Business Leaders Seek Allies in Rescue of O.C. : Policy: Executives face fierce opposition to plan that includes tax hike to keep county from financial meltdown.
Television cameras rolled as three top corporate officials delivered a blunt message: Slashing the payroll and selling off the county’s assets aren’t going to be enough. Orange County won’t survive its fiscal crisis without a tax increase.
Under the klieg lights were three of the county’s savviest business executives, men who are well-schooled in the ways of governmental decision-making. But the trio is seldom seen in places such as Santa Ana City Hall, where on Feb. 7 they gave the public a glimpse of their behind-the-scenes handiwork during the bankruptcy crisis.
The Orange County Business Council was making public a plan--crafted during a series of closed-door meetings--that was designed to rush hundreds of millions of dollars to cash-strapped cities, schools and special districts and avoid a huge legal imbroglio. But the group’s bottom-line message about taxes was inescapable.
The reaction was swift and expected in tax-wary Orange County. “We’re incensed that business leaders are espousing new taxes,” said Fullerton anti-tax activist Bruce Whitaker. And when it was suggested that business leaders may want to oust some officials, Supervisor Roger R. Stanton huffed, “It’s not up to boardroom executives to decide who’s in office.”
Unexpectedly, the corporate chieftains--their businesses, their connections and their motives--moved squarely into the searing spotlight. But, then again, Thomas C. Sutton, George Argyros and Gary H. Hunt knew they were playing with fire when they used what Argyros called the “T-word”--taxes.
The three--as well as the Business Council, which represents 6,000 local companies--are now scrambling for allies and struggling to explain who they are, what they stand for and why they decided that drastic action is necessary. This is not business as usual for Orange County, or for executives who prefer to be heard and not seen.
Certainly not for Hunt, executive vice president of the Irvine Co., the county’s largest single landowner. Or Argyros, who despite his public persona prefers to keep his business dealings and personal relationships confidential. And certainly not for Sutton, the low-profile chairman of California’s largest life insurance company, Pacific Mutual, who spent much of last year in Washington lobbying for health-care reform.
The business leaders knew they were dealing with a hot topic. When a reporter at the Feb. 7 news conference demanded that business leaders somehow guarantee that taxpayers won’t end up throwing good money after bad, Sutton shot back a rejoinder that business leaders were “the fire brigade,” not the arsonist.
On Friday, Sutton reiterated that Orange County voters--not the Business Council--will determine whether Orange County adopts additional taxes. Said Sutton: “People in the county will have to say whether they want to keep promises (made to investors and bondholders) and whether we’ll need a new revenue source.”
And, despite the protests, business leaders are continuing to wield their power and influence to shape public debate in the aftermath of the county’s unprecedented bankruptcy.
“The battle has been joined,” said UC Irvine School of Management professor Louis H. Masotti. “They’ve put together a unified force and there’s a lot of people coming out of the woodwork to help.”
Business leaders say they’re driven by the specter of an economic “meltdown” that could be triggered if the county defaults on $1 billion in municipal bonds that come due by July.
Fear of an economic meltdown was sparked, industry leaders say, by the realization that the county lacks the revenue to cover both its operating expenses and debt. Business leaders fear that the county’s fiscal woes could force a domino-like series of defaults and bankruptcies by cities, municipalities and special districts that invested in the county’s ill-fated pool.
They caution that the clock is ticking, and that the first stage could begin next month, when some cash-strapped school districts with funds tied up in the ill-fated pool will have to alert employees to possible layoffs. Business leaders worry that municipal governments with cash reserves tied up in the bankruptcy pool could be forced to default on bonds and declare themselves bankrupt.
“I don’t think people fully understand what would happen if this plan isn’t accepted and we go into . . . a meltdown,” said Edgar S. Brower, chairman and president of Pacific Scientific Co. in Newport Beach. “If we get into the position where we can’t borrow money in the open market . . . if we can’t meet vendor bills, if we cannot fund the schools . . . then one can fully see that the meltdown will happen to all of us, not just the politicians.”
Business leaders paint a grim picture of a county paralyzed by the inability to borrow funds. The downward spiral, they say, will intensify as public safety services are cut, school systems are dismantled and residential property values plummet.
“That’s not the lifestyle and environment where people will want to nurture families,” Brower said. “This isn’t an alternative, it’s the only alternative.
“We’re not talking about going out and buying the patient a new hat, a suit and a car,” he said. “We’re talking about keeping him alive.”
That’s the message business executives will spread during coming weeks “through every kaffeeklatsch, to every reporter, on every TV and radio show and to every homeowners group and service organization,” said Wayne Wedin, a member of the Business Council’s leadership. “We have to get the facts out so (voters) can make up their own minds.”
Talk of new taxes, even as a last resort, won’t be a welcome message in Orange County, a bastion of conservatism, said UCI Prof. Dennis Kling, who also worries that few Orange County residents realize how bleak the future will be if the county defaults on its debt obligations.
