O.C. City Leaders Reject Debt Forgiveness, Survey Finds

City officials in Orange County overwhelmingly oppose a proposal that they help the county government recover from bankruptcy by forgiving almost $100 million the county owes them for investment pool losses, according to a Times Orange County survey.

The survey of 117 elected officials whose cities had money in the county-run pool found that 73% oppose forgiving the debt, as the county’s legislative delegation has called upon them to do.

Some city leaders said that forgiving the debts would allow the county to escape responsibility for failing to head off the largest municipal bankruptcy in U. S. history and shift the burden to city governments that had no part in causing the financial debacle. Only 15% said they would support debt forgiveness, while 12% were undecided.

“The county needs to right itself,” said San Clemente Councilman Scott Diehl. “To do it by cannibalizing other agencies is wrong.”

Westminster Councilwoman Charmayne S. Bohman said the legislative delegation’s proposal is misguided: “I don’t see robbing the cities to get the county out of its problems, and that’s what it amounts to.”

City officials surveyed by The Times also expressed strong reservations about a legislative plan to install a state trustee to take control of the county’s bankruptcy recovery effort if the county does not get its financial house in order by year’s end.

Many said they fear a trustee would carry a “political agenda” and would be beholden not to Orange County residents but to Sacramento politicians.

“I don’t want the big hand of the state to come in and take over,” said Laguna Beach Councilman Steve Dicterow, among the 62% of city officials opposed to a trustee. “We got ourselves into it, and we will ultimately get ourselves out of it.”

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Twenty percent of those who responded to the telephone survey said they were undecided about the trusteeship proposal, while only 18% said they favored it. Supporters of the trustee proposal said it simply comes down to a lack of faith in county officials.

“You can’t trust the majority of the Board of Supervisors,” said Huntington Beach Councilman Ralph Bauer.

The results reveal a civic leadership pitted against their county and state representatives over how best to finally resolve the county’s bankruptcy. The sharp division could dash hopes of achieving a speedy resolution to the unprecedented bankruptcy.

Orange County declared bankruptcy Dec. 6 after disclosing that the risky investment strategy pursued by former Treasurer-Tax Collector Robert L. Citron had cost the county-run investment pool $1.7 billion in losses. More than 200 cities, schools and special districts had funds on deposit in the $7.2-billion pool.

In negotiating a settlement with the pool participants, the county agreed to repay all of the money invested--77% in cash, another 13% in cash for the schools and 3% for the other investors, and with various IOUs that were issued to all pool investors for their balances.

The first round of cash payments was made in May, and the schools got their second installments in June.

The county’s delegation to Sacramento has proposed that the cities and special districts forgive the remaining 10% to 11% that has not been repaid to help the county recover.

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Orange County’s bankruptcy counsel, Bruce Bennett, said the county could emerge from its fiscal crisis as early as June, 1996--much sooner than many had anticipated--if one or more of the recent bankruptcy proposals is adopted.

But an unwillingness to share the losses could deal a serious setback to proposals currently under consideration.

“It all boils down to the fact that we need to come up with some plan, and the pool participants have objected to every idea that has been put out there,” fumed Assemblyman Curt Pringle (R-Garden Grove).

Pringle and Sen. John R. Lewis (R-Orange) have formally called on cities and special districts to voluntarily share the county’s losses.

“You don’t fill a $1.7-billion hole painlessly. You can’t,” Pringle said. “Everyone’s waiting for a pot of gold to show up.”

Pringle’s and Lewis’ debt forgiveness plan excludes financially strapped school districts that are still due millions.

Cities and special districts, such as sanitation and water agencies, are still owed 20% of the money they had in the county investment pool.

The county has promised to pay them 9% from the proceeds of its litigation against Merrill Lynch & Co., which it blames for selling Citron securities unsuitable for a government investment pool, and has pledged its best-faith efforts to repay the remaining 11%.

But because the county’s debts to the cities and special districts are incorporated in a court-approved settlement agreement, any forgiveness of those debts would have to be voluntary. The Times survey of city leaders indicates that such voluntary forgiveness is unlikely.

Many city officials expressed outrage that the county would even entertain the notion of backing away from the earlier settlement agreement.

“It makes a mockery of the negotiations,” said San Clemente Councilman Patrick M. Ahle.

Others said they lack the legal authority to forgive debts owed city residents.

“I think the majority of the people in Huntington Beach want their money back,” said Bauer. “It’s not my debt to forgive.”

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Many opponents said they would consider forgiving debt if the county government were dramatically reorganized and downsized. Without such restructuring, many see debt forgiveness as letting those responsible for the fiscal disaster off the hook and throwing good money after bad.

“If they’re willing to do their share as far as restructuring is concerned, then we would be willing to help them,” said Stanton Councilman David John Shawver.

But the minority who supported debt forgiveness said they feel an obligation to share the losses.

“We took the risk. We should accept some of the loss,” said Laguna Beach’s Dicterow.

Garden Grove Councilman Mark Leyes has also called on cities and special districts to forgive county debt. Since Garden Grove is one of the few cities that did not have money tied up in the investment pool, Leyes can only watch in astonishment as the cities demanding nothing less than 100% reimbursement also endorse proposals--such as diverting transportation tax revenue--that would shift the burden to non-investors.

“Everyone is acting in their own self-interest,” he said. “If they would have been this cautious and prudent all along, they never would have invested in a risky investment pool in the first place. Belatedly, they are protecting their city purse.”

