Orange County Moves to Borrow $275 Million

Even as it considers defaulting on $600 million of its bonds, Orange County took its first tentative step Tuesday toward borrowing even more.

The County Board of Supervisors unanimously approved a new $275-million bond issue designed to pay back more than 200 cities, school districts and other agencies a portion of the losses they suffered in the collapse of the county’s investment pool.

“This is the key. This is the linchpin to the county remaining--hopefully--solvent,” the county’s bankruptcy attorney, Bruce Bennett, told supervisors before the vote.

Approval of the bonds, however, comes before the county has resolved how it will pay them back. So far, no stream of revenue has been identified to guarantee repayment of the so-called recovery bonds.

The county, desperately short of cash after declaring bankruptcy in December, currently has a number of revenue sources in mind, but none is a sure thing.

The county will put a half-cent increase in the sales tax--from 7.75% to 8.25%--on a special June ballot, but a recent poll indicates that voters will sink the measure. County officials also have proposed increasing county revenues by opening landfills to neighboring counties and boosting the fees charged to waste haulers, but cities and environmentalists have expressed concerns about the impact of such a move.

The county has asked the Legislature to divert vehicle license fees into a special “intercept fund” that could be dedicated to bond repayments, but that has yet to be approved.

“If none of these things happen, there are going to have to be very, very, very, very significant, Draconian additional budget cutting,” Bennett told the board.

The county is already looking at entering the 1995-1996 fiscal year with a budget slashed nearly in half.

The recovery bonds are a critical element of Orange County’s plan for emerging from its financial morass. For months, government agencies that had money in the county’s investment fund quarreled over how to divide what was left after the fund lost $1.7 billion in risky investments.

Schools, cities and special districts argued vehemently that the county should pay them back in full.

After weeks of negotiating, however, the county and a committee of the other fund investors settled on a plan that would give the other investors an average of 77% of their pre-bankruptcy fund balances in cash right away, with the balance paid in various types of IOUs.

One type of IOU was to be backed by the recovery bonds, which the county assured other government agencies would be “as good as gold” and convertible into cash by June 6. Various government agencies have been voting over the past several weeks on whether to accept the offer.

On top of the cash reimbursement, the settlement plan provides for schools to receive 13% of their fund balance in the form of warrants backed by the recovery bonds, with the IOUs for the remaining 10% to be treated as general claims against the county in bankruptcy court. Cities and other agencies would receive only 3% of their original investment in the form of warrants.

In order to sell the bonds, however, the county must have a source of income to guarantee their repayment.

Orange County’s bid to return to Wall Street comes as it considers a last-ditch strategy to adopt if it cannot pay back nearly $1.3 billion in county bonds due this summer, cannot reach an agreement to refinance them for another year, or cannot find any other way to resolve its financial crisis.

The county, with only half of the money needed to pay off the bonds, is considering whether to default on $600 million of the bonds on grounds that the borrowing was illegal because it exceeded debt limits spelled out in the state Constitution.

To put its plan for recovery bonds into effect, the county needs court approval.

In a Tuesday filing in Orange County Superior Court, the county asked for such judicial approval of the new bonds and warrants. And Bennett said the county is asking U.S. Bankruptcy Court Judge John E. Ryan to make a ruling May 2 that would give “super priority” to the claims of the investment pool participants.