“People whose immediate short-term interests are touched by short-term funding cuts are keenly aware, but that’s just a small fraction” of the population, Kling said. “People are not aware of the way in which flood control, police and emergency services and the court system . . . are also going to be hit.”
Local business leaders say they too were initially unable to fathom what the complicated bankruptcy would mean to county residents. During December, few executives would comment publicly on the crisis, arguing that they simply didn’t know enough about the situation. A few grumbled that county supervisors created the problem and that elected officials should be forced to solve it.
The business community’s initial response also was slowed because the Orange County Chamber of Commerce & Industry and the Industrial League of Orange County were struggling to complete a complicated merger, which resulted in the Business Council.
In mid-January, officials of the newly merged organization began to carve out a role for the business community in the crisis.
One measure of the group’s growing concern was the selection of the Irvine Co.’s Hunt as organizer of a Jan. 20 meeting at the Irvine Marriott.
At that session, 18 high-powered business leaders listened intently as county financial adviser Thomas W. Hayes, county bankruptcy attorney Bruce Bennett, Irvine City Manager Paul O. Brady Jr. and other key bankruptcy players described the growing crisis. As the day progressed, business leaders grew increasingly concerned.
“My assumption is that the people who walked into the room that day had relatively little knowledge about the breadth and depth of the problem,” the Business Council’s Wedin said. “The briefing was very sobering, even for those who felt they were reasonably well informed.”
“When (executives) left that room, there was no question in their minds,” said H. Fred Mickelson, a Southern California Edison Co. regional vice president and a former chairman of the Orange County Chamber of Commerce & Industry. “It was clear that it was a problem that was going to take the best minds in the county, perhaps the nation, to solve.”
As county executives explained the depth of the crisis, business leaders realized “that this thing had snowballed in the size and complexity of the problems,” said Doy Henley, a Business Council member and president of the conservative Lincoln Club.
Executives at the Jan. 20 meeting agreed to serve as the Business Council’s task force on government finance. And, at the behest of county supervisors, the Business Council began its bid to bridge the growing chasm between the county and increasingly frustrated fund investors who were clamoring for their money.
The Business Council authorized Sutton, Hunt and Argyros to initiate discussions with various parties to the bankruptcy. Associates said that the executives cleared their desks and dedicated most of each day to the bankruptcy. “I know George has been busy because I had an appointment on a very significant matter and his office canceled it,” Mickelson said.
“George was one of the first key people who said we’ve got to do something about (the bankruptcy),” Mickelson said. “And he was one of the first to say ‘I’ll put in the time needed to do it.’ ”
Critics contend that Argyros, whose business interests include a development company, acted to safeguard his own interests: If the county can’t provide the necessary public infrastructure, developers won’t have a very bright future.
Associates maintain that Argyros’ support for controversial measures--such as last November’s ballot measure to build a commercial airport on the El Toro Marine Corps Air Station--is driven by a belief that they will help the overall economy.
Business leaders say that solving the county’s bankruptcy will have a positive impact on many related issues--including construction of a new commercial airport, which could be jeopardized if Orange County lacks revenue to help pay for the proposed field.
Daniel D. (Ron) Lane, a Newport Beach-based developer who met Argyros during the 1950s at John Marshall Junior High School, described Argyros as “a doer, a bright man who’s lived here a long time and who wants the best for Orange County.”
Hunt, point man on many of the powerful Irvine Co.’s retail and commercial developments, also has an obvious vested interest in safeguarding the county’s overall economic strength.
But observers also said that Hunt’s involvement--including his appearance at the Feb. 7 news conference--underscores the unprecedented reaction by the local business community to the crisis.
“It speaks to the significance of this issue that the business community has been able to get people like Gary Hunt, who usually works behind the scenes, to stand up and be publicly counted,” UCI’s Masotti said.
Hunt, along with Henley, Wedin and Whitaker, will also serve on an 18-member committee assembled by the Board of Supervisors to define the scope of a sweeping outside audit of county government and steer the audit to completion.
Hunt, 46, “definitely got the backing from his company,” Mickelson said. “He can’t take that kind of leadership position unless (Irvine Co. Chairman Donald E. Bren) says to go do it.”
Irvine Co. officials have acknowledged that the bankruptcy crisis forced the Newport Beach-based development company to abandon its preferred low-profile approach.
Sutton was also forced into the public spotlight.
Friends and associates say that Sutton, who worked his way up through the ranks at Newport Beach-based Pacific Mutual after starting as a summer intern during the 1960s, has endured something of a baptism by fire.
“Tom came out of a protected, cloistered world to get out where a lot of people can see him,” Wedin said. “He did that because he believes it’s the right thing to do.”
Associates and friends describe Sutton--a registered Democrat who describes himself as a political independent--as a thoughtful person who quickly assimilates heavy volumes of information. “He’s a person who can bring things together, who can show you that he’s really been listening,” Mickelson said.
“At first blush you wouldn’t necessarily pick him out of the crowd as the swashbuckling hero,” said David Emms, producing artistic director at South Coast Repertory theater, where Sutton served as president from 1992 to 1994. “In a sense, he’s more of a strong, quiet leader.”
