Popejoy Proposes Tax Increase : Recovery: CEO asks board to let O.C. voters decide on half-cent sales levy over 10 years. Revenue would finance $700 million in new bonds but wouldn’t eliminate cuts.

Convinced that Orange County has exhausted all other financial options for digging out of its unprecedented bankruptcy, Chief Executive Officer William J. Popejoy unveiled a controversial proposal Wednesday to increase the county’s sales tax by a half-cent.

Despite county supervisors’ unanimous opposition to any tax increase, Popejoy asked them to decide within 13 days whether to put the issue before voters in a special election June 27. The measure would require approval by a simple majority of county voters.

Revenue from a tax increase, which would raise the county’s sales tax rate to 8.25%, would go into the county’s general fund. The tax would expire after 10 years.

“I have carefully examined all of our options during the last month and I have concluded that a half-cent increase in the sales tax is a necessary component of a successful bankruptcy recovery plan,” Popejoy wrote in a news release.

Although tax increases run contrary to the fiscally conservative image of Orange County residents, there has been growing support in recent weeks for such a move, especially if the revenue is devoted to public schools. Some state legislators have urged supervisors to explore raising taxes before asking Sacramento to aid the county, which on Dec. 6 declared the largest municipal bankruptcy in U.S. history.

“This is facing reality,” said Connie Haddad, president of the Orange County League of Women Voters. “A sales tax is regressive. However, in an imperfect world, we have imperfect choices.”

Paul Nussbaum, a Wells Fargo Bank executive who is assisting Popejoy in the recovery effort, said the new tax would go toward paying off bondholders and cities, school districts and other agencies that lost money when the county’s investment pool collapsed. “It would not be used to mitigate the budget cuts,” he said. County supervisors said Wednesday that they are still opposed to raising taxes, but some indicated they might be willing to let the voters decide the issue. Approval of four of the five county supervisors is required to place the measure on the ballot. The board is tentatively scheduled to decide the issue March 28.

“I don’t think there is any question that we have a gap that we can’t fill and I think we have to look at all the alternatives,” Supervisor Marian Bergeson acknowledged Wednesday. “I think the public is ultimately going to be placed in the position where they are going to have to make that decision.”

Supervisor William G. Steiner said, however, that he is still not convinced that all the county’s options have been fully examined.

“I wouldn’t give my vote until we exhausted all the other alternatives and it received support from locally elected school board members, city councils and community organizations,” Steiner said.

Board Chairman Gaddi H. Vasquez agreed with Steiner.

“The commitment of this board has been to evaluate and make decisions after we have evaluated all of our options. That has not yet been done,” Vasquez said. He said he has not decided whether he would support putting the issue before the voters.

Supervisors Roger R. Stanton and Jim Silva could not be reached for comment Wednesday.

But state Sen. Quentin L. Kopp (I-San Francisco), a member of a Senate committee looking into the county’s financial debacle, was enthusiastic about Popejoy’s announcement. Kopp said the tax increase--if embraced by supervisors and the voters--would open doors in Sacramento and on Wall Street.

“It is fiscally responsible,” Kopp said. “It will generate the confidence of potential lenders. It will generate sympathy and the approbation of most legislators, and it will improve the ability of Orange County to secure legislative and gubernatorial assistance.”

County officials estimate that a half-cent increase in the county’s 7.75% sales tax would raise about $135 million annually. Popejoy said the tax, collected over a 10-year period, could be used to back about $700 million in new borrowing.

Those bonds could be used to help refinance the county’s debt, including more than $1 billion in bond payments due this summer.

If a sales tax were approved, Orange County would become one of seven California counties with a sales tax rate of 8.25%. In 1993, sales taxes per capita in Orange County averaged $807; an increase would generate another $52 per person, according to the state Department of Finance.

On the same day that Popejoy released his proposal, a new poll released by the San Francisco-based Field Research Corp. showed that county voters are reluctantly coming to the conclusion that a sales tax is necessary to pull government out of bankruptcy, especially if the levy is limited to no more than two years and is dedicated to either public schools or law enforcement.

In a Times Orange County poll published Jan. 28, 53% of county residents said they favored a tax increase if it was earmarked to help bail out schools, but 45% opposed it.

Popejoy has repeatedly termed tax increases “a last resort” that should be considered only when the county has explored all other ways to recover from bankruptcy.

Last week, Popejoy proposed eliminating more than 1,600 county jobs--1,040 of them by layoffs--announced a list of county properties to be put up for sale and offered a list of county services that could be turned over to the private sector.

But all of those initiatives will not save or raise enough money to pay $1 billion in county bond debt that comes due by Aug. 10, or fully repay the nearly 200 cities, schools and special districts that, together with the county, lost nearly $1.7 billion when the county’s investment pool collapsed late last year.

