Popejoy Says County Needs Loans From State : Bankruptcy: CEO says ‘cruel, harsh cuts’ in personnel, services might not be enough to avoid substantial deficit.
In a grim but comprehensive overview of Orange County’s finances, Chief Executive Officer William J. Popejoy told the Board of Supervisors Tuesday that the county should seek short-term loans backed by the state although he acknowledged they would likely be criticized “as a bailout.”
Popejoy warned that even “cruel, harsh cuts” in personnel and services, which he believes the supervisors must enact, may not prevent the county from operating at a substantial budget deficit next fiscal year.
At his first supervisors meeting since taking the job Feb. 10, Popejoy also unveiled an ambitious 30-day timetable for outlining service cuts and layoffs, proposing a 1995-96 budget and developing a scheme to pay off the more than $1 billion in county debts that come due this summer.
In a 30-minute presentation addressed as much to the public as the supervisors, Popejoy said the county should seek short-term loans from the state, offering county assets as collateral.
“It will be very controversial,” Popejoy continued. “The politicians up there will jump all over us and say, ‘This is a bailout.’ But if the U.S. government can bail out Chrysler . . . I think Sacramento can think about helping us.”
Popejoy noted that 400,000 investors throughout California hold Orange County bonds.
After the meeting, Popejoy added: “We’re not asking them for any money, we’re suggesting that thought should be given to having bonds issued by us. They should be collateralized to the state’s satisfaction by our assets but backstopped by the state so we can get the best credit rating and the lowest rates.
“Some will view this as a bailout, but at the end of the day, it won’t cost the state a penny and it could very well head off problems with many, many other municipalities in the state.”
Speaking before an overflow, often hostile crowd of more than 300 people, Popejoy told the supervisors that the county’s financial situation “is much worse than I expected.”
Despite massive cuts, Popejoy said, it may be impossible for the county to balance the 1995-96 budget, whose general fund already is expected to lose as much as $188 million in revenue, primarily from interest income, as a result of the financial disaster.
He outlined three goals he hopes to reach as he leads the county recovery from the largest municipal bankruptcy in U.S. history. First, Popejoy said, he will propose a drastically scaled-back budget for next fiscal year, which starts July 1. Second, he will try to reach a settlement with participants in the county’s investment pool on how to spread the $1.69-billion loss suffered by investors. And third, he will devise a plan to finance the $1.001 billion in bond debts due by Aug. 10.
“All three problems must be addressed,” Popejoy said.
Without identifying it, Popejoy told reporters before the meeting that he has selected at least one county asset that could be sold. He also hinted that he may try to negotiate a settlement of the county’s $2.4-billion lawsuit against financial giant Merrill Lynch to help the county meet its debt payments and avoid default this summer.
Though he offered few details, the outline of Popejoy’s recovery plan includes selling county assets, privatizing services, recovering money through lawsuits against Wall Street firms, slashing the county budget and obtaining exemptions from state and federal mandates.
“I will move forward aggressively on all of these fronts,” he said.
In a separate, afternoon meeting with the editorial board of The Times’ Orange County edition, members of the Orange County Business Council provided a bleaker assessment of county finances.
“After all the dust settles,” said Irvine Co. Executive Vice President Gary Hunt, the county’s toll of current and future debts, investment losses, and operating deficits will exceed $2 billion.
“When you see those types of the numbers, the hole is so deep it forces you to look at every one of these alternatives,” Hunt said, in reference to privatizing government services, selling assets and making deep cuts.
“You’ve got a $180-million shortfall in their operating budget, of which they’re going to be able to realize about $30 (million) to $40 million net reduction in this fiscal year,” he added.
Unmentioned in Popejoy’s recovery plan was any suggestion of a tax increase. He said the option is not currently being considered because the Board of Supervisors adamantly opposes it.
Popejoy also provided few details on possible layoffs. Currently, the county employs about 15,000 workers, but more than two-thirds of them are paid with state and federal dollars. Cutting those jobs won’t significantly reduce the county’s budget shortfall, he said.
As an example, Popejoy said, the county spends about $177,000 to administer a drug program that receives $12 million in federal funding.
Popejoy said most of the layoffs he will propose will come from the 4,500 employees whose salaries are paid by county revenue. Social services are expected to take the biggest hits, county officials have said.
