ORANGE COUNTY IN BANKRUPTCY : Meeting Spurs Frustrations of Agencies in County Pool

With their coffers shrinking and the clock on debt service payments ticking, cities, school districts and other agencies with money in the collapsed county investment pool grew increasingly frustrated Wednesday over terms of a county plan to pay them back.

Pool participants spent hours behind closed doors for the first time since top business leaders unveiled a settlement proposal last week, but emerged deadlocked with the county over key elements of the plan.

“We’re all disappointed and we’re going to continue to push for a greater share of the return,” said Anaheim City Manager James D. Ruth. “We don’t want a bunch of IOUs--we want something to back them up.”

Those who had hoped for concessions from the county said they now fear the proposal is the best offer they will see.

“The plan is not different in any respect,” said Stanley Sprague, general manager of the Municipal Water Districts of Orange County. “All they’ve done is gone back and clarified a few points.”

The county plan offers an immediate 77 cents on the dollar to all pool participants, and gives each a chance to receive the rest of their funds through marketable notes and IOUs.

The plan treats school districts better than other agencies, offering them more in marketable notes. But the investors, particularly school districts, have balked at a portion of the plan that requires them to stand at the end of a long line for much of the rest of their funds.

Investors said that many agencies are facing imminent debt service payments and key budget decisions that are putting pressure on them to accept a plan they believe is far from ideal.

“It appears that everybody’s digging in,” said Ruth, whose city is facing a $100-million debt payment due April 1. “I think it’s a waiting game. The longer they wait, the more pressure the agencies have and the more likely we are to accept it.”

Patrick Shea, attorney for the committee representing pool participants, said that the $1-billion emergency reimbursement fund that U.S. Bankruptcy Court Judge John E. Ryan approved in early January to help cash-strapped investors pay operating expenses is nearly tapped out.

“We’ll be between $900 million and $1 billion by the end of February,” he said.

Shea will soon ask Ryan to allocate additional funds from the investment pool for emergency uses. He will also ask Ryan to remove a cap that had limited investors to withdrawals of no more than 30% of their total funds.

Despite widespread discontent among rank-and-file investors, Shea and some members of the investors’ committee continued to hold out hope that consensus can be reached soon.

Shea said it is “realistic” to expect an in-depth pool bankruptcy plan by March 17, which will be built upon the bare-bones plan that the Orange County Business Council unveiled, and the Board of Supervisors approved, on Feb. 7.

County bankruptcy attorney Bruce Bennett, who met for several hours Wednesday morning with the committee representing pool participants, conceded that hope of any immediate consensus on the county’s plan was “unrealistic.”

However, Bennett called the dialogue constructive.

“I think there is a greater understanding of the issues on both sides,” he said.

But that was not apparent after the general meeting of the pool investors.

“It’s almost like this is not a participatory process,” Sprague said. “There’s no consensus building.”

Added Huntington Beach City Atty. Gail Hutton: “I’d say there was a whole range of reactions, from major indignation to major disappointment, and a clear lack of understanding on the language in some parts.”

The continued deadlock represented one more blow to what business leaders had hoped would be a quick settlement to the investment pool crisis.

In unveiling the settlement plan, business leaders had also stressed that a tax hike must be considered to help pay off the notes called for in the plan--only to learn that supervisors are holding fast to their commitment not to raise taxes.

According to the proposal, all investors would get 77 cents on the dollar immediately. Beyond that, school districts were promised 13 cents on the dollar in marketable notes that would be issued by a Joint Powers Authority in a system similar to New York’s Municipal Assistance Corp. Other agencies were promised 3 cents on the dollar in notes.

The $255 million in marketable notes would be “the highest priority within the county,” business leaders said in their presentation.

Agencies other than schools would then get a 9% secured claim tied to proceeds from the county’s lawsuit against Merrill Lynch--a gamble that the county will not only prevail but succeed in setting aside enough of the proceeds to pay off investors.

Schools would have to get in line to stake their claim to their remaining 10%, while the rest of the investors would have to line up for their remaining 11%.

But the county has warned investors that they would be placed at the bottom of a list of $2 billion in county obligations that must be met, including the $255 million in marketable notes for investors; a $385-million gap that needs to be closed if the county is to pay off $1 billion in debt service coming due this summer; $370 million in secured claims; $100 million owed to vendors, and a portion of $305 million in losses that non-general fund accounts suffered in the collapse of the investment pool.

Investors spent days negotiating with the county on that sticking point, but county officials left the proposal virtually unaltered.

Stan Oftelie, chief executive of the Orange County Transportation Authority who heads the investors’ committee and chaired Wednesday’s meeting, acknowledged that investors have “strong concerns” about ever recouping the last 10% to 11% of their invested funds.

“One of the things we heard clearly is that we need to strengthen that section,” Oftelie said. “And that’s what we’re doing . . . bringing specifics to a broadly based (proposal).”

But, he said, investors have nevertheless “agreed that most elements (of the settlement plan) are in pretty good shape.”

Times correspondent Shelby Grad contributed to this report.

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Senate Committee Reconvenes

The state Senate Special Committee on Local Government Investments holds its third of four meetings today. Those testifying include former and current Orange County government figures. A profile of the committee and the testimony:

* Chairs: Sens. William A. Craven (R-Oceanside) and Lucy Killea (I-San Diego)

* Members: 10 senators

* Next meeting: March 3, in Orange County

* Mission: Study Orange County bankruptcy and devise legislative remedies

* Discussion: Bankruptcy disclosure problems; possibly limiting activities of municipal treasurers so they have only a few basic, extremely safe investment vehicles; New York-style bailouts; setting up a private organization to run the county and assuage Wall Street’s concerns; crafting a bill that would allow the state to guarantee any bailout bonds sold by Orange County.

TODAY’S WITNESS LIST

Topic: Role of Securities Firms, 9:45 a.m. to 12:30 p.m.

From Merrill Lynch:

* Richard Fuscone, managing director

* Elke W. Chenevy, vice president, Public Finance Group, Western Region

* J. Timothy Romer, vice president

From CS First Boston:

* Douglas Montague, vice president

* Anthony Hughes, managing director

Also:

* Ken Ough, senior vice president, Rauscher Pierce Refsnes Inc.

* Al DeSpirito, senior vice president, Dean Witter Reynolds

* Jean Costanza, partner, Le Boeuf, Lamb, Greene & MacRae

Topic: County Government Accountability, 1:45 to 4:30 p.m.

* Paul Sachs, partner, Arthur Andersen

* Steve E. Lewis, Orange County auditor-controller

* Ernie Schneider, former Orange County chief administrative officer

* Terry C. Andrus, Orange County counsel

Source: Senate Special Committee on Local Government Investments