ORANGE COUNTY IN BANKRUPTCY : Recovery Plan Doesn’t End Long-Term Risks, State Report Says

Orange County has a good chance of yanking itself out of bankruptcy with a recovery plan now in the works, but the county could face perilous risks to its fiscal health far into the future, according to a state report released Friday.

In the first independent analysis of the county’s bankruptcy recovery blueprint, the 15-page report by California Legislative Analyst Elizabeth G. Hill also suggests the plan poses potential problems for bus riders and could leave some creditors begging.

“Orange County’s current and future fiscal health . . . remains a concern under the plan,” the report said, adding that the county “will remain vulnerable to fiscal threats from increased spending demands or revenue shortfalls for many years to come.”

Despite those glum predictions, county leaders said Hill’s report contained no real surprises and underlines the need for state lawmakers to cement legislation in the coming weeks to help ensure the recovery proposal is realized. Orange County declared bankruptcy last December after suffering $1.7 billion in investment losses.

“While we have more confidence in this plan than the legislative analyst seems to, there’s no real surprise in the report,” Supervisor Marian Bergeson said. “I think it verifies more than it criticizes, and I think it strengthens our position as we try to get help from the Legislature.”

Supervisor William G. Steiner added that the long-term prospects for Orange County could hinge on whether the state attempts future raids on local agency funds, a tactic that has not been uncommon in recent years as Sacramento lawmakers grapple to balance their own books.

“As long as the state doesn’t take any more of our property taxes or fees, the fiscal stability of the county will be assured,” Steiner said. “We can rely on the strong economic foundation of the county to pull us out of this over the long haul.”

The report suggests that the core of the county’s plan--the effort to pay off bonds that come due next summer as well as other bankruptcy costs--is on solid ground. The county plans to issue $520 million in debt to make the payments.

But there remain numerous pitfalls on other fronts, the report said.

It rates as “speculative” any hope by the county of a huge court settlement from Merrill Lynch, which Orange County leaders blame for the financial debacle. Merrill Lynch denies the county’s claims and is vigorously fighting the lawsuit.

The report also suggests any shortfall in anticipated revenue would make it tough for the county to pay off pool participants who are toward the back of the line, such as the small number who refused to drop legal action.

A proposal to import trash to Orange County landfills might yield less money than expected, the report suggested. Meanwhile, a proposal to divert taxes from county redevelopment agencies might be unconstitutional. Rising interest rates could also suppress revenue, and the sale of certain county property and assets might produce less than expected.

While the county has cut its budget substantially, the legislative analyst was unable to determine if the lower spending targets can be realized or sustained.

“This is important since the success of the recovery plan ultimately rests on the county’s ability to maintain fiscal balance over time,” the report said, adding that “even if current budget reductions are fully achieved, the investment losses will constrain Orange County’s budget for many years to come.”

From 10% to 15% of annual tax revenue will go to pay off bankruptcy debt.

“These factors will further squeeze county resources in the future,” the report said. “The county’s fiscal health will ultimately depend on a variety of factors such as the strength of its economic base and future demand for public services.”

The report also suggested that the cash crunch will leave Orange County with “limited flexibility to deal with unanticipated events” such as natural disasters or future economic slowdowns.

Hill’s analysis also paints a gloomy picture of the plan’s effect on transit service. The county has proposed tapping the Orange County Transportation Authority for $38 million in transit funds, offsetting that by reimbursing the agency with $23 million in county gas tax money.

The resulting $15 million annual loss to OCTA would produce a 10% cutback in bus service for the next 15 years, Hill concluded in her report. Among the hardest hit would be the disabled and riders in areas such as the South County.

Moreover, the shift of county road funds would delay highway construction projects, reduce county grant funds to cities for road work and leave construction of the $40-million Antonio Parkway project in San Juan Capistrano $17 million short.

School districts, meanwhile, should fare better and even county programs that will see money siphoned for bankruptcy recovery, such as the flood-control program, wouldn’t be mortally wounded, the report said.