NEWS ANALYSIS : County Recovery Plan Hinges on a Word: ‘If’ : Bankruptcy: The blueprint for repaying debt, released last week, depends on a number of variables.

Orange County supervisors and their hired money men have spent the past months piecing together a shelter to weather a billion-dollar deluge of debts coming due this summer.

But by most accounts what they’ve built is a rickety house of cards, its very foundation resting precariously on a series of temperamental “ifs.”

If the supervisors brave the political heat and put a half-cent sales tax initiative on the June 27 ballot.

If the voters approve it.

If they can gain access to motor vehicle fees paid by county residents.

If they can overcome objections to the convoy of trucks it would take to import 6,000 tons of garbage a day--and strong-arm cities into going along with higher garbage collection fees.

And if they can persuade Wall Street to float new bonds based on all this anticipated revenue.

One thing is certain: Between June 30, three days after the vote on a tax increase, and August 10, the county must repay $1.275 billion to its bond buyers.

Should one of America’s richest counties decide not to pay and default on its debts, some market analysts predict Wall Street will blacklist Orange County for years, and the nation’s confidence in municipal bond financing will be rocked anew.

The county’s solutions “come so late in the game that if the voters should turn (the sales tax) down, you have no fallback, no room, no ability to pursue anything else,” said Christopher Taylor, executive director of the Municipal Securities Rulemaking Board. “They’ll probably be counting the damn ballots when they’re supposed to be paying off $600 million in bonds.”

So the task for county Chief Executive Officer William J. Popejoy and the Board of Supervisors is to either persuade the state Legislature to come up with a “bridge loan” of some kind, or get bondholders to roll over the county’s bonds for another 12 months.

Both these options, market analysts say, are simply another level of cards in the county’s wobbly house of solutions.

The county supervisors have alienated everyone from state legislators to investors to rating agencies with their delay in clearing the way for a tax increase.

“One of the proposals that made sense to me is to tie the passage of a sales tax to a recall” of the supervisors, said Zane B. Mann, publisher of the California Municipal Bond Advisor Newsletter. “That’d be a neat package as far as I’m concerned.”

As late as Friday, four of five supervisors resisted stating a position on boosting taxes--despite clear signs that state legislators expect them to carry the tax-increase banner.

“I would not vote for legislation giving them a loan guarantee if the supervisors do not unanimously campaign for the sales tax,” said state Sen. Quentin L. Kopp (I-San Francisco). “They had better show good faith.”

Added state Sen. Lucy Killea (I-San Diego), “I think the Board of Supervisors has to get behind it.”

As for postponing repayment of the bonds, market analysts, rating agencies and investors are split on the ramifications of that action--even if all the parties think it’s a good idea. Some bondholders already have insisted that they will not take a deal that is “crammed down” their throats without the promise of a higher interest payout. Rates on the notes maturing this summer are set as low as 4 1/2%, while more recently issued bonds carry higher rates.

Some say if the county sweetens the deal for note holders, it will buy them market goodwill. But the Standard & Poor’s Rating Group stated flatly that a debt delayed amounts to a debt unpaid--and the county will be penalized by Wall Street.

“We have questions about whether or not they’ll be able to carry out the plan,” said Steve Nelli, a director at Standard & Poor’s. “Realistically, we have to tell investors that there are a lot of risks to what they are trying to pull off.”

Popejoy does not dispute the county’s plan is dogged by risk, but he said the plan is hardly susceptible to collapse.

“It’s not a house of cards,” he said. “This is a way out. A path out that has some potholes and turns and twists. . . . Many of the solutions are difficult and complex but certainly they are obtainable. We certainly don’t view our financial plan as being fragile.”

The plan calls for raising trash dumping fees by more than 50%, a cost that will be passed on to consumers countywide, and upping the county sales tax by a half-cent and borrowing $1.25 billion in new bond issues. To accomplish this, the county is asking the state to guarantee county loans and revise state laws to allow it more freedom to borrow against future revenue.

