ORANGE COUNTY IN BANKRUPTCY : County Can Spend Funds Marked to Repay Tax Notes

U.S. Bankruptcy Judge John E. Ryan ruled Thursday that the county need not set aside tens of millions of dollars to pay off certain bondholders, freeing officials to use the money to keep the county afloat through the summer.

County bankruptcy attorney Bruce Bennett said the ruling substantially shrinks the gaping $172-million budget shortfall that the county would have faced had it been required to set aside property tax revenue to pay the debt.

“Now we’ll get through June 30 with enough cash to pay the bills,” said Bennett, who warned in court that the county would otherwise “start bouncing checks.”

At issue is $169 million worth of tax revenue anticipation notes, which most local governments rely on yearly for a steady flow of income. Property tax revenue is then set aside throughout the year in order to pay off the notes in the summer.

But the county successfully argued that the unprecedented Dec. 6 bankruptcy voided any obligation to put that money aside. Payments that the county was supposed to make between last December and July, when the notes come due, total more than $132 million.

Attorneys representing bondholders said Ryan’s ruling would send a chill through the financial markets.

“These bondholders took the county on good faith and purchased these bonds to help with some infrastructure of the county,” attorney Clarisse W.J. Young told the court.

Hugo Quackenbush, a senior vice president of Charles Schwab in San Francisco, which owns $41.5 million in other Orange County bonds, characterized the development as “another sad day in municipal finance.”

“It is absolutely vital that they set aside that money, if they’re ever going to want to go into the bond market again,” he said. “The county’s performance to date raises serious issues of credibility.”

Tax revenue anticipation notes are rated with the understanding that a regular stream of money will be set aside throughout the year in order to pay them off. The fact that a bankruptcy filing can undermine that is unsettling, said Barbara Flickinger, manager and assistant director of Moody’s Investors Service.

“It does undermine something that was a very strong feature for California notes,” she said.

Flickinger said it also raises the prospect of possible default when the notes mature in July and no money has been set aside to pay them off.

“This is a really big chunk of money they have to come up with,” she said. “It’s like paying for your house in cash, instead of making mortgage payments.”

County officials have said they are working on a plan to avoid default and simply do not have the money to set aside payments and maintain county services at the same time.

In another matter, Ryan heard from three water districts and five cities--including Anaheim and Huntington Beach--which asked the judge to let them out of the bankruptcy action so they can sue the county in state court.

Ryan continued the matter to March 30 while the disenchanted agencies meet with representatives of the committee representing all the investors with money in the collapsed county investment pool.

In court, attorneys for the increasingly restless agencies contended that they were being deliberately kept in the dark about the “secret” negotiations of the committee representing the pool investors.

“We appreciate that you may not be able to have 200 bodies at the table,” said Ronald Rus, the attorney for the water districts. But, he added, “they don’t share with us and what they do share is inconsistent.”

Both Patrick Shea, the pool’s attorney, and county bankruptcy attorney Bennett said all the information available has been shared. They described the difficulty that two large accounting firms have had trying to unravel the tangled investment accounts of former county Treasurer-Tax Collector Robert L. Citron.

A “copious account-by-account review” is still in progress, Bennett said.

The agencies asked Ryan to deny a motion to continue the hearing while the county and the pool participants try to reach a negotiated settlement. The settlement would essentially be a final version of an earlier announced proposal that promises an immediate 77 cents on the dollar to pool investors and offers the rest in notes and IOUs.

After Shea agreed to meet with Rus and representatives of the other agencies, Ryan ordered the matter continued.

How much longer individual agencies will remain content to seek a negotiated rather than a litigated settlement, however, remains to be seen.

“I certainly have heard in the pool participants’ meetings that I’ve attended unhappiness at the lack of information and the lack of explanation for how the proposed plan adjustment was arrived at,” said Bernard Schneider, attorney for the city of Anaheim and the Anaheim Redevelopment Agency.

Contributing to the ill feelings, Schneider added, is the perception that the pool’s negotiating committee is “heavily loaded with representatives of entities which have been historically closely allied with the county.”