THE BOTTOM LINE ON MEASURE R : NEWS ANALYSIS : Measure R Results Will Define Post-Crisis O.C. : Bankruptcy: Voters will answer fiscal questions while sending a message about mission of county government.

Orange County voters must decide June 27 whether they are willing to pay another half-cent on each dollar rung up on local cash registers, in order to escape the largest municipal bankruptcy in U. S. history.

In deciding the fate of a ballot initiative dubbed Measure R, which would boost the current sales tax from 7.75% to 8.25% to raise about $130 million annually for the next 10 years, voters will effectively choose whether their county will repay its debts in full, and as quickly as possible.

Beyond resolving the issue of whether to pay or not to pay more taxes, the vote will also shape the answers to other questions: When to pay? How to pay? Whom to pay?

Finally, voters will send a message about the size and mission of Orange County government, which will be seriously affected one way or another, with inevitable consequences for the quality of life.

It is, perhaps, the most important ballot that county voters have ever been called upon to cast, a watershed event in the ongoing saga of the bankruptcy, which itself stakes a claim as the most important occurrence in the county’s evolution.

The county’s elected leaders, a team of high-priced experts and a star-studded corps of volunteer executives have spent six months sorting through the mess left by former Treasurer-Tax Collector Robert L. Citron’s doomed investment strategy, which resulted in a staggering $1.7-billion loss last year for the county and some 200 cities, schools and other agencies.

To recover from the bankruptcy and repay all the losses, they fashioned a complex plan relying on special legislation from Sacramento, compromise settlements with thousands of creditors, and intricate new financing packages being taken to a wary Wall Street.

Ultimately, though, they cannot control a key element of their own plan. The fate of its linchpin, Measure R, depends on the will of the people.

A record number of absentee ballot requests suggests that Measure R may lure more voters than any special election in county history. Yet a recent Times Orange County Poll shows a hefty chunk of voters, some 15%, are still unsure which side they are on.

For many of these fence-sitters, the rhetoric of the hard-fought campaign only muddled the issues.

The Yes-on-R movement, led by the county’s top administrators, insists that the question is a practical, financial one. They say Measure R will “cap the costs” of the crisis and end the uncertainty that has plagued the county since the startling investment losses were announced in December. It is, they argue, a business solution to a business dilemma.

The pro-R people also talk about character and credibility, saying the county must show a willingness to pay for its mistakes. Voting Yes, they say, is a mark of civic responsibility.

The No-on-R campaign begins from a philosophical perspective.

We are taxed too much, they say; any more would cripple the economy. Within the crisis, the anti-taxers see a long-awaited opportunity to reform government. They worry that if we rush to plug the county’s financial hole with Measure R--the quickest, most straightforward and most far-reaching solution--the incentive to make county government more efficient will disappear.

Outraged that nobody stopped Citron from gambling their money away, they are wary of pouring good money after bad without a major overhaul of county government.

And they too talk practicalities: There are other ways to raise the dough. Let the investors--local agencies that joined the county’s investment pool and people who bought the county’s bonds--each take a hit and move on. Share the pain by shifting current tax revenue until the debts are repaid.

“People have to make a judgment: if they want to live with the uncertainty of what will happen if it doesn’t pass. Or, pass the half-cent sales tax, suffer with it and move on, put it behind us,” said Prof. Anil Puri, chair of the economics department at Cal State Fullerton.

“It may be only $50 or $60 [per person, per year], but the question is: How else are you going to use it? Are you willing to give it up? I asked one of my students about it. He said, ‘That’s a pair of sneakers for me--but that’s important to me.’ In a way, that sums it up.”

Today, The Times offers an analysis of Measure R, with a point-by-point review of both sides’ arguments.

No on Measure R

* Money would go into county’s general fund, controlled by the same people who oversaw the bankruptcy.

To designate the money for a specific purpose requires approval of two-thirds of the voters; Measure R requires only a majority and sends the projected revenue to the general fund.

According to the ordinance, the money “shall be used for general purposes of the county, including, but not limited to, preservation of essential county services and payments to schools, cities and other creditors of obligations and debts of the county related to the bankruptcy.”