The garbage plan already has incurred the wrath of city officials.

“It’s another tax increase, any way you want to look at it,” complained Irvine City Manager Paul O. Brady Jr.

“Because the county came upon a tough financial decision, instead of absorbing it they are going to pass it on to the local governments that have already been hit hard by state” cutbacks, said Seal Beach Councilwoman Gwen Forsythe.

Popejoy said the county is asking the state to co-sign a loan as a “financing mechanism to feed into our global needs,” not to pay bond debt. And he is confident the county can cut a deal with note holders to roll over their debt for a year.

“Historically, when parties agree by mutual consent to extend maturities, that’s not viewed as a default,” said Popejoy. He chalked up Standard & Poor’s harsh reaction to the rollover plan to the agency’s “chagrin” over issuing high ratings on controversial county bond deals last summer.

But Popejoy said a literal default on the debt still remains a possibility. “Absolutely. But we’re hopeful and even confident that a default can be avoided and that the new maturities can be agreed to.”

Payable this summer are $600 million (June 30) in taxable notes floated last year to raise money for the county’s ill-starred investment pool; $175 million (June 30) in taxable and tax-exempt notes that were secured by property taxes; $200 million (July 28 and Aug. 10) in tax-exempt notes secured by tax and other revenues; $300 million (July 28) in school district borrowings guaranteed by the county.

For months, rumors that the county wanted to wriggle out of repaying these bond obligations have sent jitters through some of the nation’s largest financial institutions, which own millions of dollars in Orange County bonds.

Last week those rumors took an ominous cast in a brief line in a March 16 county news release that said the county “reserved the right” to challenge the validity and enforceability of $600 million worth of taxable notes it sold last July, and to challenge the allocation of $481 million now set aside to repay the debt.

Popejoy reaffirmed that position Friday: “Our press release says what it says.”

After the news release was issued, Moody’s Investors Service, a New York ratings agency, fired off a statement saying that if the county pursued this course it would “totally undermine any hopes the county may entertain to regain credibility in the financial community.”

Note holders say if the county does invalidate the $600-million deal or default on its summer debt it could effectively lock itself out of the credit markets for at least five years. No one, however, is certain how the harsh the penalty will be--or if it will tarnish other California cities and counties seeking to raise money in the municipal bond market.

Several underwriters and financial advisers said they have seen little or no impact on the issues of other California cities selling municipal bonds in the wake of the bankruptcy.

“I think the market has pretty much discounted the effect of the bankruptcy on other entities,” said Los Angeles financial adviser John Fitzgerald.

A little over a month after the bankruptcy, Fitzgerald handled a $9.9-million bond issue for the city of West Hollywood. “We saw no evidence of a penalty at all.”

And Mann said he believed that because of a shortage of municipal bonds and the hunger for tax-free interest, other issuers would have no trouble selling them--even if their neighbor defaulted.

But Stephen Ward, chief investment officer with Charles Schwab, which owns $41.5 million of the county’s controversial $600-million issue, said Wall Street would be much tougher on Orange County.

“Any effort of the part of the county to repudiate any of its debt would be greeted very harshly,” he said.

“It would be hard to imagine how an entity that must perform the essential services that the county has to could not be in the market for four or five years,” said Jane Eddy, a director at Standard & Poor’s. “It’s almost mind-boggling to imagine.”

But there is some question how easy it will be to coax bondholders into a rollover deal after what some market analysts and investors characterized as the “arrogant” attitude of the county.

“Orange County has done and said some things that don’t give you that great warm fuzzy feeling that they care that much about honoring agreements,” said Taylor of the Municipal Securities Rulemaking Board.

Robert Moore, an attorney for the Bankruptcy Court committee representing bondholders and other creditors, said his committee was “encouraged and hopeful” a deal could be struck, if guarantees are given.

“We would like a binding court order that would be in place before the debt matures that is not subject to challenge,” Moore said. “The county has a lot of irons in the fire. If any one doesn’t pan out, the whole thing could crumble.”