In laying out a timetable for the county’s recovery from the financial crisis, the new chief executive said: “Please take these dates down and hold us to them.”
On next Tuesday, Popejoy said, he will recommend specific budgets cuts and proposed layoffs. By March 9, he will reveal proposed asset sales and privatization efforts. On March 14, he will enumerate legislative and rule changes necessary to win the county exemptions from federal and state mandates.
On March 16, Popejoy said, he will announce the status of litigation “against the bad guys” who caused the county’s fiscal nightmare. By March 21, he will announce his proposal to reorganize county government.
Finally, on March 28, Popejoy said, he would submit his plan to finance the $1-billion bond debt coming due and the county’s proposal to repay pool investors.
Throughout the budget-cutting process, public health and safety will remain priorities, but county residents can expect a much leaner government that will offer fewer services, Popejoy said. County employees who don’t lose their jobs can expect greater workloads and reduced benefits.
“There will be howls of protest,” Popejoy said at an afternoon briefing for reporters.
Popejoy added that he wants to implement the cuts over the next three months, before the next fiscal year begins. But some of the cuts might be made immediately, he said.
“We would like to do it as orderly and humanely as possible, but they won’t be orderly and they won’t be humane,” Popejoy said of the cuts.
Although he expects severe reductions in services and personnel, Popejoy acknowledged that mere cuts alone may not cover the $188-million revenue loss.
“If we simply can’t get down (that far), then we’ll proceed with a deficit and figure out some other way,” Popejoy conceded at the press briefing.
Although a balanced budget is mandated by state law, a shortfall could be carried over as long as there is a plan to make up the gap in following years, Popejoy said.
A greater concern, Popejoy said, is covering more than $1 billion in bond debt payable by Aug. 10. Currently, he said, the county is about $382 million short of being able to repay principal and interest due.
He said the consequences of defaulting would “be immense” because “the taint, the scar will last for a long time.
“A default would destroy our ability to finance schools, roads, and other facilities,” he said. “It’s just like defaulting on a home mortgage. Who will lend you money to buy another home?”
Tuesday’s supervisors meeting followed a candlelight vigil outside the Hall of Administration that drew about 70 teachers, parents and students. Chanting “No IOUs!” protesters demanded the supervisors return 100% of the $800 million school districts had invested in the ill-fated county pool.
Inside the meeting, Popejoy faced an equally angry crowed, more than 50 of whom asked to speak to the board.
“Tell me how we can exist with less money,” said Dave Reger, president of the teachers union for the Orange Unified School District. “We must get 100% back and get it back soon.”
“I don’t mind paying more taxes if it will spare the pain to the kids, the sick and the elderly,” Reger continued. “Sometimes I wonder if you have ice water in your veins,” he said to the supervisors.
Addressing county employees directly, Popejoy asked: “‘Will we come together or will we fight each other? I need your help or nothing will be accomplished.”
Times staff writer Martin Miller contributed to this report.
More Coverage: O.C. in Bankruptcy
* BUDGET PLEA--Social workers ask county not to cut money for programs for abused children. A10
* BIAS ACCUSATION--A county official is fighting her demotion on grounds of discrimination. A11
* SCHOOL CUTS--Newport-Mesa Unified board recommends $3 million in possible reductions. B1
* RELATED STORIES: A11-12, D1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Shape of Things to Come
Even after cutting personnel and services, Orange County may face a budget deficit that will be carried into the next fiscal year, which begins July 1. The county is also $382 million short of the money it needs to repay principal and interest on $1 billion in debt due by Aug. 10. Amounts in millions:
Budgeted Estimated revenue revenue Source 1994-95 1995-96 Property taxes $118 $121 Motor vehicle fees 97 101 Fund balance available 55 15 Interest earnings 162 10 Sales tax 17 18 Other 14 10 Total $463 $275
***
SHORT-TERM DEBT MATURITY
Due Principal/ Cash Issue date interest due available Delinquent property tax June 30 $179 $109 (Teeter) notes Taxable notes July 10 613 481 County cash flow notes-Series A July 19 177 29 County cash flow notes-Series B Aug. 10 32 0 Total $1,001 $619
Net Issue deficiency Delinquent property tax $70 (Teeter) notes Taxable notes 132 County cash flow notes-Series A 148 County cash flow notes-Series B 32 Total $382
Source: Arthur Andersen & Co.
