O.C. Recovery Plan Rose From a Death Struggle

Before Orange County could give birth to a bankruptcy recovery plan last week, it had to pass through the five stages of death.

First, denial that the county was truly broke. Then, anger over who was to blame. Back-room bargaining broke out next over who should bear the burden. Depression set in as the fiscal realities became clear.

Now, with the recovery plan in the hands of Sacramento lawmakers, comes the final stage: grudging acceptance among most Orange County leaders of their fate and what needs to be done to solve the worst municipal bankruptcy in U.S. history.

“It was like dying without the death,” said Chris Varelas, the county’s financial adviser. “We had to go through all the phases to get to this point.”

And the county, still struggling to recover, barely pulled out an acceptable plan.

Gov. Pete Wilson had given Orange County until Aug. 21 to come up with a plan, and county officials scheduled a 2 p.m. meeting that day to unveil the details. Yet the days and hours leading up to that presentation were marked by harried negotiating that continued virtually around the clock.

Deals came together and fell apart so quickly during the frenzied pace that no one could keep count. Along the way, officials from the county, cities, schools and special districts played a high-stakes game of power politics, seeking to protect their fiefdoms and their claims to taxpayer money.

Despite much bickering, the self-interested parties ultimately realized that if they couldn’t come up with a home-grown solution, an even harsher fate awaited.

Cities and special districts faced a crippling loss of millions of dollars in property tax revenue to help pay off the county’s financial losses. The county’s wealthy transportation agency also was exposed to a raid of more than $1 billion in sales tax receipts to fund the county’s recovery.

The most ominous threat, however, was the threat of a state-appointed trustee who would usurp the Board of Supervisors’ power and take control of the county’s destiny. Such a trustee would be charged with preventing bond default and would have little regard for protecting local governments.

“The threats were making everyone feel vulnerable,” Supervisor William G. Steiner said. “The concessions made all around were driven by the fear of the unknown, the fear that things could get much, much worse.”

The county declared bankruptcy Dec. 6 after a risky financial strategy led to the loss of nearly $1.7 billion, most of it belonging to the county, cities, schools and other government entities. In the aftermath of the bankruptcy filing, the nearly 200 agencies that had lost money in the Orange County Investment Pool demanded a 100% pay-back. Financial and legal advisers looked for ways to cut costs, sell assets and privatize services, but it became clear those efforts could barely begin to cover the loss.

The county tried to raise the sales tax by a half-cent in June as a solution, but voters rejected it. When it appeared that no progress was being made and warring parties were at a stalemate, the Orange County Business Council volunteered to enter the fray at the end of July to help navigate a solution.

Three weeks later it appeared that a framework for a solution was in hand after a daylong meeting Aug. 17 at the Marriott in Newport Beach.

“It looks like this has legs,” an exhausted county bankruptcy attorney Bruce Bennett declared to the assembled parties that included Business Council members and advisers and representatives of the pool investors.

Hours later, the euphoria faded, with the plan unraveling as new issues arose. The next three days were spent trying to resuscitate the proposal. Nearly everyone involved was connected by telephone, cellular phone or pager.

An attorney on vacation in Hawaii spent more than $100 receiving faxes at his hotel to keep tabs on negotiations, while a powerful county developer trying to relax on a houseboat in Arizona kept a cellular phone by his side.

Board of Supervisors Chairman Gaddi H. Vasquez said he spent the weekend lobbying.

“I was forceful, I was as urgent as I could be and I made it very clear we were at critical milestone in this process,” Vasquez recalled. “I said, ‘Come on folks, we’re in the ninth inning. We need to knock off the territorial protectionism.’ ”

But on the eve of Wilson’s deadline, there seemed to be little hope.

“I was stunned,” Steiner said, recalling a phone call that came late in the night of Aug. 20 informing him that the plan was falling apart. “I didn’t know what to say.”

Supervisor Marian Bergeson received a similar phone call. But the former state senator, unfazed after years of seeing the Legislature pass budgets at 3 a.m., was more optimistic. “I said, ‘Lets all get a good night’s sleep,’ ” she recalled.