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The Times Orange County surveyed elected leaders from 29 cities that placed money in the county’s ill-fated investment pool. The officials were asked about several proposals designed to help the county recover from bankruptcy. The telephone survey was conducted Aug. 1 to 4 and reached 117 of 151 elected city leaders.

The survey found that council majorities in at least 17 cities, including large investors like Irvine, Santa Ana, Huntington Beach and Anaheim, opposed forgiving the county’s debt. Only in Laguna Beach did a majority express interest in forgiving some of the pool debt.

If all cities forgave 10% of their pool investments, the county would save $94 million. The loss to individual cities would range from $22 million for Irvine to $24,000 for Tustin, which had very little money in the pool.

If special districts also supported debt forgiveness, Orange County could slash its debt by more than $400 million, which would go a long way toward helping the county out of bankruptcy, officials said.

By a large margin, city officials surveyed opposed having a state trustee run the county.

“It scares the heck out of me,” said Newport Beach Councilwoman Janice A. Debay, echoing the views of many elected officials interviewed. “I am for local planning.”

But others said a trustee might be needed if the county cannot complete a bankruptcy repayment plan by December.

“If we can’t get our house in order in a year, something needs to be done,” said Lake Forest Mayor Richard T. Dixon. “I think there is a point where the state might have to step in, but I think the county deserves an opportunity to solve its own problems.”

City leaders who responded to the survey had mixed feelings about the legislative delegation’s efforts to divert $70 million a year to the county from the Orange County Transportation Authority.

Legislation that would allow the county to do that--but would also bring in a state trustee if the county stumbles--was recently vetoed by Gov. Pete Wilson because the bill also gave $375 million to Los Angeles County, which Wilson views as having less serious problems than Orange County.

It is far from a dead issue, however; Wilson said he would consider a revised version of the bill and in his veto message warned Orange County to get a grip on its financial crisis.

While the OCTA claims that the proposed diversion of funds would virtually demolish the county’s bus service, county officials say they believe the agency has millions to spare.

Some city officials, still trying to sort through the debate, are eager to use OCTA money but are against crippling bus service or undermining road projects that might be scuttled for lack of funds.

“If the OCTA has the funds available without losing services, I would want to look at it,” Dixon said.

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But other city officials criticized such a move, saying it would hurt the poor and disabled who rely on bus service.

“The people who use public transportation are usually the people who can’t afford cars,” said Santa Ana Councilman Tony Espinoza. “If you take away their transportation, a lot of them are going to end up losing their jobs.”

Supervisor Marian Bergeson said the reality is that every resident is going to bear the brunt of the bankruptcy. It’s now a matter of figuring out what will hurt least, she said.

“No one will get out of this without sacrificing,” she said. “But so far, every group that has been approached has said, ‘Not me.’ ”

Correspondent Deborah Sullivan contributed to this story.

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Cost of Forgiveness

Some Orange County legislators have suggested that cities and special districts that had funds in the county investment pool forgive a portion of debt the county owes them. By forgiving these so-called repayment claims, the agencies would give up 10% to 11% of the money they invested in the pool. Here is a list of how much debt forgiveness would cost each city or agency:

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City/Agency Amount Anaheim $15,567,341 Anaheim Hazardous Materials Response 8,518 Anaheim Public Financing Authority 1,763,320 Anaheim Redevelopment Agency 874,593 Brea 643,860 Brea Redevelopment Agency 356,457 Buena Park 1,925,673 Buena Park Community Redevelopment Agency 1,170,973 Costa Mesa 310,376 Costa Mesa Redevelopment Agency 61,225 Cypress 628,548 Dana Point 1,683,242 Fountain Valley 655,272 Fountain Valley Community Development Agency 2,653,714 Fullerton 2,450,574 Huntington Beach 4,715,907 Irvine 22,187,224 La Habra 873,145 La Palma 594,101 Laguna Beach 832,573 Laguna Hills 95,929 Laguna Niguel 1,941,212 Lake Forest 1,009,495 Los Alamitos 229,288 Mission Viejo 1,919,398 Mission Viejo Community Development Agency 81,911 Newport Beach 1,813,859 Orange 1,439,342 Orange Redevelopment Agency 1,570,794 Placentia 2,209,304 San Clemente 3,814,451 Santa Ana 12,369,337 Santa Ana Redevelopment Agency 3,629,338 Seal Beach 217,550 Stanton 314,056 Tustin 24,532 Villa Park 135,799 Westminster 15,231 Yorba Linda 740,048 Yorba Linda Redevelopment Agency 689,590

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Source: County of Orange

City Officials Take Hard Line

Elected leaders of those 29 cities with money in the county’s bankrupt investment pool heavily oppose both forgiving debt the county owes and a bill that would give a trustee power to run the county:

Do you favor or oppose a proposal by some Orange County legislators that asks cities and special districts to forgive 10-11% of the money they placed in the county’s investment pool?

Favor: 15%

Oppose: 73%

Undecided: 12%

A bill in the state Legislature would impose a trustee to run the county if local officials do not complete a bankruptcy recovery and repayment plan by the end of the year. Do you favor or oppose the state imposing a trustee?

Favor: 18%

Oppose: 62%

Undecided: 20%

Source: Times telephone survey of 117 city officials conducted Aug. 1-4.