Bankruptcy’s Fallout Will Hit Everyone

After state lawmakers passed Orange County’s historic financial recovery plan early Saturday morning, some called for celebration of the brightest bit of news since the county declared bankruptcy last December.

County officials and creditors who spent months debating and shaping the plan cheered the moment. But others found little reason to join in.

“This plan will help the county out of bankruptcy but everyone in the county is going to end up being a victim here,” Supervisor Jim Silva said. “We’re all going to get a haircut. No one comes out a winner.”

Even with a blueprint for emerging from the county’s financial morass, the effects of bankruptcy and severe budget constraints will endure. Taxpayers need look no further than the cost of taking out the garbage--almost half the cities in the county have raised trash pickup fees.

Did you check out a book from the public library that’s now overdue? Expect the library to levy a heftier fine. And if you’re spending a leisurely Sunday at the neighborhood park--after paying increased parking and other user fees--don’t be surprised if you can’t find a restroom or the nature center that was supposed to be built there. If you took a bus to get there, you may not be able to next time.

Expect recreation fields without lighting; schools that can’t afford computers to teach cutting-edge technology; parents forking over yet another fee for transporting their kids to after-school activities.

The cost of digging the county out of bankruptcy will be felt one way or another, sooner or later.

The centerpiece of the recovery plan is a provision that diverts $570 million in county highway and transit funds to the county’s operating budget over 15 years. The county’s discretionary spending already has been pared 41% to save additional money.

The plan also would provide the county an additional $240 million--$12 million annually for 20 years--in funds intended for redevelopment, parks, flood control and beaches and harbors.

The county will continue to borrow heavily to pay off creditors it stiffed in the bankruptcy, but it will pay more for loans now with its credit-worthiness in question. Revenue to pay off those loans, however, will be limited. Until they collapsed, Orange County’s high-flying investments of the past produced high income, disguising the kinds of budget pressures faced in other counties; conservative investing is now a must, with modest returns the inevitable result. Off-limits are new taxes, an idea shot down by voters in June.

As a result, more fee hikes for services such as libraries and parks probably lie ahead.

“We’re not going to see it tomorrow, but five years from now, 10 years from now, we’ll be waiting in traffic longer, the quality of life will go down. We’re going to be nickeled-and-dimed to death for everything,” said Mark Baldassare, a UCI professor of urban planning. “I think that the people of Orange County are going to be the losers in all of this. We’re all the losers.”

The county’s bankruptcy counsel, Bruce Bennett, has an optimistic view, given the circumstances: The recovery plan, he says, could get the county out of bankruptcy by early- or mid-1996--representing “light speed” success of which everyone can be proud.

“Everyone is a big winner in all of this,” Bennett insists, adding that the fiscal disaster must be taken in its proper context. “With this solution, they’re doing far better than the underlying financial condition of the county would suggest that they do.”

Bondholders and vendors can take solace: The county has promised to repay them in a year or so. But some are complaining about losing interest on their investments along the way.

Schools, special districts and other government entities have also agreed to link the pay-back of nearly $1 billion lost in a county-run investment pool to any successful litigation against brokerages, accountants and others the county blames for contributing to the fiscal disaster.

While the impact on schools has been lessened considerably by preferential treatment they received in settling with the county over their investment losses, parents and students will see the lingering effects of bankruptcy.

Some schools that lost money in the bankruptcy are now charging transportation fees for students’ extracurricular activities. Projects, improvements and purchases are being delayed: The La Habra City School District, for example, is postponing plans to purchase computers for students’ use and put off the remodeling project it had planned at Las Lomas Elementary School.

As for new fees imposed by the county itself, it has taken to avoiding references to the bankruptcy, speaking instead about “cost recovery.”

Increasing trash fees, for example, was considered long before the bankruptcy hit. The urgency of the bankruptcy forced officials to take action sooner than expected.

“They’re going to do everything they can to try to raise taxes, no matter what they try to call it,” said Bruce Whitaker, spokesman for the Committees of Correspondence, a vocal anti-tax group that plans to fight any fee increases.

The burden of “cost recovery” in the bankruptcy plan falls on the Orange County Transportation Authority and the three divisions of the Environmental Management Agency: Redevelopment, Flood Control, and Harbors, Beaches and Parks, which will each lose about $80 million over the life of the plan as their funds are diverted to the county.

