Plan B for O.C. Would Hit Cities, Districts for Cash

Orange County’s bankruptcy-recovery team unveiled its long-awaited Plan B Tuesday saying that county government can’t raise enough cash to repay its debts and therefore should take sales- and property-tax money from the transportation agency, special districts and cities to plug the shortfall.

The county’s latest proposals were immediately criticized by local government leaders as “grand larceny,” and would require approval from the state Legislature, which departing Chief Executive Officer William J. Popejoy acknowledged is “a long shot.”

“They stole from us once, and they shouldn’t steal from us a second time,” said Irvine City Manager Paul O. Brady Jr.

But Chris Varelas of Salomon Bros., the county’s financial adviser, told the Board of Supervisors on Tuesday that with the voters’ rejection last month of a half-cent hike in the sales tax, the only remaining solution is to reallocate current tax dollars.

“You have to look at it as Orange County, not a series of little governments,” Varelas said. “You can’t look at it from the narrow-minded, myopic viewpoint of what entity pertains to me. You have to look at, ‘Is it in the best interest of Orange County residents for that dollar to go to special districts, or for it to go to the county?’ ”

Bruce Bennett, the county’s bankruptcy attorney, added, “The voters have said, ‘Don’t raise our taxes.’ We don’t think the voters have said, ‘Don’t pay your debt.’ ”

The key options outlined Tuesday include:

* Diverting up to a quarter-cent of the current 7.75% countywide sales tax from the Orange County Transportation Authority to the county general fund. That $70 million currently supports public buses, but Varelas suggested that excess funds from Measure M--a separate sales tax devoted to transportation projects--could be used to support the buses, thus utilizing Measure M money without the approval of voters that would otherwise be required.

* Taking about $90 million a year in property tax revenue from the county’s water and sanitation districts, plus county-controlled accounts such as flood control, transit, vector control and harbors, beaches and parks.

* Re-allocating up to a quarter-cent of the current sales tax--about $70 million annually--from local cities to the county.

“It’s kind of like a bully on probation that is going after the smallest kid on the block with the most lunch money,” said Supervisor William G. Steiner.

Also included in the 23-page legal and financial update Bennett and Varelas offered the board was a plan to raise $100 million by refinancing current debt against county property, and a renewed promise to refine estimates of the county’s outstanding debt and ability to tap restricted funds to pay it off.

The consultants also gave the supervisors some good news about the current fiscal year’s budget, saying the county’s annual need for routine borrowing will be about $50 million--down from $200 million last year--which it can cover through internal loans rather than the municipal bond market, where it would likely pay stiff interest penalties because of the bankruptcy.

Varelas and Bennett said they will continue refining the options and, if the Board of Supervisors approves, hope to have a package of proposals on the steps of the state Capitol by Aug. 14.

“I’m not naive enough to think that they are easily attainable, but they are doable,” Board Chairman Gaddi H. Vasquez said of the proposals. “These options are not without pain, but no crisis is without pain.”

Supervisor Roger R. Stanton, who opposed the recovery team’s first plan because it hinged on a sales-tax hike, welcomed Bennett and Varelas’ presentation.

“I can’t give an instant analysis of the viability of these options,” Stanton said, “but I think it’s healthy that we have a public airing of these things.”

The proposals are similar in philosophy, though different in approach, to ideas proffered last week by the county’s legislative delegation in Sacramento. That plan called for cities and special districts to share the burden of the financial crisis by forgiving millions in debt they are still owed by the county, and for a transfer of the Measure M funds directly, which requires a popular vote.

“My position is, as long as it doesn’t include new tax levies, I’ll consider it,” state Assemblyman Curt Pringle (R-Garden Grove) said of the county’s new ideas.

“The cornerstone of our plan would have to be approved by the voters of Orange County, whereas theirs could be done through legislative action,” said state Sen. John R. Lewis (R-Orange). “That makes theirs easier to accomplish, but the way we’re looking at it is fundamentally more democratic.”

Scott Johnson, counsel to state Sen. William A. Craven (R-Oceanside)--who co-chairs a special committee probing the county crisis--said he was surprised by Tuesday’s presentation because it differs sharply from recent suggestions by county officials that the county might not repay its debts in full and would try to raise cash through various so-called “sin taxes.”

