On Day After, O.C. in ‘New Era’ of Uncertainty

The resounding defeat of Orange County’s proposed half-cent sales tax increase set off a flurry of activity on both sides of the country Wednesday, as power brokers from Wall Street to Sacramento braced for a possible financial meltdown in the county.

Politicians, financial experts and county administrators called the rejection of the Measure R tax proposal the most defining moment in the county’s history, next to the bankruptcy it declared on Dec. 6.

“This is a new era,” Chairman Gaddi H. Vasquez of the County Board of Supervisors said in an ominous tone. “This is a new day.”

Reaction to the voters’ decision was swift:

* Supervisors, who warned that deep budget cuts are imminent in the wake of the failed tax proposal, called an emergency meeting today to discuss how to proceed with the bankruptcy recovery effort and bring both sides of the Measure R debate together in the cause.

The board will also meet in closed session to discuss the fate of renegade Chief Executive Officer William J. Popejoy, who made the tax proposal the cornerstone of his bankruptcy recovery plan. Although Popejoy indicated he wants to continue steering the county out of insolvency, he said political forces might be trying to push him out of the job.

* Gov. Pete Wilson’s staff met with supervisors and other county officials to begin searching for ways to avert bond default--a move that the state’s treasurer said would likely prompt a state takeover and jeopardize the financial well-being of every county in the state.

* Influential Wall Street rating agencies in New York criticized the county for its “outrageous and unprecedented” conduct, with one saying it will downgrade the county’s bonds to default status. Wall Street’s discontent with the county over rejection of the tax has called into question the county’s ability to borrow money in the future. Meanwhile, leaders at the Hall of Administration on Wednesday said the county should use the defeat of Measure R to chart a new direction for the county’s recovery.

Victorious tax opponents, ready to exploit their newly validated political clout, have begun talking recall or retribution against those in county government who opposed them. Their targets, they said, may be the most ardent of the tax supporters, including Popejoy, Sheriff Brad Gates and Supervisor Marian Bergeson.

The Measure R foes said they also plan to tackle the task of restructuring county government.

“This whole debate is going to go to a different level,” Supervisor William G. Steiner said. “The rhetoric will be replaced by realism. There will be significant prioritization of what we can and can’t do.”

As part of that re-evaluation, county officials said, they likely won’t be able to repay hundreds of millions of dollars in debts to the cities, school districts and county agencies that lost money when risky investments by former Treasurer-Tax Collector Robert L. Citron lost nearly $1.7 billion and forced the county to declare bankruptcy.

Most everyone agreed Wednesday that Orange County will be under siege from every corner as it grapples with its bankruptcy woes for months, perhaps even years, to come.

“It’s going to be real confrontational,” said David Kiff, an aide to Bergeson.

The county’s biggest problem in the wake of Measure R’s defeat appears to be coming from Wall Street investors whose bonds were supposed to be redeemed with proceeds from the proposed 10-year sales tax increase, which would have brought about $130 million into the county each year.

Bond default is inevitable, predicted Thomas W. Hayes, the former state treasurer who spent two months as the county’s financial adviser immediately following the bankruptcy.

“They can’t print money,” said Hayes, who also questioned whether county leaders have any viable options left. “On a private-sector model, they default on the debt. That hasn’t happened for a general-purpose government ever in history. We’re in uncharted waters, unfortunately. It’s a very serious situation.”

With the sales tax rejected as a source of revenue and approximately $800 million of bonds coming due in July and August, financial analysts said the county is essentially sending a message to municipal bond markets that it is willing to walk away from its debts. As the financial markets in New York opened Wednesday, prices of all bonds linked to Orange County fell slightly in response to investors’ worries.

Concerns over the county’s financial future were equally high in Sacramento.

“It is imperative that Orange County now move quickly to develop an alternative plan that will meet the financial obligations of the county,” Gov. Wilson said after the tax proposal was defeated.

Wilson sent state Finance Director Russ Gould and Kevin Sloat, his deputy chief of staff, to meet with Orange County officials Wednesday to begin developing such a plan. Supervisors said the governors’ representatives were supportive of renewed county efforts to extricate itself from the bankruptcy, but offered no financial assistance.

“It was clear to me that the governor believes Orange County’s fate should be determined by local control and not a state trustee as long as we don’t repudiate our bond debt,” Steiner said.

