ORANGE COUNTY IN BANKRUPTCY : Bill Would Let State Loan County Up to $700 Million : Legislation: Assembly Democrat’s ‘backstop plan’ would kick in if recovery measures such as proposed sales tax hike fail. Governor’s office reacts coolly.

Saying the state needs a backstop to Orange County’s bankruptcy recovery strategy, a Democratic legislator offered a measure Thursday to loan the county up to $700 million to tide its schools over and help pay the huge bond debt it faces this summer.

The measure, introduced by Assemblyman Louis Caldera of Los Angeles, would set up the Orange County Education and Municipal Assistance Financing Authority, to be staffed by state and local officials to sell bonds and loan money to the county and its schools.

“Too much of what we’ve been hearing from the county is overly optimistic,” Caldera said, citing Orange County’s June 27 vote on a half-cent sales tax hike and efforts to persuade Wall Street to roll over the more than $1 billion in bond debt coming due this summer. “This is a backstop plan that we all can turn to if those things the county is now counting on don’t materialize.”

Caldera’s bill offers the first peek at what Assembly Democrats envision for the county. Although the Democrats and Speaker Willie Brown have taken delight in lambasting the county over the investment debacle, Caldera said his colleagues understand the threat to cities and counties throughout California if Orange County defaults.

“The state has certain responsibilities,” Caldera said. “It absolutely cannot let Orange County default. That would have an adverse impact on the ability of every municipality in the state to raise money in the capital markets. We also have a responsibility to the schools.”

Low-interest loans made by the authority would be paid off by having the state tap into funds earmarked for return to the county. The bill does not stipulate how the loans to help schools would be paid off.

Unlike a harsher measure now moving through the Senate, Caldera’s bill would allow the Orange County Board of Supervisors to retain its fiscal powers. Operation of the assistance authority would be overseen by a trio of state officials--Treasurer Matt Fong, Controller Kathleen Connell and Finance Director Russell Gould--as well as a representative from the general public and local government appointed by the supervisors.

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That’s in sharp contrast to a bill by Sen. Lucy Killea (I-San Diego) that would yank the purse strings out of the supervisors’ hands and essentially install an administrator to take over operation of virtually all segments of county government and shepherd the recovery efforts.

Caldera said his measure “is not the final solution by any stretch, but it at least takes the immediacy of the problem away.” It also puts the state in a far better position in the weeks ahead, he said.

“If the county’s plans fail, we’d be sitting there with a gun to our head,” he said. “They’d be saying, ‘Bail us out or we’ll default.’ We’d have no other options.”

But officials in the governor’s office gave Caldera’s bill a frosty reception.

“As we have stated with the Killea bill, we are not persuaded it’s necessary,” said Sean Walsh, a spokesman for Gov. Pete Wilson. “The county officials are moving to prevent default. We believe the county should continue to strengthen its fiscal position and work out its problems. We don’t rule this out, but in our view it’s a position of last resort.”

Fong’s office, however, took a more neutral stance.

“At first glance, this is closer to something that we would find workable,” said Stan Devereux, Fong’s spokesman. “But it still needs to be discussed, and there’s some areas we would want to have refined before we’d fully endorse it.”

Sen. Quentin L. Kopp (I-San Francisco) also remained open-minded. Kopp is a co-author of Killea’s bill, but he said Caldera’s proposal “might be acceptable” as a less-harsh alternative.

“I prefer to pursue ours for the time being,” Kopp said. “But I’ll take a look at it, depending on what else the Orange County supervisors do.” In particular, Kopp said the push for Killea’s bill might ease if the supervisors aggressively support the Measure R sales tax campaign.

Meanwhile, the state Senate Local Government Committee approved a measure Thursday by Sen. Tom Hayden (D-Santa Monica) to put strict contribution limits on Wall Street firms, install oversight boards to review decisions by county treasurers, make brokers disclose risky investments and require treasurers to provide their governing boards with monthly “risk assessment” reports.

“I think it goes as far as possible to reform the process,” Hayden said after the committee approved his measure. “If some wiggle room is left open for risky ventures, then I think my bill is very important.”

The committee also approved a series of competing measures authored by Kopp and Sen. William A. Craven (R-Oceanside) that would restrict the sorts of municipal investments that got Orange County into trouble. Craven’s measures limit the use of reverse repurchase agreements to 20% of a portfolio’s worth, but Kopp proposes an outright ban.

Kopp said he and Craven would iron out those “fundamental differences” in the days to come. “I think he and I will sit down,” Kopp said. “We’ll smoke a peace pipe before we talk.”