Q & A : ORANGE COUNTY IN BANKRUPTCY : A Look at What the Settlement Will, Won’t Do

A settlement finalized Tuesday between Orange County and more than 200 schools, cities and public entities with money in the collapsed investment pool means that participants can finally get access to the $5.7 billion that remains. Here is a look at what it means.

Question: What was the importance of Tuesday’s settlement?

Answer: Most of the schools, cities, water districts and other agencies with cash in the pool now have access to a large portion of their money and most likely will not have to declare bankruptcy themselves or face massive cutbacks.

***

Q: Does the money get distributed immediately?

A: No. Those unhappy with the plan have 10 days to file an appeal, and the county has five days beyond that before it releases the cash, although county officials say they’ll try to release the money by May 15.

***

Q: Was each pool participant happy with the settlement?

A: Hardly. Those who hold Orange County bonds are unhappy because the county will have to issue $1 billion in new debt, some of which will have “superiority status” over the county’s existing debt. County officials wonder whether the settlement will somehow harm the effectiveness of their lawsuit against Merrill Lynch & Co. and other firms that advised the county about its portfolio. And some municipalities from outside Orange County still maintain that the county forced investors into making an unfair settlement in exchange for getting a portion of their money.

***

Q: Are any of the investors still on shaky ground despite the settlement?

A: Definitely. Some of the school districts that borrowed to invest in the doomed fund are most at risk, because the settlement only guarantees 77 cents in cash for each dollar invested. The rest is to come from recovery warrants and IOUs. Some school districts are counting on at least a 90% pay-back for their upcoming school budgets on July 1.

***

Q: How solid are the recovery warrants?

A: Right now, the recovery warrants are only the county’s promise that they can be converted to cash, or made “good as gold” by June 5. If they cannot be converted to cash by that time, investors retain their right to sue the county rather than settle for IOUs that are to be used to pay back the full amount.

***

Q: What is the status of the recovery warrants?

A: The county’s bankruptcy counsel and financial advisers are still working on several plans that would ensure that the $236 million in warrants are convertible into cash, but none are in place yet. Among the ideas: buying bond insurance; getting a bank to guarantee interest payments with a letter of credit; having the state guarantee the bonds; or redeeming the warrants with money now locked in restricted county accounts.

***

Q: Do the school districts have contingency plans if the recovery notes cannot be made good by June 5?

A: Yes. Newport-Mesa Unified, for example, will hire outside financial consultants and bond counsel to look at its backup plans. In Irvine, there is talk of a joint-powers agency among the city, school district and water district to help the school system through the crisis.

***

Q: Does this mean the bankruptcy is over?

A: No. Remember, there are two separate bankruptcies. One is for the failed investment pool managed by former Treasurer-Tax Collector Robert L. Citron and the other is for the county itself. The pool bankruptcy may effectively be over, but the county bankruptcy awaits, and so do anxious bondholders owed $1.275 billion this summer, vendors holding $100 million in unpaid bills and other creditors who want their money.

***

Q: How does the county come up with that money?

A: The county could roll over the $1.275 billion in bonds at last year’s interest rate, but bondholders want an increase in that rate of at least 2.5%. The county could invalidate $600 million of the bonds as illegally incurred debt, but financial experts warn that such an action would further sully the county’s reputation and mean astronomical interest rates for any future borrowing. County officials say the best chance to raise money is through the half-cent sales tax measure, called Measure R, on the June 27 ballot. But early poll results indicate voters disapprove of a sales tax increase.