ORANGE COUNTY IN BANKRUPTCY : O.C. Legislators’ Recovery Plan: Millions from Cities, Measure M : Bankruptcy: Proposal for debt forgiveness and transportation tax funds draws immediate fire as only shifting burden.

The Orange County legislative delegation unveiled a bankruptcy recovery plan Wednesday that calls for local governments to forgo money they are owed and the diversion of an existing transportation sales tax--but no new levies.

The plan immediately came under fire from other state lawmakers and officials in Orange County, who argued that it would merely shift the county’s burden onto the backs of cities and special districts already hammered by the bankruptcy.

“The state delegation is just looking down the food chain for where they can suck some money to fix the county’s problem,” said Buena Park City Manager Kevin O’Rourke. “That’s not acceptable to us.”

The county’s lawmakers in the state Capitol met for more than an hour and emerged with the rough outlines of a plan. Its key difference from ideas floated by Orange County officials is that it contains no call for direct taxes.

County officials have eyed a variety of new levies, including a possible tax on alcohol consumption.

Instead, the legislative delegation contends the county can dig out of its huge financial hole--created after it suffered $1.7 billion in investment losses last year--by having cities, special districts and the county itself give up more than $700 million they are still owed.

They also called once again for voters to decide whether revenue from Measure M, the half-cent transportation sales tax approved in 1990, should be diverted to bankruptcy recovery. State lawmakers said they want an election on the subject by November, and will push for legislation to put it on the ballot if the Orange County Transportation Authority--the agency that receives Measure M funds--doesn’t do that before the Legislature returns in mid-August for its final month of the session.

Diversion of Measure M money to bankruptcy recovery, a proposal that state lawmakers have endorsed for months, would raise more than $65 million a year, but jeopardize a proposed light rail project.

In addition, the county’s team in Sacramento suggested that local governments cool demands for money the county hopes to derive from its lawsuit against Merrill Lynch & Co.--and ratchet down their expectations if a settlement is less than the $342 million needed to repay participants in the county’s collapsed investment pool.

“We have to solve the problem,” said state Sen. John R. Lewis (R-Orange). “We cannot let Orange County remain a Third World economic nation.”

The proposal met with harsh criticism from a wide range of city and state officials, who say it punishes the municipalities for a problem that is the county’s doing. They promised a fight in Sacramento to stop it.

“This is not our problem. The problem was caused by the county,” said Irvine City Manager Paul O. Brady Jr. “We’ve got a binding bankruptcy agreement, and we have every intent of having the county live up to those conditions.”

Lewis and Assemblyman Curt Pringle (R-Garden Grove), the chief architects of the delegation’s new plan, argued that tapping the cities is justified because they took the risk of investing in the county pool without guarantees of success.

“They made a discretionary investment, and over the years they benefited from that discretionary investment,” Pringle said. “And now there’s a loss.”

They also suggested that cities would eventually go along with forgoing debt because it’s the lesser of two evils. The more pressing concerns for the cities, the lawmakers maintained, are proposals to siphon off property taxes from local governments to fuel the bankruptcy recovery.

They again raised the specter of a state-imposed trustee taking over the county, an idea that has angered the Board of Supervisors. If a workable plan doesn’t emerge, “something is going to be imposed on the county by the state Legislature that will be far more Draconian,” Lewis warned.

But city officials such as O’Rourke argued that it would be folly to tag the cities, which have financial problems of their own, to help a county government that is in serious need of an overhaul. They worried that the county might fall into insolvency again.

“We want to see some serious structural changes in county government before we’d go along with any of this,” O’Rourke said. He said the Board of Supervisors is “rudderless in the water” and that “we’d be giving an organization that’s out of control more money.”

Meanwhile, he said, the state delegation from Orange County seems more intent on avoiding all discussion of taxes. “I think it’s politically correct to come up with a plan that doesn’t show them raising taxes,” he said.

County officials were not enamored of the plan either. Supervisor Marian Bergeson raised serious doubts about its feasibility, particularly the concept of shifting Measure M money to the recovery.

“It’s just extremely difficult to accomplish,” she said. “It’s not something you can legislate, or even do legally, at this point.”

Under the group’s plan, upward of $600 million could be borrowed using the Measure M revenue to pay it off. The delegation hopes to push through legislation that would allow the county to borrow restricted reserves now held by the county and special districts. Pringle said they have identified about $244 million they believe could be borrowed.

Although the delegation was optimistic about their proposal’s chances in the Legislature, Democrats were not impressed. “This is not going to go away with voodoo economics, wishing and praying,” said Assemblyman Richard Katz (D-Sylmar). “None of that generates money. They have a debt problem and they have to take responsibility for it.”

Transportation officials also scoffed at the plan, saying the delegation has failed to grasp the reality that Measure M cannot be legally diverted without jeopardizing repayment of more than $700 million in bonds that have already been issued for a variety of projects now under construction.

“The plan stinks,” said Charles V. Smith, OCTA chairman and mayor of Westminster. “It’s a bad plan. It would only deepen the disaster.”

Pringle, however, argued that Smith and other transportation officials are camouflaging reality. The OCTA bond debt, he suggested, could be restructured without legal ramifications, He cited as an example the more than $800 million in county debt that was rolled over last week by noteholders.