject to legislative approval of a bill being presented, 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 immediate access to 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 U.S. 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.”

Several legislators were skeptical of some 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 of able-bodied and childless poor people. Another would allow the county to contract private vendors to provide many of its services.

“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 about 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 that he welcomed the governor’s participation but that 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.”

Killea said there are several ways the state can help Orange County avoid further problems. She is especially concerned about 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 intercept plan.

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

That pledge “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 with that view.

George Argyros, the South County developer who was one of the architects of the settlement plan, said, “We cannot exclude the famous T-word in 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 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 who invested in the county pool, called the settlement plan a “standard share-the-pain deal” that offers little more than what the county said in December it could provide.

“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 “we get overwhelming support from the investors.” The settlement plan said that investors agreeing to the proposal must include 80% of the investors holding at least 90% of the pool’s investments before it would be submitted to the federal judge hearing the county’s bankruptcy case.

Bennett cautioned pool investors against rejecting the settlement plan. “There’s the potential for 190 different” lawsuits that would “take forever” to resolve. “We might as well start building a new courthouse,” he said, if the settlement is rejected and all of the parties begin suing for the return of their investments.

In other developments Tuesday:

* In preparation for the special session, 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 any services.

* The supervisors rejected a proposal to raise user fees in the clerk-recorder’s office. The vote that killed the proposal was greeted with dismay by board Chairman Gaddi H. Vasquez, who said he was worried about the message it would send to state legislators. “Frankly, we’re going to be in for some rough sledding in Sacramento when they say, ‘What have you done at home?’ ” Vasquez said.

* The supervisors also interviewed two more candidates for the interim county executive officer. They are 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.

* Merrill Lynch, the giant brokerage house that sold Orange County many of the riskiest investments in its troubled fund, said it earned $62.4 million in 1993 and 1994 from its dealings with Orange County. In earlier reports, the special Senate committee investigating Orange County’s bankruptcy underestimated the firm’s profits on its Orange County business.

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

Robert Moore, an attorney for the creditors committee formed in connection with the bankruptcy, said its members, which include many of the county’s bondholders, were troubled that the recovery plan doesn’t detail how the county will pay back all its debts.

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

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

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

Irvine Co. Vice President Gary Hunt, one of the local business leaders who have spent the past three weeks brokering the plan, said, “This (bankruptcy) hole is a black hole; it’s very deep and it’s a mess.”

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.”

Sutton acknowledged that “lots of unanswered questions” remain. “This is not the solution. This is a platform that allows us to move forward. . . .”

Hunt said that “without a new source of revenue, there’s no cash available” to maintain county operations and repay the county’s outstanding indebtedness. Without the revenue that new taxes would bring, “the county won’t be able to avoid default” on its outstanding debts, he said.

And Argyros noted that “walking away from legitimate debt is not an option.” Orange County “has a legal and moral obligation” to repay its debts, he said.

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

Vasquez praised the plan advanced by the business leaders, but balked at the Business Council’s recommendation that a tax hike must be considered.

“We’re in agreement on the foundation of what’s being proposed. But I don’t think the board’s position on taxes has changed,” Vasquez said. “My position has been that taxes are not an option. . . . I think there still needs to be a thorough analysis and evaluation of all the other revenue options.”

John Schotz of Saybrook Capital Corp., the 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.

“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.”

Tom Burnham, president of the Irvine Unified School District Board of Education, said the bad news in the plan was that it would leave his district facing a $10-million loss.

Burnham said it would be impossible for the district to live with such a loss “without major pain.” He noted that the district had 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.

Stan Oftelie, chief executive of the Orange County Transportation Authority and chairman of the pool investors committee, made a brief statement lauding the Business Council’s role and praising the plan as “a platform” from which to find a larger solution to the case.

“The pool committee supports the concept” underlying the settlement proposal, Oftelie said. “But we can’t speak for all 190 agencies (in the pool) until we’ve gone out and spoken with them.”

Two of the larger pool investors said the plan was merely a starting point.

Wally Kreutzen, executive vice president of the Orange County Transportation Corridor Agencies, said the Business Council’s plan “is a very realistic place to start, but I will not support it as it is. There are a number of things that need to be worked out.”

Blake Anderson, general manager of the Orange County Sanitation Districts, said: “The issue is the level of uncertainty that everything beyond the 77 cents represents. Everyone’s got to recognize that it will take time to work out the other 23 cents. The pool will be looking for the new and improved plan. . . .”

Supervisor Bergeson, a former state senator spearheading the county’s legislative agenda, said the legislative proposals are certain to reap criticism.

“It is a package that is controversial because it questions the typical role of the county,” she said. “It questions what types of services government should provide.

She said the initiatives the county is seeking would only be good for a five-year period, while the county digs its way out of a $2-billion hole.

If passed, the legislative package could amount to more than $65 million in cost savings and cost avoidance.

Several residents expressed concern at Tuesday’s board meeting that the supervisors might look to sell such county assets as parkland, beaches and historical sites.

“We treasure our parks,” said David Perlman of Laguna Beach. “Please don’t take them away.”

Bergeson assured the public that such assets would not be sold.

Times staff writers Matt Lait, Lee Romney, Jodi Wilgoren, Debora Vrana, J.R. Moehringer and Carl Ingram and correspondents Shelby Grad, Jerry Gilliam and Carl Ingram contributed to this story.

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Search for Solutions

Forging ahead to solve Orange County’s financial crisis, Gov. Pete Wilson on Tuesday called for a special session of the Legislature on Feb. 17, as county supervisors gave their OK to a proposed settlement with cities, schools and other investors in the failed investment pool.

Payout Proposal

Schools

For every dollar in the pool, they would get:

* 77 cents

* 13 cents in marketable notes

* 10 cents in IOUs

Cities and Special Districts

For every dollar in the pool, they would get:

* 77 cents

* 20 cents in IOUs

* 3 cents in marketable notes

What County Wants From Legislature

* Intercept program: Some property taxes and vehicle license fees set aside for bondholders

* Mandate relief: Freedom from state and federal requirements such as those governing welfare and Medicaid

* Privatization: Ability to contract for any service

* Fees: Authority to bill jail inmates for part of their medical care, and some suspects for use of a public defender

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Extraordinary Legislation

The Legislature meets in special sessions to enact legislation for unusual events and conditions that were not covered in a regular session. The characteristics of a special session:

* The call: Only the governor can call and control a special session.

* Agenda: Legislature confines itself to specific subject and related matters.

* Passed bills: Generally become effective faster; bills passed in regular sessions take effect Jan. 1.

* Length: Varies; the longest special session (1940) lasted 312 days. May take only hours.

KEY EVENTS TRIGGERING SPECIAL SESSIONS

* 1989: Loma Prieta earthquake

* 1991: Oakland Hills fires; whitefly infestation; state budget cuts

* 1992: Southern California floods; California budget crisis

* 1995: Southern California floods

Sources: “California’s Legislature” by James D. Driscoll, Times reports

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Another Mountain

Even if Orange County secures a settlement with investment pool participants via the Orange County Business Council’s proposal, it still faces more than $2 billion in debt. The sources, in millions of dollars: Source: Amount Notes for subordinated claims: $580 Bond reserve deficit (to pay existing debt): $385 Secured and senior claims: $370 County department obligations: $305 Recovery notes*: $255 Trade debt: $100 Reserve for next fiscal year: $100 * To be issued as part of Business Council plan

Source: Bruce Bennett, county bankruptcy attorney

Researched by GREG JOHNSON / Los Angeles Times