City, Agency Officials, Upset by County Plan, Offer One of Their Own : Bankruptcy: Coalition proposes purchase of airport and landfills, delay in repaying some debts.

Outraged over Orange County’s bid to shift the burden of its bankruptcy onto them, a coalition of local government officials on Monday unveiled a plan of its own to end the county crisis through the purchase of the county’s airport and landfills for $415 million and indefinite postponement of repaying county debts owed cities and special districts.

The plan would give the Orange County Transportation Authority control of John Wayne Airport and the right to build an airport at the El Toro Marine Corps Air Station when it closes, and turn the county’s landfills over to the Orange County Sanitation Districts.

It also would allow the county to promptly retire its debts to noteholders and vendors, but subordinate the claims held by local agencies that lost millions in the county-run investment pool last year. Those claims would be repaid chiefly through litigation against Merrill Lynch & Co. and other Wall Street firms the county blames for its bankruptcy.

The county government’s own investment loss would be last on the list to be repaid. “The plan is intended to be as constructive, as businesslike, as can be. It’s not a slam dunk. [But] we do believe that it’s doable,” said OCSD Chairman John C. Cox Jr., a Newport Beach city councilman who spearheaded the move to form the coalition of about 10 cities, special districts and schools.

Monday night, Cox chaired an emergency meeting of the OCSD Board of Directors, who unanimously agreed to “pursue in concept only” the purchase of the county’s landfills.

“This gives the sanitation districts something of value,” said Supervisor William G. Steiner, who attended the emergency meeting. “It’s better than ending up holding an empty bag.”

Phil Anthony, chairman of the Orange County Water District, said Monday, “I think all of us want this [bankruptcy crisis] to come to an end. This is, by far, the best plan I’ve seen, because it’s the local agencies of Orange County working together.”

But the proposal--which would have to be approved by all 200 pool participants and the county itself--may come a bit too late, as the state Legislature this weekend handed the county a powerful tool to solve the crisis itself.

If Gov. Pete Wilson signs a bill to divert up to $70 million of transit taxes annually for 15 years to the bankruptcy-recovery effort, the county could emerge from bankruptcy by June, 1996, attorney Bruce Bennett said Monday.

“There is no question that the Legislature’s action dramatically accelerates the time frame for resolving this [bankruptcy] case,” Bennett said. “It’s much sooner than I expected.”

Just one month after the voters’ defeat of Measure R, a proposed sales-tax hike for bankruptcy recovery, the Board of Supervisors may now have two viable routes out of the largest municipal bankruptcy in U.S. history.

With Wilson’s signature, the county could use the diverted transit money to issue about $700 million in new bonds. That, plus revenue collected from imported trash and the refinancing of so-called Teeter notes this spring, would likely be enough to plug the entire hole, except for $500 million in subordinated claims owed to pool participants.

Litigation proceeds could shrink the debt even further.

The pool proposal, too, has as its aim a quick resolution to the bankruptcy. By subordinating the pool claims and giving the county cash to retire its other debts, the plan would take care of everything except what the county owes itself.

“Some of these plans that have now been advanced are doable. They are viable plans that will work if the parties come together and take a constructive approach,” Board Chairman Gaddi H. Vasquez said Monday. “I don’t suggest it’s easy, because these issues are very complicated, but I am encouraged by both the actions of the Legislature in moving expeditiously, and the ideas that are being advanced by the pool because it’s all in the interest of putting this situation behind us.”

Creditors’ representatives said they are pleased by the proposals, but still concerned about the details of a repayment plan being approved by all parties.

“It’s more progress than many of us expected to see this early,” said Bennett J. Murphy, a lawyer for the bondholders. “But by no means do we see the light at this point. There’s still too much tunnel.”

The latest proposal, announced at a noon news conference Monday at the Orange County Water District headquarters, was hatched two weeks ago by half a dozen elected officials and honed in recent days by financial advisers and lawyers working for the official committee of pool participants in the bankruptcy.

Spurred by county consultants’ threats to raid cities’ sales-tax revenue and special districts’ property taxes, a group of six men--Cox, Irvine Ranch Water District Chairman Peer Swan, IRWD board member John Withers, Anaheim Mayor Tom Daly, Westminster Mayor Charles V. Smith and Laguna Niguel Councilman Thomas W. Wilson--met at the Duck Club in the San Joaquin Preserve on the morning of July 15. Swan brought doughnuts, and the informal coalition was born.

In half a dozen sessions since, the group has expanded to include Anthony, Santa Ana Mayor Miguel A. Pulido Jr., John Foley of the Moulton Niguel Water District and Irvine Unified School District Trustee Mary Ellen Hadley. Over the past week, pool committee lawyer Patrick Shea and financial advisers Jon Schotz and Freddie Reiss put pen to paper and turned the group’s ideas into a plan.

No agency has yet voted on it, and many pool investors had not even heard of it before Monday.

“I know this is insulting to some elected officials--what authority did we have? We had none, other than the desire to make it work,” Cox said.

“It’s a family problem,” Foley said of the financial fiasco that has racked the county since December. “The patriarch is in trouble. It’s got a bit of financial pneumonia and a governance toothache that this plan can help resolve.”

According to the proposal, OCTA would take $215 million set aside to build a new light rail system and give it to the county for John Wayne Airport and aviation rights at El Toro.

