State Takeover May Be Price of Bailout for O.C.

An influential panel of state legislators delivered a stinging rebuke to Orange County leaders Wednesday, urging the state to take over the county’s beleaguered government only hours after the Board of Supervisors reluctantly agreed to place a proposed sales tax hike before voters.

It took five hours of fiery debate in Santa Ana--including threats of recalls, predictions of economic disaster and the outright demand that a tax be avoided at all costs--before the supervisors unanimously conceded about 1:30 a.m. Wednesday that the bankrupt county had no choice but to conduct a June 27 special ballot on a half-cent tax increase.

Yet, about 11 a.m. Wednesday in the state Capitol, the Senate Local Government Committee--also by a unanimous vote--urged the Legislature to place Orange County’s finances under the control of a three-member panel of trustees as a precondition to providing state aid.

The measure by Sen. Lucy Killea (I-San Diego) would set up a county assistance authority--run by state Controller Kathleen Connell, state Treasurer Matt Fong and state Finance Director Russell Gould--that could loan the county up to $200 million a year. The authority also could appoint an administrator to run Orange County for up to two years, with the supervisors serving only as advisers.

Killea characterized the proposal as a necessary step before state lawmakers would be willing to provide financial help to Orange County. “If they don’t want the money, they don’t have to get into this,” she said. “But if they accept the loan, it must be on the condition that they accept (the state authority).”

The vote was the first of many legislative hurdles for the measure, which Gov. Pete Wilson firmly opposes.

“The governor’s not persuaded that it’s necessary,” said Wilson spokesman Sean Walsh. “It’s the responsibility of local elected officials to ensure the county does not default and to maintain fiscal solvency. The governor believes that the county should continue to take affirmative steps to work out (its) fiscal problems.”

Supervisors were shocked by the committee’s actions.

“Yes, we may need a little assistance from Sacramento, but it certainly did not include any kind of intervention or placement of a panel or trustee,” said board Chairman Gaddi H. Vasquez, who traveled to Sacramento on Wednesday with Supervisor Marian Bergeson and Chief Executive Officer William J. Popejoy to meet with state leaders.

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Some insiders suggested that the Killea bill is a psychological ploy one wag compared to “the Acme anvil hanging over Orange County’s head.”

But Assemblywoman Marguerite Archie-Hudson (D-Los Angeles), chairwoman of the Assembly Select Committee on the Insolvency of Orange County, called the measure “a very serious bill” intended to give the state control if it ends up providing help to Orange County.

“If there is a trustee, it makes the discussion of a loan much more relevant and gives the state much more comfort,” Archie-Hudson said.

Over the past few weeks, supervisors have found themselves caught between an angry electorate opposed to higher taxes and the possibility that Orange County could default on its debt as early as this summer. Meanwhile, lawmakers in Sacramento expressed distrust of local elected leaders’ ability to make the tough decisions needed to see the county through the bankruptcy spawned by $1.7 billion in investment losses.

Only a few dozen spectators remained in the board’s once-packed meeting room at the Hall of Administration when the five supervisors cast their “aye” votes to place the half-cent sales tax hike before the electorate.

“Tonight’s vote is about giving the people of Orange County the opportunity to evaluate the facts, make a personal decision and cast a vote,” Vasquez said. “I have evaluated the width and the depth of this financial crisis. The potential for lasting negative impacts are very wide and very deep.”

If a majority of voters approves, the county’s sales tax rate would increase to 8.25% from 7.75% on Jan. 1.

Officials are counting on the measure to raise $130 million a year for the next decade, but they realize that the initiative will not be an easy sell in a county with an almost seamless record of turning down new taxes. A number of county residents who addressed the board meeting said they not only will reject a sales tax, but will move expeditiously to remove the supervisors from office for even considering a so-called “bankruptcy recovery” tax.

Tom Steele, a representative of Ross Perot’s United We Stand America organization, warned the supervisors that their vote to put such a measure on the ballot “will put into motion two campaigns. One is a vigorous campaign to defeat this tax. . . . The second is an active recall campaign. Remember who you work for.”

Others argued just as strenuously that a sales tax increase was the only way to underwrite $700 million in new bond offerings needed to avoid default on the $1.275 billion in county debt due this summer. The county also needs a new source of revenue if it is to reimburse the 194 cities, school districts and special districts for their losses in the investment pool managed by former Treasurer Robert L. Citron.

“For those of you who want this county to sink into Third World status, go ahead and vote against the tax,” said Popejoy, who summarized the county’s anemic financial condition in a chart entitled: “Citron’s Crater: $1.7 Billion Deep.”

Since signing on as the county’s volunteer CEO a month ago, the former savings and loan executive has cut 1,000 jobs, eliminated 563 vacant positions and announced the sale of $145 million in public assets. But he warned during the board meeting that even with those measures and a sales tax in place, the county still may default on its bonds--unless he wins approval for controversial proposals to accept trash from neighboring counties and to raise dumping fees at local landfills.

Wall Street has warned that any default would deny Orange County access to the financial markets for years to come.

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“On an ideological and personal level, we hate taxes,” said Robert A. Gore, a municipal bond trader at Crowell Weedon & Co., an investment banking firm in Los Angeles. “But we’re glad when they’re used to pay off our bonds.”

Still, bond traders and investment bankers said they were skeptical that typically conservative Orange County residents would approve a tax increase.

Leaders of taxpayer groups in Orange County, meanwhile, woke up angry at the supervisors for abandoning their earlier vows to oppose any tax hike.

“This represents reneging on a promise; there’s no other way to put it,” said Bruce Whitaker, a spokesman for the anti-tax Committees of Correspondence. “I understand they had pressures--maybe in court we could call it ‘duress’--from the state Legislature and (Assembly Speaker) Willie Brown. But they broke a promise.”

Whitaker said the organization will begin work immediately on a campaign aimed at defeating the tax measure, although members expect to be heavily outspent by supporters of the tax hike--expected to include business groups and county employee unions.

The organization has not yet decided whether it will mount a new effort to recall the supervisors, Whitaker said: “We want to reflect and consider the idea of a recall. We don’t want to just go off on an emotional bent before we think it through.”

There were other voices Wednesday that supported the supervisors’ decision.

“Absent any other plan that I know of, or that they have proposed, it seemed like a necessary step for them to take,” said Connie Haddad, president of the Orange County chapter of the League of Women Voters. “I’m pleased that they stepped up and assumed the responsibility.”

Platte and Trounson reported from Santa Ana and Bailey reported from Sacramento. Times staff writers Rene Lynch, Debora Vrana and Matt Lait in Orange County also contributed to this report.