With the prospect of state assistance growing dimmer by the day, Popejoy said he was left with no options but to propose a tax increase.

“This bankruptcy crisis is an Orange County problem and demands an Orange County solution,” Popejoy said. In addition, Popejoy proposed increasing fees at county dumps and accepting trash from neighboring counties, the latter a controversial idea. He did not estimate how much revenue those moves might raise.

Popejoy’s announcement Wednesday drew mixed reviews from a wide range of interest groups that have been tracking the county’s recovery effort. The tax issue has already divided conservatives: Many business leaders support taxes as a necessary part of the county’s recovery, but many community activists adamantly oppose them.

“This is going pit the elite development community in this county against the average taxpayer,” said Mark P. Petracca, a UC Irvine political science professor. “We are finally going to see who is going win that fight.”

Todd Nicholson, president of the Orange County Business Council, said he was not surprised by Popejoy’s announcement.

“The idea of an increase in sales taxes is not an attractive one to business,” Nicholson said. “But with the situation we are in now, we may not have a choice. There just might not be a logical alternative, or a practical one.”

But Bruce Whitaker, a leader of the Committees of Correspondence, a vocal anti-tax group, said his organization would strongly oppose the tax increase. He expressed dismay that Popejoy would consider the idea.

“We think any effort to have voters approve a tax increase would fail miserably,” Whitaker said. “This is not an option. I believe no matter how they package it, (a tax increase measure) would fail.”

Sellers of big-ticket items in Orange County said the proposed tax increase can do nothing but hurt business.

“It’s not the fault of the people of the county that the supervisors blew it. They should cut their paychecks in half and do it that way,” said David Longridge, new-car sales manager at Anaheim Mazda Pontiac Buick.

Fear of layoffs and higher interest rates, Longridge said, have combined to hurt car sales anyway. “Now to jack the (sales tax) rate in Orange County because of mistakes, gambling, it’s unfair,” he said. “It definitely won’t help.”

The proposal to seek a sales tax increase was greeted most warmly by public school advocates, government workers and some business leaders.

“It’s a positive move,” said Wally Kreutzen, executive vice president of finance for the Transportation Corridor Agencies. “It will give the people of this county an opportunity to say whether they want to keep their level of services.”

Added Tobye Lovelace, spokeswoman for the 11,000-member Orange County Employees Assn.: “We’ve been pushing for bringing revenue into the county. It’s long-awaited and we think it was inevitable.

“It’s absolutely needed to get the county back on its feet and preserve the services and quality of life that Orange County residents enjoy,” Lovelace added. “We also hope that this will eliminate the need for such severe layoffs.”

John Smith, head of an education activist group called the Good News Coalition, praised Popejoy for proposing the ballot measure.

“I believe that slowly but surely, the enormity of the problem is being impressed upon people,” he said. “They are concluding that we can’t get out of this without taxes.”

Smith said a portion of the tax revenue should be earmarked for schools, concurring with poll data that the tax might have a better chance of passing if schools were to benefit.

The county is currently proposing to make cash payments of 77 cents on each dollar the school districts had invested in the county pool, with another 13 cents per dollar to be repaid in so-called recovery notes and the final 10 cents per dollar in notes that would be made good after other county creditors are repaid.

Smith said revenue from a tax increase should be used to “make the schools whole. Education is important enough.”

State Sen. Lucy Killea (I-San Diego), who has proposed legislation to put the county’s financial affairs under a trustee, applauded news of Popejoy’s proposal but said a sales tax increase remains “just one piece of the solution.”

“They still haven’t come up with an overall plan to plug all the holes. They need to do all the options available to them before they can feel they’re going to make it through the summer.”

Killea also said that Orange County will probably need a loan or other financial help from the state, but that such aid will remain contingent on county leaders accepting oversight from a state-appointed trustee. On Wednesday, a Senate committee--saying county leaders had failed miserably--took steps toward toughening Killea’s trusteeship proposal.

Times staff writers Eric Bailey, Don Lee, Mark Platte, Lee Romney, Chris Woodyard and Greg Hernandez contributed to this report.

More Coverage: O.C. in Bankruptcy

* BROKERAGE SUED--Huntington Beach has sued Merrill Lynch over its role in the county fiscal crisis and has asked other cities to join in. A20

* TAX HIKE?--County voters would support a temporary bump in the sales tax to support schools or police, a survey shows. A26

* BLASTED AGAIN--Embattled Auditor-Controller Steve E. Lewis came under new attack during a hearing on budget cuts. A27

* COVERAGE: A20-28