State Panel’s Vote to Oversee O.C. Recovery Shocks Board : Bankruptcy: The decision--made just hours after supervisors voted to put a tax increase on the ballot--is seen as ‘insult’ to county. Also, Popejoy asks $20 million in cuts, paving the way for more layoffs.

An influential panel of state legislators delivered a stinging rebuke to Orange County leaders Wednesday, urging the state to take over the beleaguered county’s government.

The action came just hours after county supervisors reluctantly agreed to place a sales tax hike before the voters.

The state Senate committee unanimously approved a measure that would yank the purse strings away from Orange County leaders, allow the state to loan the bankrupt county up to $200 million annually and create a three-member panel of trustees to shepherd its recovery efforts.

Top county leaders reacted with dismay, shock and anger to Wednesday’s vote, which came less than 12 hours after the supervisors decided to place the tax hike on the June 27 ballot. If approved by a majority of the voters, the initiative, to be known as Measure R, would raise the county’s sales tax from 7.75% to 8.25%, beginning the first of next year.

Supervisor William G. Steiner was stunned at the committee’s decision and called it an “insult” to Orange County leaders and residents.

“I think they’ve had an agenda all along,” Steiner said. “The state government hasn’t done a great job with their fiscal affairs and now they want to take over ours? I resent the politics of it all. It’s absolute hypocrisy.”

Gov. Pete Wilson took a firm stand against the plan by the legislators.

“The governor is not persuaded that it’s necessary,” said Sean Walsh, a Wilson spokesman. “It’s the responsibility of local elected officials to ensure the county does not default and to maintain fiscal solvency.”

In other developments Wednesday:

* City and school district officials reacted warily to the sales tax decision, with several saying they would wait to see if county leaders actively campaign for passage of the tax before deciding whether to endorse it themselves. Some praised the supervisors for allowing voters to have their say on the controversial initiative, while others were strongly opposed.

* A state Senate panel approved several other Orange County recovery measures, including one that would help assuage the concerns of Wall Street by setting up an “intercept” program to siphon sales taxes and motor vehicle fees to pay for recovery loans. Another measure would allow the county to pay $175 million in bond debt and reap an additional $60 million by shifting the responsibility for collecting property taxes to a joint powers authority.

* County Chief Executive Officer William J. Popejoy asked department heads to cut $20 million more from next year’s budget, paving the way for additional layoffs and cuts in county services. With the board prepared to vote today on $188 million in proposed cuts for the next fiscal year, Popejoy asked department heads to examine their budgets again and find more areas to cut, sources said.

In Sacramento, members of the Senate Local Government Committee praised the supervisors’ decision Wednesday to place the sales tax measure before the voters, but indicated by their vote they still do not trust the struggling county to chart its own path toward fiscal recovery.

On Dec. 6, the county became the largest municipality in U.S. history to declare bankruptcy after its investment pool lost almost $1.7 billion in risky investments. Nearly 200 other government entities, including cities, school systems and special districts, had deposits in the fund.

The state Senate committee voted 7 to 0 to approve a measure by state Sen. Lucy Killea (I-San Diego) that would take over Orange County’s finances and place them under control of a three-member county assistance authority, to include state Controller Kathleen Connell, state Treasurer Matt Fong and state Finance Director Russell Gould.

The panel would be empowered to loan the county up to $200 million a year. It would also appoint an administrator to run the affairs of the county for up to two years, with the Board of Supervisors serving only as advisers.

Killea characterized the proposal, which next goes to the state Senate Appropriations Committee, 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,” Killea said. “But if they accept the loan, it must be on the condition that they accept” the state authority.

Killea’s proposal drew sharp criticism from the California State Assn. of Counties. Dan Wall, the association’s Sacramento lobbyist, suggested a state takeover presented constitutional problems.

“This Board of Supervisors in Orange County was elected to carry out their duties,” Wall said. “You’re going to be basically preventing them from trying to exercise their sworn duty to try to make this situation right.”

Committee members scoffed at that argument.

State Sen. Quentin Kopp (I-San Francisco) noted that counties are legal subdivisions of the state and that “the county’s powers flow from the Legislature,” giving Sacramento lawmakers a say in how the county is run.

Kopp said the supervisor’s decision to put the sales tax hike on the ballot will promote confidence in Orange County both on Wall Street and in the state Capitol. But he said state lawmakers have “an obligation to all of California” to ensure that any state money or aid to Orange County’s recovery efforts is not squandered.

Supervisors said they were shocked by the committee’s action.

“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 a trustee,” said Board Chairman Gaddi H. Vasquez, who traveled to Sacramento with Popejoy and Supervisor Marian Bergeson on Wednesday to meet with state leaders.

In recent weeks, supervisors have found themselves caught between an angry electorate opposed to higher taxes and the possibility that the county could default on its debt as early as this summer.

Steiner said the Board of Supervisors already has taken steps to show state lawmakers that it is committed to solving its own problems. The vote to put the tax increase before the electorate, the supervisor said, was a significant indication that the county wants to control its own destiny, and is capable of doing so.

Steiner added that the legislators are “playing games” and grandstanding at the county’s expense. Furthermore, the $200-million cash offer “doesn’t come close to solving our problems,” he said.

Popejoy said he was surprised that the committee would take such an action following what he described as the board’s “courageous” vote to put the sales tax increase on the ballot.

