Bankruptcy Recovery Plan for O.C. Approved
Nearly 18 months after Orange County filed for federal protection in the largest municipal bankruptcy in U.S. history, a judge Wednesday approved its complex recovery plan to borrow nearly $1 billion from Wall Street to repay its debts.
The approval will allow the county to emerge from bankruptcy protection--possibly by the end of June.
U.S. Bankruptcy Judge John E. Ryan described his final approval of the county’s reorganization plan as “a very special day for the county of Orange, its inhabitants, its employees, leaders, businesses, schools, [special] districts and cities.”
The county’s decision to file for bankruptcy protection Dec. 6, 1994, was “a shocking day etched in the history of Orange County,” Ryan said. “Few of us then would have said with any degree of certainty that the county would survive the bankruptcy crisis, let alone reach this confirmation day.”
The plan’s success--and ultimately, Orange County’s recovery--now depends on whether Wall Street investors, still leery of the county’s tainted financial reputation, will buy up to $920 million in county-issued bonds. The bonds will be used to repay note-holders, vendors and other creditors.
Bruce Bennett, the county’s lead bankruptcy attorney and one of the recovery plan’s two main architects, said he had no doubt that the county would sell the bonds by June. He said the judge’s approval puts the financial crisis “behind Orange County once and for all.”
But he was quick to add that the case won’t be over until the county is successful in its litigation campaign against Merrill Lynch & Co. and other Wall Street firms that the county blames for its financial crisis.
The most aggressive objections to the county’s recovery plan were lodged Wednesday by Merrill Lynch’s attorneys, who argued in court that Orange County did not have to declare bankruptcy to solve its financial problems.
Ronald Olson, a Los Angeles lawyer representing the brokerage giant, asked the judge not to make any finding that the county was “insolvent” when it declared bankruptcy, saying it would give county lawyers an unfair advantage in their lawsuit against Merrill Lynch seeking $2 billion.
Ryan denied the request, saying that before the bankruptcy filing “the county was not able to negotiate with its creditors because such negotiations were impracticable.”
Olson said his client would consider appealing the judge’s decision.
“The fight’s not over,” he said.
Wednesday’s approval of the plan marked a banner day for county officials and residents whose leaders since have left office or have become targets of criminal and civil investigations after Orange County’s investment pool lost $1.66 billion in late 1994.
The reorganization plan was the product of thousands of hours of work by the county’s bankruptcy attorneys and financial advisors, who coaxed, bargained and even threatened creditors to get their support.
“We had to bully them to get them to do the right thing,” said Chris Varelas, the county’s chief financial advisor and the other main author of the plan.
“It was like having to take a photograph of 1,000 people and needing them to stay still at the same time. Each day had a crisis. Each solution created more problems,” said Varelas, a vice president with Salomon Bros. “It is perhaps one of the most complex legal transactions that Wall Street has ever seen.”
Putting together the plan so far has been costly. Attorneys, accountants, financial experts and other professionals have billed the county for about $38 million in fees so far.
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The cornerstone of the county’s recovery plan--which already has been approved by lawmakers in Sacramento--calls for a diversion of $50 million annually for 20 years to pay the county’s debt. The money otherwise would have been used for mass transit, maintenance of county harbors and parks, and other public projects.
The plan calls for full repayment to companies that did work for the county, and full reimbursement to county employees owed money.
A key component of the plan is the county’s push to recover money from Merrill Lynch and from the county’s outside auditor, KPMG Peat Marwick, which it has sued for $3 billion.
The county also plans to set aside $50 million from the sale of bonds to pursue lawsuits against those firms and others it holds responsible for the collapse of its investment fund. The companies deny wrongdoing.
Under the plan, 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 reimbursed for their losses. Some, including cities and many school districts, were forced to make deep spending cuts when their investment accounts plummeted in value.
“We are still in this contest to get the litigation proceeds,” said Paul O. Brady, who represented cities in the delicate negotiations that produced the recovery plan. “We’ve put our eggs in that basket.”
But Olson said Wednesday that “the county has overstated its litigation posture from Day 1. Merrill Lynch has said from the beginning that the responsibility lies inside Orange County government, not outside.”
“There is no pot of gold on Wall Street,” Olson added. “Unfortunately, the county has failed to realize this and has set aside another $50 million for continued litigation.”
But county officials and creditors who have had little to celebrate during the last 18 months exulted in the recovery plan’s approval.
Bennett J. Murphy, a Los Angeles attorney representing investors who hold several hundred million dollars in county notes, said Wednesday’s decision represented “the turning point” for Orange County.
“Today is when Orange County has demonstrated not only that it’s back on its feet as a good place to work and live, but a county the bond market has faith in and wants to lend money to,” Murphy said.