General fund revenue is controlled by the Board of Supervisors. Of the five current supervisors, three were in office when the bankruptcy hit--Roger R. Stanton, William G. Steiner and supervisors Chairman Gaddi H. Vasquez, who announced last week that he will not run for reelection.

Little about the financial crisis was connected, however, to decisions the supervisors made during their oversight of the general fund.

If there was an oversight failure, it was in supervising the activities of former Treasurer-Tax Collector Robert L. Citron, the architect of an investment strategy that lost $1.7 billion. Citron resigned under pressure and pleaded guilty to six felony counts; his deputy, Matthew Raabe, was fired and faces the same charges of fraud and misappropriation, though he has pleaded not guilty. Staffers who oversaw the budget before the bankruptcy, such as former County Administrative Officer Ernie Schneider, have also been ousted.

In addition, Measure R funds would be monitored by a Citizens Oversight Committee.

* Funds are not earmarked for schools or law enforcement.

*

As stated above, the funds are not “earmarked” for anything, because that would require approval of the tax by a two-thirds majority. The ordinance does mention schools as one potential destination for the funds; it says nothing about law enforcement.

County officials have said that one eventual use of Measure R would probably be to pay back the remaining $109 million schools lost when rising interest rates toppled Citron’s investment pool.

* The tax would be difficult to repeal if the county borrows against it.

*

If certain revenue is pledged as backing for a new bond issue, those bonds must be paid off before the revenue stream can be cut off.

However, the county is not currently planning to use income from Measure R directly to issue new debt. Rather, Measure R funds would likely replace motor-vehicle license fees being pledged toward repayment of recovery bonds.

If the county does borrow against Measure R, and other funding sources suddenly appeared--such as a large lawsuit settlement from Wall Street firms--the bonds could be retired early, or refinanced with another revenue stream. If the county’s debts are retired early, the tax can be repealed by the voters.

The Citizens Oversight Committee is specifically charged to “conduct investigations, perform studies and make reports for the purpose of determining whether the tax . . . is generating proceeds beyond those required for the legitimate purposes of the county” and to “recommend repeal of this [taxation] ordinance when the committee determines that the legitimate financial needs of the county can be met without the proceeds of the tax.”

The tax can be repealed by a majority vote of the supervisors, followed by a majority vote of the people.

* The tax will be permanent, not ending after 10 years.

*

According to the ordinance, the tax would be in effect from Jan. 1, 1996, until Dec. 31, 2006. It cannot be extended without another vote of the people.

But the No-on-R camp says there is no such thing as a temporary tax. “How many taxes have ever been rolled back?” asks Frank Greinke, co-chair of the campaign.

“Once you’ve got people used to paying it,” added Mike Shepherd, a Jeep dealer who is fighting R, “if you’re the bureaucracy, you don’t give it back. That goes against everything you’re about.”

As an example, the anti-taxers point to the temporary sales tax passed by the Legislature after the Loma Prieta earthquake, saying that it became Proposition 172, a tax devoted to law enforcement, rather than disappearing.

But in fact, the quarter-cent sales-tax increase for the San Francisco quake elapsed Jan. 1, 1991, after its allotted 13-month life, according to a consultant for the state Senate Revenue and Tax Committee.

Six months later, the Legislature passed a separate, 1.25% sales-tax package that included another temporary tax--this time for a half-cent. Proposition 172, an initiative placed on the ballot by the Legislature, was also a half-cent tax and went into effect after the temporary component of the previous tax expired.

* The tax would remove incentives to reform county government.

*

Measure R is intended to retire county debts, including those it took upon itself when it assumed all of the investment pool’s losses, and agreed to pay the 200 cities, schools and other agencies 100% of what they had invested in the pool.

The most likely fallout if Measure R fails is that these debts will go unpaid. Efforts to reform--and even radically change--county government are happening independent of the financial maneuvering.

Government restructuring has garnered more attention since the bankruptcy filing than ever before.

Popejoy, a volunteer with no previous government experience, said after a few months on the job that he would like to abolish the Board of Supervisors and eliminate several departments. Supervisor Marian Bergeson has proffered a similar proposal that would also collapse dozens of special districts and agencies into the county and turn other county functions back to the cities and states.

