Sales Tax Failure Would Doom O.C. Plan, Auditor Says

If voters reject a proposed half-cent sales tax, Orange County’s plan to emerge from bankruptcy will unravel, jeopardizing the county’s ability to fully repay schools, cities and other agencies that lost money in the county investment pool, the California state auditor said Monday.

“The plan, as the county has structured it with a goal of 100% recovery to all of the players, will not succeed without this key element . . . a sales tax increase,” Auditor Kurt Sjoberg said in a six-page report delivered Monday to Gov. Pete Wilson, Assembly Speaker Willie Brown and Senate President Pro Tem Bill Lockyer.

Without the extra sales tax revenue that Measure R would generate, the county will be unable to borrow additional money from Wall Street, the auditor said. That will leave it well short of what is needed to make the recovery warrants issued to pool investors “as good as gold,” as promised, and to redeem nearly $1 billion of short-term notes and bonds maturing this summer.

The county is trying to negotiate a one-year extension of the maturity dates of the bonds coming due this summer.

But the elements of the recovery plan are so intertwined, the auditor said, that the failure of the sales tax initiative on a special June 27 ballot will doom the entire plan, even if bondholders agree to roll over the debt until 1996.

The county does not have a contingency plan if the sales tax fails at the polls, Sjoberg said. “They really don’t have any Plan B’s or C’s, or other elements of a plan that we could review,” Sjoberg said, adding that he found this lack of a fallback position hard to believe.

Noting that “these people [the county’s consultants] have planned their whole lives,” Sjoberg said he told his auditors, “they’ve got to have some other plans.”

“But if they do, they’re not discussing them in any kind of forum where we would be included. We had absolutely no suggestion that they had any kind of backfill plan, or a Plan B.”

Sjoberg said county officials told his auditors no other plan exists. “The other plan is that if this one fails--it’s a default. In fact, they were calling it ‘the Big D,’ ” Sjoberg said.

The auditor was asked to analyze the county’s recovery plan by the Joint Legislative Audit Committee earlier this month, after a package of bankruptcy recovery bills passed the Senate and was sent to the Assembly. Orange County declared bankruptcy Dec. 6 after trading losses of nearly $1.7 billion caused the county’s investment pool to collapse.

In an earlier audit, Sjoberg’s staff discovered that former Treasurer-Tax Collector Robert L. Citron illegally appropriated for the county $92.9 million in interest earnings due other investors in the county pool, and saddled all the pool participants with $271 million of trading losses incurred by the county.

For this report, Sjoberg said auditors spent a week in the county reviewing elements of the recovery plan.

The first and most critical element of the plan’s success would come from the passage of Measure R. It would raise an estimated $130 million a year in new sales tax revenue, money that would flow into the general fund and free up $97 million a year it receives in motor vehicle license fees. The license fees could then be pledged to pay off $750 million in new borrowings--some of which would be used to make the school recovery warrants as good as gold.

The decision to use the license fees instead of sales tax revenue to secure new borrowings may have been prompted by concern in the municipal finance market about the county’s ability to repay.

“I don’t know if it’s any absolute condition that the municipal finance market has placed on this,” Sjoberg said.

The next large revenue stream would come from turning the county’s Integrated Waste Management Department into an ongoing business by opening the county’s landfills to garbage generated elsewhere and raising the dumping fees from $22.75 to $35 a ton.

If the county receives the revenue it expects, up to $500 million in new bonds could be issued and from $12 million to $24 million in new general fund revenue created. After paying underwriters and retiring existing debt, the county estimates it would net about $360 million.

“There’s certainly some elements of all these plans that may be overstated because we don’t know for sure whether there is the out-of-county interest [in using the landfills] at the level they think there is and whether they plan to start out at $35 [a ton] and then drop to $30 or what,” Sjoberg said. “So there are certain estimates on the revenue side that are a little too unknown for us to get great comfort in that number.”

The last large block of revenue would come from restructuring the Teeter program, a borrowing based on delinquent property taxes and penalties. The county must repay $175 million in Teeter notes on June 30, but by turning the program into a self-sustaining entity and issuing a single 20-year bond issue, the county figures it can retire the old notes and generate an additional $60 million.

The balance of the county’s recovery plan is “not as clean as we would like from an accountant’s point of view,” Sjoberg said. But “it didn’t make sense for us to spend hours and hours analyzing down to the $10-million level if there were half-billion-dollar elements of vulnerability.”

How the county will use the new proceeds will be determined in part by the U.S. Bankruptcy Court and the final settlement plan.