Casting Finances in Personal Terms Shows Magnitude of County’s Woes

Think of it this way: a couple who geared their lifestyle to an after-tax income of $46,300 a year suddenly find that they have to get by on $27,500.

Adding to their headache, they discover that they lack $38,200 needed to repay debts coming due this summer. Then there is a nasty lawsuit they have offered to settle for $25,500 they don’t have. Finally, they have to find a way to start paying off $92,400 in gambling debts.

If you think these folks have problems, just multiply their woes by 10,000 and you have a good idea of the trouble Orange County government is in. As county Chief Executive William Popejoy confidently states, the “quality of life will be impaired.”

Even if our hypothetical couple managed to reduce living expenses to zero, it would be years before they could dig themselves out of the economic hole they are in.

In fact, budget cuts alone cannot solve their problem.

Could they sell off assets to meet their obligations?

Well, the assets they might sell quickly are judged to be worth about $5,000. The only other windfall might come from a pending lawsuit. But the proceeds of that suit, which they might not win, have been pledged to settle some of the gambling debts.

Beginning to get the picture?

“A lot of people . . . are in a state of denial as to the magnitude of this problem. It is awesome,” said Irvine Co. Executive Vice President Gary Hunt, one of three business leaders who drafted Orange County’s plan to settle--for 77 cents on the dollar--with the cities and school districts that invested in the now-bankrupt Orange County investment pool.

Without an additional source of income, it is beginning to look less likely that Orange County can emerge from bankruptcy and get back on its feet.

A tax increase may, in fact, be inevitable.

Even if county government shut down completely--which it cannot legally do--that would free up only the $275 million in taxes and fees that support the portion of the county budget that can be cut. The balance of the county’s income, nearly $1.2 billion, comes from state and federal coffers with strings attached that prevent the county from spending the money except in certain ways.

Like everything else associated with the county’s bankruptcy filing, the largest by a governmental entity in U.S. history, the numbers producing the county’s budget predicament are immense.

Between what it lost in the investment pool (more than $500 million), its current and future debts ($1.5 billion), and its projected budget deficit ($188 million), the county has taken a hit of more than $2 billion--nearly $1,000 for every person in Orange County.

And all because the county made losing bets on the direction of interest rates, and then doubled and tripled the same foolish wagers in an effort to offset expected losses.

“Unfortunately, they lost their principal, and the note’s coming due,” said Paul Sachs, who heads the Arthur Andersen & Co. accounting team analyzing the county’s books.

If he were counseling our hypothetical couple, Sachs said, he would tell them: “Do the best you can to cut your expenses, try to refinance if you can, but you may have to go out and get an additional job. And if none of that works, you’ll probably have to go bankrupt.”

But the kind of relief that bankruptcy provides ordinary citizens, such as the opportunity to erase debts at a fraction of their value, is not available to the county. Because of the intermittent way that taxes and fees are collected, modern government must borrow money to keep operating in the periods between feast and famine.

Defaulting on the outstanding bonds the county has issued is not an option because of what that would do to the county’s credit ratings.

“If we default, any future borrowings will be at much higher interest rates,” said Popejoy, adding that inflated interest rates would be a form of hidden tax.

Orange County’s fiscal woes stem from the investment pool it operated, which suffered a $1.69-billion loss. The county estimates that its share of that loss was at least $510 million. The accounting firm Price Waterhouse, which is working for the 186 cities, schools and special districts with money in the pool, believes an additional $300 million of the losses should be borne by the county.

Its investment funds squandered, the county can no longer rely on interest income to supplement the $265 million in local taxes and fees it channels into its general fund. The loss of that interest income has spelled disaster for the county’s budget: Where planners penciled in $162 million in interest income this fiscal year, accountants are crossing their fingers for $10 million next year.

That is the main reason the county’s operating budget will not balance, and why Popejoy contemplates shrinking the county government work force of 15,000 by up to 2,000 employees. When the fiscal year starts July 1, Orange County will have $188 million less than it once expected.

That means no county department and few, if any, county services will escape unscathed. Even the once-untouchable budget of the Sheriff’s Department is certain to fall under the ax.

So far, many programs for the poor, sick and young have been slashed the most.

“The county’s most defenseless are going to be hurt the most,” said Supervisor William G. Steiner, the former director of the Orangewood Home for abused children.

But residents will also share the burden. Libraries will probably be closed, entrance fees for parks and beaches may be increased, and there are certain to be longer lines and delays for county services, from paying property tax bills to filing lawsuits.

“County government probably affects your life more than any other level of government,” board Chairman Gaddi H. Vasquez said, from the people who inspect the cleanliness of restaurants to those who make sure you get the gallon of gas you pay for. “People don’t realize what county government does.”

How far the cuts will go is still being contemplated by Popejoy, who is scheduled to unveil a detailed plan this week. Even if he proposes slashing 2,000 employees from the county payroll--as one of his confidential memos suggested last week--the $188-million deficit won’t be cured.

Officials have estimated that the sale of county land, other than the airport, might raise $51 million. Various estimates say John Wayne Airport may be worth $250 million to $500 million. But the county’s net proceeds from an airport sale or from borrowing against it--or even whether it could do either--remains to be seen.

For one thing, any proposed sale or mortgage might not be approved by the Federal Aviation Administration.