No-on-R devotees say they are afraid this momentum will come to an abrupt halt if the tax passes. “There’s a lot of pressure on the county right now--to sell assets, to change structure, to change power blocks,” said Mark Thompson, a consultant to the anti-tax campaign. “What we’re saying is if we take this heat off, that means a return to business as usual.”

Popejoy offers a contrasting analogy: When a house is on fire, he says, you don’t rearrange furniture, you call 911.

* A tax could drive a weak Orange County economy back into recession.

*

Taxes can be a drag on the economy, but most experts do not believe an added half-cent would cripple Orange County’s strengthening economy.

“A half-cent tax is a negative, no question about that,” according to Anil Puri, chairman of the Cal State Fullerton economics department. “But being spread over 10 years, on a year-to-year basis, it is not such a major burden to cause the county’s economy as a whole to go into a recession or any such cataclysmic or major economic downturn.”

Esmael Adibi, director of the Center for Economic Research at Chapman University, estimates that taxable sales might decline $200 million, or roughly 1%, if the sales tax increase were imposed. But other economists, including Puri, question such gloomy forecasts. “There’s a real question how much impact a half-cent increase would have. . . . I don’t believe it has much direct bearing on retail sales.”

Shepherd, the anti-tax car dealer, always puts it in personal terms.

“Somebody buying a new Jeep from me is going to pay $150 more in a sales tax,” he said. “That $150 is $150 they’re not going to spend someplace else.” Still, he acknowledged that the June 27 vote will have “far less impact on the Orange County economy” than the expected escalation of the trade war with Japan.

* Debt rollover creates more time to pursue alternatives.

*

Orange County and its official creditors committee has submitted a proposal to extend repayment of $800 million in bonds and notes coming due this summer until June, 1996. That was done, in part, because revenue from Measure R would not be available until Jan. 1, 1996, to help repay those debts. If the tax fails, the rollover would create breathing room for other financing alternatives (See accompanying story).

However, the debt extension is not a done deal. At least seven parties--including two groups of note-holders and the official committee of investment pool participants--have filed legal objections to the motion, opening a nasty rift among the largest constituents in the case. The objectors contend the debt-extension proposal goes way too far in doling out rights among the creditors, arguments Judge Ryan will consider Friday.

Individual note- holders will have until July 7 to vote on the agreement. If they give it a thumbs-down, the county will likely default.

* The county may receive $1 billion from a lawsuit against Merrill Lynch.

*

Part of the recovery plan includes a massive $2.4-billion lawsuit accusing Merrill Lynch & Co. of orchestrating an illegal investment strategy for the county--accusations that the giant Wall Street brokerage vigorously denies.

County officials insist no substantive settlement talks have occurred in the case, though Popejoy flew to New York last month to meet with Merrill Lynch Chairman Daniel P. Tully. There is no known offer on the table.

Rumors, however, abound. Some say Merrill has offered $300 million and the county balked; Popejoy and several other top-ranking county officials deny that. Other sources say Popejoy asked for $1 billion or $1.2 billion and Merrill either refused or gave no reply.

In any case, most observers are betting on an ultimate settlement of not more than $500 million. “Settlements in excess of $100 million are extremely rare,” said one lawyer involved in the case. “Settlements about $200 million are even rarer, and settlements above that are unheard of. You don’t ever want to bet on litigation to solve your problem.”

Litigation proceeds have, in part, been pledged to cities and special districts under the court-approved settlement agreement. If settlement proceeds exceeded the $350 million owed those agencies, the county could use the excess to retire other debts and could move to repeal Measure R before it expires.

* Orange County’s taxes and cost of living already are too high.

*

Orange County’s current sales tax of 7.75% is below Los Angeles County’s 8.25%, is tied with Riverside and San Bernardino counties, and exceeds San Diego County’s 7%.

A Times analysis earlier this year showed that Orange County’s overall tax bite is among the highest in the state, and significantly above neighboring counties.

In 1992, the latest year for which data are available, the average Orange County resident paid $2,422--10% of his or her income--in state and local fees and property, sales and income taxes. That compares with a statewide average of $2,026 per capita, or 9.61% of individual income.

A separate study by the Tax Foundation of Washington, which used 1994 estimates of local, state and federal taxes and fees, showed that Orange County’s total tax burden is nearly 20% more than the national average.

