O.C.’s Autonomy Could Hinge on Bond Rollover Vote Today : Bankruptcy: Noteholders are expected to approve an extension, staving off a possible state takeover.

Wall Street is expected to give its blessing today to a plan allowing Orange County more time to make good on $800 million in bond payments, but state lawmakers warned that failure to roll over the debt could renew the push for a state takeover of the bankrupt county.

Capitol insiders said that if the unexpected somehow occurred and the rollover failed, state Sen. Lucy Killea (I-San Diego) would be prompted to dust off her moribund bill calling for a state trustee and press the Legislature to override a May veto by Gov. Pete Wilson.

The prediction in municipal finance markets, however, was that the rollover almost certainly will be favored by a majority of the institutional investors holding the lion’s share of Orange County notes that begin coming due on Monday.

And the number going along with the rollover will likely give the county some much-needed breathing room to plot a new recovery strategy in the aftermath of voter rejection late last month of Measure R, the half-cent sales tax hike that was the cornerstone of the bailout plan.

Killea’s trustee measure, which is popular among Wall Street firms that stand to lose if Orange County does not make good on its payments, would give Wilson the power to establish a three-member board made up of state officials. The board, in turn, could appoint a director to run the county’s financial affairs.

Perhaps more important, the measure would also shift property tax revenue from cities and special districts to the county for bankruptcy recovery, giving the county a new source of income that it desperately needs in order to borrow more money from the financial markets.

Killea’s proposal would divert to the county 2% to 5% of the annual operating revenue of the cities and special districts in Orange County and has prompted howls of protest from those government bodies, already victimized when the county’s investment portfolio lost $1.7 billion last year.

Although school districts have been repaid about 90% of what they had in the county’s failed investment pool, the cities and special districts have received only 80% and are holding county IOUs that may never be redeemed for the remainder.

But while all indications point to a successful rollover that will forestall the need for any state intervention, the question remains: Will enough of the firms holding Orange County’s notes agree to give the county a one-year extension to pay them off, or will the number fall short of 90%?

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Under an agreement approved in federal Bankruptcy Court, maturities on the entire $800 million in notes will automatically be extended if investors holding 90% of the total debt vote to go along with the proposal when they cast their ballots in an unusual election scheduled for today at a New York bank.

If more than 50% but less than 90% agree, only those that choose to are obliged to give Orange County more time. If less than 50% favor a rollover, the proposed extension is dead.

A near-unanimous verdict on the rollover would give Orange County plenty of breathing room, while a result of less than 50% would prompt an almost certain legal shark feed and state takeover.

But a vote somewhere between a majority and 90% would still present the county with problems. Orange County would probably have to default on the notes that investors refuse to roll, unless it somehow siphons enough money from its already strapped budget. Either move might ultimately cause the sort of reverberations in the municipal finance markets that could rouse the Legislature and improve the chances for a veto override on Killea’s bill.

“If they turn down the county’s rollover proposal, we’ll have to see if there’s anything we can do, perhaps as soon as on the floor Monday,” Killea said. “Certainly, we’ll raise the question of what the state’s role is.”

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Insiders said Killea has rejected the notion of reintroducing a new version of the bill because of fears that Wilson, who has taken an arms-length attitude toward the Orange County debacle as he runs for President, would veto it again.

“The positive spin of seizing control of the situation and looking presidential sounds good, but it dissipates against the image of right-wing Republicans in Orange County screaming at Pete Wilson for raising their garbage bills to pay for the bankruptcy,” said one Capitol insider. “The last thing Wilson wants is to be Emperor of Orange County.”

A Wilson spokesman did not return a phone call for comment.

Others in the Capitol, however, predicted that Wall Street will not react negatively to the rollover by exacting retribution from other California governments by placing an interest-rate penalty. As a result, state lawmakers will not have the incentive to fall into line for the two-thirds vote Killea would need to override Wilson’s veto.

Others suggested that a trustee would only materialize if Wilson goes along with the idea.

“Unless the governor actively pursues it, I tend to think it’s unlikely,” said state Sen. John R. Lewis (R-Orange). “A trustee doesn’t serve much purpose other than to satiate the voracious appetite of some people for Orange County bashing.”

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While Administration officials were keeping mum, one municipal banker said that Wilson’s finance director gave the impression during a conference call with noteholders earlier this week that the state would step in if all else fails.

“It seems the state is saying if the county does try to invalidate [its debts], they’ll appoint a receiver to take over,” said Stephen Ward, investment officer at Charles Schwab, which owns $41 million of the notes. “That helps.”

Schwab, which had been among the biggest detractors of the rollover, now plans to go along with the proposal, if last-minute negotiations Thursday were successful, Ward said.

Another major noteholder was dubious, saying that Kemper Financial Services in Chicago, which owns about $200 million, is “the 800-pound gorilla” that could dictate the outcome.

Meanwhile, attorneys for the county and its creditors believe that the defeat of Measure R virtually guarantees a successful rollover. Some $600 million of the notes are due Monday. After that, $169 million is due July 19, and $31 million is due Aug. 19.

While there is still no clear revenue stream to enable the county to repay the $800 million even by the extended deadline of June 30, 1996, agreeing to the rollover would grant noteholders validation of their debt and the prospect of added interest.

“They’d have to be out of their minds not to roll,” said one attorney involved in the case. “There’s enough sticks in there [threatening those that don’t rollover]; you’d really have to be off your rocker.”

Robert J. Moore, the creditors’ committee attorney, said that U.S. Bankruptcy Judge John E. Ryan had given a “very, very strong signal” with last week’s approval of the debt-extension agreement that he believes the noteholders should accept the rollover.

But while the one-year extension would give the county breathing room to find some other way to pay off the notes, Measure R’s defeat makes the prospect of the debt ever being repaid far less likely. The rollover might delay a default, but only new revenue can prevent one.

“What we’ve said all along,” county bankruptcy attorney Lee Bogdanoff said recently, “is if R doesn’t pass, there’s a high likelihood that the county would not pay all its debts in full.”

In the search for alternatives, county officials have been prodded to look at other revenue sources, chief among them a proposal to restructure Measure M, the existing half-cent sales tax for transportation projects. Some Measure R opponents want to see transportation revenue for a proposed light-rail project tapped for bankruptcy recovery.

But some remain dubious. Thomas W. Hayes, the former state treasurer who spent two months as the county’s financial adviser immediately after the bankruptcy, said Wednesday that he sees no way the county can avoid default.

“I believe there has been a permanent impairment of the county’s ability to pay their debt,” Hayes said. “Without some infusion of capital from an unknown source, they don’t have the cash to pay back bondholders.”

Moore, however, refused to accept the prospect of outright default. “We’re not hearing from the anti-R campaign, or in the polling, that anyone wants to repudiate the debt. There is a moral commitment to repay it in full,” he said. “We certainly have not foreclosed the prospects for full repayment of this debt.”

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Times staff writer Jodi Wilgoren contributed to this article.