ORANGE COUNTY IN BANKRUPTCY : Popejoy Pleads to State Senators for Loan Guarantees : Hearing: CEO warns panel meeting in Irvine that without help, county will default on debts. His well-received pitch to skeptical legislators is undercut by Raabe’s refusal to testify.

Warning that Orange County will default on its debts this summer without state help, Chief Executive Officer William J. Popejoy made a personal plea to an admiring panel of state senators Friday, urging them to guarantee loans for the county.

“I don’t believe in the tooth fairy, but I do believe that we can, with your help, overcome the problems,” Popejoy told the legislators. “We’re not looking for a handout. We’re looking for a helping hand to get this thing behind us.”

Popejoy’s pitch to a special state Senate panel probing the county financial crisis was tarnished by the refusal of suspended county Assistant Treasurer Matthew Raabe to testify, increasing legislators’ suspicion of Raabe’s role in the improper management of the county’s failed investment fund.

His eyes downcast and nearly closed, Raabe refused to answer the lawmakers’ queries after receiving a standard warning that the panel would not grant him immunity from criminal prosecution.

“I do not choose to testify under these conditions,” said Raabe, who was flanked by two attorneys at a witness table in Irvine City Council chambers.

Legislators later said they were not surprised by Raabe’s decision, but noted that his silence hurt Orange County’s bid for help.

“After that? A bailout? Are you nuts?” an irate Sen. Tom Hayden (D-Santa Monica) said after Raabe’s abrupt exit. “He just reminded us of all the reasons not to bail this place out, after Popejoy did such a good job selling us.”

Earlier, Popejoy and county bankruptcy attorney Bruce Bennett warned lawmakers that the county could not climb out of what amounts to a $2-billion hole without state assistance and severe changes in how county government is run.

To pay back the $1 billion in bond debt due between June and August, the county needs the state to serve as “co-signer,” Popejoy said, by backing a loan the county would use to either pay off debt or put down as collateral on additional loans. And Bennett said the state could help by easing restrictions on the use of various county funds.

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But Popejoy cautioned that the state’s “helping hand” would not be risk free. Guaranteeing a loan “should . . . cost you nothing,” Popejoy told the panel. “(But) if something goes wrong it will cost you plenty.

“We know that you’re going to be criticized for bailing out Orange County--those fat, old rich cats who didn’t care until they got in trouble,” he added.

Before each of them spoke, the lawmakers lavished praise on Popejoy’s willingness to serve the county for nothing.

“This isn’t a very chivalrous era in which we live,” said state Sen. Quentin Kopp (I-San Francisco). “Your offer . . . emblematizes the Latin term, pro bono, . . . in the very best sense of the term.”

But despite their effusive admiration, the lawmakers reacted coolly to Popejoy’s request for aid.

State Sen. Rob Hurtt (R-Garden Grove) said lawmakers might be willing to guarantee a loan to Orange County if it were backed by county assets. But he cautioned that the state’s own budget woes might reduce its ability to help.

“I can’t imagine any entity out there that would say, ‘Yes, I will loan you money even though you’re bankrupt, as long as it’s guaranteed by another entity, which is also bankrupt,’ ” Hurtt quipped. “I say that a little bit tongue in cheek, but unfortunately, it’s closer to reality than most people understand.”

Kopp also was hesitant. “If I were asked to guarantee a private loan in these circumstances, I doubt that I would do it,” he said. “Now you’re asking all the taxpayers of California to guarantee a loan.”

A spokesman for Gov. Pete Wilson--who was in San Francisco Friday to deliver an upbeat message to members of the financial community attending a symposium sponsored by Moody’s Investors Service--said Orange County officials had yet to contact the governor’s office about details of a loan-guarantee proposal. Wilson continues to believe the state cannot offer much assistance to the beleaguered county, the spokesman said.

“The state is not in the position to bail out the county for bad investment decisions,” said Sean Walsh, the spokesman. “We expect the county to review its operations and make the tough cuts and decisions to get its budget in balance.” Popejoy’s pleas for help came as Standard & Poor’s bond rating agency announced it was “extremely skeptical” that Orange County could meet its debt obligations without state intervention, debt restructuring or a tax increase.

The agency said in a prepared statement that state intervention may not take place in time for the county to pay its summer debts.

“Several significant legislative, logistical, political and legal hurdles exist that must be overcome,” the agency said. “S & P has strong doubts Orange County will be able to meet its debt obligations on time and in full.”

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Popejoy suggested John Wayne Airport and the county’s landfills as potential collateral for loan guarantees to help the county meet its debt obligations. But Kopp indicated that he would be more likely to support the plan if there were cash collateral. Kopp also said he would prefer a short-term loan, for six to 18 months, to the five-year loan county officials have previously suggested.

“It would have to be something that was acceptable to you. . . . There are a number of things that we can and are working on to propose,” Popejoy said.