The OCSD plans to offer the county $200 million for its landfills, and the district’s board met on Monday night to discuss the issuance of $200 million in bonds for that purpose.

Under the plan, the local agencies would also agree to purchase $110 million worth of certificates of participation, in effect becoming the county’s landlord by owning and leasing back various county buildings. The $110 million would have to be used, however, to repay $50 million owed schools and $60 million owed cities and special districts.

The remaining $709 million owed pool participants would all be placed behind bondholders in the repayment chain, and would be tied to future litigation against the private firms the county blames for its bankruptcy. Of that, only $265 million would be a general claim against the county; the rest would be forgotten if litigation did not yield enough.

But the county itself would get nothing from the litigation until all pool claims were repaid, leaving at least $300 million in losses suffered by county accounts unlikely ever to be repaid.

“The plan is not perfect,” Shea admitted. “But it can get us out of bankruptcy. It restores integrity to the County of Orange and it repairs the family relationship that existed before this crisis.”

Smith, who also sits on the OCTA board and presides over the Orange County League of Cities, said the pool proposal also sets the stage for a slimming of county government and a redistribution of its power among a wide group of agencies.

“It’s painfully clear that the current structure of government--and particularly the structure of the county--needs to be overhauled,” he said. “That restructuring begins by right-placing some county functions in other appropriate government units--like the airport in a transportation agency and the landfills in a sanitation agency.”

But the proposal was immediately confronted with critics.

“It appears they’re seizing on the county’s misfortune,” said Supervisor Marian Bergeson. “It seems like they want to build empires.”

Because federal law prohibits the use of airport revenue--including proceeds from an airport sale--from being used for anything other than aviation, the government coalition said that OCTA would actually be buying the rights to El Toro, and getting John Wayne Airport for free. That didn’t wash well with the Air Transport Assn., which represents commercial airlines.

“We can play a shell game up here,” said John Ek, the association’s director of state government affairs. “But if any attempts are made to take money off the airport or the future aviation system of Orange County, we will file litigation, we will file a complaint with the Department of Transportation, and we will fight on Capitol Hill.”

Others pointed out that the $415-million price tag might be below market value; county consultants and outsiders had previously valued the airport at $350 million to $500 million and the landfill system between $150 million and $500 million.

Bennett and county financial adviser Chris Varelas said they would meet with pool representatives to discuss the possibilities for the plan, but are dubious about its viability.

“The presentation is very thin,” Bennett said. “You would think if it was a serious proposal, they would have come to talk to us about it first. They didn’t. There’s no backup: cash-flows, numbers, how things are going to work.”

Varelas and Supervisor William G. Steiner also wondered about the motivation for the newly formed group, which is calling itself a “Family of Governments.”

“Only after the threat that their tax dollars would be diverted has this community spirit suddenly arisen,” Varelas noted. “So we should look at this as every party acting as self-interested bodies.”

Times staff writers Matt Lait and Davan Maharaj contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Competing Plans

A coalition of city, school and special district officials on Monday unveiled a proposal to get the county out of bankruptcy. Here’s how their plan compares to the other two major approaches being considered:

FAMILY OF GOVERNMENTS

* Orange County Transportation Authority buys John Wayne Airport and rights to develop an airport at El Toro Marine Corps Air Station for $215 million. Orange County Sanitation Districts buy county landfills for $200 million.

* A consortium of local governments buys $110 million in new certificates of participation that effectively make them the county’s landlord, leasing county buildings back to the county. With that money, the county repays $50 million of what it owes local schools and $60 million owed to cities and special districts.

* With money from asset sales plus existing $460 million in bond reserves, the county repays $800 million in short-term notes due June, 1996, as well as $30 million owed vendors and $30 million owed those whose court-settlement awards suffered losses in investment pool.

* The remaining $709 in outstanding claims owed local governments is repaid after debts owed private sector but before county replaces its own funds lost when pool went bankrupt. The county is directly responsible only for $265 million of the $709 million; the remainder to be paid only from proceeds of litigation against Merrill Lynch & Co. and other Wall Street firms being blamed for the bankruptcy.

COUNTY FINANCIAL AND LEGAL CONSULTANTS

* The county takes $70 million annually for 15 years in sales tax money now being used by OCTA to support bus service, and instead uses it indirectly to issue new bonds. This diversion was approved Sunday by the state Legislature but has not been signed into law by Gov. Pete Wilson.

* Proceeds of new bonds--plus reserves and revenue from landfill system, asset sales and previously issued Teeter notes--is used to pay off $800 million in short-term notes, vendor claims, some of county government’s own debt and, perhaps, some claims owed pool participants.

* County may try to raid property-tax revenue now collected by special districts, though the need for that money has been mitigated by the Legislature’s approval of the OCTA diversion.

* Proceeds from litigation would repay $342 million in senior claims held by pool participants. Remaining $500 million in claims would be repaid only if county gains unexpected revenues from other sources.

ORANGE COUNTY LEGISLATIVE DELEGATION

* Use the sales-tax diversion to issue bonds and repay current noteholders, vendors and other required claims as part of overall recovery plan.

* Impose a state-appointed trustee to run county’s affairs if county fails to have a full recovery plan in place by year’s end.

* Persuade local governments to either subordinate or forgive debts county owes them.

Source: Family of Governments plan, county consultants, legislative delegation, Times reports

Researched by JODI WILGOREN / Los Angeles Times