By 7 a.m. Aug. 21, the sides began arriving at the Irvine Civic Center for a last-ditch effort.

Most of the key deal points had been decided: Cities, school districts and special districts agreed that the county would pay $800 million owed to them only if it is successful in litigation against Wall Street firms that the county blames for its Dec. 6 bankruptcy.

If the county receives nothing from the litigation, neither would the other pool participants, which for months had insisted on a recovery plan that reimbursed them fully for their investment losses. Subordinating the county’s debt to them was viewed by all parties as a critical concession.

The recovery plan also would divert $570 million to the county from the Orange County Transportation Agency. Several county government agencies would also give up $240 million in property tax revenue. In exchange for the OCTA funds, the county would fork over $391 million in road funds to help OCTA offset its losses.

But the deal, which strives to repay all bondholders and vendors, was threatened because county officials were asking that the pool investors pay an $18-million tab for so-called “transition costs” incurred as the county transfers the road program to OCTA.

“That was a major issue,” said Wayne Wedin, chairman of the Business Council, who started the Aug. 20 negotiations by sequestering the parties in separate rooms.

One by one, Wedin met with officials from the county and investment pool participants to see if there was any common ground to resolve the issue.

There didn’t seem to be.

Irvine City Manager Paul O. Brady Jr., who represented the cities in the negotiations, refused to budge on the $18-million tab. Interim County Chief Executive Officer Jan Mittermeier had orders from the Board of Supervisors not to lend approval to anything that would have an impact on the county’s strapped general fund.

Meanwhile, time was ticking away. Before the breakdown in negotiations, officials had been invited to an 11 a.m. briefing at Irvine City Hall. A noon press conference was scheduled, with the expectation that a deal would be ready for unveiling.

The appointed briefing time came and went. The press conference was canceled. Various officials were briefed on parts of the recovery plan, but negotiations were still going on fast and furious.

“It was a race,” said Todd Nicholson, president of the Orange County Business Council.

Steiner, long an ally to the county’s transportation agency, had turned up the heat. He told OCTA Executive Director Stan Oftelie, who is also a member of the pool investors committee, that he was prepared to go along with his board colleagues who were poised to seek larger diversion of transit funds, if a deal wasn’t reached.

With pressure mounting, the seven-member pool investors committee finally yielded and agreed to pick up the $18-million costs. They voted to approve the plan, despite opposition from Brady and a member who represented out-of-county investors. The committee had just enough time to brief other officials before racing to the Hall of Administration in Santa Ana to make a 2 p.m. emergency meeting of the Board of Supervisors.

“I think the general feeling was, this $18 million was just one-tenth of 1% of the total problem,” Nicholson said. “The feeling was, ‘We’re not happy, but let’s not let that hang us up.’ ”

Wedin had a similar view of the situation.

“It was like we had the minister up in front, the groom is standing there and bride is coming down the aisle,” he said. “We all didn’t want her bolting away at the last minute.”

The Board of Supervisors meeting started five minutes late. Because there was not enough time to put the proposal in writing, Mittermeier made her presentation by referring to her own rough notes. When she was through, county supervisors voted unanimously to approve the recovery plan and declared their action a momentous occasion.

“It wasn’t pretty,” Bergeson said later. “It’s like what they say about sausages and laws. You don’t want to see them made.”

Some details in the recovery plan remain to be settled, but the county and pool participants agree that a deal, for all intents and purposes, has been struck. Now, it is essentially up to Sacramento to pass laws that would allow the county to implement the plan.

Varelas, the county’s financial adviser, said even though the plan came together in a few days, it was actually eight months in the making. All the successes and failures that had occurred before contributed to the final result.

“When you’re struck by any crisis, it takes time to accept that it happened,” he said. “There were no painless solutions. Everyone had to get to the point that they realized a little contribution from all was needed to solve this problem. I don’t think there was any straighter, quicker or more efficient way to get from point A to point Z.”