A team of lawyers and financial experts made a whirlwind tour of Orange County on Monday, telling cities, schools, special districts and other agencies for the first time how much they could get of the remaining $5.7 billion in the county's collapsed investment pool.
Armed with spreadsheets, graphs and an overhead projector, the attorneys and financial consultants for a seven-member committee representing 194 investors laid out the details of a settlement plan that attempts to get those in the pool the full amount of their investments.
In Fountain Valley, nearly 100 city officials got the official word that they would not be getting as much as investors who had more money in a "bond pool," or lower-risk securities, even though they had been informed a month before that it didn't matter where their funds were invested.
"We were told we'd all be treated equally, and now we find we're on the bottom rung after the schools and the transportation agencies," Dana Point Councilwoman Toni Gallagher said.
Dana Point had nearly $16 million in the riskier commingled pool.
Because former Treasurer-Tax Collector Robert L. Citron kept three separate accounts--a bond pool, a commingled pool and a fund for specific investments, all of which earned different rates of interest--committee members decided that those with money in the riskiest funds should receive less money.
Those with money in the bond pool will get 83.94 cents on the dollar and those with money in the riskier commingled pool, mostly the schools, will get 76.26 cents on the dollar. The Orange County Transportation Authority, which had its money split between the two pools, will get nearly 82 cents up front. The Transportation Corridor Agencies, the public agency building the county's first toll roads, had most of its money in the bond pool and will get 84 cents on the dollar immediately.
Under the agreement, schools are to get another 14 cents and all others four cents in so-called "recovery notes" that the county has pledged to guarantee by June 5. The committee has pledged to get schools at least 90% of their investment and other investors at least 80% by that date.
Orange Mayor Joanne Coontz said she is still concerned that the county has no specific guarantee to make the recovery notes "good as gold," as officials have suggested.
"We're not real happy about it," she said. "We still want every penny back, but it looks like it will take a while."
All investors are supposed to get an additional three cents on the dollar--two cents representing interest that officials said Citron skimmed from investors and another penny representing interest that was earned in the six months before the county's bankruptcy.
The rest of the money is supposed to come from the settlement of secured claims the county has against brokerages such as Merrill Lynch & Co. and in "repayment claims" the county hopes to make good on in years to come.
The pool committee approved the plan by a 6 to 1 vote Saturday night. Robert Locke, the lone dissenter, who represents the cities outside Orange County that invested in the pool, said Monday that he has a number of problems with the plan and voted against it when other members said there wasn't enough time to circulate it among the investors he represents.
Locke, director of finance for the city of Mountain View, said he does not like provisions of the plan that keep county officials from being sued because of the financial disaster and forbids those who sign the agreement to speak about it.
"We've got an extensive set of releases against anyone who is part of this thing, known and unknown, who have committed acts, known and unknown, which indicates there are lots of red flags that something inappropriate happened," Locke said.
Some city officials questioned how they can oppose a proposed sales tax hike to get Orange County out of bankruptcy when it is almost certain that getting all of their money will depend on whether voters approve such a tax.
"The sales tax issue and the repayment to the cities and creditors are tied together," said Laguna Niguel Mayor Mark Goodman. "Personally, I don't support a sales tax because the citizens of Laguna Niguel should not have to pay for the bad decisions of other agencies, particularly those who borrowed to make a profit and shore up their budgets."
Investors have until April 17 to decide whether to take one of three settlement options. Under Option A, they get a set amount of cash and give up their right to sue for the remaining money unless the county cannot make good on its recovery notes. Under Option B, they get the same set amount of cash but reserve their rights to sue for the rest. Under Option C, they take no money and attempt to sue for the entire amount.
Some legal experts believe that by accepting any money, investors give up the right to argue in court that the county held their money in trust and should return it all. Patrick C. Shea, the attorney representing the investors committee, told city officials Monday that such an argument is a gamble because the county is most likely to counter that the money was not held in trust.
The settlement will become official only when it is approved by 80% of the agencies holding 90% of the money. If U.S. Bankruptcy Judge John E. Ryan approves the settlement, investors will have 11 additional days to decide what option to take.
The Board of Supervisors approved the settlement agreement Monday after 90 minutes behind closed doors.
Supervisors supported the pact with the condition that the final documentation, which was still being worked on, did not alter the principal agreement.
"We feel this is a positive development," Board Chairman Gaddi H. Vasquez said. "I think we're off to a very solid start, getting one of the important aspects of this crisis resolved."
Bruce Bennett, the county's bankruptcy attorney, said he is still negotiating some points with attorneys for the creditors committee on issues that involve several million dollars. He declined to discuss those issues, but said he expected the final "language" of the agreement to be worked out by the end of today.
Meanwhile, Orange County Transportation Authority directors approved the pool settlement plan at their meeting Monday but deferred action on what option they will take to recoup money the agency had in the failed pool.
The board directed its staff to hire an accounting firm, study the agency's options and return an answer for board review before the deadline for final action by the federal bankruptcy judge.
The Transportation Corridor Agencies also approved the settlement and will decide on the options April 13.
While media attention has focused on the proposed pool settlement, several important hearings are scheduled this week in Ryan's Santa Ana courtroom.
During a 9:30 a.m. hearing today, several Orange County cities and water districts will challenge the county's legal strategy of filing two bankruptcy petitions--one for itself and one for the bankrupt pool. On Thursday, Huntington Beach and several other investors in the investment pool will ask Ryan to let them make their case to a state court judge.
Also this week, holders of Orange County bonds will reiterate their opposition to the county's practice of using bond reserve funds to pay daily operating expenses. And cash-strapped investors will ask Ryan to pull some pool money out to replenish an emergency fund that is rapidly running out of cash.
Huntington Beach officials, who hope to obtain a state court judge's opinion on the trust issue, are adamant that the county pay back 100 cents for each dollar placed in the pool.
In the meantime, Huntington Beach Councilman Ralph Bauer said he was leaning toward agreeing to the settlement plan's Option B, which gives the city about $28 million up front and allows it to move forward with legal action.
"We are not hurting like some of the school districts," Bauer said. "We want to get our money back but we want to reserve the right to take action against the county. If we take Option C, we take it out of spite. But good heavens, let's get our money back. We owe that to the residents."
Buena Park City Manager Kevin O'Rourke said his city will need to examine the settlement more closely before deciding which option to pursue. But he raised questions about the logic of choosing Option C.
"It's hard for me to picture anyone taking Option C," O'Rourke said. "If you do, you put all your taxpayers' money at risk and don't have access to the cash for probably many years."
O'Rourke also said he is concerned about what he sees as a lack of county backing for the recovery notes. "On June 6, when I'm counting the money at the bank, I will be happy. Until then, no," he said.
Margie Wakeham, a trustee with the Irvine Unified School District, said her district needs all 90% of its money immediately and simply cannot afford to do anything but select Option A.
"I think we are in a position that if we don't have our money by June, we are going to be in a large heap of trouble," Wakeham said. "And I don't know what the benefits are of getting embroiled in more legal disputes with the county."
Wakeham said that while she is happy that a settlement is on the horizon, it still leaves the district facing losses that will result in about $3 million in cutbacks.
"I'm not relieved," she said. "This is devastating."
Times staff writers Matt Lait, David Reyes and Greg Johnson contributed to this report.