Pool Investors Call County Settlement Plan Unacceptable : Recovery: School districts in particular are critical, saying that without full return of funds they will have to cut so deeply that basic education will be jeopardized.

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 went on the offensive against the plan Wednesday, saying it would deprive their agencies of critically needed funds.

In meetings throughout the day, the worried investors--including school systems, cities and special districts with financial stakes in the loss-ridden pool--criticized the 1-day-old pay-back plan because it fails to guarantee a 100% return of their principal.

Schools in particular have insisted that they are entitled to 100% because they contend they were legally obliged 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 for thousands of county children.

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, which met for five hours Wednesday. “It’s something that concerns us too.”

“We need a guarantee,” said John F. 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.”

The affluent county plunged into financial crisis Dec. 6, when $1.69 billion in losses in the county’s investment pool forced it to become the largest municipality in U.S. history to declare bankruptcy.

Brokered by Orange County business leaders and endorsed by the Board of Supervisors, the settlement plan was unveiled Tuesday as an imperfect solution to part of the bankruptcy, but one that would allow the county to take the first step toward financial recovery.

Almost immediately, however, many investors expressed disappointment, saying it fell far short of their expectations. Under the proposal, pool participants would gain immediate access to 77 cents on every dollar they had invested when the fund collapsed, and a promise that they would eventually recoup the rest.

Walter D. Kreutzen, executive vice president for finance and administration of the Transportation Corridor Agencies, said the county’s proposal to repay pool investors partly with IOUs had been unanimously rejected by the seven-member committee representing the 186 cities, school systems and special districts with money in the pool.

Kreutzen said the committee, which met for more than five hours Wednesday, had several concerns about the proposal, among them the recommendation that a portion of the pool participants’ claims to restitution--10% for schools, and as much as 20% for the rest--would be “subordinated” to those of other creditors.

“We’re concerned about these subordinated claims. The committee is uniformly saying that is unacceptable,” Kreutzen said.

La Habra City Manager Lee Risner said he was “very disappointed that (the county) put out a proposal that common sense tells you will not be accepted by the participants.”

Should the plan be adopted, Risner said, “a lot of people would probably want the heads of five supervisors on a platter.”

La Habra is now “actively considering” taking legal action to try to force the county to free the city’s $8-million investment, Risner said.

Meanwhile, officials from 31 cities gathered at Irvine City Hall on Wednesday to discuss ways of coping with the financial crisis, and many said they objected to various aspects of the settlement plan.

“It’s a first start, but it doesn’t go far enough to get us where we want to be,” said Irvine City Manager Paul O. Brady Jr., who added that the creditors committee plans to release a rival settlement proposal next week.

But the plan, offered by the Orange County Business Council, also was greeted with skepticism Wednesday by another key group, the municipal bond bankers 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-priority claim on the county’s assets in the bankruptcy proceedings, the proposal states.

The marketable 15-year notes would be used to give schools an additional 13% return, and other investors 3%, on their investment dollars, beyond the 77% they would receive immediately. The agencies could then lodge claims in bankruptcy court for the remainder due them, but would have to take a place in line behind thousands of other creditors.

But according to Cathy Bando, a municipal bond banker with Sutro & Co. in Los Angeles, the county is unlikely to find ready buyers for the recovery bonds on Wall Street, since it has thus far failed to come up with a plan to pay off its current bondholders.

“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.

Two months after the bankruptcy filing, Wall Street and bondholders are becoming increasingly nervous; Orange County has yet to come up with long-term plan for debt repayment, and has been waiting until the last minute each month to make its bond payments.

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, leaving the county’s existing debt and current bondholders out in the cold.

“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 Charles Schwab & Co., a brokerage firm in San Francisco, similarly 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 last July.

“The two are linked--you can’t finance one part without addressing the other,” Ward said. “This doesn’t address the big picture--and time is running out for bondholders,” many of whom have bonds that mature this summer.

But the investors who were perhaps the 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, lifted, then plummeted again, schools officials said, with each new pronouncement by the county and others seeking to sort out the financial mess.

Many had pinned their hopes on recent statements 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.

Steiner, who joined Bergeson in a brief meeting late Wednesday with four school officials, said full restitution “was a goal, and ultimately the schools may receive 100 cents on the dollar.”

But Steiner said it was important to present a plan that shared the loss among the schools, cities and special districts rather than appear as though the county would take the entire hit itself.

“We have to demonstrate that the county is not swallowing such a financial burden that we can’t pay our bond debt and creditors,” he explained. “The schools and the cities are not the only constituencies. There are bondholders and there are creditors.”

“The reality is that this plan will put nearly $900 million in the hands of the schools so they can meet their needs. They are going to have to prioritize and make adjustments to fill the gap,” the supervisor said. “But I believe they can avoid defaults on their debts or state takeover.”

District superintendents got their briefings on the proposal Tuesday afternoon, and said they assume they’ll take a 10% hit, which would translate into a $100-million loss overall for school districts.

Capistrano Unified School District Supt. James A. Fleming said that any proposal with the potential for a 10% loss would be “disastrous.”

Under such a scenario, the district, which had $74 million in the county pool, would have to absorb a loss of more than $7 million in principal alone, the superintendent said.

“It would just create a situation that is disastrous and unacceptable,” Fleming said. “For us to look at a $7-million to $9-million hit, the nature of the decisions that our board would have to make are so onerous (that) I would not to discuss them because people would say I’m being inflammatory.”

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

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

Chris Loumakis, a trustee with the North Orange County Community College District--one of five districts that borrowed about $50 million each to invest in the high-flying pool--said it would lose about $8.5 million under the county plan to refund 90 cents on the dollar. Its operating budget is about $93 million.

“I’m troubled by the notion that we would not get 100% back,” Loumakis said. “There were misrepresentations if not outright fraud to get the district to participate (in the pool). Legally, I think school districts should be made whole.”

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.”

The district, which has about $8 million in the county pool, has already lost its music and art programs, the superintendent said, and has only a bare-bones physical education program.

“We do very well in the basic skills,” he said. “But when it comes to the things of the spirit, as I call them, those things that make life worth living, we don’t have it.”

In another development Wednesday, the Board of Supervisors delayed appointing an interim chief executive officer, saying they will meet today to interview yet another candidate for the job.

B.J. Rone, a Dallas businessman who has helped reorganize several bankrupt corporations, was interviewed by phone Wednesday and is expected to fly into Orange County today for further discussions. Supervisors said they hoped to announce a decision today.

Staff writers Matt Lait, Jodi Wilgoren and Ching-Ching Ni and correspondents Shelby Grad, Holly Wagner, Alan Eyerly, Mimi Ko, Russ Loar and Jeff Bean contributed to this story.