Not Merely a Collateral Issue : County Puts Some Major Assets on the Line to Borrow Funds

When it comes to municipal financing, the Orange County bankruptcy has shown that it is impossible ever to say “it won’t happen.” That is, in all things related to debt and risk, the worst-case scenario needs to be kept in mind in any proposed fiscal plan. That sobering fact is worth remembering as Orange County looks to raise money to pay off its bankruptcy-related debt to bondholders by pledging its real estate as collateral.

The term “certificates of participation” is the official way of saying that the county plans to offer its real estate in a borrowing plan to make good on obligations to bondholders, vendors and most other creditors. In the months ahead, ratings agencies, bond insurers and bond investors will be looking over a deal that would result in an $800-million bond sale this summer.

Is Laguna Beach City Councilman Paul Freeman correct in saying he doubts this will affect his library at all, one of the branches going on the block? Or will the expressed concerns of Standard & Poor’s Corp. in New York City--to the effect that the county has yet to demonstrate either its willingness or ability to pay--remain a problem?

Either way, a lot of prime county real estate is being put up to secure financing. This includes the Hall of Administration, two golf courses, a number of parks, and jails and libraries.

The financing to protect these properties is to come from an unusual package of sales taxes and other fees. But the “what could go wrong” part of the equation was identified by Moody’s Investors Service. It noted that the significance of having the buildings as security is that bondholders would get them if the county somehow doesn’t make its payments.

The problem for the county is that it now has few options because of a series of decisions related to the bankruptcy that have been made all along. There is still much to be worked out and resolved.

Many on the local campaign trail this winter seem to have the idea that the bankruptcy is history, as they cheer the avoidance last year of a sales tax. It is worth remembering that the county in fact is still working its way out of the woods.

While progress has been made, the fact that the county must put up so many of its prime assets as collateral demonstrates that there really is a way to go before getting clear of this mess.