He also said it is possible that the legislators were upset with him for not fully briefing them on his recovery plan and legislative package.

“I think they want to take me behind the woodshed a little,” he said. “I would hope that they would give the county the opportunity to correct the problem. But the main thing is to get the problem corrected.”

County officials are counting on the sales tax to raise $130 million a year for the next decade. But they recognize that the initiative will not be an easy sell.

A number of county residents who addressed supervisors before the vote early Wednesday said they will not only reject the measure themselves but will move quickly to remove the supervisors for even considering a so-called “bankruptcy recovery” tax.

Others argued just as strenuously that a sales tax increase is the only way to raise $700 million in new bond offerings that are needed to avoid default on the $1.275 billion in debt due this summer. The tax is also needed to help reimburse the investors who lost millions in the fund managed by former Treasurer-Tax Collector Robert L. Citron.

Since being hired as the volunteer chief executive a month ago, Popejoy has recommended cutting more than 1,000 jobs, eliminated 563 vacant positions, and announced the sale of $145 million in public assets. But he has also warned that even with those measures and a sales tax in place, the county still may default on its bonds unless he gets acceptance for a controversial proposal to accept trash from neighboring counties and raise dumping fees at local landfills.

Wall Street has warned that if the county defaults on more than $1 billion of debt that comes due this summer, Orange County will be denied access to the markets for years to come.

Approval of the sales tax hike is needed for the county to make good on its settlement agreement with pool participants and pay off its debt, county officials said.

“Since we’re all bondholders out here in the market, we think it’s a positive move,” said Robert A. Gore, a municipal bond trader at Crowell Weedon & Co., an investment banking firm in Los Angeles. “On an ideological and personal level, we hate taxes, 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 will approve a tax increase to cover for Citron’s mistakes.

“If voters don’t approve the tax, it will scare the market,” Gore said. “But I wouldn’t be surprised if the voters said no, thinking that more should be done by officials. Orange County talks a conservative game, but the government has been fat and sassy down there for a long time.”

Analysts who rate Orange County debt also cautiously hailed the supervisors’ actions, warning that time is running out for the county to approve and implement a solution before its debt comes due.

“There’s a lot of reasons to be concerned, but clearly this is a step forward,” said David Brodsly, a vice president and manager with Moody’s Investors Service. “I don’t care whether they are on the best horse, I just want them to get on a horse and start riding. The clock is ticking and time is running out. That’s the real concern.”

Democratic state lawmakers, who have been pushing for months to get the supervisors to raise the sales tax, greeted the action warmly.

“I’m pleased,” said Assemblywoman Marguerite Archie-Hudson (D-Los Angeles), chairwoman of the Assembly Select Committee on the Insolvency of Orange County. “The supervisors have come a long way from their initial position that they weren’t going to tax. It’s a step that says they recognize the gravity of the situation.”

Republican lawmakers, though, were less positive.

Assemblyman Curt Pringle (R-Garden Grove) said he will oppose Measure R and believes the county failed to look seriously at alternatives, including a proposal to tap into the existing half-cent transportation tax approved by voters in 1990, known as Measure M.

“One of the most innocent parties in this entire process are the taxpayers who look to me like they’re going to have this recovery jammed down their throats with some very stiff tax increases,” Pringle said. “People should be given more options than just choosing between taxing themselves or accepting bankruptcy and default.”

Taxpayer groups echoed that sentiment, saying they are incensed by the action.

“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 they expect to be heavily outspent by supporters of the tax hike. “We will not have the dollars the other side has but we’re going to have tremendous grass roots support,” Whitaker said.

Some city officials too were opposed to the tax.

San Juan Capistrano Councilman Gil Jones said he was against the ballot measure. The city was one of two Orange County cities that did not have money in the county’s collapsed investment pool.

“All this tax is going to do is give the county some more leverage to borrow more money,” Jones said. “It’s like a guy with a Cadillac who sits on his butt and keeps borrowing more to make his payments.”

But there were other voices Wednesday that supported the supervisors’ choice.

“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.”

In La Habra, Councilwoman Dorothy May Rush said she would endorse the tax proposal if it comes before the City Council because many of her constituents have said they would not mind paying the tax to “help out the county. I would be willing to vote for it.”

Times staff writers Matt Lait, Debora Vrana, Rene Lynch and J.R. Moehringer along with correspondents Mimi Ko and Jeff Bean contributed to this report.

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Taxes On the Ballot

Supervisors Jim Silva and Roger R. Stanton unexpectedly decided to support a special election that will decide if Orange County’s sales tax will increase to 8.25%. Should Measure R pass, the county’s tax rate will become one of the two highest in Southern California.

“I do think that the people in Orange County are already taxed enough. But with the financial crisis, I think it is an exception to the rule. I hate it. I think it’s disgusting.”--Supervisor Jim Silva

“I don’t find any leadership in calling for a tax or opposing a tax. It’s a misuse and an abomination of the word ‘leadership’ that’s tossed around by everybody on both sides of this thing. There has to be another way.”--Supervisor Roger R. Stanton

Current Sales Tax Rates by County

Los Angeles: 8.25%

Orange: 7.75%

Riverside: 7.75%

San Bernardino: 7.75%

Ventura: 7.25%

San Diego: 7.00%

Sources: Times reports; State Board of Equalization