Pressure Builds for State Trustee Takeover in O.C.

To get a glimpse at its financial future, bankrupt Orange County might take a look at Philadelphia’s troubled financial past.

In 1991, the City of Brotherly Love tried to market $50 million in short-term notes to skirt insolvency. Wary investors boycotted the sale, sending the price Philadelphia paid skyrocketing 330% above market rates. The city only survived after the state installed a special assistance authority that took over fiscal affairs, gained the confidence of Wall Street and got recovery loans at market rates.

Facing similar circumstances, Orange County is now getting pressure from Wall Street and Sacramento to let the state of California step in and run the show. A bill that would strip the Board of Supervisors of its fiscal responsibilities and set up a special Orange County Assistance Authority headed by the state treasurer goes up for its first committee test on Wednesday.

The measure, authored by Sen. Lucy Killea (I-San Diego), has already gotten a good response in the Capitol, most notably from Democrats appalled by Orange County’s handling of the crisis. Assembly Speaker Willie Brown has repeatedly called for a state takeover, although he prefers a single, all-powerful trustee to shepherd the county through its crisis.

Perhaps most importantly, the mood on Wall Street appears solidly in favor of having the state oversee the county’s recovery efforts.

“The single most important thing that has to happen before Wall Street will buy Orange County recovery bonds is to have some other entity step in that’s viewed as independent, separate and clearly removed from the County of Orange,” said Richard Larkin, a managing director of Standard & Poor’s, a Wall Street rating agency.

The proposal hasn’t exactly been embraced by Orange County elected leaders, who fear the erosion of their vested powers.

“I don’t know what a trustee would add to this,” Supervisor Marian Bergeson said. “I just don’t understand how somebody from Sacramento who has not lived with the problem as we have here can come in and wave a magic wand and think they can tell us how better to deal with the situation.”

Board of Supervisors Chairman Gaddi H. Vasquez said he hoped county officials could help ease Killea’s concerns without appointing a trustee.

“We’re working as hard and as best as we can to address the problems and the challenges that we’re facing here,” Vasquez said. “We are doing everything we can to deal with the problems on a local level.”

As now drafted, Killea’s bill would give the supervisors until April 22 to form the Orange County Assistance Authority. After that, the proposal would be put before the county’s voters in an election June 6.

The authority would assume the supervisors’ financial responsibilities and tackle the crisis. It would be manned by state Treasurer Matt Fong, two members appointed by the governor, as well as three Orange County representatives drawn from the cities, the schools and the Board of Supervisors.

In attacking the county’s vast budgetary problems and $1.7-billion investment loss, the authority would be able to sell bonds and draw on state revenue for loans.

Legislative analysts have spotted a few pitfalls with the measure. An analysis prepared for the Senate Local Government Committee, which will consider the bill Wednesday, suggests it could run afoul of state constitutional provisions requiring a two-thirds vote before a county incurs multiyear debt.

The same report calls the June 6 election on the authority’s fate an attempt at creating the “illusion” of local control. “If the debt markets and state leaders are convinced of the need for direct intervention,” the report suggests, “the Legislature should create the Authority instead of pretending to share the decision with Orange County.”

Killea, who co-chairs the state Senate Special Committee on Local Government Investments, suggests the proposal has a good shot, but continued to hold out hope that Orange County leaders would produce a financial plan in the next few weeks that might eliminate any need for an assistance authority.

“If they show they can close the gap without a lot of help, maybe that’s something that won’t require a lot of state oversight,” she said.

But on Wall Street, the mood isn’t so patient. Municipal fund managers have consistently been pushing for both a tax increase and a state-controlled assistance authority. State takeovers are common in recent years. New York City got help from the state in the mid-1970s. Since then, cities such as Washington and Philadelphia have followed suit.

Orange County is different, most notably because it went an extra step and declared bankruptcy. “The single worst message Orange County sent to Wall Street was filing for bankruptcy,” Larkin said. “The message they sent was they were looking for a way to not pay their debts.”

Since then, the county has hardly performed admirably in the eyes of bond buyers. “It seems like people down there are in a consistent state of denial,” said Thomas Kenny, San Francisco-based municipal bond director for the Franklin Templeton Group of Funds. “Here we are, three months into the process, and we still don’t have a firm idea what their plan is.”

* D.C. RECOVERY: Republicans see District of Columbia as a proving ground. A3

* ROUGH RECEPTION: O.C. Chamber of Commerce lobbies Sacramento. A24