O.C. Hopes to Use Buildings as Collateral : Bankruptcy: Landmarks owned by county would secure $520 million in borrowing. Some experts say the device, which has been used by L.A. County, is too risky.
As part of its recovery plan pending in the state Legislature, bankrupt Orange County plans to essentially mortgage its Hall of Administration, jails and other major buildings for a $520-million financing that has drawn controversy in other municipalities.
The cash-strapped county, which has tapped most of its available revenue sources, wants to take out what amounts to a massive 20-year equity loan. As collateral, it is planning to pledge most of its landmark buildings--except for the airport.
Motor vehicle license fees and sales tax revenues dedicated to transportation also will back the financing, called certificates of participation, if special legislation is approved by the state.
“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.”
The strategy, used extensively by Los Angeles County and local governments throughout California, would repay all of the county’s obligations to current bondholders and most other creditors.
While the details of the deal 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.
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 cash-strapped 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, the deal allows municipalities to strip the equity out of their real estate assets, much like a cash-poor family that owns its home takes out a mortgage to pay for living expenses.
Called COPs, 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. The certificates typically are sold to pay for new county buildings. Many finance experts have become increasingly concerned about the borrowing binge.
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 Hall of Administration, the Criminal Courts building, coastal property in Marina Del Rey, libraries, county jails and fire stations.
But the financings were a mistake, some Los Angeles County supervisors have said in retrospect as they struggle to slash budgets and make ends meet.
Another local government that tripped up on COPs was the Richmond Unified School District in Northern California, which sold COPs 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,” said Mann. “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 COPs 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, Bennett said. “These should be regarded as a good investment.”
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 next year 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.”
Legally the bonds can be sold without voter approval, although some Orange County tax foes questioned how the county could go into debt for more than half a billion dollars without asking its residents.
“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.”
