O.C. to Mortgage Its Way Out : Bankruptcy: Most of the county’s landmark buildings would be used as collateral for massive equity loan if recovery plan passes Legislature.

If its recovery plan survives the state Legislature, bankrupt Orange County intends to mortgage most of its landmark buildings--including the Hall of Administration and its jails--to secure $520 million in loans.

In using a borrowing scheme that recently has drawn controversy in cash-strapped Los Angeles County, Orange County expects to repay all of its obligations to bondholders and most other creditors with what amounts to a massive 20-year home equity loan.

“Basically they are getting out of this mess by using their available assets to raise funds,” said Charles T. Forrest, managing director for A.G. Edwards & Sons, the county’s bond underwriter. “It’s like mortgaging your house.”

While the deal’s details are still being hammered out, the county’s financial team is considering more than 20 Orange County buildings that could be pledged in the deal. Vacant land, warehouses and other properties are also on the table, Forrest said.

Motor vehicle license fees and sales tax revenue dedicated to transportation also would back the financing technique, called certificates of participation.

The certificates could be sold this spring.

“We’ve never seen a deal like this,” said Barbara Flickinger, an assistant director with Moody’s Investors Service, a credit rating agency, which would evaluate the debt. “It’s very unusual, but it’s a very unusual time. This is clearly a financing of someone in fiscal distress--but it seems to work.”

One of the most popular revenue-raising tools for California’s local governments in recent years, certificates of participation, also known as fixed-asset leases, don’t require voter approval and are not considered debt under state law.

A complicated and controversial financing that can be structured in many ways, such deals allow municipalities to strip the equity out of their real estate assets, much like a cash-poor family that owns its home takes out a second mortgage to pay for living expenses.

The certificates are a tax-exempt financing in which the county sells an asset it owns free and clear to investors and then makes payments for continued use of the property until it is eventually repurchased. Many finance experts have become increasingly concerned about the binge in certificate borrowing, typically used to pay for new county buildings.

During the past 10 years in Los Angeles County, supervisors mortgaged or pledged as collateral most of the county’s major assets, including landmarks such as the massive Hall of Administration, the Criminal Courts building, coastal property in Marina del Rey and libraries, county jails and fire stations.

But the financings were a mistake, some Los Angeles County supervisors have said in retrospect, as they are left with few other options for borrowing their way out of the current fiscal crisis.

With this borrowing, Orange County could find itself in a similar situation if later on it faces another financial shortfall.

Another local government that tripped up on the certificates was the Richmond Unified School District in Northern California, which sold them in the late 1980s to pay operating expenses. The district later filed for bankruptcy and defaulted on the bonds, rattling the bond market in 1992.

Selling 20-year debt backed by county assets to pay current bills is questionable, said Zane B. Mann, publisher of the California Municipal Bond Advisor newsletter in Palm Springs.

“This is Richmond all over again,” Mann said. “They are mortgaging current buildings that the taxpayers in Orange County have already paid for to pay their operating expenses and debt.”

However, Bruce Bennett, the county’s bankruptcy attorney, said the certificates are entirely within the county’s legal rights and demonstrate the county’s willingness to make good on its obligations and pay current creditors as promptly as possible.

“The real estate here will not be exposed because we have adequate revenue to pay back the bonds without any stress on the general fund” in later years, said Bennett. “These should be regarded as a good investment.”

Orange County Supervisor Marian Bergeson called the certificates “very necessary. Under normal circumstances this wouldn’t be a good idea. But our long-term survival depends on us moving out of the deep hole we are in.”

Jon Schotz, a financial adviser to cities, school districts and others who participated in Orange County’s sunken investment pool, said he was concerned that interest rates on bond deals could rise by spring, when the certificates are sold, making the deal too costly for the county.

“There is some interest rate risk here,” he said. “And the potential bond buyer needs to be assured that the county won’t file bankruptcy in two years because they can’t pay this debt.”

Some Orange County tax foes questioned the wisdom of going into debt for more than half a billion dollars without giving the public a say in the matter.

“This should go before the voters,” said Carole Walters, president of the Orange Taxpayers Assn. “They filed bankruptcy without asking us too. I think all major decisions should go through the people.”

Echoing that sentiment, Joel Fox, president of the Howard Jarvis Taxpayers Assn., an anti-tax group in Los Angeles, said Orange County’s financial sleight-of-hand are what drove it into bankruptcy with nearly $1.7 billion in losses in the first place.

“They need to ask their voters,” said Fox. “Particularly in Orange County, where their problems stem from being so secretive, they ought to try and work it out with the greatest public input possible.”

This year, Richard L. Gann, president of the Paul Gann Citizens Committee in Sacramento, went so far as to draft a ballot initiative that would have required voter approval for all certificates of participation in California. The measure didn’t garner enough signatures to make the March, 1996, ballot.

Because of the deal’s risky structure and the county’s financial track record, analysts said Wall Street is likely to make the bankrupt county pay millions of dollars in penalties, such as extra interest or bond insurance, in order to borrow its $520 million.

To give bondholders added comfort, the state will create an “intercept fund” to hold the special taxes that will pay off the certificates.

But it may be hard for the county to obtain insurance: MBIA Insurance Corp., which has guaranteed other types of county bond issues since the bankruptcy, refused in May to insure a certificate of participation issue the county had considered selling. The county later sold another type of bonds.

When asked if the firm would insure the large certificate issue, an MBIA spokesman said Wednesday the firm had no comment.

Even with insurance, the bonds may be a tough sell. As an example of what could happen, analysts point warily to June 27, when Orange County sought to borrow $155 million.

Not only did the county pay nearly $15 million in extra costs, such as added insurance and interest, but a hostile investment community turned its back and refused to buy the bonds--an unprecedented event for the once AA-rated and highly coveted Orange County. The lack of interest from investors forced the county’s underwriters, who are responsible for selling the bonds, to buy what was left over and sell them later.

Still, Joe Mysak, editor of Grant’s Municipal Bond Advisor in New York, said this proposed deal, with some extra interest on the bonds and some insurance, is likely to be embraced by Wall Street.

“It’s a great idea,” he said. “This is the kind of plan the county should have put forward last November instead of filing for bankruptcy.”

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