Pool's Investors Attack O.C. Recovery Plan


With the ink barely dry on a settlement proposal designed to help Orange County chart a course toward financial recovery, participants in the county's collapsed investment pool attacked the plan Wednesday, saying it would leave their agencies with massive revenue shortages.

In meetings throughout the day, worried investors--including school systems, cities and special districts with financial stakes in the loss-ridden pool--criticized the day-old pay-back plan because it fails to guarantee a 100% return of their investments.

In Sacramento, meanwhile, Orange County's attempt to pursue changes in state law to help it recover from bankruptcy also was greeted with resistance Wednesday by a Legislature long dominated by Democrats hostile to the Republican enclave.

A package of about two dozen bills that county lawmakers will introduce next week when a special session on the bankruptcy is convened includes several ideas that have previously been floated--and rejected--in the state Capitol.

Orange County lawmakers have tried to tone down such retreads by applying them only to the bankrupt county and limiting them to periods of two to five years. But that has not placated many Democrats. A proposal to allow Orange County to contract out more public-sector jobs has once again drawn fire, as has a plan to allow the county to cut general assistance welfare benefits.

For their part, school districts were especially disappointed with the county pay-back plan because they argued that they should get all their money back because they were required to deposit all their funds with the county treasurer's office.

Without the return of their entire investments, several school officials warned, they will be forced to make budget cuts so deep that they would imperil the quality of education.

Accepting only 90% of their investments, as the settlement plan offers, "is something the schools will just not agree to," said Andrew V. Czorny, a member of the executive committee representing the pool investors that met for five hours Wednesday. "It's something that concerns us too."

"We need a guarantee," added John Dean, superintendent of the Orange County Department of Education. "We need to know how much money is coming down the pike. If it is going to take forever, we are going to have to make major reductions."

Standard & Poor's, the New York bond rating agency, said the proposed distribution plan represents forward movement, but said it is too early to judge whether the proposal could boost the credit-worthiness of Orange County and other agencies that invested in the pool.

"At this time, S & P believes that because of the preliminary nature of this proposal, no rating actions are warranted," the agency said, noting that the proposal requires the approval of both the bulk of pool investors and the U.S. Bankruptcy Court.

Brokered by Orange County business leaders and endorsed by the Board of Supervisors, the settlement proposal was unveiled Tuesday as an imperfect solution that would at least allow the bankrupt county to take the first step toward financial recovery.

Almost immediately, however, many investors expressed disappointment. Under the proposal, pool participants would immediately get 77 cents on every dollar that they had invested when the fund collapsed in early December--and a promise that they would eventually recoup the rest.

But the proposal, offered by the Orange County Business Council, also was greeted with skepticism by another key group--municipal bond investors who would be expected to purchase any new debt.

A central feature of the plan would be the sale of $255 million in so-called recovery bonds, to be paid off over 15 years by a first claim on the county's assets, the proposal states.

The marketable 15-year notes would be used to give schools an additional 13% return on their investment dollars beyond the 77% they would receive immediately. The districts could lodge claims in Bankruptcy Court for the remaining 10%.

However, according to Cathy Bando, a municipal bond buyer with Sutro & Co. in Los Angeles, the county is unlikely to find ready buyers for the recovery bonds because it has so far failed to come up with a plan to pay off its current bondholders.

Two months after the county's Dec. 6 bankruptcy filing, bondholders are increasingly nervous because Orange County still has no long-term plan for debt repayment, and has been waiting until the last minute each month to pay its bond bills.

"Right now, I don't think there are any buyers who would run up and buy these recovery notes," said Bando, who is advising the creditors committee.

Robert Moore, an attorney for the creditors committee established by the Bankruptcy Court, said his clients were troubled that the plan gives highest status for repayment to the recovery bonds, at the expense of current bondholders.

"Our concern is that this gives most-favored-nation status to the claims from the pool participants," Moore said. "We think that the county's bondholder claims have equal or greater dignity. These bonds coming due soon should be given equal priority."

Stephen Ward, chief investment officer for the Charles Schwab brokerage in San Francisco, also criticized the plan for not addressing the question of debt repayment.

"Their plan is incomplete. It doesn't address the current creditors of the county, only the pool participants," said Ward, whose company owns $41.5 million of the controversial $600 million in taxable notes the county sold in July.

"The two are linked--you can't finance one part without addressing the other," Ward said. "The whole thing has to be worked together. This doesn't address the big picture and time is running out for bondholders," many of whom have bonds coming due this summer, he noted.

Perhaps most disappointed by the settlement proposal were local school district officials, who said they have ridden a roller coaster of emotions since the county's extraordinary bankruptcy filing.

Their hopes have soared, then crashed, rose and then plummeted again with each new pronouncement by the county and others seeking to sort out the financial mess.

Many had pinned their hopes on a recent proposal by two county supervisors, William G. Steiner and Marian Bergeson, that school districts should receive 100% of their money and be first among equals when the dollars from the troubled fund are finally doled out. With the latest settlement plan, however, those hopes evaporated.

Huntington Beach Union High School District board President Michael Simons called the plan unacceptable and said it would force the district to make deep cuts, or completely deplete its reserves.

"I'm very disappointed," Simons said. "Some of the (county) supervisors have stated that they support full 100%, and this isn't 100%. I'm not willing to sign on to it, and I don't think our district is. I don't think any district would."

In the Anaheim City School District, Supt. Mel Lopez said the prospect of not receiving the full 100% of its money would be so painful that "at this point, we have refused to even take a look at it.

"Through the years we have had to cut and cut and cut,' Lopez said. "If I have to cut again it would have to be in the basics, and I can't do that."

In Sacramento, the overall rescue for the county was criticized on the grounds that it offered unfair solutions.

"I just don't think it's fair if you've had a breakdown at the top of the economic pyramid to have the people at the bottom of the pyramid paying for it," said Sen. Bill Lockyer (D-Hayward), Democratic leader of the Senate.

Democrats worried that even though legislation is specific to Orange County and has time limits, passage could prove to be a crack in the wall of resistance to proposals pushed by conservatives.

"It's hard to imagine a lawmaker saying a bad idea is a good idea for a short time," said Lockyer said. "We've all seen short-term experiments turn into long-term policy. So there's never a great deal of comfort with short term."

Even so, Orange County lawmakers remain bullish, suggesting that the "ripple effect" posed by the county's predicament will persuade recalcitrant Democrats to go along with at least enough of the proposals to help.

"We've got a county going under," said Dennis Carpenter, Orange County's lobbyist in Sacramento. "That's of statewide concern. It will affect the credit rating of every other local agency in the state. That's the urgency in this. I can't imagine anyone saying it doesn't matter. It matters to everyone."

Lockyer, however, said that such thinking is "the product of Disneyland fantasizing," adding: "It doesn't persuade me."

Times staff writers Lee Romney and Debora Vrana and correspondents Shelby Grad, Holly Wagner and Alan Eyerly contributed to this story.

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