Creditors Unveil Plan to Rescue Orange County : Bankruptcy: Proposal would tap growth in property taxes to pay off debt.

Orange County’s creditors unveiled an ambitious plan Tuesday to establish a countywide borrowing authority that would use future growth in property taxes to pay off a proposed $1.5 billion in new county debt.

The plan also includes a quarter-cent sales tax hike whose proceeds would go to county schools.

The proposal, by the official committee of creditors in the county’s bankruptcy proceedings, is scheduled to be presented today to William J. Popejoy, the county’s chief executive officer.

The plan is modeled after a state law governing redevelopment agencies, which sell bonds that are reinvested in specific communities. It would create a new authority that would divert a portion of the county’s future property tax revenues to secure new bond issues. In turn, revenue from the new bond sales would be used to pay off the county’s existing debt and to repay the losses of participants in the county’s collapsed investment pool.

“Property taxes will not go up as a result of this,” said Cathy Bando, an investment banker with Sutro & Co., adviser to the creditors committee. “What this means is that local government in the region will have to tighten their belts to the tune of 2% a year.”

The unique county-wide authority would require state legislation.

County officials have not yet scrutinized the plan, but supporters are hoping the proposal will find favor with anti-tax voters, because it would spare homeowners higher property taxes. However, the state, special districts and schools may oppose the proposal, because the growth in property tax revenues on which they depend instead would be earmarked to pay off county debt, Bando said.

“That’s going to be a hard sell,” said Dean Misczynski, director of the Senate Office of Research in Sacramento, who is helping draft a variety of bills related to the county’s efforts to recover from the biggest municipal bankruptcy in U.S. history.

Some business leaders and county advisers were also skeptical of the plan.

“I think it’s mission impossible,” said Walter Hahn, a partner with the Newport Beach office of Kenneth Leventhal & Co., a major accounting firm. “There’s too many people who get a piece of these taxes. Nobody is going to approve of it.”

Bill Carlson, executive director of the California Redevelopment Assn. in Sacramento, said a new borrowing authority could hamper local governments’ ability to raise money by precluding creation of other redevelopment zones.

Still, other experts said the experiment might work.

“This is a unique proposal, but Orange County is a unique situation,” said Joe Coomes a Sacramento lawyer who specializes in redevelopment law.

Under the plan, 2% of future property tax growth would be earmarked to repay new bonded debt over six years. If the value of county properties does not increase annually, existing property tax revenue could be tapped, Bando said.

The quarter-cent sales tax increase would offset $20 million in property tax growth that otherwise would have gone to Orange County school districts in the first year of the six-year timetable. That amount could increase each year, up to $120 million in the sixth year.

According to proponents, the average annual growth of Orange county’s assessed valuation during the past decade has been 7.4%, though values declined 4% last year.

Several times, local governments in the state have attempted to use the redevelopment law for creative fund raising. In 1992, officials in Hemet attempted to form a redevelopment area covering most of the town and to use the incremental growth in property tax revenues for schools, but their plans were thwarted by state legal action.