Popejoy’s calls for quick action were echoed Friday afternoon by two of the largest mutual funds that had purchased millions of dollars of Orange County bonds. Both firms told lawmakers that Wall Street will not be kind if Orange County defaults on its debt. They called for the state to step in and help oversee the county’s recovery process.

“Why would Franklin Templeton lend any money to the County of Orange again unless they feel there is a good plan in place?,” asked Tom Kenny, a portfolio manager for the Franklin Templeton Group of Funds in San Mateo.

When lawmakers questioned whether state oversight is needed now that Popejoy is the chief executive officer, Kenny pointed out that a recent bankruptcy court decision allowing Orange County to continue to refrain from setting aside money to pay off its notes caused shivers on Wall Street.

“The one thing that has happened has been enormously hostile to bondholders,” Kenny said.

During the daylong hearing before about 100 spectators--many of them bankers and lawyers involved in the recovery effort--the panel also heard bleak forecasts from the county’s creditors, investors and labor leaders.

Many of them took shots at Popejoy, who predicted in a Feb. 24 memo to the board that as many as 2,000 county employees could face layoffs when drastic budget cuts are announced next week.

Throughout the day, representatives of the county’s 18,000 employees raised concerns about the human toll of the budget cuts Popejoy is beginning to make.

“Let it be clear: the hounds of hell are running loose,” said John H. Sawyer, general manager of the Orange County Employees Assn., which represents nearly 70% of the county’s work force. “Fear and despair are rampant, jobs are at stake, families are destroyed.”

Popejoy agreed that the “hurt to the people (at the bottom) of our social economic ladder is going to be dramatic.” But he said he intended to make the cuts as humanely as possible and “there won’t be one big exodus.”

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John Nelson, assistant superintendent of the Orange County Department of Education, warned that under the county’s proposed recovery plan, local schools will take a $125-million loss--the equivalent, he said, of cutting 3,000 school jobs.

But in his testimony, Bennett, the county bankruptcy attorney, stressed that “the pool settlement deal is not what I would call a done deal. There remain significant differences.” Most pool participants, particularly schools, still hope to get back all the money they had invested. But the county has proposed giving schools just 90% and other pool participants 80%. Under that plan, both also would have to line up with other creditors to claim the remainder owed them.

Bennett painted a portrait of the complexity of the county’s financial problems, emphasizing that no single solution would work.

“Even if you cut the county cost portion by 28%, even if you cut it by 41%, you would not contribute a nickel to the $2-billion problem that the county has,” Bennett said.

That deficit consists of the county’s loss in the investment pool (more than $500 million), its current and future debts ($1.5 billion), and its projected budget deficit for the 1995-96 fiscal year ($188 million).

The lawmakers also asked Bennett whether bankruptcy was the appropriate solution to the county’s crisis. “Usually, bankruptcy comes after everything else is eliminated. This seemed to come first,” Killea said pointedly.

“Bankruptcy filings are an absolute last resort,” said Bennett, recounting the evolution of the county’s decision to declare what became the largest municipal bankruptcy in history Dec. 6. “All of the other options that the county was considering had failed for one reason or another by the time I arrived.”

Hayden said both he and Kopp feel there needs to be several changes--including an outright ban on the use of derivatives--in the way municipal investments are made to prevent future cities and counties from getting into trouble. Derivatives are financial instruments, such as futures or options, whose worth is tied to the value of an underlying stock, bond, commodity or financial index.

But Popejoy said it was leverage, not derivatives, that got the county in trouble.

“Derivatives are sort of like electricity,” Popejoy said. “They can light up the world, or they can electrocute you. In this case, the people didn’t know what they were doing and they got electrocuted.”

At the start of the hearing, the fourth into the fiscal crisis, Kopp reiterated his accusation that Santa Monica financier Jeffrey Leifer, who served as financial adviser for many Orange County bond deals, had lied to the panel in January.

Kopp demanded that Leifer be called to the committee’s next hearing, at the end of March, and said he would ask the Sacramento County district attorney’s office to pursue a criminal investigation against Leifer for perjury.

Neither Leifer nor his attorney, David Siegel, could be reached for comment Friday.

“Mr. Leifer testified on Jan. 17, under oath . . . that he was not a financial adviser to Orange County or to the Orange County Transportation Authority,” Kopp said. “I have reason to believe . . . that Mr. Leifer was not telling the truth.”

Kopp said he had documents from OCTA showing that Leifer provided general financial advice to the authority.

Times staff writers Martin Miller, Lee Romney, Debora Vrana and correspondent Shelby Grad contributed to this report.

More Coverage: O.C. in Bankruptcy

* TESTY EXCHANGES--John M.W. Moorlach gives state senators an earful of criticism. A14

* CLAMPDOWN--CEO William J. Popejoy tells department heads not to publicly discuss the crisis. A16

* OFFICE CUTBACKS--Supervisor William G. Steiner pledges to cut his own salary 10%. A17

* TAPPING PENSION?--The county might try to use a pension surplus to ease its fiscal crisis. A18

* MORE STORIES: A14, A16-18