A team of lawyers and financial experts on Thursday unveiled their blueprint to lift Orange County out of bankruptcy, promising to pay most of its debts in full and pledging their best efforts to repay the public agencies that lost millions in the county's disastrous investment schemes.
The centerpiece of the plan--in the works for months--calls for an annual diversion of $50 million in public money, otherwise intended for mass transit and other projects, to repay the county's many creditors.
The diversion will enable the county to finance a bond issue sometime next year that is expected to raise some $660 million all at once. Under the plan presented Thursday, the county could emerge from bankruptcy as early as next June, if most of the individuals and agencies owed money agree to the terms.
The 131-page document reaffirms Orange County's uncertain strategy of relying on lawsuits against Wall Street firms to fully repay the hundreds of millions of dollars lost by some 187 public agencies.
Thursday's developments came little more than a year after the county lost $1.64 billion in risky investments and sank into the country's worst municipal bankruptcy. The authors of the plan said it offered Orange County a means to recover its financial footing without the benefit of a tax increase. The recovery plan relies exclusively on Orange County funds to pay off creditors.
"[This] marks the beginning of the end of the bankruptcy case," county bankruptcy attorney Bruce Bennett told the Board of Supervisors. "The road has been long and tortuous."
The supervisors accepted the plan on a 4-0 vote and directed the county's lawyers to file it in U.S. Bankruptcy Court, where Judge John E. Ryan will have final say on whether it passes muster.
The plan released Thursday contained few elements not already exhaustively discussed in public. It provides for full payment to the dozens of individuals and institutions that hold outstanding county notes or bonds. The plan calls for full repayment to companies that did work for the county, and full payment to county employees who are owed money.
The plan promises a big push in the courts against such stalwart Wall Street firms as Merrill Lynch & Co. and accounting giant KPMG Peat Marwick, which the county blames in part for the financial calamity. The plan sets aside $50 million to pay the costs of pursuing lawsuits against them and others. The firms have denied any wrongdoing.
The county promises to distribute any money gained from the lawsuits among the public agencies that invested in the county's pool. To date, those agencies have been partially--but not fully--reimbursed for their losses. Some of them, including many school districts, were forced to make deep spending cuts when their investment accounts plummeted in value.
Local elected officials hailed the document as a symbolic end to a dismal year of turmoil and pain.
"This is a significant milestone in the Orange County bankruptcy," Supervisor Marian Bergeson said. "We can perhaps all enjoy the holidays."
The plan faces steep hurdles before it could go into effect. It must earn the approval of Ryan, the Wall Street firms that rate municipal bonds, and the public agencies that lost money in the county's investment pool. And it must also be accepted by a majority of the individuals, companies and agencies owed money by the county.
Initial reaction to the plan was mostly positive.
"We are absolutely delighted," said Richard Marshack, an attorney who represents some 2,000 businesses that are owed approximately $65 million. Under the recovery plan, the businesses would be paid in full.
"There is no big shock there," said Jon Schotz, financial advisor to the Orange County Investment Pool committee. "Everybody is trying to move ahead as expected."
The claims of the pool investors represent one of the trickiest obstacles to the county's recovery. All local school districts, most of the county's cities and a host of other public agencies had deposited their reserves in the pool. To date, the school districts have been refunded 90% of their prebankruptcy deposits. The other agencies have recouped 80% of their money. Their prospects of recovering the balances hinge on the county realizing a windfall from its lawsuits.
The pool investors are reluctantly endorsing the county's strategy as their only alternative. Earlier this week, the pool investors committee voted 9 to 0 to approve the so-called "comprehensive settlement agreement"--the complex document spelling out the rights and responsibilities of all of the pool participants that is the heart of the recovery plan.
Individual votes by the 187 agencies will follow. If a majority of them reject the plan, the governor could be obligated to appoint a trustee who would assume the powers of the Board of Supervisors.
Ryan will have the final say over the plan. Assuming that enough pool investors and other claimants sign off on it, the judge will probably hold a hearing in May to decide whether the plan is legally sound. Among the factors he will weigh are the views of creditors and whether the county's recovery could be achieved any other way.
The success of the plan--and ultimately, Orange County's recovery--rests on how well it is received by investment analysts on Wall Street. If the county's plan receives high marks from the financial rating agencies, the county will save tens of millions of dollars in interest payments on its future debts.
If it doesn't, the county will have little flexibility: It would have to postpone the repayment of millions of dollars it once held in escrow for local public agencies.
Bennett, the county's lawyer, said he was confident that Wall Street would approve of the county's plan. Bennett said he hoped to convince the rating agencies of the underlying soundness of the government's finances.
"One of the things we intend to show is that the county's financial problems are solved, and we don't expect them to happen again," Bennett said.
Chris Varelas, a financial advisor with Salomon Bros., predicted that the Wall Street rating agencies--which were blind-sided by the county's bankruptcy--would be tough to convince. But he expressed confidence that they would buy into the county plan.
"There is a lot of emotion wrapped up in this," Varelas said. "These are the same ones who rated the county previous to the bankruptcy."
Jane Eddy, director of municipal finance with Standard & Poor's Corp., said she saw a few potential trouble spots in the county's plan.
She said that county finances were so tight that she worried about the possibility that unforeseen circumstances could break the budget--and put repayment at risk.
"It is inconceivable that if the health, safety and welfare of the county were jeopardized, that the county would continue to pay its debts," Eddy said.
Still, she applauded the county's progress.
"Compared to a year ago," Eddy said, "the county is in great shape."