When the Going Gets Tough, Citizens Must Prove Wise : The nation watches as Orange County decides its troubled fiscal fate

Fueled by rage, egged on by ideologues, many Orange County voters appear to be adopting a new and troubling attitude toward municipal finance, one with devastating implications. Already financial markets are nervous about California in general, and Los Angeles County stands admonished by Wall Street to get its financial house in order. What happens to Orange County in its June 27 special election matters to everyone.

Polls suggest that Orange County voters probably would turn down Measure R, a temporary half-cent sales tax increase (to 8.25%) that would raise $1.3 billion for bankruptcy recovery. If Measure R fails in the voting next week, citizens in effect will be punishing themselves for the mistakes of others and sending a terrible signal. They also would be repudiating an article of faith in a conservative county, the idea that responsibility must underlie all transactions.

Today and in two subsequent editorials, we will explore why voters must pass Measure R, taking their sure dose of medicine now. A “no” vote would be a vote for continued bankruptcy.

TROUBLE BREWING: Peter C. Goldmark Jr., New York state’s budget director during the New York City fiscal crisis of the 1970s and now Rockefeller Foundation president, observes that anybody in Orange County’s situation basically faces a choice between an orderly and a chaotic recovery: “You pay in the end; the question is how you pay. Any expert will tell you that the essential element of a bankruptcy and composition [settlement] is that everybody pays.”

In a real sense, if Orange County rejects the tax, a crucial means of providing a revenue stream to restore fiscal credibility, it will be choosing the option of chaos. Nobody has ever thrown the dice quite this way.

Consider the unraveling that already has occurred as financial markets and creditors become increasingly jittery. The county last week was forced to pay much higher costs to return to the bond market and was shunned by some investors. The county wants to roll over nearly $1 million in bonds and notes, but some creditors now doubt the county’s good faith. To a degree once unthinkable, the faith and credit of an issuer are on the line.

Can Orange County borrow in the future if it fails to show caution now? Yes, but at a very high price. In the past, others have needed time to get back into financial markets even with new taxes. For New York, at least the stigma of impending bankruptcy in the 1970s was sufficient to produce a consensus of self-interest. Tragically, no such consensus can be found in Orange County today.

Advocates of the proposed tax estimate that it would generate $130 million a year that could be used to raise an additional $400 million in new borrowing. California state Auditor Kurt Sjoberg has said that without this money the county’s entire recovery plan will fail.

The National Federation of Municipal Analysts says that many California short-term debt issuers may not be able to finance annual seasonal borrowing notes in an orderly fashion. Zane B. Mann, publisher of California Municipal Bond Advisor, writes that in the future a warning to investors that “Orange County’s word and its pledge mean nothing” might be merited in so-called official offering statements.

AWOL LEADERSHIP: Shortsighted political considerations have ruled the day. Some members of the County Board of Supervisors have waffled or worse. One, Roger R. Stanton, who had waved through the profligate borrowing that led to the fiscal collapse, later complained that others weren’t coming up with a recovery plan that suited him, and then, last week, he said he was opposed to Measure R.

As the prospect of a deadbeat county has developed, there has been an astonishing unwillingness to face facts. All the supervisors were slow off the mark. The state Legislature has provided some help; the Wilson Administration has been sympathetic but generally held the Orange County financial collapse at arm’s length. Overall, the casualness with which the crisis has been addressed throughout California reflects an irresponsible view.

This laissez-faire approach to recovery has been abetted by ideologues. Their goal is not the restoration of government but its undoing. However, it is county residents who would pay in the end through lower real estate values, higher borrowing costs, reduced services, delayed infrastructure improvements, a public health crisis and the stigma of continued bankruptcy.

Tuesday: The disingenuous “no” campaign.