ORANGE COUNTY IN BANKRUPTCY : Summit on Staving Off Schools’ Insolvency Set

Officials considering a variety of ways the state can help with Orange County’s financial crisis are scheduled to meet Wednesday to hammer out the details of a plan designed to save local schools from insolvency.

Lawmakers have insisted that a handout from Sacramento is out of the question. Instead, representatives from the state Department of Finance and other agencies are looking at ways the state could guarantee county loans.

But legal, budgetary and political hurdles may block the way.

County bankruptcy attorney Bruce Bennett said Friday that “the problem we have to solve is getting enough money to the schools,” and that he is looking at many options that would do that.

“There are a number of statutory and constitutional hurdles,” Bennett said. “If things work out, none of the approaches will require any state commitment of funds. But there’s no doubt that there will be potential exposure for many of them.”

Bennett and others said Friday that the loan guarantees Chief Executive Officer William J. Popejoy has been requesting for the past few weeks are impossible under the state Constitution. Instead, county officials are hoping to find a different legal format that would accomplish the same goal as a guarantee.

Popejoy said Friday he wants the county to try to solve the problem with its own money.

“I’m not particularly interested in the state loaning us money directly,” Popejoy said. “If they can guarantee a loan, then we can pay it back ourselves. We have not asked for the state to give us money.”

Schools had invested about $1 billion in the county’s portfolio, which suffered a 23% loss last year, triggering the county’s bankruptcy filing.

At issue in the negotiations with the state are $132 million to $150 million in recovery notes that the county has promised the schools as part of a proposed bankruptcy settlement. Under the terms of that deal, schools would receive 13% of what they had in the pool in recovery notes payable over 15 years.

In offering the deal last month, county officials said the recovery notes “were as good as gold, cash equivalents,” according to Jon Schotz of Saybrook Capital Corp., financial advisers to the participants in the county’s pool.

Bennett reiterated that Friday, saying: “We’ve got to find a way that the recovery notes can be turned into cash for the schools that need cash.”

One option, Bennett said, would be a “standby purchase commitment,” in which the state would promise to buy the recovery notes from the schools if the schools couldn’t find a buyer for them on the market. Another idea would be for the state to buy the recovery notes from whichever school districts needed the cash soonest, leaving the county owing the state rather than the schools.

County officials said they would likely offer John Wayne Airport as collateral.

Maureen DiMarco, the state’s secretary for child welfare and education, said that even if the recovery notes were turned to cash, some schools would still be unable to function without the final 10% of their investment in the pool, which the county has promised to reimburse in the form of an unsecured note that would be paid over an unspecified period.

“The big problem for school districts is they can’t put a hope note down in their books as money they have coming,” DiMarco said. “That would push them into insolvency.”

County officials will meet Wednesday with representatives from the state Department of Finance, the state treasurer’s office and the California Debt Advisory Commission to discuss the recovery notes.

Paul S. Nussbaum, the Orange County banker assisting Popejoy, said the county and state officials have examined “a menu of options” which the state officials are now analyzing.

“There are a lot of different ways to accomplish this transaction,” he said. “We basically put it back into the lap of the state officials for them to let us know what are the accounting ramifications and the statutory ramifications of various options.

“And then, what are the political ramifications?” Nussbaum asked. “What is politically palatable and what is not palatable?”

For Assemblyman Richard Katz (D-Sylmar), that’s a high threshold.

“I think we only step in on schools if Orange County has exhausted everything else,” Katz said. “To step in before they’ve fired everybody they can fire or made all the cuts they can or raised taxes simply lets them off the hook for their bad decisions.”