O.C.--AFTER THE BANKRUPTCY : O.C. Can Expect the Bills to Keep Coming

The bankruptcy may be over, but the bills will keep coming and coming and coming.

Orange County taxpayers will be paying tens of millions of dollars over the next several years for lawyers, accountants and financial advisors to deal with the problems wrought by the disaster.

With luck, they will get most of it back.

But without a big victory in court, the final bill to the public could exceed $130 million.

That’s enough to build a new county jail. Or run the sheriff’s office--deputies and all--for nine months. Or rehire the hundreds of county employees who lost their jobs and keep them on the payroll for five years.

“Anyone who thinks [the bankruptcy’s] all over is in Fantasyland,” said Dennis Bunker, the county claims manager. “It will take a while to tie up the loose ends.”

Even after this week, when Orange County enters the ranks of the solvent, teams of high-priced experts will remain to execute the myriad aspects of the bankruptcy recovery plan. Among the tasks: cutting checks to some 125,000 companies and people who are owed money, and resolving some 6,600 disputed claims on the county’s money.

How long those experts will be needed, and what they will ultimately cost, is a mystery, county officials say.

“We really don’t know,” Finance Director Thomas Beckett said.

So far, the lawyers and accountants and financial experts hired by the county to deal with the bankruptcy have run up bills exceeding $38 million. There’s more to come: The county has yet to be billed for millions of dollars of work performed by those same firms.

The final totals could exceed $40 million. At the depth of the bankruptcy, the county retained more than 20 firms to help with the disaster.

After this week, Bunker said at least three firms are likely to remain on the county’s payroll: the law firm of Hennigan, Mercer & Bennett; theaccounting firm of Arthur Andersen and the Wall Street bond house of Salomon Bros.

Together, the three firms have billed more than $15 million.

And they still have work to do.

“In some ways, it’s just beginning,” said Paul Sachs, a partner with Arthur Andersen.

The Arthur Andersen firm, for example, will handle the repayment of debts to the thousands of creditors, vendors and bondholders. Hennigan, Mercer and Bennett will help resolve the thousands of claims pending against the county. Salomon Bros., which was on a $150,000-a-month retainer, will likely bill much less now that the bankruptcy is over.

The firm will provide financial advice to the county for about $250,000 a year over the next two years--and more if the county wishes to sell bonds.

The biggest money-eater of all--and the biggest potential jackpot--is the county’s ambitious legal offensive against the Wall Street brokerages and several other companies it blames for the bankruptcy.

The course is risky and expensive.

The county has sued Merrill Lynch & Co., which underwrote many of the county’s bonds and put together most of the money-losing securities deals that triggered the bankruptcy, for $2 billion. It has sued KPMG Peat Marwick, the county’s outside auditor, for $3 billion. More lawsuits are on the way.

To pursue the suits, the county has borrowed $50 million. Because the money is borrowed, taxpayers will have to pay the interest. Over 30 years, that could easily turn $50 million into $90 million.

It’s a huge gamble, not the least because Merrill Lynch and Peat Marwick deny all wrongdoing and have mounted vigorous defenses.

The county’s elected representatives and outside experts say the risk is worth taking.

“It’s an unfortunate situation,” Supervisor Marian Bergeson said. “But we know we have to have the best talent and legal services.”

Some experts say the county will probably not need $50 million--but that the money is a good way to show Wall Street that it’s serious.

“The county is sending the most powerful signal to Merrill Lynch,” said Elizabeth Warren, a professor at Harvard Law School. “We believe this lawsuit is worth $50 million.”

County officials say they are ready to spend the money if they need to--particularly since they say Merrill Lynch and Peat Marwick are likely to outspend them.

“I suspect strongly that they will be spending more than we will,” said Thomas Hayes, the former state treasurer who is managing the $50-million litigation fund.

Andy Sieg, a spokesman for Merrill Lynch, would not say how much the firm has spent on the suit. But he derided the county’s efforts as wasteful.

“They spent millions of dollars with nothing to show for it,” Sieg said. “At the end of the day, they can’t escape the reality that it was the actions of county officials themselves that caused these losses to occur.”

Some lawyers have criticized the county for paying its lawyers whether they win or not.

In the end, they say, the strategy could leave the county $50 million lighter without anything in exchange.

They say taxpayers would be better served by paying the county’s lawyers only part of their fees now, and leaving the rest contingent on their success in court.

Ron Rus, a lawyer specializing in corporate and bankruptcy law, said plenty of top-notch lawyers would be willing to take the case under that arrangement.

“You could put together a dream team,” Rus said.

Bruce Bennett, one of the county’s lawyers, said he would be willing to take the case on a contingency basis, but said that the county prefers the current arrangement because, if he wins, his firm could walk away with tens of millions of dollars.

“You would have to expend a great deal more money,” Bergeson said.

Hayes, the county’s litigation manager, is on a contingency agreement: He only gets paid if the county wins big.

Under the terms of his contract with the county, Hayes would receive 1.5% of all litigation proceeds over $200 million. If the county recovers less than that, Hayes would go largely uncompensated.

Under that formula, if the county wins $300 million, Hayes would get $1.5 million.

“If this is not one of the largest damage recoveries in history,” Hayes said, “I’ll get nothing.”

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The Cost of Going Bankrupt

County taxpayers could wind up paying well over $100 million for professional services related to recovering from the bankruptcy. If the county wins big in court against the Wall Street firms it blames for the bankruptcy, it will get the money back.

Category: Amount

Amount billed so far: $38 million

Amount set aside to fight lawsuits: $50 million

Cost to borrow the $50 million: $40 million

Total: $128 million

Source: Orange County officials