Orange County Can Sell Bonds to Repay Debt, Courts Rule

In a step that could save taxpayers millions of dollars, Orange County gained court clearance Monday to pursue the most cost-effective route for a partial repayment of its debts to school districts, cities and other agencies that had money in its collapsed investment pool.

With approval from judges in Orange County Superior Court and U.S. Bankruptcy Court, the county can issue $275 million in fully insured municipal bonds that carry the highest rating, rather than more esoteric notes that would probably have forced the county to pay junk-bond interest rates.

“It’s the first and best option,” said the county’s financial adviser, Christopher Varelas of Salomon Bros.

Under the court rulings, the county will issue so-called recovery bonds backed by MBIA Insurance Corp., the nation’s largest municipal bond insurer. The bond proceeds will be used to redeem $236 million in warrants given last month to about 200 investors in the county’s failed pool as part of a court-approved settlement.

School districts will recoup through the bond sale about 13% of what they had on deposit in the investment pool when the county sought bankruptcy protection Dec. 6. Other agencies will get back about 3% of their money through the recovery bond sale.

Pool participants already received about 77% of their deposits back in cash. They hope to recapture the remainder from whatever the county garners in its litigation against Merrill Lynch & Co. and from new money-raising schemes--including a half-cent hike in the sales tax on the ballot June 27.

MBIA insurance will cost the county about $10 million--four times the normal rate. But over the life of the 30-year bonds, going without insurance would have cost the county about $100 million in higher interest rates.

“School districts will now receive the funds they need to provide essential services at the lowest possible cost to Orange County taxpayers,” MBIA Senior Vice President Neil Budnick said in a statement released Monday. “We are pleased to be playing a role in both helping the county take this essential first step in restoring its fiscal health and enabling it to significantly reduce the expense of issuing the recovery notes.”

Stan Oftelie, the chief executive of the Orange County Transportation Authority, said the county’s ability to issue fully insured bonds “gives great credibility to the county.” Oftelie chairs the bankruptcy committee representing pool participants.

Five people with lawsuits pending against the county had temporarily derailed the plan by objecting to the issuance of new debt before their claims were resolved. That forced the county to consider issuing Certificates of Participation backed by leases on county property--notes that would have been more expensive and harder to sell on the market.

Over the weekend, county officials persuaded the five to effectively withdraw their objections, allowing Superior Court Judge James L. Smith to give required court approval to the new debt Monday morning. The approval means that the county can sell the insured bonds in time to repay investors by the mid-June deadline outlined in the pool settlement agreement.

County officials will scramble over the next two days to finalize a prospectus for the recovery bonds. They plan to hold conference calls with potential investors Thursday, Friday and Monday. Varelas said he hopes that the bonds will be priced next Tuesday, then sold June 16.

Although four local school districts have large debt payments due next Tuesday, they have negotiated bridge loans from other agencies to tide them over until the recovery warrants can be cashed in. Other school districts need the cash from the warrants by month’s end to avoid insolvency.

The switch back to the original plan came on the exact day that the county had vowed to make the recovery notes “good as gold.”

Times staff writer Susan Marquez Owen contributed to this report.