The three business executives have refused requests for interviews since making their controversial bankruptcy plan public during the Feb. 7 news conference. Earlier that day, the Business Council representatives presented their plan to county supervisors, who unanimously adopted it, as well as to representatives of the pool investors.
The plan promises cash-strapped cities, schools and special districts immediate access to 77 cents on every dollar they had invested when the pool plunged into bankruptcy.
Business leaders were quick to acknowledge that the plan has flaws--the most significant being the lack of a guarantee that investors will recoup all of their funds. Hunt has described the plan as “tough love” for a sick county. Sutton cautioned that “a sensible person” could not be happy with the plan.
Within hours of being made public, the plan--and talk of a tax increase to pull the county out of its fiscal black hole--generated fiery criticism.
County supervisors endorsed the pool bankruptcy plan--but Supervisor Gaddi H. Vasquez made it clear that he wasn’t endorsing a tax hike. Owners of Orange County municipal bonds argued that the plan favored pool investors at the expense of bondholders. And conservative citizens’ groups erupted in a chorus of opposition to talk of new taxes.
Civic activists, who normally are close allies of business on taxes and regulatory issues, are upset by what they perceive as the Business Council’s heavy-handed use of its power and influence. Activists were enraged by reports that influential business leaders were pressing supervisors who were in office when the bankruptcy occurred to resign or forgo reelection.
But even harsh critics of the business-brokered plan acknowledge that the plan moved discussions off dead center.
“They got people talking,” said Brady, the Irvine city manager who is fighting to save his city’s $205-million pool investment. “At the very least, they got something out on the table. Up to that point, we were not getting much of a response out of the (county).”
The plan “accelerates the process of addressing key issues,” said Robert Moore, an attorney who represents disgruntled owners of Orange County bonds. “We’re now better able to try and negotiate.”
Business Council leaders say they’re confident that the plan will lead to an eventual solution to the pool bankruptcy. And they believe that as voters recognize the depth of the county’s fiscal problems they will understand why the Business Council, which represents nearly 6,000 local employers, decided that a temporary tax increase will be inevitable.
“As people begin to understand what the consequences of not doing something are, and what the impact is going to be on the quality of life, we’re fairly confident that an agreement will be reached,” Business Council President Todd Nicholson said.
A recent Times poll suggests that Orange County residents’ fierce anti-tax sentiment might be softening in the wake of the bankruptcy filing. A majority of respondents to a poll in late January said they would favor raising taxes to help public schools survive the crisis, and the poll respondents were split evenly on new taxes to support police and fire services.
But residents are unwilling, according to the poll results, to support new taxes to meet obligations to the county’s existing bondholders.
UCI’s Masotti questions whether Wall Street is willing to wait much longer, given Orange County’s historic antipathy toward taxes and local political leaders’ seeming reluctance to state up front that taxes might be a necessary component of an eventual bankruptcy reorganization plan.
“The existing (Board of Supervisors) leadership can’t seem to break away from its traditional Orange County response, which is to avoid conflict,” Masotti said. “What the county needs is a good swift kick in the ass.
“When you use the full faith and credit of your government (to borrow) and you don’t pay (the debt), you’re dead in the capital markets,” Masotti said. “There’s a growing belief (in the financial world) that maybe what’s got to happen is that Orange County has got to be dissed big time by Wall Street.”
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Leadership Coalition
A coalition of Orange County business executives led by Thomas C. Sutton, Gary H. Hunt and George Argyros share credit for a plan to guide the county through its bankruptcy crisis. Background on the three businessmen:
Thomas C. Sutton
* Age: 52
* Position: Pacific Mutual Life chairman and CEO
* Education: Bachelor’s degree, math and physics, University of Toronto, 1965; advanced management program, Harvard University, 1982
* Activities: Serves on numerous boards and advisory committees, including Center for Corporate Public Involvement, Partnership 2010, Leadership Tomorrow, California Institute for Federal Policy Research and Coro Southern California. Was president of the South Coast Repertory Theatre board from 1992-1994.
* Personal: Married, four children
***
Gary H. Hunt
* Age: 46
* Position: Irvine Co. executive vice president for corporate affairs and administration
* Education: Bachelor’s degree, public administration and political science, Sacramento State University; law degree, Irvine University School of Law
* Activities: Serves on Beckman Foundation and Harbor Day School boards; member of California Business Roundtable board of directors; vice chairman of the California Institute for Federal Policy Research; member of the county-appointed audit oversight committee.
* Personal: Married, two children
***
George Argyros
* Age: 58
* Position: President, Arnel & Affiliates
* Education: Bachelor’s degree, economics, Chapman College, 1959
* Activities: Orangewood Children’s Foundation board of directors; fund-raising chairman, Center for Peace and Freedom at the Richard Nixon Library & Birthplace; World Affairs Council board of directors; executive director, Orange County Boy Scouts Council
* Personal: Married, three children
Source: Pacific Mutual Life Insurance, Irvine Co., Times reports
Researched by JANICE L. JONES / Los Angeles Times
