Supervisors Race Deadline to Approve Bankruptcy Package : Crisis: The plan must win the favor of lawmakers and all pool investors, some of whom are still balking.

In a last-ditch effort to develop a bankruptcy recovery plan before a crucial state deadline, Orange County supervisors on Monday endorsed a package that seeks to raid $570 million from the county’s transportation agency and forces cities, schools and special districts to postpone and possibly forgive more than $800 million in debt.

The plan, which was the product of two weeks of intensive negotiations between the county and other public entities, aims to spread the financial burden among all the investors who lost money in the county’s ill-fated investment pool, which collapsed Dec. 6.

“This is about as good as it gets,” Board Chairman Gaddi H. Vasquez said. “Everyone is going to suffer.”

Some investors reluctantly agreed to accept the county’s plan, while others said it wasn’t good enough. Even though the Board of Supervisors unanimously approved it, the plan still needs formal ratification of all pool investors.

The plan also needs the consent of Sacramento lawmakers, who have to pass special legislation allowing the county to implement it. Legislators are expected to meet today to discuss the recovery package.

“I think no one is in love with it. There’s a lot to hate about it,” said Thomas Woodruff, general counsel for the Orange County Sanitation Districts. “But it’s a good workable plan. . . . It preserves local control.”

The two most significant elements of the plan are an annual diversion of $38 million in transit revenue to the county for the next 15 years, and an agreement that allows the county to reimburse the investment pool losses of the cities, schools and special districts solely from litigation proceeds.

If the county receives no money from its $2.4-billion damage suit against Merrill Lynch & Co., and from potential lawsuits against other Wall Street firms the county blames for its bankruptcy, the cities, schools and special districts don’t get paid.

“These are some major concessions,” Supervisor William G. Steiner said.

The goal of the county’s plan is to pay all the noteholders, vendors and other creditors left holding the bag for roughly $2 billion of debt after the county declared bankruptcy. The controversial bankruptcy, the largest by any municipality in U. S. history, was declared after risky investments by former Treasurer-Tax Collector Robert L. Citron drained $1.7 billion from the county-run investment pool.

In addition to diverting transit tax revenue, the county plans to grab a total of $12 million a year in property tax revenue for 20 years from three county agencies: its Harbors, Beaches and Parks division, Flood Control District, and Redevelopment Agency.

Other elements of the plan include importing enough trash to raise $300 million over 20 years, issuing bonds against delinquent property tax returns to net $100 million over 20 years, selling $20 million worth of county assets, and refinancing certificates of participation that are repaid with county property leases to raise another $95 million.

The county calculates its debts total $1.9 billion, including everything from the cost of its high-priced bankruptcy attorneys and financial advisers to $324 million it needs to avoid defaulting on bond debt due next summer.

Chris Varelas, the county’s financial adviser, told the supervisors Monday that the hodgepodge of targeted revenue streams identified in the county’s recovery plan was very tenuous and leaves no room for error.

“We have just enough to clear the hurdle,” Varelas said. “There is no cushion for any unforeseen events.”

Varelas said the county hopes the plan produces an adequate annual revenue stream to allow the county to sell about $500 million in bonds in the next six months to help cover its obligations.

One of the most complicated aspects of the recovery plan involves the disbursement of litigation proceeds. Under the arrangement, the first $53 million would go to the schools, and the next $324 million to other pool investors.

After that, the next $176 million would then belong to the county. Any proceeds beyond that, up to $1.25 billion, would be split so that pool investors would receive two-thirds of the proceeds and the county one-third.

As part of the recovery plan, an independent litigation trust, initially funded to the tune of $50 million, is established to pay for litigation.

County officials said Thomas W. Hayes, the former state treasurer brought in to manage the liquidation of the county’s investment fund in December, has agreed to manage the litigation trust.

County officials negotiated with representatives of cities and special districts throughout the weekend, trying to develop a plan that would be acceptable to all parties involved. The county had to craft the plan by Monday--which was the deadline set by Gov. Pete Wilson--or face severe repercussions, such as the likely appointment of a state trustee to run the county.

In the end, the threat of a trustee with powers to redirect tax revenue was too much to bear. Even with the plan approved by the board Monday, legislators in Sacramento may push for a trustee to handle the recovery if county officials stumble.

“Everybody is being driven to this consensus by the deadline,” Steiner said Monday afternoon as the final deal was being cut.

