ORANGE COUNTY IN BANKRUPTCY : Default Bid Would Be Disaster, Panel Told : Bankruptcy: Financial experts say repercussions would be felt across state. Panel told county would be ‘cut beyond the bone.’

A parade of Wall Street investors, rating agency representatives and lawyers warned a state Senate panel Tuesday that any attempt by bankrupt Orange County to default on bond payments in the coming months could send fiscal aftershocks throughout the state.

Investment bankers also said they will avoid bond offerings by California municipalities this summer because of the Orange County investment debacle and expressed ire over Gov. Pete Wilson’s veto of a bill that would have given the state control over the county’s recovery.

Meanwhile, a bankruptcy lawyer told the Senate special committee on the Orange County crisis that the county faces grave consequences if it defaults on its debts.

Lee Bogdanoff, a bankruptcy attorney for the county, said Orange County could emerge from bankruptcy early next year if its recovery plan works out and voters approve a half-cent sales tax hike on the June 27 ballot.

But if those plans fail and the county is forced to default, the bankruptcy would drag on far longer, creditors would not be paid and government services would be cut “beyond the bone,” he said.

Phil Carlson, a credit risk officer for Northern Trust Co., told the committee that the proposed county sales tax increase--Measure R--is “absolutely vital” to prevent a default and its rejection by voters would be a “recipe for disaster.”

That disaster could ripple through the state, experts testified.

Cadmus Hicks of the investment firm John Nuveen & Co. said existing interest rate penalties applied to local governments in California in the aftermath of Orange County’s troubles “will persist and grow worse” if the county defaults on its bond debt.

Thomas Kenny, an investment manager with Franklin Advisers, criticized Wilson for vetoing a bill by Sen. Lucy Killea (I-San Diego) that would have given the state broad authority over Orange County operations.

“I think the market today has no confidence in Orange County leaders,” Kenny said.

Daniel Heimowitz, director of public finance at Moody’s Investors Service, a Wall Street rating agency, said any effort by Orange County to avoid its debt would prove “extremely chilling” for the municipal bond market nationwide and could “threaten to unravel the fabric of public finance.”

If the county pays off the $1 billion in bonds it has coming due this summer, Heimowitz said, “confidence in a short time would be rebuilt” as investors regained faith that municipalities would come through with payments “come hell or high water.”

But a default by Orange County would be seen as proof that “a systemic weakness” existed in the California bond market, fueling an “environment of mistrust,” he said. Heimowitz noted that in some cases it is years before toppled municipalities can successfully return to the bond market. After New York City was beset by financial difficulties in the 1970s, it did not sell bonds for half a dozen years.

Dick Larkin, a managing director at the rating agency Standard & Poor’s, agreed that attempts by Orange County to roll over its bond debt would sharply limit its access to the market.

“How long will it take to repair an abrogation of trust and confidence?” Larkin asked rhetorically. “I can only say a long, long time.”

He said other local governments in the state would likely be penalized because of “guilt by association.” While the state likely wouldn’t be locked out, it would undergo far more scrutiny, he predicted.

Even as the two rating agency officials predicted dire consequences for Orange County, one lawmaker put them on the defensive to a degree.

Sen. John Lewis (R-Orange) pressed the pair on why their agencies hadn’t raised concerns about the Orange County debacle when warning signs surfaced months before the county announced in December that it had lost $1.7 billion in investments.

“I wouldn’t say we were prescient in foretelling that the county was going to have a lot of problems,” Larkin acknowledged, adding that in the future “we’re obviously going to be asking a lot more questions . . . [and] perhaps we might not be so trusting” of answers given by municipalities.