The high overall taxation is caused, in part, because of the county’s affluence. Income taxes are higher because Orange County residents have higher income; and property taxes are high because the county has some of the nation’s most expensive housing, much of it built and sold after Proposition 13 froze property tax assessments.

* Local agencies that invested in the county-managed fund do not deserve total repayment. Instead, they should be punished for gambling with public money.

*

Of the $1.7 billion in investment losses, about 40% was suffered by the county itself, the rest by participants in Citron’s pool.

Some agencies, such as school districts, were forced under state law to keep virtually all of their funds in the county treasury. Others chose to invest because of Citron’s historic high yields. And about a dozen groups borrowed large sums specifically to reap profits from the risky investments.

In May, Ryan approved a settlement between the county and its 200 pool participants that outlined a plan for total repayment over time, with some money coming from litigation proceeds and revenue such as Measure R.

Persuading local agencies to forgive the debt, and thus share the pain from the investment losses, would be a monumental political feat. But since many local leaders have denounced the tax or refused to take a stand on it, they might be more willing to consider taking a hit if Measure R is rejected.

Yes on Measure R

* Measure R will get Orange County out of bankruptcy quickly.

Bankruptcy attorney Bruce Bennett estimates that if Measure R passes, the county will emerge from Chapter 9 protection between June and October of 1996. If it fails, Bennett said, the bankruptcy will likely last six months to a year longer, postponing the day when the county can once again make decisions without seeking approval of a judge.

Rejection of the tax increase would send the county finance team back to the drawing board, reviving options that were placed on the back burner because they did not raise enough revenue, or because they entailed major legal or political obstacles. Unwilling to accept the notion that the county cannot afford to pay them back in full and promptly, creditors will also brainstorm financing options--and fight in court over who gets what. They may push for another sales tax vote next year.

“If you’re not repaying the creditors at 100 cents on the dollar, the county will have to try to move from 25 cents to 26 cents, and so on,” Bennett said. “The case will bog down into a comprehensive search for pennies.”

The bankruptcy will end only when U. S. Bankruptcy Judge John E. Ryan confirms a “plan of adjustment” to divvy up the county’s assets. That comes after a long process of hearings and voting by creditors.

The county has already spent millions of dollars for lawyers and financial advisers, and the meter stops ticking once the bankruptcy ends. But other than that, the impact of an extra year under bankruptcy protection is unclear. The damage to the county’s reputation and economy was done at the onset of the financial crisis and the bankruptcy filing; the difference between a two-year bankruptcy and a three-year bankruptcy will not be much.

* Our schools need Measure R. If the tax fails, it will trigger a rash of bankruptcies among local agencies and invite a state takeover of the school system.

*

Orange County’s 31 school districts and the county Department of Education already have been repaid 90% of what they had in the investment pool at the time of the bankruptcy filing Dec. 6. Along with some education agencies from outside the county, they are still owed about $109 million.

The county promised to use its best efforts to repay that last 10 cents of every dollar the schools invested but laid out no specific plans or timetable. Officials have said that without Measure R, the schools will probably never get that money back, though there is also no guarantee that Measure R money will end up in school coffers.

No school system faces insolvency because of a 10% loss. Nor will any local city or special district be forced into bankruptcy if it does not recover the rest of the money lost during the financial crisis.

The state is required to step in and run the schools if an individual district cannot, but that is not on the horizon now that the schools have been repaid 90% of their investment pool balances.

However, schools have very few ways to raise revenue, and if they lose $109 million they had planned on having, there will undoubtedly be cuts in programs and some layoffs, which could lead to increased class sizes and delays in school improvement.

* Measure R will only cost you $50 per year.

*

Based on last year’s taxable sales, Measure R is expected to raise $130 million a year. Out-of-county residents will probably pay about 15% of that, leaving $110.5 million. Using 1990 census figures, that amounts to about $45 for every person living in Orange County, or $133 per household.

The $50-a-year figure used by proponents is based on spending of $10,000 for taxable goods. But that assumes that everyone spends equally--which is not true. Obviously, if you buy a $20,000 car, you would pay an extra $100 in taxes on that item alone, bringing your total for the year far above $50.

