ORANGE COUNTY IN BANKRUPTCY : Officials Investigate Ways to Cope With County Bankruptcy : Crisis: With sales tax shot down, alternatives include walking away from debts and raiding special districts.

Without a sales tax to help rescue Orange County from bankruptcy and little hope for a Sacramento bailout, county officials Wednesday began to seriously consider walking away from debts to investors, raiding the revenue of special government districts and tapping into Measure M transit funds.

County Chief Executive Officer William J. Popejoy, Sheriff Brad Gates and financial adviser Christopher Varelas all said Wednesday that without new revenue from Measure R, the county’s only choice is to take money from other agencies and county funds that are typically restricted by law for specific purposes.

“We have to interpret a No vote on Measure R, combined with the consensus that default is not a desired result, to mean that current tax dollars should be shuffled from other agencies,” said Varelas, a Salomon Bros. vice president who heads the county finance team. “In other words, steal from the rich agencies to pay the poor.”

With other options seen as impractical or unworkable, county leaders said it is unlikely they can make good on their promise to pay schools, cities and other public entities the $513 million they are still owed from former Treasurer-Tax Collector Robert L. Citron’s collapsed investment portfolio.

“I think the final 10% or 11% being paid to cities and schools and special districts is really in doubt right now,” said Peer Swan, chairman of the Irvine Ranch Water District. “Nobody in their right mind would plan a budget with that amount.”

Added Supervisor William G. Steiner: “Making cities, school districts and special districts whole, while not off the agenda, is not a priority.”

But that kind of talk only irritated investors, who met Wednesday to devise a post-election strategy and concluded the county could further trim spending and sell more of its property.

“Our reaction is that we have a settlement agreement that the court has approved and we are not going to abandon that,” said Paul O. Brady Jr., Irvine’s city manager, who sits on the investors committee as representative to the cities. “If after assets are sold, restructuring is accomplished and . . . if there is still a gap, then and only then can we look at some options to give up a few cents. But we’re not there yet.”

John Nelson, assistant superintendent of the Orange County Department of Education, who represents schools on the pool committee, shared that sentiment.

“The school districts are in a situation that the last 10-cent strip is very important to us and means $100 million of educational programs,” Nelson said. “Otherwise, we have no choice but to make cuts. The schools need that money very badly.”

The county and other finance experts have examined proposals to divert sales or property taxes from cities and schools, but most agree the political obstacles would be too great. That makes special districts--ranging from the wealthy Orange County Transportation Authority to the Irvine Ranch Water District--the most likely targets of a county raid, although state legislation would be needed.

Varelas, the county’s financial adviser, said he is looking at tapping some or all property taxes collected by special districts, some $375 million, as well as the cash reserves of such agencies.

About $2.1 billion in property taxes is collected annually in Orange County--but more than half goes to schools and only $155 million currently goes to the county.

“We have to use Measure R as a tool,” Varelas said. “The fact that Measure R didn’t pass might make some options open to us that weren’t available to us before.”

But Swan said that if property taxes received by special districts were shifted to the county, “special districts would just have to raise fees. To the extent that special districts live off that money, they’d increase fees.”

Swan said he and others would put up a fight against any attempt to raid district reserves.

“Those with beautiful wives always have neighbors coveting them,” he said. “I don’t think anyone is going to give the reserves up.”

Measure M money, the half-cent sales tax for transportation projects that has been eyed by county officials since the bankruptcy, is also under a microscope as various interests explore ways it could be siphoned off.

County Supervisor Jim Silva wants $340 million of Measure M money planned for development of a light rail system between Disneyland and John Wayne Airport transferred to the county. Silva wants voters to decide whether the money should be used for the continued development of the 26-mile rail system or to offset the problems caused by the bankruptcy.

Although transportation officials are generally dubious of using voter-approved transit money for the bankruptcy--arguing that it is illegal--Orange County Transportation Authority Chief Stan Oftelie said Wednesday that it may be possible for OCTA to use the light rail system money to purchase John Wayne Airport, estimated to cost between $225 million and $350 million.

“We think we can do it,” Oftelie said. “We think we can purchase an aviation facility.”

Meanwhile, county Supervisor Marian Bergeson, who met Wednesday with the state Finance Director Russ Gould and Kevin Sloat, a representative of Gov. Pete Wilson’s office, said she wants to dip into the reserve funds of the county’s flood control district, county redevelopment agency and “anywhere else we can.” Such a move would require state legislation.