Supervisor Don Saltarelli said the judge’s decision “sends a message that Orange County is back,” while Supervisor William G. Steiner called Wednesday’s developments “a remarkable achievement to put this all together so quickly.”
But as the county celebrates its accomplishments in bankruptcy court, other courts of law are still determining the fate of several present and former county officials.
The county’s former treasurer, Robert L. Citron, who managed the ill-fated investment pool on behalf of the county and dozens of other public entities, has pleaded guilty to six felony counts of fraud and misappropriation of public funds. He is awaiting sentencing.
Citron’s former chief assistant, Matthew R. Raabe, has vowed to fight the same charges, while the county’s former budget director, Ronald S. Rubino, also has pleaded not guilty to charges that he aided and abetted Citron’s illegal investment practices. Both Raabe and Rubino are expected to stand trial late this summer.
Meanwhile, Supervisors Steiner and Roger R. Stanton and the county’s auditor-controller, Steven E. Lewis, have been accused of willful misconduct in office for their roles in the bankruptcy crisis. If the accusations are found to be true, they face removal from office. All three have denied wrongdoing.
In a separate action in federal court, Citron and Raabe reached settlements with the U.S. Securities and Exchange Commission. They did not admit or deny wrongdoing but promised not to violate federal securities laws in the future.
The SEC did not impose any additional sanctions on Citron and Raabe, who also have agreed to cooperate with agency officials investigating the county’s financial collapse. Members of the county Board of Supervisors in office at the time of the bankruptcy have agreed to similar terms in a separate settlement with the agency.
The county’s reorganization plan was crafted after Orange County voters overwhelmingly rejected a half-cent sales tax increase last June.
After defeat of the tax plan, known as Measure R, county officials and their advisors slashed the county’s budget, diverting money from health, public protection and environmental programs. In all, the county has eliminated about 1,500 positions since the bankruptcy. It has also cut some programs that helped mental patients, abused children and low-income pregnant women.
Documents filed recently in bankruptcy court show that Orange County has the leanest government in the five-county Southern California region. The county has 5.8 employees for every 1,000 residents compared to Los Angeles County’s 8.9.
“The county can sustain no further budget cuts in its general and administrative functions without impairing [its] ability . . . to provide essential services to its citizens,” said Robert E. Wilson, the county’s assistant chief executive officer.
But Varelas said Wednesday that while it was “unfortunate that people had to lose their jobs and money had to be diverted from other services, the pain has been minimized and is less than we would have thought possible in December 1994.”
Times correspondent Shelby Grad contributed to this story.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Plan at a Glance
The bankruptcy recovery plan approved by U.S. Bankruptcy Judge John E. Ryan calls for Orange County to fully repay investors who bought county bonds, and individuals and companies that provided services to the county and its employees. Key elements of the plan:
NEW BOND SALES
* To raise money to complete the plan, Orange County will sell $800 million in insured, long-term, tax-exempt bonds backed by county buildings, parks, golf courses and land. The bonds, known as certificates of participation, will be repaid with sales taxes and motor vehicle license fees previously intended for other projects, such as mass transit.
* The county will sell $120 million in new taxable bonds to retire some pension bonds issued in 1994.
WHO GETS WHAT
* Investors in the county’s notes will be repaid more than $700 million.
* County vendors will be repaid about $65 million.
* County employees will be repaid about $35 million in sick leave, vacation pay, salary and merit increases.
* The county will establish a $50-million litigation trust fund to pursue lawsuits.
* County pool investors will share $430 million in secured claims to be paid first if the county collects in its lawsuits against financial firms and others.
* Other pool investors will share $385 million if the county collects in lawsuits after secured claims are paid.
Sources: Second Amended Disclosure Statement and Second Amended Plan of Adjustment, U.S. Bankruptcy Court
WHAT’S NEXT
Orange County on Wednesday crossed a major hurdle when U.S. Bankruptcy Judge John E. Ryan approved the county’s recovery plan. What to expect in the next few weeks:
* County officials and financial advisors are scheduled to hold meetings in Orange County and “road shows” in New York to market $920 million in bonds. The plan will be effectively confirmed when the bonds are sold and the proceeds are used to pay Orange County’s debts. * The plan calls for the county to employ former state Treasurer Thomas Hayes as its litigation czar and gives him a $50-million budget.
* Hayes is expected to use the money to pay lawyers to sue several Wall Street brokerages and other firms that the county blames for its bankruptcy. The county has already filed multibillion-dollar lawsuits against Merrill Lynch & Co. and its outside auditor, KPMG Peat Marwick. Other potential targets are the county’s former bond counsel, LeBoeuf Lamb, Greene & MacRae, and numerous other brokers who sold the county risky securities before the bankruptcy. All of the firms deny wrongdoing.
* The county hopes to obtain more than $1 billion from litigation proceeds to recover its own pool losses and repay cities, school districts and other agencies that lost money when the investment pool crashed.