But with some state lawmakers talking about reviving a proposal to install an “all-encompassing” state trustee in Orange County, state Treasurer Matt Fong threw his support behind the idea Wednesday, but only if the county defaults on its upcoming bond debt payments, fails to keep government operating or invites such a takeover.

Fong said the trustee should have control over all county services, such as the transportation agency, water districts and other agencies, so that reserve funds could be tapped to help bail out the county.

The treasurer also said he expects Wall Street to go along with a proposal to roll over the $1 billion in debt for a year, but only after some grumbling. “The bottom line is they don’t really have much of a choice, because it means getting paid a year from now or not getting paid at all,” Fong said.

Locally, government officials tried to put the best spin on the voters’ resounding repudiation of that tax measure, which lost by a ratio of more than 3 to 2. They said it was an opportunity to regroup and take a different tack on the bankruptcy recovery effort.

“It’s a time for cooling off right now,” Bergeson said.

Vasquez and Supervisor Roger R. Stanton said the defeat of the tax leaves the county back where it started seven months ago. Ideas previously rejected or judged unfeasible in the past--such as selling John Wayne Airport and landfill space to out-of-county trash haulers--must once again be considered.

“In cases [such as the proposed airport sale], we have come up against laws standing in our way or a response that has been far below our expectations,” Vasquez said. “But we are going to have to look at it all again. There may be a need to try to do things differently now.”

Stanton, a critic of Measure R, said the board will have to make up for lost time caused by the tax campaign.

“Measure R was a last resort, but it was put at the top of the list of things to do,” Stanton said. “Now what happens? We go back and retrace our steps.”

Stanton declined to name names, but he said those who voiced “doomsday” predictions if the tax failed should be held responsible.

“I think their feet should be held to the fire for those statements they made,” said Stanton, adding that he was not trying to downplay the seriousness of the fiscal crisis, but believes that it has been taken out of its proper context.

“You can’t run around saying the sky is falling unless something has hit you on the head. There is a credibility problem with that approach, which voters obviously saw through,” Stanton added.

Supervisors said they didn’t want to rush to embrace a Plan B until county officials have a time to re-evaluate and study the problem more thoroughly.

But certain elements of an alternative plan already are taking shape. Among other things, it would include: stiffing the cities and school districts for the remaining money they are owed; using property tax growth for more county borrowing; and attempting to raid sales tax revenue earmarked for transportation funds--an option that has been previously rejected because of legal obstacles.

“Making cities, school districts and special districts whole, while not off the agenda, is not a priority,” Steiner said.

Severe budget cuts are another key component of a new recovery plan, supervisors said.

“They will be painful and there will be no other way,” Vasquez said.

Bergeson predicted: “They will be excruciating . . . No knight in shining armor is going to come through and save Orange County.”

Some county officials have estimated that another $70 million will be cut from an already reduced general fund budget of $275 million--which represents a 41% cut in discretionary spending from the previous year.

“It’s like realism and shock at the same time,” Health Agency Director Tom Uram said of the feelings of county officials on the day after the sales tax defeat. “There’s disappointment, obviously. We’re trying to do a thoughtful response and redirection.”

Supervisor Jim Silva, the first county board member to oppose the tax, called for today’s emergency meeting to assess the county’s financial situation.

“Everything needs to be on the table,” Silva said.

Irvine City Manager Paul O. Brady Jr. said he and other investors who lost money in Citron’s ill-fated pool met Wednesday morning and pledged to work with the county in seeking more sales of county assets, including a possible trade of county properties, such as parks and libraries, in return for forgiving some of the money still owed to pool participants.

“We will do an assessment of the properties that are within each of our jurisdictions and the county would be able to trade or sell to use in exchange for us forgiving some obligations,” Brady said. “We also believe the county must continue to downsize, because with an 18,000-member employment base, the county has yet to scratch the surface.”

Times staff writers Debora Vrana, Jodi Wilgoren, Peter M. Warren and Mark Platte contributed to this report.

More Coverage

* SHOWDOWN: Supervisors call closed-door meeting to discuss Popejoy’s job performance. A30

* PLAN B SCRAMBLE: Officials consider walking away from some debt, raiding special districts. A30

* GRASS-ROOTS WIN: Measure R foes revel in their victory against more powerful opponents. D1

* RELATED STORIES: A30-31, D1