House Panel to Probe O.C. Recovery Effort : Hearing: Testimony will help determine any need for legislation to forestall future municipal financial calamities.

Having already gained notoriety for gambling away taxpayers’ money through bad investments, Orange County is coming under scrutiny once again--this time on Capitol Hill, where lawmakers will study how the county is handling the financial fallout.

The answer is, not very well, according to some of those scheduled to testify today and Thursday before a House Banking subcommittee.

Twenty-three state officials, municipal bond rating and securities industry representatives and Orange County community leaders are expected to paint a picture of financial and political gridlock with no resolution in sight.

The House panel is seeking to learn whether Orange County is a precursor to a looming national crisis and whether federal legislation is needed to prevent future investment failures like the county’s $1.7-billion loss last year. But the committee is also expected to see the ugly side of state and local politics as major players in the crisis point the fingers of blame away from themselves.

“You cannot legislate accountability. You cannot legislate tough, reasonable investment policies,” said Mark P. Petracca, a UCI professor who is scheduled to testify today.

Unable to muster a solid debt repayment plan--a proposal to raise money through a higher sales tax was recently defeated by voters--the state and the county are still wrangling over dozens of bills designed to restore financial stability.

In testimony prepared for the two-day hearings, County Chief Executive Officer William J. Popejoy will tell the panel he will walk away from his position at the month’s end with a sense that county government needs a major overhaul.

“Don’t ask citizens to approve a tax increase until their sense of betrayal subsides,” Popejoy said in testimony released Wednesday.

Popejoy, whose departure from the county is the result of a power struggle with the Board of Supervisors, is one of several witnesses expected to question the county’s decision to declare bankruptcy. The county sought federal bankruptcy court protection within hours of the disclosure of its financial losses in order to avoid an investors’ run on the cash remaining in the pool.

“Bankruptcy for a county government seems like a poor substitute when compared to the parties involved voluntarily getting together and working out a 100% plan of recovery,” according to Popejoy’s statement.

A Washington analyst who has studied two decades of municipal government failures, Philip M. Dearborn, warns that Orange County will set a bad precedent if it “succeeds in avoiding its financial obligations by use of the federal bankruptcy law.”

“Many local governments have been forced by budget problems to make very hard choices involving increased taxes or reductions in vital services,” Dearborn states in a prepared text of his testimony to be presented to the committee. “Any evidence that such hard choices can be successfully avoided by use of the bankruptcy law could trigger” other actions similar to Orange County’s.

Orange County government leaders are expected to describe how they were given bad advice by their broker and now have a lawsuit pending.

Bond rating agencies, which once gave Orange County the highest marks, will tell how they were misled by the county’s financial officers.

Tougher rules requiring governments to disclose their financial well-being are useful when there’s no fraud, “but we can only rely on those providing [the disclosure] to provide reliable information,” said a spokeswoman for bond rating firm Standard & Poor’s Co.

California Treasurer Matt Fong is expected to complain that despite the state’s efforts to tighten the investment rules and help in Orange County’s recovery, an adversarial culture has evolved that places more emphasis on winning political points than on problem solving.

But the state government may also face criticism from the investments industry for having such lax rules that Orange County was allowed to borrow beyond its means in order to make risky investments.

The result, according to some of the prepared testimony, is an anxious financial market. Some local governments are having to pay higher borrowing costs because of Orange County, and bondholders are wondering if Orange County will lead by bad example and default on its debts.

If there is to be a silver lining in the crisis, it is that Orange County’s debacle serves as a wake-up call for other California counties, said state Auditor Kurt Sjoberg. Within days and weeks of the Orange County bankruptcy, almost half of the state’s counties drew up investment guidelines for their treasurers, he said in an interview Tuesday.

He plans to tell the committee that at one point, a state audit showed six counties facing crises similar to Orange County’s. But new safeguards should prevent that in the future.