O.C. Pool Investors Strike Deal : Agreement: Formula for dividing remaining $5.7 billion penalizes agencies whose money was in higher-risk investments. Supervisors, bankruptcy judge must sign off on it.

The committee representing those in Orange County’s collapsed investment pool reached a consensus Saturday for disbursing the $5.7 billion that remains, but the deal penalizes those agencies whose money was used by the county’s former treasurer in higher-risk investments.

The agreement calls for a return of 76 cents on the dollar to those investors in a risky commingled pool of funds while those in the lower-risk bond pool will receive nearly 84 cents. Because no entity had all of its money in the bond pool, however, the highest average amount any one agency will receive is about 81 cents.

Up until last week, some participants in the pool were under the impression that they would all be getting a guaranteed return of 77 cents on the dollar, no matter where their money had been placed. But a financial adviser to the committee said the revised distribution was spelled out in a document given to investors in early February.

Under the agreement signed Saturday, schools will get an additional amount in recovery notes that will allow them to recoup 90% of their investment and all others will get a similar guarantee so that 80% of their money can be returned.

The county has promised to make the $237 million in notes “good as gold” with the guarantee that they can be cashed by June 5. In the event that the notes can’t be converted into cash, any of the nearly 200 public agencies that invested will have the right to sue to recover their money.

“This was the best deal on the table and the best deal we could obtain,” said M. Freddie Reiss of Price Waterhouse, the accounting firm working for the pool participants. “Everyone on the committee feels this is the best deal available.”

County Chief Executive Officer William J. Popejoy called the settlement “a major step forward.”

“It’s really a linchpin in our plan,” he said. “It has been described as fragile, but most things at birth are fragile.”

The settlement becomes official if it is approved by the elected officials of 80% of the agencies holding 90% of the money in the pool. The Orange County Board of Supervisors and U.S. Bankruptcy Judge John E. Ryan also must sign off.

Each investor has a choice of repayment plans. Under Option A, investors give up their right to sue for their remaining money unless the county does not make good on its guarantee that its notes can be cashed by June 5.

Under Option B, investors take just what they are entitled to under the formula and reserve the right to file a lawsuit. Some investors have indicated they will reject both offers, accept no money and sue the county seeking the return of their entire investments.

The money has been tied up since Orange County filed for bankruptcy Dec. 6, after the county’s investment pool plunged $1.7 billion in value as interest rates rose.

Most of the investors--including the school districts, cities, water districts and even the county itself--had their money tied up in the commingled pool, where it had been highly leveraged to make large gains over the years.

Others, such as the Transportation Corridor Agencies, which is building the county’s first toll roads, and the Orange County Transportation Authority, which runs the bus system and manages freeway construction, kept much of its money in the low-risk, low-yield bond pool.

Stan Oftelie, chairman of the seven-member pool committee and chief of the county’s transportation authority, said committee members settled on the revised formula after considering disclosures early this year that the treasurer’s office shifted at least $140 million in losses to pool participants and skimmed about $85 million in interest that should have gone to other investors.

“The whole issue of the bond pool and commingled pool and specific investments came up in the context of frustration that the county had invaded the funds of other agencies,” Oftelie said. “That was an extraordinary event for the people working on this program and it sharpened my concern that we didn’t want to invade other people’s funds.”

Committee members concluded that since those in the bond pool had gotten lower returns over the years than those in the commingled pool, it was unfair to evenly distribute the remaining funds.

“In the bond fund, the investments were indentured by contract and type of investment,” Oftelie said. “These were safer investments.”

Oftelie said that there may be other funds, such as the interest accumulated in the investment fund before the bankruptcy and the return of the skimmed interest, that might allow all investors to receive at least 77% of their money.

“When the math is all worked out, I believe everyone will get their 77 cents,” Oftelie said.

The committee did not take a vote on Saturday’s settlement, but Oftelie said the group came to a favorable consensus.

