ORANGE COUNTY IN BANKRUPTCY : Pool Participants Must Now Decide How to Invest Anew : Finance: At least one agency will leave its newly freed money with the county, but most are considering alternatives.
Burned by the worst municipal bankruptcy in U.S. history, Orange County’s cities, schools and special districts faced a new dilemma Tuesday: figuring out how to safely invest the $5.7 billion they will receive from the county’s investment pool.
At least one agency, Capistrano Bay Community Service District, plans to leave its funds in the pool, where county officials promise it will be invested in a conservative fashion--unlike the exotic financial maneuvers that caused the loss of nearly $1.7 billion.
But most of the more than 200 participants were looking at alternatives, from setting up regular savings accounts to investing funds on their own or with the help of a private money manager.
“We’re taking it elsewhere,” said Stan Oftelie, executive director of the Orange County Transportation Authority, the single largest pool participant, with $1 billion invested at the time of the pool’s collapse. “We’re in the process of evaluating what we are going to do. We’re looking at money managers.”
Yorba Linda Councilwoman Barbara Kiley, whose city had $7 million in the pool, said, “I think it would be remiss for a city to go back and do what they did before. I think they should take the money and run. I don’t think citizens are at all (trusting) of the county anymore.”
At best, Tuesday’s settlement agreement, approved by U.S. Bankruptcy Judge John E. Ryan, was a Pyrrhic victory for investment pool participants. Although it gives them a quick infusion of much-needed cash, city and school district officials were quick to point out that they still face months of uncertainty that in some cases could mean the difference between solvency and bankruptcy.
“I wish this was the end of the process,” said Villa Park Mayor Bob Patchin, whose city had $1.2 million in the pool at the time of the collapse and is currently debating what to do with its share. “I think this will bring closure to the first part of all this. (But) I think a lot remains to hassle over.”
Most investors said they felt confident Judge Ryan would approve the settlement agreement, which gives pool participants an average of 77% of what they had in the pool Dec. 6, the day the county filed for bankruptcy. But investors wonder how they will secure the rest of their money.
Those who chose the settlement plan’s Option A are to receive the rest of their investment in “recovery warrants” that the county promises will be “good as gold” and payable in cash by June 5, and in IOUs. They give up the right to sue the county.
A few investors, such as Yorba Linda, who are skeptical of the county’s reimbursement plan, chose Option B, which gives them the 77 cents on the dollar and the right to sue the county for the rest.
“I just don’t believe this ‘good as gold’ stuff,” said Kiley. “I just don’t see this all happening.”
School districts remain in the most tenuous position and are basing their 1995-96 budget plans on receiving 90% of their pool money by June. Some of the hardest-hit districts warn that they could go bankrupt and others say they would be forced to make massive cutbacks if they do not receive 90 cents on the dollar.
“The recovery notes are absolutely crucial,” said Margie Wakeham, an Irvine Unified School District trustee. “If they are not made good, we are in deep trouble.”
School districts that borrowed money to invest in the county pool--Newport Mesa, Irvine Unified, Placentia-Yorba Linda Unified, the North Orange County Community College District and the Orange County Department of Education--find themselves in the most dire circumstances. Combined, they borrowed more than $200 million that must be paid back this summer, in addition to paying the rest of their bills.
The school systems are now considering contingency plans, including layoffs and borrowing more money.
Some options: the Irvine Ranch Water District has expressed an interest in providing the Newport-Mesa and Irvine school districts with short-term loans. In Irvine, the city, the school district and the water district have discussed the possibility of forming a joint powers authority to help Irvine Unified avoid insolvency.
Both Newport-Mesa and Irvine Unified have proposed millions of dollars in cuts, which could include personnel as well as programs. At the North Orange County Community College District, officials are considering borrowing as much as $6 million.
Despite some gloomy predictions, officials in several cities said they do not believe the fiscal crisis will ultimately have a devastating impact on their municipalities.
And many, dubious about the county’s ability to make them financially whole, are planning as if the 77% reimbursement is all they will be getting.
“We’re prepared to move into the future without the money represented by the recovery notes,” said Santa Ana Mayor Miguel A. Pulido Jr., whose city plans to invest on its own. He pointed out that the most significant impact of the county’s financial crisis on Santa Ana has been the delay of two construction projects, including a police facility building.
Cities have not resorted to layoffs or service cuts. But some did delay capital projects in the weeks after the Dec. 6 bankruptcy filing, projects that can move forward if cities receive an 80% settlement.
However, Huntington Beach Mayor Victor Leipzig said his city will eventually have to find a way to absorb the 20 cents on the dollar that it won’t immediately receive under the settlement.
“That will be a brutal and emotionally wrenching process,” he said. “There is a lot pain still to be suffered.”
Other options for the pool participants include joining a joint powers authority being formed by the pool participants’ committee or making deposits in the state-run Local Agency Investment Fund.
County Treasurer Tax-Collector John M.W. Moorlach, who was appointed to the post by the Board of Supervisors in March, said he understands why investors would avoid placing their money in the county investment pool, which he said is currently earning a yield of about 5.8% through treasury bills, discount notes and commercial paper.
“Once your credibility has been impacted, it’s very difficult to convince someone to stay,” Moorlach said.
Peer Swan, president of the Irvine Ranch Water District, one of the pool’s biggest losers, says he is not convinced.
“I feel more comfortable investing my money than letting an on-the-job-training treasurer invest it,” he said. “I think it’s wise to get out.”
So far, only the Capistrano Bay Community Service District Board of Directors has committed to staying in the pool. The district had $183,000 in the pool at the time of the crash.
“I guess we’re the unusual ones,” district Manager Michael Farrier said. “We’re planning on staying with the county when everyone else is probably going the other way. But we feel the Orange County investment pool, as it will exist, is probably the most scrutinized investment pool that you can find. There’ll be so much oversight.”
Times staff writer Jodi Wilgoren contributed to this report.
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Holding Their Breath
The pool settlement approved Tuesday provides investors with an average of 77 cents on the doollar in cash, likely to be distributed later this month. School districts will receive another 13 cents in recovery notes the county says will be cashable by June 5. The recovery notes are crucial for the five school districts listed below because they plan to use the funds to help pay off loans taken out last year to invest money in the county pool.
Cash Recovery School district distribution notes Irvine Unified $59,480,238 $13,214,066 Newport-Mesa Unified $50,356,293 $11,143,883 North Orange County Community College $48,650,488 $11,681,687 Orange County Department of Education $29,643,761 $9,402,483 Placentia-Yorba Linda Unified $53,464,164 $11,427,090
Debt Debt payment School district payment due (in millions) Irvine Unified June 13 $54.5 Newport-Mesa Unified June 13 $47 North Orange County Community College June 13 $59 Orange County Department of Education June 13 $42 Placentia-Yorba Linda Unified Aug. 24 $50
Source: School districts, Times reports
Researched by SHELBY GRAD / For The Times
