ORANGE COUNTY IN BANKRUPTCY : Two Legislators Urge Cities, Districts to Forgive $400-Million County Debt

A pair of state lawmakers are calling on cities and local districts with a stake in Orange County’s fallen investment pool to forgive more than $400 million the county owes, saying the gesture would relieve pressure to raise revenue with a sales tax increase.

Calling it a “bold and necessary action,” Assemblyman Curt Pringle (R-Garden Grove) and Sen. John R. Lewis (R-Orange) dispatched letters Tuesday to all pool participants except school districts, asking they drop demands for the final 11 cents on every dollar owed by the county.

“Without this forgiveness, it is the taxpayers of Orange County who will be asked to make up the difference,” Pringle and Lewis said in the letter. “The revenue that the county craves will come out of the pockets of the taxpayers in your neighborhood and throughout this county.”

The pair said the plea is prompted by their belief that Measure R, the half-cent sales tax hike proposal, will be rejected by county voters June 27 and there will be a need for alternative solutions.

If pool participants choose to drop demands for full payment of every cent invested, it would “relieve the pressure on the county to raise new revenues, such as Measure R,” Pringle and Lewis said in a draft of the letter obtained by The Times.

They also told the 400 council members and special district trustees who will receive the letters that “through your leadership, you could stave off a tax increase for Orange County and be a great help to taxpayers of our community.” The lawmakers also asked the local officials to put the matter on their agendas “at the earliest opportunity.”

The proposal drew protests from participants in the county’s investment pool, which lost $1.7 billion last year and prompted Orange County to file for bankruptcy.

“Nice try,” Jon Schotz, a financial adviser to the pool participants, said after learning of the idea. “It’s just not going to fly. I think our guys feel very, very strongly they’re owed this money and it’s the county’s responsibility.”

Schotz also questioned why pool participants would want to give in when the county “hasn’t even scratched the surface” on ways it could save revenue by privatizing services and selling off assets.

Other pool investors said the proposal seemed hollow, given that the county probably won’t begin paying off the final 11% it owes for years anyway.

“Many of us feel we’ve already done what Curt and John are asking for,” said Peer Swan, president of the Irvine Ranch Water District, which was among the biggest losers in the county investment pool. “As it stands now, we’ll be taking a piece of paper that we may or may not see anything from.”

“It’s a surprising suggestion in light of the county just negotiating a settlement agreement that includes this money,” said Stan Oftelie, executive director of the Orange County Transportation Authority, the single biggest investor in the county pool. “I’ll be interested in reviewing the letter.”

M. Freddie Reiss, another financial adviser to the pool participants, called the proposal “totally unacceptable,” saying it is “absolute folly” to suggest cities and special districts should “walk away from their claims.” Reiss said the proposal seemed ready-made for the campaign against Measure R, which both Pringle and Lewis oppose.

Even some in county government, which would gain if the debt was forgiven, suggested the proposal seemed too late.

“All of the settlements have been reached after months and months of negotiating,” Supervisor Marian Bergeson said. “It has been done in good faith, and there would be tremendous legal challenges if anyone really tried to push this. The $400 million we saved (through budget cuts) would be gobbled up in another legal feeding frenzy.”

But at least a few officials were keeping an open mind.

“Quite honestly, we’re encouraged (they) are attempting to find a way to help,” said Paul Nussbaum, an adviser to county Chief Executive Officer William J. Popejoy. “And we would hope the cities would seriously consider this proposed forgiveness of the last 11 cents.”

But Nussbaum said the county still needs Measure R.

“Actions like this could only lessen the time that Measure R is needed,” he said, adding that perhaps the proposed 10-year sales tax could be repealed after a few years. “We might have the sales tax off our back sooner than the 10-year duration. But we still need it.”

Orange County Treasurer-Tax Collector John M.W. Moorlach raised questions about whether pool investors need to be made “100% whole.”

“If I were to make the settlement agreements, I’d say give them the recovery notes and that’s it,” said Moorlach, who said he is leaning toward opposing Measure R. “I don’t see the county as being a charity. I still see (Measure R) as a make-us-whole tax and I don’t agree with that.”

Under the settlement agreement between the county and pool participants, 80 cents of every dollar invested will be returned to participants in the form of cash and recovery notes. Another nine cents on the dollar is expected from the proceeds of pending lawsuits against Merrill Lynch and other firms the county accuses of playing a role in the debacle. The final 11 cents is covered by an unsecured note.

Lewis and Pringle said in their letter that the remaining 11 cents “may seem to be a small piece of the final solution,” but would amount to $407 million of the nearly $2 billion the county says it needs to meet its obligations.

The lawmakers did not send the proposal to the county’s 31 school districts, which were required by state law to participate in the investment pool. If the schools were to somehow give up 11% of their investment in the pool, it would amount to $106 million.

“There’s no question the schools deserve a certain degree of preference and priority,” Pringle explained in an interview. “It’s clear they did not have as much discretion as other pool participants in how they invested.”

Times staff writer Rene Lynch contributed to this story.