Orange County Forced to Expand Search for Funds : Bankruptcy: Higher fees, reduced services may result if money is taken from municipalities, special districts.

Orange County voters may have rejected higher sales taxes as the best remedy for the nation’s worst government bankruptcy, but if some politicians get their way, the alternative may be just as costly: higher fees and reduced services.

Casting about for other means of filling the gaping $1.7-billion hole dug by investments gone bad, lawmakers are taking inventory of every public vault in Orange County--from the transportation agency’s more than $1 billion, to special reserves for the upkeep of the county’s harbors, beaches and parks.

Most frequently targeted, however, are the savings and property taxes that cities use to keep their service levels high and that special districts, such as water and sewer agencies, rely on to keep their customers’ bills from increasing.

Supervisor Marian Bergeson has proposed, for example, that the county could raise about $400 million a year by grabbing some of the property taxes and all of the surplus reserves of dozens of special districts providing water, sewer and sanitation services.

Consolidating those agencies, or having private interests absorb them, would free up another $95 million a year, she said.

“Frankly, these were issues considered before the sales tax vote,” Bergeson said, “but were thought to be too difficult to pursue. Now we have to revisit them.”

Even more severe is a proposal by state Sen. Lucy Killea (I-San Diego), co-chair of the special Senate committee that looked into the county’s bankruptcy. It calls for taking money both from the special districts and from Orange County’s cities.

Killea’s proposal, which also involves appointing a state trustee to oversee county finances, was vetoed by Gov. Pete Wilson as premature, but it has since been reintroduced.

This bill has all 31 cities in a panic. It calls for diverting property taxes to the county for the next 20 years, taking 4% of the cities’ levies the first year, 8% the second, 12% the third and 16% from the fourth through the 20th year. Overall, it would rob special districts and cities of about $1 billion.

“We’re very concerned,” said Janet Huston, director of the League of California Cities’ Orange County division. “Because other people refuse to solve their own problems, the cities may be forced to raise revenues and cut services. The cities have worked hard to balance budgets and maintain services, but everyone considers them to have deep pockets.”

Huston said the cities stand to lose $605 million, not counting inflation, if Killea’s bill became law. Many cities have already sounded an alarm that a loss in property taxes would have severe impact:

* In Cypress, all capital projects relying on general fund revenues would be halted for the next 20 years, and cuts would be made in public safety services and park maintenance.

* In Garden Grove, the city would eliminate after-school programs, community policing and school crossing guards, as well as 21 city jobs.

* La Palma would cut many of its police community programs, such as Drug Abuse Resistance Education and Neighborhood Watch.

Killea said she is not sure whether she can muster the two-thirds vote to override Wilson’s veto, but she is adamant that Orange County taxpayers should solve their own problems without a state bailout.

“They’re the ones who live there, and at least some of them voted for those officials who were in office at the time of the bankruptcy,” she said. “The cities and special districts might not exactly be the same as the county, but they are at least close relatives.”

City officials could not disagree more, arguing that relying on property taxes to solve the county’s problem is inequitable when existing sales taxes or motor vehicle license fees could be tapped instead.

“It’s totally illogical,” said City Manager Ken Frank of Laguna Beach, one of the cities that relies most heavily on property taxes. “Why take the money from cities because Orange County has a problem? Why should city revenues suffer?’

Laguna Beach has a $19-million annual budget, about $7 million of that from property taxes, making it the city that will probably suffer most if Killea’s bill is approved. It could lose about $1.2 million in the first two years of the Killea plan--the cost of 30 city employees.

In Garden Grove, the situation is particularly maddening, because officials there refused to invest in the pool and stand to lose $1 million over the first two years under Killea’s plan.

“We’re part of Orange County and we must be part of the solution, but this is not fair,” said City Manager George Tindall. “The state has never chosen to deal with local government financing in the right way. They didn’t do it with Proposition 13, and they still haven’t done it today.”

Rather than take money from the cities, Tindall said, the county could write off the debts it still owes investors, telling Sacramento it can no longer provide some state-mandated services, and by diverting money from Measure M, the 1990 half-cent transportation sales tax.

Tindall is not the only official looking to Measure M money to help the county out of bankruptcy. Several supervisors are also eyeing the $3.1 billion that the tax will raise over 20 years. About $655 million has already been spent, and another $1 billion in contracts have already been signed.

For John Schatz, general manager of the Santa Margarita Water District, it’s deja vu .

“I thought [the Legislature] would come back to get the rest of it in 1993, but the budget picture improved,” Schatz said. “Now with the bankruptcy, I figured this would resurface.”

Property taxes contribute only $1.4 million a year to the district’s $25-million operating budget. But the district has $90 million in reserves, and Schatz shudders at the thought that this money might be grabbed. Half was set aside for water treatment plants and sewer facilities to be built within the next two years. The other half are to guarantee repayment of outstanding bonds.

Schatz said he did not believe the county could lay any legal claim to the reserves, even with state legislation.