Orange County Unveils Proposal to Shift Funds

Orange County’s bankruptcy recovery team unveiled its long-awaited “Plan B” Tuesday, saying that county government--lacking the power to raise enough cash to repay its debts--should take sales and property tax money from the transportation agency, special districts and local cities to plug the shortfall.

The proposals were immediately criticized by local government leaders as “grand larceny.” They would require approval by the state Legislature, which outgoing Chief Executive Officer William J. Popejoy admitted is “a long shot.”

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

“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?’ ”

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 a year 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, harbors and beaches.

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

Varelas and county bankruptcy lawyer Bruce Bennett said they will continue refining the options and hope to have a package of proposals at the state Capitol by Aug. 14.

Also included in their legal and financial update to the board was a suggested extension of current leases on county properties, which could yield $100 million in one-time revenue, and a renewed promise to refine estimates of the county’s outstanding debt and ability to tap restricted funds to pay it off.

“I’m not naive enough to think that they are easily attainable, but they are doable,” board Chairman Gaddi H. Vasquez said of the options outlined.

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

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

Schotz and others complained 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 transportation authority and other entities without offering anything in exchange--such as its airport, landfills or other assets.

But representatives of some other creditors’ groups said they were encouraged by 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 a means of responding to financial hardship, not a prescription for theft. He noted that the special districts, like the county, are instruments of the state, with no permanent hold on future taxes.