The pool investors committee voted 5 to 2 in favor of the county’s compromise plan. Irvine City Manager Paul O. Brady Jr., who represents cities on the pool investor’s committee, and the representative for out-of-county investors voted against the proposal.

In addition to the recovery plan they endorsed Monday, the supervisors may also submit other recovery options they approved last week. After approving six different recovery options last Tuesday, the county developed this latest plan in response to criticism from state lawmakers and the governor that they had abdicated their leadership responsibilities by failing to make the hard choices to come up with a single plan.

The latest county plan is essentially a compilation of competing recovery plans proposed by the county’s own financial and legal advisers, the League of California Cities, and a coalition of special districts.

Although most of the agencies represented on the Orange County Investment Pool committee agreed to the elements in the plan, not everybody is happy about it.

Officials from the Orange County Transportation Agency contend that the diversion of $38 million of annual sales-tax revenue will have an adverse impact on operations of the county’s bus system. But it is far more palatable than a $70-million annual hit approved by the state legislature, then vetoed by the governor, earlier this month.

Furthermore, the county agreed Monday to give OCTA $23 million in annual road funds that will largely make up for the agency’s losses. Those funds come to the county from state gas tax revenue. With those funds, however, OCTA would become responsible for road improvements and capital projects.

County Chief Executive Officer Jan Mittermeier said the county will be getting out of the “road business” and will only be responsible for road maintenance.

As part of the complicated agreement, the pool investors are obligated to pay the county $18 million over the next five years to cover the “transition” costs of turning the road operations over to OCTA.

Brady said he voted no on the plan because of the transition expenses.

“I cannot support having [cities] pay for county overhead when they can’t even define what it is,” he said. “The county ought to able to cover this without the cities.”

The plan drew mixed reviews from local officials to lawmakers in Sacramento.

Anaheim City Manager James D. Ruth said the new bankruptcy recovery plan is appealing because it does not divert tax revenue from cities.

“Everyone hopes to get back 100%. But speaking for my city, we felt if you could get 90% out of a bankruptcy, you were doing very well,” Ruth said. “We are not excited about writing off any debt, but the chances of achieving [a 100% pay-back] is very limited.”

Some city officials, however, said the ever-changing nature of the county’s bankruptcy plans has made them hesitant to pass judgment quickly.

“It isn’t over until it’s over. We are not going to let down our guard,” Huntington Beach Mayor Victor Leipzig said. “Until the last issues are ironed out, we have to watch out for our interests.”

John Nelson, the assistant superintendent of the Orange County Department of Education who represents schools on the pool committee, was delighted by Monday’s agreement because the schools get the first crack at the litigation proceeds.

“We have reason to believe that at least $53 million would be paid and that certainly would be a big help,” he said. “Everyone seems to have recognized the value of supporting education in Orange County.”

With the $53 million, schools would be getting 95% of what it invested in the pool. The final nickel, another $53 million, would still be outstanding, however.

While some state representatives reserved comment until reviewing the plan in detail, some complained that the plan lets OCTA off easy while placing a burden on cities, schools and special districts.

Scott Johnson, chief counsel of the Senate Special Committee on Local Government Investments, which is holding an emergency hearing today on the county’s recovery plan, said parts of the county’s plan were still speculative.

“It’s amazing that they waited until absolutely the last possible moment to get this done. If they waited any longer, it wouldn’t be possible,” Johnson said. “We still have a number of political hurdles to overcome. There will be some fine-tuning by the Legislature. I wouldn’t go out tomorrow and buy bonds based on this deal just yet.”

“It’s a valid step forward for the county,” said state Sen. Lucy Killea (I-San Diego), who has been a critic of the way the county has gone about handling its fiscal crisis. “It is, finally, a plan.”

Times staff writer Rene Lynch and correspondent Shelby Grad contributed to this report.

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Proposal Passes

The Orange County Board of Supervisors approved a final bankruptcy recovery proposal Monday, with concurrence of a committee of investors with millions in the now-collapsed pool. Key elements of the plan:

* Orange County Transportation Authority will contribute $570 million

* Cities, special districts, other public entities postpone, possibly forgive, $817 million in claims unless county wins in court against Wall Street brokerages

Other revenue

* $240 million in property tax revenue from the county’s Harbors, Beaches and Parks division, Flood Control District and Redevelopment Agency

* $300 million for importing trash and $100 million for bonds issued against delinquent property taxes

* $20 million in asset sales; $95 million from refinanced property leases

Sources: Orange County government, Orange County investment pool committee