For those who are unsure how much they spend on taxable goods, there are other ways to guess how much Measure R might cost.

Esmael Adibi, director of the Center for Economic Research at Chapman University, said Orange County residents spent an average of 44% of their income last year on taxable goods. Groceries and prescription drugs are non-taxable, as is any rent you might pay. So if you earn $50,000 a year, you might spend $22,000 on taxable goods, and face an added $110 from Measure R.

But Adibi warned that middle-class residents spend a far higher proportion of their income than those in the higher-income group. Typically, the middle-class spends 90% of its income annually, he said, meaning that the middle class would shoulder a proportionately greater share of the tax.

* Measure R funds are protected from abuse or misuse by politicians.

*

The ordinance provides for a Citizens’ Oversight Committee to watch how the proceeds are spent. The five-member committee would be selected by lottery, one person from each supervisorial district, after applications are screened by former Orange County grand jurors. No elected or appointed government officials are eligible. Members would serve two-year terms.

The committee would not actually decide how the money is spent. That task resides with the supervisors and the county administrative staff that prepares its budget. But the committee is empowered to “monitor and recommend” to the board appropriate uses for the money, and to analyze whether the tax is raising more revenue than necessary and should be curtailed.

Measure R requires the committee to meet, in public, four times a year, and to present a report to the board and “to the citizens of Orange County” on the matters pertaining to the tax.

Mark Thompson, who is running the anti-R campaign, complained that the oversight panel would have “no authority, no impact.”

“They can have a press conference and say the County Board of Supervisors are not doing what they’re supposed to and [the supervisors will] sit up there and laugh at them,” he said.

But Paul S. Nussbaum, County Chief Executive Officer William J. Popejoy’s chief adviser, said it is up to the citizens to protect Measure R. “The public’s attitude is the driver there. They can’t treat it like a blue-ribbon commission. The public cannot, this time around, abdicate responsibility again. It’s their tax to monitor,” he said.

* County services will be jeopardized if Measure R fails.

*

Measure R is not intended to pay for county services directly, so there is only an indirect link between its passage and service levels. If the sales-tax hike fails, however, the county will be searching for money wherever it can find it, and may yank some from county programs.

Popejoy has already cut $188 million from the county’s general fund budget of $463 million, eliminating entire programs from the health-care and Social Services departments and chopping staff in other areas. He has promised further cuts--perhaps as much as $75 million--regardless of Measure R’s fate.

Services cuts will more likely be felt at the community level. The county plans to use $550 million from Measure R to repay schools, cities and other agencies that invested in its pool. If those groups don’t get their money back, they will finally be forced to make budget cuts that will hurt programs and services they provide.

* Local residents and small business will lose millions of dollars without Measure R.

*

Among the county’s massive debts are about $975 million in short-term notes and bonds, some of them held by Orange County residents, and at least $100 million owed local vendors for goods and services provided before the bankruptcy filing but never paid for.

Popejoy and Sheriff Brad Gates said last week that these debts would fall into a second-priority category if Measure R fails and be repaid only at a rate of about 20 cents on the dollar.

But that may be just a scare tactic.

On Friday, Ryan approved a plan to repay the holders of $175 million in bonds in full, leaving about $430 million in reserves for the $800 million in outstanding debt; that means bondholders could be repaid an average of 54% without any new revenue at all.

Though there are no such reserves for vendors, both groups are represented by lawyers and sit on the county’s creditors committee. The county might not get away with just stiffing them.

“That’s what happens in bankruptcies,” said Frank Greinke, co-chair of Citizens Against a Tax Increase. “You don’t get all your money back.”

* The business and job climate will be hurt by a long bankruptcy.

*

Economists say it is virtually impossible to measure the effect of the bankruptcy on the local business climate and prospects for job creation. While the negative publicity and uncertainty surrounding the bankruptcy undoubtedly takes a psychological toll on people deciding whether to move or expand businesses here, there has been no startling shift in the economy during the six months of the bankruptcy.

“Fundamentally, the Orange County economy is well-diversified and very strong,” said Anil Puri, chairman of the Cal State Fullerton economics department. “The impact on the economy is not going to be significant one way or the other, because the economy is too big.”

While “the bankruptcy is bad [for business], no question about it,” Puri noted that a hike in the sales tax would also have a depressing effect on the economy.

