O.C. Voters Reject Sales Tax Hike by 3-2 Margin : Bankruptcy: Defeat cripples recovery plan, sets stage for cuts in services. State takeover called possible.

Orange County voters overwhelmingly rejected a half-cent sales tax increase Tuesday, snatching away the linchpin of the county’s bankruptcy recovery plan and delivering an angry message that residents won’t pay for a financial mess created by county leaders.

The tax measure’s probable defeat, by a margin of about 3 to 2, leaves the county facing an uncertain financial future. It triggered talk of a state takeover and set the stage for brutal budget cuts in education, public safety and services to the needy.

“I was in hopes it wouldn’t be that way,” said a dejected county Chief Executive Officer William J. Popejoy when confronted with early returns. “But it looks like our fears have been realized.”

Sheriff Brad Gates, who led the pro-tax campaign, remarked that voters obviously wanted “to express their anger . . . to punish somebody.”

Tom Rogers, one of the leaders of the anti-tax campaign, said, “It was absolutely the height of folly to expect people to tax themselves and turn it over to the same people who caused the problem.”

With 700 of 958 precincts reporting by late Tuesday night, voters had rejected the measure 171,078 to 109,960.

Even before the first returns were announced, Wall Street investors punished the county by demanding exorbitant interest rates for a $155-million bond issue that was another component of the county’s recovery plan.

Many institutional buyers refused to purchase the bonds at all, and some bonds remained unsold--something that was unheard of just last year when the county enjoyed one of the highest credit ratings in the nation.

And in Sacramento, a growing number of lawmakers began suggesting that a state takeover might now be inevitable.

“The interest of avoiding a disaster in government services [in Orange County] and the damaging effect it would have on state borrowing would be sufficient to justify the state taking over the county and managing it in some way,” said Senate President Pro Tem Bill Lockyer (D-Hayward).

Gov. Pete Wilson, who has tried to avoid becoming entangled in the Orange County mess, said late Tuesday that in light of the election’s outcome, “it is imperative that Orange County now move quickly to develop an alternative plan that will meet the financial obligations of the county.”

Wilson said he was sending state Finance Director Russ Gould and Kevin Sloat, his deputy chief of staff, to meet with Orange County officials today to begin developing such a plan.

The ballot proposal known as Measure R was billed by county officials as the quickest, cheapest, and most equitable way to rescue the county from the nation’s worst municipal bankruptcy ever.

By raising the county’s sales tax from 7.75% to 8.25%, county officials hoped to raise $130 million a year over the next decade.

They hoped to use the money to speed the county’s recovery from bankruptcy, which the county filed Dec. 6 after risky investments by former Treasurer-Tax Collector Robert L. Citron drained the county’s investment pool of nearly $1.7 billion.

Without the tax, the nation’s fifth-largest county probably will wallow in bankruptcy for years to come, and may be unable to repay $800 million in bond debts due this summer. Because the county was unable to meet those obligations, they may be extended for a year under a plan that received court approval Tuesday.

Seven months into the county’s bankruptcy, residents had been largely untouched by the fiscal crisis, which generally had been confined to cuts in the county’s bureaucracy. Few services had been reduced, and business seemed to go on as usual in a county known for its affluence.

But some warn that the blunt force of the bankruptcy is about to be felt more widely.

“The [annual general fund] budget is still $275 million. I didn’t say that logically, reasonably, it can be cut, but arithmetically it can be cut,” Popejoy said on Election Day. “You can cut it down to zero.” Other county officials were equally pessimistic about what the future holds.

“Tomorrow? What happens the day after a nuclear war?” said county financial adviser Christopher Varelas, when asked what might unfold in the wake of the measure’s defeat.

Supervisor William G. Steiner said one likely result of the election is that the county will never fully repay the money still due the cities and schools that invested with Citron. Under the disbursement plan approved by the court, the county repaid cities and schools about 10% of their balances with IOUs.

“That half-billion dollars [owed to them] probably won’t be repaid in our lifetime,” Steiner said.

Voters who opposed the tax were unsparing in their scorn for the supervisors in office when the debacle occurred.

“I might have considered voting for it if we could have gotten rid of these guys,” said Larry Ciaccio, a 67-year-old Newport Beach resident. “They are incompetent.” Ciaccio said at first he was torn over how to cast his vote, but decided to vote no because he said he has no faith in his elected officials.

Many voters remained unconvinced that the county had cut as deeply as possible. One was Mark Waldron of Anaheim. “We’ve got enough money coming in and we can manage the money better,” he said, adding, “I think they have to look internally to see where they have excess and cut costs.” Waldron said he wasn’t sure he believed massive layoffs of county workers would occur if the tax measure failed: “I don’t know how much is scare tactics and how much will really happen,” he said.

Even “yes” voters expressed profound doubts about the ability of county leaders to solve the fiscal fiasco.

While he was angry at the supervisors, Nelson Wong, 60, a retired director of community relations for Rockwell International, said his concern about the future of Orange County persuaded him to vote for the measure.

“It was a tough decision to make,” Wong said. “I didn’t just upfront decide I was going to support it. I read a lot of things both pro and con about it, and I think it’s the old case of pay me now or pay me later.”

When Popejoy applied for the newly created job of county chief executive in February, the retired millionaire businessman, who accepts no salary, said he too was hesitant to call for any new taxes.

But after weeks of studying the problem, Popejoy concluded that the county’s finances were so dire that there was no other reasonable alternative.

Although his tax plan was soundly defeated, the county’s top executive offered a conciliatory message to his Measure R foes.

“I feel even more strongly the final decision on such matters rests with the people. Orange County citizens have decided the issue with their votes,” he said. “That’s what our country is all about.

“Now the leaders should come together and forge a program to move the county forward. Differences must be forgotten and a new path for the county charted within the borders decided by the people,” Popejoy said.

During the campaign, opponents of the tax accused county officials of using “scare tactics” to win support for the measure. They claimed that the county had not thoroughly explored alternatives to the tax, such as selling more county assets, privatizing services and even defaulting on debt.

The election amounted to a referendum on Orange County’s future after its stunning surrender to bankruptcy. Even before the polls opened Tuesday, interest in the special election was very high.

Absentee ballot applications totaled 175,729; about 125,000 had voted by mail as of last Friday. The number of applicants surpassed the total in the 1992 presidential race.

Despite the insistence of some supervisors that he come up with a viable fallback position if the tax increase failed, Popejoy steadfastly refused to offered other recovery alternatives.

But with the election’s outcome no longer in doubt, Popejoy said a plan has been quietly in the works for some time.

“It’s not something we would wait until the last second and say, gee, what do we do now? We have fallback plans. We always have had them--they just haven’t been viable,” Popejoy said. “Now that the election [has passed], we have to sharpen our pencils.”

The CEO insisted that he wants to meet with anti-R forces to include them in the next phase of the recovery plan. But in reviewing the possible alternatives, he kept returning to two: severe cuts to the county budget and diversion of property taxes from cities and special districts to county coffers.

Among the most promising, Popejoy said, is a Dedicated Revenue Financing plan that is part of a bill introduced by state Sen. Lucy Killea (I-San Diego). It would dedicate the future growth of property taxes countywide to finance bonds issued by the county.

The plan, however, requires state legislation and could be a difficult sell politically because it relies on money that now goes to cities and schools.

Times staff writers Jodi Wilgoren, Michael G. Wagner, Rene Lynch and Tracy Weber and correspondents Alan Eyerly, Russ Loar and Hope Hamashige contributed to this report.