O.C. Seeks Rollover of Short-Term Debts : Bankruptcy: Proposed one-year deferment for $1.275 billion due this summer draws criticism from bondholders.

In their latest gambit to ease an intensifying cash crunch, Orange County officials Thursday laid out a proposal to unilaterally extend for one year--at existing interest rates--$1.275 billion in short-term county and school debt due this summer.

But representatives of bondholder groups disputed the need for the so-called rollover and said that without the promise of a higher interest payout the proposal almost certainly would be rejected by most bondholders.

County officials described the plan, which was presented late Wednesday to the county’s creditor committee, as a maneuver to buy time for new revenues to fill the gap caused by the county’s $1.7-billion investment fiasco.

“It’s just an interim step,” said Paul S. Nussbaum, deputy to county Chief Executive Officer William J. Popejoy. “It’s not a solution by any means. It’s just a step to allow for . . . other revenue sources to kick in.”

Among those revenue sources is the half-cent increase in the county’s sales tax that Popejoy proposed Wednesday--his first acknowledgment that a tax increase might be necessary to close the county’s budget gap.

Popejoy floated the latest proposal even as obstacles arose to some of his other initiatives to balance the county budget and drum up short-term assistance.

For one thing, the Board of Supervisors on Thursday balked at the stringency of a 25% budget cut he had proposed for the county Social Services Agency.

“This is either a wish list or a death threat,” Supervisor Marian Bergeson said of a proposal that would pare 725 staff members from the agency. “It’s completely unrealistic.”

Supervisor William G. Steiner warned Popejoy he would not support the tax increase if the agency--responsible for welfare, child abuse and other programs--was to absorb the brunt of the county’s budget cuts and layoffs.

“Some departments have not even broken a sweat,” Steiner said.

Meanwhile, Gov. Pete Wilson, in his first appearance in the county since its Dec. 6 bankruptcy petition, shied away from any promise of state aid, arguing that solutions to the crisis must be “a local decision.”

But he also cautioned county leaders against even considering defaulting on the county’s debt.

“Make certain that you stabilize the situation and you do not default,” Wilson said in a speech to about 600 business leaders at the Newport Beach Marriott. “Orange County must maintain its credit and its credibility.”

As for the plan to roll over the short-term notes for another year, Bruce Bennett, the county’s bankruptcy attorney, said individual bondholders would have the right to accept the proposal or insist on their bonds being redeemed on the original maturity dates.

“People who understand the issues, I think, will participate” in the extension, Bennett said.

But creditors’ committee spokesmen interviewed Thursday were decidedly cool to the plan.

“We have not agreed that it is necessary to extend the debt nor to any of the terms,” said Robert Moore, an attorney for the Bankruptcy Court committee representing bondholders and other creditors. “The committee still expects the county to satisfy its obligations this summer.”

At issue are $600 million in taxable notes floated last year to raise money for the county’s ill-starred investment pool, due July 10; $200 million in tax-exempt notes secured by tax and other revenues, due July 19 and Aug. 10; $175 million in taxable and tax-exempt notes secured by property taxes, due June 30, and about $300 million in school district borrowings guaranteed by the county, due July 28.

The county has argued that its fiscal situation is so precarious that if held to those payoff dates it would risk defaulting on the notes.

Moore and other spokesmen for the creditors said the county’s proposal may violate state constitutional and legal prohibitions on using one year’s revenues to pay off obligations incurred in an earlier year.

An even bigger problem may be the idea of asking bondholders to accept a rollover without offering a higher interest rate. Since the notes were issued, prevailing market interest rates have risen by more than 1 1/2 percentage points--and the sheer risk of investing in Orange County notes has soared immeasurably.

“It would seem unreasonable to us for the county to not adjust interest rates to reflect” those differences,” Moore said.

Rates on the notes are now set at 4 1/2% to 6 1/8%.

How much pressure the county could place on bondholders to accept the deal as offered is unclear. Under Chapter 9 of the U.S. Bankruptcy Code, the county has wide latitude to manage its fiscal affairs, including disposition of pre-bankruptcy debt.

But to ensure that it maintains access to credit markets, the county is likely to try to win approval of a majority of its debt holders.

Jeffrey Chanin, a financial adviser to the creditors’ committee, cautioned that the bond market would not look kindly on any attempt to push through the plan unilaterally.

“If the county crams down these bonds, it won’t be able to borrow another nickel for the next 20 years,” Chanin said.

Among the largest of the investors the county would have to convince are Charles A. Schwab & Co., which owns $175 million of the $600-million taxable note issue, and Kemper Financial Services, which owns $190 million of the same notes.

Kemper this week sued Merrill Lynch & Co., the issue’s underwriter, for $200 million, asking that Merrill be forced to buy back the bonds on grounds that the Wall Street firm did not disclose terms in the bond contract that reduce their value.

Times staff writers Debora Vrana, Jodi Wilgoren and Lisa Richardson contributed to this story.