Further, the duration of the bankruptcy may well be meaningless to the average home buyer, business owner or tourist. The financial crisis and bankruptcy filing have already left a blemish on the county. Ending Chapter 9 may dull it, but won’t erase it.

* Measure R will help stop the decline in home values.

*

Analysts do not believe the bankruptcy has had a real effect on home values or home sales--which have been dropping since 1991--so they do not accept the notion that the sales tax will noticeably affect either.

In May, Orange County’s home sales were down 25.2% from the previous year, while San Diego County’s dropped 23.8%, according to Dataquick. But comparing the first five months of 1995 to the same period in 1994, Orange County fell 26.5% and San Diego crashed 27.8%.

“So far, we have not seen any evidence that bankruptcy has had any impact on home sales in Orange County,” said Nima Nattagh, a market analyst for TRW Ready Property Data. “If Orange County stood out as the only county in Southern California [to experience declines], then I think you could have made a case that the bankruptcy had an impact.”

TRW found that home values slipped 0.7% in Orange County during the first four months of 1995 compared to the same period in 1994, while San Diego County’s home values fell 2.3% and Los Angeles County’s were off 4.1%. Looking just at single-family home resale value for the first five months of this year compared to last, Orange County’s prices were down 2.9%, while San Diego and Los Angeles counties both tumbled 5.2%.

“The fundamental source of declining home values is the same here as anywhere else, which is rising interest rates,” said Cal State Fullerton’s Puri. “The bankruptcy may be affecting things psychologically. It may be a contributing factor, though it is not the main source of housing-sales decline. There are real economic things. It’s happening in other counties, so how do you explain that?”

While the fact of being bankrupt may not cause a downward spiral, several analysts agreed that if local agencies slash services it could make Orange County a less attractive place to live.

“If my perception of Orange County is that the level of services--the schools, a whole range of other utilities--if that’s going to suffer as a result of the bankruptcy, then obviously it will have an impact on my decision whether to buy or not,” Nattagh said. “If the bankruptcy doesn’t have an impact on the level of services then I don’t think it will matter.”

* It will cost you more to vote No.

*

Popejoy often talks of a three-pronged tax that residents will face if Measure R fails: the tax of ongoing legal fees; the tax of depressed property values; and the tax of a penalty imposed by Wall Street for the county’s unwillingness to make good on currently outstanding debt that will go into default.

It is, of course, impossible to calculate those numbers.

Municipal bond market observers estimate that Orange County will pay a penalty in future financings of about 2%. The county issues about $1 billion a year in short-term debt, so that would be about $20 million a year. Other local agencies issue about $3 billion a year; if they face similar penalties--either because they invested in the county pool or simply because they get tarnished by their geographical location--that could be an additional $60 million a year.

Last week brought the first hint of the price Orange County would pay. In its first step back into the market, investors demanded an extra 0.25% in interest on $278 million in county bonds, compared to the interest for similar issuances sold on the same day. The county also paid extra for insurance and underwriting fees, for a total added cost of about $25 million.

And while passing Measure R could send a signal of stability to the market, Wall Street will not soon forget what happened in Orange County.

*

SPECIAL REPORT

THE BOTTOM LINE ON MEASURE R: The Vote on the Half-Cent Sales Tax Increase

10 Days To Go

* REVENUE OPTIONS: Other financing alternatives remain on the back burner because they take too long to accomplish, raise too little or involve roadblocks. A27

* AWAITING PAYMENT: Vendors owed money from bankrupt county are still waiting to be repaid, and a No vote will make the wait longer, officials say. D1

* PRO ARGUMENTS: Measure R will get the county out of bankruptcy faster, help schools stave off financial disaster, and keep county services from being jeopardized. A26

* CON ARGUMENTS: If measure passes, money will be controlled by people who oversaw bankruptcy, and funds aren’t set aside for schools, law enforcement. A26

* DAY OF RECKONING: Sheriff Brad Gates says a No vote will result in a return of 20 cents on the dollar to vendors and those who invested in county bonds. A26

* NOT BUYING IT: Hugh Hewitt says voters know they are being asked to tax themselves to replace money already paid by them just to refill government coffers. A26