“I hate to borrow against this money. It’s like using one credit card to borrow against another,” she said. “But when you don’t have the money, you don’t have it.”

Salomon Bros. is also pursuing other ideas for new financing, including extending the leases on county properties currently being used to back lease-related bonds. That involves cooperation from Wall Street, but could enable the county to reap more value--perhaps as much as $100 million, Varelas estimated--from the same assets.

Another crucial task for Salomon Bros. in coming days will be to re-evaluate and make a priority list of all of current debt and available revenue in light of Measure R’s failure.

“The fact that Measure R didn’t pass means that it’s very unlikely that we’ll have a 100-cents-on-the-dollar case,” Varelas said. “Whereas before we didn’t make choices of what would get paid and what didn’t get paid, now we have to make those difficult choices.

“My job is only to assess the financial options. The supervisors will ultimately decide what we do.”

Further reductions in the debt may come with a closer look at claims from vendors, estimated at anywhere from $25 million to $100 million. Another $342 million owed to pool investors could be taken care of by litigation proceeds.

Finally, the county will continue analyzing its own investment pool loss, trying to determine which of the debts must be repaid and which could be written off, a figure some have estimated at $200 million.

Another key component of the county plan will be to drain cash from county funds that are outside the discretionary budget and therefore require legislative action before they can be diverted. A preliminary analysis shows there is $814 million in cash on hand in those accounts, but only about $200 million is likely to become available even with special legislation, according to Walter Fath, who works for Popejoy.

But some of that money may be unavailable because it is tied to open contracts, Fath added. If any of these county funds are used, he noted, it will mean further cuts in services.

“The money wasn’t collected to just be there, it was collected for a certain purpose. They don’t have excess funds, so you have to cut what you’re doing,” Fath said.

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County Accounts

The county may look to appropriate money from other special agencies, such as the Orange County Transportation Authority, to pay its debts. Schools, cities and special districts may receive nothing more. Amounts already paid and still owed, in millions:

* Schools: The county had pledged its best efforts to repay another $109 million it owes the schools.

Repaid: $928

Still owed: $137

****

* Cities, special districts-Option A: This group has been promised $330 million the county hopes to win from lawsuits against Wall Street firms. The $450-million balance was to be repaid with Measure R money.

Repaid: $2,900

Still owed: $800

****

* Cities, Special Districts-Option B: This group will try to collect its $44-million balance through litigation against the county.

Repaid: $143

Still owed: $44

****

* Bondholders: The county has only $460 million set aside in reserves to repay these short-term debts, due this summer.

Repaid: $0

Still owed: $800

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* Vendors: Total owed remains in dispute; the county estimates $100 million, but vendors’ figure is higher.

Repaid: $0

Still owed: $100

****

* Professional: Estimated fees to lawyers, accountants and consultants for 1995-96 is $40 million.

Repaid: $7.5

Still owed: $11.5

Source: Times reports, Orange County comprehensive settlement agreement

Researched by CAROLINE LEMKE and APRIL JACKSON / Los Angeles Times

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Going to Plan B

Following voter rejection of Measure R, the half-cent sales tax increase designed to help the county bail itself out of bankruptcy, three alternatives emerged Wednesday:

1) Refuse to pay cities, schools and special districts the last 10% of money they are owed as part of the settlement agreement approved by U.S. Bankruptcy Judge John E. Ryan.

* For: Would reduce county’s outstanding debt. Some believe these investors should take a hit for entrusting their money to former Treasurer-Tax Collector Robert L. Citron.

* Against: Schools, cities and special districts are expecting $513 million back from the settlement and warn programs would face severe cutbacks if the money is not repaid.

****

2) Raid reserves and revenue streams, including property tax allotments, of special districts, such as the local water, sanitation districts and transportation agencies.

* For: County government has no money, but other local agencies are flush. Those special entities should be forced to help county out of bankruptcy.

* Against: Special districts might raise fees to compensate for loss and most certainly would fight to keep the money. Some believe gesture is meaningless; money would be used, in part, to pay back those same special districts and agencies.

****

3) Tap into Measure M, the half-cent sales tax for transportation projects.

* For: Money for projects such as light rail system is better used for this ongoing emergency, at least for now.

* Against: There are possible legal hurdles and it may require an election.

Source: Orange County officials

Researched by MARK PLATTE / Los Angeles Times