To offset its loss of $570 million over 15 years to the recovery effort, the county will give the Orange County Transportation Authority $368 million in gas tax money over 16 years. But transportation officials say losing more than $200 million threatens to slash bus service by at least 21%, force more than 200 layoffs of transportation employees and eliminate close to half of the county’s bus routes. The cuts will take effect in several months unless the agency can find some way to avoid them--which critics contend they can.

OCTA has few alternatives because much of its remaining funding is mandated for specific projects, said Lisa Mills, the agency’s assistant chief executive officer.

“It will be hard to lose this kind of money and not see an impact,” said Mills, whose agency also lost $221 million in the county-run investment pool and is bracing itself for a 44% cut in some federal transit funds.

But there has been little attention focused on the EMA. Its director, Michael M. Ruane, says his agency will take a bigger fiscal hit than the county’s transportation authority because the gas tax money the county is using to “backfill” the OCTA loss comes from EMA.

Ruane said there are several projects already headed for the chopping block.

Nix the plans for an interpretive center at the Bolsa Chica wetlands park named after former Supervisor Harriett M. Wieder, who was on duty when the county went bankrupt. Forget plans for a similar new center at a park named after former Supervisor Thomas F. Riley--who, like Wieder, ended his term shortly after the bankruptcy; the park will make do with the cramped trailer where an interpretive center is currently housed, Ruane said.

Also at risk is a toll road bypass at Newport Coast Drive and improvements on Laguna Canyon Road.

EMA will also have to trim back on restroom facilities at some parks. There will be fewer lights at ballparks and a plan to spend more than $1 million to spruce up fields and recreation centers at urban parks will be scrapped, officials said.

Expect more advertising and private concessions on public property. Lots more.

“It’s really the only way,” said Ruane, who envisions the EMA promoting parks as venues for weddings, other special events and perhaps as backdrops for films. Private campgrounds and a private spa are among the projects under consideration, Ruane said.

EMA’s priority will be traffic safety, but it may take longer to fill potholes, brighten up faded striping and resurface roadways, said Ruane. The shrinking budget for maintenance for flood control and recreation areas will have to be carefully doled out, he said.

Ruane said he is most concerned about disaster or lawsuits. Last winter, rains and flooding caused $20 million in damage to homes, businesses and county flood channels and property.

“I think you’ll see it all hit in about four years, that will be the cliff for us,” said Ruane.

Ruane said the redevelopment portion of EMA should be able to absorb the funding loss without too much pain to the public.

As for investors, money due will come eventually, the county vows.

Most of the cities, schools and special districts that lost money have already been paid roughly 80 cents on the dollar from the funds that remained in the bankrupt pool. They agreed to tie the pay-back of the rest of the funds to litigation against those the county blames for the bankruptcy.

In exchange for that major concession, participants secured an assurance that county officials will not try to seize any more of their tax funds and would not endorse the appointment of a state trustee that could do the same, even though the Legislature early Saturday approved a scheme that could lead to such an overseer.

Jon Schotz, financial adviser to the agencies that placed money in the failed county investment fund, calls it a Pyrrhic victory at best.

“I’m trying to keep it in perspective,” Schotz said. “We’re tying a lot to litigation, but we’re safe on property taxes and a trustee. It came down to the lesser of two evils.”

Faring best in the recovery plan are bondholders and vendors, who will be fully repaid their money. But they are hardly euphoric.

Holders of $800 million in bonds that were to be paid this summer reluctantly agreed to wait one year, after the county said the only other option was to default on their notes. But they are losing interest on their money in the interim.

Vendors who provided goods and services to the county but were left holding the bill for an estimated $100 million when the county declared bankruptcy, are also being promised a 100% pay-back.

But there are still some concerns: if the county’s debt to vendors turns out to be more than $100 million--as many of them contend it is--the county faces problems coming up with the cash.

In the final analysis, said former County Chief Executive Officer William J. Popejoy, there are few winners, even with a recovery plan now in place.

“I think it’s a victory for the county to get itself out of bankruptcy, but winners? There are no winners here. Except the attorneys.”