Montebello Council OKs Settlement to Recoup Frozen O.C. Funds : Finances: City would get 77% of its $33.5 million in the failed investment pool and could sue for remainder later.

The Montebello City Council has agreed to a settlement plan that could allow the city to recoup a major portion of its funds currently frozen in Orange County’s ill-fated investment pool.

The plan, which is scheduled to be reviewed Tuesday by U.S. Bankruptcy Judge John E. Ryan, could provide 77% of the $33.5 million in city funds in the collapsed investment pool. Montebello would have the option of suing Orange County to try to recover the remainder, city officials said.

The settlement was approved earlier this month by a majority of the nearly 200 schools, cities, agencies and special districts that invested in the pool. The complex formulas were hammered out over six weeks of private negotiations between the county and pool participants, with help from business leaders.

If Ryan approves the settlement, Montebello and other entities could start receiving cash by mid-May. County bankruptcy attorneys, however, said a mechanism for distributing the money must still be arranged.

Initially, Montebello’s investment in the Orange County pool was more than $47 million. The city had borrowed $31 million at lower interest rates and invested it in the pool in hopes of earning a higher return.

The city had planned on withdrawing a portion of its funds from the pool in December to meet other debts, but all funds were frozen when the county filed for protection under federal bankruptcy laws.

The city found itself in a financial crunch, facing a Dec. 30 deadline for paying back $25 million of the $31 million that it borrowed. A federal judge released about $14 million from the Orange County pool, and lenders agreed to extend the remainder until June.

Last month, in anticipation of the upcoming June payment, Montebello borrowed $16.5 million from a division of Sumitomo Bank. The cash infusion allowed the city to avert immediate budget cuts and meet its June deadline to pay the rest of the debt. If the city were to default on the loan, Sumitomo could seize its $2-million-a-year motor vehicle license fees and take over operations of the city’s golf course.

The city has the option of paying back the Sumitomo loan at any time, and officials plan to do so after receiving a portion of the investment in the Orange County pool, officials said.

In approving the county settlement deal, the Montebello council chose Option B, which will allow the city to receive about 77% of its investment in cash but will preserve the city’s right to sue Orange County to collect the remainder.

The vast majority of the investors chose Option A, in which they can collect 77% of their investments but waive their right to sue Orange County. Instead, the investors receive “recovery notes” on some of their remaining frozen investments and a variety of county IOUs on the rest. The county has promised to convert the “recovery notes” to cash by June 5. Montebello selected Option B, said City Administrator Richard Torres, “because we think it will provide the best opportunity to recover 100% of our investment and any other costs . . . as a result of the collapse.”