“They’re talking about no real government reform, and about taking it out of the hides of a lot of local governments. I don’t think that’s an easy sell,” Johnson said. “If the document were presented as it is now, I don’t think there would be very many willing authors [of bills].”

Outraged representatives of cities and special districts said the county’s new plan is immoral because it simply transfers the financial crisis rather than solving it, like someone who uses a Master Card to pay off a Visa bill.

“Did they pass out an air-sickness bag with this thing?” quipped Jon Schotz, financial adviser to some 200 local government agencies that lost money last year in the county-run investment pool, when Varelas handed out copies of the county plan. “The way I learned English, diversion is stealing. They’re stealing our money to pay us back!”

Schotz and others complained, however, that the county is trying to pass the buck, forcing other governments to cut services and raise fees rather than doing so itself. They also criticized the county for trying to take money from the OCTA and other governmental entities without offering anything--such as the county’s coveted airport, landfills or other assets.

“It’s just different ways of grabbing money from one pot and sticking it in their pot to solve their problem,” said Westminster Mayor Charles V. Smith, who is also president of the Orange County League of Cities.

Vowing to fight “tooth and nail” in Sacramento to block the proposal, Smith added: “What the county’s doing is trying to hold onto their empire.”

Cities rely on sales-tax revenues for 20% to 30% of their annual budgets. While the cities could probably absorb a loss of a quarter of that without massive service cuts, Varelas said, that portion of the proposal is least likely to go through because of the cities’ clout in the Capitol.

But the threat of taking the sales tax money could help pressure cities into forgiving a portion of the debt they are owed, as suggested in the legislative delegation.

Though it angered local agencies, the presentation pleased representatives of the county’s other creditors, who said they were encouraged by the the county’s continued efforts to find a 100% solution to its bankruptcy.

“The math is really simple. If you’re not going to have any new tax revenue, you’re going to have to use money already in the tax base,” said Robert Swerdling, financial adviser to the county creditors’ committee of bondholders, vendors and employees.

Henry Kevane, an attorney for the creditors’ committee, said the proposal is about responding to financial hardship, not theft. He noted that the special districts are--like the county--instruments of the state with no permanent hold on future taxes.

“That’s like saying when your dad cuts back your allowance, he’s stealing from you,” Kevane said. “You’ve been getting a nickel every Saturday. Now he’s cutting back to three cents, because your dad’s in trouble. That’s not stealing.”

Varelas and Bennett also said Tuesday that they hope to finish research in the coming month that will provide a new, more accurate picture of the county’s overall financial situation.

Officials originally pegged the county shortfall at $2 billion, but that number could be chopped by nearly $500 million simply by examining the numbers more closely.

For example, Sheriff Brad Gates is leading an effort to determine how much of the county’s own investment losses must be repaid according to state and federal law, and how much of the cash in some restricted accounts could be used instead to help replenish the ailing general fund. Some estimate the debt the county owes itself could easily drop from $360 million to $100 million.

Also, debts owed county vendors have always been calculated at $100 million but may be as little as $25 million. Further, $236 million in recovery bonds issued earlier this spring to repay pool investors could be wiped off the debt list if budget planners can free up just $8 million each year, starting in 2001, to pay off the principal.

And by extending current lease agreements, the county could raise $100 million immediately, drawing down the debt further, though that would require the cooperation of Wall Street.

Once the consultants settle on the actual amount of debt owed, the supervisors will have to decide how long to stretch out the repayment plan.

Times staff writer Matt Lait contributed to this report.

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New Game Plan

Orange County’s Plan B for emerging from its debt crisis mostly involves taking money from other sources and giving it to the county. The essence of Plan B:

* Divert up to a quarter-cent in non-Measure M sales-tax revenue from Orange County Transportation Authority to county general fund.

Yield: $70 million per year

* Take property tax revenue from water, sanitation and other special districts.

Yield: $90 million per year

* Reallocate up to a quarter-cent of current sales tax from cities to county.

Yield: about $70 million per year

* Extend current leases on county properties.

Yield: $100 million in onetime revenue

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“You have to look at it as Orange County, not a series of little governments. You can’t look at it from the narrow-minded, myopic viewpoint of what entity pertains to me. You have to look at, ‘Is it in the best interest of Orange County residents for that dollar to go to special districts, or for it to go to the county?’ “--Chris Varelas, Salomon Bros. financial adviser