“Everyone who worked on this has parts that are desirable and parts that are undesirable,” Oftelie said. “Everyone had a piece of this that they hated. But for each person it is a different piece.”

Although Oftelie predicted the settlement would be “a pretty easy sell” to investors, not everyone was happy with the arrangement that called for a different distribution between those who invested in the commingled pool and those who put their money in the bond pool.

“We were told in the beginning that there would be no distinguishing between the two pools,” said Bernard Schneider, an attorney representing Anaheim in the investment pool’s bankruptcy. “We were only told about a week ago that there was going to be a distinction” in terms of disbursing the money.

Schneider said he has been concerned for some time about the lack of information from the pool committee--which represents the cities, schools, special districts, two transportation agencies and those entities outside the county that invested with since-resigned Treasurer-Tax Collector Robert L. Citron.

“If the committee or the county wants us to make a decision, they are going to have to provide all the information,” Schneider said. “The time for trusting is over. If we trust again, shame on us.”

Peer Swan, the chairman of the Irvine Ranch Water District, which had $118 million in the commingled pool, said that although his agency will lose substantial money under the new formula, he thinks the distribution is fair.

“Do I like to lose money I thought I had?” Swan said. “Of course I don’t. But we needed to get this deal done or a whole lot of people were going to run out of money. We had to get it resolved.”

Jon Schotz of Saybrook Capital Corp., the financial adviser to the investment pool participants, said investors were given documentation in early February that specifically disclosed two ways in which the money could be distributed: either across-the-board or based on what each investor had in the bond pool, commingled pool and a third special fund for specific low-risk investments. Schotz said the financial team had to reconstruct exactly what was in each of those pools in order to come up with an acceptable formula.

In the end, the committee members accepted the framework of a plan first proposed last month by members of the influential Orange County Business Council, who first proposed the 77% settlement.

A week ago, the pool committee announced that it had reached a settlement “in concept,” but negotiations with county bankruptcy attorneys broke off during the week. Committee members and their financial team said they are convinced now that the county will guarantee the $237 million in recovery notes needed to get schools back to 90% and other entities back to 80% of their investments.

“If the recovery notes cannot be cashed, the schools will have to file for Chapter 9 bankruptcy and there will be a meltdown in this county,” Schotz said. “The county is not going to let that happen.”

Schotz predicted that the county would find an investor to buy the notes at full value, secure a letter of credit from a bank or consortium of financial institutions or obtain bond insurance to make the notes acceptable by June 5.

One other sticking point in the negotiations was settled Saturday. Investment banks being sued by the county were holding about $120 million in pool money as of last week and investors were concerned when the money would be returned. Reiss said that about $60 million is to released in about a month, $40 million of which will go to pool participants and $20 million of which will go to the county.

Oftelie said the committee is most concerned with getting the schools 90% of their money and everyone else 80% of what they put into the fund.

Investors other than schools also will receive an additional 9% of their investments in notes secured by the proceeds that the county hopes to win from its lawsuit against Merrill Lynch & Co. and other litigation against those being blamed for the investment pool losses. Merrill Lynch sold Orange County most of its high-risk securities that lost value as interest rates climbed. The county contends that the Wall Street brokerage had no authority to sell such securities and broke the law in doing so.

The county also will put forth its “best efforts” to repay schools the final 10%, and everyone else the final 11% of their investments. These “repayment claims” carry no guarantees and the agreement doesn’t specify how long or in what way the county will attempt to pay them.

The agreement signed Saturday involved the creation of a special $13-million reserve fund to pay legal and professional costs associated with the settlement.

Oftelie said the amount is not large, considering that once the bankruptcy with the investment pool is repaired, the pool participants will become creditors in the county’s bankruptcy, which may stretch out another two years.

The agreement also calls for a “joint powers agency” of investors who want to manage the county’s investment portfolio. The investors would be permitted to appoint a board of directors and hire its own staff to manage the group’s funds.

Times staff writers Michael G. Wagner and Matt Lait contributed to this report.