O.C. Will Feel Cost of Insolvency for Years

Officially, Orange County will emerge from the worst municipal bankruptcy in U. S. history this week--a mere 18 months after going broke.

But in reality the debacle will haunt the nation’s fifth-largest county for decades to come.

Crooks will spend less time in jail and potholes will go unfilled longer, while county residents pay increased fees for parks, trash collection and a host of other services.

Tens of millions of taxpayer dollars will go to pay off debt year after year, instead of being used to counsel young children, heal the sick, feed the poor, build new roads or erect badly needed jails.

It is a sobering truth that county officials say will diminish the glee and public fanfare over its remarkably speedy escape from bankruptcy last Wednesday, when it sold $880 million in bonds to cover its debts.

This week, the county wires proceeds of the bond sale to creditors.

“This will not be a red-letter day for Orange County,” said Gary Granville, the county’s clerk-recorder. “This bankruptcy isn’t behind us. The devastation is more thorough than anyone can imagine.”

Although they are pleased with the quick resolution, beleaguered county supervisors were equally reserved about the impending achievement.

“A big price has been paid to get out of bankruptcy,” Supervisor William G. Steiner said. “County government has been weakened in terms of its clout and stature. Public confidence has been shattered.”

Observers say the public’s disenchantment is due, in part, to the lack of major reforms and restructuring of county government, which leaders had promised would be the “silver lining” to the financial crisis.

“This was a missed opportunity,” said Fred Silva, a member of the California Constitution Revision Commission.

For the most part, though, the county’s financial recovery went better than many experts expected.

The majority of county residents have barely been pinched by the $1.64 billion in investment losses. In fact, the county’s overall economic climate has significantly improved since the county government declared bankruptcy on Dec. 6, 1994. Unemployment is down, economic activity is up, and the housing market is rebounding.

“I don’t know how much applause we should give county officials, but for them to come out of a mess like this in 18 months is worthy of praise,” said Zane B. Mann, publisher of California Municipal Bond Advisor, who has monitored the crisis.

But getting out of its unprecedented collapse wasn’t easy. Orange County had to endure the scorn of the nation’s financial markets, which feared that the county would renege on its debts. Its leaders had to suffer the backlash of citizens, who rejected an attempt to raise the sales tax to bail out the government. And officials had to fend off attempts to install a state trustee who would have taken over the county’s finances.

Orange County officials had to beg, confiscate, compromise and intimidate to get creditors, legislators and Wall Street to buy off on its complicated recovery plan.

In the end, the cities, schools, special districts and other agencies that kept their money in the county’s ill-fated investment pool agreed to take between 80 cents and 90 cents on the dollar, and to gamble that the balance would come from damage lawsuits the county filed against Wall Street and other firms it blames for the bankruptcy.

To pay off the county’s other creditors, the county raided revenues earmarked for its transportation, redevelopment, flood control, harbors, beaches and parks. County officials referred to it as a “Robin Hood” plan, because it took from agencies supposedly awash in cash to save the bankrupt county.

“It was the best solution,” said Chris Varelas, the county’s financial advisor. “It spread the burden around so no one took the brunt of the pain.”

Nonetheless, pain was inflicted. The bankruptcy has taken the biggest toll on the county’s neediest, who rely on health and welfare programs that have been scaled back or eliminated altogether.

“We’re not too optimistic that the poor, the ill and the needy will become a priority” in the post-bankruptcy county, said Jean Forbath, a board member of Save Our Selves, a Costa Mesa-based anti-poverty agency. “The suffering will probably continue.”

County government has also suffered greatly.

The county’s discretionary budget was cut 41%, or $188 million. Some 3,000 county jobs were eliminated. Many assets were sold; others were mortgaged.

At the same time, political careers were ruined. Robert L. Citron, the county’s elected treasurer, has pleaded guilty to fraud and misappropriation of funds and awaits sentencing. One supervisor resigned, two others retired amid public scorn, and the two who remain are being prosecuted by the district attorney on charges of doing their jobs so poorly that it bordered on criminal.

Ironically, the downsizing and streamlining has made the county financially more stable than many governmental bodies in the state.

“I’d say we’re in better shape than Los Angeles County,” Varelas said. “The bankruptcy actually made the county more efficient.”

While Orange County may be fiscally efficient, many reformers complain that little has been done to rearrange its antiquated governing apparatus.

“Orange County has had the same government structure since the turn of the century” when the region was mostly rural and agricultural, said Silva, the state commission member.

In the wake of the bankruptcy, the Board of Supervisors formed several committees and task forces aimed at government restructuring, but many recommendations put forth by the groups--such as increased privatization and a ban on lobbyists--have been ignored.

Moreover, the public outrage that was the driving force behind reform efforts has dissipated.

In March, voters overwhelmingly rejected a proposed county charter to revamp government, imposing term limits on supervisors and making it easier to contract with private business. Supervisors are divided on term limits but decided to place the issue before voters again in November.

Some changes have been made. A treasury oversight committee was formed to watch over the treasurer’s investment practices. The supervisors also converted the county’s top administrative position to an executive one and empowered it to hire and fire most department heads, in an effort to centralize decision-making.

But the change has been criticized by some who said the government has become more secretive and less accountable to the public.

“The supervisors have passed their authority and responsibilities to non-elected people,” said Granville. “The bureaucracy is setting the agendas, not the supervisors.”

Some reformers said there is still hope for significant restructuring.

“I don’t think it would have been practical to restructure before now,” said former San Juan Capistrano Councilman Gary Hausdorfer, whose consulting firm was hired by the county to study government restructuring. “Now that the bankruptcy is over, there is an opportunity for creating a better local government.”